Standard Chartered - Global Focus-Q4-2017

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Global Focus Q4-2017
Is this as good as it gets?
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Table of contents
Global overview 3 Cameroon Holding the line 93
Real GDP growth, 2017 forecasts (%) 4 Cte dIvoire Its gonna be okay 95
Is this as good as it gets? 5 Gabon Head above water 97
The Gambia Picking up 99
Geopolitical economics 10
Ghana IMF programme extension is positive 101
The threat of extremism in Southeast Asia 11
Kenya Election re-run 103
Economies Asia 15 Mauritius On unsteady ground 105
Asia Watching for dovish surprises 16 Mozambique A bridge too far 107
Asia Top charts 18 Namibia Austerity hits 109
Asia Macro trackers 19 Nigeria Emergence from recession disappoints 111
Australia Fewer worries 21 Senegal A job half done 113
Bangladesh Steady as she goes 23 Sierra Leone Marching on 115
China Get the party started 25 South Africa The make or break quarter 117
Hong Kong Riding the tailwinds 27 Tanzania Still below trend 119
India Coping with disruptive policy changes 29 Uganda Tackling past imbalances 121
Indonesia Steady growth 31 Zambia Still waiting for the IMF 123
Japan Robust growth, modest inflation 33 Economies Europe 125
Malaysia Delivering a growth rebound 35
Europe Top charts 126
Myanmar Growth potential vs stability 37
Euro area Changing policy 127
Nepal Politics to dominate in Q4 38
Switzerland Moderate growth 129
New Zealand Still accommodative 39
UK Negotiating the transition 131
Pakistan Mind the gap 41
Czech Republic More tightening coming 133
Philippines Good, but could be better 43
Hungary Buoyant growth 135
Singapore Benefiting from external support 45
Poland Still strong 137
South Korea Threats and opportunities 47
Russia Uneasy relations 139
Sri Lanka Improving macro fundamentals 49
Taiwan A temporary soft patch 51 Economies Americas 141
Thailand Low political risk is key 53 US and Canada Top charts 142
Vietnam We expect stronger growth in H2 55 Latin America Top charts 143
US Sustained momentum 144
Economies Middle East and North Africa 57
Canada Boomtown 146
MENA Grappling with the new normal 58
Brazil Green shoots, despite fiscal setbacks 148
MENA Top charts 61
Mexico There could be trouble ahead 150
Bahrain Deficits and debt 62
Egypt A marathon, not a sprint 64 Strategy outlook 152
Iraq Tackling challenges on various fronts 66 Another brick in the wall 153
Jordan Cautious optimism 68 Forecasts and reference tables 163
Kuwait Easier said than done 70 Forecasts Economies 164
Lebanon One step forward, two steps back 72 Forecasts FX 165
Oman Surging public debt 74 Forecasts GDP 166
Qatar Adjusting to new realities 76 Forecasts Rates 167
Saudi Arabia Bumps in the road 78 Forecasts Commodities 168
Turkey Fiscal stimulus supports growth 80 Forecasts Long-term GDP and inflation 169
UAE Rough edges 82 Forecasts Selected interbank rates by tenor 171
Economies Africa 84 Reference tables Asia 172
Africa Not yet out of the Woods 85 Reference tables MENA 173
Africa Top charts 88 Reference tables Africa 174
Angola The new man in charge 89 Reference tables Euro area and UK 175
Botswana Losing steam 91 Reference tables Americas 176
Global overview
Real GDP growth, 2017 forecasts (%)

Global overview
>7
6 to 7
5 to 6
4 to 5
3 to 4
2 to 3
1 to 2
<1
N.A.
26 September 2017 4
Is this as good as it gets?
Global overview
Finishing strong
Marios Maratheftis +971 4508 3311 The world economy is heading into the year-end relatively strong. Growth is higher
Marios.Maratheftis@sc.com
Chief Economist than in 2016, although still below the averages seen before the global financial crisis
Standard Chartered Bank
(GFC). Volatility in asset markets is low. Inflation is weak and major central banks are
keeping monetary policy accommodative. Although there are fears that asset markets
are becoming frothy, the rebound in economic growth and market performance is not
being accompanied by a credit boom. This makes calls for more aggressive
monetary tightening highly risky.
This is our Goldilocks moment. The world economy is neither too hot, nor too cold.
The temperature is just about right.
This is our Goldilocks moment; the But beware of complacency. This recovery is cyclical in nature and therefore
world economy is neither too hot vulnerable; structural challenges remain. Productivity growth is weak, especially in
nor too cold
the West. Geopolitical risk is high, and given the problematic nature of domestic
politics in the US, there is the added risk of a trade war. Debt levels are very high
across developed and emerging economies, and they have increased since the GFC.
As a result, there is little space for fiscal policy to deal with shocks. With global
interest rates low, there is also limited space for monetary policy to deal with shocks.
Although the road we are currently on seems easy, structural issues pose medium- to
long-term challenges to the global economy. In this edition of Global Focus, we
assess the outlook for the economies we cover, and the global economy, for Q4-
2017 and early 2018. Given the structural issues facing the world and the cyclical
nature of the growth rebound, is this as good as it gets? Or could things turn out even
better over the next six months? Here, we examine possible shocks, both positive
and negative.
Figure 1: Global real GDP growth

GDP, constant prices (% change)
6
5 Pre-GFC average
growth (1998-2007)
4
GDP growth
3 Post-GFC average
growth (2008-16)
2
-1
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: IMF, Standard Chartered Research
26 September 2017 5
Politics and shocks

Global overview
Could there be a positive shock in US politics?

Trump and Congress could agree Remember the reflation euphoria following Donald Trumps election? Expectations of
on some type of tax reform fiscal stimulus and a boom in infrastructure spending led to expectations of stronger
growth. Markets thought that the heavy dependence on low interest rates and
monetary policy as the sole support of growth was finally coming to an end. We did
not share this initial euphoria following Trumps election. We were highly doubtful of
the administrations ability to implement such policy, and its effectiveness in driving
growth (see Thinking out Loud, 13 March 2017, Follow Janet not Donald). Since
then, markets have come around to our view. The US dollar has surrendered its post-
election gains, and political paralysis in the US has lowered expectations of
meaningful tax reform.
But there is a risk that markets may have become too negative. In particular, there is
a possibility that Trump and Congress could agree on some type of tax reform,
providing the economy with fiscal stimulus.
We highlight three points. First, although the White House and the Republican Party
would like to show progress before the next midterm elections, they have limited time
to design and pass comprehensive tax reform. Given the divisions within Congress,
any tax plans are likely to be limited in scope and less grand than once anticipated.
Given low expectations, even limited developments could be seen as positive.
With a positive output gap, fiscal Second, with the output gap at zero or slightly positive, the US economy is operating
stimulus is more likely to push US at capacity. Fiscal stimulus is therefore likely to push US interest rates and the USD
rates and the dollar higher, but to higher, particularly as currency markets are now positioned short USD. The impact
have very little impact on economic
on growth is more likely to be muted, both because of the positive output gap and
activity
also because fiscal stimulus is more likely to take the form of tax cuts than increased
infrastructure spending.
Third, if the Fed needs to hike more aggressively than markets anticipate, emerging
markets will likely be affected. In Thinking out Loud Shocks, the Fed and emerging
markets, we showed that currencies are the main EM shock absorber, and that not
all emerging markets react the same way. A country such as Turkey is far more
Figure 2: The US economy is operating at capacity

Output gap, %
-2
-4
-6
-8
Jun-61 Jun-69 Jun-77 Jun-85 Jun-93 Jun-01 Jun-09 Jun-17
Source: SF Fed, Standard Chartered Research
26 September 2017 6
vulnerable than, for example, the Philippines. Current account balances and net
foreign asset positions are two key variables that determine how countries and their
Global overview
currencies are affected by Fed shocks.
Brexit and Trump are a much-needed wake-up call for Europe

We expect growth in Europe to The main difference in 2017 versus previous post-GFC years has been the
continue, despite persistent resumption of growth in Europe, which is no longer a drag on global growth. We
structural challenges expect this to continue in the coming months, despite still-serious underlying
problems in the euro area. Debt levels in the south are high, although they probably
peaked last year. Monetary union without political and fiscal union led to the crisis.
One size clearly did not fit all, and this fundamental problem remains.
Nonetheless, the cyclical recovery is likely to continue over the next few months. And
on the political front, there have been some positive developments.
Brexit and Trumps antagonistic rhetoric may have been the best things that could
have happened to the euro area, as they served as a wake-up call for European
voters. Elections in the Netherlands, France and Germany have all gone in favour of
pro-Europe politicians.
However, the rise of the far right leaves no room for complacency. This, in our view,
is likely to encourage Germany and France to work more closely together to find
solutions to the many challenges facing Europe.
Germany has every incentive to make it easier for French President Emmanuel
Macron to proceed with his reforms. Failure for Macron, after far-right candidate
Marine Le Pen received 34% of the vote, could have serious implications for the
European project. Germany and the rest of Europe therefore want a successful
Macron administration. We expect close co-operation between France and Germany.
And although the previous nine years of austerity have led Europe to become more
German in its approach (or at least try to), Frances influence now could bring a
more balanced approach.
Korea The human factor and the importance of communication

In North Korea, the main risk is that The biggest geopolitical risk lies on the Korean peninsula. Our main scenario,
a miscalculation or assuming that rationality prevails, is that military escalation will be avoided. Still,
miscommunication results in tensions are likely to remain elevated and rhetoric aggressive. Markets will find it
military escalation
difficult to incorporate this into prices. Geopolitical risks tend to have little relevance
to financial markets and economic activity, until the moment they do.
In such an environment the main risk is a miscommunication or miscalculation that

leads to military escalation. Assuming that rationality will prevail is one thing, but the
human factor implies risk. In his book How Wars Begin, A.J.P. Taylor finds that many
wars begin because of apprehension rather than plans for conquest.
Many historians see the Korean War of 1950-53 as the result of a series of
miscalculations and miscommunications. The US backed the South Korean government
of Syngman Rhee, but started withdrawing troops from South Korea in 1948. In January
1950, Secretary of State Dean Acheson said in a speech at the National Press Club that
the US defence perimeter ran through Japan, the Ryukyus and the Philippines. This was
interpreted by North Korea as meaning that the US would be unprepared to defend
South Korea in case of invasion. Six months later, the North invaded.
26 September 2017 7
The decision to invade was clearly a miscalculation on the part of North Korea. And it
was the result of a miscommunication on the part of the US. The US was also caught
Global overview
completely unawares by the invasion, despite clear signs of war preparation that
included the build-up of military forces and the removal of civilians from the border
area. The perception in the US was that North Korea would not invade without the
support of the Soviets, and that the Soviets would not have approved such plans.
The main case is for rationality to prevail. But this assumption depends on each side
being able to correctly interpret the other sides moves and intentions.
We expect no further escalation in the GCC

In the GCC, strong pressure from In the Middle East, the focus is on the standoff between Qatar and the quartet of
the US and other allies to end the Saudi Arabia, the UAE, Bahrain and Egypt. The standoff looks set to continue for
standoff makes a further escalation now, but a further escalation is highly unlikely, in our view. All of the countries
unlikely
involved are key Western allies and there are currently heavy diplomatic efforts,
primarily by the US. This increases the likelihood of some form of solution over
several months, but not immediately.
Monetary policy
Easy monetary policy is one of the key factors driving economic growth. Given our
view that this recovery is cyclical in nature and that structural challenges remain, the
monetary policy outlook will be key in determining the recoverys sustainability.
The outlook is positive for now, as we expect major central banks to hike interest
rates only gradually. China is refocusing its attention on financial stability rather than
just on growth. As a result, monetary policy is turning neutral from accommodative,
which should lead to a moderation in growth. This is necessary, in our view, as the
pace of credit growth was becoming increasingly unsustainable. At the same time,
we think growth is still important to the authorities. President Xi is likely to reiterate
th
the goal of doubling Chinas 2010 real GDP by 2020 at the 19 Party Congress
starting on 18 October. To achieve this, China has to maintain a minimum growth
rate of 6.3% from 2018-20. As a result, the authorities will want to ensure that policy
is not tightened aggressively enough to derail growth.
Figure 3: The US job market is tightening Figure 4: but inflationary pressure is not materialising
Unemployment rate SA,% (LHS); Fed funds rate, % (RHS) Inflation vs target, ppt (LHS); Fed funds rate, % (RHS)
11 Unemployment 8 3.0 This will not be the first time Fed 8
rate tightening occurs while inflation is
10 7 2.5 7
undershooting the 2% target
2.0 6
9 6
1.5
8 5 Fed funds 5
1.0 (RHS)
7 4 4
0.5 Inflation vs.
6 3 target 3
0.0
5 2 -0.5 2
Fed funds 1
4 1 -1.0
(RHS)
3 0 -1.5 0
Aug-91 Aug-95 Aug-99 Aug-03 Aug-07 Aug-11 Aug-15 Jul-91 Jul-94 Jul-97 Jul-00 Jul-03 Jul-06 Jul-09 Jul-12 Jul-15
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
26 September 2017 8
The Feds decisions have a significant impact on the world economy given their
effect on global liquidity. We expect the Fed to follow a very gradual hiking trajectory.
Global overview
Dovish hikes should be positive for the global economic environment.
Fed policy will be key in sustaining The relatively strong pace of US growth allows the Fed to proceed with raising
this benign global environment, and interest rates. However, the absence of inflation indicates that these hikes should be
we expect dovish hikes to continue gradual. The absence of inflation is a paradox. Falling unemployment has led to
rising inflation in the past. And although unemployment is now at 4.4% (May and July
printed 4.3%, the lowest since June 2001), inflationary pressures are not
materialising. One possible reason for this is the presence of positive supply shocks,
possibly as a result of technological developments and globalisation. The question
policy makers will need to answer is whether the shocks are transitory or permanent.
If these factors are transitory, then the Fed should continue with its hikes. If not, it
should stop.
It is difficult for anyone, including the Fed, to determine a priori with confidence how
transitory these shocks are. Hiking interest rates aggressively in anticipation of higher
inflation that does not materialise could push the US economy back into recession.
We therefore expect the Fed to continue with its gradual approach.
The risk is that wages (and consequently inflation) will begin to rise more rapidly, as
they have done in previous cycles. Early signs of such dynamics could lead to more
aggressive Fed hikes. We see this as the key risk to this recovery, but mostly later in
2018 and 2019.
Final thoughts
We expect the world economy to end 2017 and start 2018 with good momentum,
despite ongoing structural challenges. This cyclical recovery will likely depend heavily
on a continuation of relatively loose monetary policy, particularly from the Fed and
the European Central Bank. Although this is our main scenario, we do not ignore the
possibility of policy shocks. We worry less about the period three to six months
ahead, but think they could become more of a concern later in 2018. The positive
outlook also depends on no further deterioration in global geopolitics, particularly in
Korea. We assume rationality will prevail; but history demonstrates that this is not
always the case.
26 September 2017 9
Geopolitical economics
The threat of extremism in Southeast Asia

A growing and changing risk
Philippe Dauba-Pantanacce +44 20 7885 7277 As the so-called Islamic State (IS) fights what are likely to be its last battles in Iraq
Philippe.Dauba-Pantanacce@sc.com
Senior Economist, Global Geopolitical Strategist and Syria, the question arises: What will be the next frontier in its struggle? We
explore how the threat posed by radical Islamic groups while not existential at this
point is rising in Southeast Asia.
The end of the IS caliphate in the Radical Islamic terrorism has taken multiple forms over the years. The ideology has
Middle East will not end the continued to thrive and reinvent itself over the past three decades, targeting various
spreading of its ideology societies and geographies under multiple brands. Three main events have marked
the global evolution of radical Islamic terrorism: (1) the 1980s Afghan war and the
internationalisation of the mujahedeen fighter and ideology; (2) the 9/11 attacks, a
pivotal event in terms of scale, shock, and international response; and (3) the
declaration of a caliphate in Syria and Iraq in 2014, an important catalyst for the
spreading of its ideology.
Until recently, the movements recruitment and battle terrain was mostly in the Middle
East, Afghanistan and Pakistan. It has since expanded to Somalia, Africas Sahel region
and Western Africa (where Boko Haram is the most prominent example). Western
countries have also both been fertile ground for recruiting disenchanted youngsters and
planning attacks. In Asia, while Islamic terrorism has been a major concern on the Indian
sub-continent for years, intelligence agencies are now sounding the alarm about the
growing threat it could represent to Southeast Asia both in terms of terror attacks and
gradual changes in social fabric and national identities.
While some Islamic movements in Southeast Asia have older ideological foundations,
these have recently combined with the opportunistic rise of transnational terrorist
organisations seeking to leverage local grievances to expand their influence. The
geographic scope of the threat has expanded. Within Southeast Asia, the threat was
previously seen as being concentrated in Indonesia and the southern Philippines, but has
become a growing concern in Malaysia, Thailand, Myanmar and even Singapore. To be
clear, we do not think that Islamic terrorism poses an existential threat to Southeast Asia
at this point, as has been the case in some Middle East countries. But it is a trend to
reckon with, and combating it will require growing regional cooperation.
Figure 1: Radical Islamic movements have spread throughout Asia

Uzbekistan
South Korea
Estimated Muslim population
Japan
0 - 6%
7- 19%
Afghanistan 20 - 48% (None)
Bhutan China 48 - 78%
Pakistan
79 - 100%
Nepal
Malaysia
Uzbekistan
Afghanistan
India
China
Vietnam
Myanmar Philippines Bangladesh
Laos India
Pakistan
Indonesia
TOTAL ASIA
Bangladesh Thailand
0 50 100 150 200 850 900
Cambodia Millions
Sulu Sea
Malaysia
Central and South Asia Southeast Asia
Sri Lanka Malaysia
Celebes Triborder area Ansartawhid in the land of Hind Jemaah Islamiyah
Sea Tawhid Battalion Laskar Jihad
Singapore ISIS Khorasan Province Islamic Defenders Front
Islamic movement of Uzbekistan
Abu Sayyaf Group
Indonesia Caliphate and Jihad Movement
The Moro Islamic Liberation Front
Abtalul Islam Foundation
Hefazat e Islam
Indonesia
Harakah al-Yaquin
Source: BBC, IPAC, Carnegie Council, Standard Chartered Research
26 September 2017 11
Risks have spread across Asia

The rise of radical Islamic groups in The rise of radical Islamic groups across Asia has been a decades-long process, but
Asia took a decisive turn after the has accelerated recently. The Afghan war of the 1980s is widely seen as the turning
Afghan war of the 1980s point the first catalyst for the globalisation of transnational extremist Islamist
groups. It enabled the sharing of ideologies and combat practices among fighters
from different countries, which they then took back to their countries. It also provided
a sense of purpose in uniting against a shared enemy.
More recently, the 9/11 attacks were viewed by many radical groups as the ultimate
success in achieving the desired confrontation with the West. The current war in
Syria-Iraq and the creation of the cross-border IS caliphate in 2014 have further
galvanised jihadist movements in Asia through the two-way flow of militants, the
dissemination of ideology, combat training opportunities, and networking (or in some
cases competition) between various movements.
The threat is multi-faceted, going Scholars have noted that the risk of Islamist extremism stretches across the region,
beyond the human and physical from Central and South Asia to Southeast Asia. According to Joshua Kurlantzick of
costs of attacks to shape national the Council on Foreign Relations, IS leaders have stepped up their campaigns to
agendas
train, advise and influence potential radicals in South and Southeast Asia, regions
which are home to the largest number of Muslims in the world. The war in Syria and
Iraq has significantly altered modern Islamic terrorism, and its effects are widely felt
in Central Asia, according to Jozef Lang of the Centre for Eastern Studies. The threat
goes beyond the human and physical costs of terrorist attacks and is increasingly
emerging from seemingly non-militant civil society groups with a radical agenda,
according to Chietigj Bajpaee, a doctoral candidate at Kings College London.
In South Asia, the rise of Islamic extremist groups is regularly in the headlines in
Pakistan, Afghanistan and India. Bangladesh has seen rising instances of
harassment or murders of liberal writers, secular figures, religious minorities and
state officials. In Myanmar, local grievances among the Rohingya minority have
paved the way for the creation of a wider Islamic insurgency movement, Harakah al-
Yakin. The movement was founded by an ethnic Rohingya born in Pakistan and
raised in Saudi Arabia, blurring the lines between local political grievances and
international Islamic terror networks. Radicalisation has even reached micro-states
such as the Maldives, which has been reported as having the worlds highest ratio of
nationals waging jihad in Syria.
Southeast Asia in focus

9/11 and the 2002 Bali attack Southeast Asia has witnessed multiple terrorist incidents since 9/11, many
brought a change in Southeast perpetrated by the Al Qaeda-linked Jemaah Islamiyah terrorist cell and its
Asias perceived vulnerability associates. After investigations revealed that some of the 9/11 planning took place in
Southeast Asia, the regions governments started to treat counter-terrorism as a top
policy priority with varying degrees of success. A year after 9/11, the October 2002
Bali bombings killed more than 200 people, marking a turning point in Southeast
Asias perceived vulnerability to Islamic radicals.
While radical Islamic groups have The war in Syria-Iraq and the creation of the caliphate has galvanised localised
increased regional cooperation, militant groups. The June 2014 announcement by IS of the caliphate captured the
counter-terrorism agencies have imagination of the radical fringes across Southeast Asia, Brookings Institution
maintained a national focus
scholar Joseph Liow said in US congressional testimony in 2016. The same summer,
a series of radical groups and clerics from Indonesia and the Philippines pledged
allegiance to IS. More than 60 groups in Southeast Asia have pledged allegiance to
self-declared caliph Abu Bakr al-Baghdadi, according to Rohan Gunaratna, head of the
Singapore-based International Center for Political Violence and Terrorism Research.
IS has led to increased cross-border logistical, ideological and training cooperation

among extremist groups in the region, Gunaratna said. Meanwhile, most of the
regions law enforcement agencies still have a national focus, according to the
Institute for Policy Analysis of Conflict (IPAC). Increased cross-border cooperation is
urgent because in the short term, IS losses in the Middle East could increase the
incentive to undertake acts of violence at home, the institute said in a 2016 report.
Localised struggles
Transnational radical movements Most radical Islamic terror groups in Southeast Asia have aligned themselves with
have adapted to the local context home-grown jihadi or criminal agendas. International movements typically adapt to
and leveraged pre-existing political the local context and adopt pre-existing political grievances originally unrelated to
grievances or criminal activities
any religious agenda. In some cases, these political causes are consistent with the
groups ideological and religious goals, while in others (such as in the southern
Philippines) the alliances are more opportunistic, and are used by local groups to
further objectives such as narcotics/human trafficking and other criminal activity.
Philippines
Islamist extremists grabbed headlines earlier in 2017 for staging a weeks-long siege
in the southern Philippine city of Marawi, which resulted in aerial bombardment and a
ground invasion by the national army. Hundreds of lives were lost, including about
300 militants, according to the Philippine military. While the reasons for the rise of
militancy in the southern Philippines are complex, the threat has increased in recent
months. Intelligence reports leaked in the Philippine press in May revealed a plan by
rebel groups to occupy Marawi and raise the IS flag. The leader of the rebellion,
Isnilon Hapilon, had been named the IS emir for Southeast Asia in 2016.
Thailand
There are growing concerns that transnational jihadist terrorist groups are co-opting
the longstanding political struggle of the Malay-Muslim ethnic group in southern
Thailand despite the two following different religious traditions. Malay-Muslim
separatist violence has resulted in 7,000 deaths since 2004. According to the
International Crisis Group, insurgency in Thailands South has little in common with
jihadism, but persistent instability would provide openings for foreign jihadists who
thrive on disorder and could make the insurgents susceptible to radicalisation.
Indonesia
Jemaah Islamiyah, which masterminded some of the countrys most deadly attacks in
the 2000s, was the product of a growing and increasingly radicalised movement
that has evolved over decades. Despite ideological and competitive differences with IS,
Jemaah Islamiyah is still very active and acts as a central command in Southeast Asia
Figure 2: A sampling of attacks attributed to Islamist groups in Southeast Asia

since early 2016
Country City Casualties Date
Indonesia Jakarta 14 24 May 2017
Philippines Marawi 103 23 May 2017
Myanmar/Bangladesh Border 9 October 2016
Philippines Davao 14 3 September 2016
Bangladesh Dhaka 20 July 2016
Malaysia Kuala Lumpur 8 28 June 2016
Indonesia Jakarta 24 14 January 2016

Source: Media reports, Standard Chartered Research
to develop ideological and regional training camps (IPAC report, October 2016). In
2016, foreigners including Chinese Uighurs were found during a police shootout
at a Sulawesi training camp of an IS-affiliated group.
Jemaah Islamiyah was created by two Indonesian clerics of Arab origin with roots in the
Darul Islam movement, and populated by Afghan war veterans who targeted
disenchanted Darul Islam supporters. Darul Islam Indonesia (Islamic State of
Indonesia) was established by radicalised youth after the transfer of power from the
Dutch in 1949, and waged an armed struggle against the Dutch. Several subsequent
waves of radicalisation took place in Indonesia, most notably following the Afghan war.
Malaysia
The Malaysian authorities have More than 100 alleged IS sympathisers were arrested in Malaysia in 2015 alone. The
become publicly concerned about authorities have become particularly concerned about the proliferation of Malay-
the risk of radicalist contagion language radical websites and chat groups with a pro-IS orientation, as they heighten
the risk of self-radicalisation and the prospect of lone wolf terrorism. The deputy
defence minister told the parliament in 2015 that 70 army personnel were found to have
been involved with IS. In June 2016, eight people were injured in a grenade attack on a
nightclub in Kuala Lumpur; the police later declared that the attack had been carried out
on the orders of a Malaysian IS fighter in Syria. In May 2017, a cell smuggling guns for
IS was dismantled by the governments counterterrorism unit.
Malaysias political climate has evolved towards identity politics (rather than issue-
based politics), which has fuelled growing ethnic and religious polarisation
traditionally fertile ground for extremist religious ideologies.
Geopolitics does not help

Southeast Asias combination of geography and politics increases the
counterterrorism challenge, creating concrete obstacles to fighting the logistical and
physical presence of radical Islamic movements.
The policing and governance of the waters that include the Sulu Sea (Philippines),
the Sabah waters (Malaysia) and the Celebes/Sulawesi Sea (Indonesia) have proved
difficult. The region has developed over centuries as a seamless exchange zone
outside of formal and legal cross-border trade, and has recently become a central
transfer point for the movement of militants and terrorists and for human and arms
trafficking, according to Liow of the Brookings Institution.
The vast size of the tri-border area and the regions complex topography make
operational control challenging; close transnational cooperation which is currently
tentative would be needed to surmount these difficulties. This area has been
described as an emerging safe haven for terrorists, facilitating their network. It is an
area where non-state actors control territory, arms are quite readily available and there
are so many insurgencies that many people are trained in combat, according to Sidney
Jones, director of the Indonesia-based Institute for Policy Analysis of Conflict. What we
are seeing is a large-scale mobilisation to recruit fighters from the region.
Extremist Islamic groups represent a formidable challenge for Southeast Asias

governments, not just in terms of combating terrorist attacks but also in terms of ideology
and narrative. As history has repeatedly shown, a governance vacuum such as the one
in the tri-border area can act as a strong enabler and multiplier for such groups. Strong
cross-border cooperation between government counter-terrorism agencies could help to
address an issue that risks becoming a regional threat if left unchecked.
Economies Asia
Asia Watching for dovish surprises

Economic outlook Focus on structurally lower inflation
David Mann +65 6596 8649 While the external backdrop remains benign, Asias larger, less open
David.Mann@sc.com
Chief Economist, Asia economies may see reason to keep easing monetary policy. Both India and
Standard Chartered Bank, Singapore Branch
Indonesia have already delivered rate cuts (India in August, Indonesia in August and
September); we had flagged the risk of these dovish outcomes in the June edition of
Global Focus. In the case of India, we expect another rate cut. In Indonesia, we see
a risk of further cuts in 2018 if growth momentum falters and inflation remains
subdued. The main barrier to such moves would be an unexpectedly hawkish turn by
the US Fed, triggering another round of the US reflation trade, as seen after Trumps
election victory in November 2016. In the absence of this, soft inflation (despite y/y
spikes in energy prices) and local-currency strength have left monetary conditions
relatively tight in India and Indonesia, as well as Thailand and Taiwan.
We expect export data around the Chinas indicators point to slowing growth after a stronger-than-expected start to the
region to soften gradually after a year: an easing housing market, a weakening fiscal policy impulse and softer
very strong H1-2017 exports. This, combined with the end of Chinas inventory restocking cycle, should
also cause exports to weaken across Asia for the rest of 2017 and early 2018.
Shipments of a major new smartphone later in 2017 may provide a positive impetus
for exports, but this is likely to result in a less favourable base effect thereafter.
Monetary policy India and Indonesia in focus

Our MCIs suggest that dovish risks We think markets are underestimating the potential for further easing; the
remain in place for India and extent will depend on whether policy makers see a structural shift to lower
Asia
Indonesia inflation. Our Monetary Conditions Indices (MCI), as shown in Figure 1, have been
effective in warning of surprise monetary policy easing in the last few years. They
correctly signalled the dovish outcomes in India and Indonesia in 2017. Our MCIs
use three key indicators: (1) real credit growth, (2) real short-term interest rates, and
(3) change in the real effective exchange rate. They currently point to the risk of more
dovish surprises from both India and Indonesia. In both cases, inflation has
undershot expectations. The main question for the markets is whether the reduction
in inflation has been structural, which would mean a lower range for policy rates. In
both countries, efforts to tackle food inflation through increased price transparency
have helped to offset the effects of higher energy costs.
Figure 1: MCI has been an effective leading indicator of monetary policy action
MCI indicated tight conditions in Indonesia and India before both central banks eased in August; BI eased in September too
2016 2017
JP Loosest
NE Asia
KR
CN
Greater
HK
China
TW
ID
0
MY
ASEAN PH
SG
TH
AU
IN Tightest
Source: CEIC, Bloomberg, Standard Chartered Research
Monetary policy action indicated by arrows. Down arrows signal policy easing (), up () signals tightening. Non-consensus moves are indicated with thick arrows (). Dashes ( )
indicate no change in policy, when markets expected a policy move; August 2017 data based on our estimates where unavailable.
Shades of green (or red) indicate looser (tighter) conditions than in the past four years; darker shades show a stronger signal
In India, the focus remains on policy India has faced multiple economic headwinds so far this year: the lingering effects of
easing given headwinds to growth demonetisation, uncertainty related to the Goods and Services Tax, and a stressed
and soft inflation pressure banking sector. GDP growth fell to a 13-quarter low of 5.7% in Q1-FY18 (quarter
ended June 2017). The governments commitment to fiscal consolidation leaves little
room to support growth on that front. While we think inflation has bottomed out, price
pressures remain soft.
In Indonesias case, a more positive FDI and investment story is unfolding. FDI rose
10% y/y in Q2-2017, and realised fiscal capital expenditure rose 18.7% y/y in
7M-2017. The governments direct contribution to GDP growth may improve in the
coming months after a slow start to 2017. In addition, our simulation suggests that
inflation may rise towards 4% by H2-2018. For these reasons, further policy easing
by Bank Indonesia (BI) is not our core scenario, but we do not rule it out over the
next six months if inflation continues to surprise to the downside.
Chinas 19th Party Congress dominates the agenda

We expect a new lease of life for the Major political events are in focus in Northeast Asia. While tensions on the
Belt and Road initiative after the Korean peninsula may continue to grab market attention, Chinas most important
Party Congress th
political event the 19 Party Congress starts in Beijing on 18 October. The Party
Congress will elect a new Central Committee (currently composed of 205 full
members and 171 alternates) that will appoint the partys top leadership, including a
new Politburo and Politburo Standing Committee. The Party Congress also has the
authority to revise the partys constitution, something that has been done at every
Party Congress since the current constitution was adopted in 1982. Xi Jinping is
expected to be reappointed for a second five-year term. We expect the new Politburo
Asia
to be in a position to more aggressively push Xis agenda, including the Belt and
Road initiative, SOE reform and promoting urbanisation.
Market outlook Too much, too soon for the CNY

The CNY REER is 9% down from the Markets around the region have been closely following the rapid Chinese yuan (CNY)
multi-year peak seen in 2016 appreciation since May 2017. At the start of 2017, expectations of CNY moves had
become too one-sided in favour of depreciation, which we disagreed with. We see
more two-way risk from this point. Despite CNY strength against the USD, the real
effective exchange rate (using BIS trade weights) is still down 9% from the 20+ year
peak reached in February 2016.
Policy measures already being taken are aimed at slowing appreciation to counter a
one-way-bet mentality in the market. Achieving this could reduce outflow pressure.
These measures include removing the requirement for all foreign entities to set aside
20% of USD purchases, and removing the reserve requirement on CNY deposited
onshore by foreign financial institutions.
This rollback of measures introduced in 2015, which were at the time aimed at
preventing excessive CNY depreciation, are a sign that macro-prudential policies will
be implemented and reversed as needed to prevent excessive volatility in the USD-
CNY rate. All this is a result of the more benign backdrop for global financial markets
than was expected at the start of 2017. While currencies around the region avoid
depreciation pressure, led by the CNY, we would not be surprised to see economies
such as India and Indonesia opt for even more monetary easing than the consensus
currently expects.
Asia Top charts

Figure 1: China and AXJC likely to contribute c.60% of Figure 2: Mixed performance in H1-2017
global growth in 2017 (contributions to global growth, ppt) GDP growth, % y/y
1.5 Forecast 9 H1-2016
US
China 8
H2-2016
1.0 7
Euro area AXJC H1-2017
6
0.5
5
4
0.0
3
-0.5 2
1
-1.0 0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 CN PH IN MY VN ID HK TH KR SG TW AU JP
Source: IMF, Standard Chartered Research Source: Bloomberg, CEIC, Standard Chartered Research
Figure 3: Energy inflation has been driving headline CPI Figure 4: Real policy rates have declined in 2017 on
Food and energy inflation by economy, % y/y higher inflation (average real policy rates, %)
25 6 2015
20
5
15
2017 YTD 4 2016
10
Asia
2016
5 3 2017 YTD
0 2
-5
1
-10
-15 0
TW
TW
TH
SG
CN
SG
TH
CN
MY
JP
AU
KR
PH
HK
KR
MY
PH
HK
AU
JP
IN
ID
ID
IN
-1
Energy Food IN VN ID TW CN PH TH NZ JP AU KR MY
Source: CEIC, Standard Chartered Research Source: Bloomberg, CEIC, Standard Chartered Research
Figure 5: Asias nominal exports likely peaked in H1-2017 Figure 6: Export growth is easing as Chinas inventory
% y/y building cycle peaks (% y/y 3mma)
50 40 25
Export volumes picked TW KR SG
40 up in Q1-2017 Assuming the 24-mth avg m/m growth
30 20
rate continues, the base effect will
30 50% price become the main drag on the y/y
20
retracement growth rate 15
20 Export
Constant
volume 10
price
10 10
0
0
Export value 5
-10
-10 (USD)
-20 0
-20 CN industrial product
inventory (RHS)
-30 -30 -5
Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Mar-11 Jun-12 Sep-13 Dec-14 Mar-16 Jun-17 Sep-18
Note: We include Australia, Japan, China, Hong Kong, South Korea, Singapore, Taiwan, *We forecast export growth until 2018 using the average 24-month m/m growth,
Malaysia and Thailand in Asias composite exports, Source: CEIC, Standard Chartered Research
Source: WTO, Standard Chartered Research
Asia Macro trackers

Figure 1: USD export growth Broad-based strong performance across the region
Shades of green (or red) indicate better (worse) growth compared to the past three years; darker shades show a stronger signal
2013 2014 2015 2016 2017
JP Highest
NE Asia
KR
CN
Greater
HK
China
TW
ID
0
MY
ASEAN PH
SG
TH
AU
IN Lowest
Source: CEIC, Standard Chartered Research
Figure 2: Local-currency export growth Set to moderate for the rest of 2017 but remain robust
Shades of green (or red) indicate better (worse) growth compared to the past three years; darker shades show a stronger signal
2013 2014 2015 2016 2017
JP Highest
NE Asia
KR
CN
Asia
Greater
HK
China
TW
ID
0
MY
ASEAN PH
SG
TH
AU
IN Lowest
Figure 3: Current account Surpluses narrowed across most of Asia in H1-2017

Shades of green (or red) indicate surplus (or deficit); darker shades show a stronger signal
2013 2014 2015 2016 2017
JP Surplus
NE Asia
KR
CN
Greater
HK
China
TW
ID
0
MY
ASEAN PH
SG
TH
AU
IN Deficit
Figure 4: Headline inflation Inflation eased across most regions on easing transport inflation
Shades of green (or red) indicate higher (lower) inflation compared to the past three years; darker shades show a stronger signal
2013 2014 2015 2016 2017
JP Highest
NE Asia
KR
CN
Greater
HK
China
TW
ID
0
MY
ASEAN PH
SG
TH
AU
IN Lowest
Figure 5: Food inflation has remained benign

2013 2014 2015 2016 2017
JP Highest
NE Asia
KR
CN
Greater
HK
China
Asia
TW
ID
0
MY
ASEAN PH
SG
TH
AU
IN Lowest
Figure 6: Energy inflation has eased as the low price base effect dissipates
2013 2014 2015 2016 2017
JP Highest
NE Asia
KR
CN
Greater
HK
China
TW
ID
0
MY
ASEAN PH
SG
TH
AU
IN Lowest
Australia Fewer worries

Economic outlook Before sunrise
Chidu Narayanan +65 6596 7004 We expect steady but below-average growth in the medium term as the
Chidambarathanu.Narayanan@sc.com
Economist, Asia Australian economy rebalances away from mining. We forecast 2017 GDP growth of
2.3% on a stronger H2 due to a favourable base effect, following lukewarm growth in
Mayank Mishra +65 6596 7466 H1. A strong job-market recovery and falling housing price inflation, particularly in
Mayank.Mishra@sc.com
Macro Strategist Sydney, should reduce risks to growth and stability. Household consumption, the
biggest contributor to growth, is likely to edge lower in the near term as real wage
growth remains subdued. We continue to expect the Reserve Bank of Australia
(RBA) to remain firmly on hold near-term while emphasising its accommodative bias;
we expect the policy rate to stay at its current low of 1.5%.
Mining investment continued to drop in H1, but at a slower pace, in line with our
expectations; it is now at only 36% of its peak level. Non-mining capex rose 2.6% q/q
in Q2, the fastest q/q growth in six quarters. We believe mining capex is close to its
bottom, while non-mining capex is likely to stay steady. The quarterly survey by the
Australian Bureau of Statistics estimated non-mining investment at only AUD 70bn in
FY18 (year ending June 2018); we estimate this at closer to AUD 75bn. We estimate
overall capex at about AUD 100bn well below AUD 150bn in FY15, contributing
significantly less to overall growth.
Export growth is likely to be steady, Export growth is likely to slow but remain high near-term, keeping the trade balance
supported by commodity exports in surplus. Exports rose 22.6% y/y in January-July 2017, the fastest growth in nine
years, on the commodity price rebound and Chinas inventory rebuild. The rebound in
Asia
prices of iron ore and coal, which make up c.40% of all goods exports, has been the
biggest driver of exports. While prices of both commodities are likely to fall from
current levels on still-high supply, they will likely remain higher than in 2016,
supporting exports. We expect trade to remain in surplus in Q3, before slipping back
into a mild deficit in Q4.
Job creation has been much The labour-market recovery has been much stronger than expected so far in 2017.
stronger than expected this year More than 265,000 jobs were created in the first eight months of the year, the fastest
pace of job creation in 11 years. Encouragingly, over 75% of these were full-time
jobs. Despite the volatility of Australian labour-market data, the job market has
recovered significantly. Wage growth, however, will take longer to improve
significantly and support household consumption, in our view. The RBA has noted
Figure 1: Australia macroeconomic forecasts Figure 2: Consumption is now a key growth driver
GDP contributions, ppt, LHS; GDP, % y/y, RHS
2017 2018 2019 6%

5%
GDP grow th (real % y/y) 2.3 2.9 3.2 4%
3% GDP
CPI (% annual average) 1.9 2.6 2.2
2%
Policy rate (%)* 1.50 2.00 3.00 1%

0%
AUD-USD* 0.75 0.80 0.84 -1%
Net exports
-2%
Current account balance (% GDP) -1.1 -1.7 -1.5 Gross private investment
-3% Household consumption
-4%
Fiscal balance (% GDP)** -2.2 -1.5 -1.3
2009 2010 2011 2012 2013 2014 2015 2016 2017
*end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: Australian Bureau of Statistics, Standard Chartered Research
that wage growth is low and is likely to remain so for a while, but that stronger
labour-market conditions should drive wage growth higher. Low wage growth will
likely cap household consumption in the near term, but should also help to keep
inflation expectations subdued.
Inflation edged lower in H1 as housing price growth slowed and retail competition led
to lower retail goods inflation. Headline inflation was 1.9% y/y in Q2, well below
market expectations of 2.3%. Core inflation remained below the RBAs 2-3% target in
H1; we expect it to remain subdued in the near term. Continued low inflation and
subdued inflation expectations should give the central bank sufficient space to
remain accommodative through early 2018.
Policy Still accommodative, but less concerned

The RBA is likely to maintain a We expect the RBA to keep the policy cash rate on hold at 1.50% in the near
dovish hold throughout 2017 term. The RBA has turned progressively less concerned about the economy thanks
to the labour-market recovery and falling housing price inflation. However, we believe
that monetary policy is still finely balanced and hiking rates too soon could derail the
nascent recovery. Markets are now fully pricing in rate hikes only in Q4-2018, in line
with our view.
Credit growth to housing investors fell in H1; this, combined with lower housing
inflation (particularly in Sydney), should give the central bank comfort. Business
credit growth has also picked up, although it is too early to point to a sustained
improvement. This solidifies the argument against further easing. In line with RBA
Governor Lowes comments in a July speech, we think the next policy rate move will
Asia
be a hike, but will not occur in the near term. The current lending restrictions will
likely continue at least through early 2018, in our view.
Lower housing price inflation likely Housing price inflation in Sydney has fallen recently. An expected increase in supply
to allow the RBA to maintain could lower housing inflation still further, which should add to the RBAs comfort
accommodative policy level. The RBA would likely be cautious in the event of a sharp correction, which we
believe is unlikely. While excessive household leverage could curtail household
consumption, rising household equity has supported spending. We see a low risk of
rate hikes even in H1-2018 given the weak labour market and muted wage growth.
The August and November 2018 meetings are likely to be important, as the RBA has
in the past preferred to change its policy cash rate at meetings following quarterly
inflation prints.
Market outlook
We maintain our Underweight short- and medium-term weightings on the
Australian dollar (AUD). The AUD has had a strong run in recent months, rallying
c.8% against the USD since the start of June. Amid broad USD weakness, AUD
outperformance has been driven by the rally in base metals prices ahead of Chinas
planned capacity cuts later this year. Iron ore prices are up more than 40% since
June. However, Chinas policy makers appear increasingly concerned about the
extent of the recent rally and the accompanying pick-up in speculative activity.
Furthermore, Chinas slowing activity data and deleveraging may weigh on
commodities sentiment. These downside risks, coupled with extended long AUD
positioning, make us cautious on the currency. We maintain our end-2017 forecast
for AUD-USD at 0.75.
Bangladesh Steady as she goes

Economic outlook
Saurav Anand +91 22 6115 8845 Growth to moderate as consumption slows. Bangladeshs solid macroeconomic
Saurav.Anand@sc.com
Economist, South Asia performance is set to continue in FY18 (year ending June 2018). We forecast growth
Standard Chartered Bank, India
of 6.9% (FY17: 7.2%) and a balance-of-payments surplus. Private consumption is
Nagaraj Kulkarni +65 6596 6738 likely to remain muted given lower remittances and floods in Q4-FY17 and Q1-FY18.
Nagaraj.Kulkarni@sc.com
Senior Asia Rates Strategist However, we expect private investment to improve, helped by political stability, lower
trade logistics costs after the opening of two key road projects, and improved access
Divya Devesh +65 6596 8608
Divya.Devesh@sc.com
to electricity.
Asia FX Strategist
The governments fiscal stance remains conservative. Provisional estimates suggest
that FY18 government spending got off to a slow start in July, in line with the trend of
The government has adopted a
conservative fiscal stance the previous five years. We forecast the FY18 fiscal deficit at 4.5% lower than the
government target of 5.0% given capacity constraints in implementing budget
proposals. For FY17, revenue and spending trends through April 2017 suggest a
fiscal deficit of 3.5-4.0%, lower than our forecast of 4.5% and the budgeted 5.0%.
The central bank remains In its July bi-annual monetary policy statement, Bangladesh Bank (BB) reiterated its
accommodative, with a cautious accommodative policy stance to support higher growth, while maintaining a cautious
stance on inflation stance on inflation. BB targets average annual inflation of around 5.5% in FY18,
slightly below our forecast of 5.7%. However, based on econometric estimates, BB
projects average inflation of around 5.5-5.9% for H1-FY18; current one-year-ahead
inflation expectations are above 6%. We expect inflation to remain above BB targets
on higher food prices due to recent floods and a low base effect. These factors
Asia
should be partly mitigated by subdued global and regional inflation.
Private-sector credit growth is likely to remain within BBs target of 16.2% in H1-
FY18. Meanwhile, excess banking-sector liquidity due to lower government
borrowing from the banking sector continues to drive down interest rates. The
average lending rate fell to 9.6% in June 2017 from 12.8% in July 2014, and the
average deposit rate fell to 4.97% from 7.7%. The government repaid c.BDT 275bn
of outstanding loans to banks in FY17 after borrowing over BDT 520bn via National
Savings Certificates c.250% higher than the targeted borrowing amount of BDT
196bn. Stressed assets in the banking system show no signs of improvement, and
the sector is saddled with a high NPL ratio of more than 10.1% (as of June 2017).
Figure 1: Bangladesh macroeconomic forecasts Figure 2: Inflation has picked up on rising food prices
% y/y
12%
FY17 FY18 FY19
10%
GDP grow th (real % y/y) 7.2 6.9 6.8
8% Headline Food
6%
Policy rate (%)* 6.75 6.75 6.75
4%
USD-BDT* 82.00 83.00 83.50
Non-food
2%
Current account balance (% GDP) -0.5 -0.5 -0.5
0%
Fiscal balance (% GDP) -4.5 -4.5 -5.0
Jun-12 Apr-13 Feb-14 Dec-14 Oct-15 Aug-16 Jun-17
Note: Economic forecasts are for fiscal year ending in June, FX forecasts are for end- Source: CEIC, Standard Chartered Research
December; *end-period; Source: Standard Chartered Research
The C/A deficit is likely to be similar We expect the current account (C/A) deficit to remain broadly flat in FY18 versus
in FY18 to FY17, at 0.5% of GDP FY17, at 0.5% of GDP. The trade deficit is set to widen on higher infrastructure-
related and food imports (due to floods). Provisional data for July showed a 44% y/y
surge in imports, led by capital machinery and rice. We expect remittances to rise by
5% in FY18, following an increase of more than 30% in the number of workers going
abroad in FY17 and government efforts to increase formal remittances. We expect a
USD 2bn BoP surplus in FY18, supported by capital inflows. FX reserves are
therefore likely to stay comfortable at c.7-8 months of import cover.
Policy Reforms required for higher medium-term growth

Given the slow and fragmented reform process, we think GDP growth is unlikely to
be sustained above 7% the level achieved in FY16 and FY17 in the medium
term. The two-year deferral of the rollout of the new VAT law is a setback. The law
was due to be implemented on 1 July 2017, according to the FY18 budget, but the
date was deferred to 1 July 2019 just a couple of days before the scheduled rollout.
The government now plans a gradual transition until 2019. The tax authorities have
started raising VAT rates to 15% from multiple existing rates between 1.5% and 10%
(levied on 19 sectors). The current system of levying taxes on a truncated base
rather than on actual value added is also likely to be phased out. VAT is an important
structural reform to address Bangladeshs low revenue-to-GDP ratio of 10% one of
the lowest in the world.
BIDA is trying to reform the weak The newly established Bangladesh Investment Development Authority (BIDA), with
institutional framework and improve support from IFC, aims to reform the countrys institutional framework and improve its
Ease of Doing Business rankings ranking in the World Banks Ease of Doing Business survey to 99 by 2021 (from 176
Asia
out of 189 countries in 2016). Bangladeshs institutional framework is weak. For

example, of the 56 laws relevant to the private sector, 26 were enacted before 2000,
th
12 pre-date independence in 1971, and three date back to the 19 century. Most of
the remaining 15 reformed laws have been only partially implemented. The World
Economic Forums Global Competitiveness Index (2016) indicates that infrastructure
investment specifically in roads, port and air transport infrastructure, and electricity
is an immediate necessity.
Politics Alliances shaping up for 2019 elections

The political situation is calm and is likely to remain so for the next quarter. BNP, the
leading opposition party, has published its Vision 2030 statement indicating its intent
to participate in the 2019 elections; it had boycotted the January 2014 elections.
Other opposition alliances of smaller and new parties are also taking shaping for the
2019 elections.
Market outlook Maintain Neutral outlook on T-bonds

We maintain a Neutral outlook on LKR T-bonds. While the stable policy rate
environment is a key positive, we do not see any triggers for a bond rally. The policy
rate-cutting cycle is over and money-market rates are edging up. We expect the yield
curve to move gradually higher in a bear-steepening fashion.
We expect further BDT weakness The Bangladeshi taka (BDT) corrected some of its overvaluation in June 2017 as
amid a wider trade deficit USD-BDT inched higher and the EUR strengthened; the REER index corrected to
140.32 from 148.04 in March. We expect further BDT weakness amid a wider trade
deficit and continuing overvaluation. We forecast USD-BDT at 82 by end-2017.
China Get the party started

Economic outlook Growth target within reach
Wei Li +86 21 3851 5017 The near-term growth outlook remains constructive. The economy is benefiting
Wei.Li@sc.com
Senior China Economist from benign external demand, a risk-averse political backdrop and recovering
Standard Chartered Bank (China) Limited
industrial profits. With GDP growth averaging 6.9% y/y in H1, China is well positioned
Shuang Ding +852 3983 8549 to beat its target of around 6.5% in 2017. While real activity may decelerate
Shuang.Ding@sc.com
Head, Greater China Economic Research moderately in the quarters ahead due to less accommodative macro policies, we
Standard Chartered Bank (HK) Limited th
expect a solid economic performance ahead of the 19 Communist Party Congress
Eddie Cheung +852 3983 8566
Eddie.Cheung@sc.com
(due to start on 18 October) and potentially through March 2018, when a five-yearly
Asia FX Strategist government reshuffle is to take place. We maintain our 2017 growth forecast of 6.8%.
Standard Chartered Bank (HK) Limited
Reforms have advanced amid Amid improving growth, the authorities have begun to address some of the
healthy growth momentum economys medium-term vulnerabilities. In particular, the Peoples Bank of China
(PBoC) has largely removed monetary policy accommodation by keeping liquidity
tightly balanced. Market rates have risen as a result. Off-balance-sheet wealth
management products have been included in the Macro-Prudential Assessment to
strengthen financial stability. Corporate debt growth has moderated, and
commendable progress has been made in reducing industrial overcapacity. Banks
are under pressure to reduce new financing to sectors with overcapacity. Supply-side
reforms have led to a recovery in producer prices and industrial profits.
Headwinds may lead to a moderate Nonetheless, Chinas growth is likely to moderate gradually over the next year.
slowdown over the next year Tighter financial conditions, cooling housing markets and slower net export growth
are expected to cap upside for the economy. Interbank funding costs, bank lending
Asia
rates and corporate bond yields have all moved higher. Growth in total social
financing slowed to 14.5% y/y in August 2017 from 16.0% at end-2016 (after
adjusting for local government bond issuance). China has tightened property-market
policies since H2-2016, including restrictions on purchases, sales, prices and
mortgages, as well as loans to developers. As a result, growth in floor space sold and
real-estate investment has shown signs of fatigue recently.
High-frequency indicators suggest that export growth has peaked (Figure 2). The
trade surplus narrowed to 3.9% of GDP in Q2-2017 on a rolling annual basis from
4.5% at end-2016, reflecting robust domestic demand and a deterioration in Chinas
terms of trade. We now expect the current account (C/A) surplus to narrow to 1.4% of
GDP in 2017 (previous forecast: 2.0%) from 1.8% in 2016, reflecting a bigger-than-
Figure 1: China macroeconomic forecasts Figure 2: Export growth is losing steam

Trade growth, % y/y (LHS); trade balance, USD bn (RHS)
2017 2018 2019 100 Trade balance Exports Imports 100
80 80
60 60
CPI (% annual average) 1.6 2.7 2.6 40 40
20 20
Policy rate (%)* 1.50 1.50 1.50
0 0
USD-CNY* 6.55 6.45 6.45
-20 -20
Current account balance (% GDP) 1.4 1.6 1.5 -40 -40
-60 -60
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
*end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Narrower C/A surplus offset by expected fall in the goods trade surplus and a widening services trade deficit. We
declining capital outflows lower our C/A surplus forecasts for 2018 and 2019 to 1.6% (from 2.2%) and 1.5%
(from 1.9%) of GDP, respectively, reflecting Chinas progress on economic
rebalancing. So far, the narrower C/A surplus has been more than offset by falling
capital outflows amid stronger growth, tighter capital account management, and
easing CNY depreciation expectations.
Pivoting towards a neutral policy stance

We expect a neutral monetary With industrial production growth and CPI inflation moving broadly sideways, we
policy stance expect no material changes to Chinas monetary policy stance in the near term.
Higher interest rates and slower credit growth have helped to reduce excessive
financial leverage and limit pressure on the CNY exchange rate. However, with
economic growth projected to moderate over the medium term, we see limited room
for the PBoC to tighten financial conditions further from here. We therefore no longer
expect a 10bps hike in the 7-day reverse repo rate in Q4-2017. The recently
concluded Financial Conference required the PBoC to continue to implement sound
monetary policy, striking a balance between boosting economic growth, facilitating
structural adjustment, and managing total social financing.
Fiscal stimulus is set to fall in H2 Fiscal stimulus is likely to moderate in H2 after front-loaded spending in H1. Fiscal
revenue grew 10.3% y/y in H1-2017, while spending expanded 16.1%. As a result,
the H1 fiscal deficit reached CNY 918bn, CNY 553bn higher than in H1-2016. Since
the targeted annual budget deficit for 2017 is only CNY 200bn more than the 2016
deficit, the government will have to run a smaller deficit in H2-2017 than in H2-2016
to comply with the CNY 2.38tn deficit ceiling. Fiscal spending already slowed
Asia
significantly in July and August.
A busy political calendar for the next six months

th
Policy implementation will likely The keenly awaited 19 China Communist Party (CCP) Congress will start on
become more effective after the 18 October. The event, which usually lasts a week, will elect a new Central
Party Congress st
Committee. The 1 Plenum of the Central Committee will take place straight
afterwards to unveil Chinas top decision-making body, the Politburo Standing
Committee (PSC). In February 2018, the Central Committee will meet again to
nominate key members of Chinas state agencies. The five-yearly government
reshuffle will take place in March during the annual National Peoples Congress.
President Xi Jinping is widely expected to consolidate power during the Party

Congress. This should lead to more effective implementation of his economic, social
and political plans. We do not expect major changes in Chinas broad economic
policy direction, as Xi is already the architect of these plans after five years in office.
We expect China to continue to press ahead with SOE reforms and financial
deleveraging, and make concrete progress on the Belt and Road initiative.
CNY REER is consistent with fundamentals

Chinas real effective exchange rate We expect USD-CNY to end 2017 at around 6.55 and 2018 at 6.45. We lower our
is in line with fundamentals end-2019 forecasts for both USD-CNY and USD-CNH to 6.45 from 6.8 to mark to
market recent gains in the CNY basket. Chinas real effective exchange rate (REER) is
broadly consistent with its economic fundamentals, according to the IMF. Policy makers
appear to have become more concerned that a further CNY rally could hurt Chinas
exports and economy over time. Recent moves by the PBoC to unwind capital controls
are aimed at releasing USD demand to slow the pace of CNY appreciation.
Hong Kong Riding the tailwinds

Economic outlook Keep rolling
Kelvin Lau +852 3983 8565 We see growth moderating mildly in H2-2017 after a strong H1. The favourable
Kelvin.KH.Lau@sc.com
Senior Economist, Greater China base effect is likely to normalise and the export recovery could fade, but other
positive stories from H1 are likely to continue. The strong contribution of private
Becky Liu +852 3983 8563 consumption expenditure to headline growth reflects households ability to spend
Becky.Liu@sc.com
Head, China Macro Strategy thanks to low interest rates, a tight labour market, and rising asset prices all of
which are likely to be sustained in H2. The investment recovery is also becoming
more broad-based, having recently spread to machinery and equipment from building
and construction. A further stabilisation in local sentiment could unleash more pent-
up demand, in our view. Our Standard Chartered Hong Kong SME Leading Business
Index (SMEI) eased to 44.3 in Q3 from 45.6 in Q2 (50 = neutral), showing lingering
caution; we see room for improvement.
We revise down our inflation Inflation remains subdued, despite stronger-than-expected H1 growth. Headline CPI
forecast to reflect the softer start inflation has hovered at or below 2.0% this year, versus averages of 2.4% and 3.0%
to 2017 in 2016 and 2015, respectively. We see upside risk re-emerging in H2, when earlier
increases in residential property prices should translate into a faster rise in the
private rent component of the CPI; full employment should also continue to support
food and services prices. Even so, we lower our full-year average inflation forecasts
to 2.0% for 2017 (from 2.5%) and 2.5% for 2018 (3.0%) to reflect the softer-than-
expected start to 2017.
Policy Still-flush liquidity suppresses HIBOR for now
Asia
History suggests that a wide The spread between HIBOR and USD LIBOR looks set to stay wide. Ample local
HIBOR/LIBOR gap can persist liquidity suppressed HIBOR during previous rounds of Fed rate hikes. We expect the
same in the coming quarters, barring an external shock or a change in the Feds
modest approach to policy normalisation. Inflows to EM should remain supported by
steady global growth, low inflation, a weak USD and flat yield curves. Hong Kong
should continue to attract healthy inflows despite its unfavourable carry.
It is also worth recalling that we have seen wider spreads before. The 3M
HIBOR/LIBOR gap, for example, persistently exceeded 100bps (versus c.60bps now)
in the mid-2000s, during the Feds previous hiking cycle (Figure 2). The liquidity
cushion suppressing HIBOR is much larger now after years of quantitative easing by
major central banks. The recent decision by the Hong Kong Monetary Authority
(HKMA) to issue additional Exchange Fund Bills (EFBs) aimed at lowering the
Figure 1: Hong Kong macroeconomic forecasts Figure 2: We have seen wider HIBOR/LIBOR spreads
%, 3M interbank rates
8
2017 2018 2019
7
3M USD
GDP grow th (real % y/y) 3.4 2.8 3.0 6 LIBOR
5
CPI (% annual average) 2.0 2.5 2.5 4
3
3M HIBOR* 0.85 1.50 1.65 2
1 3M HIBOR
USD-HKD* 7.84 7.80 7.79 0
-1
Current account balance (% GDP) 4.0 3.5 3.5 Spread
-2
-3
Fiscal balance (% GDP)** 1.0 1.5 1.5
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Aggregate Balance, a gauge of interbank liquidity, to c.HKD 180bn by late October

from HKD 260bn in mid-August has pushed 1M HIBOR slightly higher. 3M HIBOR
(and beyond) appears unaffected; we believe more drainage, which is possible in the
coming quarters, is needed to change the ample liquidity backdrop. The Aggregate
Balance was typically below HKD 5bn before 2008.
We lower our HIBOR forecasts to We lower our HIBOR forecasts to reflect a shallower-than-expected upward
reflect the shallow HIBOR uptrend trajectory. We now forecast 3M HIBOR at 0.85% at end-2017 (versus our previous
forecast of 1.00%). This means that monetary conditions are unlikely to help cool
property prices anytime soon. Residential property prices are up 10% YTD, after
rising almost 8% in 2016. Primary-market sales, dominated by small-sized flats,
continue to be met with strong genuine local demand; secondary-market turnover
remains subdued amid few willing sellers, limiting supply and supporting prices.
Despite price rises, leverage is not a major concern thanks to the HKMAs tight
macro-prudential measures.
A new affordable housing scheme for first-time home buyers is set to headline Chief
Executive Carrie Lams inaugural Policy Address in October. The scheme will aim to
help young families who earn too little to afford private housing but too much to
qualify for public rental flats. Lam has also established a 30-member task force to
review the land supply situation. The task force will carve out at least 1,200 hectares
of new land for housing by 2030, through 12 options that will be up for public
discussion. We do not expect these initiatives to affect short-term supply dynamics.
Offshore Renminbi (CNH) Catching a break

A stronger CNY and the recent New dynamics are at play for Renminbi internationalisation. After trading above
Asia
unwinding of restrictions on the 6.8 level for most of H1-2017, USD-CNY spot has since retreated to below 6.60.
outflows should support a recovery A weaker USD and expectations of further CNY stability ahead of the 19th Party
in CNH activity
Congress in mid-October have revived appreciation expectations, recently prompting
the PBoC to unwind some of its earlier restrictions aimed at stemming outflows. We
do not see a fundamental economic need to persistently appreciate the CNY,
especially against the basket. But the mere combination of a steadier CNY and the
further unwinding of temporary measures to curb outflows could create the right
conditions for a recovery in CNH activity.
In the meantime, foreign investors continue to gain access to Chinas onshore

markets. While initiatives like the Stock Connect and Bond Connect programmes
have yet to boost CNH activity, they are necessary channels for the CNYs continued
international ascent. To better track foreign investors holdings via such channels, we
recently added a fifth index parameter foreign holdings of onshore assets to our
Standard Chartered Renminbi Globalisation Index (RGI). The revamped RGI rose to
1,721 in July from a revised 1,659 in June. Of the 3.7% m/m headline increase the
biggest in almost two years the new parameter contributed 0.45ppt, the fifth straight
month of positive contributions.
Market outlook Removing excess HKD liquidity over time

The HKMA may continue to mop up excess HKD liquidity via EFB issuance, but
HKD rates are likely to stay below USD rates in the foreseeable future. We
revise up our HKD rates forecasts from Q3-2017 onwards to reflect the HKMAs
proactive approach to reducing HKD liquidity since August, and we expect the gap
between Hong Kong government bond (HKGB) yields and USTs to narrow. We
revise up our forecasts for the 10Y HKGB yield to 1.8% from 1.2% for end-2017, and
to 2.5% from 1.2% for end-2018.
India Coping with disruptive policy changes

Economic outlook Short-term pain is inevitable
Anubhuti Sahay +91 22 6115 8840 Growth likely to remain subdued in FY18 (ending March 2018). Indias economy
Anubhuti.Sahay@sc.com
Head, South Asia Economic Research (India) is in a steady state of disruption. The roll-out of major policy changes including
demonetisation (November 2016) and the Goods and Services Tax (July 2017) has
Kanika Pasricha +91 22 6115 8820 taken a toll on economic activity already weighed down by the high level of stressed
Kanika.Pasricha@sc.com
Economist, India assets in the banking sector. While these changes are medium-term positives, they
have led to a 150-200bps loss in growth, in our view. We forecast FY18 GDP growth
Nagaraj Kulkarni +65 6596 6738 at 6.7%, down from 7.1% in FY17 and 8% in FY16.
Senior Asia Rates Strategist
Standard Chartered Bank, Singapore Branch Q1-FY18 GDP growth captured the first round of adverse impact, slowing to a
13-quarter low of 5.7% on destocking ahead of GST implementation and the lingering
Divya.Devesh@sc.com impact of demonetisation. While businesses have expressed optimism that the dip in
Asia FX Strategist
Standard Chartered Bank, Singapore Branch growth is temporary, the pain is likely to persist for the next few quarters. GST-related
teething issues including business uncertainty, rising compliance costs (especially
for SMEs), and technology issues with the GST network, which is the backbone of
The economy is likely to take a few
more quarters to realign to the new tax reforms will continue to weigh on growth. The outlook for private investment is
GST framework clouded by Indias twin balance sheet problem (high corporate leverage mirrored in
the high level of stressed assets in the banking sector) and excess capacity.
The right balance has to be struck Expectations are growing that the government may roll out fiscal stimulus to cushion
between potential fiscal stimulus the growth slowdown. We believe that the size of stimulus, if any, would be small
and hard-earned macroeconomic given existing fiscal constraints. The combined fiscal deficit narrowed to 6.2% of GDP
stability in FY17 from 6.9% in FY14, playing an important role in macroeconomic stability. In
our view, the boost to growth from fiscal stimulus (if any) will be limited amid the twin
Asia
balance sheet issue and implementation challenges for government plans.
Headline inflation is likely to remain Inflation to remain benign this year, although it has likely bottomed out. We
benign in FY18 forecast FY18 CPI inflation at 3.5% (FY17: 4.5%). The economic slowdown is
unlikely to trigger further downside, as (1) food inflation has bottomed out, and (2)
core CPI inflation may see moderate upward pressure on a rise in crude oil prices,
the asymmetrical effects of GST on growth and inflation, and the technical impact of
the government housing rent allowance hike.
External-sector dynamics are comfortable. We expect the balance-of-payments

surplus to remain in double digits (in USD bn terms). Underlying dynamics are likely
to change marginally, however. We forecast that the current account deficit will widen
Figure 1: India macroeconomic forecasts Figure 2: Loss of economic momentum is evident

GDP growth, % y/y
8.0%
FY18 FY19 FY20
7.5%
7.0%
6.5%
Policy rate (%)* 5.75 5.75 5.75 6.0%
USD-INR* 64.50 66.00 67.50 5.5%
Current account balance (% GDP) -1.7 -1.8 -2.0 5.0%
4.5%
FY13 FY14 FY15 FY16 FY17 FY18 (F)
Note: Economic forecasts are for fiscal year ending in March, FX forecasts are for end- Source: MOSPI, Standard Chartered Research
December of previous year; *end-period; **central + state governments;
Source: Standard Chartered Research
to 1.7% of GDP in FY18 from 0.7% in FY17 on strong gold demand, a greater-than-
expected GST impact on non-oil non-gold imports (in Q1-FY18) and higher demand
for imports due to a stronger Indian rupee (INR). The composition of capital inflows
may change, with portfolio inflows making up a larger share in FY18 than in FY17.
We expect FDI flows to remain robust, in line with the trend of the past few years.
Policy Its all about striking the right balance

Any fiscal stimulus that is perceived We expect a final 25bps rate cut in December, based on our benign inflation
to be inflationary could keep the projection, the high real policy rate, weak growth momentum and the relatively stable
MPC on hold global environment. Fiscal stimulus, if any, could reduce the probability of a rate cut,
especially if it is perceived to be inflationary. We see limited scope for more than
25bps of easing unless growth continues to weaken, pulling CPI inflation lower. Such
a scenario could prompt the Monetary Policy Committee (MPC) to relax its view of
the need for high real rates. The MPC prefers higher real rates given worries that
lower interest rates can lead to the evergreening of bad loans and weak monetary
policy transmission.
GST-related uncertainty could The focus areas of potential fiscal stimulus are crucial. The central governments
weigh on central government fiscal health is a concern, as it reached 92.4% of its FY18 fiscal deficit target in April-
finances July, compared with 73.7% in the same period last year. Fiscal concerns are unlikely
to fade soon given GST-related revenue uncertainty, the front-loading of expenditure
due to the earlier budget announcement date, and the downside surprise of the
Reserve Bank of Indias dividend payment to the government. We currently expect
the central government to meet the fiscal deficit target of 3.2% of GDP in FY18,
though the risk of slippage has increased. While the government has the flexibility to
Asia
deviate from the stated target by 0.5% of GDP in case of a revenue shock due to
structural changes, a greater push to raise revenue through sources like
disinvestment is needed to maintain Indias hard-earned macroeconomic stability.
Any fiscal stimulus would have to strike the right balance between increasing capex
and revenue expenditure (including bank recapitalisation).
Stressed assets in the banking We are watching progress on the banking sectors asset-quality issues. The
sector will likely take few years to use of the Insolvency and Bankruptcy Code (IBC) to address banks stressed assets
resolve is a radical move, as it provides for a time-bound resolution of non-performing assets.
So far, National Company Law tribunals are dealing with such cases expeditiously,
but it is too early to assess the IBCs success. Moreover, we still think addressing
non-performing assets without outlining a plan for recapitalisation is ineffective.
Politics Focus on state elections in the run-up to 2019

Ahead of general elections in Q2-2019, India will hold 15 state elections, starting with
Gujarat in Q4-2017. The results will be an important gauge of the ruling partys
popularity amid weak growth, especially after GST implementation.
Market outlook Valuations support short-end IGBs;

Overweight INR medium-term
The IGB sell-off triggered by media reports of likely fiscal stimulus has made
valuations attractive for investors not yet involved in IGBs, in our view. We therefore
prefer to stay long 6.84% 2022 IGBs. We maintain a short-term (3M) Neutral FX
weighting on the INR and forecast USD-INR at 64.50 by end-2017. Recent market
concerns about potential fiscal slippage, slower growth and a wider trade deficit are
likely to limit INR strength even in a weak USD environment.
Indonesia Steady growth

Economic outlook
Aldian Taloputra +62 21 2555 0596 We maintain our GDP growth forecast of 5.2% for 2017. H1 growth came in at
Aldian.Taloputra@sc.com
Senior Economist, Indonesia 5.0% y/y, softer than we expected, due to electricity tariff hikes, slow government
Standard Chartered Bank, Indonesia Branch
consumption, fewer working days, and easing commodity prices. We think these
Divya Devesh +65 6596 8608 factors will be less of an impediment in H2 and growth will regain momentum. Higher
Divya.Devesh@sc.com
Asia FX Strategist energy subsidies and favourable weather should keep inflation stable, supporting
purchasing power. Low inflation has also allowed Bank Indonesia (BI) to cut interest
rates to stimulate demand. On the fiscal side, government stimulus is likely to
increase given the low base from last years budget cuts and increased fiscal deficit.
Infrastructure development is likely to remain the governments top priority for

reviving investment. The governments capital spending realisation grew a solid 19%
y/y in the first seven months of 2017, boosting building investment growth, which
accelerate to 6.1% y/y in Q2. The government is also pushing alternative
infrastructure financing through SOE asset securitisation. PT Jasa Marga Tbk, for
instance, offered IDR 2tn of securities backed by its future toll-road revenue stream;
this move will likely be a showcase for other SOEs to raise financing.
We revise down our 2018 and 2019 We trim our 2018 and 2019 GDP growth forecasts to reflect the slower-than-expected
GDP growth forecasts recovery in private investment. We now expect 2018 growth of 5.4% (versus 5.5%
previously) and 2019 growth of 5.6% (5.8%). Private investment, which is mainly
reflected in non-building investment, slowed to 3.3% y/y in Q2 from an average of 6%
since 2011. Corporates are expanding cautiously amid soft consumption growth and
spare capacity. While faster FDI growth (to 15% y/y in Q2 from a 1% contraction in
Asia
2016) suggests better business confidence, we think a more sustained recovery will
require evidence of stronger household demand. To accelerate investment, the
government aims to further simplify investment licensing by introducing a single
application that will integrate licences from the central and local governments.
Increasing Indonesian travel abroad We expect the C/A deficit to widen to 2% of GDP in H2, bringing the 2017 deficit to
and diminishing price effect on 1.8%, on a lower goods surplus and a wider services deficit. Vehicle and mechanical
trade to widen the C/A deficit appliance exports improved in H1, complementing commodity-based exports such as
coal and palm oil. While external demand and commodity prices should continue to
support exports, we think export performance peaked in H1. On the services side,
increased Indonesian travel abroad will likely contribute to a wider deficit in H2.
Figure 1: Indonesia macroeconomic forecasts Figure 2: OMO curve flattening to accelerate policy
transmission (BI open-market operation curve, %)
7 Before Aug BI
2017 2018 2019
meeting
(18 Aug)
GDP grow th (real % y/y) 5.2 5.4 5.6 6

5
After Sep BI
Policy rate (%)* 4.25 4.25 4.25 meeting
(25 Sep)
USD-IDR* 13,200 13,600 14,000 4

3
O/N 1 week 2 week 1 month 3 month 6 month 9 month 12 month
Fiscal balance (% GDP) -2.6 -2.6 -2.6 (benchmark)
Absence of fuel price hikes, stable We recently revised down our end-2017 inflation forecast to 3.8% y/y from 4.3%, and
food prices should keep our end-2018 forecast to 4.0% from 4.5%. Delayed fuel price hikes, favourable
inflation low for this year weather and soft domestic demand will likely to keep inflation low for the rest of this
year. However, we see upside risks in 2018 from less favourable weather conditions,
higher oil prices and a better growth outlook (see Economic Alert, Indonesia BI
likely to stay put for rest of 2017). The government is working on structural reforms
to bring down inflation over the longer term, including development of dams and
irrigation systems to lower logistics costs and boost food supply. A task force is
monitoring food prices, sales and inventory in order to prevent speculation that could
drive prices higher. That said, we think these reforms will take three to five years to
have a meaningful impact on inflation.
Policy Second push

We expect the benchmark rate to BI surprised the market with 50bps of rate cuts in two consecutive months. Soft
stay flat for the remainder of this economic growth, low inflation and accommodative global monetary conditions have
year and 2018 prompted BI to embark on a new round of easing following 150bps of cuts last year.
BI described its policy stance as neutral, and indicated that further policy loosening
would require a declining inflation trajectory and Indonesian rupiah (IDR) stability.
BI maintains a positive outlook on the economy, estimating growth in the range of

5.1-5.5% in 2018 (up from 5.0-5.4% in 2017). Strong economic growth in major
economies and a domestic demand recovery supported by fiscal stimulus and
accommodative monetary policy should support growth. We think the upbeat growth
outlook and higher inflation risk support a more neutral monetary policy stance, and
we expect BI to stay on hold for the rest of 2017 and 2018. However, we see a risk of
a further cut in early 2018 if growth momentum falters and inflation remains subdued.
Asia
We expect fiscal stimulus to The governments YTD budget deficit reached 1.7% of GDP as of August, lower than
accelerate in H2 2.1% in the same period last year. Given lower YTD deficit realisation and a higher
targeted deficit this year relative to last year, we think government spending will be
notably higher in the final four months of 2017. We expect the budget deficit to increase to
1% of GDP for the September-December period, double the level in the same period last
year. Tax revenue realisation growth was only 9.6% y/y YTD as of July (versus a 15%
target), and is likely to ease further given the high base from last years tax amnesty. Our
simulation shows that assuming 7% tax revenue growth, the government would have to
spend 94% of the budgeted amount (versus 89% last year) to meet the deficit target of
2.7% of GDP. This implies a spending increase of 8% compared to last year.
Politics Warming up
Local elections to set the stage for the 2019 general election. Indonesia will hold local
government elections on 27 June 2018 in 171 provinces and sub-provinces, including
West Java, Central Java and East Java. These three provinces together have 91mn
voters, almost half of Indonesias registered voters in the 2014 general election. Local
election results will reflect the relative positioning of the political parties that will contest the
2019 election. Political factors are likely to become more prominent in policy making
leading up the elections, as reflected in the higher energy subsidy allocation for 2018, the
first increase in three years. The current administration enjoys high approval ratings.
President Joko Widodos rating has increased to 68% in 2017 from 66% in 2016 on legal,
economic and maritime developments, according to the latest survey by CSIS.
Market outlook
We maintain our Positive IDR outlook on solid macro fundamentals and a weak
USD. USD-IDR has recently traded below its long-held range amid broad USD
weakness. We expect USD-IDR to remain stable amid supportive fundamentals and
attractive vol-adjusted carry. We forecast USD-IDR at 13,200 by year-end.
Japan Robust growth, modest inflation

Economic outlook
Chidu Narayanan +65 6596 7004 We expect GDP growth to rebound to 1.2% in 2017 and ease slightly to 1.0% in
Economist, Asia 2018. Economic activity has been robust so far in 2017. The annualised pace of
growth more than doubled in Q2 (2.5%) versus Q1 (1.2%), reaching the fastest pace
Tony Phoo +886 2 6603 2640 since Q1-2015. Strong growth performance was driven by a rebound in external
Tony.Phoo@sc.com
Senior Economist, NEA demand and a weaker Japanese yen (JPY). Household consumption which was a
Standard Chartered Bank (Taiwan) Limited
drag on growth in 2016 recovered strongly as the benign labour-market outlook and
Mayank Mishra +65 6596 7466
equity price gains boosted consumer confidence. Strong overseas tourist arrivals
Macro Strategist (particularly from China) have also contributed positively to domestic demand
this year.
Robust headline growth, however, masks underlying issues that pose significant
challenges for policy makers. Workers average disposable income rose just 0.1% y/y
in H1, even as corporate earnings jumped 22.6% y/y to a record high in Q2. This
shows that the improved growth outlook has yet to result in faster wage growth. The
latest economic assessment by the Cabinet Office suggests consumers are more
inclined to save than increase spending. Also, the improved jobs-to-applicants ratio
a key measure of job availability does not fully reflect the growing trend among
local companies to hire temporary workers to save costs.
Robust headline growth masks On a more positive note, public confidence has improved following the recent cabinet
underlying challenges reshuffle. Key economic posts remained unchanged including Chief Cabinet
Secretary Yoshida Suga, Finance Minister Taro Aso, and Economy, Trade and
Asia
Industry Minister Hiroshige Seko reassuring the business community on the
continuity of foreign trade and financial policy.
Japan is on track to register the largest current account surplus since 2007; the 7M-
2017 surplus increased 3% y/y to JPY 12.8tn as stronger tourism receipts and
investment income offset a slightly weaker trade balance. We expect the current
account surplus to remain strong at 3.7% of GDP in 2017 and 3.8% in 2018.
Modest inflation outlook We expect inflation expected to stay modest at 0.6% in 2017, edge up to 1.0% in
underscores the challenge of 2018. CPI inflation was 0.4% y/y in 7M-2017, a reversal from the 0.1% decline
spurring price gains recorded in 2016. We expect rising food prices and fuel and transportation costs
which account for 40% of CPI basket to continue to put mild upward pressure on
Figure 1: Japan macroeconomic forecasts Figure 2: Growth likely to stay robust

Real GDP % y/y (LHS); Eco Watchers Survey Index (RHS)
10 80
2017 2018 2019 Economic
8 70
Watchers
GDP grow th (real % y/y) 1.2 1.0 0.9 6 Survey Index,
3M fwd 60
4
0 40
Policy rate (%)* -0.10 -0.10 -0.10
-2 30
USD-JPY* 110.00 105.00 100.00 -4
20
-6 Real GDP %
Current account balance (% GDP) 3.7 3.8 3.8
-8 y/y (LHS) 10
-10 0
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
headline CPI inflation in 2018. Benign headline CPI inflation is in sharp contrast to
recent sharp gains in PPI inflation (to 1.8% in 8M-2017, up from a 3.5% decline in
2016). We expect PPI inflation to turn positive in 2017 for the first time since 2014,
driven by global commodity prices and a weaker JPY.
Policy outlook
BoJ is likely to continue with its BoJ to maintain its accommodative monetary stance, keep 10Y yield target at
asset purchases and keep the target c.0%. The BoJs yield curve control policy, under which it anchors the 10Y
yield for the 10Y JGB at c.0% Japanese Government Bond (JGB) yield at c.0%, has become its primary monetary
policy tool. Policy makers have reiterated their commitment to continuing bond
purchases to achieve the 2% inflation target.
Recent data shows robust economic activity, while inflation remains modest. The
widening gap between PPI and core CPI inflation is a concern. It shows that
producers are unable to pass on rising costs to end consumers. Indeed, the BoJ
recently pushed back the timing for achieving its 2% inflation target by a year to
FY19. This underscores the challenge policy makers face in spurring price gains.
Given the modest inflation outlook, we expect the BoJ to maintain its current
accommodative monetary stance at least through H1-2018.
Fiscal policy is likely to be slightly Fiscal policy is likely to be slightly expansionary in FY18. The government is
expansionary in FY18 currently drafting the budget for FY18 (year starting in April 2017). General budget
requests from government ministries are likely to top JPY 100tn, according to local
media reports. This would be a slight increase from the JPY 97.45tn disbursed in
FY17. On the revenue side, the governments decision to delay the doubling of the
Asia
sales tax rate to 10% until H2-2019 could make it difficult to collect enough
revenue amid ballooning social security costs and funding needs for the 2020
Summer Olympics.
Politics
Abe has called a snap election amid Abe called a snap election for 22 October and announced the dissolution of
improved public approval ratings parliament on 28 September. Approval ratings for Abe and the ruling Liberal
Democratic Party (LDP) coalition have steadily improved after the July cabinet
reshuffle. Abes strong stance against recent missile tests by North Korea has
received strong public support. The resignation of several key party members after a
change of leadership in early September also reduces the ability of the main
opposition Democratic Party (DP) to close the gap with the ruling LDP. A poll by
Nikkei shows that Abes LDP is supported by 44% of voters, while the DP has 8%
and the new Party of Hope (founded by Tokyo Governor Yuriko Koike) also has 8%
Market outlook
We forecast USD-JPY at 110 and We forecast USD-JPY at 110 at end-2017 and 105 at end-2018. The BoJ is likely
105, respectively at to maintain an accommodative policy stance throughout 2018 in a bid to achieve its
end-2017 and end-2018 long-run price stability target of 2%. Consumer spending remains soft and wage
growth sluggish, even with the jobless rate at a multi-decade low and the jobs-to-
applicants ratio at a 43-year high. Given tepid inflation expectations, we expect the
BoJ to be more dovish than its peers, notably the US Fed and the European
Central Bank.
Malaysia Delivering a growth rebound

Economic outlook
Edward Lee +65 6596 8252 We expect GDP growth to rebound to 5.4% in 2017 from a muted 4.2% in 2016.
Lee.Wee-Kok@sc.com
Head, ASEAN Economic Research We maintain our view that growth will ease in H2 from the robust 5.7% recorded in
H1. Private consumption may slow slightly, as real wage growth was slightly negative
Divya Devesh +65 6596 8608 in H1, while private investment is likely to moderate on slow loan growth. Growth in
Divya.Devesh@sc.com
Asia FX Strategist H2 should receive support from external demand, especially the robust electronics
cycle, but an unfavourable base effect may come into play in late Q4. Bank Negara
Jonathan Koh +65 6596 8075
Jonathan.Koh@sc.com
Malaysia (BNM) expects GDP growth of above 4.8% (the upper end of the
Economist, Asia governments forecast range of 4.3-4.8%) in 2017.
Private consumption may moderate The resilience of domestic consumption In H1 was a surprise given that (1) real wage
in H2 growth remained negative for a second straight quarter in Q2, at -0.4% y/y; (2) the
unemployment rate remained elevated at 3.4% as of Q2, above the five-year average
of 3.1%; and (3) household leverage remained high, albeit down from H1-2016
levels. We expect private consumption to ease in H2. We have found that real wage
growth affects domestic consumption with a lag of about three quarters. Furthermore,
the unfavourable base effect from one-off measures that boosted spending in H2-
2016 and H1-2017 may weigh on private consumption in H2.
Robust private investment in H1 was also unexpected. Private-sector investment

contributed c.33% of the 5.7% GDP growth in H1, likely supported by ongoing
infrastructure projects, particularly machinery and equipment investment. We expect
private investment to moderate, as loans disbursed and capital-goods imports eased
Asia
in Q2 from Q1 and construction projects have declined over the past few quarters.
Slower capital-goods imports We maintain our 2017 current account surplus forecast at 2.4% of GDP. The Q2
support the current account surplus surplus was supported by a wider goods surplus and narrower services and income
deficits. The goods surplus was driven by a significant slowdown in capital-goods
import growth to 7.1% y/y from 42% in Q1. The electronics trade surplus, boosted by
higher exports, also helped. Meanwhile, the commodities trade surplus narrowed as
crude palm oil prices softened in Q2 versus Q1.
We lower our 2017 average inflation forecast to 3.8% from 4.0%. 7M-2017 headline
CPI inflation stood at 4% y/y, down from 4.3% in Q1, as transport inflation eased on
Figure 1: Malaysia macroeconomic forecasts Figure 2: Monitoring core inflation against potential GDP
LHS: Core CPI (% y/y), OPR (%); RHS: Deviation from
potential GDP growth, ppt
4.0 0.8%
2017 2018 2019
3.5 0.6%
GDP grow th (real % y/y) 5.4 4.6 4.5 OPR
3.0
0.4%
CPI (% annual average) 3.8 2.5 2.8 2.5
0.2%
2.0
Policy rate (%)* 3.00 3.00 3.00 Core CPI
0.0%
1.5
USD-MYR* 4.10 3.90 3.80 -0.2%
1.0 Dev. from
potential GDP -0.4%
Current account balance (% GDP) 2.4 3.0 3.4 0.5
growth (RHS)
0.0 -0.6%
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
*end-period; Source: Standard Chartered Research Source: Bloomberg, CEIC, Standard Chartered Research
the dissipating oil-price base effect. We expect headline inflation to moderate further
in H2, especially in Q4, when an unfavourable base effect will kick in. Food prices
may also ease on a stronger Malaysian ringgit (MYR), capping imported inflation. Our
2017 headline inflation forecast is at the upper end of the governments projected
range of 3-4%.
Policy
BNM may have shifted subtly We expect BNM to keep the overnight policy rate unchanged at 3% for the rest
towards a slightly hawkish stance of 2017. We think the central bank has shifted towards a slightly hawkish monetary
policy stance from a neutral one. The latest monetary policy statement in September
contained a few interesting tweaks relative to the July statement. The wording on the
monetary policy stance was changed to remains accommodative from is
accommodative, potentially suggesting a slightly hawkish stance. The same wording
was changed in the opposite direction (to is from remains) in January 2016; the
policy rate was cut three meetings later, in July.
We keep a watchful eye on core The central bank also upgraded its view on growth. It noted in the September
inflation statement that 2017 growth will likely be stronger than earlier expected. In the July
statement, BNMs tone on growth was positive but more subdued. The central banks
view on core inflation is key to the policy outlook, in our view. BNM maintained its
view that headline inflation is likely to moderate for the rest of 2017, while core
inflation will be sustained but contained. We believe the unchanged stance on core
inflation is important, as the strong pace of H1 growth increases the risk of a pick-up
in core CPI inflation and may lead to a build-up of rate-hike expectations should
growth continue to surprise on the upside. Overall, we think that BNM appears
Asia
comfortable maintaining its neutral stance for the rest of 2017.
Politics
Expectations of an early election remain. The next general election has to be held
by August 2018, but there is speculation that it may be held earlier. The latest re-
delineation exercise was proposed in September 2016, but the process faces
ongoing court challenges. In the event that the re-delineation is not completed by the
time elections are called, the existing electoral boundaries will be used.
Market outlook
We have short- and medium-term Overweight FX weightings on the MYR. The
MYR is among the most undervalued EM currencies, and foreign investors overall
positioning remains extremely light. More importantly, MYR sentiment onshore has
improved with better USD supply dynamics. Onshore FX turnover is well off its late
2015 lows. At the same time, onshore foreign-currency deposits have turned a
corner. The MYR also benefits from Malaysias strong linkage to the global supply
chain amid robust global export volumes.
Myanmar Growth potential vs stability

Economic outlook Growth phase
Tim Leelahaphan +66 2724 8878 On the road to recovery. Myanmars economic growth slowed to 6.4% in FY17 (year
Tim.Leelahaphan@sc.com
Economist, Thailand ended 31 March 2017) from 7.3% in FY16 due to a weak external environment
Standard Chartered Bank (Thai) Public Company Limited
(Figure 2). We expect growth to recover to 7.5% in FY18 as domestic demand gains
strength and the newly elected government provides a clearer economic policy direction.
Most importantly, the development of Special Economic Zones (SEZs) should

support the recovery. Three SEZs are currently in development: Thilawa, Dawei and
Kyauk Phyu. The Thilawa SEZ, launched three years ago, involves more than USD
1bn of investment. Almost all of the land plots in Zone A have been sold and the
building of manufacturing plants is underway; infrastructure for Zone B is under
construction. Dawei SEZ has been further delayed. For Kyauk Phyu SEZ, a
memorandum of understanding is expected to be signed soon.
New investment law is likely to The new investment law, implemented in April 2017, is likely to attract more foreign
attract FDI direct investment (FDI) inflows. Changes under the law include the reformulation of
tax incentives to encourage investment in rural areas and provisions requiring the
government to treat foreign investors no less favourably than their domestic
counterparts. The law also includes streamlined procedures for simple investment
project approvals.
We expect inflation to edge higher as a result of stronger economic growth. Despite

rising FDI inflows, we expect the current account deficit to widen as imports rise. The
fiscal deficit is likely to be contained given government plans to strengthen tax
Asia
revenue collection and improve public expenditure efficiency.
Policy Focusing on macroeconomic stability

Tighter policy expected. Risks to macroeconomic stability are a growing concern
for the central bank. It may tighten monetary conditions by restraining money supply
and credit, as inflation may rise with faster growth. This would coincide with focused
efforts to phase out direct financing of the fiscal deficit by the central bank. In
addition, new regulations governing the banking sector are expected under the
Financial Institutions Law; regulations already issued include a minimum liquidity
ratio of 20% for all banks. We expect the authorities to maintain exchange rate
flexibility and build up international reserves as a buffer against external shocks.
Figure 1: Myanmar macroeconomic forecasts Figure 2: On the road to recovery

% y/y
10 5Y moving Real GDP
FY18 FY19 FY20
9 average growth

7
5
Policy rate (%)*
4
USD-MMK* 1,450 1,350 1,400 3
2
Current account balance (% GDP) -5.0 -5.5 -5.8 1
0
2012 2013 2014 2015 2016 2017F 2018F
Note: Economic forecasts are for fiscal year ending in March, FX forecasts are for end- Source: ADB, Standard Chartered Research
December of previous year; *end-period; Source: Standard Chartered Research
Nepal Politics to dominate in Q4

Economic outlook Reverting towards the mean
Saurav Anand +91 22 6115 8845 We expect growth to moderate. We forecast growth of 4.6% in FY18 (year ending
Saurav.Anand@sc.com
Economist, South Asia 15 July 2018), down from 7.5% in FY17. This is in line with long-term trend growth of
4.2% from FY11-FY15. A moderation this year appears inevitable, as FY17 growth
the highest in two decades benefited from the one-off factors of a favourable base
Slower remittances, elections and
uncertainty around budget effect and post-earthquake reconstruction. Slower private consumption on softer
implementation to keep growth inward remittances (30% of GDP), a series of elections in late 2017/early 2018, and
muted likely challenges to budget execution are also likely to keep growth subdued.
The new constitution has transformed Nepals unitary system into a federal structure,
with the creation of new provinces and local bodies. This could lead to uncertainty
over the revenue and spending split between the central government, provinces and
local bodies during the transition period. While rising private investment is likely to
provide support as infrastructure projects such as hydropower plants start production,
we expect growth momentum to stay weak.
Increased vulnerabilities in the financial sector are another challenge. Banks are
running up against regulatory limits on lending and may face lending issues if
deposits do not rise. Banks are allowed to lend 80% of their local-currency deposits
and core capital.
We now forecast a C/A deficit of 0.5% of GDP in FY18 (FY17: -0.4%) due to lower
remittances; we previously expected a surplus of 0.5%. Migrant departures have
fallen by c.25% in the past two years (with significant declines in departures to
Asia
Malaysia and Saudi Arabia), leading to a weak outlook for remittances.
Policy
We expect CPI inflation to pick up to 6.5% in FY18 from a moderate 4.5% in FY17 as
the effects of Indias demonetisation fade. Nepals inflation is closely correlated with
Indias given that India is its largest trade partner, the two countries share a porous
border, and Nepals currency is pegged to the Indian rupee (INR).
Elections are the most important Federal elections in Q4-2017 are the most important upcoming event and will keep
event to watch in Q4 political noise elevated. A series of local and provincial elections in Q4-2017 and Q1-2018
(as introduced in the new constitution) are also political milestones, and will determine
whether Nepal moves towards political stability after a tumultuous last decade.
Figure 1: Nepal macroeconomic forecasts Figure 2: Growth to moderate in FY18 towards long-term
trend (% y/y, ppt contributions)
20%
FY18 FY19 FY20 Government
15% consumption
10% Private
consumption GDP
5%
Policy rate (%) 0%
USD-NPR* 103.20 105.60 108.00 -5% GCF
Current account balance (% GDP) -0.5 0.5 0.5 -10% Net exports
-15%
FY12 FY13 FY14 FY15 FY16 FY17 (F) FY18 (F)
Note: Economic forecasts are for fiscal year ending 15 July, FX forecasts are for end-December Source: CEIC, Standard Chartered Research
of previous year; *NPR is pegged at 1.6x INR; Source: Standard Chartered Research
New Zealand Still accommodative

Economic outlook
Jonathan Koh +65 6596 8075 We maintain our 2017 GDP growth forecast of 2.6%; consensus has converged
Jonathan.Koh@sc.com
Economist, Asia with our view. We expect the robust labour market to support private consumption
for the rest of 2017, while construction may remain a drag. GDP expanded 2.5% in
Chidu Narayanan +65 6596 7004 H1-2017, slower than 3.2% in H1-2016, on weaker construction activity. The services
Economist, Asia sector remained resilient, driven by retail trade and accommodation, while the robust
labour market supported private spending. Transportation also performed well,
Mayank Mishra +65 6596 7466
benefiting from increased trade volumes.
Macro Strategist
The labour market has started to show signs of tightening. The unemployment rate
The labour market is showing signs fell to 4.8% (seasonally adjusted) in Q2, the lowest level since 2008. Employment
of tightening and the labour-force participation rate also posted their first declines since Q3-2015.
Net immigration levels remain high, but the July print was the lowest of 7M-2017
(matching Aprils). We expect a gradual decline in net immigration levels, which have
kept wage inflation subdued, as conditions in overseas labour markets namely
Australia improve. As a result, we expect the labour market to tighten gradually,
reducing the current slack in the market and leading to a steady rise in wage growth.
The inflation outlook for the rest of We lower our 2017 average inflation forecast to 1.7% from 2.0% to reflect weaker-
2017 remains weak than-expected recent readings. CPI inflation eased to 1.7% y/y in Q2 from 2.2% in
Q1, driven by lower tradables inflation. The outlook for tradables inflation remains
weak amid subdued global inflationary pressure. Core inflation also eased in Q2, to
1.4% from 1.5%, on subdued non-tradables inflation. In its August monetary policy
Asia
statement, the Reserve Bank of New Zealand (RBNZ) cited a study suggesting that
past-three-year inflation outcomes carry more weight than future inflation
expectations in domestic price-setting behaviour. The implication is that recent weak
inflation may act as a headwind to near-term inflation. We see upside risk to our
forecast if wage inflation picks up due to a tighter labour market.
Policy
Monetary policy is likely to remain We expect the RBNZ to keep the cash rate unchanged at 1.75% for the rest of
accommodative through H1-2018 2017. The central bank said in its August statement that monetary policy will remain
accommodative for a considerable period, with no change to its official cash rate
projections from the previous meeting. Barring post-election risks, we continue to
expect no change in monetary policy for the rest of 2017. We expect the next hike
Figure 1: New Zealand macroeconomic forecasts Figure 2: Core inflation remains subdued
Inflation by key component (% y/y)
7
2017 2018 2019
6
4
CPI (% annual average) 1.7 2.1 1.9 3 Non-tradables
2
Policy rate (%)* 1.75 2.25 2.25
1
Core* Headline
NZD-USD* 0.70 0.74 0.74 0
-1
-2
Tradables
-3
Fiscal balance (% GDP)** 1.5 1.6 1.6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
*end-period; **for fiscal year ending in June; Source: Standard Chartered Research *Core: RBNZs Sectoral Factor model; Source: RBNZ, CEIC, Standard Chartered Research
only in Q3-2018 for a few reasons. First, recent inflation outcomes have been below
the central banks projections, and growth has eased in recent quarters. Second, the
RBNZ remains concerned about currency strength, and is likely to want to keep the
trade-weighted index in check. Finally, interim Governor Grant Spencer will helm the
RBNZ until March 2018 after Graeme Wheeler steps down on 26 September, and is
unlikely to deviate from the current monetary policy stance.
Politics
The National Party won the most votes (46%) in the 23 September general
election, according to preliminary results. This gives it 58 seats in parliament, three
short of the number it needs to form a government alone. The parties with which
National formed a coalition in the last government (Act, Maori, United Future) won
only one seat between them. As a result, National will have to rely on the nationalist
New Zealand First party to form a government, making NZ First the kingmaker. The
Labour Party (45 seats) and Green Party (7 seats) could also form a government with
NZ First (9 seats). NZ First leader Winston Peters has suggested that negotiations
will take some time.
Labour and NZ First propose Both the Labour Party and NZ First have proposed reducing net immigration levels.
slashing net immigration levels We see two potential implications. First, the labour market may tighten and wage
inflation may be observed over the next few quarters. Second, curbs on immigration
may act as a drag on long-term growth. We think markets are likely to view tighter
immigration controls as negative for the New Zealand dollar (NZD).
Labour and NZ First have proposed reforms to the monetary policy framework. NZ
First has proposed creating a sensible exchange rate regime that serves New
Asia
Zealands economic interests, without providing much detail. It has called for a
weaker currency, on the view that NZD strength is hurting the export-dependent
economy. Labour has proposed adopting a dual mandate (inflation targeting and full
employment) for the RBNZ and shifting to a committee-based monetary policy
decision-making framework (see On the Ground, New Zealand Political risks loom).
Risks to financial stability

Macro-prudential measures have Tighter credit conditions have helped to stabilise the property market, but
helped to tighten credit conditions, households remain highly leveraged. Median housing price inflation eased to
but households remain highly 2.6% y/y in July (the slowest in 20 months) from unsustainably high levels. New
leveraged
residential mortgage loans have fallen for 11 consecutive months; loans with high
loan-to-value ratios have fallen for 14 straight months, and at a faster pace.
Nevertheless, households remain highly leveraged the debt-to-disposable income
ratio rose to a record-high 167.8% in Q2, although the pace of increase was the
slowest in 16 quarters. Debt servicing as a percentage of disposable income remains
low, but high debt levels may pose risks to financial stability if interest rates increase.
Market outlook
We maintain short- and medium-term Neutral weightings on the NZD. The NZD
has been the worst-performing G10 currency since the start of August, declining more
than 3% against the USD and on a trade-weighted basis over this period. The currency
has been weighed down by stronger jawboning from the RBNZ, which raised the
possibility of FX intervention and changed the language in its August policy statement
to say that a weaker NZD was needed (from helpful previously). Political uncertainty
is far from over, with NZ First emerging as the kingmaker after the election. Markets
may also be concerned about a Labour-Green-NZ First coalition.
Pakistan Mind the gap

Economic outlook Widening deficits
Bilal Khan +92 21 3245 7839 Growth is accelerating, but the external sector poses risks to the outlook. We
Bilal.Khan2@sc.com
Senior Economist, MENAP maintain our 5.5% growth forecast for FY18 (year ending June 2018). Although the
Standard Chartered Bank (Pakistan) Limited
strength of domestic demand poses upside risks to our forecast, we remain cautious
Nagaraj Kulkarni +65 6596 6738 for two reasons. First, pressure from net trade is likely to continue as imports surge
Senior Asia Rates Strategist while exports grow more modestly. Second, although policy makers have
downplayed the rapidly deteriorating external position, policy action is needed
through downward exchange rate flexibility, and tighter fiscal and monetary policy.
These measures may dampen consumer confidence and domestic demand, the main
engine of the economys decade-high growth of 5.3% in FY17 (see Pakistan
Growth accelerates to a 10-year high).
Delaying FX and monetary policy Our base case assumes that policy action to fend off risks from the external sector
adjustment to support growth will be gradual. However, political considerations ahead of the 2018 polls may result
would raise macro risks in a longer period of policy status quo than we currently expect. Although delaying
policy action could bring higher growth in FY18 than we currently forecast, this would
be a Faustian bargain, in our view. It would significantly raise uncertainty on the
timing and scale of the eventual FX adjustment, raising downside risks to growth.
External sector Somethings got to give

The growing import bill reflects PKR The C/A deficit is widening. It reached USD 2.6bn in 2M-FY18 doubling y/y and
strength and robust domestic equivalent to 4.6% of GDP on an annualised basis, based on central bank estimates
demand (see Pakistan Policy action is needed). We are concerned over Pakistans growing
Asia
macro imbalances, and recently raised our C/A and fiscal deficit forecasts for FY18
and FY19 to reflect this (Pakistan Twin deficits are widening rapidly).
Strong domestic demand caused the goods import bill to grow c.28% y/y in 2M-FY18.
Although policy makers claim that the import surge reflects higher capital-goods
imports particularly for China-Pakistan Economic Corridor (CPEC) projects we
reiterate our view that most of these are non-machinery imports (see Figure 2 and
Pakistan FX remains inflexible, macro costs mount). The rise in imports reflects FX
strength that has channelled domestic demand from locally produced goods to
imported substitutes, in our view. Higher import taxes currently under consideration
would only channel goods-imports into the informal economy, in our view.
Figure 1: Pakistan macroeconomic forecasts Figure 2: Importing more than just machines
Non-machinery goods imports, USD bn; PKR REER (12mma)
3.7 125
FY17 FY18 FY19
3.6
GDP grow th (real % y/y) 5.3 5.5 6.0 REER 120
3.5
Imports
3.4 115
Policy rate (%)* 5.75 7.00 7.50

3.3 110
USD-PKR* 108.00 112.50 113.00 3.2
105
Current account balance (% GDP) -4.0 -5.3 -4.1 3.1
Fiscal balance (% GDP) -5.8 -6.5 -5.3 3.0 100

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
Note: Economic forecasts are for fiscal year ending in June, FX forecasts are for end- Source: CEIC, Thomson Reuters DataStream, Standard Chartered Research
Policy focus needs to shift beyond Meanwhile, although goods exports increased c.18% y/y in 2M-FY18, this was from a
financing to containing the low base after declines for the past couple of years. Similarly, overseas workers
C/A deficit remittances rose c.13% y/y in 2M-FY18 after falling c.3% in FY17 (and posting
double-digit growth over the previous few years). However, this was likely due to a
seasonal boost from the Eid-ul-Azha festival rather than a structural shift, given the
weak economic outlook in the GCC (which accounts for two-thirds of total
remittances). September numbers should provide greater clarity on the outlook given
recent policy initiatives to boost inflows.
We also see downside risks to FX earnings from President Trumps negative

comments on Pakistans role in fighting terror. A deterioration in bilateral US-Pakistan
relations could reduce the chances of a near-term agreement on the future of
Coalition Support Funds (a reimbursement for Pakistans role in fighting militancy that
counts as exports of defence services in the external accounts).
Reflecting C/A weakness, the State Bank of Pakistans (SBPs) FX reserves declined
to c.USD 14.3bn as of 15 September (only 2.6 months of import cover, based on our
forecasts) from over USD 19bn in October 2016. The pace of this decline is
unsustainable, in our view. Media reports suggest that Pakistan is likely to tap the
markets for USD 1bn soon. While such financing is necessary to support reserves, it
is insufficient, in our view. Beyond the focus on debt financing, narrowing the C/A
deficit is critical to preserving macro stability.
Policy FX and monetary adjustment: when and how?

Our base case assumes a staggered Uncertainty on the scale and speed of FX adjustment persists. USD-PKR
FX adjustment, but we see a risk of stability has seen the Pakistani rupee real effective exchange rate (PKR REER)
Asia
a one-off move increase c.23% over the past four years. This means a significant FX adjustment is
needed to alleviate C/A pressure. It also highlights a key uncertainty facing financial
markets: Will policy makers opt for a one and done depreciation, or small staggered
moves? Given policy makers strong ongoing commitment to FX stability (new Prime
Minister Khaqan Abbasi has, at this moment, ruled out a devaluation), our base
case assumes gradual depreciation. We forecast USD-PKR at 108 by end-2017.
Still, a weaker PKR when it happens is likely to fuel imported inflation. Based on
our FX forecasts, we expect inflation to rise to an average of 5.6% in FY18. A smaller
(bigger)-than-expected FX adjustment poses downside (upside) risks to this forecast.
We still expect monetary tightening to begin in 2017 but acknowledge that no MPC
member has yet voted for a hike. The scale and speed of hikes are closely linked to
the pace of external account deterioration and uptick in inflation.
Politics Polls in sight

Sharifs dismissal has not led to We expect the new government to see through its term until the 2018 polls. Our
political upheaval, but opposition base case assumes that the PML-N government under Abbasi, after Nawaz Sharifs
parties are emboldened disqualification by the Supreme Court, will see through its term (see Pakistan New
cabinet with many old faces). However, cabinet reshuffles cannot be ruled out in the
interim. Opposition parties, particularly Imran Khans PTI and the larger PPP, have
capitalised on Sharifs removal from office to launch rallies and campaigns in
preparation for the 2018 polls. Yet it remains unclear whether the opposition will be
able to translate these efforts into electoral gains, despite Sharifs dismissal.
Market outlook Cautious outlook on PKR bonds

We have a Negative outlook on PKR bonds due to expectations of monetary
tightening and widening twin deficits.
Philippines Good, but could be better

Economic outlook Investment pick-up awaited
Chidu Narayanan +65 6596 7004 We expect the Philippines to be the fastest-growing ASEAN-6 economy in
Economist, Asia 2017, expanding 6.5%. Still-strong domestic demand and steady services-sector
growth will likely remain the primary growth drivers. Infrastructure investment has
Divya Devesh +65 6596 8608 been slower than expected so far in 2017; better implementation of planned
Divya.Devesh@sc.com
Asia FX Strategist infrastructure investments might drive even faster growth, closer to 7%, in the
medium term. We think inflation has peaked and will remain steady in the near
Arup Ghosh +65 6596 4620
Arup.Ghosh@sc.com
term, which should enable the central bank to maintain a neutral policy stance
Senior Asia Rates Strategist throughout 2017 and early 2018.
The trade deficit remained wide in 7M-2017, even as export growth rose to a seven-
year high of 14.5% y/y. While growth in capital-goods imports slowed to just 2.8%
y/y, mineral fuel imports rose 31% on higher prices, contributing 3ppt to the 7.9%
overall import growth. We expect capital-goods imports to remain subdued over the
next six months; mineral fuel imports are likely to moderate from Q4 as a high base
effect kicks in. Export growth, however, is also likely to ease as the electronics cycle
tops out, leading to a still-wide trade deficit.
Current account compression is not Remittance growth is likely to remain steady in the medium term; we still expect 4-6%
a concern; we expect a small growth in 2017. H1 saw growth of 4.7% y/y, down slightly from 5% in 2016.
surplus for full-year 2017 Remittances from the US, the biggest source, rose 6.7% in 2016, faster than other
regions. We expect the current account to remain under pressure on a still-wide trade
deficit and slower remittance growth, but expect an improvement in Q4 on
Asia
idiosyncratic factors.
Inflation is likely to remain subdued in the near term, averaging only 3.2% y/y in
September-December 2017. We expect inflation to edge up to 3.3% in 2018; higher
infrastructure investment and government tax reform (likely to be passed in Q4-2017)
should add 0.3-0.5ppt to headline inflation next year. Food inflation, the biggest
contributor to headline readings so far in 2017, has likely peaked and should
moderate in 2018. We expect housing inflation to be the primary driver of inflation in
the near term. Faster-than-expected implementation of infrastructure investments
and higher commodity prices present upside risks to our 2018 forecast. The central
bank will look through any inflationary pressures, in our view.
Figure 1: Philippines macroeconomic forecasts Figure 2: Domestic consumption, investment remain key
to growth (ppt contributions to GDP growth, by expenditure)
2017 2018 2019 16 Household consumption Govt GFCF Net exports

14
10
GDP, y/y
6
Policy rate (%)* 3.00 3.00 3.00 4
2
USD-PHP* 52.50 50.50 50.00 0
-2
Current account balance (% GDP) 0.2 0.6 1.1 -4
-6
-8
2012 2013 2014 2015 2016 2017
Policy BSP to maintain a neutral policy stance near-term

BSP is likely to keep the policy rate We expect the central bank to maintain a neutral monetary policy stance in the
on hold in the near term near term, keeping the overnight borrowing rate and the standing overnight deposit
rate unchanged for the rest of 2017. Bangko Sentral ng Pilipinas (BSP) is also likely
to maintain banking-system liquidity through the ceiling (standing overnight lending
facility, set at 3.5%) and floor (standing overnight deposit facility, set at 2.5%) of the
interest rate corridor, and via the term deposit auction facility. We expect the central
bank to keep the reserve requirement ratio at 20%; however, we see a risk that it
could be relaxed to 15% in Q4 if liquidity tightens unexpectedly.
BSP Governor Nestor Espenilla Jr. has ensured policy continuity since taking over
from Amando Tetangco, in line with our expectations. Espenilla has also expressed
comfort that inflation is unlikely to be a concern in the medium term, despite the
governments tax reform plan. We think BSP is confident that inflation will remain
within its target range, even taking into account likely government spending.
Espenilla has also been sanguine about the underperformance of the Philippine peso
(PHP), while noting that reserves are adequate to curb excess market volatility. FX
reserves stood at USD 81.5bn as of August 2017, amounting to 10.7 months of
import cover well above the six months advised by the IMF.
Politics
Implementation of infrastructure The government is keen to increase infrastructure investment; one year after the start
investments will be key of its term, the focus is on implementation. The Department of Budget and
Management forecasts that infrastructure spending will rise to 5.4% of GDP in 2017
Asia
and 6.3% in 2018, from an average of just 2.7% in 2011-15. Implementation,

however, has been subdued so far. Increased implementation of planned projects
presents an upside risk to our 6.5% GDP growth forecast for 2018, which is below
the governments 7% target.
Market outlook
The central bank has been sanguine We expect the trade deficit to persist in the near term, leading to continued PHP
about recent PHP weakness weakness. In addition, onshore demand for USD has picked up strongly as a result of
PHP weakness, C/A balance compression, new FX liberalisation measures and
increased political noise. Onshore foreign-currency deposits have risen consistently
even amid a widening trade deficit. Despite ample FX reserves, the central bank has
maintained a hands-off approach to FX markets. All of this is likely to continue to
weigh on the PHP in the medium term.
While low UST yields are broadly supportive of local-currency (LCY) markets, PHP
bonds continue to underperform Asian peers and USTs. In an environment of likely
gradual FX depreciation, foreign demand for PHP bonds looks subdued relative to
strong demand in other Asian LCY markets. The low weight of PHP bonds (<1%) in
the LCY benchmark index has also kept foreign interest light. Domestic headline CPI
inflation is likely to stay close to the mid-point of BSPs 2-4% target band in 2017,
and is unlikely to be a strong catalyst for duration demand. We maintain our Neutral
outlook on PHP bonds.
Singapore Benefiting from external support

Economic outlook
Edward Lee +65 6596 8252 We raise our 2017 GDP growth forecast to 2.6% from 2.1% to account for strong
Lee.Wee-Kok@sc.com
Head, ASEAN Economic Research H1 growth of 2.7%. While we expect external demand to moderate in H2, it is likely to
continue to support growth this year, offsetting subdued domestic activity. Trade
Jonathan Koh +65 6596 8075 growth rebounded strongly to 13% y/y in 7M-2017, the fastest pace since 2010. Non-
Jonathan.Koh@sc.com
Economist, Asia oil domestic exports (NODX) rose 8.7% during the period, versus -4.8% in the same
period last year. Benefiting from the pick-up in external demand, sectors such as
Divya.Devesh@sc.com
manufacturing and transport/storage have performed positively. Electronics
Asia FX Strategist manufacturing, in particular, is having a stellar year. We also raise our GDP growth
forecasts for both 2018 and 2019 to 2.3% (from 1.9% and 2.0% previously,
respectively) to reflect higher growth so far in 2017.
We upgrade our 2017 growth The pick-up in economic activity has been narrow, however. Of the six main
forecast to reflect the electronics manufacturing clusters, only electronics, precision engineering and chemicals
cycle upturn and still-strong expanded in 7M-2017. Biomedical, transport engineering and general
external demand
manufacturing contracted. Electronics provided the main boost, rising 37% y/y
YTD. Within electronics, activity was primarily lifted by the semiconductor sector.
The strong electronics cycle is a key reason for this years growth recovery.
External support is offsetting more Domestic activity is more subdued. Another 7,800 jobs were lost in Q2, the most
subdued domestic market since Q2-2003. This was the second consecutive quarter of negative job creation; the
sentiment last time this occurred was during the global financial crisis. The positive spillover
from the strong electronics recovery may be less than in previous years, as
Asia
manufacturing employment now only accounts for around 13% of total employment,
down from 16% in 2012. Soft consumer sentiment is reflected in subdued retail sales
(on a constant price basis), which rose only 1.5% y/y in 7M-2017. The property
market has been a silver lining residential property transactions have started to pick
up and rose in Q2 to c.8,200, the highest level in four years. This should lend support
to the business services sector.
Meanwhile, private-sector investment contracted for the seventh consecutive quarter

in Q2. It may stay subdued, as construction contracts awarded declined further in Q2.
While loan growth picked up to 5.9% y/y in July, this was due to a favourable base
effect; on a m/m basis, outstanding loans declined in July.
Figure 1: Singapore macroeconomic forecasts Figure 2: Relying on external pull

GDP by expenditure; % y/y
2017 2018 2019 4

Large inventory accumulation at
3 risk of correction when external
GDP grow th (real % y/y) 2.6 2.3 2.3 demand eases
2
H1-2016
1
3M SGD SIBOR* 1.30 1.60 1.60
0
USD-SGD* 1.34 1.30 1.38 H1-2017
-1
-2
Fiscal balance (% GDP) 0.5 0.5 0.2 Private cons. Government Investments
Investment Net exports Change in
cons. inventories
We expect growth to soften in H2 compared to H1. Inventory accumulation in H1

(Figure 2) may offset some of the continued strength we expect in external
demand. Demand from China may also soften slightly due to deleveraging efforts
by the authorities, property-market cooling measures, and inventory restocking
having peaked. China has accounted for about two-thirds of the rise in NODX so
far this year.
Policy
Markets may focus on whether the We expect the central bank to keep monetary policy parameters unchanged but
MAS removes the reference to strike a less dovish tone. Global economic conditions have continued to improve
extended period in October since April 2017, when the latest bi-annual Monetary Policy Statement was released.
Domestic growth has also picked up further, to 2.9% y/y in Q2 (from 2.5% in Q1).
The Ministry of Trade and Industry has raised its 2017 growth forecast range to 2-3%
from 1-3% and said that growth of 2.5% is its core view. However, domestic growth
remains narrow, largely externally led and driven by the strong electronics cycle.
Meanwhile, uncertainty remains around tensions on the Korean peninsula and
potential US protectionism against trade partners such as China.
Inflation remains benign. Headline and core inflation were only 0.7% and 1.5% y/y,
respectively, in 7M-2017 well within the central banks expectations. The Monetary
Authority of Singapore (MAS) forecasts 2017 headline and core inflation at 0.5-1.5%
and 1-2%, respectively.
We lower our full-year headline CPI Headline inflation had surprised to the downside so far this year. Food inflation in
inflation forecast due to the particular has been benign, capping inflation upside even as transport costs have
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downside surprise in food prices increased this year after numerous months of deflation. Accommodation costs have
also helped to depress prices as rents have continued to fall. As a result, we lower
our average 2017 CPI inflation forecast to 0.9% y/y from 1.2%, but we maintain our
core inflation forecast at 1.5%.
Given narrow growth dynamics and benign inflation, we expect the MAS to keep its
monetary policy stance unchanged in mid-October. We forecast that the central bank
will keep the Singapore dollar nominal effective exchange rate (SGD NEER) slope
flat, the centre of the policy band unchanged, and the width of the band at +/-2%. But
we see scope for the MAS to strike a less dovish tone and dilute its commitment to
maintaining a neutral monetary policy stance for an extended period. Specifically, we
think that the MAS may remove the words extended period from its statement (see
Singapore Supported by external demand in H1). The risk scenario is for the MAS
to reverse the April 2016 move and increase the slope slightly if it views the current
flat slope as too accommodative, rather than neutral.
Market outlook
We expect the SGD to benefit amid broad USD weakness. The SGD tends to
have the highest correlation of any Asian currency to moves in both the broad USD
and US Treasury yields. Given further EUR and JPY strength against the USD and
low market expectations of Fed rate hikes, we see scope for the SGD to appreciate
further against the USD. Our expectations that the MAS may sound less dovish and
dilute its commitment to neutral monetary policy may also support the SGD. If the
MAS drops the reference to extended period in October, the SGD NEER may trade
higher in the strong half of the policy band.
South Korea Threats and opportunities

Economic outlook Headwinds amid geopolitical tensions
Chong Hoon Park +82 2 3702 5011 We expect Koreas economy to grow 2.8% in 2017 but slow to 2.7% in 2018.
ChongHoon.Park@sc.com
Head, Korea Economic Research While solid recovery momentum is likely to continue in H2-2017, sentiment may
Standard Chartered Bank Korea Limited
weaken as the domestic contribution to GDP growth falls to the 2-3ppt range from
Kathleen B. Oh +82 2 3702 5072 5ppt in H1. Construction investment already started to slow in Q2 after peaking in
Kathleen.BN.Oh@sc.com
Economist, Korea 2016. Tougher real-estate regulations implemented in August may depress housing-
Standard Chartered Bank Korea Limited
market activity, while a proposal to impose a higher tax rate on large corporates is
Eddie Cheung +852 3983 8566
Eddie.Cheung@sc.com
likely to reduce the incentive for business investment. The minimum wage hike
Asia FX Strategist (16.4% y/y) effective in 2018 may also erode Koreas export price competitiveness.
Moreover, geopolitical tensions on the Korean peninsula are likely to continue
through next year, negatively affecting the growth outlook.
Koreas economy was resilient in The economy was resilient in H1 (growth of 2.8%) thanks to a favourable global trade
H1; we expect growth of 2.8% in environment and the boost to sentiment from policy expectations for the new
2017, with upbeat sentiment government. Domestic growth improved markedly, contributing 4.8ppt to H1 GDP
growth, on strong facility and construction investment. Private consumption and
domestic investment continued on a solid recovery path, despite global protectionist
rhetoric, Fed rate hikes and geopolitical friction with China. Net exports were
negative due to large imports driven by investment demand. While exports by value
rose 16% y/y in H1, GDP accounting captured only a 3% rise in volume terms. Net
exports made a negative contribution due to larger imports. However, export
outperformance this year is leading to more upbeat sentiment relative to last year.
Asia
We forecast average CPI inflation at 1.9% y/y this year, in line with the Bank of
Korea (BoK) forecast. The base effect from last years electricity tariff discount has
driven recent above-2% inflation readings. We expect the base effect from low oil
prices and the electricity discount to disappear by Q4, bringing inflation back below
2%. The BoK has an inflation target of 2%. We expect stable prices throughout 2017.
Headwinds include a potential rise The economy faces major headwinds, in our view. Potentially higher market rates
in market rates, a slowing housing following expected Fed rate hikes until mid-2018 are likely to pressure Koreas over-
market, geopolitical tensions and leveraged households. Further tightening of macro-prudential measures on
protectionism
household debt (mortgage lending) may slow housing-market activity. External
factors including prolonged geopolitical tensions with the North, Chinas economic
retaliation over the installation of the US Terminal High Altitude Area Defense
Figure 1: South Korea macroeconomic forecasts Figure 2: Domestic factors show resilience
Contributions to GDP by expenditure, ppt
Private consumption Government expenditure
2017 2018 2019 Construction investment Facility investment
5 Net exports Real GDP growth, % y/y
3
2
Policy rate (%)* 1.25 1.50 1.75 1
0
USD-KRW* 1,140 1,130 1,100
-1
-3
Q1-15 Q2-15 Q3-15 Q4-15 Q1-15 Q2-15 Q3-15 Q4-15 Q1-17 Q2-17
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
(THAAD) system, and potential protectionist policies from the US may also hinder
growth. The positive outlook for sectors such as IT, semiconductors,
communications, medical services and education services may offset downside risks.
Policy BoK to maintain the status quo until Q2-2018

BoK is likely to keep rates on hold We expect the BoK to keep rates unchanged as it monitors the Feds next
until the Feds next hike move. The BoK appears cautious ahead of anticipated Fed rate hikes next year and
their potential to trigger sudden capital outflows. Market expectations of Fed hikes
this year have diminished on mixed US labour-market and inflation data. We do not
expect the BoK to make a move until further US tightening. In terms of domestic
conditions, policy makers are likely to watch the inflationary impact of severe weather
on agricultural product prices near-term. Heightened tensions on the Korean
peninsula and cautious investor sentiment may turn policy makers less hawkish. We
expect the BoK to maintain its current rate until next year, hiking in Q2-2018.
Politics Geopolitical tensions to continue

Geopolitical tensions are likely to Tensions on the Korean peninsula are likely to remain high, with no
continue, with markets becoming breakthrough in sight. Geopolitical risks have risen as North Korea has
less reactive to headlines demonstrated its increased missile and nuclear capabilities in 2017. The North
appears determined to gain the upper hand in negotiations. It conducted its latest
(sixth) nuclear test on 3 September, triggering harsher sanctions from the United
Nations Security Council. The Trump administration will likely continue with its
maximum pressure and engagement strategy. However, leveraging relations with
China and Russia to push for an oil embargo or a freeze on Kim Jong-uns assets
Asia
may prove difficult. While South Korean equities and the Korean won (KRW) have
avoided major losses as a result of rising geopolitical risk, we expect tensions to
persist in the absence of a breakthrough.
South Korea also faces uncertainty over potential trade protectionism from the US.
Although rhetoric on terminating the Korea-US free trade agreement has subsided for
now, the Korean governments handling of trade relations with the US and China will
be critical to exports to its two largest trading partners.
Market outlook
We expect strong fundamentals to FX: We maintain a constructive view on the KRW for the rest of 2017, as we expect
support the KRW markets to move past ongoing geopolitical tensions on the Korean peninsula and
focus on domestic positives. Valuation and flows are likely to remain constructive for
the KRW. Heading into the year-end, we forecast USD-KRW at 1,135 at end-Q3 and
1,140 at end-Q4.
KTBs are likely to outperform USTs Rates: We have a Neutral duration outlook on Korea Treasury Bonds (KTBs). BoK
medium-term rate-hike expectations and light foreigner interest amid ongoing geopolitical risks
have offset the supportive backdrop of low UST yields. Markets are fully pricing in a
25bps BoK hike by mid-2018. The 10Y KTB/UST yield spread has widened to the
widest level since 2016, with KTBs yielding above USTs. We expect KTBs to
outperform USTs medium-term, as the BoK is unlikely to hike rates in a hurry. We
also see signs of an economic slowdown in Korea in H2-2017 as the boost to exports
from Chinas inventory cycle eases, while inflation is likely to moderate to below 2%.
Sri Lanka Improving macro fundamentals

Economic outlook A story of two halves
Saurav Anand +91 22 6115 8845 We expect 2017 growth to remain sluggish at 4.5% on continued fiscal
Saurav.Anand@sc.com
Economist, South Asia consolidation, the lagged impact of monetary tightening, and weather shocks.
However, we expect economic activity to pick up in H2 from a weak H1 as
Nagaraj Kulkarni +65 6596 6738 disruptions caused by droughts and floods fade. Consumption is likely to recover in
Senior Asia Rates Strategist H2 on a favourable base effect and a gradual pick-up in private investment, led by
the construction sector. Exports should also improve after the restoration of GSP+
Divya.Devesh@sc.com
status in May 2017, leading to lower duties on exports to the EU. However, we
Asia FX Strategist expect public investment to be scaled back in H2 as the government tries to adhere
to its fiscal deficit target. We forecast growth at 5% in H2, versus 3.9% in H1.
Revenue slippage relative to 2017 The government remains committed to the economic reform programme and plans to
budget targets is likely meet its fiscal consolidation target a budget deficit of 4.7% of GDP in 2017
despite likely revenue slippage due to weather shocks. We expect a slightly wider
deficit of 5%. We estimate revenue slippage of 0.3% of GDP due to cash transfers to
the drought-affected population, lower non-tax collection (as two large dividend
payers in 2016 turn to losses in 2017), and lower tax revenues (due to the delayed
passage of the Inland Revenue Act). A reduction in public investment to meet the
fiscal deficit target is a downside risk to our 5% forecast (see On the Ground, 4
September 2017, Sri Lanka trip notes: Improving macro stability).
Inland Revenue Act implementation The governments current focus is on implementing the Inland Revenue Act (IRA),
in 2018 should improve revenue which was approved in parliament on 7 September. Some clauses will take effect
Asia
realisation from 1 October, while most of the bill will be implemented from 1 April 2018. The IRA
will widen the tax net, raise tax rates, introduce new taxes (such as a capital gains
tax) and reduce tax holidays. Existing incentives provided by the government will
continue. According to government estimates, the IRA is likely to improve
government revenues by c.USD 760mn (0.9% of GDP) in the first year of
implementation.
C/A deficit to remain wide at 2.3% of We expect the C/A deficit to remain wide at 2.3% of GDP in 2017 (2016: 2%) on a
GDP in 2017 marginally wider trade deficit, weak remittances and slow tourism growth. The trade
deficit is likely to widen to USD 9.2bn in 2017 from USD 9bn in 2016 on higher rice
and fuel imports; however, we expect it to narrow in H2 versus H1. We expect textile
exports (40% of exports) to recover on the restoration of Sri Lankas GSP+ status by
Figure 1: Sri Lanka macroeconomic forecasts Figure 2: Private-sector credit growth is slowing gradually
% y/y
40% 14%
2017 2018 2019 Private-sector
35% SLFR (RHS)
credit growth 12%
GDP grow th (real % y/y) 4.5 5.0 5.5 30% y/y
25% 10%
CPI (% annual average) 5.7 5.0 5.0 20% 8%
15%
Policy rate (%)* 7.50 7.25 7.00
10% 6%
USD-LKR* 155.00 160.00 164.00 5% SRR (RHS) 4%

0%
Current account balance (% GDP) -2.3 -2.0 -2.0 2%
-5%
-10% 0%
Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17
*end-period; Source: Standard Chartered Research Source: CBSL, Standard Chartered Research
the EU, after declining 5.2% in H1. High fuel imports in H1 were driven by diesel
demand for power production; this should ease in H2 after rains in May led to
increased production from hydropower plants.
Remittances declined 5.6% y/y in January-July 2017, and are likely to remain muted
given still-low crude oil prices and the turbulent geopolitical situation in the Middle East.
Tourism earnings growth also slowed to 3.5% in January-August on airport-related
maintenance and a dengue fever outbreak. While tourism is likely to recover somewhat
in H2, we expect growth to be below the 12-15% seen in the last three years.
Policy We expect a 25bps policy hike in H2-2017

Private-sector credit growth is We maintain our forecast of a 25bps policy rate hike in H2-2017 on stubbornly high
easing but still high private-sector credit growth. While the growth rate eased to 18.6% y/y in June 2017
from a peak of c.28% in July 2016, monthly disbursals remain high especially of
personal loans and loans to the real-estate sector. At the current run rate, private-
sector credit growth will be in the range of 16-17% by December 2017, well above
nominal GDP growth of less than 10% (2016: 8%).
We expect average inflation to moderate to 5% in Q4 from 6.2% during the January-

August period on declines in both food and non-food inflation. Food inflation is likely
to ease to 6% in Q4 (from 7.5% in January-August) as supply-side shocks due to
drought and floods in H1 fade. We expect non-food inflation to moderate to 4.5% in
Q4 (from an average of 5.6% for January-August) on a favourable base effect as the
impact of the VAT rate hike fades from November.
Hambantota port sale proceeds External-sector vulnerabilities are also likely to ease. FX reserves rose to USD 7.7bn
Asia
should boost FX reserves in August from a low of USD 5bn in April as the government raised funds via
sovereign bonds and syndicated loans, and as FII inflows picked up. The treasury is
also likely to receive c.USD 940mn in Hambantota port sale proceeds (completed in
July); 40% of this is likely to be received by Q4-2017. Further investments in
developing an export zone around the port should attract FDI inflows from H2-2018.
Politics Provincial elections likely to be held in Q1-2018

The political situation remains stable, although we expect opposition to government
policies to keep rising as we approach provincial elections in Q1-2018. The
government is trying to hold all provincial council elections on the same day and
change the way representatives are elected. Currently, all members are elected
based on a first-past-the-post system, where the candidate with the largest number of
votes wins. Under the new system, 60% of members will be elected based on the
first-past-the-post system. These members will then nominate the other 40% under a
proportionate representation system (based on their share of votes).
Market outlook
We are long 10Y LKR bonds We have a Positive outlook on LKR bonds. We are long 10Y LKR bonds given
attractive valuations, a resilient currency due to the improving FX reserve position,
and continuing progress on government reforms.
We expect USD-LKR to depreciate gradually to 155 by end-2017 as the central bank

prefers a gradual adjustment in USD-LKR in order to build its FX reserves.
Taiwan A temporary soft patch

Economic outlook
Tony Phoo +886 2 6603 2640 GDP growth likely to remain modest at 2.0% in 2018, little changed from 1.9% in
Tony.Phoo@sc.com
Senior Economist, NEA 2017. Exports, overseas orders, industrial production and other data suggest slower
Standard Chartered Bank (Taiwan) Limited
growth momentum in the coming months, partly owing to a less favourable base effect.
Eddie Cheung +852 3983 8566 Also, rapid gains in global DRAM and panel prices have stalled, casting doubt on the
Eddie.Cheung@sc.com
Asia FX Strategist near-term outlook for the tech sector. Falling capital-goods imports a gauge of local
manufacturing confidence suggest that private fixed capital investment will act as a
Growth momentum is likely to further drag on growth. With businesses turning more cautious, a potential downward
moderate in the next few quarters, adjustment to the inventory cycle is also likely to weigh on GDP growth near-term.
mostly due to transitory factors
However, we believe many of these negative factors are transitory. The unfavourable
base effect is set to wane by Q2-2018. The inventory adjustment cycle is likely to
reverse in the next two to three quarters, barring an unexpected deterioration in the
global economic backdrop. Consumer spending is expected to remain a strong
growth pillar in 2018. Benign labour-market conditions and positive residential
property-market sentiment should support consumer confidence. In addition, the
government plans to raise public-sector wages by 3% in 2018, the first increase in
seven years. The proposal has received positive feedback from major business and
commercial groups, which have indicated they will follow suit.
We expect headline CPI inflation to pick up slightly to 1.3% in 2018 from 1.0% in
2017. Domestic price pressure should remain broadly stable near-term, partly due to
a favourable base effect; recent Taiwan dollar (TWD) strength is likely to cap
Asia
imported inflation. This is most evident in core CPI inflation, which has remained
steady around 0.9-1.0% since early 2016. However, headline inflation is likely to
move gradually higher in H2-2018 on the tobacco tax hike, potential upside risks to
food-price inflation, and a waning base effect.
We expect the current account surplus to decline further to 10% of GDP in 2018 from
11% in 2017. This compares with the 13-14% levels registered in 2015-16. Given the
economys high dependence on energy imports, we expect higher global oil prices to
continue to pressure the trade surplus. Separately, tense cross-straits relations have
negatively affected overseas arrivals from mainland China, the largest source of
tourist arrivals to Taiwan since 2010. This is likely to reduce tourism receipts and
lead to a widening services deficit.
Figure 1: Taiwan macroeconomic forecasts Figure 2: Interest rates likely to stay on hold for now
Real GDP % y/y 4Qma (LHS); rediscount rate % t-12 (RHS)
15 1.5
2017 2018 2019
1.0
CBC
GDP grow th (real % y/y) 1.9 2.0 2.5 10 rediscount rate 0.5
% t-12
0.0
-0.5
Policy rate (%)* 1.38 1.75 1.75 -1.0
0
Real GDP -1.5
USD-TWD* 30.80 30.80 30.80
saar % y/y -2.0
-5 4QMA, 1Q
Current account balance (% GDP) 11.0 10.0 8.0 Fwd(LHS) -2.5
-10 -3.0
1995 1998 2001 2004 2007 2010 2013 2016
Policy
Policy makers are likely to stay with Taiwan central bank (CBC) to maintain pro-growth policy stance through H1-
their pro-growth monetary stance 2018. We expect the CBC to keep the benchmark rediscount rate steady at 1.375%
through H1-2018 at least through H1-2018. Recent comments from policy makers show that they are
cautiously optimistic on near-term growth prospects given the demand recovery in
overseas markets such as the US, China and Europe. They also expect inflation to
remain stable, citing the negative output gap, softer commodity prices, and moderate
domestic demand. Policy makers view the current accommodative policy stance as
supporting growth and allowing for price and financial stability; as a result, they are
unlikely to tighten unless the growth recovery is sustained and clear upside risks to
inflation emerge.
Property market
Gains in residential prices and There are growing signs that the residential market may bottom out soon.
transacted sales suggest the market Residential property prices across Taiwan recorded sequential gains for a second
is likely to bottom out soon straight quarter in Q2, after remaining mostly in negative territory since 2014,
according to data from Sinyi Real Estate. The three-month moving average of
residential property sales transactions across six major cities rose to 18,984 units in
August, staying above 18,000 for a second straight month after being below this level
since February 2016. Net new mortgage lending increased 74% y/y in H1 to TWD
117bn, further supporting the view that the market is bottoming out.
Politics
The appointment of William Lai as Taiwan will hold nationwide city mayoral and local township government
Asia
premier may be an attempt by the elections in late 2018. The election is seen as a litmus test for the 2020 legislative
ruling DPP to regain confidence and presidential elections. With the opposition Nationalist (KMT) Party remaining in
ahead of 2018 elections
disarray, the ruling Democratic Progressive Party (DPP) appears likely to retain all
four of its mayoral seats in Hsinchu, Taichung, Tainan and Kaohsiung. The focus will
be on whether DPP can secure victories in Taipei City (currently held by independent
Ko Wen-je) and New Taipei (currently held by Eric Chu of the KMT).
President Tsai Ing-wen recently announced a minor cabinet reshuffle in a bid to

shore up public support amid growing angst within her party ahead of the 2018 polls.
She appointed Tainan Mayor William Lai as the new premier. Lai may be the partys
best hope for regaining public confidence ahead of next years elections given his
high profile as a rising political star, strong credentials, and popularity among young
supporters.
Market outlook
The authorities are likely to be less We forecast USD-TWD at 30.80 at end-2017. Foreign capital inflows, which
tolerant of TWD strength as the benefited the TWD in H1, are showing signs of slowing. Foreign investor participation
terms of trade deteriorate in Taiwans equity market is at a record high, and a potential shift in sentiment is
likely to weigh on the TWD. We also see limited TWD gains near-term as Taiwans
terms of trade deteriorate. Additionally, strong TWD performance this year has
caused local life insurers to incur significant FX losses. The local authorities may
therefore become less tolerant of further TWD appreciation going forward (see
FX Explorer, 18 August 2017, New FX forecasts).
Thailand Low political risk is key

Economic outlook GDP revised up
Tim Leelahaphan +66 2724 8878 Recovery momentum builds. We revise up our 2017 GDP growth forecast to 3.6%
Tim.Leelahaphan@sc.com
Economist, Thailand (from 3.5%) and maintain our 2018 forecast of 4.3%. H1-2017 growth of 3.5% y/y
Standard Chartered Bank (Thai) Public Company Limited
was broad-based, and we expect private consumption, public investment, and
Divya Devesh +65 6596 8608 tourism to remain key drivers (see Economic Alert, Thailand Q2 GDP beat
Divya.Devesh@sc.com
Asia FX Strategist expectations; watch politics and Thailand trip notes Cautiously optimistic). The
larger budget deficit of THB 450bn planned for FY18 (starting in October 2017), up
from THB 390bn in FY17, should help to stimulate the economy.
The military governments push to implement big-ticket projects before leaving office
should drive the economy forward. Pipeline projects include infrastructure projects,
the Eastern Economic Corridor and the soon-to-be-launched Thailand Future Fund
(the governments infrastructure fund). Infrastructure projects worth a combined total
of THB 1.79tn are planned by 2022; disbursement from 2014 through July this year
was around THB 50bn, around 3% of the total, according to the latest information
from the finance ministry. We expect disbursements to accelerate next year, as most
planned projects have progressed past the initial stages of approval and signing.
Exports have enjoyed a strong and broad-based recovery, rising 8% y/y in the first
seven months of this year. Industrial exports have performed fairly well (+13% YTD).
In particular, electronics export growth has picked up (24% y/y YTD), helping to
absorb excess capacity in the industry. More importantly, imports of capital goods,
raw materials, and parts for electrical and electronics equipment have shown
Asia
strength. This points to increasing domestic economic activity in Q4 and in 2018. We
see the narrowing trade surplus as a good sign for the economy.
Private investment has yet to show Private investment is the only area yet to show sustained improvement. We think a
sustained improvement revival will be challenging amid excess capacity and in the early stages of an
economic recovery. However, businesses should become more active after other
economic indicators have improved.
Policy Rate-hiking cycle to start in mid-2018

Inflation is likely to rise later this year. While the economic growth outlook has
improved, headline inflation remains low 0.6% y/y YTD through August, versus the
Bank of Thailands (BoT)s 1-4% target range. The low inflation print largely reflects
Figure 1: Thailand macroeconomic forecasts Figure 2: Roadmap to democracy, based on our expected
timeline
2017 2018 2019 27 September The Supreme Court will deliver its verdict on
Yingluck, regardless of her presence
GDP grow th (real % y/y) 3.6 4.3 4.5 26 October Royal cremation of the late King
Early 2018 Coronation of the new King
Completion of the drafting of four organic laws,
necessary for general elections. Two laws the
Policy rate (%)* 1.50 2.25 2.25
Ongoing Election Commission (EC) and political-party laws
have been passed by parliament. The law on the
USD-THB* 32.50 31.00 33.75 EC has been published in the Royal Gazette. The
other two are bills regarding MPs and senators.
Current account balance (% GDP) 7.0 3.7 -1.0 H1-2018 Parliament to scrutinise the last two organic laws
Fiscal balance (% GDP)** -2.9 -3.0 -3.0 From mid-2018 General elections (within 150 days of the organic
laws becoming effective)
*end-period; **for fiscal year ending in September; Source: Standard Chartered Research Source: Local press, Standard Chartered Research
the fall in food prices from a high base due to last years drought; in addition, all
regions have enjoyed good rainfall this year. To reflect this, we revise down our 2017
inflation forecast to 1.0%, from 1.1%.
Inflation has risen in Q3 due to higher prices of oil and non-food items. The high base
effect is now fading. Inflationary pressure is likely to arise in Q4 from improving
domestic demand and a continued rise in energy prices (more than 10% of
Thailands CPI basket). Higher energy/fuel prices should boost transport cost
inflation. Also, the costly registration process employers now face when hiring
undocumented migrant workers will likely contribute to an increase in inflation.
BoT has emphasised financial On the monetary policy front, we expect the BoT to hold its policy rate steady at 1.5%
stability for the rest of this year. We maintain our view that a policy rate-hiking cycle will start
around mid-2018. This should help stem speculative risks arising from the prolonged
low-interest-rate environment, as the BoTs statements have emphasised financial
stability. At the same time, we have seen no signals from the BoT that it will cut
interest rates to weaken the Thai baht (THB), which has risen 8.5% against the USD
and is the best-performing currency in Asia this year.
In the minutes of the latest Monetary Policy Committee meeting, the committee held the
view that a policy rate cut would be ineffective in returning inflation more quickly to
target, as low inflation was attributed mainly to supply-side factors. It also emphasised
that the recent decline in short-term yields had no bearing on the future monetary policy
stance, which would be primarily conditioned on the outlook for inflation, economic
growth and financial stability (see ACT, Close pay THB 2Y swaps).
Asia
Politics Low risk

Limited scope for uncertainty. Former PM Yingluck failed in August to show up to
hear a verdict in a negligence case related to her government's rice-pledging
scheme. However, stock markets and the THB did not react negatively to the news.
With the upcoming events of the late Kings cremation in October and the coronation
of the new King after that, we see little potential for political uncertainty in the
medium term.
The military government has declined to confirm whether a general election will be
held next year. It cited the passage of four organic laws required by the new
constitution as a condition for holding an election, and the key factor determining the
timing. Two of the four laws the Election Commission and political-party laws
have been passed by parliament. We continue to believe the general election may be
held sometime after the middle of 2018, which is four years after the junta took power
in May 2014.
Market outlook THB likely to be supported...

...both politically and economically. THB strength has been driven by healthy
macro fundamentals rather than portfolio inflows. These include improved GDP
growth and a current account (C/A) surplus of USD 26bn through July on strong
exports and tourism, despite a moderating trade balance. Foreign capital flows into
Thai bond markets have also been robust (c.THB 130bn through early September)
on widening real-yield differentials due to low inflation. The central bank has signalled
its concern about THB strength, but has not introduced stricter measures to curb it.
We think any potential central bank measures will have only a limited impact on the
currency, and we expect further THB appreciation.
Vietnam We expect stronger growth in H2

Economic outlook
Chidu Narayanan +65 6596 7004 A pick-up in H2 should boost full-year growth to a robust 6.4%. Growth
Economist, Asia accelerated in Q2 after a slowdown in Q1, in line with our non-consensus
expectation. Improving manufacturing output should drive better growth in H2; we
Eddie Cheung +852 3983 8566 expect construction growth to remain strong in H2, while the mining-sector
Eddie.Cheung@sc.com
Asia FX Strategist contraction has likely bottomed out. Manufacturing output should receive further
medium-term support from strong FDI inflows. We expect inflation to edge lower in
Lawrence Lai +65 6596 8261
Lawrence.Lai@sc.com
H2, allowing the central bank to maintain an accommodative monetary policy stance.
Asia Rates and Flow Strategist
Electronics exports are likely to slow in Q4 after a strong Q3 that was supported by
demand for components, particularly those used in mobile displays. Electronics
We expect slower export growth in exports, which now make up a third of the total, rose 25% y/y in January-August;
Q4 as electronics exports top out we expect lower but still-strong growth of c.15% in Q4. Commodity exports have
risen sharply in the past couple of months on higher prices. While commodity
exports are less important to Vietnam than in the past, they are likely to continue to
provide strong support in the medium term. Capital-goods imports have been
robust so far this year, in line with our expectations; we expect this to continue,
keeping overall imports high in the medium term. We forecast a small trade surplus
over the next 12 months; slower-than-expected export growth presents a downside
risk to our forecast.
Retail sales are likely to be robust in H2, pushing annual growth up to 11-13% y/y.
Wage growth has improved on better job creation in the manufacturing sector,
Asia
supporting domestic consumption. Visitor arrivals are likely to remain strong during
the holiday season in Q4, while industrial production growth is likely to remain high,
at over 7% y/y.
FDI in manufacturing should remain Implemented FDI rose on a y/y basis in H1-2017, in line with our forecasts.
strong in H2; we expect Implementation is typically higher in H2; we forecast implemented capital of close to
implemented FDI to be higher than USD 8bn in H2-2017 and more than USD 15bn for the full year. We expect registered
in H1
FDI of close to USD 20bn, a nine-year high. Vietnams geographical proximity to
China and its young and growing population make it attractive to manufacturers and
should attract strong FDI inflows over the medium term, despite the absence of the
Trans-Pacific Partnership.
Figure 1: Vietnam macroeconomic forecasts Figure 2: Growth is likely to pick up in H2

Contributions (ppt), real GDP growth (% y/y)
12 GFCF Change in stocks Consumption Net exports
2017 2018 2019 Forecasts
10
GDP grow th (real % y/y) 6.4 6.6 6.9 8 6.4 6.6
GDP
6
4
Policy rate (%)* 6.25 6.25 7.00 2
0
USD-VND* 23,000 22,800 22,600
-2
Fiscal balance (% GDP) -5.9 -6.0 -5.5 -6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
We expect inflation to remain We expect inflation to edge lower in H2, bottoming out in Q4 and remaining
manageable in H2, providing space manageable. Inflation eased to 3.4% y/y in August from c.5% in Q1. It has not
for the SBV to remain moderated as fast as we expected, however, amid hikes in administered fuel prices.
accommodative
We raise our 2017 and 2018 average inflation forecasts to reflect this. We now
forecast 3.6% for 2017 (from 3.0% previously) and 3.7% for 2018 (3.2%).
Food and foodstuffs deflation continued for a seventh consecutive month in August;
food inflation is likely to remain subdued in the coming months on better monsoon
rains and a high base effect, keeping inflation low. Core inflation (which excludes
prices of food, energy, health care and education services) remains benign at less
than 1.5%, and is likely to stay subdued in the near term.
Policy
The State Bank of Vietnam (SBV) is likely to remain accommodative in the near term,
with benign inflation providing room for policy manoeuvre. The central bank surprised
markets by lowering interest rates by 25bps on 10 July, the first cut in three years; it
reduced the refinance rate to 6.25% and the rediscount rate to 4.25%. The central
bank said that the cuts were aimed at managing inflation and supporting business
and economic growth.
We expect unchanged policy rates in 2017 and a mild devaluation of the Vietnamese
dong (VND). We see a risk of further easing this year, however. The government has
pushed for more easing by the central bank to help achieve the full-year GDP growth
target of 6.7%. While we do not expect further easing, we think that any rate cuts
would be targeted to support credit growth in specific sectors, unlike the broad rate
cut in July.
Asia
Credit growth is likely to edge Credit growth has been strong, at 7.54% in H1 versus end-2016; this is mildly below
higher in H2, to meet the SBVs the SBVs 18% target for the year, but higher than 6.2% growth in the same period
target of 18% last year. We expect faster credit growth in H2. The banking sectors non-performing
loan (NPL) ratio only recently started to decline it was 2.46% as of end-2016, down
from 2.55% at end-2015, according to the SBV. International credit rating agencies
estimate a ratio closer to 9%.
Market outlook
We maintain Neutral short- and medium-term FX weightings on the VND. While
spot has stabilised in recent months, USD-VND fixings continue to be set on an
upward trend. As a result, the spot-fixing gap has narrowed to its lowest in months,
boding well for confidence in the currency. We look for slightly more VND
depreciation in early 2018, and expect a gradual shift towards appreciation in mid-
2018 as economic growth momentum builds. We forecast USD-VND at 23,000 at
end-2017 and 23,200 by Q2-2018.
We maintain our Neutral outlook on Vietnam Government Bonds (VGBs).

Favourable inflation dynamics and lower UST yields support onshore rates. VGB
demand is supported by flush banking-system liquidity, which is affected by stable
policy rates and seasonal factors. The central banks full-year credit growth target
is 18%; this is likely to put pressure on bank demand for VGBs if credit growth
picks up further. However, we think the impact will be mitigated by ample onshore
liquidity. We forecast the 5Y VGB yield at 5% at end-2017 and 6.00% at Q2-2017
(versus 7.50% previously).
Economies Middle East and North Africa
MENA Grappling with the new normal

Economic outlook Growth faces downside risks
Dima Jardaneh +971 4 508 3591 We expect economic growth to bottom out his year. We forecast that aggregate
Dima.Jardaneh@sc.com
Head, Economic Research, MENA weighted growth in the GCC will drop to 0.3% in 2017 from 2.1% in 2016; this would
be the lowest level since oil prices dropped in mid-2014. The expected slowdown is
largely because of the decline in oil production, as both OPEC and non-OPEC
producers in the Middle East and North Africa (MENA) region have agreed to cut
production to March 2018.
Non-oil economic activity in the 2018 should bring a pick-up in headline growth. Oil GDP is likely to be flat, as
GCC could continue to GCC oil producers are expected to maintain oil production output levels at the current
underperform target levels agreed under the OPEC/non-OPEC oil production cut agreement.
Meanwhile, negative business and household sentiment, along with constraints on
government spending, is weighing on non-oil economic growth. We expect this trend
to continue into 2018 as the prolonged diplomatic rift in the Gulf weighs on
confidence and activity across the GCC bloc.
Our base case is that the standoff will continue into next year, which would have
negative repercussions for the GCC as a whole. We think that the economic costs of
the conflict will not be limited to Qatar, and expect investor sentiment towards the
region to worsen more broadly as the period of uncertainty and heightened political
risk drags on.
Slowing Saudi economy has Saudi Arabias slowing economic growth is complicating the rollout of its
prompted the authorities to revise reform agenda. Saudi Arabia may be considering a slower pace of reforms to
reform plans support growth (as we highlighted in Global Focus Q3 2017 Swans, bulls and
bears), as its economic growth has slowed sharply owing to lower household and
government consumption. Fiscal reforms including cuts in public-sector allowances
and benefits (reversed in April 2017), the partial removal of subsidies, and measures
to raise non-oil revenues have taken a toll on businesses and consumers, damping
consumption and economic activity.
Revisiting the reforms underway is requiring the Saudi government to revise the
National Transformation Program 2020 (NTP), which was launched in June 2016.
Available information suggests that the revision entails devolving some targets into
MENA
other implementation frameworks and possibly extending delivery of some

objectives beyond 2020, making them more realistically attainable. Ambitious
targets under the NTP include raising government non-oil revenue to SAR 530bn in
2020 from a baseline of SAR 163.5bn. We think the government may amend the
programme to reflect the difficulty of raising non-oil revenues amid slowing growth.
Setting the right pace for economic reforms requires particular consideration of
domestic social and political forces as Crown Prince Mohammed bin Salman
cements his power after being elevated to the position in June.
Portfolio inflows pour into Egypt, Foreign investors refocus on Egypt, swayed by high yields and progress on
attracted by high returns economic adjustment under the IMF-supported programme. Egypt attracted USD
17.6bn of foreign investment into local-currency government debt instruments
between November 2016 and mid-September 2017, according to comments to
Reuters by Deputy Finance Minister Ahmed Kojak. July 2017 alone saw inflows of
USD 7.6bn after the central bank hiked interest rates by a cumulative 400bps
between May and July.
EGP has remained broadly stable Meanwhile, a confluence of factors has boosted Egypts external sector: a weaker
despite the recovery in inflows Egyptian pound (EGP) has bolstered exports of goods and services and supported a
gradual recovery in tourism receipts. The countrys net international reserves reached
USD 36.1bn at end-August, a level not seen since before the 2011 revolution. Despite
the strong recovery in inflows, the EGP has remained broadly stable, appreciating 2%
since end-2016. This stability has been crucial to safeguarding the EGPs
competitiveness, despite the large inflation differential between Egypt and its trading
partners. Improvements in security and the domestic economy will be essential to
safeguarding the nascent recovery in the external sector, by encouraging higher levels
of tourism receipts and foreign direct investment.
While gains on the external front have bolstered Egypts economic growth outlook,
the countrys fiscal funding gap remains large. Egypt is likely to fund this gap
externally with plans to issue USD 8bn of Eurobonds in 2018, and a 1.5bn EUR-
denominated issuance before end-November 2017. Meanwhile, fiscal consolidation
measures may continue to put upward pressure on consumer prices, constraining
domestic growth drivers.
Policy Taxing times; VAT preparations taking shape

Saudi Arabia and the UAE have Plans to introduce VAT in early 2018 appear to be on track. Despite delays in
issued local VAT legislation in other areas of fiscal reform, Saudi Arabia and the UAE have taken important steps
preparation for implementation towards VAT implementation in recent months, publishing related legislation and, in
Saudi Arabias case, implementation procedures. Both countries appear to be
adhering to the effective date of 1 January 2018. Other GCC member states appear
to be lagging behind on such legislation, which may delay their VAT implementation.
The GCC unified VAT agreement stipulates that once two member states have
enacted the agreement, it is considered ratified and other member states will be
considered outside of the scope of the agreement until they have enacted their own
VAT legislation. The agreement allows GCC member states to implement the VAT at
different times.
The IMF has long advocated that GCC economies introduce VAT to diversify
government revenue away from oil. As a consumption-based tax, VAT is expected to MENA
provide a stable revenue base, which is particularly useful for GCC economies facing
an urgent need to decouple government revenue from oil. Making the VAT base as
broad as possible would raise its efficiency, while exemptions could dilute it.
Furthermore, since the VAT on inputs must be credited, the tax does not distort
prices that producers charge each other, which preserves the economys production
potential. The IMF estimates that the potential revenue from a 5% VAT could range
between 0.8% and 1.6% of GDP in GCC countries, depending on the share of
consumption in GDP.
We expect GCC economies to remain fiscally challenged in 2018, despite new

fiscal measures. Our 2018 Brent crude average price forecast of USD 61 per barrel
is still below the breakeven oil prices for all GCC countries (to varying degrees).
Against this backdrop, GCC governments will likely continue to absorb the terms-of-
trade shock, chiefly by consolidating their fiscal positions and introducing fiscal
measures. This could limit economic growth.
Kuwait, Qatar, Saudi Arabia and the The outlook for GCC member states external accounts varies, based on the
UAE to post C/A surpluses at vulnerability of their current account (C/A) balances to the oil price. The UAE has
current oil prices maintained a C/A surplus despite the drop in oil prices. This is attributed to the
countys more diverse export base of goods and services relative to the rest of the
GCC. Qatar is also expected to continue to post C/A surpluses despite the trade
blockade imposed by Saudi Arabia, the UAE, Bahrain and Egypt. This is because the
countrys hydrocarbon exports (primarily liquefied natural gas) have not been
impacted by the blockade. Furthermore, the economic shock resulting from the crisis
with its neighbours has compressed the countrys import bill; we expect the import bill
to rise gradually as trade is rerouted. Meanwhile, declines in private and public
consumption have lowered the Saudi governments import bill for goods and
services, which helped turn the C/A balance to surplus of USD 6.2bn in Q1-2017
from a deficit of USD 2.3bn in Q4-2016.
External public debt has risen Barring pressures from capital outflows through the financial account, Qatar, Saudi
rapidly in Oman and Bahrain Arabia and the UAE face less pressure on their FX reserves, which should support
their USD currency pegs. On the other hand, Oman and Bahrain are expected to
continue to post large C/A deficits, which could increase pressure on their FX
reserves and pose risks to the sustainability of their currency pegs over the next 12
months. In particular, Bahrain had only two months of import cover based on June
reserves. Both countries are relying primarily on external borrowing to finance the
gap, which is rapidly increasing their public debt.
Politics Shifting sands

The standoff between Qatar and other GCC member states could raise
questions about the functionality of the GCC. With the standoff in its fourth month,
we see a low likelihood of further escalation, but we expect the deadlock to continue
for another few months. Mediation efforts spearheaded by Kuwait and the US could
stall, particularly after the failure of the recent US-mediated phone call between
Saudi and Qatari leaders: Saudi Arabia announced after the call that it was
suspending further dialogue with Qatar.
The stalemate could raise questions about the ability of the GCC to deal with
conflicts, and whether adequate mechanisms are in place to resolve intra-GCC
differences. This could also put at risk other GCC initiatives, including those in the
MENA
economic arena.
MENA Top charts

Figure 1: Differentiation within the GCC bloc Figure 2: Saudi Arabias economy feels the impact of
1Y forward points reforms (%)
1,800 6
1,600
5 Headline
1,400 growth
1Y SAR
1,200 4
1,000 3
800 Non-oil sector
2 growth
600 1Y OMR
400 1Y QAR 1
200 1Y BHD
1Y KWD 0
0
1Y AED
-200 -1
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 2014 2015 2016 2017F 2018F 2019F
Source: Bloomberg, Standard Chartered Research Source: General Authority for Statistics, Standard Chartered Research
Figure 3: Large financing needs are contributing to a Figure 4: QAR has yet to normalise since the GCC
rapid accumulation of public debt (%) standoff began (USD-QAR spot)
100 2018F
3.80
90
80
70 3.75
60
50 2014 3.70
40
30
3.65
20
10
0 3.60
Bahrain Oman Saudi Arabia Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17
Source: IMF, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
MENA
Figure 5: Egypts FX reserves cross 2010 highs... Figure 6: ...but inflation may decline only gradually
Central Bank of Egypts FX reserves, USD bn CPI inflation, % y/y
40 40
Forecasts
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
Sep-07 Dec-08 Mar-10 Jun-11 Sep-12 Dec-13 Mar-15 Jun-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19
Source: Thomson Reuters Datastream, Standard Chartered Research Source: Thomson Reuters Datastream, Standard Chartered Research
Bahrain Deficits and debt

Economic outlook Muddling through
Carla Slim +9714 508 3738 We lower our 2017 growth forecast to 2.3% from 3.0%, as the impulse from
Carla.Slim@sc.com
Economist, MENA infrastructure spending is likely to fade. We see non-oil-sector growth slowing to 3%
in 2017 from 3.7% in 2016. Economic activity so far has been supported by the GCC
Simrin Sandhu +65 6596 6281 development funds commitment to Bahrains agenda, while traditional drivers such
Simrin.Sandhu@sc.com
Senior Credit Analyst, Financials & Head, ME Credit as manufacturing, government services and tourism are slowing.
Research
Our growth forecast assumes a 0.5% contraction in hydrocarbon growth. Oil
The oil sector is likely to weigh on production contracted on a y/y basis in H1-2017. Bahrains hydrocarbon growth is
Bahrains economic activity supported by output from the Abu Safah offshore field (shared with Saudi Arabia).
into 2018 Saudi Arabias commitment to reducing oil output as part of the OPEC deal could
lead to weaker production from Abu Safah, which makes up two-thirds of Bahrains
total oil production. Oil output at Bahrains onshore Awali field continues to decline
gradually.
Policy Leveraging up
We lower our 2017 fiscal deficit forecast to 8.3% (from 12.6%) to reflect higher-than-
expected non-oil revenues and lower-than-expected project expenditure. Non-oil
revenue is on track to meet the budgeted target, according to H1-2017 fiscal data
published in the bond prospectus. Spending on projects was USD 162mn in H1-
2017; it will likely miss the target of USD 880mn, as Bahrains reliance on the GCC
for infrastructure investment is growing significantly. Current expenditure, which
includes debt service, continues to make up the bulk of government spending (96%
in H1-2017).
Debt ceiling has been raised again, Bahrain has returned to the markets as it continues to borrow to finance the
to BHD 13bn fiscal deficit. The debt ceiling was raised in July to BHD 13bn from BHD 10bn, and
government debt will likely reach 89% of GDP by end-2017, according to the IMF.
We do not expect much fiscal consolidation, although the IMF did flag the urgent
need for a sizeable fiscal adjustment in its Article IV consultation mission to Bahrain.
Government spending is fairly rigid. As such, the authorities may be reluctant to rein
in spending against the backdrop of simmering domestic instability. Rising interest
payments due to debt accumulation is likely to partly offset efforts to increase non-oil
revenue, such as VAT implementation. We expect inflation to increase by 0.5ppt in
MENA
2018 on a one-off impact due to the VAT coming into effect.
Figure 1: Bahrain macroeconomic forecasts Figure 2: FX reserves to remain under pressure

USD bn
6
2017 2018 2019
5
4
3
Policy rate (%)* 1.75 2.25 2.25
2
USD-BHD* 0.38 0.38 0.38
1
Fiscal balance (% GDP) -8.3 -7.7 -7.0 0

2013 2014 2015 2016 H1-2017
*end-period; Source: Standard Chartered Research Source: Bond prospectus, Standard Chartered Research
Higher interest rate environment. We expect the central bank to raise its key policy
rate in December, in line with our expectation of one more US Fed hike this year. In
support of the Bahraini dinar (BHD) peg to the USD, the Central Bank of Bahrain
(CBB) has mirrored recent Fed hikes by raising its key policy rate, the 1-week deposit
rate. As such, we see the policy rate rising to 1.75% by year-end. High external
financing needs, compounded by deteriorating ratings, could make it more expensive
for Bahrain to tap international markets. Bahrain recently raised USD 3bn, compared
with USD 2bn in 2016 and USD 1.5bn in 2015. Demand for Bahrain bonds is holding
up, with the latest issuance five times oversubscribed.
Politics
Financial support from GCC peers Domestic political tensions persist. Since the suspension of Al Wefaq, the main
remains key opposition group, and Waad, a secular opposition political party, a constitutional
change now allows civilians to be tried by military courts. Against a fragile economic
backdrop, financial support from GCC peers remains key for Bahrain. Bahrain joined
Saudi Arabia, the UAE and Egypt in severing diplomatic ties with Qatar in June.
Other issues Continued erosion of FX reserves

The CBBs FX reserves fell to USD 1.6bn at the end of June, according to the bond
prospectus. This marks a deterioration from BHD 953.9mn (USD 2.5bn) at end-April,
according to the central banks last statistical bulletin. The June reserve position
represents 1.3 months of import cover and 6% of broad money supply (M2).
FX reserves will likely remain under pressure in the coming months and into 2018,
partly due to financing of the current account (C/A) deficit. We maintain our 2017 C/A
deficit forecast at 3.3% of GDP (USD 1.1bn). To support reserves, Bahrain may
resort to debt-creating flows, as seen last October, when reserves increased by
USD 1.1bn m/m following external debt issuance. Foreign-currency proceeds from
Bahrains recent bond issuance could provide some relief if FX receipts are
temporarily parked with the central bank before being utilised.
CBBs reserve position We expect the authorities to remain committed to the USD peg. We believe other
remains fragile GCC governments might step in to support the currency if need be. GCC
governments could opt to support Bahrains FX reserves through a deposit with the
CBB. The bond prospectus highlights that according to Article 19 of the CBB and
Financial Institutions Law, reserves permanently maintained by the CBB shall not be MENA
less than 100% of the value of currency in circulation. At end-June, BHD 728mn
worth of notes and coins were in circulation this matched total reserves at end-June
(including gold, SDRs and reserves with the IMF).
Market outlook
A deteriorating credit profile, rating pressure and a heavy supply pipeline will likely
keep the BHRAIN complex wide, in our view. That said, BHRAIN spreads reflect
some of these concerns, trading more in line with B-rated sovereigns.
Egypt A marathon, not a sprint

Economic outlook Difficult but improving
Bilal Khan +92 21 3245 7839 External demand improves, but domestic conditions remain challenging. We
Bilal.Khan2@sc.com
Senior Economist, MENAP raise our GDP growth forecasts to reflect the large competitiveness boost to exports
from a weak Egyptian pound (EGP). We now expect growth of 4.0% in FY18 (year
ending June 2018), versus 3.0% previously; and 4.6% in FY19 (versus 3.6%). On
balance, however, we remain more cautious on near-term growth prospects than the
IMF. This view reflects the hit to real incomes from high CPI inflation, and the focus
on fiscal and monetary consolidation under the IMF programme.
rd
August PMI data showed that non-oil economic activity contracted for a 23 straight
month, although at a slower pace than in July. Firms responded to subdued domestic
demand by reducing employment; however, new export orders rose markedly. The
IMF downgraded its FY18 growth estimate to 4.5% from 4.8% after the first review of
the Extended Fund Facility (EFF) in July. Still, Finance Minister Amr El-Garhy said in
media remarks that Q1-FY18 growth could reach 4.75-5%.
Tourism and FDI could drive We acknowledge near- and medium-term upside risks to growth. The tourism
growth higher sector a key source of FX earnings appears to be responding positively to a weak
EGP. Tourist arrivals increased c.46% y/y in the six months to May 2017 (following
EGP liberalisation in November 2016). Nevertheless, the volatile security situation
remains a risk to the recovery: incidents such as the July attack on tourists and, more
recently, the September attack on security officials could yet dampen sentiment.
FDI is also showing early signs of recovery. If Egypt continues to reduce its arrears to
international energy companies, the trajectory could be sustained. Media reports of
investment deals with China support this outlook, as does a new investment law
aimed at improving Egypts attractiveness as a place to do business.
FX weakness is supporting external rebalancing

We lower our USD-EGP forecasts as We turn less bearish on the EGP. We lower our USD-EGP forecasts to reflect the
the external situation improves, but continuing rise in FX reserves: to 17.85 for end-2017 (18.40 prior); to 18.50 for end-
we remain cautious 2018 (19.80 prior); and to 19.0 for end-2019 (20.80). FX reserves increased to over
USD 36bn as of July, worth six months of import cover, based on our estimates.
Still, the EGP has so far defied market expectations of a quick reversal of the initial
post-liberalisation overshooting. Instead, it has traded close to our forecast of 18.00
for Q3-2017. At this level, on a real effective exchange rate (REER) basis, the EGP
appears to be around 25% weaker than its 10-year average.
MENA
Figure 1: Egypt macroeconomic forecasts Figure 2: Drifting apart

REER and NEER (rebased, 27-Dec-2016 = 100)
135
FY17 FY18 FY19
130
125
CPI (% annual average) 23.3 27.8 9.5 120 REER
115
Policy rate (%)* 16.75 18.75 15.25
110
USD-EGP 17.85 18.50 19.00
105

NEER
95
Dec-16 Feb-17 Apr-17 Jun-17 Aug-17
Note: Economic forecasts are for fiscal year ending in June, FX forecasts are for end- Source: Thomson Reuters Datastream, Standard Chartered Research
We do not expect sharp EGP We see several reasons to remain cautious on the EGP. First, while the nominal
appreciation near-term effective exchange rate (NEER) is up less than 2% (as of 21 September) from its
10-year low in December 2016, the REER has rebounded c.18% over the same
period, reflecting Egypts widening inflation differentials with trading partners
(Figure 2). This means sudden EGP appreciation could quickly erode
competitiveness.
Second, we are cautious in interpreting the recent rise in FX reserves gross

external debt (government and non-government) increased to USD 74bn in March
2017 from USD 56bn in June 2016, and likely surpassed USD 78bn after the
second IMF tranche and the May Eurobond issuance. In addition, USD c.14bn of
repayments on medium- to long-term external public debt are due in 2018; that
said, GCC deposits are a large part of this (c.USD 8.5bn) and may be rolled over
given improved relations with Saudi and the UAE. Garhy has said Egypt plans to
issue Eurobonds worth USD 8bn in 2018, and a 1.5bn EUR-denominated issuance
before end-November 2017.
Policy Guided by the IMF and the need to tame inflation

We see the C/A narrowing further The C/A is improving. The FY17 current account (C/A) deficit narrowed c.22% y/y
in FY18 to USD 15.6bn, lower than our forecast of a USD 16.7bn deficit. Beyond import
compression, this reflected higher export earnings and overseas workers
remittances. We maintain our C/A forecasts in USD terms but lower them as a
percentage of GDP to reflect changes to our GDP and FX forecasts. We now forecast
the FY18 and FY19 C/A deficits at 3.4% (3.6% prior) and 2.7% (2.9%), respectively.
Egypts offshore gas field development could be an additional positive for the C/A
beyond FY18.
CBEs FX reserves rose to over EFF is on track after the first review. The IMFs Executive Board approved the
USD 36bn in July second tranche of USD 1.25bn in July. In the accompanying statement, the IMF said
the programme was off to a good start but that macroeconomic stability was still
fragile and the reform agenda is difficult. In line with our expectations, the IMF
revised a range of EFF targets for FY18. It raised forecasts for inflation and external
debt, and increased the allocation for FY18 energy subsidies to 3.1% of GDP from
1.4%. As a result, the IMF now expects a primary fiscal surplus of 0.4% of GDP,
versus its initial target of 1.1%. Garhy expects the second EFF review in October.
We expect fiscal financing Fiscal policy to balance the effects of inflation against fiscal consolidation. Media
requirements to remain large reports suggest that the FY17 fiscal deficit was 10.8% of GDP, higher than the 10.5% MENA
revised EFF target. We raise our FY17 fiscal deficit forecast to 10.7% of GDP (from
9.1%) and our FY18 forecast to 9.9% (from 8.1%) to reflect recent increases in interest
rates, which are likely to raise sovereign financing costs; higher subsidy costs on EGP
weakness; and relief measures to protect the public from inflation.
We maintain our view that any fiscal improvement is likely to come from higher revenue
growth as a result of the higher VAT rate of 14% effective 1 July, combined with high
inflation rather than significant spending cuts. In fact, in EGP terms, we expect
Egypts fiscal financing requirements to remain large; reducing the debt burden will
depend on high nominal GDP growth, supported by high domestic inflation.
CBE is likely to maintain a We expect the central bank to hold steady. We raise our FY18 inflation forecast to
hawkish bias 27.8% (19.1% prior) on Julys fiscal measures and expectations of further subsidy
cuts. However, we lower our FY19 forecast to 9.5% (10.1%) on the higher FY18
base. We continue to expect the Central Bank of Egypt (CBE) to maintain the policy
status quo, but still do not rule out further hikes given the central banks inflation
target of 13% (+/- 3ppt) by end-2018.
Iraq Tackling challenges on various fronts

Economic outlook Lower oil output to weigh on growth
Carla Slim +9714 508 3738 Iraq has strayed slightly from its oil production target under the OPEC deal. Oil
Carla.Slim@sc.com
Economist, MENA production has been on a gradual downtrend in 2017, declining to an average of
4.44 million barrels per day (mb/d) in 7M-2017 from 4.6mb/d at end-2016. However,
output remains above the 4.35mb/d level Iraq agreed to maintain under the OPEC
deal. Iraqs oil ministry lacks clarity on and control over oil production from the
Kurdistan Regional Government (KRG), which partly explains the difficulty in meeting
the production target. We raise our 2017 GDP growth forecast to 1% (from 0%
We raise our 2017 growth forecast previously), as we now expect oil-sector growth of 1%, versus our previous
as Iraq has strayed slightly from oil expectation of a 0.5% contraction. Our 2017 headline growth forecast is higher than
production quotas
the IMFs forecast of -0.4%.
We do not expect Iraq to stray much further from its target in the coming months and
into 2018, particularly if the current deadline under the OPEC deal (March 2018) is
pushed to later in the year our base-case scenario. Iraq has committed to cut
production amid the expansion of its production capacity (oil production posted
double-digit growth in 2016). The expiry of OPEC quotas under the current deal will
likely bode well for Iraq, although future oil production could be capped by low
investment in oil infrastructure due to government revenue constraints. Iraqs proven
oil reserves were 153 billion barrels (the worlds fifth-largest or 9% of global reserves
at end-2016, according to the BP Statistical Review of World Energy).
The energy and water sectors We project an improvement in non-oil-sector growth in 2017 on a modest pick-up
present significant opportunities in private consumption following three years of contraction. Medium-term non-oil-
amid Iraqs reconstruction drive sector growth will likely be supported by the governments reconstruction drive. Iraqi
officials have announced a 10-year reconstruction plan that could cost c.USD 100bn,
with funding sourced from domestic revenue, international borrowing and grants.
Iraqs energy and water sectors, which have suffered from the effects of protracted
conflict and under-investment, will likely be the main beneficiaries of reconstruction
funding.
Policy Further consolidation to sustain IMF programme

Performance under the IMFs Stand-By Arrangement (SBA) has been mixed.
MENA
The pace of fiscal consolidation has been slower than programmed due to military
costs, humanitarian needs and weak control of investment spending. Public financial
Figure 1: Iraq macroeconomic forecasts Figure 2: Fiscal deficit narrows on higher oil prices and
consolidation (% of GDP)
0
2017 2018 2019
-2
-4
CPI (% annual average) 0.6 1.0 1.5 -6
-8
Policy rate (%)* 4.00 4.00 4.00
-10
USD-IQD* 1,182 1,182 1,182
-12
Current account balance (% GDP) -4.5 -3.0 -2.5 -14
-16
2014 2015 2016 2017F 2018F 2019F
*end-period; Source: Standard Chartered Research Source: IMF, Standard Chartered Research
management is an area of weakness for Iraq and a key component of the SBA
Although performance under the targets particularly reining in inefficient capital expenditure while protecting social
IMF programme has been mixed, spending. Iraq also repaid less in arrears to international oil companies (IOCs) than
the second tranche of the loan has targeted under the programme because of cash constraints. The IMFs executive
been disbursed
board approved the second disbursement of Iraqs USD 5.3bn SBA in August,
bringing the total disbursed amount to USD 1.4bn (the first tranche of USD 617.8mn
was disbursed in December).
We lower our 2019 fiscal deficit forecast to 2.9% of GDP (from 4.6%) to factor in
greater fiscal consolidation efforts as part of the IMF programme. Iraq has not yet
identified financing for the USD 7.1bn gap it will likely face in late 2018 and 2019.
According to the IMF, the authorities are in talks with one donor.
Amid fiscal pressure, the KRG announced deals to close arrears with IOCs.
IOCs will be given higher ownership shares in their respective producing fields and
oil revenue. The federal government and the KRG have not implemented their
budget-sharing agreement, under which the KRG transfers revenue from oil
extracted in its territory in exchange for transfers from the federal government.
Politics Referendum adds to political risks

We highlight risks to domestic stability beyond those related to the so-called
Islamic State (IS). Various groups are currently involved in the liberation of northern
Iraq, and their lack of unity could complicate the situation should they seek to keep
control of liberated areas. On-the-ground stability will depend on cooperation
between these groups, while public spending cuts could exacerbate tensions.
The Kurdish independence referendum adds to these challenges. The Iraqi

parliament has rejected the referendum and rendered it unconstitutional. In our view,
a yes outcome will likely be used to put pressure on the federal government. We
also highlight security challenges in Iraqs south, the main oil-producing region. Tribal
clashes have recently worsened amid a void of security forces, which are mostly
concentrated in the north and west to retake territory currently controlled by IS.
Increased violence could threaten stability in Basra, a hub for Iraqs oil exports.
Other issues Reconstruction will require foreign funding

Re-establishing basic services is Iraqs immediate challenge is to restore basic services in cities recaptured from IS so MENA
key for the return of displaced that displaced residents can return. The energy and water sectors have suffered from
people to territory recaptured protracted conflict and underinvestment. Inadequate electricity supply is the top
from IS
concern of the government, companies and citizens. Given tight public finances due
to low oil prices, Iraq will likely require foreign investment for its 10-year USD 100bn
reconstruction plan. Multinationals may look to participate but will likely seek
attractive financial returns, given higher risk than elsewhere. Iraqs standing in
quantitative governance indices (ranked 166 out of 176 countries in Transparency
Internationals 2016 corruption index) creates a more challenging working
environment.
Iraqs USD 1bn international bond, issued in August, received strong demand. The
order book was more than six times oversubscribed and Iraq secured a yield of
6.75%, less than initial expectations. Moodys initiated an unsolicited rating for Iraq
and assigned it a Caa1 rating with a stable outlook, lower than the S&P and Fitch
ratings of B-.
Jordan Cautious optimism

Economic outlook Border boost
Bilal Khan +92 21 3245 7839 Reopening of the Iraqi trade route creates significant upside for growth. We
Bilal.Khan2@sc.com
Senior Economist, MENAP upgrade our 2017 GDP growth forecast to 2.4% from 2.2% to reflect the recent
reopening of the Iraqi-Jordanian border crossing at Karameh-Tureibil. The border
was closed as Iraqi troops withdrew in 2014 after Islamic State seized control on the
Iraqi side. Iraq accounted for c.20% of Jordanian exports prior to the disruption to the
trade route; this highlights the potential upside for exports and growth (Figure 2).
Even so, we remain cautious, as significant downside risks remain.
We raise our 2017 growth forecast Q1 GDP growth was in line with our bearish 2.2% forecast, reflecting subdued
to 2.4% but await more hard data to domestic activity and weak sentiment (see Jordan FX reserves stabilise, but growth
assess 2018 prospects still weak). As such, the border boost comes from a low base. Second, the positive
impact will be captured in GDP data for Q4-2017, limiting the impact on full-year
growth. Third, domestic macroeconomic challenges are likely to persist near-term. In
particular, further fiscal consolidation is planned under the IMFs Extended Fund
Facility (EFF) to lower the public debt burden. We also expect financial conditions to
remain tight. Further monetary policy tightening is likely to preserve confidence in the
USD-JOD peg, even as the currency has appreciated considerably in the past couple
of years as it absorbed broad USD strength.
We also acknowledge significant upside for 2018 growth as wholesale/retail trade

and the logistics sector get a boost from Iraqi demand and pipeline development
projects get underway over the medium term. However, our current 2.8% growth
forecast already incorporates an initial boost from the border reopening. We await
greater visibility on actual trade and investment flows after the reopening, and the
sustainability of securing the route on the Iraqi side, before factoring additional upside
into our forecasts.
A weaker outlook for external The current account deficit is likely to improve gradually. We expect rising external
grants may partially offset upside demand to lead to an uptick in 2017 exports; Q1 goods exports increased c.7% y/y. As
from exports phosphate prices and volumes rise, we expect this improvement to be sustained, with
the border reopening providing further upside towards end-2017. However, while a
narrower goods trade deficit is welcome, we expect a muted overall impact on the
MENA
current account (C/A) deficit given the uncertain outlook for remittances and grants.
Figure 1: Jordan macroeconomic forecasts Figure 2: A border crossing that counts

Share of Jordanian exports to Iraq, % of total (12mma)
20
2017 2018 2019
18
16
12
Policy rate (%)* 4.00 4.50 4.50
10
USD-JOD* 0.71 0.71 0.71
8
Current account balance (% GDP) -8.9 -8.6 -8.4 6 Closure of Karameh-Tureibil

4
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Public transfers were down c.10% y/y in Q1, even as workers remittances increased
by c.3%. We estimate that the Q1 C/A deficit, at JOD 788mn, was 10.7% of GDP on
an annualised basis. Given upside from external demand, we maintain our C/A deficit
forecasts of 8.9% of GDP for 2017 and 8.6% for 2018. However, the deficit may be
significantly wider than we expect if bilateral and multilateral partners channel
assistance under the Jordan Compact through concessionary loans (rather than
grants/direct transfers).
Policy Fiscal and FX reserves

Weak growth and uncertainty over Fiscal consolidation is proving challenging. The fiscal deficit (excluding grants)
foreign grants make fiscal widened by c.19% y/y in JOD terms in 7M-2017. Including grants, however, it was
consolidation challenging c.70% wider, reflecting a c.46% decline in foreign grants. This means that despite
planned fiscal consolidation under the EFF, gross fiscal financing requirements are
likely to remain large particularly if foreign grants continue to disappoint.
The IMF highlighted in its latest Article IV consultation that additional budgetary
support through grants is needed to help bring Jordans public debt in line with EFF
targets. The 7M-2017 fiscal deficit (excluding grants) was 3.9% of our GDP estimate
on an annualised basis. While we maintain our 2017 and 2018 fiscal deficit forecasts
of 3.4% and 3.2% of GDP as we think further consolidation measures under the
EFF are likely we see upside risks to our forecasts.
The IMF acknowledged fiscal The IMF approved the first review of the EFF in June, calling for greater donor
progress but highlighted assistance to Jordan to cope with the ongoing Syrian refugee crisis. In approving the
vulnerabilities next tranche of c.USD 71mn, the IMF granted waivers for lower net international
reserves at the Central Bank of Jordan (CBJ). The CBJs FX reserves have been
pressured in the face of a wide C/A and sluggish capital inflows: they were down
c.13% YTD as of end-July to c.JOD 8bn 6.4 months of import cover, as per the
central banks estimates. Although IMF staff agreed that the USD-JOD peg has
anchored monetary and macroeconomic stability, they said that if Jordans
extraordinarily challenging external environment were to persist, the authorities
might need to consider recalibrating policies to facilitate external adjustment. Our
base case is that policy makers will remain committed to the peg.
While concerns over the USD-JOD We expect policy makers to focus on external borrowing to fund twin deficits.
peg are growing, we expect the CBJ With still-high fiscal financing requirements and pressure on FX reserves, we expect MENA
to remain committed to the peg policy makers to rely increasingly on external borrowings particularly as domestic
financing costs rise. IMF projections, while targeting a reduction in the public debt
burden to 95.6% of GDP by end-2017, see external debt rising to 40.7% of GDP by
end-2017 from 37.5% at end-2016, and rising further to 43% by end-2018. This
reaffirms our view of a diversification away from domestic debt by increasing
borrowing from both multilaterals and markets.
We expect a tightening bias from the CBJ. We maintain our CPI inflation forecasts
of 3.8% for 2017 and 3.1% for 2018. We also continue to forecast the CBJs 1-week
repo rate at 4% at end-2017. Nevertheless, we expect the CBJ to maintain a
tightening bias to counter pressure on FX reserves and prevent dollarisation in the
economy. As such, we do not rule out a tighter policy path than that implied by the
Feds moves alone and as assumed in our base case.
Kuwait Easier said than done

Economic outlook In with the new
Dima Jardaneh +971 4 508 3591 Non-oil growth could rebound from 2016 levels despite low oil prices. We
Head, Economic Research, MENA expect the economy to contract 0.5% in 2017, primarily driven by the drop in crude oil
production. Kuwait has complied with its production target under the OPEC/non-
Simrin Sandhu +65 6596 6281 OPEC agreement since it took effect in January 2017. Kuwaits oil production
Senior Credit Analyst, Financials & Head, ME Credit averaged 2.71 million barrels per day (mb/d) in H1-2017, down 8.6% from the H1-
Research
Standard Chartered Bank, Singapore Branch 2016 average, based on data from the Joint Organisations Data Initiative (JODI).
Average crude exports dropped 4.5% to an average of 2.03mb/d in H1-2017. Based
on lower oil production in 2018-19, we lower our 2018 economic growth forecast to
1.5% (1.7% prior), and our 2019 forecast to 2.7% (3.5%).
Discord between the government Non-oil GDP growth has been volatile, including during the period of high oil prices; it
and parliament could derail averaged 2.3% from 2010-14, and reached a high of 4.8% in 2014. Despite lower oil
implementation of plans under the prices, we expect non-oil economic growth to ramp up slowly over the next couple of
New Kuwait initiative
years, averaging c.3% from 2017-19. The governments newly launched
development plan, New Kuwait 2035, could boost growth by finally encouraging
more investment in non-oil economic activity, contingent on better alignment between
the executive and legislative branches of government.
Oil and gas continue to dominate So far, though, oil and gas continue to dominate Kuwaits mega-projects in the
government project spending, bidding/planning phase or already underway. Oil and gas projects account for KWD
despite plans to develop a wider 11.72bn (48% of total mega-projects), followed by transport (26%). Meanwhile, the
range of public infrastructure
government has announced that shares in the countrys first public-private
partnership (PPP) project, an independent power and water plant, will be available to
Kuwaiti citizens though an initial public offering slated for Q1-2018.
Policy Facing up to budget rigidities

Government posted a budget surplus of KWD 436mn in the first four months of
FY18 (ending 31 March 2018), and disbursed only 21% of budgeted full-year
expenditure. We expect spending to ramp up for the remainder of FY18 given
rigidities in the governments current spending. The actual fiscal deficit for FY17
exceeded our estimate, coming in at KWD 4.6bn (equivalent to 12.3% of 2017 GDP).
MENA
Figure 1: Kuwait macroeconomic forecasts Figure 2: Banking-sector liquidity remains comfortable

Advances-to-deposits ratio
0.88
2017 2018 2019
0.86
GDP grow th (real % y/y) -0.5 1.5 2.7
0.84
0.82
Policy rate (%)* 3.00 3.50 3.50
0.80
USD-KWD* 0.30 0.30 0.30 0.78
0.74
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
*end-period; **for fiscal year ending 31 March; Source: Standard Chartered Research Source: CBK, Standard Chartered Research
We raise our fiscal deficit forecasts for FY18 and FY19. Kuwaits official oil selling
price averaged USD 48 per barrel from April-August 2017. As a result, we lower our
estimate for the governments FY18 oil revenue receipts to c.USD 45bn. We
accordingly raise our FY18 fiscal deficit estimate to 9.1% of GDP (3.5% prior).
Factoring in lower oil production in 2018, as we expect the OPEC/non-OPEC deal to
be extended, we raise our FY19 fiscal deficit forecast to 4.5% of GDP (-2.0%).
Parliament could stand in the way Preparations to introduce VAT appear to be lagging behind those of other GCC
of VAT implementation member states. According to the IMF, the VAT and excise taxes could raise
government revenues by 1.75% of GDP. While the VAT has received cabinet
approval, it still requires parliamentary approval to be ratified. A number of
lawmakers have expressed opposition to the governments plan for a 5% VAT,
saying they will not vote for the measure when it comes to the National Assembly.
In other reforms, the government raised electricity and water tariffs for the investment
sector in August, after introducing an increase for users in the commercial sector in
May. A planned tariff increase for the government sector is set to take effect in
November 2017.
Banking-sector liquidity remains Domestic public debt is rising fast, albeit from a low base. Domestic public debt
comfortable instruments held by domestic banks reached KWD 4bn in June 2017 (equivalent to
12% of 2016 GDP), up from KWD 2.3bn 12 months earlier. The Kuwaiti banking
system continues to enjoy ample liquidity, despite the low oil price environment. The
loan-to-deposit ratio was 85% in June 2017 compared with 83% a year earlier. We
expect the Central Bank of Kuwaits (CBKs) discount rate to reach 3.0% by end-
2017, as we expect the CBK to mirror the next 25bps increase by the US Fed, which
we expect in December 2017.
The current account surplus narrowed to c.USD 880mn in Q1-2017 from USD
2bn in Q4-2016. This was primarily the result of a widening services account deficit
and lower investment income, while the trade balance and workers remittances were
broadly flat q/q. Expectation that Kuwaits current account will remain in surplus is
helping to boost the central banks foreign assets, which rose to USD 31bn in June
2017 from USD 29bn at end-2016. To reflect Kuwaits lower oil export price so far
this year than what we factored in earlier, we lower our forecast for the 2017 current
account surplus to 3.1% of GDP (from 5.0%).
MENA
Official inflation data has been revised down based on a change in CPI
methodology, including the weights of basket components and a shift to 2013 as the
base year. By linking monthly inflation for June-July 2017 with the historical series
(base year: 2007), we arrive at average inflation of 2.6% for January-July 2017.
Taking year-to-date inflation into consideration and factoring in a pick-up in transport
costs in line with our oil price forecast, we lower our 2017 inflation forecast to 2.9%
(3.5% prior). Based on the 2017 revision, we lower our 2018 inflation forecast to
3.2% (from 3.5%) and raise our 2019 projection to 3.0% (from 2.5%).
Market outlook
We think the KUWIB curve is fairly priced, trading slightly wider than ADGB. As one
of the strongest sovereigns in the region and one that is not directly involved in the
ongoing diplomatic spat, we expect strong sponsorship for KUWIB paper.
Lebanon One step forward, two steps back

Economic outlook Marginal improvement in growth
Carla Slim +9714 508 3738 We maintain our 2017 growth forecast of 1.5%, based on our 2016 estimate of
Carla.Slim@sc.com
Economist, MENA 1.0%. We expect growth to rise marginally this year, following sluggish economic
activity since 2011. The central banks coincident indicator points to improved real
economic activity it rose by 12% y/y in July and averaged 6% in 7M-2017, slightly
higher than the 4.5% growth recorded in the same period last year. Our forecast is
subject to upside risk due to the new public-sector salary bill, which may lift
household consumption.
Healthy growth in tourist arrivals Relative domestic stability and improved security conditions underpinned healthy
should support a marginal H1-2017 growth in tourism, which rose to 1.8mn visitors at Beirut International Airport
improvement in the real economy (up 7.8% y/y). However, arrival numbers are capped by the ongoing travel warning
issued by a number of GCC countries. The hotel occupancy rate increased 7.3% y/y
in 7M-2017, reaching an average of c.64%, but lagged behind those for the UAE,
Muscat and Cairo.
Medium-term growth prospects have improved. However, we believe that

Lebanons ability to tap opportunities is contingent on strategic planning and policy
making. Opportunities include oil and gas exploration, post-war reconstruction in
Syria and Iraq, and Chinas Belt and Road drive. We are bearish on the development
of potential hydrocarbon resources, specifically given the dispute with Israel (with
which Lebanon has technically been at war since 2006) over the ownership of
offshore areas.
Policy Revitalising policy making proves difficult

Policy makers are unlikely to The current national unity government has sought to revitalise policy making
prioritise debt-stabilising reforms at following a protracted political deadlock. Despite these efforts, debt-stabilising
this juncture reforms are not currently at the top of the policy agenda, in our view. The long-
awaited public-sector wage bill was ratified and came into effect in September.
However, the constitutional council later suspended tax reforms that were intended to
raise revenue to finance the new salary scale (estimates range from LBP 1.2-2.0tn).
The tax reforms included a VAT increase to 11% from 10%, an increase in the tax on
interest on deposits to 7% from 5%, and a rise in the corporate income tax rate to
MENA
Figure 1: Lebanon macroeconomic forecasts Figure 2: Reserves surge following renewed financial
engineering by BdL (USD bn)
44
2017 2018 2019
42
40
38
Policy rate (%)* 10.00 12.00 12.00
36
USD-LBP* 1,508 1,508 1,508 34
30
Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17
*end-period; Source: Standard Chartered Research Source: Banque du Liban, Standard Chartered Research
17% from 15%. We raise our 2017 fiscal deficit forecast to 8.9% of GDP (from 8.6%),
as the cost of the new salary scale is now likely to widen the fiscal deficit given the
reversal of the tax reforms.
FX reserves (excluding gold) recovered to USD 41.6bn in July from a year-to-

date low of c.USD 38bn in May (Figure 2). This occurred as Banque du Liban (BdL)
appears to have undertaken new financial swaps with commercial banks. Its reserves
had declined by USD 2bn between January and May, despite a sustained recovery in
non-resident deposit growth. This was likely partly due to the financing of a widening
current account deficit, and possible redemption of CDs as the result of the 2016
financial swap between BdL and commercial banks. Growth in non-resident deposits
recovered to an average of c.8% y/y in H1-2017 from a low of 1.5% in April 2016,
before BdL undertook its 2016 financial swap.
Given BdLs apparent preference for financial engineering over hiking rates, we
expect it to lag behind the US Fed in raising interest rates. Amid renewed efforts by
the US Congress to tighten sanctions on Hezbollah, a delegation of Lebanese
politicians and bankers visited Washington in May, as the authorities have made it a
priority to minimise punitive action against Lebanese banks.
Inflation will likely rise in the coming months on demand-driven pressures as a

result of the public salary adjustment. We therefore raise our 2017 inflation forecast
to 4.5% (from 3.7%). Inflation rose to an average of 4.3% y/y in 7M-2017 as higher oil
prices pushed up the transport/fuel and utilities components.
Politics
Long-awaited parliamentary The next parliamentary elections are scheduled for May 2018, following the long-
elections have been scheduled for awaited amendment of the electoral law, which was finalised in mid-June. This will be
May 2018 the first general election since 2009, after several postponements due to
disagreements on the new electoral law. The elections should result in the
formation of another coalition government, which could be headed again by
Prime Minister Hariri.
Efforts to rekindle relations with Gulf states have yet to yield results. Tensions
with Gulf states have risen owing to concerns over Iranian influence in Lebanon.
Saudi Arabia has suspended military aid, and a number of GCC countries have MENA
issued travel warnings discouraging their citizens from visiting Lebanon weighing
heavily on tourism. An improvement in relations could eventually lead to the reversal
of the travel warnings.
Other issues Debt burden continues to rise

All three credit rating agencies rate In September, both S&P and Fitch affirmed Lebanons B- rating with a stable outlook.
Lebanon six notches below Moodys downgraded Lebanons rating to B3 from B2, which means that the ratings
investment grade of all three agencies have converged to six notches below investment grade. The
Moodys downgrade was driven by the rise in the debt burden. Lebanons solvency
metrics are weak, with public debt approaching 150% of GDP and interest payments
close to 50% of government revenue (see Lebanon Debt sustainability: What you
need to know). Concerns are exacerbated by the absence of short- and medium-term
fiscal planning, as the 2017 budget has yet to be endorsed and a medium-term plan
to support debt sustainability is not in place.
Oman Surging public debt

Economic outlook Sluggish growth persists
Carla Slim +9714 508 3738 We expect weak economic activity in the coming months and into 2018, due to
Carla.Slim@sc.com
Economist, MENA slowing non-hydrocarbon growth and a contraction in the hydrocarbon sector due to
the extension of the OPEC deal to limit global oil output. Although not an OPEC
Simrin Sandhu +65 6596 6281 member, Oman, along with other non-OPEC producers, has agreed to extend the
Senior Credit Analyst, Financials & Head, ME Credit Research OPEC deal to March 2018. Oman has reduced oil production along with OPEC cuts
on several occasions, including in January 2017. Oil production averaged 968 million
barrels per day (mb/d) in 7M-2017, a c.4% contraction compared with the 2016
average. We expect output to remain constrained by the OPEC deal in H2-2017.
Economic activity will likely remain We continue to expect slow non-hydrocarbon growth, weighed down by slowing
constrained by the OPEC deal and private consumption. Government revenue from corporate income tax fell 10% y/y in
slow non-hydrocarbon growth H1-2017, pointing to weakness in corporate earnings. Moderating non-oil economic
activity is also reflected in new vehicle registrations, which dropped 23% y/y in 7M-
2017, according to the National Centre for Statistics and Information. We highlight
upside risk to our 2017 growth forecast of 0.6%, as Oman stands to benefit from
having provided Qatar with alternative routes for foreign trade through its ports.
Policy Weak fiscal performance in H1

H1-2017 fiscal deficit was 81% of The 2017 fiscal deficit will likely exceed the target. The H1-2017 deficit was OMR
the projected full-year deficit 2.4bn (USD 6.3bn) 81% of the full-year deficit projected in the 2017 budget.
Government spending (including actual expenditure under settlement) was OMR
6.4bn. While this was flat versus the same period last year, it will likely exceed the
full-year target of OMR 11.7bn.
Government revenue rose 29% y/y in H1-2017, driven by a sharp increase in oil
revenue. The Omani official oil selling price averaged USD 51.6/bbl in 7M-2017, up
42% y/y, gradually closing the gap with Brent. However, this remains well below
Omans fiscal breakeven oil price. We raise our 2017 fiscal deficit forecast to 13.7%
of GDP (from 11.7%) to factor in the weaker-than-expected fiscal performance in H1.
We think the narrowing of the fiscal deficit this year will result from increased oil
revenue due to higher oil prices, as opposed to efforts to rein in spending.
MENA
Figure 1: Oman macroeconomic forecasts Figure 2: Large financing needs have led to a surge in
public debt (% of GDP)
50
2017 2018 2019
45
35
25
Policy rate (%)* 1.90 2.40 2.40
20
USD-OMR* 0.39 0.39 0.39 15
10
0
2011 2012 2013 2014 2015 2016 2017F
*end-period; Source: Standard Chartered Research Source: CBO, Standard Chartered Research
Remittances declined in 2016. This points to slower economic activity, particularly

in the private sector, which has the highest concentration of expatriate workers.
Omans 2016 current account (C/A) deficit was 18.6% of GDP (USD 12.2bn),
according to the latest data slightly narrower than we had expected. We lower our
2017 C/A deficit forecast to 10.6% of GDP (from 11.4%) to reflect the base effect of a
smaller 2016 deficit and lower remittances. China remains the leading destination for
Omans crude oil exports, accounting for 77%.
Omans stock of public debt surged Omans public debt stock is rising sharply. The government raised c.USD 10bn
to 44% of GDP from c.5% in a span (including a USD 2bn sukuk and a USD 5bn international bond). Oman also signed a
of three years USD 3.6bn loan with China banks in July, arranged by the newly established debt
management office, part of Omans Ministry of Finance. Financing the large twin
deficits has resulted in a rapid increase in government debt, which we forecast will
rise to 44% of GDP in 2017 from a low of 4.8% in 2014.
Central Bank of Oman (CBO) foreign-currency holdings fell to USD 17.4bn in

June from USD 20.2bn at end-2016. Despite the marginal decline, CBO reserves
remain adequate, at 10 months of import cover. CBO foreign liabilities which may
have been raised to bolster its gross FX reserves declined to USD 3.1bn in June
from USD 5.5bn at end-2016. We expect the CBO to continue to increasing interest
rates incrementally. The repo rate rose to 1.7% in August from 1.0% a year earlier
in line with rising LIBOR. Sultan Qaboos appointed Taher Bin Salem Al Amri as
executive president of the CBO in a decree published in early September. Since his
appointment, he has reiterated Omans commitment to the currency peg in
comments to the media.
Liquidity is set to tighten again Liquidity could continue to tighten in the coming months. The credit-to-deposit
towards year-end ratio rose again to 107.4% in June from a year-to-date low of 103.5% in April on a
renewed slowdown in deposit growth. Deposit growth slowed to 2.7% y/y in June,
after having accelerated in Q1-2017, as banking-sector liquidity benefited from the
USD 5bn international bond issuance earlier this year. Meanwhile, private-sector
credit growth slowed to 5.5% y/y in June from 8.2% at end-2016. Slowing credit
growth could be a result of slower economic activity.
We expect 2017 inflation to remain benign at 1.8%, up from 1.1% in 2016.

Inflation averaged 1.75% y/y in 7M-2017. The doubling of tobacco taxes last year
MENA
caused tobacco prices to rise c.20% between October 2016 and July 2017. Given the
one-off impact of the tax increase, we expect inflation in tobacco prices to stabilise as
of October.
Market outlook
The OMAN complex trades wider than similarly rated EM peers and offers relative
value, although negative rating pressure is an overhang. An increase in index weight
has supported performance. We prefer being positioned at the long end given the
steep 10Y/30Y curve. The OMAN 30Y trades c.120bps over DUGB, versus c.70bps
at the front end.
Qatar Adjusting to new realities

Economic outlook Slightly lower growth
Carla Slim +9714 508 3738 We lower our 2017 growth forecast marginally to 2.3%, from 2.5%. This reflects
Carla.Slim@sc.com
Economist, MENA the repercussions of the GCC rift for sentiment and trade, and our expectations of
fading non-hydrocarbon growth momentum even prior to the diplomatic spat. We see
Simrin Sandhu +65 6596 6281 downside risk to our forecast, particularly since we assume that the hydrocarbon
Senior Credit Analyst, Financials & Head, ME Credit sector will expand late in the year on new output from the Barzan gas project,
Research
Standard Chartered Bank, Singapore Branch following a contraction of 1% in 2016. It remains unclear whether the Barzan gas
project will be onstream before year-end or face further delays.
Qatar will likely keep FIFA projects Amid the diplomatic standoff, Qatar has made efforts to diversify its import sources
on track despite trade disruptions and channels, including through Oman and India. Plans to improve domestic food
processing should make Qatar more self-sufficient. The protracted standoff could
raise concerns over Qatars hosting of the FIFA 2022 World Cup (see Qatar A
Mexican standoff, 13 July 2017). However, infrastructure projects appear to be
continuing. Qatar seems to have tapped its inventory of construction materials to
mitigate any shortages, and has identified alternative routes for imports.
Policy Responding quickly

We now expect import compression We now expect Qatars current account (C/A) to turn to a small surplus in 2017
to turn the C/A balance to a surplus from a deficit of 5.5% of GDP in 2016. The C/A balance turned to a surplus of QAR
1bn (c. USD 300mn) in Q1-2017, driven by a 17% y/y increase in exports, likely due
to higher hydrocarbon prices. Imports contracted by 4% y/y in Q1, which reflects
slower economic activity, in our view. We raise our 2017 C/A forecast to a surplus of
1.3% of GDP (from a 4.4% deficit previously) to factor in the Q1 surplus, as well as
import compression in H2-2017 due to trade disruptions and lower demand amid the
diplomatic standoff. The latest trade data shows imports down 35% y/y in July, while
exports continue to grow at a healthy pace.
FX reserves fell sharply in June Qatars USD peg is sustainable despite current pressures, in our view
assuming the authorities remain committed to it. The central banks net international
reserves fell sharply by QAR 37.8bn m/m in June to QAR 88.8bn. However, the
reserve position remains comfortable, at nine months of import cover. The Qatar
Central Bank (QCB) issued a statement in early July stressing Qatari riyal (QAR)
MENA
stability, and guaranteeing QAR convertibility onshore and offshore at the official
pegged rate at any time. USD-QAR reached a high of c.3.80 (4.4% above the
Figure 1: Qatar macroeconomic forecasts Figure 2: Total bank deposits remains flat despite drop in
non-resident deposits (QAR bn)
700 Non-resident 200
2017 2018 2019
deposits
600 (RHS) 190
500 Public 180

CPI (% annual average) 1.7 2.0 2.5 sector
400 170
Policy rate (%)* 5.25 5.75 5.75
300 160
USD-QAR* 3.64 3.64 3.64 Private
sector &
200 NBFIs 150
100 140
Apr-17 May-17 Jun-17 Jul-17 Aug-17
*end-period; Source: Standard Chartered Research Source: QCB, Standard Chartered Research
pegged rate of QAR 3.64 per USD) after Saudi Arabia, the UAE, Bahrain and Egypt
severed diplomatic ties with Qatar. With USD liquidity improving, the rate
subsequently moved lower to 3.66.
We now expect the fiscal deficit to narrow to 5.4% of GDP in 2017 (versus our
previous forecast of 3.1%) as the 2016 fiscal deficit was higher than we expected at
9% of GDP due to lower government revenues. The Supreme Council for Economic
Policies and Investment has approved the second national development strategy,
with enhanced focus on economic diversification.
Food inflation, which had been negative since the start of 2016, rose to 4.5% y/y in
July. The impact of higher food prices due to trade disruptions brought about by the
boycott has not fed through to headline inflation yet; CPI rose just 0.2% y/y in July.
Higher food prices have been offset by negative inflation in clothing and footwear,
housing and utilities, communication, and recreation and culture.
Labour and residency reforms have picked up pace. Qatar announced a visa-free
entry programme for 80 nationalities to stimulate tourism. A draft law on a new
permanent resident status for foreigners was approved at a cabinet meeting in
August, although it remains unclear when it will be implemented.
Politics Regional standoff lingers

The protracted standoff between Qatar and Saudi Arabia, the UAE, Bahrain and
Egypt (the quartet) could persist into 2018. Although mediation has stalled, we see a
low likelihood of further escalation with the standoff in its fourth month. In September,
the Qatari and Saudi leadership talked directly for the first time since the crisis
erupted, but the conversation ended with no agreement, and both parties retreated to
their earlier positions. Given the gravity and duration of the rift, it will likely have
enduring implications for relations between GCC member states.
Other issues Risks to the financial sector

Non-resident deposits fell in the Qatars financial sector could continue to feel the impact of the GCC rift. Non-
aftermath of the GCC rift, mitigated resident deposits and interbank liquidity (combined) fell by QAR 100.4bn in June-
by responses from the Qatar August, and interbank liquidity fell by QAR 64.7bn. This was offset by a QAR 67bn
Investment Authority
increase in domestic deposits in the same period, driven by increased public-sector
deposits. The sovereign has already provided support for the banking system via its MENA
sovereign wealth fund (SWF). We believe that any additional liquidity support
required would be provided by the central bank or through capital injections from the
government.
Market outlook
Qatari credits have retraced a significant part of the spread widening that took place
in the weeks following news of the diplomatic spat. At current levels, we do not think
Qatari sovereign and corporate credits are particularly attractive on a relative value
basis. We prefer to be positioned in financials, which still trade reasonably wide of
pre-standoff levels. We expect banks to tap commercial funding sources as foreign
deposits roll off. The fundraising is likely to be through a mix of private placements,
loans and public debt.
Saudi Arabia Bumps in the road

Economic outlook The growth conundrum
Dima Jardaneh +971 4 508 3591 Oil contraction pulls growth into negative territory. The economy contracted
Head, Economic Research, MENA 0.5% y/y in Q1, according to preliminary data; oil GDP likely contracted by 2.3% and
non-oil expanded 0.6%. Within the non-oil sector, the government sector posted a
Simrin Sandhu +65 6596 6281 contraction of 0.12%, while the private sector grew by 0.9%. We expect constraints
Senior Credit Analyst, Financials & Head, ME Credit on domestic demand and negative business sentiment to linger, supporting our 2017
Research
Standard Chartered Bank, Singapore Branch economic growth forecast of -0.5%, which is based on a 3.4% contraction in oil GDP
and 1.7% growth in non-oil activity. We see downside risk to our non-oil growth
forecast, as private-sector activity may be slower to recover than we currently expect.
We expect Saudi Arabia to maintain its oil policy stance and to support extending
the current oil production cut agreement beyond March 2018. Saudi Arabia and
Russia are already in talks on extending the agreement, according to media sources
including Reuters. Our base case is that the agreement will be extended by nine
months to end-2018. Accordingly, we lower our 2018 economic growth forecast to
1.6% (from 2.4%) and our 2019 forecast to 2.0% (2.1%) to reflect lower expected oil
GDP growth.
Consumer prices have declined y/y Consumer prices continue to decline on a y/y basis, dropping by an average of 0.4%
every month since the beginning of in January-August 2017. The government implemented the excise tax on tobacco
2017, reflecting pressures on and soft and energy drinks in June, but this has not changed the trend of y/y declines
household consumption
in consumer prices since the beginning of the year. Accordingly, we lower our 2017
inflation forecast to 0.4% (2.9% prior), 2018 to 2.5% (3.4%), and 2019 to 3.0%
(3.2%). Our inflation forecasts assume that the government will delay the
implementation of future phases of the water and energy price reforms until 2018.
The protracted standoff between the boycotting countries (Saudi Arabia, the UAE,
Bahrain and Egypt) and Qatar may be negatively affecting the Saudi economy and
weighing further on private-sector business sentiment. Saudi Arabias non-oil exports
fell 19% y/y in June to SAR 12bn. A number of Saudi corporates may have been
affected, being unable to export goods to Qatar. Meanwhile, uncertainty around
Crown Princes Mohammed bin Salmans economic reform agenda in recent months
may affect investment.
MENA
Figure 1: Saudi Arabia macroeconomic forecasts Figure 2: Banks excess liquidity is on the decline
Reverse repo daily average, SAR bn
2017 2018 2019 140
120
GDP grow th (real % y/y) -0.5 1.6 2.0
100
80
Policy rate (%)* 2.00 2.50 2.50
60
USD-SAR* 3.75 3.75 3.75 40
Current account balance (% GDP) 2.5 3.8 2.6 20
0
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
*end-period; Source: Standard Chartered Research Source: SAMA, Standard Chartered Research
Policy Easier said than done

VAT revenues could reach c.SAR Reforms could be deferred to avoid further economic costs. The government
38bn in 2018 has stated that it is revising its National Transformation Program 2020 (NTP), raising
questions about the direction of reforms and NTP implementation. The government
appears to be proceeding with its plan to introduce the VAT in January 2018, despite
possibly reconsidering the pace of other fiscal measures. The VAT draft legislation
and final implementing regulations were published in Q3, with the VAT set to come
into effect on 1 January 2018. Supplies of goods and services exempted from the tax
include financial services and leasing or licensing of residential real estate. We
estimate that the government could gain c.SAR 38bn annually from a 5% VAT
(assuming VAT revenue is 1.6% of GDP).
The H1 fiscal deficit was half the year-ago level, largely on higher oil revenue.
The H1-2017 deficit came in at SAR 72.8bn, down from SAR 150bn in H1-2016. Oil
revenue was up 63% in H1 and non-oil revenue fell 12%, resulting in total revenue
growth of 29%. Total expenditure of SAR 381bn was down 2% y/y.
We expect government spending H1-2017 government revenue was 44.5% of the budgeted amount for 2017, while
pressures to increase in H2 expenditure was close to 43%. This suggests that the government is on track to meet
its budget target this year, contingent on oil prices remaining around USD 50/bbl in
H2-2017. Nonetheless, we remain cautious; as we expect a faster pick-up in
spending in H2, as some payments may be deferred until year-end. The government
may also deliver more economic stimulus in H2 to support growth.
Taking into consideration H1-2017 fiscal performance, we lower our 2017 fiscal
deficit forecast to 9.1% of GDP (from 11.2%). To factor in lower oil revenue in 2018,
higher non-oil revenue (including VAT revenue), and the base effect from 2017, we
also lower our 2018 deficit forecast to 6.4% (from 8.6%), and our 2019 forecast to
5.7% (7.2%)
Banking-sector excess liquidity has declined in the past couple of months. The
daily average reverse repo position of commercial banks at the Saudi Arabian
Monetary Agency fell to SAR 64.0bn in mid-September from SAR 113bn at end-July
(Figure 2). The government raised SAR 37bn from the local-currency-denominated
government sukuk programme in Q3 to put towards budget deficit financing.
MENA
Credit demand remains subdued; the loan book contracted 1.1% y/y in July 2017,
but has grown c.1% since the beginning of the year. Total banking-system deposits
were up 3.3% y/y in July 2017.
Market outlook
While the KSA complex outperformed QATAR in the aftermath of the diplomatic spat,
it continues to look attractive on a rating-adjusted basis versus EM peers. The KSA
26 trades c.40bps wider than the lower-rated MALAYS 26 and in line with BBB-rated
sovereigns such as the INDON 26 and COLOM 26. At the longer end, we prefer
being positioned in SECO bonds given the steep 10Y/30Y curve.
Turkey Fiscal stimulus supports growth

Economic outlook Pick-up in growth continues
Carla Slim +9714 508 3738 The economic recovery will likely continue into 2018, supported by expansionary
Carla.Slim@sc.com
Economist, MENA fiscal policy and a gradual improvement in tourism. The government has adopted a
counter-cyclical fiscal policy to smooth the impact of domestic instability on economic
Philippe Dauba-Pantanacce +44 20 7885 7277 activity. This has yielded results: Q2-2017 GDP growth rose to 5.1% y/y (Figure 2).
Philippe.Dauba-Pantanacce@sc.com
Senior Economist, Global Geopolitical Strategist The economic recovery is reflected in the unemployment rate, which fell to a 12-
month low of 10.2% in June. The August manufacturing PMI survey rose to 55.3 from
Geoff Kendrick +44 20 7885 6175 47.7 at end-2016.
Geoffrey.Kendrick@sc.com
Emerging Markets FX & Global Macro Strategist
We raise our 2017 GDP growth forecast to 4.7% from 3.1% to reflect stronger-than-
expected growth in H1. We see 2018 growth decelerating to 3.9% as expansionary
fiscal policy fades. A further deterioration in Turkeys relationship with Germany
We raise our 2017 growth forecast represents the largest downside risk to our forecast, given significant trade and
to 4.7% to reflect H1 data tourism ties. German tourists made up 13% of total visitors to Turkey in H1-2017, and
9% of Turkeys exports went to Germany in 7M-2017.
We expect healthy export growth to continue in the coming months and into 2018,
benefiting from better global growth. Despite total export growth of 9% y/y in 7M-
2017, net exports contribution to growth will likely be negative, offset by similarly
strong import growth (on higher oil prices and a recovery in economic activity).
Tourists are returning to Turkey Foreign tourist arrivals continue to recover, albeit from a low base, growing 46% y/y
arrivals were up 46% y/y in July in July. Tourist arrivals had been contracting since August 2015 as a consequence of
domestic stability and security concerns. The number of visitors rose despite a sharp
decline in visitors from Germany (down 21% y/y in H1-2017), which was offset by the
return of Russian tourists (rising to 1.5mn visitors from only 175,000 last year). The
gradual recovery in the tourism sector is also reflected in balance-of-payments data;
income from travel services grew to USD 5.3bn in H1-2017.
Policy Expansionary fiscal policy

The government will likely maintain its expansionary fiscal stance in the coming
months and in 2018, resulting in a wider fiscal deficit. Government spending
increased c.22% y/y in 7M-2017, driven by increased government consumption
(purchases of goods and services), transfers and capital expenditure. We think the
MENA
government has the fiscal space to continue with counter-cyclical measures, given
moderate government debt of c.30% of GDP in 2017. We lower our 2017 fiscal deficit
Figure 1: Turkey macroeconomic forecasts Figure 2: Fiscal stimulus has yielded a strong growth
recovery (real GDP growth, %; 2009=100)
8
2017 2018 2019
7
5
4
Policy rate (%)* 8.00 8.00 8.00 3
2
USD-TRY* 3.50 3.70 3.90
1
-1
Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17
*end-period; Source: Standard Chartered Research Source: Turkstat, Standard Chartered Research
Expansionary fiscal stance is likely forecast to 2.6% of GDP (from 2.9%) to adjust for higher-than-expected government
to continue in the coming months revenue in H1-2017, which was driven by double-digit increases in direct and indirect
tax collection. The economic recovery drove a higher-than-expected increase in the
import bill. We therefore raise our 2017 C/A deficit forecast to 4.6% of GDP (from
4.3%). The C/A deficit widened 9% y/y in H1-2017 to USD 20.8bn. This was due to a
wider trade deficit, even as services income rebounded (rising 24% y/y to USD
6.1bn) on improved FX receipts from travel services.
Inflation will likely remain high, Monetary conditions are not tight enough to contain inflation; core inflation rose
although we expect it to fall to to 10.2% y/y in August. August CPI data pointed to demand-driven inflationary
single digits by year-end pressures, likely reflecting the economic recovery driven by fiscal stimulus. Food
inflation also rose to 12% y/y in August from 10% in July. We now expect the Central
Bank of the Republic of Turkey (CBRT) to stay on hold, versus our previous forecast
that it would raise its key policy rate (the weekly repo rate) by 50bps to 8.50% by
year-end as US interest rate hikes are widely expected and the Turkish lira (TRY)
has strengthened. The CBRT will likely refrain from reversing previous hikes in the
late liquidity window rate (LLW) on a wider C/A deficit and higher inflation this year.
Credit to the private sector grew 20% y/y in 7M-2017. We expect inflation to fall to
single digits by year-end.
Politics Uneasy transition

Political tensions remain, but they Attempts to return to business as usual, despite ongoing political tensions.
have become less prominent for While the political issues that have clouded Turkeys outlook for the past 18-24
investors months remain largely unresolved, their impact in terms of market headlines has
diminished. The recurrent ballots of recent years seem to be over (although we do
not rule out early general elections in the next 12 months), and domestic terror
attacks have abated. President Erdogans attempts to engineer a return to normality
after a period of exceptional political volatility are complicated by the ongoing
crackdown on dissent, political opponents and journalists.
Domestically, Erdogans AK Party is undergoing a reorganisation in an attempt to

consolidate the presidents control of the party and the government. Tensions with
Western allies Europe and Germany in particular still dominate international
relations. Relations with Germany have become so fraught that in unprecedented
remarks, Chancellor Angela Merkel mentioned in September that she would call for a
formal discussion of Turkeys bid for EU membership and possibly end these
accession talks. Such a decision would require the unanimous agreement of the 28 MENA
EU members. Regionally, the Iraqi Kurds 25 September referendum on seceding
from Iraq is also a cause of considerable concern for Ankara.
Market outlook
We have been bullish on the TRY and long in active trade recommendations since
May (see ACT, 24 August 2017, Locking in profits). The TRY is our top buy in EM
FX, as it models our top-down framework of buying EM FX driven by high-yield bond
inflows, with a stable political backdrop. However, we are watching three risks. (1)
Positioning Our SC FIRST database shows that funds FX exposure to the TRY
has become more overweight (see Cyclical flows matter). (2) Commodity prices We
prefer commodity exporters over importers; Turkeys structural C/A deficit is driven by
its oil and gold imports, and recently higher oil prices may become TRY-negative. (3)
Local USD buying Local USD deposits fell by USD 17bn following the attempted
coup in July 2016. They have been more than fully rebuilt and have stabilised since
June. However, given the structural trend higher in USD deposits, some local USD
buying is expected.
UAE Rough edges

Economic outlook Weakening sentiment is taking hold
Dima Jardaneh +971 4 508 3591 We no longer expect non-oil economic growth to rebound this year. We lower
Head, Economic Research, MENA our 2017 GDP growth forecast to 0.9% from 1.2%; we now expect non-oil economic
growth of 2.5% this year for the UAE (versus 3.2% previously). The slowdown in
Simrin Sandhu +65 6596 6281 domestic credit growth in recent months also suggests a slower pace of expansion in
Senior Credit Analyst, Financials & Head, ME Credit Research
economic activity (Figure 2). Abu Dhabis economy grew 1.8% y/y in Q1-2017, based
Standard Chartered Bank, Singapore Branch on non-oil growth of 0.1% and oil growth of 3.6%, according to preliminary data.
Dubais Q1 growth was reported at 3.2%, up slightly from 2.9% in Q4-2016; we
expect Dubai to post slower growth in H2 as the impact of tourism incentives fades
and productive sectors experience deeper margin cuts.
We now expect a smaller contraction of 2.5% in UAE oil GDP this year (3.2% prior),
based on average oil production of 2.9 million barrels per day (mb/d) in H1-2017,
exceeding the 2.87mb/d target under the OPEC/non-OPEC oil production-cut
agreement.
We lower our 2018 and 2019 GDP growth forecasts to 2.6% (from 3.3%) and 3.1%
(from 3.4%), respectively, as we now expect a more muted pick-up in non-oil activity.
We think growth could surprise to the upside if the impulse from Expo 2020 is larger
than we currently envisage.
Credit to the private sector slowed Weakening business sentiment appears to be weighing on domestic credit growth,
sharply in the 12-month period which slowed to 2.8% y/y in July 2017 from 5.2% at end-2016. The UAE banking
ended July 2017 system saw three consecutive months of negative credit growth in Q2-2017; the July
reading was slightly positive at 0.3%, following a decline of 0.7% in June. Credit
growth to the private sector has slowed sharply over the past year, to 2.9% y/y in July
2017 from 7.1% a year earlier.
The Qatar crisis may be weighing Despite preparations to host Expo 2020, project awards in the UAE fell 13% y/y in
on corporates operating in the UAE, H1-2017 to USD 21bn, according to MEED Projects data; this implies stalled
while margins are tightening for investment momentum. The Qatar crisis could weigh further on business sentiment in
retail and hospitality the UAE for the remainder of the year. Dubais economy could falter as businesses
are forced to scale back operations in Qatar due to operational and logistical
difficulties brought about by the blockade; Dubai hosts businesses seeking to benefit
from its interconnectedness with the rest of the GCC. Meanwhile, retail and
hospitality operators are seeing their margins compress as they reduce prices to
boost demand for their products and services.
MENA
Figure 1: UAE macroeconomic forecasts Figure 2: Steepening decline in credit growth

LTD ratio, y/y growth
2017 2018 2019 1.00 Loan growth Net loans-to- 9%

(RHS) deposits
0.98 8%
0.96 7%
0.94
CPI (% annual average) 2.7 3.2 3.4 6%
0.92
5%
Policy rate (%)* 1.75 2.25 2.25 0.90
4%
0.88
USD-AED* 3.67 3.67 3.67 3%
0.86
0.84 2%
Current account balance (% GDP) 3.9 4.3 3.6 1%
0.82
Fiscal balance (% GDP) -2.3 -1.0 -1.5 0.80 0%

Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17
*end-period; Source: Standard Chartered Research Source: CBUAE, Standard Chartered Research
Policy Putting tax reforms into action

VAT is on track for implementation The government has issued a series of laws that will pave the way for the
in early 2018 introduction of excise taxes and VAT, to help raise non-oil revenues. Excise taxes
of 100% on tobacco and energy drinks and 50% on soft drinks will come into effect
on 1 October 2017. VAT will come into effect on 1 January 2018.
Key aspects of the legislation are a standard VAT rate of 5%, and a 0% rate for the
supply of goods and services for (1) direct or indirect exports outside of the
implementing states; (2) international transport of passengers and goods that starts or
ends in the UAE or passes through its territory, including related services; (3) regular
commercial air passenger transport; (4) air, sea, and land transport for passengers and
goods; (5) aircrafts or vessels designated for rescue and assistance by air or sea; (6)
the supply or import of precious metals for investment purposes; (7) first supply of
residential buildings for sale or lease within three years of completion; (8) crude oil and
natural gas; (9) educational services, including government-owned higher education
institutions; and (10) basic health-care services. Supply exempted from VAT includes
financial services identified in the executive order, residential buildings for sale or lease
that are not zero-rated, bare land, and local passenger transport.
Excise taxes and VAT will likely put We maintain our inflation forecasts for 2017-18, which already factor in the
upward pressure on consumer introduction of excise taxes in Q4-2017 and a 5% VAT in early 2018. The inflation
prices rate averaged 2.3% y/y in H1-2017; transport posted the highest inflation rate of
6.7%, followed by health services at 5.5%, while prices of recreation and cultural
services fell by an average 4% in the same period. We lower our 2019 inflation
forecast to 3.4% (3.8% prior) as the impact of VAT will be temporary, but we factor in
some cost-push inflation.
Higher non-oil revenue leads us to raise our fiscal balance forecasts for 2018-
19. We lower our fiscal deficit forecast to 1% of GDP for 2018 (-1.8% prior) and to
1.5% in 2019 (-2.4%).
Other issues Dubai sovereign and GRE debt

USD 20bn owed to Abu Dhabi- Dubais total indebtedness still exceeds 100% of GDP. Dubais public debt stock,
related entities is expected to be which includes sovereign and government-related entity (GRE) debt, was USD
rolled over next year 119bn in mid-2017 (as reported by the IMF in the 2017 Article IV consultation country
MENA
report). Debt-service obligations due in 2018 are reported at USD 27bn; USD 20bn of
this is in bonds owed to Abu Dhabi-related entities and the Central Bank of the UAE,
which we expect to be rolled over again.
Market outlook
We do not see value in the front end and belly of the ADGB and DUGB curves, as
they are strongly anchored by local support. Low supply has been a positive
technical factor, as neither Abu Dhabi nor Dubai has issued in the bond market so far
this year. We think that the DUGB long end offers better value, trading c.70bps wide
of the KSA 46 versus 20bps at the front end. We prefer to be positioned in the quasi-
sovereign corporates and banks over the sovereign in both Abu Dhabi and Dubai.
Economies Africa
Africa Not yet out of the Woods

Economic outlook Growth rebound
Victor Lopes +44 20 7885 2110 Growth across Africa is set to rebound in 2017 from a weak base in 2016. The
Victor.Lopes@sc.com
Senior Economist, Africa expected recovery will be driven by large economies that are emerging from
recession, namely oil producers Angola and Nigeria, and by South Africa, where
external demand has lifted mining and manufacturing. In all three instances,
however, the recovery remains weak.
The rebound in SSAs larger GDP growth in South Africa and Nigeria turned positive in Q2, at 0.6% y/y and
economies is likely to remain weak 1.1% y/y, respectively. Higher oil output and improved FX availability have driven
Nigerias rebound. While the FX market remains fragmented, the situation has
improved since the introduction of an Investors and Exporters FX window in April,
and capital inflows have picked up. In South Africa, strong agricultural performance
and gains in mining and manufacturing have supported the recovery. We expect
Angola to return to positive growth (quarterly GDP data for 2017 is not available yet).
However, the recovery is likely to be even more muted than in Nigeria and South
Africa given the acute FX shortage, banking-sector challenges and larger
imbalances. The FX supply situation in Angola is extremely difficult, and corporates
remain cash-strapped.
Growth trajectories diverge Elsewhere in Africa, growth dynamics vary across countries. Kenya faces a
across SSA cyclical slowdown due to the impact of the interest rate cap legislation, weak
agricultural performance and political uncertainty. In the rest of East Africa, a
moderation in growth is likely. In Ethiopia, we expect slow growth given a recent
drought and political unrest. In Tanzania, policy uncertainty has added to investor
nervousness. In Francophone Africa, Senegal continues to perform well, with growth
of 6.4% in Q2. We expect Cte dIvoires growth to slow on the impact of lower cocoa
prices, but remain high around 7%. Growth should remain modest in Cameroon and
Gabon. Monetary policy is set to remain generally accommodative across SSA given
lower inflationary pressure in the context of stable FX and modest growth.
Commodity price developments have been favourable, with the notable

exception of cocoa prices; this has been particularly negative for Cte dIvoire. Oil
prices have rebounded so far in 2017 (averaging USD 52/bbl versus USD 45/bbl in
2016), but they remain too low for oil-producing countries Angola, Gabon and
Nigeria to correct their imbalances anytime soon. While the oil price rebound helps,
external adjustment is driven mostly by import compression. For oil importers (East
Figure 1: GDP growth Recovery expected Figure 2: Public debt-to-GDP ratios, SSA
% y/y % GDP
14 Ghana
MZ
12 GH
Tanzania GA
10
Senegal SN
8 2017
AO
6 2015
Kenya ZM
4 KE
Africa
Uganda ZA
2
C
South Africa
0 CM
-2 TZ
Nigeria NG
-4
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 0 20 40 60 80 100
Source: National statistics, Standard Chartered Research Source: IMF, Standard Chartered Research
Africa, Senegal), the modest rebound in oil prices does not pose a risk to their trade
balances. The increase in metal prices has led to improvements in Zambias and
Mozambiques external accounts. For Ghana, higher gold prices have helped to
offset the impact of lower cocoa prices.
Policy Increasingly engaging with the IMF

In H2, Cameroon and Gabon have Many countries are in talks with the IMF, and these talks have progressed in most
signed deals, while CDI and Ghana cases (for our earlier analysis on this, see Africa A walk in the Bretton Woods).
have extended either the period or Cte dIvoire and Ghana were already under IMF programmes but have changed
the amount of their programmes
some elements. In Cte dIvoires case, funding was increased by USD 225mn to
help the country deal with the impact of lower cocoa receipts and higher spending; in
Ghana, the current programme due to end in April 2018 was extended by one year.
In the CEMAC region, things have also moved fast since the December 2016
emergency meeting. At that meeting, the Central African Economic and Monetary
Community (CEMAC) countries, under growing pressure from declining FX reserves,
agreed to engage with the IMF in order to preserve the sustainability of their peg to
the euro. Both Cameroon and Gabon signed deals with the IMF in June; other
members, like Equatorial Guinea and Congo, have yet to finalise discussions.
In Zambia, a deal is still expected In Zambia, discussions have dragged on, with talks towards a funded IMF
despite delays; in Mozambique it programme due to continue in October. A staff-level agreement may be possible
remains unlikely before the end of the year. The prospect of an IMF programme for Mozambique
remains distant given little progress on debt restructuring, and contentious issues
related to the audit of SOE debt. In the case of Angola, the election of a new
president might pave the way for a resumption of talks with the IMF (talks were
abandoned last year mainly for political reasons), but the timing remains uncertain.
Reducing deficits and debt, and Fiscal consolidation will be the order of the day for countries under IMF
clearing arrears, will be the key programmes. Even in countries without programmes, such as Angola and Senegal,
policy challenges restrictive fiscal policies are likely. In others, like Nigeria and Kenya, attempts at fiscal
consolidation already difficult with fiscal revenues under pressure are likely to be
affected by political uncertainty. Kenya faces a re-run of its presidential election in
October 2017, with election-related costs likely to add to government expenditure. In
Nigeria, elections are scheduled for February 2019. The political cycle may
complicate any attempts at fiscal consolidation.
Figure 3: IMF and Africa

Amount Date current Quota Date previous
Country Current status
(USD mn) prog. (USD mn) prog.
Angola 1, 000 2009/12
Cameroon ECF 666 2017/20 373 2005/09
Cte d'Ivoire ECF/EFF 899 2016/19 879 2011/15
Ethiopia 406 2009/10
Gabon ECF 642 2017/20 292 2007/10
Ghana ECF 918 2015/19 997 2012/15
SBA/SCF
Kenya 1,500 2017/19 733 2015/16
(precautionary)
Cancelled in
Africa
Mozambique In talks 282.9 307 2015/17

2016
Namibia 258
Nigeria 3, 315 2000/01
Senegal PSI* 2015/2018 437 2008/10
Tanzania PSI* 537 2012/14
Uganda PSI* 2013/2017 488 2002/06
Zambia In talks 1, 321 2008/11
Note: ECF = Extended Credit Facility; EFF = Extended Fund Facility; SBA = Stand-By Arrangement; SCF = Standby Credit
Facility; PSI = Policy Support Instrument; *non-funded programme; Source: IMF, Standard Chartered Research
Rising domestic arrears highlight the extent of pressure on public finances and
weakness in public financial management (some countries, like Gabon, have even
accumulated external payment arrears). Arrears have had an adverse impact on the
private sector and economic activity. The necessary clearance of arrears (countries
under IMF programmes have explicit objectives) makes fiscal consolidation
more challenging.
Debt levels continue to rise, with debt-to-GDP ratios above 50% in many SSA
frontier economies. Debt appears higher than expected in many cases. Even in
Senegal, despite a steady narrowing of the fiscal deficit, debt has increased more
than expected. Recourse to Eurobonds in Q4 will be limited in frontier Africa after
significant issuance this year (from Nigeria, Cte dIvoire, Senegal and Gabon).
Angola and Nigeria are both considering Eurobond issuance in Q4, while Kenyas
issuance planned for FY18 (year ending 30 June 2018) looks likely to be
postponed given the extended election period.
Politics Uncertainty in some key markets

Politics remain in focus Angola saw its first change of president in 38 years following the August general
election, as Joao Lourenco replaced Eduardo Dos Santos as head of state. We expect
this to bring continuity rather than radical change. Key things to watch will be any hints
of changes in the FX policy which, in our view, is increasingly unsustainable and
talks with the IMF, which are possible given the current economic difficulties.
In Cte dIvoire, political uncertainty has increased following several mutinies this
year, and political noise remains high given tensions within the ruling coalition. In
Zambia, the release of opposition figures from jail has eased political tensions and
should help to improve relations with international community. Cabinet reshuffles in
Gabon, Senegal and Cte dIvoire have had few implications for economic policy.
Kenya election re-run is the main In Kenya, a new presidential election will take place at end-October after the August
risk in SSA in Q4 election results were nullified by the Supreme Court. For the first time ever in Africa,
a court has invalidated an election result that favoured the incumbent. While this
shows Kenyas institutional strength, it also creates significant political uncertainty.
Growth and confidence are likely to be negatively affected by the extended electoral
period and the risk of heightened tensions.
Political manoeuvring is likely to In Nigeria, concerns over the health of President Buhari and political manoeuvring
affect policy in South Africa ahead of the 2019 elections may affect the appetite for reforms. Given that the
and Nigeria political timetable is already focused on the next presidential election in February
2019, achieving meaningful structural change in the interim may be difficult. In South
Africa, political uncertainly will prevail ahead of the ANCs elective conference,
scheduled for December. A recent court ruling (nullifying the result of an earlier
internal election of the party in KwaZulu Natal) has raised the prospect of delays to
the conference. A victory for a perceived reformist team in the ANCs internal election
would be viewed positively by the markets; an outcome suggesting continuity of the
status quo would be less welcome.
Africa
Africa Top charts

Figure 1: Divergent growth outlook across SSA Figure 2: Relative currency stability in 2017
% y/y SSA FX vs USD, Jan 2015=100
10
230
2016
8 2017F
210
6
4 190
NGN
2 170
0 150 ZMW
-2 GHS
130
-4 UGX
Cameroon
Senegal
Tanzania
Uganda
Angola
Zambia
Ghana
Nigeria
Kenya
Cote d'Ivoire
South Africa
110
KES
ZAR
90
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17
Source: National sources, Standard Chartered Research Source: National sources, Bloomberg, Standard Chartered Research
Figure 3: SSA imports have dipped with weaker growth Figure 4: Commodity prices remain a challenge
Imports down from 2014 peaks (USD bn) Commodity price, Jan 14=100
40 140
Cocoa
35
120
30 Gold
25
Rest of SSA 100
20
15 80
Copper
10
South Africa 60
5
Nigeria Brent
0 40
May-11 Mar-12 Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
Source: IMF DOTs, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Figure 5: Inflationary pressures have generally receded Figure 6: Central banks across SSA have been easing
% y/y SSA policy rate changes from Jan 2015, bps
25 Zambia 700
Uganda Angola
600
20 500 Ghana
Ghana
400
15
300
Kenya
200
Africa
10 Nigeria South Africa

Kenya
100
5 0
South Africa -100

Nigeria
0 -200
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17
Source: National sources, Bloomberg, Standard Chartered Research Source: National sources, Standard Chartered Research
Angola The new man in charge

Policy What now?
Victor Lopes +44 20 7885 2110 All eyes are on new President Joao Lourenco for clues to the economic policy
Victor.Lopes@sc.com
Senior Economist, Africa direction. The new administration in place following the August general election will
have to deal with a severe economic crisis. Tighter fiscal policy will be needed, but
the outlook for FX policy is less clear.
Crisis management will remain the The 2018 budget, to be discussed in Q4, should provide more clarity on fiscal
order of the day; fiscal policy to be policy, but there is little room for manoeuvre and it is likely to be restrictive. Budget
more restrictive, FX policy is execution in 2017 is unclear at this stage, but the rise in imports (+19.5% y/y in H1-
uncertain
2017) might be a consequence of loose fiscal policy. It is also due to Banco Nacional
de Angola (BNA) supplying more FX this year than in 2016 around EUR 7.6bn in
January-July, versus c.EUR 4.4bn in the same period last year. Most of the FX
increase occurred in Q1, when BNA sold EUR 4.6bn; FX supply has declined since
then. The existence of a parallel market is symptomatic of FX market distortions, but
the parallel rate (currently at 385 versus the USD) is not necessarily a good
indication of the fair value exchange rate. While the premium versus the official rate
has narrowed, the FX shortage does not appear to have improved.
Devaluation and an IMF deal look Currency devaluation appears inevitable; the timing is the issue. We maintain
necessary, but timing is uncertain our long-held view of a devaluation in Q4-2017. However, we now see risks to this
given that the new government takes office in October, and will likely avoid
devaluation during the Christmas holidays. This provides a narrow window for
devaluation this year. The previous Angolan kwanza (AOA) devaluation happened in
early January 2016. The authorities have always been wary of the inflationary impact
of currency devaluation; it could reverse recent progress in slowing the pace of
inflation. Such a move, shortly after taking office, would send a strong signal on a
new economic policy direction, and could pave the way for discussions with the IMF
on a funded programme.
Devaluation and the IMF deal had been on the back burner because of the
electoral cycle. With the elections now over, negotiations on an IMF programme are
a possibility. The new president did not rule out this option during a recent press
interview. An IMF deal would probably take time to negotiate once discussions start
the timing is uncertain at present. While a segment of the ruling MPLA has
traditionally not been keen on an IMF deal, Angola did have a funded programme
Figure 1: Angola macroeconomic forecasts Figure 2: Overvalued kwanza

REER
200
2017 2018 2019
Policy rate (%)* 16.00 18.00 18.00

Africa
125
USD-AOA* 205.0 210.0 214.2
100
75
*end-period; Source: Standard Chartered Research Source: Bruegel, Standard Chartered Research
from 2009-11. An IMF deal would make even more sense now given the more acute
crisis owing to the greater extent of imbalances, FX market distortions and the loss of
correspondent banking relations especially since there are fewer political
constraints. Unlike Nigeria, Angola has limited options to close its external financing
gap: it cannot attract offshore portfolio flows given its under-developed local markets.
Angolas gross FX reserves stood at USD 22bn in July; while this was an
improvement from June (USD 20.3bn), it came at the cost of more limited FX supply.
Financing needs remain high Government plans for a Eurobond issue indicate its still-high financing needs.
It is possible that bilateral loans from China (Angolas main source of financing) have
become less readily available, hence the recourse to a Eurobond. Gross external
financing requirements are likely to remain quite high this year, possibly at c.USD
10bn. While the current account deficit is relatively modest, external debt
amortisation is high (external debt service is equivalent to c.23% of revenues). The
presidential decree authorising Eurobond issuance mentions that this is part of the
strategy to refinance the debt, confirming that large loan amortisations are due. The
government has increased domestic borrowing, and greater recourse to central bank
financing also highlights growing financing needs. Potential contingent liabilities from
the banking sector and SOEs remain an additional risk.
It is difficult to envisage a meaningful rebound in economic activity. A slight

pick-up in growth in 2017 is still likely following the recession in 2016, but we lower
our 2018 growth forecast to 2% (from 4%). Also, public arrears will continue to weigh
on public finances. Oil prices are not rebounding strongly, and the non-oil sector
continues to be affected by arrears and FX shortages. The banking sector is also still
struggling: non-performing loans stood at 17.6% at end-2016; July credit growth was
-10% y/y.
Politics New president, old regime

Gradualism rather than radical The ruling MPLA achieved a comfortable victory (61% of the votes), which should
change allow Joao Lourenco to establish his authority; however, support was lower than in
2012 given the economic crisis. The new presidents capacity and willingness to
undertake reform remains unclear, although he has not ruled out an IMF programme
or privatisation of some SOEs. Gradual rather than radical change looks likely.
Former President Dos Santos, who held power for 38 years, is likely to maintain
some influence initially, as he will remain leader of the MPLA. This will be the first
time that the ruling president is not also head of the ruling party. The former
presidents ability to exert influence will also be dictated by his health, which has
deteriorated and led him to give up power. Any changes (or lack thereof) in the
leadership of key public entities such as the national oil company or the sovereign
wealth fund, both headed by Dos Santos family members might provide clues to
the ongoing influence of ex-President Dos Santos.
Africa
Botswana Losing steam

Economic outlook Tentative growth to resume in H2
Emmanuel Kwapong, CFA +44 20 7885 5840 Botswanas growth remains below trend. We expect growth to pick up in H2-2017
Emmanuel.Kwapong@sc.com
Economist, Africa after a weak Q1, on a recovery in global demand for rough diamonds. Q1 growth of
0.8% y/y marked the slowest start to a year since 2009. Growth remained export-led,
largely reflecting inventory drawdown; the mining sector contracted by 28.9% y/y.
Non-mining growth was strong, lifted by downstream diamond trade. While we expect
a pick-up in growth, risks to our outlook are tilted to the downside.
Pressure on household incomes is Weak household consumption is a key concern. Modest public-sector wage
holding back consumption growth has contributed to the slowdown in household consumption. Private-sector
wage growth is also likely to be weak given sluggish domestic activity and relatively
low inflation rates. High unemployment, particularly youth unemployment, has put
further pressure on household incomes. Household deposits contracted by 5% in
June after growing by 7% during same period last year. High household debt levels
have also constrained households ability to smooth consumption by borrowing.
Household debt accounts for 60% of total outstanding commercial bank loans, and
household credit growth slowed to 5% y/y in H1-2017 from 12% in H1-2016.
Businesses remain fairly downbeat Private-sector activity is likely to remain sluggish. Despite a recovery in growth in
about the economy 2016, business confidence is still low; the latest Business Expectations Survey by the
Bank of Botswana (BoB) shows that just 48% of companies are optimistic about the
current business environment. Hard data also shows that FDI inflows fell sharply in
2016 to just USD 10mn from USD 679mn in 2015, a contraction of 98%, largely due
to a decline in mining-related investment. In the absence of more conducive business
conditions, private investment is likely to remain weak.
A mining-sector recovery is Mining growth should turn positive in 2017 after two years of contraction.
expected Diamond output is likely to have picked up on improved global demand for rough
diamonds. Diamond production by Debswana, Botswanas largest mining company,
was up 14% y/y in Q2. Debswana projects annual diamond production of 22mn
carats for 2017, which would be the highest output since 2014. The closure of three
copper-nickel mines in H2-2016 should also provide a low base for growth in the
second half of the year.
Figure 1: Botswana macroeconomic forecasts Figure 2: Growth momentum is fading

GDP % y/y
2017 2018 2019 8
4
2
Policy rate (%)* 5.50 6.50 7.00
Africa
0
USD-BWP* 10.23 10.16 10.40 -2
-6
Q1-14 Q3-14 Q1-15 Q3-15 Q1-16 Q3-16 Q1-17
*end-period; **for fiscal year ending in March; Source: Standard Chartered Research Source: Statistics Botswana, Standard Chartered Research
Weak growth increases the risk of a rating downgrade. Of the three largest
economies in the Southern Africa Customs Union (SACU), Botswana is the only
country to have avoided a downgrade this year; South Africa and Namibia were both
downgraded to sub-investment grade (IG). While Botswanas IG investment rating is
not at risk, S&P has assigned a negative outlook to the countrys A- rating since April
2016, largely on a weak growth outlook. Botswana could be subject to negative rating
action if growth remains below trend over the medium term.
The current account (C/A) position has improved considerably. Provisional

figures from the BoB indicate that the C/A surplus was up 274% y/y in Q1-2017 (we
estimate that it stood at c.25% of GDP). The visible goods trade balance accounted
for much of the improvement: exports rose 15% y/y against a backdrop of improved
diamond exports. Imports contracted 29%, partly due to weak domestic demand and
reduced capital spending. Imports are likely to have inched up in subsequent
quarters given higher planned capital expenditure.
Policy rate to remain on hold

Policy rate should remain on hold We expect the policy rate to remain on hold for the rest of 2017. Inflation should
on a benign inflation outlook stay close to the lower bound of the BoBs target range of 3-6% as inflationary
pressures remain subdued on weak domestic demand. Inflation trended upwards in
the first half of the year, rising to 3.5% in June from 3.0% in December. This was
largely due to increases in fuel, utility and transport tariffs during the period. We
expect inflationary pressures to ease in H2-2017 and see inflation falling slightly to
3.2% y/y by December from 3.4% in August, although any increase in administered
prices could pose upside risks to our forecasts.
Revenue performance should Limited risk of revenue underperformance in the near term. We expect decent
remain strong revenue growth in FY18 (year ending March 2018). The improved diamond-mining
outlook should support robust mineral revenue growth, which remains the largest
source of government revenue. Although projections of weak growth in South Africa
would likely affect SACU revenue, Botswanas customs receipts are likely to increase
in FY18 due to an upward adjustment for past underpayments, in line with SACUs
revenue-sharing formula. However, SACU revenues will likely decline in subsequent
years. The government intends to implement tax administration reforms in order to
increase domestic revenue and reduce Botswanas dependence on more volatile
mineral and SACU revenues.
Market outlook Steady

We see no pressure on the peg. The Botswana pula (BWP) appreciated 0.13%
against a trade-weighted basket of currencies in H1-2017, largely in line with the
BoBs upward rate of crawl of 0.26% for the year. At USD 7.3bn, FX reserves remain
more than sufficient to support the peg. The large C/A surplus should allow for a
further build-up in reserves.
Africa
Cameroon Holding the line

Economic outlook Still afloat
Victor Lopes +44 20 7885 2110 Oil accounts for only 5% of Cameroons GDP but about 25% of fiscal revenue. Lower
Victor.Lopes@sc.com
Senior Economist, Africa oil prices, coupled with higher security spending in response to the Boko Haram
threat, have led to slippage, making a fiscal adjustment necessary this year. This is
likely to have an impact on growth. Cameroons growth has been resilient compared
with its Central African Economic and Monetary Community (CEMAC) peers;
nonetheless, it will likely slow this year on the back of lower public investment. We
maintain our 4% GDP growth forecast.
Policy IMF-driven fiscal consolidation

Cameroons public finances are not Cameroon has finally concluded talks with the IMF, initiated at the beginning of the
as concerning as in many SSA year, and signed a three-year USD 666mn Extended Credit Facility (ECF). This is
countries, but the IMF programme part of a wider initiative to support the CEMAC region, which is facing severe
will provide additional comfort
pressure due to ongoing low oil prices and declining FX reserves. Other CEMAC
members, including Gabon and Chad, have also signed deals; the Republic of Congo
and Equatorial Guinea have yet to conclude negotiations. For 2017, the IMF will
disburse EUR 270mn. Other multilaterals and bilaterals will also step in and provide
EUR 512mn to meet Cameroons financing requirements.
The IMF programme will focus on fiscal consolidation. It targets reducing the fiscal
deficit (on a cash basis) to 4.2% of GDP in 2017 from 5.4% in 2016, mainly by
reducing recurrent spending (by c.1.5ppt of GDP) and capex (by 1ppt). The IMF plan
is to reduce the fiscal deficit to 2.8% of GDP at the end of the programme in 2019.
The 2018 general elections will test The planned fiscal adjustment is more drastic than we had expected. The most
the commitment to fiscal significant reduction in the deficit is in 2017: by 3.1% of GDP on a commitment basis
consolidation and 1.2% of GDP on a cash basis (as the government repays arrears). The pace of
consolidation will be more modest in 2018 and thereafter. This implies a spending
reduction of c.2.7% of GDP in 2017 versus 2016, moderating to 0.3% in 2018. 2018
is an election year, so even a small reduction in spending might be difficult to achieve
then. On the revenue side, a modest increase of 0.4% of GDP is expected via
reduced exemptions, an increase in the fuel tax or gains from better compliance. We
maintain our 2017 fiscal deficit of 4.7% of GDP for now, as the reduction in current
spending might be difficult to achieve.
Figure 1: Cameroon macroeconomic forecasts Figure 2: Ambitious fiscal consolidation plans

Fiscal balance and spending targets, % of GDP
0 24
2017 2018 2019
-1 23
-2 22
-3 Fiscal balance 21
Policy rate (%)* 3.20 3.20 3.20
Africa
-4 20
USD-XAF* 538 517 538
Spending
-5 (RHS) 19
-6 18
2015 2016 2017F 2018F 2019F
The IMF programme will also involve measures to improve public financial
management, traditionally weak in Cameroon, as highlighted by the recurrent
accumulation of payment arrears. Arrears amounted to 3.6% of GDP in 2016; however,
this is not especially high relative to Cameroons history of recurrent domestic arrears,
and is lower than other countries under or considering IMF programmes (e.g., Gabon,
Ghana or Zambia). Measures will be taken to improve budget transparency, and the
authorities have committed to reducing the quasi-fiscal operations of the national oil
company (it undertook security spending in the past).
The IMF programme should help to Cameroons reserves stood at USD 2.1bn in April 2017, a decline of c.USD 1.2bn
stem the decline in FX reserves (-34%) since the end of 2014. While this is significant, it is much less than for other
CEMAC members. Despite lower oil prices, the current account has been narrowing
since 2014 as project-linked imports have declined and the country has reduced its
dependence on imported cement as it ramps up domestic production. The decline in
FX reserves has not been driven by the current account, but by the deteriorating
financial balance owing to lower repatriation of export proceeds. This, in turn, reflects
nervousness among corporates about XAF peg sustainability amid deteriorating
liquidity in the CEMAC zone.
Debt ratios remain low According to the latest IMF data, total public debt (including government-guaranteed
debt to SOEs, as well as arrears) could rise to 36.1% of GDP in 2017 from 34.1% in
2016. Surprisingly, the IMF classifies Cameroon as being at high risk of debt distress
(as we noted in Global Focus, Swans, bulls and bears) but recognises that
programme implementation provides a good chance for it to be upgraded to
moderate.
Politics Stability despite security threats

Boko Haram attacks are likely to After initial successes in the fight against Boko Haram, attacks have increased in
remain the key security threat recent months. While this is unlikely to destabilise the country, the security and
humanitarian situation in the north remains a source of concern. This will continue to
pose a risk to public finances; the situation has already cost the equivalent of 1% of
GDP, according to the IMF.
Political noise has also arisen over protests related to demands for greater autonomy
in the Anglophone provinces (which represent about 20% of the population). The
governments response to the protests has included the detention of activists and the
temporary shutdown of the internet in the region. The release of some activists
should help to ease tensions, but further noise remains possible, especially ahead of
the 2018 presidential elections.
Market outlook Stable

While the XAF peg to the euro will likely remain under pressure, we do not expect a
devaluation, as the IMF programme should help ease pressure on FX reserves. Also,
Cameroon, a pillar of the CEMAC, would likely oppose a devaluation scenario. Credit
dynamics remain supported by a resilient and diversified economy, moderate debt
levels and prospects of fiscal consolidation under the IMF programme.
Africa
Cte dIvoire Its gonna be okay

Policy Adapting to shocks
Victor Lopes +44 20 7885 2110 This year has proven challenging so far. Several mutinies and popular discontent
Victor.Lopes@sc.com
Senior Economist, Africa in the context of lower cocoa prices have led to increased fiscal pressure, falling
exports and slower growth. Questions have arisen over the governments strategy in
relation to the mutinies: the latest mutiny happened because the government
reneged on its promise to pay bonuses, before changing its position again and
agreeing to pay them after the mutiny. However, the economic policy response to the
fiscal shock has been credible; the government promptly revised its 2017 budget to
limit the widening of the fiscal deficit to 4.5% of GDP (versus an initial target of 3.7%).
Strong policy response and The current fiscal shock (equivalent to 1.2% of GDP for 2017) is manageable,
international support to help CDI especially compared with the situation in other SSA countries. The fiscal cost of the
navigate economic turbulence mutinies and of lower cocoa revenues is equivalent to 0.6% of GDP each.
International cocoa prices have fallen significantly so far in 2017; the government
removed the 5% registration tax to support cocoa farmers as farm-gate prices (fixed
at 60% of international prices) had been reduced to XOF 700/kg from XOF 1,100/kg.
With a large proportion of the population directly or indirectly dependent on cocoa, an
impact on consumption looks likely. We maintain our 2017 growth forecast of 7.5%,
but see downside risks to this projection from lower domestic consumption and
investment. The government has adopted a tighter stance on spending, and plans
cuts equivalent to 0.7% of GDP, mostly related to capital spending.
The agreement on public-sector wages will not weigh on public finances this
year, as the settlement of EUR 370mn of arrears will be spread over eight years,
starting in 2018. This should make the annual fiscal cost relatively manageable. This
is a long-standing issue: the arrears were accumulated during the previous
administration before 2011. The agreement with public servants stipulates that they
will not go on strike in the next five years.
This wider fiscal deficit is not cause for concern, in our view, as the extra
financing needed is in place (see Global Focus Q3-2017, Cote dIvoire, Mutiny in
the country). The government issued Eurobonds worth USD 1.25bn and EUR 625mn
in June 2017 (USD 1.2bn to be used for financing purposes and USD 750mn for buy-
back operations). Strong international goodwill towards the current administration is a
key positive factor, as evidenced by donors stepping in to provide additional
Figure 1: Cte dIvoire macroeconomic forecasts Figure 2: Wider deficit, debt contained
% GDP
0.0 49
2017 2018 2019
-0.5
48
GDP grow th (real % y/y) 7.5 7.5 7.0 -1.0
-1.5 47
CPI (% annual average) 2.0 2.0 2.0 -2.0 46
-2.5
Policy rate (%)* 4.50 4.50 4.50
45
Africa
-3.0
Public debt
USD-XOF* 538 517 538 -3.5 (RHS) 44
-4.0
Fiscal balance 43
Current account balance (% GDP) -4.5 -2.0 -2.0 -4.5
-5.0 42
2014 2015 2016 2017
financing. The existing IMF programme was extended by USD 224.8mn; other
multilaterals (World Bank, African Development Bank and EU) will provide EUR
175mn of additional financing, and France will provide EUR 35mn. President
Alassane Ouattara was the first African head of state to be received by recently
elected French President Emmanuel Macron.
Positive market sentiment makes it Debt remains manageable. While the government is taking on more external debt,
easier for the government to meet (largely non concessional), this increase has been offset by lower domestic debt
its financing needs issuance in 2017. Given rising local yields, the government chose to issue more
externally. Liquidity improved in Q3 following a squeeze in H1-2017 after the
introduction of new regulations by the Central Bank of West African States (BCEAO)
to cap the amounts local banks can access via its repo window. This allowed the
government to issue more in the regional bond market in Q3 but recourse to local
debt so far in 2017 is much lower than it was in 2016.
Debt remains stable despite larger The overall debt-to-GDP ratio should remain stable in 2017, with only a marginal
deficits pick-up to 48.7% compared with 48.5% in 2016. According to the latest IMF data the
ratio is even lower in 2017, at 42.5%, if we exclude the debt owed to France under
the C2D scheme. (France cancelled CDIs debt in 2012 using a specific debt-
conversion scheme called C2D whereby CDI continues to service its debt and then
these amounts are channelled back in the form of aid for specific development
projects.) Interest costs on public debt have increased this year but remain
manageable, at 9.5% of government revenues in 2017, compared with 8.5% in 2016.
Politics Gearing up for succession

Politics are taking centre stage. A round of mutinies that shackled the country (and
public finances), public-sector strikes, as well as sporadic attacks from unidentified
armed groups on military/police installations have led to increasing concerns about
the countrys political stability.
The main issue that led to the mutinies (namely the payment of bonuses) has been
addressed but there are still concerns about the re-emergence of security risks and
financial demands given slow progress in reforming the army. Noise is also
increasing around who will succeed Ouattara ahead of the 2020 presidential election.
President Ouattara has relinquished the leadership of the RDR party and was
replaced by Henriette Diabate who seems an unlikely presidential candidate given
her age. Speculation around who President Ouattara will support to succeed him will
continue in the context of growing divisions within the ruling RDR-PDCI coalition.
Market outlook Stable

The CFA franc (XOF) peg to the euro is likely to remain in place as there is little
pressure on it despite lower cocoa prices. Eurobond issuance from CDI and Senegal
will support reserves at the West African Economic and Monetary Union level.
Creditworthiness should remain underpinned by strong growth, moderate deficits and
debt levels, as well as international support. Political noise remains the key risk.
Africa
Gabon Head above water

Policy Focus on fiscal adjustment
Victor Lopes +44 20 7885 2110 As expected, the government reached an agreement with the IMF in June for a
Victor.Lopes@sc.com
Senior Economist, Africa three-year USD 642mn Extended Fund Facility (see Country Briefing 19 June 2017,
Gabon Waiting for an IMF deal). This is key to covering the countrys financing gap.
Also, the August USD 200mn tap of its 2025 Eurobond enables it to refinance the
2017 maturity due in December. Gabon secured EUR 500mn of financial support
from the African Development Bank earlier this year (Country Briefing 28 March
2017, Gabon Bridge over troubled water), plus support from the World Bank
(EUR 185mn) and the French Development Agency (EUR 75mn).
The IMF, other IFIs and bilateral Talks with the IMF were concluded quite swiftly. CEMAC members announced at
financing, coupled with the an emergency meeting in December that they would need to go to the IMF to
Eurobond tap, to cover Gabons preserve the current parity of the CFA franc (XAF) peg to the euro (EUR). Formal
large financing needs
talks began in February (according the IMF press release) and the programme was
concluded on 26 June. This contrasts with other Central African Economic and
Monetary Community (CEMAC) countries (Congo and Equatorial Guinea) that have
yet to reach an agreement with the IMF; debt, transparency and political issues might
explain the delays in both those cases.
This fast-track process highlights Gabons willingness to move ahead (it had
few alternatives given its high financing needs), and political willingness on the part
of Gabon and France to preserve the peg. France has supported the initiative and
even pushed for the IMF deal, despite strained relations with President Ali Bongo.
The IMF and international partners appear to have adopted a relatively lenient
approach towards Gabon: it has external debt arrears, and has been supported by
international financial institutions (IFIs) despite the general rule of no lending into
arrears.
Payment arrears appear to be larger than expected, highlighting the pressure

on public finances. While the headline fiscal deficit appears moderate, gross
financing needs so far in 2017 are large, at 14.5% of GDP. Arrears currently amount
to about 9.7% of GDP according to the IMF. This includes supplier and VAT arrears
(7.7% of GDP) but also and more worryingly arrears on official and commercial
external debt (2% of GDP). The IMF programme envisages that domestic arrears will
be cleared within four years and external arrears this year.
Figure 1: Gabon macroeconomic forecasts Figure 2: Higher deficits, higher debt

% GDP
2017 2018 2019 70 Fiscal balance 3

(RHS) 2
60
50 0
40 -2
Domestic debt
Policy rate (%)* 3.20 3.20 3.20 -3
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30
-4
USD-XAF* 538 517 538 20 -5
External debt -6
-7
Fiscal balance (% GDP) -4.6 -2.3 -2.0 0 -8
2014 2015 2016 2017F
The large accumulation of arrears Public debt has increased rapidly and the latest IMF data which includes the
illustrates the magnitude of the arrears puts the public debt-to-GDP ratio at 64% in 2016 (from 44.7% in 2015).
fiscal challenges Gabons debt ratios are now closer to those in other oil countries such as Angola.
The arrears situation also constrains the economic outlook. We expect economic
growth of only 1% in 2017 and a modest rebound to 3% in 2018 as the government
struggles to repay the private sector. Also, reduced public investment on the back of
more restrictive fiscal policy will impact growth.
Fiscal consolidation might prove The programme will focus mainly on fiscal consolidation, with fiscal adjustment
challenging but looks achievable equivalent to 2% of GDP in 2017. This looks achievable to us, although the wage bill
and oil subsidy reduction might prove controversial. This looks to be a less severe
fiscal adjustment than typically seen under such programmes. The fiscal deficit (on a
cash basis) is to be reduced to 4.6% in 2017 from 6.6% in 2016.
Most of the adjustment is to come on the spending side (1.7% of GDP) from
reductions in the wage bill and subsidies, and rationalisation of other current
spending. Capital spending has already been reduced significantly, so it will remain
flat (at 4.9% of GDP) to preserve economic growth. According to the programme,
capital spending could be reduced by 0.5% of GDP but only in the event of lower-
than-expected growth and revenues. On the revenue side, improved collection and
reduced tax exemptions should generate fiscal revenue gains of 0.7% in 2017.
Pressure on FX reserves to ease The current account deficit has widened significantly (to a forecast 10% of GDP
in 2017 from 5.6% in 2016), putting pressure on FX reserves. The current account
deficit should narrow this year (to 9.2% of GDP) helping to stabilise FX reserves.
Gabons international reserves declined to USD 704mn in May 2017 from USD 1.5bn
a year earlier (fiscal buffers have been eroded, with government deposits at the Bank
of Central African States amounting to only 2.5% of GDP at end-2016). The fact that
Gabon, and especially Cameroon (the largest CEMAC economy), are under IMF
programmes should improve the sustainability of the XAF peg with the EUR;
however, this will take time and countries will have to deliver on the fiscal front for the
pressure to ease.
Politics Easing tensions

Political outlook remains stable Political stability has prevailed despite controversial presidential elections in
August 2016. The post-electoral context has strained relations with some
international partners at the political level, but Gabon has continued to enjoy
financial support.
The president reshuffled the cabinet in August to incorporate some opposition

figures (an opposition member was also named vice president). The key ministers
(prime minister, ministers of finance and defence) remain in place. This is part of the
national dialogue with segments of the opposition to ease political tensions (however,
the main opposition figure, Jean Ping, refuses to participate). The government is also
considering an amnesty law to pardon protesters involved in post-electoral violence.
Legislative elections scheduled for July 2017 were postponed until April 2018. The
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postponement reduces the likelihood of political noise in the short term.
The Gambia Picking up

Economic outlook Still vulnerable
Emmanuel Kwapong, CFA +44 20 7885 5840 The economy is showing signs of a gradual recovery. Many of the variables that
Economist, Africa hampered growth in 2016 have dissipated. Improved rains this year should support
agricultural output following a poor season in 2016. The peaceful resolution of the
political impasse in January bodes well for the tourist industry, which was negatively
affected by the crisis. Confidence is up on improved FX liquidity and sharply declining
domestic interest rates. Nonetheless, downside risks remain given the economys
vulnerability to exogenous shocks. Lower-than-expected tourist arrivals in Q4-2017
(tourism accounts for 20.5% of GDP) or persistent flooding that severely impacts
agricultural output could drag growth lower.
Arbitration could delay further Dispute over oil blocks could stall exploration. In July, the government declined
oil-exploration activity to extend the oil exploration licence of Norwegian-listed African Petroleum
Corporation, citing the firms inability to fulfil its obligations under the agreement.
Since then the two parties have been in dispute, but African Petroleum announced in
September that it was preparing to formally commence arbitration. The disputed
blocks are believed to contain substantial oil reserves given their proximity to blocks
in neighbouring Senegal where significant oil discoveries have been made.
Arbitration will likely delay new investment and exploration in the two disputed oil
blocks, a setback to The Gambias oil-related ambitions.
Policy Monetary policy loosened

CBG has taken a very We lower our policy rate forecasts for 2017, 2018 and 2019 to 14%, 12.5% and
accommodative policy stance 12%, respectively (from 25%, 25% and 24% previously). The Central Bank of The
Gambia (CBG) has taken a very front-loaded, accommodative stance as it moves to
normalise monetary policy, easing the policy rate by a cumulative 800bps between
May and June. Sizeable deficit financing under the previous government and limited
monetary policy tools rendered monetary policy transmission largely ineffective,
requiring a relatively high policy rate. With inflation trending downwards and the new
government committed to fiscal discipline, we see room for another 100bps cut this
year at the November Monetary Policy Committee meeting. To further improve
monetary policy transmission, the CBG plans to introduce new policy tools, including
repos and overnight facilities to better manage liquidity and reduce interest rate
volatility around the policy rate.
Figure 1: The Gambia macroeconomic forecasts Figure 2: Monetary policy has been loosened significantly
% y/y
2017 2018 2019 25 Policy rate

15
Policy rate (%)* 14.00 12.50 12.00

Africa
10
USD-GMD* 48.70 53.40 57.30
5 CPI inflation

Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Jul-17
*end-period; Source: Central Bank of the Gambia, IMF, Standard Chartered Research Source: CBG, Thomson Reuters Datastream, Standard Chartered Research
Increased fiscal discipline and We now expect lower fiscal deficits of 3.2%, 4.5% and 5.1% for 2017, 2018 and
external funding should support a 2019, respectively, from (10%, 10% and 12.3% previously). While domestic revenue
narrower fiscal deficit is likely to remain relatively weak on sluggish economic activity, external budget
support should help close the funding gap. The government has also made
considerable efforts to keep to its commitment of a net domestic borrowing limit of
1% of GDP (from 11.4% in 2016). The domestic debt stock declined to 61.1% of
GDP in July 2017, from 67.1% at the same time last year.
Declining domestic interest rates should bolster fiscal consolidation. Latest

figures by the CBG indicate that yields on the 91-day, 182-day and 364-day T-bills
declined to 8%, 8.9% and 10.6%, respectively, in August, from 16.1%, 16.9% and
20.1% during the same period last year. Efforts to restructure the domestic debt
profile via issuance of longer-dated debt have helped ease short-term interest rates
and reduce rollover risk. Increased external budget support has also helped reduce
the governments demand for domestic financing. Given that interest payments
accounted for 42% of government revenue in 2016, declining interest rates should
reduce debt-service costs and create some fiscal space for crucial spending.
The external outlook is positive The external position has improved. Gross official reserves increased significantly
to a three-year high of 4.2 months of import cover in August. Available data indicates
that the balance of payments surplus more than tripled in the first six months of 2017
compared with H1-2016. This was largely due to improvements in the financial and
capital accounts. Nonetheless, the current account deficit also recorded a marginal
improvement, narrowing to USD 36.8mn in H1-2017 from USD 38.4mn a year earlier.
The start of the tourist season in Q4-2017 should further support the current account.
Politics Cracks in the coalition

There is uncertainty over the term of the ruling coalition that came into power
following a surprising win over former President Jammeh in the 2016 presidential
election. In forming the coalition ahead of the election, the seven opposition parties
agreed to a three-year term for the president. However, this is not allowed under the
constitution, which guarantees a five-year presidential term. At this point, it is unclear
how the coalition intends to enforce its self-imposed term limit.
The governments mandate has been strengthened. Legislative elections were

held on 6 April 2017, the first since the coalition government assumed office in
January. Although the ruling coalition secured an absolute majority, it contested the
elections along individual party lines. Of the seven parties included in the coalition,
three have no representation in parliament. Former President Jammehs party, the
Alliance for Patriotic Reorientation and Construction (APRC), lost its majority and
held on to just five of its 43 seats in the previous parliamentary election.
Market outlook GMD stability to continue

We expect the Gambian dalasi (GMD) to remain relatively stable for the remainder
of 2017. In May, the CBG rescinded the FX directive introduced in November 2016
that required commercial banks to sell 15% of their foreign exchange purchases to the
Africa
central bank. This has contributed to improved FX liquidity. FX inflows from multilateral
organisations have also helped rebuild international reserves. In August, reserves
were up 466% versus the start of the year.

Ghana IMF programme extension is positive

Economic outlook Improving
Razia Khan +44 20 7885 6914 The one-year extension of the IMF programme is positive for investor sentiment
Razia.Khan@sc.com
Chief Economist, Africa towards Ghana, boosting the likelihood of fiscal consolidation and a reduction in debt
levels. The aim of the Extended Credit Facility from the IMF is to restore Ghanas debt
sustainability. Given significant fiscal slippage in 2016 the fiscal deficit on a cash
basis widened to a revised 9.3% of GDP it would have been difficult for Ghana to
achieve programme objectives by April 2018, the original end date of the programme.
The IMF forecasts that Ghana will Ghanas growth outlook remains positive, despite real GDP growth slipping to
be one of the fastest-growing SSA 3.5% in 2016; this was the weakest in two decades, according to the IMF. We expect
economies in 2018 on rising oil and improving electricity production and rising oil and gas output to support growth this
gas production
year. Nonetheless, we lower our 2017 GDP growth forecast to 5.9% (from 6.3%) to
reflect weakness in the non-oil economy in Q1-2017; hydrocarbon-related activity
provided the main boost to growth. While decelerating inflation, higher real incomes,
and significant monetary easing are likely to lift non-oil activity, we now think the
growth impact will come with a longer lag. Headwinds from earlier policy tightening
necessitated by the IMF programme, and the fiscal adjustment required after
slippage in 2016, will continue to influence 2017 growth. In addition, NPLs related to
legacy energy debt are still dampening bank credit growth.
Efforts to rationalise Ghanas tax structure and introduce a more business-friendly

environment have improved the longer-term growth outlook; we expect a corporate
tax cut to be announced in the 2018 budget on 15 November.
Recent ruling on maritime boundary The 2018 growth outlook is much better. We raise our 2018 GDP growth forecast
dispute is positive for Ghana to 6.5% (from 6.2%) to reflect the growth boost from rising oil and gas production,
although we are still less optimistic than the IMF (8.9%) and the government (9.1%).
A recent ruling by the International Tribunal for the Law of Sea, settling a maritime
boundary dispute between Ghana and Cte dIvoire, is positive for Ghana. The new
boundary will not disrupt production at the TEN field, which remains within Ghanas
territory. Output from the field will remain at c.50 thousand barrels per day (kb/d) until
end-2017. New drilling should allow it to rise to c.80kb/d in 2018, adding to
production from the Jubilee and Sankofa fields. The use of gas for domestic power
production, and the partial privatisation of Ghanas distribution, should provide an
additional boost to growth.
Figure 1: Ghana macroeconomic forecasts Figure 2: Ghana has weathered the commodity shock well
Commodity prices, Jan 2010=100
2017 2018 2019 180

160
GDP grow th (real % y/y) 5.9 6.5 7.5 Gold
140
(USD/ounce)
100
Crude oil
Policy rate (%)* 19.50 17.50 16.50 80 (USD/bbl)
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USD-GHS* 4.60 5.35 5.80 60

40 Cocoa
(USD/t)

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
*end-period; Source: Standard Chartered Research Source: Thomson Reuters Datastream, Standard Chartered Research

Policy Unlocking private-sector credit growth

Ghana is expected to address Ghanas efforts to deal with energy-sector arrears will be closely followed in
energy-sector debts in Q4 Q4-2017. Energy-sector debts have contributed significantly to NPLs in the banking
sector. Resolution of these legacy debts is important to unlocking new credit growth.
The authorities hope to front-load the paying of these debts in order to stimulate new
lending and encourage faster economic growth. The IMF has stated that ongoing
debt restructuring efforts are helpful but are no substitute for better SOE
management and greater efforts to stem ongoing SOE financial losses.
New banking-sector capital Bank of Ghana (BoG) intervention in two insolvent banks in August is likely to
requirements are GHS-positive establish a sounder base for the banking-sector recovery in Q4 2017. The assets and
deposits of the two lenders, which failed to present recapitalisation plans to the BoG,
were assumed by the part-state-owned Ghana Commercial Bank. Plans to raise the
minimum capital requirement to GHS 400mn (from c.GHS 120mn) by December
through fresh capital injections and/or retained earnings are also expected to trigger
a wave of consolidation in the sector. The higher capital requirement is part of the
authorities plan to strengthen banking-system resilience and boost credit growth.
The banking-sector recapitalisation effort is expected to be GHS-positive, at least
initially. Dividend outflows from the banking sector may decline, while Ghana is likely
to attract new foreign investment.
We see a medium-term narrowing of The July supplementary budget lowered the 2017 fiscal deficit forecast to
the fiscal deficit, but not to levels 6.3% of GDP from 6.5%. Both revenue and spending targets were cut. We
projected by the IMF maintain our fiscal deficit forecast of 7.2% of GDP for this year, as we think
revenue projections still look optimistic. Moreover, the lack of budget flexibility in
some areas of spending may make it difficult for the authorities to cut spending in
line with further revenue undershooting. In the medium term, the extension of the
IMF programme and Ghanas adoption of a fiscal rule limiting the budget deficit to
3-5% a year are likely to generate better outcomes. Given debt service costs,
capping the deficit at 5.0% by 2018 (as proposed by the government) appears
ambitious. We now expect a deficit of 6.0% of GDP in 2018 (down from 6.5%
previously), narrowing to 5.0% of GDP by 2019.
T-bill yields, which reflected over- We still expect significant easing from the BoG, supported by lower inflation. We trim
exuberance earlier, have now our average CPI inflation forecasts to 11.6% for 2017 (from 11.8%) and to 9.4% for
corrected 2018 (9.7%, to reflect the latest available data. We now see a slower downtrend in T-
bill yields than we previously expected. We expect the 91-day T-bill yield to end 2017
at c.13% (11.2% previously). Increased demand from pension funds for longer-dated
bonds should cause local demand to soften at the front end of the curve. The local
bid had driven T-bill yields to unsustainably low levels earlier this year.
Africa

Kenya Election re-run

Economic outlook Election re-run to weigh on activity
Razia Khan +44 20 7885 6914
Razia.Khan@sc.com
The Supreme Court annulment of the 8 August presidential election result, a
Chief Economist, Africa first in Africa, means that a re-run has to be held by the end of October. The date for
the new poll has been set for 26 October, but uncertainty still surrounds the process.
The opposition National Super Alliance (NASA) says that it was not consulted on the
date for the new poll. NASA has demanded changes at the Independent Electoral
and Boundaries Commission (IEBC) and has asked for a formal probe of IEBC
officials involved in the election. While the Supreme Court decision annulling the
election result because of irregularities was viewed as a sign of Kenyas deepening
institutional strength, prolonged uncertainty in the run-up to the new poll risks
exacerbating the cyclical slowdown.
Kenyas cyclical slowdown may be Kenyas economy has already faced a number of stresses this year. Headwinds
exacerbated by new uncertainty to growth have included a drought in early 2017, a sharp slowdown in private-sector
credit growth after limits were imposed on banking-sector spreads, and a winding
down of activity ahead of the August election. The presidential election re-run is likely
to defer business decisions for even longer, pending greater political certainty.
Proposed measures to boost the economy, for example new legislation mitigating the
growth-negative aspects of the Banking Sector Amendment Act, may be delayed
until 2018. The need for fiscal consolidation and a likely slowdown in new
infrastructure projects may also take a toll on growth.
We maintain our conservative 2017 We maintain our conservative (and below-consensus) GDP growth forecast of 4.5%
growth forecast, and raise our 2018 for 2017, which factors in an extended election period and a potential run-off. We
forecast given improved rainfall raise our 2018 growth forecast to 4.6% (from 4.2%). The extended uncertainty
caused by drawn-out elections is likely to trigger a deeper effort to implement
growth-boosting measures. The authorities have announced a KES 103bn (USD
1bn) supplementary budget, to be tabled in late September. In addition to covering
the estimated KES 10bn cost of the new election, the budget will increase spending
on various benefit programmes, public secondary school education and other
election commitments.
A faster-than-expected recovery from drought should also lift 2018 growth. Finally,
there are tentative signs of a turning point in private-sector credit growth, which
should strengthen further in 2018. Expected changes to the banking legislation may
Figure 1: Kenya macroeconomic forecasts Figure 2: We see a turning point for credit growth
Private-sector credit % y/y (RHS); GDP % y/y
2017 2018 2019 12 GDP 40
35
Private-sector 30
8 credit (RHS)
Policy rate (%)* 9.50 9.00 10.00 6 20

Africa
15
USD-KES* 104.50 107.70 109.00 4
10
5
Fiscal balance (% GDP)** -10.2 -7.8 -6.9 0 0

Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Q1-15 Q1-16 Q1-17
*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: Bank of Kenya, KNBS, Standard Chartered Research

be helping credit growth to rebound from recent lows. This effect is likely to be more
pronounced after the election.
A recovery in 2018 will require that elections proceed peacefully, with the
outcome accepted by all parties. We do not expect a repeat of the aftermath of the
end-2007 election, which saw GDP growth slump to 0.2% in 2008 from 6.9% in 2007.
Given weak demand, we see a more We expect a narrower current account (C/A) deficit in the years ahead, reflecting
gradual pace of KES depreciation softer demand and a slowdown in infrastructure payments. Weak import growth
should support the Kenyan shilling (KES); we recently revised down our medium-term
USD-KES projections. FX reserves of USD 7.5bn (five months of import cover) are
healthy, despite the anticipated repayment of a maturing USD 750mn syndicated loan
in October (which may also involve a refinancing). Kenya also has a Stand-By
Arrangement with the IMF, which would make another USD 1.5bn available if needed.
Discussions on a renewal of the programme, which ends in March 2018, will soon
begin. Markets are likely to view a new IMF programme as necessary for much-
needed medium-term fiscal consolidation, although a Stand-By Arrangement will have
less influence than an Extended Credit Facility with more regular disbursements.
All eyes on fiscal policy and debt sustainability

Fiscal consolidation is needed to The need for meaningful fiscal consolidation remains a key concern. Weak
bring down debt levels revenue collection before the election, drought-related spending, and higher public-
sector wage demands contributed to an overshooting of the fiscal deficit in FY17
(ended 30 June 2017). The government estimated the FY17 deficit at 10.2% of GDP
including grants (10.9% excluding grants) in its July pre-election fiscal report, up from
an estimate of c.7.9% in June.
The governments planned fiscal consolidation targeting a deficit of 6.1% of GDP in

FY18 may be difficult to achieve. Although the Treasury plans to finance the
September 2017 supplementary budget with savings through austerity measures to
keep domestic borrowing below its ceiling, meaningful spending cuts will be difficult
amid a cyclical slowdown and weak revenue momentum. Cuts in development
expenditure would be an additional negative for growth. We raise our fiscal deficit
forecasts for FY18 and FY19 to 7.8% and 6.9%, respectively (from 7.2% and 6.0%)
to reflect the additional spending and a likely increase in debt-service costs.
We see risks to our call of a 50bps Given the cyclical slowdown, monetary policy may have to provide more support; this
rate cut in November, and expect has been difficult in the recent past because of drought-related food price pressures
front-loaded easing in 2018 and uncertain monetary policy transmission following loan rate caps. We maintain
our forecast of a 50bps central bank rate (CBR) cut in November, although we see
risks to this call, as inflation will still likely be relatively high at c. 7.5% by the year-
end. We now expect more front-loaded easing in 2018. We forecast a 50bps CBR cut
in March 2018 (versus our previous forecast of May), and then expect the CBR to
remain on hold at 9% through end-2018. A cyclical recovery in 2019 should bring
resumed tightening; we raise our end-2019 CBR forecast to 10% (from 9%), given
our expectation of stronger credit growth by then, as well as higher inflation.
Africa
We lower our near-term inflation forecasts to reflect the rapid impact that drought
relief measures have already had on food prices. We now expect CPI inflation to
average 8.8% in 2017 (versus our previous forecast of 10.8%) and 5.6% in 2018
(7.1%), although CPI should rise more strongly to 7.3% in 2019 (7.1%).

Mauritius On unsteady ground

Economic outlook Export performance remains weak
Sarah Baynton-Glen, CFA +44 20 7885 2330 Risks to the outlook remain, despite slightly better momentum recently.
Sarah.Baynton-Glen@sc.com
Economist, Africa Expansionary fiscal policy and the resulting improvement in construction activity
should boost activity in the coming months. Construction-sector growth has now
been positive for three consecutive quarters, following three years of consistently
negative performance. Tourism and financial intermediation are both likely to
remain positive growth drivers. However, export industries have been hit by both
weaker international demand and a strong Mauritian rupee (MUR). The
authorities are cautious about the growth outlook and as a result have kept
monetary policy loose.
As a small, open economy, external factors are important for Mauritius growth
trajectory. This is particularly so given limited room to increase spending
domestically. The budget for FY18 (year ending June 2018) envisages a 15%
increase in government expenditure, with capex accounting for 14% of it. Recurrent
expenditure still forms the bulk of expenditure, so improving tax revenue will need to
be a key focus to enable higher development expenditure. This is especially
important given plans to increase infrastructure spending between FY17-FY20 while
at the same time undertaking fiscal consolidation. The Ministry of Finance expects
the budget deficit to decline to 3.2% in FY18 from 3.5% in FY17.
Trade and current account deficits External imbalances are likely to widen despite improved growth prospects.
are likely to expand on weak Strong tourism receipts helped to drive the current account deficit lower in 2016 but
exports and strong import demand the positive impact is likely to be offset by a wider trade deficit in 2017 due to
higher import demand. Mauritius is heavily import reliant. Stronger growth, higher
domestic demand and government investment will result in stronger import
demand. In Q2 imports rose 10.4% y/y, largely as a result of higher fuel and capital
goods imports.
At the same time, export performance has been poor. Manufactured and sugar
exports have fallen due to lower international sugar prices and a strong MUR. Tax
measures were announced in the budget to support export sectors, with the tax on
export profits reduced to 3% from 15%. In September, Prime Minister Pravind
Jugnauth (who is also the finance minister) announced a package of measures,
Figure 1: Mauritius macroeconomic forecasts Figure 2: Trade balance has widened with higher imports
and weak exports
MUR bn
2017 2018 2019 30 Exports

20
10
-10
Policy rate (%)* 3.50 4.00 4.00
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-20
USD-MUR* 33.00 35.00 36.00
-30

Imports Balance
-50
Fiscal balance (% GDP) -3.5 -3.2 -3.0 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17
*end-period; Source: Standard Chartered Research Source: Stats Mauritius, Standard Chartered Research

scheduled to last for six months, to support exporters. Support for sugar exporters
includes assistance to sugar planters and millers of MUR 1,250 per tonne of sugar;
for other exporters support is based on the difference between the rate at which an
exporter exchanged their USD and a reference rate of 34.5, to a maximum amount of
2.5 rupees per USD. This should help promote activity in export industries and
improve profitability, although the government has not announced how it will fund this
and whether the six-month programme has a monetary limit.
Policy Growth is the biggest concern

Loose monetary policy should The Bank of Mauritius (BoM) has eased policy to support growth. Although the
support growth, but upside inflation economy has improved so far in 2017, the Monetary Policy Committee remains
surprises remain a risk concerned about external factors. Despite IMF recommendations and our own
expectations that rates may need to be tightened to deal with inflationary
pressures, the BoM cut its policy rate by 50bps to 3.5% at its meeting in August. As
a result, we now expect the BoM to remain on hold for the remainder of 2017; we
lower our end-2017 policy rate forecast to 3.5% from 4.4% and our end-2018
forecast to 4.0% from 4.5%.
Real interest rates remain negative, with inflation at 4.6% y/y in August. Inflation
picked up on the back of an increase in excise duties on alcohol and tobacco (of
5% and 10%, respectively) introduced in the budget, as well as higher fuel import
prices and peaked at 6.4% in June. The BoM expects these effects to be transitory.
While we expect inflation to remain around 5% in Q4 given a high base, Mauritius
is also susceptible to risks from global prices for food and fuel that could push
imported prices higher. Given higher-than-expected price pressures, we increase
our average CPI forecast for 2017 to 4.1% (from 2.5% previously), and for 2018 to
3.4% from 2.3%.
Politics Noise ahead of 2019 elections

Pravind Jugnauth assumed the role of prime minister after his fathers
resignation in January 2017. Although the move was in line with the constitution,
the opposition has been vocal in questioning the legitimacy of Jugnauths position.
Political noise is likely to continue ahead of elections in 2019.
Market outlook MUR overvaluation

MUR strength has impacted on The MUR has appreciated against the USD, impacting negatively on Mauritius
export-focused industries competitiveness. For the remainder of 2017 we expect the MUR to remain relatively
stable against the USD, but EUR appreciation may result in further MUR strength
against the USD through 2018.
Africa

Mozambique A bridge too far

Policy Some rebalancing, but no restructuring yet
Victor Lopes +44 20 7885 2110 The outlook for Mozambique is dependent on the resumption of an IMF
Victor.Lopes@sc.com
Senior Economist, Africa programme. Prospects for this seem distant given the lack of progress on debt
restructuring. The IMF cannot enter into a programme with a country deemed to have
unsustainable debt, which is the case for Mozambique. Its debt-to-GDP ratio stood at
120% in 2016. Ongoing talks with external private creditors on commercial external
debt restructuring are likely to take time; talks began about a year ago, with little
progress so far (see On the Ground, 14 November 2016, Mozambique Mayday,
mayday). According to the World Bank, external debt arrears currently amount to
USD 590mn.
Considerable uncertainty remains around the scope and terms of restructuring.

So far, the authorities have hinted that they want to restructure all external debt in
default into a new instrument. This debt includes government-guaranteed bank loans
for two SOEs Mozambique Asset Management (MAM) and Proindicus and its
sovereign Eurobond repayments. In any case, a haircut looks likely.
An IMF deal still appears far away The possibility that the Eurobond will be treated the same way as the bank
given the absence of progress on loans is likely to face strong resistance from Eurobond holders. They claim that
debt restructuring and issues the government has the capacity to service the Eurobond and that it should not be
regarding the SOE audit
treated in the same way as SOE debt, as they consider the latter to be illegitimate
(many domestic civil society groups hold the same view).
The audit of SOEs is likely to remain a contentious issue. While there has been
little progress on the debt front, there have been some developments on the audit
front. An international audit of undisclosed SOE loans has long been a key condition
of international donors. The audit summary was published by Kroll in June. The IMF
subsequently said in a press statement that critical information gaps remain
unaddressed regarding the use of loan proceeds; the swift resumption of an IMF
programme therefore looks unlikely. It also remains to be seen whether the
international audit triggers more political tensions.
The budget will remain under pressure in the absence of international donors
until a deal is reached with the IMF. The government has had to reduce capital
spending, which is hurting growth. It has made less effort to reduce current spending
Figure 1: Mozambique macroeconomic forecasts Figure 2: Monetary stabilisation but still many challenges
CPI (% y/y) and USD-MZN
2017 2018 2019 90 30

80
70

50
Policy rate (%)* 25.00 17.00 15.00 15
40
Africa
MZN
USD-MZN* 66.00 62.00 60.00 30 10
20
CPI (RHS) 5
0 0
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

cutting the wage bill would be politically sensitive ahead of the 2019 national
elections although a reduction in subsidies is underway. On a more positive note,
Mozambiques external and monetary positions have improved significantly.
Lower current account deficit, lower A final investment decision on a key gas project has been signed after
inflation and currency appreciation numerous delays. This is a game-changer for Mozambiques medium-term economic
are key positives, but public outlook, with significant foreign direct investment likely to support growth. Gas
finances remain under stress
exports are not expected before 2022, however. The sale of a stake in one of the key
projects to a company seen as having significant expertise in such projects is
positive. More importantly for short-term creditworthiness, the sale could potentially
generate windfall gains equivalent to 2.5-4.5% of GDP in the form of capital gains
tax. However, considerable uncertainty remains on the exact amount of capital gains
tax and the governments intentions for use of the proceeds.
The metical has appreciated 14% this year, helping to lower inflation following
significant monetary tightening in 2016. Inflation peaked at 27% in November 2016
and slowed to 14.1% in August 2017, allowing the central bank to reduce the policy
rate to 22.5% this year. Recent increases in utility tariffs might prevent a further
decline in inflation, and real rates are likely to remain elevated.
Improvements on the external side have supported the currency. The trade
balance has improved thanks to a slowdown in imports (a reflection of the economic
crisis) and higher extractive industry exports as aluminium and coal prices have
recovered. The current account deficit narrowed to USD 947mn in H1-2017 from
USD 2.4bn in H1-2016, according to the latest data from the Bank of Mozambique.
As a result, we lower our 2017 current account deficit forecast to 32.5% of GDP from
45%. The fact that the government has not been servicing debt also helped FX
reserves to recover to USD 2.4bn in June from USD 2bn at end-2016. With currency
appreciation the debt ratio might improve to slightly below 100%, but it remains
unsustainable, in our view.
A modest rebound in growth There are signs of a modest pick-up in the economy, with GDP growth rising to
is likely 3% in Q2 from 2.9% in Q1-2017 and 1.1% in Q4-2016. Even so, economic activity
remains subdued by historical standards. GDP growth of 3.8% in 2016 was the
lowest in decades. A modest rebound to 4% in 2017 looks likely as low public
investment, arrears and low confidence continue to constrain economic activity.
Politics Noise ahead of elections

Political noise will increase ahead of municipal elections due in 2018. The ruling
Frelimo party will be conscious that its recent poor economic management at the
national level might impact the vote at the local level; it may therefore be nervous
about losing key cities to the opposition. The next general election is due in 2019.
Africa

Namibia Austerity hits

Economic outlook Limited bright spots
Sarah Baynton-Glen, CFA +44 20 7885 2330 Economic weakness persists. We think growth could improve marginally in the
Economist, Africa second half of 2017 following a very weak H1 GDP declined 2.7% y/y in Q1, and
contracted by 1.7% in Q2. However, the growth rates Namibia achieved as recently
as 2015 look increasingly out of reach. Growth is unlikely to rebound towards the 6%
recorded in 2015 any time soon given fiscal constraints and a weak domestic and
regional economy. We lower our 2017 GDP forecast to 0.7% and that for 2018 to
2.5% (from 2.5% and 5.0% previously).
The Bank of Namibia noted that H1-2017 had been weak at its August meeting.
Construction was negatively impacted by lower government spending, while other
sectors including manufacturing, wholesale and retail trade and transport performed
poorly given weak domestic demand. Private-sector credit extension slowed to 8.5%
on average in H1-2017 compared with 12.5% in the same period a year prior.
Nonetheless, we expect more positive economic momentum in the coming months.

As with South Africa, Namibia should benefit from a positive base effect as the
agricultural sector recovers from drought. Mining is also likely to improve, both as a
result of better global conditions and higher production from the Husab uranium
mine, following contractions in the sector since 2013. Higher production will likely
push uranium exports into Namibias top 10 export products. However, with primary
industries accounting for only c.17.5% of GDP, strong growth in these sectors will not
be enough to meaningfully boost overall GDP numbers.
Policy Austere times

Sharp development expenditure Austerity will continue. Moodys cut Namibias rating to sub-investment grade in
cuts have weighed on the domestic August in response to the authorities increasing lack of fiscal flexibility. Capital
economy expenditure will remain under pressure as long as sticky recurrent expenditure forms
such a substantial portion of total expenditure. The authorities have already cut
capital expenditure aggressively and this has been the driver of weak construction
sector performance. Capex was reduced to NAD 6.7bn in the FY18 budget from
NAD 11.1bn in the FY16 budget. In contrast, recurrent expenditure continues to
grow, particularly salaries. Wages account for 49% of expenditure in the FY18
budget (c.NAD 31bn), up from NAD 23bn in FY16.
Figure 1: Namibia macroeconomic forecasts Figure 2: Deficit targets have consistently been missed
Fiscal deficit targets and actual (% of GDP)
0
2017 2018 2019
-1
GDP grow th (real % y/y) 0.7 2.5 4.8 -2
-3
-5
Policy rate (%)* 6.50 6.25 6.25
Africa
-6 Budget
Actual
USD-NAD* 14.20 14.60 14.80 -7
-8
-10
FY13 FY14 FY15 FY16 FY17 FY18
*end-period; Source: Standard Chartered Research Source: Ministry of Finance, Standard Chartered Research

Heavy reliance on falling Southern African Customs Union (SACU) revenues and an
exceptionally weak domestic economic performance are further risks to the
authorities ambitious 9.5% y/y targeted improvement in revenue, as well as their
projected 3.6% budget deficit for FY18. The authorities growth forecast of 2.5% for
2017 looks optimistic to us. Regular overshooting of deficit targets was a key driver of
Moodys rating action. Fitch is not bound by a rating timetable but a downgrade in the
coming months is possible, and would see Namibia lose its IG rating.
Namibias monetary policy will Further rate cuts ahead. We now expect the Bank of Namibia to cut its repo rate
continue to track that of South further following a 25bps cut to 6.75% at its meeting in August, as the Bank of
Africa given the peg
Namibia continues to track South African Reserve Bank (SARB) policy. We expect a
further 25bps cut, likely in December 2017 and reduce our year-end forecast to 6.5%
from 7.25% previously, in line with our expectation of a SARB cut in November. We
also now expect the easing cycle to continue through 2018 and lower our end-2018
forecast to 6.25% from 7.25%. Namibias economy has performed poorly so far in
2017. Inflation continues to broadly track South Africas as imports from the latter
form the bulk of Namibias imports (c. 55% of the total). Softer food prices as the
drought recedes have driven inflation lower. Inflation is likely to ease sharply,
particularly in the first two months of 2018 due to a high base effect from drought. As
a result we lower our 2017 inflation forecast to 6.3% from 6.9% previously and adjust
our 2018 forecast marginally higher to 5.4% from 5.2%.
Politics Increased political risk

Political noise is increasing ahead of the SWAPO party congress in December.
President Hage Geingob is likely to be chosen as the ruling partys candidate at the
party congress, ahead of the 2019 presidential election. Fiscal risks will also be
elevated in the coming years, with the possibility of spending over-runs ahead of the
election.
Market outlook Stronger buffers

FX reserves boosted by inflows Given its peg to the South African rand, the Namibian dollar (NAD) remains susceptible
to global risk sentiment, as well as South Africas domestic political developments.
FX reserves have improved markedly, rising to USD 2.5bn (5.5 months import
cover) in August from USD 1.7bn at end-June. This is due to repatriation of funds
by financial institutions from South Africa (c.NAD 2bn) and inflows from the African
Development Bank (AfDB). In May, the AfDB issued a NAD 3bn (USD 226.5bn)
credit line to Namibia to provide budget support. The government has said that it
expects to receive an additional NAD 3bn in the next year from the AfDB, as well
as NAD 4bn for development projects, although the AfDB has not publicly
confirmed this.
Africa

Nigeria Emergence from recession disappoints

Positive growth after five quarters of contraction
Razia Khan +44 20 7885 6914 Despite the economys emergence from recession in Q2-2017, we lower our
Razia.Khan@sc.com
Chief Economist, Africa 2017 growth forecast to 1.2% (from 2.4%). Headline growth of 0.6% y/y in Q2
followed five consecutive quarters of contraction. Despite this seemingly good news,
Q1-2017 growth was revised down to -0.9% y/y from -0.5%. The oil sector finally
returned to positive growth in Q2, expanding 1.6% y/y (less than we expected), but
the data also revealed slowing momentum in non-oil GDP, which represents more
than 90% of the economy. We still expect growth to accelerate in H2-2017, but the
weak starting point in H1 will weigh on full-year growth.
NSE has rallied since FX reforms Surprising signs of weakness in the Q2 GDP print suggest that real economic
were initiated, but non-oil GDP performance has yet to catch up with financial-sector exuberance triggered by better
slowed in Q2 FX availability. Agriculture growth slowed from previous quarters, the trade sector
contracted, and construction growth was almost flat (suggesting limited execution of
the federal governments capital budget even after considerable external
fundraising). Manufacturing momentum weakened, dragged down by a contraction in
the cement sub-sector.
These were surprising outcomes given the reduction of the FX demand backlog from
late February and deeper FX market reforms: a new Investor and Exporter (I&E)
window was established in April. We expect the lagged impact of this to lead to
improved outcomes in H2-2017. In addition, Paris Club refunds to state governments
for the payment of salary and pension arrears should boost aggregate demand.
However, the Nigerian economy continues to perform below its potential.
We lower our 2018 GDP forecast to 3.5% (4.1% previously). We raise our 2019
forecast to 4.1% (from 3.5%), as the base is now weaker and early elections in
February 2019 should have a less pronounced impact on full-year activity.
OPEC production cap of 1.8mb/d is Questions over Nigerias compliance with a new round of OPEC production
likely to affect export growth cuts have focused attention on the current account (C/A) outlook. The 2016 C/A
surplus was largely driven by weak FX availability and a forced contraction in import
demand. Import demand is likely to grow as the economy recovers and execution of
the capital expenditure budget improves; to date, this has been delayed.
Figure 1: Nigeria macroeconomic forecasts Figure 2: Monetisation of the deficit poses risk to CPI
CBN claims on federal govt, NGN bn (LHS), CPI % y/y (RHS)
6,000 CPI 20
2017 2018 2019
5,000 18
4,000
14
CPI (% annual average) 16.5 9.9 7.1 3,000 12
2,000 10
Policy rate (%)* 14.00 11.00 11.00
Africa
1,000 8
USD-NGN* 365.0 420.0 430.0 6
0
Claims on 4
Current account balance (% GDP) 0.6 -1.2 -2.0 -1,000 federal 2
government
-2,000 0
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17
*end-period; Source: Standard Chartered Research Source: CBN, Bloomberg, Standard Chartered Research

Given oil production shortfalls due to Niger Delta militancy, Nigeria was exempted
from the first round of OPEC production cuts. Under a second round of cuts, Nigeria
will cap production at 1.8mn barrels per day (mb/d) once output recovers to this level.
Crude production is currently estimated at c.1.63mb/d, with crude and condensate
production totalling c.2mb/d (condensate is not subject to an OPEC quota).
Compliance with future OPEC quotas a new deal for the post-March 2018 period
must still be worked out may affect export growth. Compliance with the new OPEC
production cap will also have fiscal implications, as Nigerias 2017 budget assumes
output of 2.2mb/d. We amend our C/A balance forecasts to +0.6 for 2017 (from
+0.3%) and to -1.2% for 2018 (from -1.8%) given our expectations of a weaker
economic recovery and lower import demand. Capped oil export growth will likely see
the current account moving into deficit from 2018.
Fiscal stress, monetary accommodation

CBN monetisation of the deficit Inflation has decelerated but more slowly than we expected, especially given
triggers concerns; while inflation significant Nigerian naira (NGN) appreciation. Parallel-market USD-NGN currently
has slowed, it is sticky trades in a 360-370 range, down from levels above 500 before the CBN initiated
retail FX sales in February. Corporate participants in CBN FX auctions can access
lower rates (c.328). Yet inflation has not reflected cheaper FX availability. Sticky
food-price inflation, partly as a result of security issues, may be to blame.
Technically, broad money supply contracted in July 2017, reflecting negative y/y
growth in private-sector credit (the base was affected by the July 2016 NGN
devaluation). Downward rigidity in inflation may be related to CBN monetisation of
the fiscal deficit. Left unchecked, this monetisation might pose a risk to our year-end
inflation projection of just above 15%. We see an even sharper fall in inflation in
2018, with CPI moderating to single digits by June.
We expect the CBN to hold its policy rate at 14% for now, with cuts of 100bps each
(as inflation improves demonstrably) at the May, July and November 2018 MPC
meetings. However, we see a risk that concern over weak private-sector credit
growth and the high cost of government debt service issues already raised by
several MPC members may prompt earlier easing.
Finance ministry to focus on Fiscal revenue mobilisation has been difficult. The cumulative fiscal deficit in H1-
reducing debt-service costs 2017 deepened to NGN 2.51tn (from NGN 1.21tn in H1-2016). Debt-service costs
are elevated given high domestic interest rates aimed at stabilising the exchange
rate, and a growing debt burden. While most measures estimate these costs at
c.40% of budgeted revenue in 2017, our estimate based on revenue undershooting
the target considerably is over 60%. Tax reforms are a step in the right direction,
but weak economic momentum and prior FX policy bottlenecks have inhibited
structural improvements in revenue collection. This should now change, but only
gradually. A stable official FX policy will likely limit revenue gains from
NGN depreciation.
Government plans to shift the focus to external borrowing are likely to cap
domestic debt issuance and bring down debt-service costs near-term. In August, the
finance ministry announced plans to refinance USD 3bn worth of maturing local-
currency debt by issuing new Eurobonds. While external borrowing may provide a
near-term boost to FX reserves, the lack of more organic means of FX reserve
accumulation is a concern. Even with lower oil prices, Nigeria remains overly
dependent on a single export commodity. Moreover, external borrowing, rather than
Africa
oil earnings, appears to have had a bigger impact on FX reserve accumulation

highlighting Nigerias fundamental vulnerability.
In line with our new FX and growth assumptions, we raise our 2018 and 2019 fiscal
deficit projections to 4.0% and 3.8%, respectively (3.8% and 4.2% prior).

Senegal A job half done

Economic outlook Strong growth momentum
Victor Lopes +44 20 7885 2110 Senegals economic momentum continues. The economic activity index (which
Victor.Lopes@sc.com
Senior Economist, Africa measures the performance of economic sectors excluding agriculture) increased
12.2% y/y in July, and we expect another impressive growth rate in 2017. We
maintain our 6.5% forecast, but see a possibility of even higher growth. The IMF has
extended its current Policy Support Instrument by one year and will therefore
continue to monitor government policies; the latest IMF review was relatively positive.
Growth, fiscal and current account dynamics are favourable, but the debt trajectory
has been disappointing.
Policy Lower deficit, higher debt

While fiscal deficit reduction has Once again, the debt ratio appears higher than initially thought despite the fiscal
been impressive, the debt trajectory consolidation progress. In our previous Global Focus Swans bulls and bears, we
has disappointed expected debt ratios to stabilise at 57% of GDP in 2017 but new data from the IMF
(taking into account the latest Eurobond issuance) puts the debt-to-GDP ratio at
62.1% in 2017 (and 60.6% in 2016). External debt service has increased significantly
to 16.1% of government revenue in 2017, from 14% in 2016 and 11% in 2015 (this is
still manageable and better than most Sub-Saharan African SSA countries, but is
now higher than Cote dIvoire for example). That said, debt is still at low risk of
distress according to the latest IMF debt sustainability analysis.
Full fiscal consolidation requires Higher debt despite a lower fiscal deficit is puzzling, but the latest IMF review
lowering the debt ratios sheds light on this. For 2016 and 2017, it is mostly because despite lower deficits,
overall financing needs increased owing to liabilities incurred from the loss-making
Post Office (equivalent to 0.4% of GDP in 2016), the civil service pensions deficit
(0.2% of GDP in 2016) and, above all, because of the settlement of past obligations
(unspent appropriation from past budgets increased financing needs by 1% of GDP
in 2016). Reforms are underway to reduce these additional sources of borrowing in
2017 and 2018 and eliminate them by 2019.
Fiscal consolidation includes reducing both government deficits and debt accumulation.
When it comes to the headline reduction of its fiscal deficit, Senegal stands out in SSA,
but more meaningful fiscal consolidation has yet to be achieved. The debt-to-GDP ratio
is likely to peak in 2017 before stabilising and progressively declining as the
governments Public Financial Management reforms bear fruit.
Figure 1: Senegal macroeconomic forecasts Figure 2: Incomplete fiscal consolidation

Fiscal balance and debt ratios, % of GDP
2017 2018 2019 0 63

62
GDP grow th (real % y/y) 6.5 6.5 6.5 -1
61
CPI (% annual average) 1.5 1.5 1.5 -2 60

59
Policy rate (%)* 4.50 4.50 4.50 -3
Fiscal balance 58
Africa
USD-XOF* 538 517 538 -4 57

Debt to GDP 56
Current account balance (% GDP) -5.8 -6.0 -6.0 -5 (RHS)
55
-6 54
2015 2016 2017F 2018F

While challenging, we think the Reducing the deficit to 3.7% of GDP this year seems achievable. Fiscal revenue
2017 fiscal deficit target can still performance should remain solid thanks to strong economic growth, the introduction
be met of new taxes and fewer tax exemptions. However, the overall revenue-to-GDP ratio is
likely to decline in 2017, given the high base in 2016 owing to certain windfall
revenues, e.g., from telecom licences. So most of the deficit narrowing will have to
come on the spending side. In nominal terms we expect spending to remain flat.
According to MoF data, from January to July 2017 spending increased by 21.7%.
This is mainly due to an increase in capital spending (+61%), as current spending
(+3%) is roughly in line with targets. The overall fiscal target can still be met as it
appears that a large share of the capital spending was frontloaded.
Stronger external position Current account deficit improvement is driven by the improving trade balance
on low oil prices and lower food imports. As a result, we revise our current
account deficit projection to 5.8% of GDP in 2017 and 6.0% in 2018 and 2019 (from
8% previously in 2017 and 2018 and 7.5% in 2019). The current account deficit is
likely to remain broadly in line with that posted in 2016. The overall balance of
payments position is set to improve on the back of the FDI pick-up and the USD
1.1bn Eurobond issuance this year. Senegals better external position will therefore
contribute to maintaining FX reserves at a healthy level in the West African Economic
and Monetary Union (WAEMU) and contribute to the sustainability of the CFA franc
(XOF) peg to the euro (EUR). Senegals reserves are likely to increase to USD 2.3bn
this year.
Politics New government, same policies

Large victory for the ruling coalition The ruling coalition, Benno Bokk Yakaar (BBY), won the legislative elections
at the legislative elections held at the end of July, gaining 125 of the 165 seats. The governments economic
track record and the divided opposition made for a relatively easy victory, despite
initial concerns that discontent within the coalition over President Macky Salls
broken promise (he will serve a seven-year mandate despite promising to reduce it
to five years) would undermine its support. This victory will strengthen Macky Salls
position ahead of the 2019 presidential election.
The president reshuffled the government following the elections, but kept the prime
minister in place he led the coalition in the election; the finance minister and budget
minister also remain in place given successful economic policies so far. Changes in
several portfolios (six ministers left) mainly reflect the president gearing up for the
2019 election. The election should not call into question the consistency of current
economic policy; however, after several years of fiscal consolidation further progress
here is likely to be limited.
Market outlook Still positive

There is little pressure on the XOF peg to the EUR. Senegal is the second-largest
economy in the WAEMU after Cte dIvoire and its current positive dynamics support
the peg. While debt ratios are higher than expected, they are likely to stabilise going
forward. Twin deficits are low and growth remains strong.
Africa

Sierra Leone Marching on

Economic outlook Growth should remain strong
Emmanuel Kwapong, CFA +44 20 7885 5840 Sierra Leones growth outlook remains positive. Increased iron ore production
Economist, Africa coupled with a surge in iron ore prices should boost growth considerably in 2017;
2016 growth was revised up to 6.1%, from an initial 4.9% on strong iron ore output.
The non-iron ore economy is also likely to continue its gradual recovery following
significant FDI flows into agriculture and energy. Improved rainfall is supportive of
agricultural output, although flooding in some areas could have an adverse impact on
the sectors output.
Economic activity is likely to be A recent mudslide in the capital, Freetown, poses significant downside risk to growth.
impacted by the recent mudslide At the time of writing, reports indicate that more than 1,000 people were killed by the
mudslide in mid-August. This is likely to impact economic activity in the capital where
more than half of the urban population resides and which accounts for a significant
proportion of Sierra Leones GDP. Emergency government spending in response to
the disaster may also negatively impact ongoing fiscal consolidation efforts.
The external position should benefit from rising iron ore prices. Iron ore prices
rose c.32% y/y in September, averaging USD 74/t YTD from USD 58/t in 2016. While
mining data for 2017 is not yet available, the IMF projects that Sierra Leones iron ore
output will increase by 45% y/y in 2017 following the resumption of production in
February 2016. Donor inflows in response to the August mudslide should also have a
favourable impact on the current account balance.
Policy IMF programme to deepen reform

A new IMF programme provides The governments request for a new IMF programme signals a continued
additional time to achieve deep commitment to reform. In June 2017, the IMF Board approved a new three-year
reforms Extended Credit Facility (ECF) for Sierra Leone following the completion of the
previous ECF arrangement in 2016. The government had made notable progress
towards restoring fiscal stability under the previous ECF but the dual shocks of Ebola
and the collapse of iron ore prices hindered the programmes success. A new three-
year ECF should help maintain the reform momentum and consolidate progress
made under the previous programme.
Figure 1: Sierra Leone macroeconomic forecasts Figure 2: Iron ore prices have rebounded
Iron ore, USD/t
2017 2018 2019 95
Policy rate (%)* 15.00 17.00 14.00 65

Africa
USD-SLL* 8,156 9,031 9,672 55
Current account balance (% GDP)** -16.5 -16.1 -14.4 45
35
Fiscal balance (% GDP) 6.6 5.8 5.5
Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17
*end-period; **non-iron ore GDP; Source: IMF, World Bank, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Lower receipts and rising We now expect wider fiscal deficits and revise our fiscal deficit forecasts to 6.6%,
expenditure are likely to drive fiscal 5.8% and 5.5% for 2017, 2018, and 2019, respectively (from 3.9%, 3.1% and 3.0%
deterioration previously). We had expected the complete removal of fuel subsidies by Q2-2017,
following initial implementation of fuel subsidy reforms in November 2016 that
pushed pump prices up by 60%. We now think that this is unlikely to happen until
H2-2018 given the presidential election scheduled for March 2018. Raising fuel
prices soon after the recent mudslide disaster may stoke social unrest. On the
expenditure side, mudslide-related emergency government spending, particularly in
relation to government plans to relocate thousands of displaced people, will put
significant pressure on fiscal performance.
Tighter control of expenditure is key. The fiscal deficit for 2016 was 8.3% against
a target of 4.6%. This was largely the result of higher-than-budgeted spending on
goods and services, and domestically financed capital projects in H2-2016. Rapid
implementation of the Public Financial Management (PFM) law that provides greater
transparency and tighter control over public finances should help reduce the risk of
future expenditure overruns.
A tight monetary policy stance is We raise our policy rate forecasts to 15%, 17%, and 14% for 2017, 2018 and
required to ease inflation pressures 2019, respectively (from 11.5%, 10.0%, and 9.0% previously). We expect hikes of
100bps each at the September and December MPC meetings. While inflation has
trended downwards recently (at 19.2% y/y in June after peaking at 20.2% y/y in
March), risks remain tilted to the upside as prices remain pressured. The lag effect of
significant FX depreciation is likely to keep inflation elevated, although the onset of
the harvest season from August should provide some reprieve. Inflation is likely to
remain in double digits until H2-2018.
Politics Presidential election draws nearer

Political activity is heating up ahead of the election in March 2018. Sierra Leone
will have a new president for the first time in over a decade following the election, as
President Koroma of the All Peoples Congress (APC) will step down after his second
and final term ends in March 2018. The ruling party and main opposition have yet to
elect their respective presidential candidates. With the opposition looking
fragmented, the APC is in a strong position to secure a third consecutive victory,
albeit by a narrower margin.
Market outlook SLL to depreciate

We expect modest Sierra Leone leone (SLL) depreciation in Q4-2017. FX
liquidity has been impacted by the Bank of Sierra Leone (BSL)s decision to halt its
weekly FX auctions. The BSL will now only intervene in the FX market to
smooth excess volatility as it seeks to rebuild FX reserves. However, tightening
domestic liquidity, together with increasing exports, should limit the downside to
SLL depreciation.
Africa

South Africa The make or break quarter

Razia Khan +44 20 7885 6914 Q4-2017 will be unusually important for South Africa. The economy emerged
Razia.Khan@sc.com
Chief Economist, Africa from a technical recession in Q2, helped by external demand, but growth remains
weak. The South African Reserve Bank (SARB) cut its repo rate to 6.75% in July to
support faltering demand. We expect monetary easing to continue in Q4 and into
next year. New revelations of state capture continue to dominate headlines, raising
questions about the continuity of the countrys long-perceived institutional strengths.
The Medium-Term Budget Policy speech (MTBPS), due on 25 October, will provide
an important update on fiscal developments. The authorities will announce revenue
projections through to FY21 and bailout plans for SOEs, likely using funds from the
Public Investment Corporation. Cyclical weakness in revenue collection is already
evident from monthly budget updates; more structural underperfomance could have
implications for medium-term fiscal consolidation. Debt levels continue to soar; South
Africas public debt-to-GDP ratio is over 63% (including contingent liabilities from
guarantees provided to SOEs) and rising.
Q4-2017 will bring significant risk South Africa has already lost its investment-grade (IG) foreign-currency (FCY)
events Octobers medium-term rating from two rating agencies. One of them, Fitch, already assigns a sub-IG rating
budget statement, November rating to South Africas local-currency (LCY) debt. Should Moodys and Standard and
reviews and December ANC elective
Poors (S&P) follow with LCY downgrades to junk status, the market reaction may be
conference
far more severe than anything seen to date. IG LCY ratings from both agencies are
needed for South African Government Bonds to be included in the World Global
Bond index.
A further downgrade by Moodys or S&P could trigger c.USD 10bn of outflows from
South African assets, according to consensus estimates. Both agencies have
negative outlooks on South Africas ratings, with reviews scheduled in late
November/early December. The market consensus with which we agree is that
rating actions are unlikely immediately after the MTBPS, which may outline broad
revenue-raising measures to further fiscal consolidation. A downgrade is also unlikely
just ahead of the elective conference of the ruling African National Congress (ANC),
scheduled for 16-20 December, which is seen by many as pivotal for the future of the
country. However, it cannot be ruled out.
Figure 1: South Africa macroeconomic forecasts Figure 2: Weak consumption, faltering investment
Real gross domestic final demand,Q1-2012 = 100
120
2017 2018 2019 Final consumption expenditure
by general government
Gross fixed capital formation
Policy rate (%)* 6.50 6.25 6.25

Africa
105
USD-ZAR* 13.20 13.10 13.60 Final consumption expenditure
100 by households
95
Q1-12 Q1-13 Q1-14 Q1-15 Q1-16 Q1-17
*end-period; **for fiscal year ending 31 March; Source: Standard Chartered Research Source: Stats SA, Standard Chartered Research

New ANC leadership could Politically, the ANC leadership election in December is the key risk event.
dramatically alter South Africas Although ANC branches have yet to announce their nominations for the party
governance trajectory or not leadership, two apparent front-runners, ostensibly representing different factions of
the ANC, have emerged Deputy President Cyril Ramaphosa and former African
Union Chair Nkosazana Dlamini-Zuma, an ex-wife of President Jacob Zuma. Markets
see Ramaphosa (once thought to be Nelson Mandelas preferred successor) as
representing the more reformist faction of the party, and potentially able to revive the
ANCs popularity in the next elections in 2019. Dlamini-Zuma, in contrast, is seen as
representing the status quo.
It is still too early to call how the leadership election might evolve, as many other
members of the ANCs National Executive Committee have signalled their interest in
the presidency. Following a High Court ruling cancelling the result of a disputed ANC
provincial election in KwaZulu Natal (where recent growth in party membership has
been particularly strong), there was some uncertainty over whether the elective
conference would be held as scheduled in December. More meaningful audits of
branch membership could play a key role in the outcome of the conference.
Economic outlook Still bleak

Above-consensus Q2 GDP growth We see a weak outlook, despite above-consensus Q2-2017 GDP growth of 2.5%
provides little reassurance q/q SAAR. We keep our growth forecasts unchanged. External demand provided a
boost to mining and manufacturing in Q2, and the recovery in agriculture continued
following the severe drought of 2016. However, there was little in the Q2 GDP data to
signal sustained economic growth. Investment contracted, with private-sector gross
fixed capital formation falling 6.9% q/q SAAR.
Money supply trends are also worrying. Despite the headline economic recovery,
Q2-2017 saw the first q/q SAAR contraction in total money supply since Q4-2009
(a year when the economy contracted). Real growth in total loans and advances has
hovered around zero in y/y terms since early 2016. Demand for bank credit remains
weak. Households are repairing their balance sheets; household debt-to-disposable
income recently fell to its lowest level since the global financial crisis. Cash-rich
corporates have little demand for bank credit, although corporate bond issuance is
starting to rise from a deeply negative base (up c.17% y/y in July). We see two more
rate cuts of 25bps each from the SARB in this cycle, in November 2017 and January
2018, unless concerns over potential rating downgrades prompt a sharper-than-
expected sell-off in the South African rand (ZAR) and new inflation fears.
We lower our C/A deficit forecasts External rebalancing has been one of the few positives of South Africas growth
significantly slowdown, with weak import demand driving a stronger trade surplus year-to-date.
Fewer dividend payments to non-resident investors appear to have led a structural
improvement in the current account (C/A). In the last three quarters, the C/A deficit
averaged only 2% of GDP. We lower our C/A deficit forecasts accordingly, to 2.2%
for 2017 (from 4.0%), 2.4% for 2018 (from 3.8%) and 2.9% for 2019 (3.9%). A large
C/A deficit was long seen as one of South Africas key vulnerabilities; like household
debt, it is correcting amid slower growth.
Africa
We also raise our fiscal deficit forecast for FY18 (year ending 30 April 2018) slightly to
4.1% of GDP (4.0% prior). Given the ZAR 13bn revenue shortfall in Q1-FY18, a full-
year revenue shortfall of more than ZAR 50bn is plausible. Although expenditure has
also been weaker than budgeted, initial Treasury assumptions for nominal growth this
year (based on real GDP growth of 1.3% and GDP inflation of 6.4%) are likely to have
been too optimistic. Plugging in our own estimates, we derive a higher deficit.

Tanzania Still below trend

Economic outlook Private-sector confidence remains low
Sarah Baynton-Glen, CFA +44 20 7885 2330 The coming months should see a slight improvement in Tanzanias economic
Economist, Africa performance, after a probable growth slowdown in H1-2017. In Q1 (the latest
available quarterly data), growth dropped to 5.7% y/y. Although this is still relatively
robust from a regional perspective, it marks a slowdown from 7.0% y/y in 2016. We
expect Q2 and Q3 to have continued to be relatively weak as private-sector activity is
impacted by an unpredictable policy environment, and a public-sector investment
slump amid more robust expenditure controls.
Q4-2017 may start to look better. Public-sector investment should pick up as

delayed government projects get underway. Government development expenditure
for FY17 (year ended 30 June 2017) stood at less than 60% of its target by May,
acting as a drag on growth. In recent months, public-sector investment appears to
have gained momentum. At the end of August, the government invited bids for a
three-year USD 2bn hydropower project that would be the fourth-largest in Africa,
and should double Tanzanias current power production capacity. As it will take some
time before projects reach construction phase the positive impact is unlikely to be felt
until at least 2018.
Any improvement in private-sector Improved liquidity may lead to slightly better private-sector credit growth, but
credit growth as a result of better weak private-sector confidence could cap any increase. Better borrowing conditions
liquidity will be capped by policy may result in stronger private-sector borrowing growth, especially towards the end of
uncertainty
the year given a low base. Central bank efforts to improve banking-sector liquidity
should help, following a collapse in private-sector credit growth to just 2.5% y/y in
May (the latest available data) from more than 16% in the same month of 2016. The
overnight rate has dropped sharply, reaching 4.05% on 4 September 2017 from
16.2% in September 2016 following easing of the Statutory Minimum Reserve ratio in
March and a 700bps reduction in the discount rate in 2017 so far (400bps in March
and an additional 300bps in August). However, despite the countrys five-year
development plan to 2021 promoting private-sector-led development, erratic policy
making by President Magufuli, particularly in the mining sector, is likely to constrain
any near-term improvement in private-sector investment.
Figure 1: Tanzania macroeconomic forecasts Figure 2: O/N rates have declined on improved liquidity
%
20
2017 2018 2019
18
14
10
3M T-bill (%)* 4.30 4.50 6.00
8
Africa
USD-TZS* 2,250 2,320 2,360 6

4
0
Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17
*end-period; **ends 30 June (includes donor assistance); Source: Standard Chartered Source: Bloomberg, Standard Chartered Research
Research

We lower our 2017 CPI forecast to 5.5% from 6.7% previously given much faster
disinflation than expected. Our forecast for 2018 also changes to 5.2% from 5.8%.
Inflation has trended lower in recent months and is likely to continue to improve
barring any shocks from a weaker Tanzanian shilling (TZS) or international fuel
prices. Inflation fell to 5.2% in July from 5.4% in June largely due to food price
declines as drought receded. Food price inflation fell to 8.95% in July from 9.6% in
June, and should improve further. Looking forward, fuel price pressures, which have
eased in recent months, will be driven by an increase in regulated prices effective
6 September (energy and fuel account for 8.7% of the CPI basket). Outside of food,
fuel has been the sub-indicator with the highest inflation, at 7.1% y/y in July.
Policy Overly optimistic revenue targets

Although revenue collection has Revenue collection has improved from 2016 levels but has undershot targets.
improved, weak growth and mining- The budget for FY18 anticipates a 13% increase in domestic revenue. Recent
sector uncertainty mean budget policy changes and investigations into mining exports are likely to have weighed on
targets look optimistic
export earnings and revenue. The value of gold and concentrates exports will likely
fall by more than USD 500mn according our calculations, thanks to a shortfall of
c.USD 200mn from lower production given cost pressures and an inventory build-
up of more than USD 250mn of concentrates at the Bulyanhulu mine due to the
export ban. This is sizeable given that total mineral exports in the year to May 2017
were USD 1.5bn.
The authorities will need to focus on revenue-raising measures given ambitious

investment plans, and to narrow the budget deficit. EWURA (the energy and water
utility regulator) has said that it received a proposal from Tanzanias Bulk
Procurement Agency to raise fees for oil marketing companies to TZS 3 per litre from
TZS 0.5 per litre previously. The current fee contributes approximately TZS 2.4bn to
the budget. This should help to fill the revenue gap given recent weak economic
performance and likely revenue shortfalls as a result. The proposal still needs to be
submitted to the Minister of Energy for approval.
Politics Some noise likely

Magufulis centralised leadership style has caused uncertainty, with private-sector
activity hit particularly hard given perceived erratic decision-making. A greater degree
of private-sector consultation is needed to boost confidence and activity.
Political noise has increased and is likely to continue following the shooting of an
opposition member, Tundu Lissu, in September. Lissu was critical of the government
and had been arrested earlier in 2017 for commenting that Magufulis style is
dictatorial. In September, a minister named in an investigation into the diamond
mining sector resigned and investigations into other sectors are possible. This follows
an investigation into and allegations against companies in the gold mining industry
earlier this year.
Market outlook Pressure on the TZS ahead

Africa
We expect a return to modest TZS depreciation. The large improvement in the

current account deficit in H1-2017, driven by lower capital goods and oil imports, and
better agriculture and mining exports, is likely to be short-lived. Gold and minerals
exports are likely to fall following recent policy changes, and increased public-sector
investment will drive capital goods imports again. Reserves remain adequate at
USD 4.4bn, equivalent to 4.3 months import cover (as of May 2017).

Uganda Tackling past imbalances

Economy recovering, C/A rebalancing
Razia Khan +44 20 7885 6914 We expect a gradual acceleration in GDP growth in the coming years as the
Razia.Khan@sc.com
Chief Economist, Africa approach of oil production has a greater impact on activity. Fiscal stimulus in FY18
(ends 30 June 2018) should allow the economy to regain momentum near-term after
a post-election slowdown in 2016, which was exacerbated by weak private-sector
lending (see Uganda Haunted by NPLs past, Global Focus, Q2-2017).
We see support for near-term growth from improved agriculture (given better
weather conditions), higher FDI, a more accommodative monetary policy the central
bank has eased rates by 700bps since April 2016 and a pick-up in FDI.
Uganda has benefited from lower oil The current account (C/A) deficit has narrowed meaningfully from earlier highs.
prices, but has also seen higher Lower oil prices have been key to this adjustment, although we think it has run its
exports course. Weak implementation of public investment projects in the recent past and
sub-trend credit growth played a role in external rebalancing. Robust export earnings
also contributed exports rose 18% to USD 3.17bn in FY17, albeit from a low base.
Exports had averaged only c.USD 2.7bn in the five years preceding that, according to
Bank of Uganda (BoU) data.
We lower our C/A deficit forecasts significantly given the lower starting point. We
now see the C/A deficit averaging 5.4% of GDP in 2017, 6.1% in 2018 and 8.6% in
2019 (versus 9.3%, 9.7% and 9.5% previously). A recovery in public investment
projects towards the end of this period and the approach of Ugandas oil production,
which should cause a surge in capital imports, are likely to drive the C/A deficit
widening we expect.
One more rate cut is possible, but there are risks

Focus on core inflation allowed the Despite temporary pressure on headline inflation from regional food price rises
BoU to look through the food-price (food inflation reached a high of 23.1% y/y in May because of adverse weather), better-
shock behaved core inflation allowed the BoU to cut its policy rate steadily to 10% in June.
Relative stability in the Ugandan shilling (UGX) FX rate and subdued domestic demand
helped to keep core inflation low. The BoU kept its central bank rate (CBR) on hold in
August, signalling a neutral stance after 700bps of cuts since April 2016 a faster pace
than we had previously forecast.
Figure 1: Uganda macroeconomic forecasts Figure 2: We forecast one more rate cut in this cycle
Headline CPI, CBR (LHS) and USD-UGX (RHS)
2017 2018 2019 18 3,800

USD-UGX
16
3,600
14
Policy rate 3,400
10 3,200
Policy rate (%)* 9.50 11.00 14.00 8 Headline CPI
Africa
3,000
6
USD-UGX* 3,650 3,820 4,000 2,800
4
Core CPI
Current account balance (% GDP) -5.4 -6.1 -8.6 2,600
2
0 2,400
Fiscal balance (% GDP)** -4.3 -4.4 -4.6 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17
*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: BoU, UBOS, Thomson Reuters Datastream, Standard Chartered Research

Given the improvement in CPI, we We see headline inflation continuing to decelerate through to end-2017,
see room for a modest 50bps potentially to sub-4% levels, and briefly dipping below 3% in Q1-2018. We therefore
easing in this cycle; there are risks expect one more rate cut by the BoU in this cycle, by 50bps to 9.5% at the December
meeting. However, we see considerable risks to this call. It may be difficult for the
BoU to resume easing after previously signalling a neutral stance, especially as it
sees growth picking up and a closure of the negative output gap by the end of FY18.
Expectations of faster growth due to an expansionary fiscal stance in the FY18
budget will be an important factor. Global policy tightening may add to the perceived
risks of further easing UGX stability would be needed for the BoU to consider a
CBR rate cut by the end of 2017.
We now see inflation averaging 5.5% in 2017, 4.1% in 2018 and 6.3% in 2019
(down from 7.3%, 7.3% and 6.6% previously), leaving room for the BoU to ease
further. We update our CBR forecasts to take into account the faster-than-expected
pace of BoU easing to date we now see the CBR at 9.5% at the end of 2017 and
11.0% in 2018 (down from 10.5% and 12.0% previously). We see the BoU raising the
CBR by 50bps in August 2018 and 100bps in December 2018, followed by another
300bps of tightening in early 2019.
Ugandas traditionally wide interest In the latest tightening cycle, the BoU raised its policy rate by 600bps before
rate spreads should ease as cutting by 700bps (we see a full 750bps of cuts in this cycle). An enhanced inflation-
inflation targeting becomes more targeting reputation the BoU is seen as one of the most credible central banks in
entrenched
Sub-Saharan Africa and structural weakness in the banking sector arguably
allowed the BoU to ease faster than we expected. We see a total of 450bps of
tightening in 2018 and 2019, and potentially more thereafter as Ugandas oil boom
approaches and if FX market conditions warrant it. There should be room to
gradually reduce the differential between the CBR and inflation as the BoUs anti-
inflation reputation becomes more entrenched and, crucially, if fiscal policy sees a
more structural improvement.
Fiscal outlook Lower aid dependency

Ugandas aid dependency has fallen significantly. However, revenue mobilisation
remains weak. Reliance on donors for budget financing has fallen to c.10% of
revenue recently, from as high as 40% around 2002.
Poor execution of the development budget, with delays in large investment

projects, was responsible for much of the recent improvement in fiscal performance
(public expenditure as a percentage of GDP has fallen). While we expect budget
execution to improve, lower fiscal deficits are likely in the next few years as Uganda
puts in place measures to reassure on public debt sustainability (its external funding
is largely concessional). We now estimate the FY17 deficit to have been c.4.3% of
GDP, down from an earlier estimate of 7.3% of GDP. We see the FY18 and FY19
deficits remaining modest at 4.4% and 4.6% of GDP, respectively (6.8% and
6.0% previously).
Africa

Zambia Still waiting for the IMF

Copper, agriculture drive economic improvement in 2017
Razia Khan +44 20 7885 6914 Zambias negotiations with the IMF take centre-stage in the coming quarter.
Razia.Khan@sc.com
Chief Economist, Africa Talks have been ongoing for a while and have been subject to a number of delays,
including two presidential elections. With discussions to continue at the October IMF
meetings, hopes are high that progress will be made, allowing for the announcement
of a staff-level agreement. Zambia has already benefited from sizeable portfolio
investor flows on the assumption that an agreement on an Extended Credit Facility
with the IMF will soon be announced. With a concentration of external debt maturities
starting in 2022, Zambia has limited time to refinance maturing debt. Many market
participants view an IMF programme as necessary before Zambia can tap markets
for additional Eurobond financing.
We see faster growth in 2017, driven We raise our 2017 GDP growth projection to 4.3% (3.8% previously). Improved
by stronger copper prices and performance in agriculture following last years drought, more favourable copper
recovery from drought prices and improved electricity supply will boost growth. Although liquidity conditions
have improved with lower inflation and Bank of Zambia (BoZ) easing, we do not
expect a turnaround in credit growth until Zambias domestic fiscal arrears are more
fully dealt with. The mines ministry recently estimated that Zambias copper output
will ease to 754 thousand tonnes (kt) in 2017 from 774kt in 2016, largely because of
a c.40% decline in output at Konkola Copper Mines. Output at the Lumwana mine is
also expected to decline by c.15%, although this should be offset by a rise in
production at First Quantum Minerals Sentinel mine.
We see credit growth improving in We now expect growth to accelerate further in 2018 to 5.6% (4.5% previously), in
2018 as earlier BoZ easing feeds line with the authorities own forecast. Our 2019 forecast of 7.0% is unchanged.
through Improvements in fiscal policy, including more substantial arrears clearance, should lift
activity in hard-hit sectors such as construction. By 2018, earlier BoZ easing is also
likely to drive a more robust rebound in credit growth, especially given that we expect
inflation to be better behaved.
Figure 1: Zambia macroeconomic forecasts Figure 2: Zambian Eurobonds react to IMF deal expectations
Z-spread
1,500
2017 2018 2019
1,400
GDP grow th (real % y/y) 4.3 5.6 7.0 1,300
1,200
CPI (% annual average) 6.4 5.1 7.0 1,100
1,000
Policy rate (%)* 9.50 9.50 10.50 900 2027
Africa
800
USD-ZMW* 9.40 10.20 10.60 700
2024
600
500
2022
400
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17

Subsidy removal had a limited We lower our 2017 and 2018 CPI inflation forecasts to reflect actual prints in
impact on inflation recent months. We now see 2017 inflation averaging 6.4% (versus 8.0% previously,
when we were more concerned about the impact of fuel and utility subsidy removal).
The subsidy removal has had a more muted impact on inflation than we expected, as
the measures coincided with bumper food harvests, which kept price levels in check.
Also, the share of electricity in Zambias CPI basket is in single digits, while food has
a 53.5% share. Recent FX appreciation at the time of the subsidy removal (May and
September for utilities) also likely helped, and demand conditions remain below
trend. We now forecast 5.1% inflation in 2018 (5.8% previously). In 2019, we expect
CPI inflation rise to 7.0% y/y (6.3% previously) on stronger growth.
Higher mine output should We now see a slightly wider current account (C/A) deficit in 2017, at 3.0% of GDP
eventually drive C/A deficit (2.6% previously); our projections for 2018 and 2019 are unchanged. The deficit is
narrowing, but not just yet likely to widen in 2017 as total mining output has declined, while increased
investment activity in the mining sector on electricity improvement has driven higher
capital-goods imports. This is partly offset by our expectation of a higher food surplus
for export in 2017. Increased mining-sector activity should result in a lower deficit in
2018-19 as output improves.
Policy Bringing the IMF on board

2018 budget to set the tone for IMF The 2018 budget (due 29 September) will be key to shaping negotiations with
negotiations in October the IMF. IMF concerns have included not just the existing stock of arrears, but the
continued accumulation of new ones. We expect budget measures dealing
specifically with arrears clearance. In both 2017 and 2018, we expect the cash deficit
to be larger than the budget deficit on a commitment basis, reflecting the extent of
arrears clearance. While our 2017 budget deficit estimate is unchanged at 8.5% of
GDP (despite our 0.5ppt increase in projected real GDP, as tax revenues have
underperformed), we see wider budget deficits of 6.5% and 5.0% in 2018 and 2019,
respectively (6.4% and 4.8% previously). The IMF would like to see a 5-6% deficit on
a commitment basis in 2017, from a c.10% of GDP deficit in 2016.
We adjust our policy rate forecasts Monetary easing to date has exceeded our expectations. The BoZ cut its policy
to reflect faster easing already rate by 150bps each at meetings in February, May and August, combined with
delivered by the BoZ adjustments to the statutory reserve ratio as well. (Most recently, this was cut to 9.5%
at the August MPC meeting, from 12.5% previously.) Given the still-favourable
inflation profile, we expect a further 150bps cut in the policy rate, to 9.5% at the
November MPC meeting, the last meeting in 2017. We then see the policy rate on
hold at 9.5% throughout 2018. Fiscal policy is likely to remain an important
determinant of the monetary stance, so the adoption of tighter budget policy should
allow the BoZ some room to stimulate lending growth. We see a resumption of
monetary tightening in 2019. Our year-end policy rate forecasts for the period 2017-
19 are 9.5%, 9.5% and 10.5% (11.5%, 8.5% and 10.0% previously).
Zambian kwacha (ZMW) performance will also be an important influence on

monetary policy. The ZMW has exhibited stability for much of 2017, reflecting
strong offshore investor demand for Zambian government debt, muted demand
Africa
locally, and an interbank FX market not yet restored to its pre-crisis (end-2015) level
of functioning. More broadly, demand for Zambian assets is likely to be susceptible to
any IMF-related disappointment.

Economies Europe
Europe Top charts

Figure 1: Economic upswing across Europe Figure 2: Euro-area confidence is high
Real GDP, Q1-2007=100 EU Commission consumer and business surveys
Europe
114 1.5 0
Germany Consumer
UK confidence
110 1.0 -5
(RHS)
France
106 0.5 -10
102 Spain 0.0 -15

Business
climate
98 Euro area -0.5 indicator -20
94 Italy -1.0 -25
90 -1.5 -30
Q1-2007 Q1-2009 Q1-2011 Q1-2013 Q1-2015 Q1-2017 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17
Source: Eurostat, ONS, Standard Chartered Research Source: European Commission, Standard Chartered Research
Figure 3: Core inflation low despite falling unemployment Figure 4: Sentiment regarding EU is improving
Euro-area core HICP, % y/y, and unemployment rate, % % of respondents who are in favour of the euro and free
movement of labour, by country (2016, 2017)
2.5 Unemployment 13 100
2017
rate (RHS) 12 90 2016
Inflation target
2.0 80
11
70
10 60
1.5
9 50
8 40
1.0 30
7
20
0.5 6 10
Core CPI
5 0
Germany France Italy EU Germany France Italy EU
0.0 4
Aug-05 Aug-07 Aug-09 Aug-11 Aug-13 Aug-15 Aug-17 Euro Free movement of labour
Source: Eurostat, Standard Chartered Research Source: Eurobarometer, Standard Chartered Research
Figure 5: Diverging employment prospects in the UK Figure 6: Central Europe Growth up after 2016
BoE agents employment intentions scores slowdown (GDP growth, %)
2.0 5
1.5 Services Hungary

employment 4
intentions Poland
1.0
3 Czech
0.5
2
0.0
-0.5 1
Manufacturig
emploment
-1.0 intentions 0
-1.5
-1
Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 2013 2014 2015 2016 2017f
Source: BoE, Standard Chartered Research Source: Eurostat, Standard Chartered Research

Euro area Changing policy

Economic outlook Strong growth
Europe
Sarah Hewin +44 20 7885 6251 The economy is doing well, but inflation pressures remain low. Euro-area
Sarah.Hewin@sc.com
Chief Economist, Europe growth is running at 2-2.5% p.a., well above trend growth (1%), driven by strong
domestic demand. Consumer spending is supported by rising employment, rising real
Nick Verdi +44 20 7885 8929 earnings and strong consumer sentiment. Investment has been accelerating since
Nick.Verdi@sc.com
Head of G10 FX Strategy early 2016 after several years of contraction. Migrant flows over the past couple of
years have also boosted domestic demand. With business sentiment buoyant,
borrowing costs low and final demand strong, we expect business investment will
continue to grow. Governments are generally running slightly expansionary policies
(low but rising cyclically adjusted deficits). By contrast, net exports are likely to
remain a drag on growth, with import growth outpacing exports. The current account
surplus should decline due to buoyant domestic demand.
Inflation is likely to rise only slowly Unemployment of 9.1% is close to the estimated 8-9% natural rate of unemployment.
That said, wage pressures remain muted, although the improving jobs market should
gradually pull wage growth higher (wage growth picked up to 2% y/y in Q2-2017 from
1% in Q2-2016). Indexation in some sectors and countries may also underpin wage
growth. But we expect inflation to rise only slowly in 2018-19, with y/y declines in
EUR oil prices weighing on headline HICP in the early months of 2018.
Policy Preparing for tapering

We expect QE tapering to begin The ECB is getting ready to taper QE; government policies are slightly
next year stimulatory. We expect the European Central Bank (ECB) to begin tapering its
quantitative easing (QE) purchases from the start of 2018, even though inflation is likely
to take time to move back to the close-to-but-lower-than-2% target. Policy makers
believe that buoyant growth will gradually eliminate spare capacity, driving underlying
inflation pressures (particularly wages) higher. Concerns over unwarranted tightening of
financial conditions (including EUR strength) mean that policy makers will continue to
adopt a very cautious approach to removing policy accommodation; we them to reduce
and finally end QE purchases by Q3-2018. We forecast the first rate hike in Q1-2019,
taking the deposit rate less negative before the refi rate is raised in Q2-2019.
The ECB will likely continue to emphasise that it can raise QE purchases or re-start
the programme if necessary. But this could be challenging in practical terms, as
sovereign bond shortages will start to appear in 2018 if QE purchases continue at the
Figure 1: Euro area macroeconomic forecasts Figure 2: A broad-based recovery

Real GDP, % y/y, selected euro-area economies
6
2017 2018 2019
5 Q2 2017
4
CPI (% annual average) 1.5 1.3 1.6 Q2 2016
3
Policy rate (%)* 0.00 0.00 0.20
2
EUR-USD* 1.22 1.27 1.22 1
-1
GR BE IT FR GE EA SK AU FI PO SP NL LI LT SV EE IR
*end-period; Source: Standard Chartered Research Source: Eurostat, Standard Chartered Research

current EUR 60bn monthly pace. We think the ECB will only maintain the programme
at current levels if deflation risks emerge. Policy makers could temporarily move
away from capital key-determined purchases and buy where supply is greatest, or
Europe
buy other assets (e.g., more corporate and supra-national bonds, or even equities).
Governments are delivering a small We expect the euro-area government deficit to fall to 1.3% of GDP in 2017; that said,
stimulus to the economy governments in the region are delivering a small fiscal stimulus. Germany has run a
fiscal surplus since 2014; by contrast, Frances deficit may remain above the 3% limit
this year and next, and Italys government is asking for flexibility on its deficit targets,
partly to support newly arrived migrants. Euro-area government debt is 90% of GDP;
it is higher in Italy, Portugal (130% of GDP) and Greece (175%), though debt should
decline as GDP growth recovers and fiscal deficits stay under control. Greek debt
restructuring talks have been postponed until after Germanys election.
Politics Focus on Germany, Austria, Spain and Italy

Germany voted Angela Merkel in for Several months before a German government can be formed. Angela Merkels
a fourth term, but support for the centre-right CDU/CSU won the largest number of votes in Germanys election (24
CDU/CSU has fallen September), albeit polling sharply lower than in the 2013 elections. The Social
Democrats (SPD) also suffered a drop in votes and have declared that they will no
longer stay in a CDU/CSU-led government. The anti-EU Alternative fr Deutschland
(AfD) came third and enters parliament for the first time, but will not be asked to join
a coalition. Merkel will therefore need to turn to the Greens and liberal Free
Democrats (FDP) for support. Policy differences are likely to delay the formation of a
government, and a new election is possible.
Austrias election may see the far- We expect Austrias general election (15 October) to bring a change of government.
right Freedom Party voted into The junior opposition partner in the current government, the Peoples Party (OVP), is
government ahead of the largest government party, the Social Democratic Party (SPO), in opinion
polls. However, the OVP will likely need the support of the right-wing nationalists, the
Freedom Party (FPO). An OVP-FPO coalition would adopt more hardline policies on
immigration, but ultimately we do not expect Austrias membership in the EU and
euro area to be threatened.
In Spain, Madrid is taking legal action against a proposed Catalan independence

referendum on 1 October. If the vote proceeds and turnout is larger than the 37%
reached in 2014s unofficial referendum, secessionist parties will declare victory,
though there would be no constitutional legitimacy for independence.
A hung parliament is the most likely Italian elections, due by May 2018, will come increasingly into focus. Polls suggest
outcome in Italys general election that support is split evenly between Matteo Renzis Democrats (PD), the Five Star
Movement (M5S) and the centre-right parties of Berlusconi's Forza Italia, the
Northern League (LN) and Brothers of Italy (FdI), with no coalition likely to win
enough seats to secure an outright parliamentary majority.
Market outlook Taking flight

Positive economic surprises, flows Strong fundamentals are EUR-USD supportive. We remain bullish for three
into the region and USD weakness fundamental reasons: (1) economic data surprises favour the euro area over the US;
are EUR-USD supportive (2) flows into the euro area remain supportive of the EUR; and (3) broad-based USD
weakness is driving FX reserve diversification away from the USD, which could
benefit the EUR. We continue to forecast a rally in EUR-USD to 1.22 at end-Q4-2017
and 1.27 at end-2018.

Switzerland Moderate growth

Economic outlook CHF headwinds are easing
Europe
Sarah Hewin +44 20 7885 6251 The economy grew at a moderate pace in H1-2017. We lower our 2017 GDP
Sarah.Hewin@sc.com
Chief Economist, Europe growth forecast to 1.0% (from 1.2%), and expect 1.3% for 2018 (previously 1.4%)
and 1.5% for 2019 (1.6%). Past Swiss franc (CHF) appreciation has been a
Nick Verdi +44 20 7885 8929
headwind to growth, though the latest data suggest a recovery in sectors such as
Nick.Verdi@sc.com
Head of G10 FX Strategy industry and hospitality that previously suffered from a lack of competitiveness.
Stronger activity in major trading partners, particularly the EU, should help exports.
Moderate growth expected Industrial output picked up in Q2 after falling in Q1, supported by stronger goods
in H2-2017 exports. Surveys suggest that momentum picked up in Q3: the manufacturing PMI
rose to 61.2 in August from 60.9, indicating buoyant manufacturing activity in Q3, and
the KOF economic barometer spiked to a multi-year high in July before fading again
in August. Investment intentions are improving on rising capacity utilisation and
improving demand. But GDP growth was just 0.3% q/q in Q2 after 0.1% in Q1.
Consumer spending rose 0.2% q/q and equipment investment rose 0.3%, but net
trade was a drag due to a sharp rise in pharmaceutical and chemical imports.
The labour market is gradually improving, and the unemployment rate is low, at
3.2%. CPI inflation remains low, at 0.5% in August; we forecast 0.5% in 2017 and
2018 and 1.0% in 2019. Higher energy prices helped to turn inflation positive early in
2017, but underlying inflationary pressures remain low, with wages subdued despite
a very low unemployment rate.
Policy SNB less concerned about CHF strength

We expect the SNB to stay on hold We think the Swiss National Bank (SNB) will keep policy unchanged at least
at least until end-2018 until after the ECB starts to raise rates. It kept the LIBOR target range at -1.25%
to -0.25% and the sight deposit rate at -0.75% at its September quarterly meeting.
The CHF weakened in July and August as earlier safe-haven flows unwound,
following dovish comments from SNB Chairman Jordan regarding negative interest
rates and the willingness to increase the central banks balance sheet. The CHF
decline particularly against the EUR in Q3-2017 is helping to reduce to some
extent the significant overvaluation of the currency, according to the SNB. Officials
were previously concerned about significant overvaluation, using this phrase since
Figure 1: Switzerland macroeconomic forecasts Figure 2: Swiss franc strength is easing

EUR-CHF
2017 2018 2019 1.25
GDP grow th (real % y/y) 1.0 1.3 1.5 1.20
Policy rate (%)

-1.25 to -1.25 to -1.25 to 1.10
-0.25 -0.25 -0.25
USD-CHF* 0.95 0.91 0.94 1.05
Fiscal balance (% GDP) 0.5 0.6 0.6 0.95

Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

early 2015, but now describe the CHF as merely highly valued. CHF depreciation
allowed the SNB to raise its inflation forecast slightly in September compared
with June.
Europe
Monetary policy is likely to remain We expect policy to remain unchanged, with negative rates and, when required,
unchanged foreign exchange intervention. Currency intervention is driving the SNBs balance
sheet higher; foreign-currency reserves reached CHF 717bn in August. The balance
sheet is equivalent to more than 120% of GDP, although CHF depreciation is slowing
the pace of balance-sheet growth. The SNB aims to achieve a positive annual rate of
inflation below 2% over the medium term. ECB policy normalisation, which we expect
from 2018, should further ease pressure on the CHF.
Commenting on the residential sector, the SNB has warned that while growth in
mortgage lending remained relatively low in Q2, residential property prices have risen
slightly in recent months and risks in the residential investment sector
have increased.
Budgets are likely to stay balanced We expect fiscal policy to remain broadly neutral, with small budget surpluses. Low
national debt and low borrowing costs give the government the flexibility to use fiscal
policy if needed.
Politics Relations with the EU remain sensitive

New rules avoid quotas on Brexit shines a spotlight on Switzerlands special relationship with the EU.
EU workers Swiss voters have challenged the right of EU citizens to work in the country, but
Switzerland has faced EU penalties. The Swiss government had until February 2017
to announce measures in response to a 2016 referendum to impose limits on the
number of foreign workers allowed into the country. In December 2016, the
parliament adopted a bill that gives priority to Swiss-based job seekers Swiss
nationals and foreigners registered with Swiss job agencies. This avoids quotas on
EU citizens.
The concern is that after Brexit, the EU will propose an institutional framework deal
with Switzerland, which would require Swiss laws to change automatically in line with
EU rules as EU legislation evolves. Such a framework would likely be rejected by the
nationalist Swiss Peoples Party (SVP), and could undermine the current truce
between the EU and Switzerland.
The next federal election is due in 2019. Given the countrys tradition of coalition-
style politics, we do not expect a significant change in policy or rise in political risk.
Market outlook Safe havens need not apply

We do not expect a change in SNB Safe-haven flows into the CHF diminish. We do not expect demand for CHF
policy anytime soon assets to increase into year-end, and we remain bearish on the CHF as investors
continue to steer asset allocations away from safe havens amid solid global growth.
Meanwhile, we do not expect a hawkish turn from the SNB anytime soon. We
forecast a decline in USD-CHF to 0.95 at end-2017. Meanwhile, we expect modest
EUR-CHF upside, to 1.16 at end-2017 and 1.17 in Q1-2018.

UK Negotiating the transition

Economic outlook Subdued growth ahead of Brexit
Europe
Sarah Hewin +44 20 7885 6251 Growth is weak, but agreement on a Brexit transition could support sentiment.
Sarah.Hewin@sc.com
Chief Economist, Europe We expect growth to be weak in Q4-2017 and Q1-2018 on uncertainty over the Brexit
process and on high imported inflation. But government hints at a more conciliatory
Nick Verdi +44 20 7885 8929 approach to a transition arrangement once the UK leaves the EU in March 2019
Nick.Verdi@sc.com
Head of G10 FX Strategy suggest that a cliff edge can be avoided. We raise our growth forecast for 2017 to
1.6% (previously 1.4%) and for 2018 to 1.2% (previously 1%), and see growth
staying at 1.2% in 2019. Businesses trading with or engaged in supply chains with
EU countries will soon need reassurance over access to the single market during a
post-Brexit transition period, to avoid downside risks to economic activity.
Consumers face falling real wages, The economy has slowed since last year, and consumers face headwinds from
but new export orders are solid falling real incomes; consumer confidence remains subdued, as reflected in weak
sentiment among retailers. But employment has held up better than expected (the
unemployment rate has fallen to its lowest level since 1975 and vacancies are high);
this should partially offset other risks to consumer spending. Business surveys show
a split between manufacturing and export-oriented products, where sentiment is
positive, and services, where activity is softer. Solid new orders have been boosted
by strong export performance, although export volumes have been slow to pick up so
far. We expect the UKs current account deficit to shrink further over the next couple
of year as export growth outpaces import growth.
Inflation is likely to breach 3% Inflation slowed in mid-summer before reaccelerating to 2.9% in August, and is likely
to breach the upper 3% band of the Bank of Englands (BoEs) target in the coming
months. Rising imported prices are driving up core, as well as headline inflation, and
the lingering effect of the British pounds (GBPs) post-referendum devaluation is
likely to hold inflation in a 2.5-3% range this year and next. Wages have failed to
keep pace so far, despite full employment, as employers struggle to pass on higher
labour costs. We think that softer growth in the coming months will slow hiring, and
that wages will pick up only slowly over the coming year, limiting the impact on
underlying inflation. That said, the government is lifting the public-sector pay cap for
some workers; this may cause wages to edge higher in the private sector, too.
Figure 1: UK macroeconomic forecasts Figure 2: Consumer and manufacturer sentiment indices

have diverged since the referendum
Manufacturing PMI and consumers 12-month outlook
2017 2018 2019 60 20

Manufacturing
GDP grow th (real % y/y) 1.6 1.2 1.2 PMI 10
Policy rate (%)* 0.50 0.50 0.75 -10
GBP-USD* 1.24 1.28 1.30 50 -20

First reading
post-Brexit Consumer -30
Current account balance (% GDP) -3.9 -3.7 -3.5 outlook (RHS)
referendum
45 -40
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17

Policy Less need for an emergency stance

The growth slowdown has not been The BoE is moving closer to hiking rates. We now expect the BoE to reverse last
as bad as feared, suggesting that Augusts 25bps rate cut, most likely at its November 2017 meeting, raising the bank
Europe
the August 2016 rate cut can rate to 0.5% from 0.25%. Minutes from the September policy meeting noted that
be reversed
some withdrawal of monetary stimulus is likely to be appropriate over the coming
months. Since August 2016, growth has been stronger, unemployment lower and
inflation higher than policy makers anticipated. They see a modest recovery in pay
and limited spare capacity, indicating concerns over a future wage-price spiral.
We think that progress on a Brexit transition arrangement in the coming months

would ease fears of activity being damaged by Brexit uncertainty; this should allow
scope for policy tightening. That said, we expect wage pressures to remain muted,
and easing headline inflation and below-trend growth to keep the BoE on hold for
some time after the first rate hike.
The government deficit came in below forecast in FY17 (year ended March 2017),
but is expected to widen in FY18 due to softer activity and one-off factors. We expect
the deficit to then narrow slowly, with weak revenues offsetting ongoing austerity.
With Labour doing well in the polls, Politics Government is divided, but no early election
the Conservatives are unlikely to
The government is weak, but likely to last its full term until 2022. The minority
trigger an election before 2022
Conservative government is being supported by the Democratic Unionists. Opinion
polls since the June general election have indicated a narrow lead for the opposition
Labour party so, although the Conservative party is deeply split on the direction of
Brexit negotiations, it looks unlikely that government MPs would trigger an early
election. But tensions are likely to arise over the Repeal Bill, which has to transpose
EU law into UK law by Brexit. Prime Minister Theresa Mays position is shaky, with
Octobers Conservative party conference likely to prove challenging. We expect her
to remain leader until after Brexit, and be replaced before the next election.
Brexit negotiations Slow progress

The government is prevaricating Little progress yet, but hopes for a breakthrough on a transition arrangement.
over exit arrangements, but a Six months after Article 50 withdrawal notification was given and three months into
transition is needed to avoid an UK-EU negotiations, there has been little concrete progress on Brexit. The EU
economic cliff edge
requires broad agreement on phase 1 of the discussions, covering the UKs exit bill,
rights of EU citizens in the UK and the Northern Ireland border, before discussing the
post-Brexit UK-EU trade relationship; so far, the UK has prevaricated.
But hopes are building for agreement on a transition arrangement allowing continued
UK access to the EU single market after March 2019. In exchange, the government
now appears willing to continue paying into the EU budget, allow free movement of
labour and adhere to EU rulings for two to three years post-Brexit while a UK-EU
trade deal is negotiated. That said, there is strong opposition from some influential
Conservatives, with a risk that a limited or no arrangement leaves the UK
vulnerable after Brexit.
Market outlook Brexit talks to keep GBP on the back foot

Gradual hiking cycle could limit Brexit uncertainty overwhelms more hawkish monetary policy. The GBP has
GBP gains rallied sharply versus the USD and euro (EUR) in recent weeks on an unexpectedly
hawkish turn in the BoEs monetary policy stance. If the BoE can convince markets
that this policy change does not represent the start of a hiking cycle, the GBP could
give up some of its recent gains.

Czech Republic More tightening coming

Economic outlook Cruising ahead
Europe
Sarah Hewin +44 20 7885 6251 The economy maintained good momentum in Q3, after very strong H1 growth.
Sarah.Hewin@sc.com
Chief Economist, Europe Given solid growth, above-target inflation and mild appreciation of the Czech koruna
(CZK), the Czech central bank was the first in Europe to hike in July. We expect
Geoff Kendrick +44 20 7885 6175 higher growth in the short term and a slightly faster pace of tightening. The main risks
Emerging Markets FX & Global Macro Strategist ahead relate to housing-market financial stability. Political risks are also a concern,
as the European Commission has opened a case against the Czech Republic over
its refusal to accept the relocation of refugees.
We raise our GDP growth forecasts for 2017 to 3.3% from 2.7%, for 2018 to 2.8%
from 2.5%, and for 2019 to 2.4% from 2.3%. H1-2017 growth was significantly
stronger than expected. Rising household consumption, private and government
investment are all supporting above-trend growth this year. Higher investment is
partly due to the timing of the utilisation of EU structural funds, a pattern observed
across emerging Europe. For inflation, we lower our 2017 forecast to 2.4% from 2.6%
to reflect a slower rise in oil prices than we had earlier anticipated. We leave our
2018 forecast unchanged at 2.2%.
Strong labour market has led to The unemployment rate fell to a record-low 2.9% in Q2-2017. Supply constraints are
accelerating wage growth emerging: the labour market continues to tighten and there are reports of a scarcity
of workers (mostly high-skilled) in some sectors. The strong labour market and higher
minimum wages pushed nominal wage growth to above 5% y/y in H1-2017, the
fastest since 2008.
Inflation has averaged 2.4% y/y so far in 2017, above the 2% target. This is not just
because of temporary factors, as core CPI inflation is also accelerating steadily and
is likely to move gradually higher given tight labour-market conditions.
Policy Monetary policy to tighten

We expect further tightening in 2018 We expect the Czech National Bank (CNB) to continue its hiking cycle in 2018,
and 2019 at 50bps per year for the next two years. The CNB hiked its 2-week repo rate (the
key rate) in July to 0.25% from 0.05%; we expect two rate hikes in 2018, taking the
key rate to 0.75% by end-2018 and 1.25% by end-2019. Buoyant GDP growth,
robust wage growth and very mild CZK appreciation after the EUR-CZK floor was
removed prompted an earlier-than-expected hike. Signs of an overheating housing
Figure 1: Czech Republic macroeconomic forecasts Figure 2: Housing market shows signs of overheating
House price growth and mortgage outstanding, % y/y
2017 2018 2019 14 House prices

12
10
Mortgages to
Policy rate (%)* 0.25 0.75 1.25 6 households
4
USD-CZK* 21.31 19.69 21.88
2
-2
Fiscal balance (% GDP) 0.5 0.6 0.5
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

market also reinforced the decision. Mortgage lending to households rose 10.9% y/y
in H1, while housing prices were up 10% y/y during the same period. Macro-
prudential measures, such as limits on mortgage loan-to-value (LTV) ratios, were
Europe
introduced in H1 to reduce financial stability risks. That said, in the context of wage
growth, housing price growth does not seem out of control: nominal wages have
risen 18% since 2010, while housing prices have risen 16%.
Fiscal policy remains slightly expansionary, yet we expect a small budget surplus for
2017, as tax receipts so far have been stronger than expected. Sovereign debt is low
at around 40%, and on a declining path. The major rating agencies rate the Czech
Republic comfortably in investment grade with a stable outlook.
Politics Preparing for elections

The October election is expected to Legislative (general) elections are set to take place on 20-21 October 2017; investors
produce another multi-party are sanguine about the political outlook. Czech elections typically result in multi-party
coalition coalitions, often with opposing economic policies, preventing radical policy changes.
The current government consists of a coalition between the Social Democrats

(CSSD) and centrist ANO. According to opinion polls, popular support for CSSD has
declined since the last election, to about 15.0% from 20.5%. Support for ANO has
risen to about 30% from 19% in 2013 (the first election in which it participated).
ANO is likely to be the major coalition partner, with the prime minister probably
coming from its ranks. If so, the founder and current head of ANO, Andrej Babi,
would be the most likely candidate. Babi is a prominent businessman; he positions
himself as not being a career politician, and therefore being able to fight alleged
corruption within the traditional political parties. He served as finance minister in the
current government until May 2017, when he was asked to step down by Prime
Minister Bohuslav Sobotka (CSSD) due to allegations of tax evasion.
The country is required by EU treaty to adopt the euro, although there is no deadline.
While the CSSD favours joining, Babi comments on the euro have been mixed. He
has said that some companies would benefit from not having to worry about currency
volatility, but that the euro area has several problems and membership would reduce
the flexibility the Czech Republic currently enjoys. The population overwhelmingly
rejects the euro: at the moment, about 70% of voters do not want to join.
Market outlook CZK is our top choice in CE3

Central European 3 (CE3) FX prospects are dominated by the aftermath of the
EUR-CZK floor removal on 6 April. Since the introduction of the floor in November
2013, the Czech Republic has received net portfolio bond inflows of EUR 33bn, more
than double those of the previous decade. Czech inflows in recent months partly
reflect index inclusion the country joined J.P. Morgans local-currency bond index in
May. They also reflect investor flows into CZK assets ahead of the removal of the
EUR-CZK floor. Given that the CNB is comfortable with a further tightening of
financial conditions following the removal, EUR-CZK should continue to head lower.
In terms of expected returns to expected volatility (EUR-CZK vol remains low), EUR-
CZK shorts are the best EUR shorts in CE3, in our view.

Hungary Buoyant growth

Economic outlook Labour shortages are a constraint
Europe
Sarah Hewin +44 20 7885 6251 We expect growth to accelerate in 2017, supported by domestic and external
Sarah.Hewin@sc.com
Chief Economist, Europe tailwinds. We maintain our forecasts at 3.4% for 2017 and 3.1% for 2018, and
expect growth of 3.0% in 2019. In the medium to long term, Hungarys ageing
Geoff Kendrick +44 20 7885 6175 population and the continued emigration of skilled workers is likely to be a drag on
Emerging Markets FX & Global Macro Strategist growth and a risk to government finances.
The economy faces supply The unemployment rate stabilised at 4.3% in Q2, close to historic lows. Business
constraints, particularly of skilled surveys show that the lack of skilled staff is managers top concern. Sharp minimum
workers wage hikes 15-25% for 2017 depending on the type of worker, with further hikes
planned for 2018 are one measure the government is taking to limit emigration of
highly skilled workers to western EU countries where pay is significantly higher.
Inflation remains below target After three years of around zero inflation, the headline rate accelerated sharply to
2.7% in Q1, slowed closer to 2% in Q2, and has subsequently spiked higher, largely
due to temporary factors (higher tobacco and milk prices). We lower our CPI inflation
forecasts to 2.3% for 2017 (from 2.8%) and to 2.7% for 2018 (from 3.0%) on lower-
than-expected oil prices and persistently low domestic inflation, despite strong wage
growth. However, given the tight labour market, we expect core CPI inflation to
continue to rise gradually.
Policy No rush to tighten the monetary stance

Central bank is in no rush to Fiscal and monetary policy will likely remain accommodative. With inflation
tighten policy below target for the past four years, the National Bank of Hungary (NBH) has
adopted a highly accommodative stance. It lowered the base rate to 0.9% in 2016
and has introduced unconventional measures since November to further reduce
lending rates. We expect the NBH to gradually remove accommodation first by
dropping its commitment to use further unconventional tools in H1-2018, and then by
hiking gradually, starting in H2-2018. The credit cycle is picking up, but the recovery
is still in its early stages. Outstanding credit for both corporate borrowers and
households is rising after several years of deleveraging, and banking-sector
resilience is improving, as bad loans appear to have peaked.
To reduce the burden of the minimum wage increase on employers, the government
reduced social contribution rates and cut the corporate tax rate to 9% for all
Figure 1: Hungary macroeconomic forecasts Figure 2: Labour market is tight

Unemployment rate, % and wage growth, % y/y
14 Net wage
2017 2018 2019
growth, % y/y
Unemployment
12
10
8
Policy rate (%)* 0.90 1.15 1.65
6
USD-HUF* 254 228 254 4
0
Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17
*end-period; Source: Standard Chartered Research Source: Hungarian statistical office, Standard Chartered Research

companies. The results of the minimum wage hike will take time to become visible,
but the tight labour market should limit the negative impact on employment,
especially as it should trigger higher demand. While the government can borrow
Europe
relatively cheaply at present given loose global financial conditions and the cyclical
growth upswing, the declining working-age population means government finances
are likely to come under pressure in the medium term.
Politics Spat with the EU may escalate further

Deterioration in EU-Hungary The spat between Hungary and the EU has escalated, and the European
relations does not worry Commission has started legal proceedings against the Hungarian government.
investors yet According to the European Commission, new registration, reporting and
transparency requirements of the Hungarian NGO law violate EU fundamental rights
law and rules on free movement of capital. This procedure could eventually lead to
sanctions, such as suspending a member states voting rights. However, the
likelihood of this happening is low, as a unanimous vote by the rest of the EU
members is needed for sanctions to be approved, and Hungary and Poland have
indicated that they would vote to support each other.
The ruling party, Fidesz, continues to enjoy broad support, at 45%, according to
recent polls. The opposition is fragmented, with support for the centre-left Socialist
Party ranging between 15% and 20%. The next parliamentary election is due in
Q2-2018. A further rise in nationalist sentiment is a key political risk. Jobbik, a far-
right populist party, enjoys around 15% support. Moreover, concerns remain about
the rule of law in Hungary and its relationship with the EU. The government enjoyed
a two-thirds majority in parliament until 2015, which allowed it to make changes to
the constitution that were seen as consolidating the power of the executive and being
anti-liberal. The governments refusal to comply with an EU decision on refugee
settlement has raised calls for EU funding to be withheld.
Market outlook HUF is our least preferred in CE3

We continue to look for HUF Central European 3 (CE3) FX prospects remain dominated by the aftermath of
underperformance within the CE3 the EUR-CZK floor removal on 6 April. Since the floor was introduced in November
2013, the Czech Republic has received net portfolio bond inflows of EUR 33bn, more
than double those of the previous decade. At the same time, Hungary has
experienced net outflows of portfolio debt liabilities of EUR 11bn (compared to
+EUR 25bn over the previous decade). The positive story for CZK bond flows is
negative for the Hungarian forint (HUF).
Weak financial account flows have more than offset Hungarys strong current
account surplus, particularly since Hungarian rates fell below Polish rates in early
2016. We noted in April that we expected the NBH to end its intervention in FX
forwards (it sells EUR-HUF forward) soon, allowing the HUF to weaken (see FICC
Alert, 4 April 2017, CE3 Similar economies, divergent opportunities). Since then,
however, the NBH has rolled its forwards; net of forwards, its reserves are down
EUR 1.7bn since the removal of the EUR-CZK floor.
The NBH favours keeping local conditions ultra-loose (BUBOR has been at 15bps
since April) at the expense of local-currency strength. Drawing down FX reserves
adds to local liquidity, holding BUBOR down but also lowering EUR-HUF. We think
this policy will eventually be abandoned as inflation approaches the 3% target. As a
result, we continue to look for HUF underperformance within CE3.

Poland Still strong

Economic outlook Cyclical expansion continues
Europe
Sarah Hewin +44 20 7885 6251 Growth is picking up from the sluggish pace of 2016. We raise our GDP
Sarah.Hewin@sc.com
Chief Economist, Europe forecasts to 3.8% for 2017 and 3.4% for 2018 (previously 3.4% and 3.2%) and leave
our 2019 forecast unchanged at 3.0%. Key short-term risks relate to domestic policy
Geoff Kendrick +44 20 7885 6175 uncertainty due to governance issues. In the medium to long term, demographics
Emerging Markets FX & Global Macro Strategist pose a challenge.
Growth accelerated strongly to 4.0% y/y in H1, with consumption growing at close to
5% y/y; surveys suggest that momentum will continue in H2-2017. Similar to other
Central and Eastern Europe (CEE) countries, Polands economy slowed in 2016 due
to a sharp decline in EU-funded fixed investment (down 5.5% y/y) related to the
timing of EU investment fund disbursement. Funding via EU structural funds picked
up in H1-2017, reflected in strong government fixed investment. That said, we expect
private investment to remain sluggish as considerable political and regulatory
uncertainty reduces investment appetite.
Core inflation remains subdued for Inflation accelerated sharply in Q1-2017 to 2.0% y/y, from -0.2% on average in 2016,
now, despite accelerating headline mainly due to oil-price base effects and a spike in fresh food prices; it has since
inflation declined to slightly below 2.0%.
We expect headline inflation to average around 2.1% in 2017 given our view of
higher oil prices by Q4, with some support from higher core inflation. Core inflation
has been subdued at less than 1.0% y/y since 2012. We expect the tight labour
market and loose fiscal policy to gradually create price pressures, taking core CPI
inflation higher in H1-2018, though still short of the 2.5% target.
Polands EU-harmonised unemployment rate fell to a record-low 5.0% in Q2,

reflecting the tightening of the labour market. In the medium term, Poland faces the
challenge of growing old before growing rich, a likely drag on growth. The working-
age population has declined by 5% in the past five years, at a rate of about 300,000
people per year. Policies to address this include raising the retirement age and
encouraging those outside the labour force to join. However, the government recently
reversed planned increases in the retirement age.
Figure 1: Poland macroeconomic forecasts Figure 2: Inflation is likely to accelerate

CPI and nominal wages, % y/y
2017 2018 2019 6.0 Wage growth,

% y/y
5.0
4.0
CPI, % y/y
Policy rate (%)* 1.50 1.75 2.00 2.0
1.0
USD-PLN* 3.48 3.19 3.57
0.0
Current account balance (% GDP) -0.3 -0.2 -0.1 -1.0
-2.0
Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17
*end-period; Source: Standard Chartered Research Source: Polish Statistical office, Standard Chartered Research

Policy No rush to tighten monetary policy

NBP to stay on hold until 2018 We expect the National Bank of Poland (NBP) to maintain a wait-and-see stance
as inflationary pressures remain benign. We expect core inflation to rise gradually
Europe
to around 2.5% in H2-2018, which will allow the NBP to begin gradual monetary
policy tightening; we expect a 25bps hike in H2-2018. Moreover, we think that the
ECB will gradually withdraw policy accommodation in 2018, and that CEE central
banks will follow to avoid pressure on their exchange rates.
Low interest rates do not appear to be fuelling a credit bubble in Poland. Mortgage
credit and consumer credit is rising at about 3-4% y/y in local-currency terms, broadly
in line with GDP growth. Housing prices are rising at around 2-4% y/y, which is not
alarming. The share of mortgage lending in foreign currency (mostly Swiss francs) is
declining, which is positive for financial stability. The bank asset tax has encouraged
banks to increase their holdings of government debt; these have risen to 30% of
Polish sovereign bonds from 20% three years ago, posing a potential macro-
prudential risk.
The government will likely continue to run an expansionary fiscal policy, while
keeping the deficit within the EU Stability and Growth Pact limit of 3% of GDP. Given
Polands ageing population, a disciplined medium-term fiscal plan is needed, as
government spending is likely to rise in the coming years due to higher pension and
health-care expenses.
Politics Anti-EU rhetoric and policies may backfire

Laws interfere with the Government rhetoric and policies that run counter to EU values are a key risk
independence of the courts and the for Poland. The opposition and international observers have accused the
freedom of the press government of passing laws that interfere with the independence of the courts and
freedom of the press. The government is also in a spat with the European
Commission over its refusal to accept the relocation of refugees from other countries.
In 2016, the Commission adopted a Rule of Law Recommendation in response to

the situation in Poland, setting out its concerns and recommendations. If further talks
fail to resolve the issue, the Commission could, in theory, trigger Article 7 of the EU
treaty and formally acknowledge that Poland has breached its obligations under EU
law. This could lead to a curtailing of Polands voting rights. Moreover, press reports
in May said that Germany was investigating ways to freeze EU funds for countries
that violate EU rule-of-law norms; this could be a significant blow to Poland.
The current administration is led by the right-wing/nationalist Law and Justice party
(PiS). PiS won an absolute majority in the 2015 elections, enabling it to govern with
few checks and balances. The president, voted directly by the public, is also from PiS
and has significant executive powers. The next parliamentary election is due in 2019.
Market outlook Positive prospects for the PLN

Central European 3 (CE3) FX prospects remain dominated by the aftermath of
the EUR-CZK floor removal on 6 April. Strong inflows to the Czech koruna (CZK)
have come mostly at the expense of the Hungarian forint (HUF), but also partly the
Polish zloty (PLN). Net portfolio debt inflows to Poland have declined to EUR 7bn
since November 2013 from EUR 66bn in the previous decade. We expect these
flows to gradually return, supporting the PLN.

Russia Uneasy relations

Economic outlook Accelerating growth
Europe
Sarah Hewin +44 20 7885 6251 The economy is showing some positive signs in the short run, but structural
Sarah.Hewin@sc.com
Chief Economist, Europe issues remain. We raise our GDP growth forecasts, to 1.8% from 1.3% for 2017 and
to 1.9% from 1.8% for 2018. Key risks to the economy in the short to medium term
Geoff Kendrick +44 20 7885 6175 are a decline in oil prices and rising geopolitical instability. In the long run, protracted
Emerging Markets FX & Global Macro Strategist slow growth due to structural economic weakness is a risk.
Russia is leaving the recession The economy grew at a decent rate of 1.6% y/y in H1-2017, versus a mild decline in
behind, but prospects are limited H1-2016; a slightly faster pace looks likely in H2. We expect inflation to slow, ending
the year below the 4% target and bringing the annual average to 3.9%, as food
inflation eases in H2. We therefore expect below-target CPI inflation in 2018, at
3.7%, rising to the 4.0% target in 2019. That said, the Russian ruble (RUB)-Brent
crude oil correlation has declined significantly in recent months, which may dampen
the oil prices impact on inflation.
Positive signs near-term There are signs of a pick-up in consumption in the short term. Retail sales registered
positive growth in real terms in Q2-2017 for the first time since 2014; car sales are
showing positive annual growth for the first time since 2012. However, consumption
is constrained by falling real disposable income due to declining non-wage income
(lower pensions in real terms; lower incomes for individual entrepreneurs because
they are not adjusted for inflation). Companies are reluctant to invest, as interest
rates are still high and geopolitical concerns make foreign investors wary. On the
production side of the economy, the tradable sectors (agriculture and manufacturing)
are contributing the most to growth as the historically weak RUB supports investment
in these industries and boosts exports. Russias average wage is now about 20%
below Chinas, making production relatively cheap.
Oil production cuts are not a Russias reliance on oil and gas (which account for two-thirds of total exports and
sustainable strategy to support oil one-third of federal revenue) leaves the economy vulnerable to energy-price volatility.
prices and the economy Russia has agreed with OPEC to extend oil production cuts to support prices. This is
benefiting Russia in the short run even after the cuts, production is close to its
highest levels since the Cold War, and the higher oil price supports federal revenues
(we expect crude oil prices to accelerate towards the turn of the year). However, this
strategy is not sustainable in the long term. Meanwhile, the 2017 budget is based on
a conservative assumption of Brent crude prices at USD 40/bbl.
Figure 1: Russia macroeconomic forecasts Figure 2: RUB-oil correlation is down

USD-RUB and Brent crude oil, % y/y
2017 2018 2019 100% Brent crude, %

80% y/y
GDP grow th (real % y/y) 1.8 1.9 1.8 60%
USD-RUB
40%
20%
0%
Policy rate (%)* 8.25 7.25 6.75
-20%
USD-RUB* 58.0 60.0 60.0 -40%
-60% Correlation
Current account balance (% GDP) 3.0 3.0 3.0 -80%
-100%
Fiscal balance (% GDP) -2.5 -2.5 -2.0 Feb 15 Aug 15 Feb 16 Aug 16 Feb 17 Aug 17

Policy CBR to cut further, budget deficit to persist

CBR is likely to continue cutting the We expect the Central Bank of Russia (CBR) to continue its easing cycle, albeit
benchmark rate as inflation recedes at a slower pace. The inflation rate has declined swiftly, allowing the CBR to cut the
Europe
key rate by 150bps so far in 2017. We expect another 25bps of cuts this year, taking
the key rate to 8.25% by end-2017; we forecast another 100bps of cuts in 2018,
taking the key rate to 7.25% by end-2018. CBR Governor Nabiullina has stated that
real interest rates of c.2.5-3.0% are appropriate for Russia. Therefore, as long as the
inflation target remains at 4%, the key rate should remain at or above 7%.
In contrast to monetary policy, there is little room for manoeuvre on fiscal policy.
Government revenues have dropped significantly since the oil price decline in early
2015 (the oil and gas sector accounts for about half of government revenue). The
government completed a few significant privatisation deals in 2016, which
substantially boosted the fiscal position, but these represented one-off revenue.
Privatisations look unlikely to continue, as there is now less pressure to raise cash.
Fiscal consolidation drive is likely The government has proposed new fiscal rules effective in 2020 and has begun
to continue making budget proposals and policies in preparation. The proposed budget for 2017-
19 contains substantial fiscal consolidation, mainly via spending cuts. Moreover, the
government has started a programme to reduce RUB volatility by buying foreign
currency (USD and EUR) when Brent crude oil is above USD 40/bbl and selling when
it is below. The impact of these purchases on the RUB has been negligible.
Politics Major decisions unlikely before the 2018 election

Election may give rise to political The government will likely try to maintain stability until the next presidential
unrest, but opposition remains election, to be held in March 2018. We expect President Vladimir Putin to stand for
weak and fragmented re-election. Given his reported approval rating above 80% and the weak opposition,
we do not expect major domestic political turmoil. That said, recent polls show that
his approval rating has slipped a few percentage points since the beginning of the
year, especially ratings for the handling of corruption and the economy; foreign affairs
ratings remain strong.
Market outlook RUB tailwinds fade

We re-entered a USD-RUB short position following the recent recovery in oil prices,
see ACT, 31 July 2017, Sell (more) USD-RUB (again) . The main risk to this view is
renewed oil price weakness, which looks unlikely in the near term. The other big
global risk, renewed global pressure linked to Crimea, also seems to have
receded again.
Central bank intervention in USD-RUB, while ongoing, remains small. The CBR buys
USD-RUB when oil prices are above USD 40/bbl, but does so in a size equivalent to
the gap between achieved and budgeted oil revenues. Using the Ministry of
Finances assumptions for 2017 of USD 40/bbl oil and USD-RUB at 67.5, we
estimate that the central bank has bought around USD 5bn since the policy was
announced in late January. Rather than moving spot, the policy has mostly lowered
volatility, improving RUBs carry:vol characteristics.

Economies Americas
US and Canada Top charts

Figure 1: US wage pressures are weak in this cycle Figure 2: Phillips curve may be delayed, not broken
Wage inflation (% y/y), U3/U6 unemployment differential Average earnings (% y/y) vs U3/U6 differential (12m lag)
5.0 2.5 4.5
4.5 U3/U6 spread 4.0

3.5
(ppt, RHS, Y = -0.319 X +4.164; R^2 = 0.748
4.0 Atlanta Fed 3.5
inverted)
wage tracker, 4.5
AHE y/y %
3.5 3.0
% y/y 3mma
3.0 (12m lag) 5.5 2.5
2.5
6.5 2.0
Average hourly
2.0 earnings, % y/y 1.5
3mma (12m lag) 7.5
1.5
Americas
1.0
1.0 8.5 3 4 5 6 7 8
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 U6/U3 unemployment differential (lagged 12m)
Source: BLS, Atlanta Fed, Bloomberg, Standard Chartered Research Source: BLS, Bloomberg, Standard Chartered Research
Figure 3: Rising US quit rate reflects confidence Figure 4: Feds balance-sheet reduction likely be gradual
JOLTS survey, quits and layoffs (000s, 6mma) Russell 2000 index, Fed balance sheet (USD tn)
3,500 1,600 Fed balance 5.0
sheet (USD tn,
1,400 4.5
Quits RHS)
3,000 4.0
1,200
3.5
2,500 1,000 3.0
Russell 2000
800 2.5
2,000 Layoffs/cuts 600 2.0
1.5
400
1,500 1.0
200 0.5
But we note that layoffs have picked up slightly
1,000 0 0.0
Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17
Source: JOLTS survey, Bloomberg, Standard Chartered Research Source: Bloomberg, Federal Reserve, Standard Chartered Research
Figure 5: BoC is quickly reducing considerable stimulus Figure 6: Canadian credit is expanding sharply in 2017
BoC monetary conditions index; USD-CAD Credit growth, % y/y
4 1.00 8.0 Consumer/business
2 1.05 7.5 credit outstanding, % y/y
0 1.10 7.0
1.15 6.5
-2
BoC monetary
1.20 6.0
-4 conditions
index 1.25 5.5
-6
1.30 5.0
-8
1.35 4.5 Mortgages
-10 1.40 4.0 outstanding, %
USD-CAD y/y
-12 (inverted, 1.45 3.5
RHS)
-14 1.50 3.0
Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Source: BoC, Bloomberg, Standard Chartered Research Source: STCA, Standard Chartered Research

Latin America Top charts

Figure 1: Regional growth has been soft, but improving Figure 2: Despite easing, real rates are still too high
Annual GDP range, 2012-16, vs 2017 forecasts Regional policy rates, core inflation-adjusted
8 8
Bar displays minimum and maximum
Max 7
growth from 2012-16
6 6 Brazil
5yr avg 5
4 4
3 Colombia
2 Min Mexico
2
2017 forecast 1 Peru
0
0
-2 -1
Chile
-2
Americas
-4 -3
Argentina Brazil Chile Colombia Mexico Peru Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17
Source: Government websites, Bloomberg, Standard Chartered Research Source: Various central banks, Bloomberg, Standard Chartered Research
Figure 3: BoP improvements are likely peaking in 2017 Figure 4: A stronger Brazilian economy is good for Latam
Current account (% GDP) Economic activity index (% y/y), capacity utilisation (%)
4 15 86
Capacity utilisation,
%, RHS 84
2
Argentina 10
Chile 82
0
Brazil 5 80
-2
Mexico 78
0
Peru
-4
Colombia 76
Economic activity
-5
-6 proxy, % y/y 74
-8 -10 72
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Source: Various central banks, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Figure 5: Chiles growth improves but loan demand is weak Figure 6: Low inflation in Chile could keep rates low
Chile growth proxy and loan growth, % y/y CPI inflation and wage growth, % y/y
20 8
7
15
6
Total Hourly wages,
10 5 % y/y
Commercial 4
5 3 Core CPI, % y/y
(ex. food/energy)
2
0
1 CPI, % y/y
IMACEC
growth proxy
-5 0
Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Source: IMACEC, Banco Central de Chile, Standard Chartered Research Source: Banco Central de Chile, Standard Chartered Research

US Sustained momentum
Economic Outlook On track
Sonia Meskin +1 212 667 0786 Underlying economic momentum has remained solid in Q3, with business
Sonia.Meskin@sc.com
US Economist, The Americas investment and manufacturing data evidencing sequential improvement. We think the
Standard Chartered Bank NY Branch
economy remains on track to expand 2.1% y/y in 2017, with a modest risk to the
John Davies +44 20 7885 7640 upside. While weather-related effects from recent hurricanes are likely to hit growth in
John.Davies@sc.com
US Rates Strategist the short term, we believe that these effects will be tempered by a rebound in
construction and other activity in the affected regions over the following months.
Business investment, This recovery cycle has been quite long, but it is still not in its final stage, in our view.
manufacturing and commercial Business investment, manufacturing, and commercial credit indicators all point to
credit are evidence of moderate ongoing, albeit moderate, strengthening in the aftermath of the 2015-16 declines
strengthening
(which were driven primarily by the slump in the energy sector). Consumers also look
Americas
healthy, with labour-market and household balance-sheet strength reflected in

historically low consumer delinquency rates. We expect global growth to help sustain
domestic momentum through the positive impact of a weaker USD and a related
improvement in the current account balance.
Expectations of fiscal stimulus have waned since the start of the year, but tax reform
may still show meaningful progress in 2017. This would, at a minimum, further buoy
equity-market valuations and investor sentiment. The impact on economic growth
would likely be magnified should corporations deploy funds gained from tax reform
into capital investment and other productive activity, but this would probably be a
2018 story.
Policy Fed narrative is intact, for now

Fed looks through low inflation At its 20 September meeting, the FOMC reiterated its conviction that economic
prints; no shift in policy outlook, growth remains on track, despite persistently low inflation. Consequently, the Fed
balance-sheet tapering as expected signalled continued commitment to another rate hike in 2017 and three more in 2018,
as implied by the unrevised median staff forecasts (dots).
The FOMC also revised down the median 2019 and long-term federal funds target
rate (FFTR) forecasts. We believe that the lower estimates for the long-run FFTR
are due to declines in the Feds estimates of potential economic output. In short,
the FOMC sees the US economy growing more slowly than in the decades before
Figure 1: US macroeconomic forecasts Figure 2: Consumer and commercial credit still healthy
%
Delinquency
2017 2018 2019 8
rates on credit
cards
4
Core PCE (% annual average) 1.6 1.8 1.9
2
Delinquency
Fed funds target rate (%)* 1.50 2.00 2.00
0 rates
on C&I loans
10Y UST yield (%)* 2.40 2.25 2.60 -2

Real GDP, y/y
-6
*end-period forecast. FFTR: upper-end of expected range; Source: Federal Reserve Bank of St Louis

the 2008-09 global financial crisis. Indeed, the FOMCs estimate of potential output
(and therefore the appropriate long-run FFTR) has fallen fairly steadily since then.
This currently suggests that the output gap has closed; the unemployment rate is
running below its long-run, natural rate; and ongoing tightening of monetary policy
therefore remains appropriate. The measured and well-telegraphed nature of the
tightening trajectory is likely seen by those who subscribe to this narrative as
sufficiently accommodative.
Separately, the Fed announced the start of its balance-sheet run-off programme in
October, as outlined in its June statement, while leaving the policy rate unchanged in
September. Both were widely expected by the markets and elicited minimal
price action.
Fiscal policy Out of the doldrums?
Americas
We expect progress on tax reform, While the Trump administration has faced significant setbacks on several of its key
but the economic boost will depend policy proposals, the corporate tax initiative appears to be the exception. Within the
on the response from the corporate Republican Party, the idea enjoys broad support (unlike disjointed efforts on the
sector
Affordable Care Act). It therefore stands a reasonable chance of passing along party
lines through the expedited reconciliation procedure, which requires only simple
majority support in Congress. Details of the plan would still need to be hashed out
and could pose additional roadblocks; they include the ultimate size of the cut,
whether tax relief will be temporary or permanent, and debate around how the cuts
will affect the deficit and government spending.
The current Republican proposal seeks to cut corporate taxes by USD 1.5tn over the
course of 10 years. Ultimately, however, the effect on economic growth will depend
on whether corporations choose to invest the funds to expand production and R&D
activity (thus helping to sustain healthy employment trends) instead of increasing
share buybacks.
UST market outlook Dont fight the flattening

The dominant theme for the US Treasury (UST) curve so far in 2017 has been curve
flattening. Short-end yields have trended gradually higher as the Fed hiked rates
twice in H1 and maintained its guidance of a further move by year-end. Long-end
yields, however, have edged lower due to subdued inflation and growing speculation
of a persistently lower neutral rate, a view backed up by the renewed decline in the
Feds median longer-run policy rate projection to 2.75%. Given the December rate
hike we expect, curve flattening may carry a more bearish tone in the near term but
we expect a more bullish tone to emerge next year and forecast a completely flat
2Y/10Y curve with yields at 2% by mid-2018.

Canada Boomtown
Economic outlook Leading the G7 pack
Mike Moran +1 212 667 0294 Canadas Q2-2017 annualised GDP growth rate of 4.5% was the strongest since
Mike.Moran@sc.com
Head, Research, The Americas Q3-2011. Consumption spending drove the acceleration in headline growth; net trade
also deserves an honourable mention, having grown at an 11.8% annualised rate in
Q2, solely driven by goods rather than services. The mining sector (predominantly
driven by oil and gas extraction) is reporting 20% y/y growth rates as the industry
moves out of last years recession. While these growth rates are likely to be
unsustainable over the long run, they lead us to raise our GDP forecasts. We now
expect growth of 3.0% in 2017 (from 1.7% previously), 2.4% in 2018 (1.5%), and
2.0% in 2019 (1.5%). The economic backdrop for Canada looks relatively solid going
into 2018, despite an expected slowing in activity numbers.
Americas
A quickly improving labour market With consumer spending driving recent growth, household fundamentals
has revived consumer spending remain critical to the outlook. On the positive side, the ongoing recovery in
Canadas labour market is likely to remain supportive for the rest of the year. The
jobs recovery was knocked off course in 2015-16 as commodity prices corrected, and
could play catch-up with US labour-market trends, with which Canada is closely
correlated. Canadas August jobless rate was 6.2%, still above the pre-global
financial crisis low of 5.8%. In Canada, unlike in the US, wage growth has been
responsive to tightening labour markets and should continue to support short-term
household spending (Figure 2). Price pressures were weaker than expected in H1-
2017, but improving wage and consumer spending dynamics suggest stronger
inflation in 2018. We reduce our 2017 inflation forecast to 1.7% (from 1.9%) and raise
our 2018 forecast to 1.7% (from 1.5%).
While home price inflation in Household debt is an oft-cited risk to Canadas economy; this issue is unlikely
hotspots need to be monitored, to go away anytime soon. Canada does look heavily indebted by many traditional
strong net migration offers metrics (debt to GDP or debt to disposable income), as the Bank of Canada (BoC)
structural support for housing
continues to highlight in its policy reports. Data suggests that targeted measures to
demand
cool prices in Toronto and Vancouver are curbing transaction volumes, if not prices.
While household debt cannot be dismissed, tighter monetary policy seems
warranted, especially as the economy is enjoying a cyclical upswing. Moreover,
strong net migration trends (+68,000 in Q1-2017) are fuelling structural demand for
property aside from speculation.
Figure 1: Canada macroeconomic forecasts Figure 2: Phillips curve seems alive and well in Canada
Wages (% y/y) vs unemployment rate (%)
2017 2018 2019 5.5% 6.0

5.0% 6.2
GDP grow th (real % y/y) 3.0 2.4 2.0 4.5% 6.4
CPI (% annual average) 1.7 1.7 1.9 4.0%
6.6
3.5%
Policy rate (%)* 1.25 1.75 1.75 6.8
3.0%
7.0
USD-CAD* 1.22 1.18 1.30 2.5%
2.0% 7.2
Unemployment rate, %
Current account balance (% GDP) -2.5 -2.0 -2.0 1.5% (inverted, RHS) Wages, % y/y 7.4
1.0% 7.6
Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: STCA, Bloomberg, Standard Chartered Research

Policy More BoC hikes to come

BoC wasted little time in reversing The BoC has raised policy rates twice, by a cumulative 50bps, since July,
the insurance stimulus of 2015 swiftly removing the insurance policy cuts of 2015. Given the tone of the latest
policy statement, the BoC does not seem content to merely reverse 2015 policy
stimulus. We see scope for additional policy hikes of 25bps in Q4-2017, Q1-2018 and
Q2-2018, taking the year-end 2018 policy rate to 1.75%.
The BoC has clearly signalled that the improving breadth of the domestic recovery
and the synchronous global economic expansion have added to its confident
policy outlook. The BoC further underscored its tightening bias by highlighting that
the removal of some of the considerable monetary policy stimulus in place is
warranted. Notably, the statement made only a descriptive reference to the
strength of the Canadian dollar (CAD), rather than including a prescriptive warning
Americas
about it getting too strong. In other words, neither the 10% rally in the CAD versus
the USD, nor the 8% gain in the trade-weighted basket, has yet to become a
concern; the tightening of monetary conditions from a stronger currency is still
aligned with the BoCs policy settings.
Urgency of recent policy action The BoC delivered back-to-back rate hikes with relative urgency after a long
suggests that future BoC meetings period of policy action characterised by caution and carefully crafted guidance. The
will be live 12 July policy hike was preceded by hawkish commentary from both Governor Poloz
and Deputy Governor Wilkins, and delivered at a policy meeting with a scheduled
press conference. The 6 September policy hike was delivered without a press
conference and virtually no advance guidance from BoC leadership. This is a
refreshing break from G10 central banking convention (where policy changes are
well telegraphed ahead of time), and suggests that upcoming BoC policy meetings
may be live. The BoC is arguably among the most hawkish G10 central banks.
Market outlook Proactive BoC to keep CAD underpinned

Leveraged positioning in the CAD A hawkish turn from the BoC since June, culminating in the first policy rate hike since
has flipped from large net shorts to September 2010, has upended future rate expectations and driven a sharp sell-off in
net longs as the BoC quickly USD-CAD. The US/Canada 2Y bond yield spread, which widened to a nearly nine-
signalled a tighter policy stance
year high in May, has since almost closed. Short-term leveraged positioning in the
CAD (according to CFTC data) showed record net shorts prior to Julys policy hike,
which helps explain the sharp rally in the currency in recent months. Net leveraged
CAD longs are now at two-year highs, suggesting that additional currency strength is
likely to be more gradual than the price action of June-July. The BoCs relative
hawkishness, in tandem with the strength of the cyclical economic upswing, should
keep the CAD on a firm footing. We forecast USD-CAD at 1.22 at end-Q4-2017 and
1.21 at end-Q1-2018.

Brazil Green shoots, despite fiscal setbacks

Economic outlook Consumers show signs of life
Mike Moran +1 212 667 0294 After spluttering in H1-2017, the Brazilian economy is finally showing durable signs of
Mike.Moran@sc.com
Head, Research, The Americas life. High-frequency activity indicators have improved and point to a more sustainable
and positive growth trajectory than the market consensus at the start of 2017. Recent
data is consistent with our 2017 GDP growth forecast of 0.9%. We raise our 2018
and 2019 forecasts to 2.2% and 2.4% (from 1.7% and 2.0%, respectively) to reflect
the more solid fundamental outlook, now that the economy appears to have turned
the corner after the 2015-16 recession.
Recovering consumer sector has Renewed consumer spending is the key to the emerging recovery. Retail sales
been a key ingredient of firmer growth, on a real basis, is accelerating back above 3% y/y, the strongest since early
economic performance 2014. The improving consumer outlook coincides with a recovering labour market,
Americas
which registered its first quarterly job gains in Q2 since Q4-2014. The unemployment
rate reached a cyclical peak of 13.7% in March 2017, and is likely to continue falling
towards 12% by year-end. Real earnings, having contracted for much of 2016 as the
recession deepened, rose 2.5% y/y in July, the highest in three years. The emerging
consumer recovery is underpinning the broader economic upswing as domestic
investment spending struggles to gain traction. Capacity utilisation rates remain near
cyclical lows for now (though they are turning higher), suggesting that the recovery
still has room to run in 2018-19.
Brazils BoP still looks strong, Brazils external sector remains a relatively bright spot, although further significant
though C/A deficit reduction may improvements in the current account (C/A) deficit may be harder to come by.
slow as domestic demand recovers Recessions typically reduce import demand, boosting trade balances; in Brazils
case, improved terms of trade (particularly commodities) have also helped to reduce
the C/A deficit from over 4% of GDP in 2015 to 0.7% in July 2017. We lower our
2017 C/A deficit projection to 0.9% of GDP from 1.4% to reflect the H1 performance.
With domestic demand recovering, the deficit is likely to widen again in 2018 and
2019 to 1.2% and 1.5% of GDP, respectively. Brazil continues to attract healthy FDI
inflows (USD 84.5bn on a 12-month rolling basis to July 2017), making external
financing ample.
Figure 1: Brazil macroeconomic forecasts Figure 2: Labour market shows a notable upturn in growth
Job creation, unemployment rate
2017 2018 2019 16 200

150
GDP grow th (real % y/y) 0.9 2.2 2.4 14 100
50
-50
Policy rate (%)* 7.00 7.00 9.75 10
-100
8 -150
USD-BRL* 3.15 3.30 3.25
-200
6 Job creation -250
Current account balance (% GDP) -0.9 -1.2 -1.5 Unemployment (3mma, '000s, RHS)
rate -300
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Policy Easing cycle approaches an end

We expect BCB to reduce policy Banco Central do Brasil (BCB) has delivered 600bps of easing in the past 12 months,
rates to 7.00% by end-2017 the steepest rate-cutting cycle since 2005-07. The latest move was a 100bps rate cut
at the 6 September policy (COPOM) meeting. Inflation slowed to 2.7% in July 2017
from 10.8% y/y in 2016. We reduce our average inflation forecasts to 3.0% for 2017
(from 4.6%) and 4.0% for 2018 (from 4.8%). The inflation cycle is showing signs of
bottoming in H2-2017, and BCB has signalled that the current easing cycle may be
gradually ending. That said, we still see scope for another 125bps of easing by year-
end, bringing the policy rate to 7.00%. Inflation expectations are well-anchored below
current target rates, with little sign of picking up. Based on our reading of the latest
COPOM minutes, we think BCBs sensitivity to setbacks in fiscal reforms has
decreased in recent months; this suggests that it may be comfortable reducing policy
rates even as the reform outlook becomes more uncertain.
Americas
Meaningful fiscal overhaul may be The fiscal outlook remains a key risk to the Brazilian economy, despite markets
deferred until the next government taking this years reform setbacks in stride. Much-anticipated progress on social
takes office in 2019 security and pension reforms has been a casualty of President Temers political
scandals; the likelihood of meaningful changes before year-end is diminishing. The
impetus to overhaul Brazils structural fiscal deficiencies may not be revived until the
next government takes office in 2019. In the meantime, Brazils debt/GDP is likely to
deteriorate. Primary fiscal targets through 2020 have already been loosened. While
Brazil has made progress on restraining government spending, revenue likely needs
to be boosted to manage the fiscal deficit. Tax revenue, weakened in 2017 due to the
recession, should begin to improve in 2018 as growth accelerates, providing a
cyclical boost to the fiscal accounts. Public-sector asset sales planned in 2018 could
also supplement the fiscal shortfall, but the long-term drag from social security
spending still needs to be addressed.
Politics 2018 presidential field remains broad

Electioneering starts in earnest in While Brazils next presidential election is still more than 12 months away (October
early 2018 2018), candidates are already jockeying for position; more detailed policy platforms
will start to emerge in early 2018. The current field of candidates is wide but should
thin as 2018 begins. Markets see centre-right Geraldo Alckmin, the governor of So
Paulo, as among the steadier hands and supportive of fiscal reform. Marina Silva,
who finished third in 2014 elections, has also polled well lately. Her centrist policy
platform includes some of the current fiscal reform initiatives. It is unclear whether
left-leaning former President Lula da Silva will be eligible to run, as he awaits an
appeal on corruption charges, which may not be settled until 2018. Lula remains
popular in the rural north and polls well; he could add uncertainty to the elections.
Market outlook Carry outweighs fiscal setbacks

We think the improvement in Despite fiscal setbacks in 2017, investor enthusiasm for Brazil has not been dulled.
Brazils institutional credibility has We think the key factors behind Brazils resilience have been strong investor appetite
been critical to its resilience to for high-yielding assets in 2017, a more confident fundamental backdrop for China
recent political shocks
and commodity prices, and a marked improvement in the Brazils institutional
credibility, including of the BCB. While Brazil still has significant fiscal challenges to
address (which could hurt growth), recent green shoots in the domestic economy
could ease some of these concerns.

Mexico There could be trouble ahead

Economic outlook A strong H1, but headwinds remain
Mike Moran +1 212 667 0294 Despite the uncertainties facing Mexicos economic outlook, H1-2017 was
Mike.Moran@sc.com
Head, Research, The Americas surprisingly resilient and H2 is likely to be similar. Economic activity and fiscal
dynamics have improved, buying time from credit agencies, which recently lifted
Mexicos credit outlook back to stable. While a benign risk backdrop and strong US
demand have been positive recent drivers, we remain concerned about the risks
surrounding the North American Free Trade Agreement (NAFTA) renegotiation and
looming presidential elections in 2018. We modestly raise our 2017 GDP growth
We revise up our 2017 GDP growth forecast to 2.2% (from 1.9%) to take into account resilient H1 activity, though we
forecast to 2.2%, but revise down revise down our 2018 and 2019 growth projections to 2.0% and 1.7% (from 2.2%
our 2018 forecast to 2.0% and 2.4%, respectively) to reflect headwinds expected over the forecast period.
Americas
Economic performance in Q2 showed underlying resilience. GDP growth

softened marginally to 0.57% q/q from 0.66% in Q1, but it accelerated on both a
seasonally and working-day adjusted basis (to 3.03% and 2.95% y/y, respectively).
Private consumption outperformance continued to drive growth (4.36% y/y), despite
little help from government (0.11%) or gross investment (0.0%) expenditure.
Although aggregate investment (private and public) was flat, private capital formation
growth picked up to 1.95% in Q2 from -0.83% y/y in Q1. The ongoing consolidation of
the fiscal accounts is keeping public expenditure growth negative.
A stronger MXN and tighter Our more cautious economic outlook for 2018-19 hinges on both cyclical and
monetary policy could present structural risks that have yet to fully emerge. From the domestic cyclical perspective,
headwinds to Mexicos economy the competitive boost from a weak Mexican peso (MXN) in 2015-16 27%
in 2018
depreciation on a real effective exchange rate (REER) basis is likely to fade. The
MXN REER has already strengthened 15% in 2017, adding to the tightening in
aggregate financial conditions driven by the 2015-17 policy hiking cycle. The impact
of this may not become more apparent until 2018 and beyond, and could dampen the
positive momentum carried forward from H2-2017.
Complementing this risk is the evolution of the US demand cycle, which figures
closely into Mexicos outlook. The surge in US ISM surveys shows some signs of
consolidation (albeit from high levels) and may point to similar stabilisation in
manufacturing growth for Mexico in H2 and beyond (Figure 2). Exchange rate
fluctuations are only one factor; bumper US auto-replacement demand in the wake of
Figure 1: Mexico macroeconomic forecasts Figure 2: US PMI upswing is starting to stabilise

US ISM vs Mexico manufacturing exports
Mexico manufacturing
2017 2018 2019 60 10
exports (6mma, % y/y)
58 8
6
56
4
54
Policy rate (%)* 7.00 6.25 5.50 2
52
0
USD-MXN* 17.75 18.00 17.00 50
US ISM -2
Current account balance (% GDP) -2.4 -2.2 -2.6 48 manufacturing (LHS) -4

Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17

US hurricane damage could provide a short-term boost to Mexicos auto sector. The
sector saw a 15.6% y/y increase in exports to the US in H1-2017, according to the
Mexican Automobile Industry Association. One in five light vehicles produced in
North America comes from Mexico.
Uncertainty over NAFTA In this context, ongoing NAFTA negotiations remain critical. While the early
renegotiations is holding back hostile rhetoric has been pared back, much remains up in the air; some policy points
investment decisions, despite more have been declared non-negotiable. The third round of talks begins on 23-27
constructive signals lately
September in Ottawa. Unofficial sources suggest that the most contentious issues
(rules of origin revisions, standardising labour conditions, and new trade dispute
mechanisms) are likely to be pushed to the later rounds of talks closer to year-end.
This suggests that short-term clarity is unlikely and a conclusion is distant. Mexico
remains resolute in fending off calls to narrow local wage differentials with the
US/Canada, just one potential sticking point that could scupper a deal.
Americas
Policy Rate cycle reaches its peak
Banxico seems comfortable at a Banco de Mxico (Banxico) has likely completed its tightening cycle (the latest
7.00% policy rate policy hike was in June); we expect policy rates to remain at 7.00% until at least
Q2-2018. Recent policy statements retained a mostly neutral tone but also
highlighted residual hawkish precautions on inflation. In particular, Banxico
highlighted the continued need to monitor second-order inflation risks. With the
economy proving resilient, the argument for early policy easing has weakened.
Banxico is likely to keep a close eye Banxicos reaction function will remain sensitive to several factors: (1) inflation
on core goods and services prices, dynamics, particularly expectations; (2) MXN fluctuations and their perceived
which have trended higher influence on inflation expectations; (3) interest rate differentials with the Federal
Reserve; and (4) Mexicos economic outlook. Encouragingly, headline inflation is
starting to peak and should start to fall as lower base effects wear off. That said,
beyond the impact of gasoline price hikes earlier this year, core price pressures were
building even prior to January, especially in core goods and services. This is an area
of vigilance for Banxico and a key factor behind tight policy.
While Banxico sees inflation moving back towards 3% by end-2018, medium- and
long-term breakevens are higher than the central bank would like. Recent fiscal
policy data shows an improvement. Belt-tightening measures are taking effect, and
gains from FX reserves have boosted the fiscal accounts. To reflect this, we lower
our fiscal deficit forecasts to 1.7% for 2017 (from 2.4%) and 2.1% for 2018 (2.7%).
Politics AMLOs MORENA leads early polling

AMLO is building a lead in The close gubernatorial election in the state of Mexico (Mexicos most
national polls populous state) suggests that the 2018 presidential election will be hotly contested.
Andrs Manuel Lpez Obrador (AMLO) of the leftist MORENA party is building on
recent successes; opinion polls indicate that he is the frontrunner in next years
presidential election, with 23.3% of the vote. Voter disillusionment with the centrist
PRI and centre-right PAN (which have yet to settle on candidates) and the growing
appeal of politicians with populist and anti-establishment messages are likely to keep
AMLO in the drivers seat. His vocal criticism and opposition to recent US policy
could be a risk that is still underpriced by markets at this early juncture, and another
headwind to Mexicos outlook in 2018.

Strategy outlook
Another brick in the wall

Eric Robertsen +65 6596 8950
Eric.Robertsen@sc.com Low UST term premium continues to drive EM performance
Head, Global Macro Strategy and FX Research
Standard Chartered Bank, Singapore Branch USD weakness and flat yield curves remain key supports for EM
Low inflation allows the FOMC and ECB to proceed cautiously
EM carry remains attractive, but we take a selective approach
We stick with our LAVA framework stay long assets with vol
accumulation to protect against increasing risks
FX
The broad USD is down 8% YTD, driven by a decline in US rate-hike expectations,
low UST term premium and a flattening yield curve. These factors are driving the
outperformance of many EM assets, and we expect these trends to continue. We
therefore maintain our short USD-EM bias and look for opportunities to buy EM FX
selectively. We focus on currencies driven by high-yield bond inflows, and we favour
commodity exporters over importers. Our preferred currencies are INR, SGD, THB,
MYR, TRY, RUB, CLP and MXN.
Stay short the USD as US rate-hike USD weakness in 2017 has occurred amid remarkably low volatility (Figure 1).
expectations continue to fall and Inflation rates around the world are converging at lower levels, as we highlighted in
the yield curve continues to flatten The Long View Opportunities in the new Great Moderation. Declining inflation and
accommodative central banks have offered critical support to EM assets. We also
argue that FX rates may have a more limited role to play in economic rebalancing,
Strategy outlook
which implies less volatility. In an environment of attractive carry, this suggests more
sustainable trends in EM FX.
So far, USD weakness has extended only to the bottom of the range of the past two
years. If it breaks the bottom of this range, we see potential for the USD to fully unwind
the rally that took place between 2014 and 2016 implying more than 10% further
downside from current levels. As we described in the 3 September edition of SMS, the
implications for EM FX gains are significant, since USD strength (along with FOMC rate
hikes) was often cited as a key risk to EM assets during the 2015-17 period.
AXJ currencies have recently The recent acceleration in USD weakness has seen a number of AXJ currencies
experienced significant breakouts break significantly to the upside. USD-CNY recently declined to the lowest level since
December 2015, and both USD-IDR and USD-INR have fallen to the lowest levels
since November 2016. In addition to USD weakness, the decline in global yields has
reinforced demand for carry, and volatility-adjusted carry remains compelling in a
number of our preferred currencies (Figure 2).
Figure 1: Term premium weighs on EM FX volatility Figure 2: Static carry remains a key driver of flows
10Y UST term premium, bps (LHS) vs our EM FX vol index, % Ratio of 1Y carry/vol (LHS), vs 1Y carry, % (RHS)
(RHS)
1.00 16 1.0 25%
0.75 0.8 20%

EMFX vol 14
0.50 (RHS) 0.6 1Y Carry/ vol
12 (LHS) 15%
0.25 0.4
0.00 10 10%
0.2
-0.25 5%
8 0.0
-0.50 UST 10Y term
-0.2 1Y carry 0%
premium 6
-0.75 (RHS)
(LHS) -0.4 -5%
-1.00 4
PHP
CNH
PEN
ARS
HUF
PLN
CLP
COP
BRL
SGD
TWD
KRW
ZAR
RUB
CNY
THB
CZK
MYR
MXN
TRY
IDR
INR
Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17


Rates
We are Positive on India, Thailand Heading into the final quarter of 2017, emerging markets are driven by concerns over
and Sri Lanka bonds; stay Neutral US domestic politics and heightened geopolitical risks on the Korean peninsula. The
on low-yielders 10Y UST yield recently fell below 2.10% to its lowest level this year, while the USD
index dropped to its lowest level in over two years. This backdrop of low UST yields
and a weaker USD is broadly supportive of Asian local-currency (LCY) bonds.
Though bouts of geopolitical uncertainty tend to put pressure on regional equities and
increase the risk of outflows, sizeable reserve accumulation by Asian central banks in
H1-2017 provides a cushion for LCY markets.
We maintain our Positive outlooks on India, Thailand and Sri Lanka bonds, while
staying Neutral on Asian low-yielders. We expect Indian Government Bonds (IGBs)
to benefit from favourable inflation dynamics and further rate-cut expectations; we
stay long 6Y IGBs. Our Positive outlook on THB bonds is underpinned by high real
yields relative to Asian peers with current inflation below the central banks 1-4%
target range. Korea Treasury Bonds (KTBs) have become cheaper on rate-hike
expectations, bond issuance pressure and geopolitical risk. The KTB/UST yield
spread is close to its widest since early 2016, with KTBs now yielding above USTs.
We recommend buying 10Y KTBs versus USTs.
Commodities
Oil markets are still dominated by Oil prices remain range-bound as the market remains focused on rising US output
Strategy outlook
negative sentiment volume and overlooks supportive stock data. We believe US output growth dynamics
have turned negative, which will ultimately offset increased production from countries
such as Libya. We expect Brent oil to recover in to the mid-50s USD/bbl by year-end.
We remain positive on gold prices on continued USD weakness, heightened

geopolitical tensions and reduced prospects for monetary tightening from the FOMC.
We expect gold prices to remain above USD 1,300/oz for the rest of 2017. In copper,
we take the opposite view and we are tactically short, targeting USD 6,500/t.
Medium-term fundamentals are still supportive, but we believe prices have overshot
near-term fundamentals; we also expect the refined market to move into surplus in
Q1-2018. We project an average copper price of USD 6,450/t for Q1-2018.
Figure 3: Selected LCY markets still offer high real yields Figure 4: Gold supported on reduced rate hikes
10Y bond yield minus current CPI inflation, bps %, inverted (LHS) vs gold price, USD/oz (RHS)
800
-0.2 1,400
700 -0.1
1,350
0.0
600 Gold (RHS) 1,300
0.1
500 0.2 1,250
400 0.3
1,200
0.4
300 0.5 1,150
200 0.6 1,100
0.7 10Y UST TIPS
100 (LHS) 1,050
0.8
0 0.9 1,000
BR IN ID CH TH SG MY TW KR Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

UST term premium still holds the key to EM

Wish you were here
We are sticking with a positive bias We maintain our positive bias towards EM assets. Low inflation and flat yield curves
towards EM but increasing our are keeping UST term premium at low levels. Combined with a softer USD, this has
hedges allowed EM assets to continue their exceptional performance in 2017. We expect no
change to any of these key risk factors for EM, so we stick with our long bias for now.
But consistent with the LAVA approach we introduced in MSV Every breath you
take, we continue to advocate that investors use low levels of volatility to accumulate
hedges and tail-risk protection (Figure 5). We believe that while EM remains
attractive, market risks have gone up due to potential monetary policy tightening and
growing political risk in Washington.
Yellen introduces a third Ultimately, we expect inflation to remain low, the UST yield curve to flatten, and the USD
mandate financial stability to remain soft which should support EM assets (Figure 6). We forecast that the UST
yield curve will flatten to 0bps at the 2% level by Q2-2018. Yellen introduced the notion
of financial stability to the monetary policy debate at Jackson Hole, but this is unlikely to
imply a faster pace of rate hikes. Further, it is unlikely to be supportive of the USD.
The FOMC has become increasingly concerned about the low level of inflation, and
we see a rising risk that it will lower the dot plots for 2018-19 and lower its forecast of
the terminal Fed funds rate. Short-term interest rates are already priced for a very flat
rate-hike trajectory, but long-dated yields and forwards are still 40-50bps higher than
Strategy outlook
their levels on US Election Day. As those yields decline further and the US yield
curve flattens, the USD should continue to weaken and EM assets should extend
their gains. We acknowledge that market risks are higher in the short term, but the
medium-term outlook remains benign for EM.
Watching the domestic US outlook for clues

Elevating financial stability within the monetary policy debate could be seen as an
attempt to provide cover for further rate hikes, despite the underperformance of
inflation relative to the FOMCs mandate. But we see a contradiction within this logic.
If the FOMC is worried that keeping rates too low for too long will encourage
excessive risk-taking and leverage, it can tighten more than the level of inflation
would justify, but this would raise the risk of creating market volatility and an
economic recession. Alternatively, it could place a premium on transparency and
gradualism, all the while continuing to raise rates. But the risk is that the FOMC
Figure 5: Term premium weighs on EM FX volatility Figure 6: The USD suffers under a flattening curve
10Y UST term premium, bps (LHS) vs our EM FX vol index, % UST yield curve, bps (LHS) vs USD broad TWI (RHS)
(RHS)
1.00 16 150 130
0.75 128
EM FX vol 14 130 Broad USD
0.50 (RHS) TWI (RHS) 126
12 124
0.25 110
0.00 10 122
90 UST 2Y/10Y 120
-0.25
8 (LHS)
-0.50 10Y UST term 118
70
premium 6
-0.75 116
(LHS)
-1.00 4 50 114
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17

tightens and financial conditions remain loose (or ease further) as we are currently
seeing, and as we saw in the 2004-06 rate-hiking cycle. As the latest BIS report
highlights, gradualism and transparency are no panacea.
The concept of forward guidance If the FOMC wants to inject more risk premium into markets to discourage excessive
may have outlived its intended risk-taking, it would be better served by eliminating forward guidance, including the
purpose dot plots. Forward guidance was meant to be an additional form of policy easing a
way to guide markets towards the FOMCs intended policy trajectory. It was a
method of compressing term premium and long-term yields. If the FOMC wants to
inject term premium into market pricing and behaviour, it should take away some of
the explicit signposts.
The bigger issue, in our minds, is the lack of inflation. The US labour market is
approaching FOMC estimates of full employment, but wage and price inflation remain
low. Several indicators also show a loss of momentum in the US economy.
Commercial and industrial loan growth has slowed (Figure 7). This suggests that
there may not be excessive demand for leverage in the economy, in spite of the
Feds concerns. Further, we think the lack of private demand for credit helps to
explain the low level of inflation.
Market-based domestic indicators Several market-based indicators of domestic US momentum also show a slowdown.
have also lost momentum The Russell 2000 is an index of small-cap, domestically focused stocks (Figure 8). Its
poor performance relative to the S&P in 2017 suggests to us that investors are losing
faith in companies geared towards the domestic economy (as opposed to large-cap
Strategy outlook
multinationals that earn most of their revenues overseas). We think the FOMC is
unlikely to hike rates according to its current forecast with emerging evidence of
softness in US economic momentum.
Learning to fly
Can US rates markets remain The biggest threat to our benign view on UST term premium is the FOMCs plans to
supported with less Fed buying? start reducing the size of its balance sheet. As expected the FOMC announced at the
September meeting that it will begin tapering in October, capping the amount of
securities that are allowed to roll off (Figure 9). The remaining principal from maturing
securities will be reinvested. The key factor for the shape of the yield curve and the
level of term premium is whether the pace of balance-sheet contraction disrupts the
supply-demand balance in rates markets and causes a sudden re-steepening.
Figure 7: US credit demand declines along with inflation Figure 8: US equities are not a domestic story
US total bank loans and leases, y/y (LHS) vs US core PCE, % S&P 500 (LHS) vs Russell 2000/S&P 500, ratio (RHS)
(RHS)
15% 3.0% 2,500 S&P 500 0.64
US loans (LHS)
10% (LHS) 2.5% 0.62
2,300
0.60
5% 2.0%
0.58
0% 1.5% 2,100
Russell/S&P 0.56
US core PCE (RHS)
-5% 1.0%
(RHS) 0.54
1,900
-10% 0.5% 0.52
-15% 0.0% 1,700 0.50

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

We believe that the initial cautious approach to tapering the balance sheet will be a
manageable risk for markets. Our view is consistent with Federal Reserve research
showing that even USD 600-800bn of balance-sheet contraction over two years will
lead to only a moderate increase of c.25bps in 10Y UST term premium.
Mortgage and rates volatility In our opinion, this pace of tapering alone should not lead to a significant reduction in
markets show little stress demand for US Treasuries. But the key may rest with the performance of mortgage-
back securities (MBS) and their impact on rates volatility through the negative
convexity channel. With consumer spending representing such a large percentage of
US GDP (over 60%), and housing representing a significant component of consumer
balance sheets, the interest rate on mortgage debt is a critical variable for US
financial conditions. If markets were concerned about an imbalance in MBS supply
and demand, we would expect both MBS rates and US rates volatility to shift higher
in anticipation of MBS duration hitting the market.
We do expect the supply-demand balance for UST and MBS to deteriorate after
September 2018. The run-off cap is likely to exceed monthly UST maturities, and this
should start to add incremental duration to the market. But until then, we expect term
premium to remain low and the US yield curve to flatten. Additionally, we expect
demand for US duration to remain robust, especially considering our view that
inflation will stay low and the possibility of US fiscal stimulus is falling by the day.
Money
Strategy outlook
Foreign buyers have returned to the In addition to gauging whether increased supply of securities from balance-sheet
UST market reduction will push rates higher, it is critical to know where the incremental demand
could come from to replace reduced demand from the Fed. An important source of
demand has returned to the UST market in 2017: foreign buyers. In 2016, foreign
holders reduced their UST holdings by nearly 5%. This reduction was led by China,
but large holders such as Japan and Saudi Arabia also trimmed their holdings. Total
holdings have nearly recovered their 2016 highs, and this has contributed to the
continued compression of UST term premium (Figure 11). Barring an inflation scare
or a US fiscal crisis related to the debt ceiling that causes a surge in term premium
neither of which we expect we believe that foreign demand for US fixed income will
remain robust.
Figure 9: Fed reinvestment to continue despite tapering Figure 10: No sign of balance-sheet anxiety in rates vol
Projected maturities of Fed UST assets vs run-off cap, US 30Y fixed rate mortgage, % (LHS) vs 3M10Y US swaption
USD bn vol, bps (RHS)
80 Monthly 4.5 110
UST roll-off 3M10Y rates
70
Forecast vol (RHS) 100
4.3
60 run-off cap
90
50
4.0
40 80
30 3.8
70
20
3.5
30Y mortgage 60
10 rate (LHS)
0 3.3 50
Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17
Source: Federal Reserve, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

The extent to which US banks Contrary to the recovery in foreign demand, though, we have seen a reduction in US
continue to buy UST and MBS will bank holdings of UST and non-MBS agency securities (Figure 12). This reduction
be a critical variable began in Q1, presumably in anticipation of Trumps inflationary fiscal plans. As long
as inflation remains low and the Feds tapering of the balance sheet is benign, we
expect US banks to maintain their holdings of US fixed income.
Shine on you crazy diamond

Low inflation is allowing EM central A softer USD, a flat US yield curve and low UST term premium are the exogenous
banks to ease monetary policy factors supporting EM assets. In addition to low inflation in DM, low inflation in EM is
allowing a number of central banks to continue to ease monetary policy. Brazils
central bank has cut the Selic rate 600bps since Q4-2016 to 8.25%; the Reserve
Bank of India has cut its policy rate 200bps since Q1-2015 on decade-low inflation;
and Bank Indonesia delivered a surprise rate cut on 22 August, citing lower-than-
expected CPI inflation.
Declining inflation and accommodative central banks offer further support to EM

assets. Inflation rates around the world are converging at lower levels, as we
described in The Long View Opportunities in the new Great Moderation. This
suggests to us that FX rates may play a more limited role in rebalancing, which also
implies less volatility. In an environment of attractive carry, we believe this argues for
a continuation of the lower volatility trend in EM FX and rates markets.
EM valuations are still attractive on Low inflation levels and monetary policy easing by selected central banks further
spread to DM enhance the attractive relative valuation argument. Although interest rates and carry in
Strategy outlook
EM have declined in absolute terms due to the general decline in global interest rates,
the decline in DM yields means that EM remains attractively valued in relative terms. EM
equities still trade at a 22% valuation discount to their DM counterparts using estimated
P/E ratios (Figure 13). Additionally EM local-currency (LCY) debt markets continue to
offer attractive yield spreads to DM in both nominal and real (inflation-adjusted) terms
(Figure 14). In FX, a number of currencies in our coverage universe screen as attractive
from both a pure carry and a carry/volatility point of view. The INR, IDR, MXN and TRY
are all attractive carry candidates on a 3M, 6M and 1Y time horizon.
EM vs DM convergence applies to Some argue that it is difficult to compare EM and DM equity valuations because the
more than just economic composition of the indices is too different. Yet index composition may not be as
fundamentals disparate as many assume. For the S&P 500, the technology and telecom sectors
together make up 25.5% of the index market cap. For MSCI EM, these sectors make
Figure 11: Foreign buyers of UST keep term premium low Figure 12: Domestic demand for UST subsides
Foreign UST holdings, USD tn (LHS) vs 10Y UST term US commercial bank debt holdings (USD bn) vs 10Y UST
premium, % (RHS) term premium, % (RHS)
6.5 -1.0 800 10Y UST term -1.0

Foreign premium
holdings UST 750 -0.5
-0.5 (RHS,
6.0 (LHS) inverted)
700 0.0
0.0
5.5 650
0.5 0.5
UST term 600
5.0 premium 1.0 1.0
(RHS, 550
US 1.5
inverted) 1.5 500 commercial
4.5
2.0 bank UST and 2.0
450 non-MBS
4.0 agency 2.5
2.5 400
holdings
3.5 3.0 350 3.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

up 27.3%. Financials make up c.14.5% of the S&P and 19.6% of the MSCI EM.
Finally, the energy sector makes up c. 6% of both the S&P and MSCI EM. So in
addition to the economic convergence we discussed in The Long View, we see
further convergence between EM and DM valuations.
Carry/vol ratios continue to Absolute levels of yield or carry have declined across most of our currency universe.
highlight attractive EM currencies Lower global yields are keeping relative yield spreads in EM attractive; in addition,
volatility has declined across assets, implying that carry/volatility ratios remain
attractive for a number of currencies (Figure 15). Looking at 1Y tenors, the TRY, INR,
IDR and RUB remain the most attractive on this metric.
The biggest threat to this attractive carry and valuation narrative is a possible surge
in UST term premium, in our opinion. We maintain our view that a sharp rise in term
premium is unlikely, but we are conscious that this was a key component of the taper
tantrum that proved so destabilising to EM assets in 2013. 10Y UST term premium
spiked 160bps between May and December 2013, leading to declines of 5-17% in
the EM currencies highlighted above. It is also noteworthy that several of the
currencies that weakened the most in 2013 such as the IDR, TRY, INR and MYR
screen as attractive again today.
There is an important offset to the potential risk of a taper tantrum. Several Asian
countries have taken advantage of local-currency strength to add to their FX reserves
this year (Figure 16). India, Thailand and Indonesia have been building reserves all
year; their currencies were among those that suffered the most in 2013.
Strategy outlook
Figure 13: EM equities remain cheap relative to DM Figure 14: EM LCY debt is still attractive on spread to DM
EM valuation discount to DM, estimated P/E EM/DM yield spreads in nominal and real terms, %
35% 6%
30% 5%
EM/DM
25% 4% nominal yield
spread
20% 3%
15% 2% EM/DM real

yield spread
10% 1%
5% 0%
0% -1%
Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Figure 15: Static carry remains a key driver of flows Figure 16: EM reserve accumulation increased in Q2
Ratio of 1Y carry/vol (LHS) vs 1Y carry, % (RHS) Average monthly change in FX reserves, USD bn
1.0 25% 8
0.8 20% 6
1Y Carry: vol
0.6
(LHS) 15% Q1
4
0.4
10% Q2
2
0.2
5%
0.0 0
-0.2 1Y carry 0%
-2
(RHS)
-0.4 -5%
-4
PHP
CNH
PEN
ARS
SGD
HUF
PLN
CLP
COP
BRL
TWD
KRW
ZAR
RUB
CNY
THB
CZK
MYR
MXN
TRY
IDR
INR
INR SGD THB KRW IDR TWD PHP MYR


The rebuilding of FX reserves in The building of FX reserves in Asia ex-Japan has important implications for the EUR
AXJ has likely contributed to the and other G10 currencies. As AXJ reserve managers buy USD to smooth or slow the
performance of the EUR appreciation of their currencies, they typically recycle those dollars into other
currencies to maintain consistent weights across the various currencies in their
reserve portfolios. Although Chinas FX reserves have been shrinking since 2014,
removing a key source of reserve recycling, USD buying by other AXJ reserve
managers has likely contributed to the performance of the EUR in 2017.
The dark side of the moon

Risk appetite towards China has improved dramatically. Capital outflows have
slowed from the aggressive average monthly pace of over USD 60bn at the turn of
the year. Investors are now implementing long CNY and CNH strategies to take
advantage of positive carry, whereas at the start of 2017, we saw heightened
depreciation expectations expected annual CNY depreciation implied by CNY
NDFs reached 5.0%, and 12M CNH points reached over 3,500 (Figure 17). FX option
volatilities have nearly halved from the start of the year, and onshore government
bond yields have come down after spiking 60-80bps in response to policies designed
to force deleveraging among banks and non-bank financial institutions.
Risk sentiment in Chinas asset Market pricing and sentiment have largely reversed from this extreme pessimism, but
markets has turned around in 2017 we now feel that both FX and rates markets are pricing risk incorrectly. We expect
th
stability until the conclusion of Chinas 19 Party Congress (thought to take place in
late September), but see increasing risks thereafter. FX volatility and risk reversals
Strategy outlook
are too low, in our opinion, and in fixed income we believe that onshore China
government bond yields are too high, especially relative to USTs (Figure 18). Chinas
5Y and 10Y government bond yields are trading at two-year highs versus USTs; we
feel that this is a good time to be long bonds and rates to position for slower growth
and inflation in H2.
The risk to Chinas growth is from Economic activity in China softened over the summer but remains consistent with
more aggressive policy tightening GDP growth above 6.5%. Our base case is for a moderate slowdown in H2, and we
maintain our 2017 growth forecast at 6.8%. But we are concerned about the potential
policy response to the recent surge in base metals prices. We worry that this price
increase raises the risk of more aggressive liquidity tightening by policy makers after
th
the conclusion of the 19 Party Congress. For example, we believe the iron ore rally
Figure 17: Risk premium collapses amid desire for carry Figure 18: China government bonds are cheap to USTs
12M CNH points (LHS) vs USD-CNH 6M 25d risk reversal, % China government bond minus UST, 10Y spread, %
(RHS)
4,000 6 1.6
12M CNH
points (LHS)
3,500 5 1.4
3,000
4 1.2
2,500
3 1.0
2,000
2 0.8
1,500
1,000 1 0.6
USD-CNH 6M
25d RR (RHS)
500 0 0.4
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17

has been partially driven by a pick-up in steel prices on speculation over steel
capacity cuts in China.
China Iron and Steel Association (CISA) recently warned that the rally in steel prices
was not driven by market demand or reduced market supply but rather by over-
interpretation, or even misinterpretation of the effect of Chinas environmental
policies and clampdown on low-quality steel. This warning was followed by measures
from the Shanghai exchange aimed at curbing speculation, including higher
transaction fees and intraday position limits on rebar futures. What if these measures
to curb speculation do not have the desired effect? Could China join the ranks of
central banks that might potentially tighten more than current market expectations?
Watch for signs of tightening A policy-induced slowdown in Chinas economic activity would increase the risk of a
liquidity conditions after the Party reversal not only in base metals, but also in commodity-linked currencies. For example,
Congress Chinas fixed asset investment (FAI) growth slowed to a one-year low of 6.5% y/y in
July, pointing to lower levels in commodity-linked currencies such as the AUD. If activity
slows more materially, this could lead to increased capital outflows, which have been
relatively stable at a monthly average of USD 15bn since February. We will be watching
for signs of tighter liquidity conditions in China after the Party Congress.
Comfortably numb
As we highlighted in the 20 August edition of SMS, buyers of volatility have not been
rewarded this year in any asset class. Despite several episodes of geopolitical
Strategy outlook
tension, risk premium in most markets trades at multi-year lows. For example, the
escalation of tensions on the Korean peninsula between 8-14 August led to the
largest spike in equity volatility since the US election. Yet nearly all of these volatility
gains have already been reversed. In spite of global markets resilience, we think
risks remain, and we want to be using low levels of volatility to partially hedge our
core longs in EM.
The premium for EM FX volatility The decline in EM FX volatility that began in January has accelerated to new lows for
over G7 vol has nearly fallen to zero the year since the easing of geopolitical tensions on the Korean peninsula. The
distinct lack of a hawkish message from central bankers at the Jackson Hole
conference (24-26 August) has opened up further downside in EM FX vol. Further,
the premium of EM over DM FX vol has collapsed to virtually zero (Figure 19).
Although we believe the messaging from central bankers supports our positive
Figure 19: EM FX vol is too low relative to G7 Figure 20: EM equity vol vs S&P
Our EM FX vol index, % (LHS) vs ratio of EM/G7 volatilities MSCI EM vol index, % (LHS) vs ratio of EM/S&P volatilities
(RHS) (RHS)
16 1.4 60 2.2
EM/S&P vol
EM/G7 FX vol
ratio (RHS)
ratio (RHS)
14 2.0
50
1.2
1.8
12 40
1.0 1.6
10 EM FX 30
average 1.4
(10.5%) 0.8
8 EM FX vol 20
1.2
(LHS) EM equity vol
(LHS)
6 0.6 10 1.0
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

stance on EM assets, we also like using low levels of vol to build hedges against
possible risk events such as the US debt ceiling debate. Within FX, we like owning
options in the following currency pairs:
th
In AXJ, 6M implied volatilities for both USD-INR and USD-SGD are below the 5
percentile on a one-year watch window.
th
In Latam, 6M vols for USD-BRL and USD-MXN are below the 5 percentile. In
EMEA, USD-RUB and USD-TRY vols are below this level.
The currency pairs with the most attractive vols also happen to be some of those
we find most attractive right now (RUB, TRY, MXN).
EM equity volatility is low but not EM equity volatility also strikes us as low, but we would not go so far as to call it
cheap on a relative basis cheap. By the metric cited above, the ratio of EM equity to S&P index vol remains in
the middle of its historical range (Figure 20). This can be largely attributed to the
extremely low levels of delivered (or realised) volatility in S&P options, where 60-day
realised vol has sunk to decade lows. But for investors able to look across asset
classes, we recommend using EM FX options to hedge core positions rather than EM
equity options.
Outside of pure FX hedges, we like using the following hedges in a multi-asset

portfolio:
Pay US rates at the front end of the yield curve a full 25bps FOMC rate hike is
Strategy outlook
not priced in until June 2018. We feel this is conservative, and paying rates
provides a hedge against the FOMC delivering more rate hikes.
Long gold volatility 6M implied vol for gold options has reached the lowest level
since 2005 (12.0%). The gold market appears unprepared for either an
escalation of tension in Washington or for the FOMC to lower its dot plots.

Forecasts and reference tables
Forecasts Economies
Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP)
Country 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
Majors 2.0 1.6 2.0 1.8 1.6 0.8 0.9 1.5 1.6 1.9 -0.3 -0.1 0.2 0.1 -0.1
US^ 2.4 1.6 2.1 1.9 1.5 1.4 1.7 1.6 1.8 1.9 -2.5 -2.5 -2.0 -2.0 -2.3
Euro area 2.0 1.8 2.2 2.0 1.8 0.0 0.2 1.5 1.3 1.6 3.1 3.3 3.0 2.7 2.4
Japan 1.2 1.0 1.2 1.0 0.9 0.8 -0.1 0.6 1.0 2.5 3.1 3.8 3.7 3.8 3.8
UK 2.2 1.8 1.6 1.2 1.2 0.0 0.7 2.7 2.7 2.3 -4.3 -4.4 -3.9 -3.7 -3.5
Canada 0.9 1.4 3.0 2.4 2.0 1.1 1.4 1.7 1.7 1.9 -3.4 -3.3 -2.5 -2.0 -2.0
Switzerland 1.2 1.4 1.0 1.3 1.5 -0.8 -0.5 0.5 0.5 1.0 9.0 10.0 12.0 12.2 12.0
Australia 2.4 2.5 2.3 2.9 3.2 1.5 1.3 1.9 2.6 2.2 -4.7 -2.6 -1.1 -1.7 -1.5
New Zealand 2.5 3.1 2.6 3.1 2.8 0.3 0.6 1.7 2.1 1.9 -2.9 -2.7 -3.5 -3.5 -3.1
Asia 6.2 6.0 6.1 6.1 6.2 2.5 2.6 2.4 3.1 3.2 2.4 2.0 1.2 1.0 0.8
Bangladesh* 6.6 7.1 7.2 6.9 6.8 6.4 5.9 5.4 5.7 6.0 1.1 1.5 -0.5 -0.5 -0.5
China 6.9 6.7 6.8 6.5 6.4 1.4 2.0 1.6 2.7 2.6 2.8 1.8 1.4 1.6 1.5
Hong Kong 2.4 2.0 3.4 2.8 3.0 3.0 2.4 2.0 2.5 2.5 3.3 4.6 4.0 3.5 3.5
India** 8.0 7.1 6.7 7.1 7.5 4.9 4.5 3.5 4.0 4.6 -1.1 -0.7 -1.7 -1.8 -2.0
Indonesia 4.9 5.0 5.2 5.4 5.6 6.4 3.5 3.9 3.5 3.8 -2.0 -1.8 -1.8 -2.1 -2.5
Malaysia 5.0 4.2 5.4 4.6 4.5 2.1 2.1 3.8 2.5 2.8 3.0 2.0 2.4 3.0 3.4
Pakistan* 4.0 4.7 5.3 5.5 6.0 4.5 2.9 4.2 5.6 6.3 -1.0 -1.2 -4.0 -5.3 -4.1
Philippines 6.1 6.9 6.5 6.5 6.4 1.4 1.8 3.1 3.3 3.2 2.5 0.2 0.2 0.6 1.1
Singapore 2.0 2.0 2.6 2.3 2.3 -0.5 -0.5 0.9 1.5 1.5 19.7 19.0 20.0 19.0 18.0
South Korea 2.8 2.8 2.8 2.7 2.8 0.7 1.0 1.9 2.0 2.3 7.7 7.5 6.0 5.5 5.0
Sri Lanka 4.8 4.4 4.5 5.0 5.5 1.3 4.0 5.7 5.0 5.0 -2.4 -2.0 -2.3 -2.0 -2.0
Taiwan 0.7 1.5 1.9 2.0 2.5 -0.3 1.4 1.0 1.3 1.3 14.6 13.0 11.0 10.0 8.0
Thailand 2.8 3.2 3.6 4.3 4.5 -0.9 0.2 1.0 2.0 2.3 8.1 11.7 7.0 3.7 -1.0
Vietnam 6.7 6.2 6.4 6.6 6.9 0.6 2.7 3.6 3.7 4.5 0.5 4.7 0.9 1.1 1.7
MENA 3.3 2.4 1.0 2.3 2.7 3.9 3.5 5.4 6.9 3.9 -1.4 -2.7 0.2 1.6 1.4
Bahrain 2.9 3.0 2.3 2.3 2.5 1.8 2.8 1.3 1.8 1.5 -4.5 -4.0 -3.3 -2.8 -2.6
Egypt* 4.4 4.3 4.1 4.0 4.6 11.0 10.2 23.3 27.8 9.5 -3.7 -5.9 -6.6 -3.4 -2.7
Iraq -2.4 11.0 1.0 3.0 4.0 2.0 0.4 0.6 1.0 1.5 -6.4 -6.8 -4.5 -3.0 -2.5
Jordan 2.4 2.0 2.4 2.8 3.6 -0.9 -0.8 3.8 3.1 3.0 -8.9 -9.3 -8.9 -8.6 -8.4
Kuwait 1.8 3.6 -0.5 1.5 2.7 3.3 3.2 2.9 3.2 3.0 5.2 -4.6 3.1 8.2 8.5
Lebanon 1.0 1.0 1.5 2.5 3.2 -3.7 -0.8 4.5 3.0 3.5 -15.5 -18.9 -22.5 -21.2 -22.6
Oman 4.2 2.1 0.6 1.9 2.3 0.1 1.1 1.8 2.0 1.6 -15.5 -18.6 -10.6 -7.1 -6.1
Qatar 3.7 2.2 2.3 2.8 2.9 1.7 2.7 1.7 2.0 2.5 5.0 -4.7 1.3 3.5 6.7
Saudi Arabia 3.5 1.4 -0.5 1.6 2.0 2.3 3.5 0.4 2.5 3.0 -8.3 -3.9 2.5 3.8 2.6
Turkey 3.8 2.9 4.7 3.9 3.9 7.7 7.8 10.0 8.5 7.5 -4.4 -3.8 -4.6 -4.9 -4.9
UAE 3.8 3.0 0.9 2.6 3.1 4.1 1.8 2.7 3.2 3.4 5.8 2.4 3.9 4.3 3.6
Africa 3.0 0.6 2.3 3.7 4.3 7.4 12.6 11.2 7.5 6.4 -4.1 -3.7 -2.1 -2.8 -3.2
Angola 3.0 -3.7 2.0 4.0 5.0 10.3 38.0 25.0 15.0 10.0 -7.6 -5.5 -4.5 -4.5 -4.0
Botswana -1.7 4.3 2.9 3.5 3.8 3.1 2.8 3.3 3.1 3.2 9.3 11.7 11.5 9.2 9.6
Forecasts and references
Cameroon 5.8 5.0 4.0 5.0 5.0 2.7 2.5 2.5 2.5 2.5 -2.7 -4.7 -3.5 -3.0 -2.5
Cte dlvoire 10.3 8.2 7.5 7.5 7.0 2.5 2.5 2.0 2.0 2.0 -1.8 -1.8 -4.5 -2.0 -2.0
The Gambia 4.3 2.2 4.0 4.5 5.0 6.5 7.0 7.5 7.5 6.0 -13.5 -11.0 -10.0 -10.0 -12.3
Ghana 3.8 3.5 5.9 6.5 7.5 17.1 17.5 11.6 9.4 8.6 -7.8 -6.2 -6.5 -6.0 -5.9
Kenya 5.7 5.8 4.5 4.6 5.4 6.6 6.3 8.8 5.6 7.3 -6.8 -6.6 -7.0 -6.5 -6.8
Nigeria 2.8 -1.6 1.2 3.5 4.1 9.0 15.6 16.5 9.9 7.1 -2.4 -3.2 0.6 -1.2 -2.0
Sierra Leone -20.5 6.1 6.3 7.1 7.8 8.0 10.4 13.6 8.9 7.9 -12.0 -16.9 -16.5 -16.1 -14.4
South Africa 1.3 0.3 0.5 1.5 2.0 4.6 6.3 5.2 4.9 5.1 -4.1 -3.3 -2.2 -2.4 -2.9
Tanzania 7.0 6.4 6.0 6.5 7.0 5.6 5.2 5.5 5.2 5.4 -8.7 -4.2 -7.0 -6.8 -6.5
Uganda 5.0 4.6 5.2 5.9 5.8 5.2 5.5 5.5 4.1 6.3 -10.0 -6.5 -5.40 -6.10 -8.60
Zambia 3.0 3.4 4.3 5.6 7.0 10.0 18.2 6.4 5.1 7.0 -3.4 -3.6 -3.0 -2.4 -2.0
Europe
Czech Republic 5.3 2.6 3.3 2.8 2.4 0.3 0.6 2.4 2.2 2.1 0.9 1.1 0.9 1.0 1.2
Hungary 3.1 2.0 3.4 3.1 3.0 0.1 0.4 2.3 2.7 3.0 3.4 3.8 3.5 2.7 2.2
Poland 3.8 2.7 3.8 3.4 3.0 -0.7 -0.2 2.1 2.3 2.6 -0.6 -0.3 -0.3 -0.2 -0.1
Russia -3.7 -0.2 1.8 1.9 1.8 15.6 7.0 3.9 3.7 4.0 5.0 1.7 3.0 3.0 3.0
Latin America 0.0 -0.6 1.8 2.5 2.7 9.2 9.5 6.4 5.1 4.6 -3.1 -2.5 -2.0 -2.0 -2.4
Argentina 2.7 -2.3 3.0 3.6 3.2 26.7 39.0 25.0 15.0 10.0 -3.0 -2.8 -3.1 -3.2 -3.4
Brazil -3.8 -3.6 0.9 2.2 2.4 9.0 8.8 3.0 4.0 4.5 -3.2 -1.3 -0.9 -1.2 -1.5
Chile 2.3 1.6 1.9 2.3 5.0 4.3 3.9 2.7 3.4 4.0 -2.1 -1.8 -1.4 -1.2 -1.7
Colombia 3.1 2.0 2.0 2.6 2.9 5.0 7.5 5.5 4.5 3.7 -6.7 -4.2 -4.0 -3.8 -4.1
Mexico 2.6 2.3 2.2 2.0 1.7 2.7 2.8 5.5 3.5 3.3 -2.6 -2.2 -2.4 -2.2 -2.6
Peru 3.2 3.9 3.6 4.7 6.0 3.5 3.6 3.3 3.3 3.6 -4.8 -2.6 -2.7 -2.9 -3.1
Global 3.4 3.1 3.6 3.7 3.8 3.1 3.0 2.9 3.1 3.1
* Bangladesh, Pakistan, and Egypt: Figures are for fiscal year ending in June of year shown in column heading
** India: Figures are for fiscal year starting in April of year shown in column heading
^ Inflation: Core PCE deflator used for US

Forecasts FX
Country Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 2017 2018 2019 2020 2021
Majors
Euro area 1.22 1.24 1.25 1.26 1.27 1.22 1.27 1.22 1.26 1.28
Japan 110.0 112.0 110.0 108.0 105.0 110.0 105.0 100.0 100.0 110.0
UK 1.24 1.25 1.26 1.27 1.28 1.24 1.28 1.30 1.32 1.34
Canada 1.22 1.21 1.20 1.19 1.18 1.22 1.18 1.30 1.29 1.28
Switzerland 0.95 0.94 0.93 0.92 0.91 0.95 0.91 0.94 0.92 0.90
Australia 0.75 0.76 0.77 0.78 0.80 0.75 0.80 0.84 0.81 0.79
New Zealand 0.70 0.71 0.72 0.73 0.74 0.70 0.74 0.74 0.70 0.67
Asia
Bangladesh 82.00 82.50 83.50 84.00 83.00 82.00 83.00 83.50 84.00 84.50
China 6.55 6.58 6.55 6.50 6.45 6.55 6.45 6.45 6.75 6.75
CNH 6.56 6.59 6.55 6.50 6.45 6.56 6.45 6.45 6.75 6.75
Hong Kong 7.84 7.83 7.82 7.80 7.80 7.84 7.80 7.79 7.78 7.77
India 64.50 64.50 65.00 65.00 66.00 64.50 66.00 67.50 69.00 70.00
Indonesia 13,200 13,300 13,500 13,600 13,600 13,200 13,600 14,000 14,400 14,800
Malaysia 4.10 4.10 4.10 4.00 3.90 4.10 3.90 3.80 3.80 3.70
Pakistan 108.0 109.0 110.0 112.0 112.5 108.0 112.5 113.0 114.0 115.0
Philippines 52.50 53.00 52.50 51.50 50.50 52.50 50.50 50.00 49.00 48.00
Singapore 1.34 1.33 1.32 1.31 1.30 1.34 1.30 1.38 1.37 1.36
South Korea 1,140 1,150 1,155 1,150 1,130 1,140 1,130 1,100 1,090 1,080
Sri Lanka 155.0 155.5 156.0 158.0 160.0 155.0 160.0 164.0 168.0 172.0
Taiwan 30.80 30.90 31.00 30.85 30.80 30.80 30.80 30.80 30.60 30.50
Thailand 32.50 32.00 32.00 31.50 31.00 32.50 31.00 33.75 33.50 33.50
Vietnam 23,000 23,100 23,200 23,000 22,800 23,000 22,800 22,600 22,200 21,500
MENA
Bahrain 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38
Egypt 17.85 17.85 18.00 18.25 18.50 17.85 18.50 19.00 19.50 20.00
Iraq 1,182 1,182 1,182 1,182 1,182 1,182 1,182 1,182 1,182 1,182
Jordan 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71
Kuwait 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Lebanon 1,508 1,508 1,508 1,508 1,508 1,508 1,508 1,508 1,508 1,508
Oman 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39
Qatar 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64
Saudi Arabia 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75
Turkey 3.50 3.55 3.60 3.65 3.70 3.50 3.70 3.90 4.00 4.10
UAE 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67
Africa
Angola 205.0 205.0 205.0 210.0 210.0 205.0 210.0 214.2 218.5 222.9

Botswana 10.23 10.22 10.16 10.01 10.16 10.23 10.16 10.40 10.53 10.52
Cameroon 538.0 529.0 525.0 521.0 517.0 538.0 517.0 538.0 521.0 512.0
Cte dlvoire 538.0 529.0 525.0 521.0 517.0 538.0 517.0 538.0 521.0 512.0
The Gambia 48.70 49.00 50.00 51.50 53.40 48.70 53.40 57.30 59.00 61.00
Ghana 4.60 4.75 4.95 5.10 5.35 4.60 5.35 5.80 5.90 6.20
Kenya 104.5 105.9 106.4 107.0 107.7 104.5 107.7 109.0 110.0 111.2
Nigeria 365.0 375.0 385.0 395.0 420.0 365.0 420.0 430.0 440.0 460.0
Sierra Leone 8,156 8,369 8,629 8,872 9,031 8,156 9,031 9,672 10,296 10,656
South Africa 13.20 13.20 13.10 12.90 13.10 13.20 13.10 13.60 13.80 13.80
Tanzania 2,250 2,270 2,290 2,300 2,320 2,250 2,320 2,360 2,420 2,570
Uganda 3,650 3,680 3,700 3,750 3,820 3,650 3,820 4,000 3,950 4,010
Zambia 9.40 9.66 9.80 10.05 10.20 9.40 10.20 10.60 11.00 11.40
Europe
Czech Republic 21.31 20.77 20.40 20.04 19.69 21.31 19.69 21.88 20.34 20.00
Hungary 254.0 246.0 240.0 234.0 228.0 254.0 228.0 254.0 237.0 229.0
Poland 3.48 3.39 3.32 3.25 3.19 3.48 3.19 3.57 3.35 3.25
Russia 58.00 58.50 59.00 59.50 60.00 58.00 60.00 60.00 61.00 62.00
Latin America
Argentina 17.00 17.50 17.00 17.00 17.00 17.00 17.00 16.00 16.50 16.00
Brazil 3.15 3.20 3.20 3.25 3.30 3.15 3.30 3.25 3.25 3.25
Chile 610.0 615.0 620.0 625.0 625.0 610.0 625.0 660.0 680.0 700.0
Colombia 3,300 3,300 3,200 3,100 3,000 3,300 3,000 3,000 3,200 3,400
Mexico 17.75 18.00 18.00 18.00 18.00 17.75 18.00 17.00 17.00 17.00
Peru 3.40 3.45 3.45 3.45 3.50 3.40 3.50 3.60 3.70 3.80

Forecasts GDP
Country Real GDP growth (% y/y, unless otherwise stated)
Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19
Majors
US* 2.5 2.2 2.0 1.7 1.7 1.7 1.5 1.5
Euro area 2.2 2.3 2.0 1.9 1.9 1.8 1.8 1.9
Japan* 1.2 1.1 0.9 1.1 1.2 1.2 1.1 1.1
UK 1.1 1.1 1.1 1.1 1.3 1.4 1.3 1.2
Canada* 3.3 3.0 2.4 2.4 2.4 2.0 2.0 2.0
Australia 2.7 2.8 2.7 3.1 3.1 3.2 3.1 3.0
New Zealand 2.7 3.1 3.0 3.2 3.0 2.9 2.8 2.9
Asia
China 6.6 6.3 6.5 6.5 6.7 6.5 6.4 6.3
Hong Kong 2.6 2.6 2.6 2.8 3.0 3.0 3.0 3.0
India 7.2 7.2 7.5 7.2 7.0 6.8 7.2 7.3
Indonesia 5.4 5.3 5.3 5.5 5.5 5.5 5.5 5.6
Malaysia 4.7 4.2 4.3 4.5 5.2 4.9 4.6 4.4
Philippines 6.3 6.4 6.5 6.5 6.4 6.5 6.3 6.3
Singapore 1.3 2.4 2.3 2.0 2.3 2.4 2.4 2.4
South Korea 2.8 2.6 2.6 2.6 2.6 2.8 2.8 2.8
Sri Lanka 4.5 4.8 5.0 5.0 5.2 5.2 5.0 5.0
Taiwan 1.4 1.5 1.9 2.2 2.3 2.5 2.5 2.4
Thailand 3.8 3.9 4.1 4.5 4.5 4.5 4.5 4.5

Vietnam 6.9 6.5 6.7 6.9 7.1 6.4 6.6 6.7
Latin America
Brazil 1.0 2.0 1.9 2.0 2.2 1.9 2.1 1.7
Chile 2.0 2.2 2.3 2.4 2.4 2.2 2.0 1.9
Colombia 2.4 2.1 2.6 2.2 2.9 2.7 3.0 3.0
Mexico 2.2 2.2 1.8 1.8 1.6 1.7 2.0 2.1
Peru 4.0 4.7 4.8 4.2 4.0 4.0 3.7 3.4

* q/q SAAR; Source: Standard Chartered Research

Forecasts Rates
End-period Current Q4-17 Q1-18 Q2-18 Q3-18 Q4-18
United States Policy rate 1.25 1.50 1.75 2.00 2.00 2.00
3M LIBOR 1.33 1.65 1.90 2.15 2.10 2.10
2Y bond yield 1.43 1.75 1.90 2.00 2.00 2.00
5Y bond yield 1.87 2.10 2.10 2.00 2.00 2.10
10Y bond yield 2.26 2.40 2.25 2.00 2.00 2.25
Euro area Policy rate 0.00 0.00 0.00 0.00 0.00 0.00
3M EURIBOR -0.33 -0.35 -0.35 -0.35 -0.35 -0.30
10Y bond yield 0.45 0.60 0.60 0.50 0.50 0.75
United Kingdom Policy rate 0.25 0.50 0.50 0.50 0.50 0.50
3M Libor 0.29 0.65 0.65 0.65 0.65 0.65
10Y bond yield 1.37 1.40 1.25 1.25 1.40 1.70
Australia Policy rate 1.50 1.50 1.50 1.50 1.50 2.00
3M OIS 1.51 1.58 1.65 2.15 2.55 2.80
China Policy rate 1.50 1.50 1.50 1.50 1.50 1.50
7-day reverse repo rate 2.45 2.45 2.45 2.45 2.45 2.45
10Y bond yield 3.61 3.45 3.50 3.50 3.50 3.50
Hong Kong 3M HIBOR 0.76 0.85 1.00 1.20 1.40 1.50
10Y bond yield 1.57 1.80 1.90 2.10 2.30 2.50
India Policy rate 6.00 5.75 5.75 5.75 5.75 5.75
91-day T-bill rate 6.10 5.80 5.80 6.00 6.00 6.10
10Y bond yield 6.67 6.30 6.40 6.50 6.40 6.60
Indonesia Policy rate 4.25 4.25 4.25 4.25 4.25 4.25
FASBI rate 3.50 3.50 3.50 3.50 3.50 3.50
10Y bond yield 6.46 6.75 7.00 7.25 7.25 7.50
Malaysia Policy rate 3.00 3.00 3.00 3.00 3.00 3.00
3M KLIBOR 3.40 3.40 3.40 3.40 3.40 3.40
10Y bond yield 3.87 4.10 4.20 4.30 4.40 4.50
Philippines Policy rate 3.00 3.00 3.00 3.00 3.00 3.00
SDA rate 2.50 2.50 2.50 2.50 2.50 2.50
3M PDST-R2 2.76 2.50 2.50 2.50 2.50 2.50
10Y bond yield 4.58 4.90 5.00 5.10 5.20 5.30
Singapore 3M SGD SIBOR 1.00 1.30 1.45 1.60 1.60 1.60
10Y bond yield 2.07 2.70 2.75 2.80 2.85 2.90
South Korea Policy rate 1.25 1.25 1.25 1.50 1.50 1.50
91-day CD rate 1.38 1.35 1.35 1.65 1.65 1.65
10Y bond yield 2.28 2.40 2.50 2.60 2.60 2.70

Taiwan Policy rate 1.38 1.38 1.38 1.50 1.63 1.75
3M TAIBOR 0.66 0.75 0.80 0.85 0.85 0.85
10Y bond yield 0.99 1.25 1.40 1.50 1.55 2.20
Thailand Policy rate 1.50 1.50 1.50 1.75 2.00 2.25
THFX6M 1.02 1.65 1.65 1.80 2.10 2.35
10Y bond yield 2.29 2.40 2.60 2.80 2.90 2.90
Vietnam Policy rate (Refi rate) 6.25 6.25 6.25 6.25 6.25 6.25
Overnight VNIBOR 0.77 3.00 3.50 2.50 2.40 2.70
5Y bond yield 4.70 5.00 5.50 6.00 6.50 7.00
Ghana Policy rate 21.00 19.50 18.50 18.00 17.50 17.50
91-day T-bill rate 17.00 13.00 12.90 12.80 12.70 12.60
5Y bond yield 17.45 17.10 16.80 16.50 15.90 15.50
Kenya Policy rate 10.00 9.50 9.00 9.00 9.00 9.00
91-day T-bill rate 8.15 7.60 7.40 7.30 7.20 7.10
10Y bond yield 13.00 13.40 13.60 13.80 14.00 14.00
Nigeria Policy rate 14.00 14.00 14.00 13.00 12.00 11.00
91-day T-bill rate 19.82 18.60 16.20 14.00 13.00 10.90
10Y bond yield 16.40 15.90 15.20 14.50 14.00 13.80
South Africa Policy rate 6.75 6.50 6.25 6.25 6.25 6.25
91-day T-bill rate 7.11 6.90 6.60 6.40 6.38 6.36
10Y bond yield 8.40 8.65 8.25 8.40 8.20 8.40
Tanzania 91-day T-bill rate 4.07 4.30 4.20 4.30 4.40 4.50
10Y bond yield 15.75 16.00 16.20 16.30 16.50 16.50

Forecasts Commodities
Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 2017 2018
Energy
Crude oil (nearby future, USD/bbl)
ICE Brent 58 62 59 59 62 65 56 61
NYMEX WTI basis Cushing, Oklahoma 56 60 56 56 59 62 53 58
Dubai 54 59 56 56 60 63 53 58
US natural gas (nearby future, USD/mmBtu)
NYMEX basis Henry Hub Louisiana 2.70 2.75 2.65 2.70 2.80 3.00 2.79 2.73
Metals
Base metals (LME 3M, USD/t)
Aluminium 2,200 2,300 2,250 2,150 2,300 2,300 1,993 2,250
Copper 6,500 6,450 6,650 6,600 6,700 6,700 6,088 6,600
Lead 2,475 2,350 2,300 2,250 2,300 2,200 2,318 2,300
Nickel 9,600 9,800 9,400 9,600 9,800 9,500 9,895 9,650
Tin 21,500 21,750 22,500 22,500 23,250 25,000 20,457 22,500
Zinc 3,250 3,300 3,400 3,200 3,000 2,450 2,892 3,225
Precious metals (spot, USD/oz)
Gold 1,300 1,300 1,270 1,270 1,300 1,320 1,259 1,285
Palladium 910 860 910 990 1,040 1,020 850 950
Platinum 990 980 1,040 1,080 1,100 1,100 968 1,050

Silver 17.5 18.6 19.0 17.7 17.9 17.5 17.3 18.3

Forecasts Long-term GDP and inflation

Structural concerns beyond the cyclical recovery
Madhur Jha +44 20 7885 6530 The world economy is enjoying a cyclical recovery. However, we believe this
Madhur.Jha@sc.com
Head, Thematic Research recovery is vulnerable to persistent structural challenges, and our long-term growth
expectations for both developed and emerging economies remain largely unchanged.
Samantha Amerasinghe +44 20 7885 6625
Samantha.Amerasinghe@sc.com
Economist, Thematic Research Long-term growth in the developed world is constrained by high levels of
indebtedness and ageing populations. Structural reforms to encourage higher
participation for women and raise the retirement age are needed to bolster the labour
Growing anti-immigration sentiment force and offset these challenges. Higher immigration would also be an effective
a risk to labour-force participation policy to raise labour-force participation rates, but growing anti-immigration sentiment
in the West
in the West makes this an unlikely option in the medium term. Reforms to encourage
greater investment would help by leading to increased use of digital technologies,
which could boost productivity growth from very weak levels currently.
Emerging markets can use digital technology to boost growth

China is already boosting its labour We see reason to be more optimistic on long-term growth prospects for emerging
force through the use of industrial markets as they catch up with development levels in the West. Unencumbered by old
robots infrastructure, many of these countries can leap-frog earlier stages of development to
adopt the latest technologies and the associated infrastructure, boosting productivity
growth. Countries facing ageing populations, such as China, are also now beginning
to use automation and other digital technologies to supplement shrinking labour
pools and support longer-term growth. China is already the worlds largest user of
industrial robots. While we expect Chinas growth rate to trend lower to c.5.0% in the
late 2020s, this is still a robust pace for one of the worlds largest economies.
Many other countries in Asia and Africa should benefit from better demographic
trends relative to other regions in the coming decade. This improvement, together
with low income starting points, suggests a period of rapid catch-up for these
economies; Indias economy is set to expand by over 8.0% p.a. on average for the
next 15 years. As countries enter middle-income status, slower growth is normal.

Emerging Southeast Asian economies are on a solid growth trend of c.5-7%. Steady
progress on the ASEAN Economic Community (AEC) and new reforms could pose
an upside risk to these forecasts.
Anti-globalisation trend is a threat to emerging-market growth

Threat of a trade war has Emerging markets have undeniably benefited from the growing integration of the
diminished, but protectionism is on world economy through trade and globalisation. However, the rise in protectionism
the rise and anti-trade sentiment poses potential risks to our long-term growth forecasts. US
President Trumps election victory gave rise to concerns about a full-blown global
trade war. These concerns have receded, but the likelihood of greater protectionism
has increased. Over a longer-term horizon, the key concern is whether any other
economy can replace the US as the main engine of import demand. We expect
China to increasingly take over this mantle (see our Special Report on global trade).
China is already the biggest final demand destination for Australia, Malaysia and
Hong Kong, and is likely to play a bigger role as the worlds final demand destination,
building on its mega-trader status.

Our long-term forecasts

Real GDP growth (%) Inflation (yearly average, %) FX
Country 2017 2018 2019 2020 2021 2021-25 2026-30 2017 2018 2019 2020 2021 2021-25 2026-30 2017 2018 2019 2020 2021 2025 2030
Majors
US^ 2.1 1.9 1.5 1.8 1.8 1.8 1.8 1.6 1.8 1.9 1.6 1.6 1.6 1.6
Euro area 2.2 2.0 1.8 1.5 1.5 1.3 1.1 1.5 1.3 1.6 1.8 1.8 1.8 1.8 1.22 1.27 1.22 1.26 1.28 1.30 1.30
Japan 1.2 1.0 0.9 1.0 1.0 1.1 1.2 0.6 1.0 2.5 1.7 1.8 1.8 2.0 110.0 105.0 100.0 100.0 110.0 110.0 110.0
UK 1.6 1.2 1.2 1.5 1.6 1.6 1.5 2.7 2.7 2.3 2.1 2.0 2.0 2.0 1.24 1.28 1.30 1.32 1.34 1.36 1.38
Canada 3.0 2.4 2.0 2.0 2.0 2.0 2.0 1.7 1.7 1.9 1.8 1.8 1.8 1.8 1.22 1.18 1.30 1.29 1.28 1.26 1.25
Switzerland 1.0 1.3 1.5 1.6 1.6 1.6 1.6 0.5 0.5 1.0 1.3 1.3 1.3 1.3 0.95 0.91 0.94 0.92 0.90 0.87 0.83
Australia 2.3 2.9 3.2 3.2 3.3 3.3 3.1 1.9 2.6 2.2 2.3 2.3 2.3 2.2 0.75 0.80 0.84 0.81 0.79 0.76 0.72
New Zealand 2.6 3.1 2.8 2.8 2.8 2.8 2.8 1.7 2.1 1.9 2.3 2.3 2.3 2.2 0.70 0.74 0.74 0.70 0.67 0.64 0.60
Asia
Bangladesh* 7.2 6.9 6.8 6.7 6.8 6.6 6.5 5.4 5.7 6.0 6.0 6.0 6.0 5.2 82.00 83.00 83.50 84.00 84.50 87.00 90.00
China 6.8 6.5 6.4 6.3 6.0 5.5 4.4 1.6 2.7 2.6 2.5 2.5 2.5 2.5 6.55 6.45 6.45 6.75 6.75 6.75 6.70
Hong Kong 3.4 2.8 3.0 3.0 3.0 3.0 3.0 2.0 2.5 2.5 2.8 2.8 2.8 2.8 7.84 7.80 7.79 7.78 7.77 7.76 7.76
India** 6.7 7.1 7.5 7.6 7.7 8.0 8.0 3.5 4.0 4.6 5.0 5.3 5.3 5.0 64.50 66.00 67.50 69.00 70.00 73.00 75.00
Indonesia 5.2 5.4 5.6 5.6 5.8 6.0 6.0 3.9 3.5 3.8 3.8 3.5 3.5 3.5 13,200 13,600 14,000 14,400 14,800 15,100 15,500
Malaysia 5.4 4.6 4.5 4.5 5.0 5.0 4.8 3.8 2.5 2.8 3.0 2.3 2.3 2.3 4.10 3.90 3.80 3.80 3.70 3.65 3.60
Pakistan* 5.3 5.5 6.0 6.0 6.0 6.0 6.0 4.2 5.6 6.3 6.9 7.0 6.2 6.0 108.0 112.5 113.0 114.0 115.0 120.0 125.0
Philippines 6.5 6.5 6.4 6.2 6.3 5.7 5.5 3.1 3.3 3.2 3.3 2.5 2.5 2.5 52.50 50.50 50.00 49.00 48.00 45.00 44.00
Singapore 2.6 2.3 2.3 2.2 2.2 2.4 2.5 0.9 1.5 1.5 1.7 1.8 1.8 1.8 1.34 1.30 1.38 1.37 1.36 1.35 1.35
South Korea 2.8 2.7 2.8 2.8 3.0 3.0 2.7 1.9 2.0 2.3 2.3 2.5 2.3 2.0 1,140 1,130 1,100 1,090 1,080 1,075 1,060
Sri Lanka 4.5 5.0 5.5 6.0 6.5 6.8 7.0 5.7 5.0 5.0 5.0 5.0 4.4 4.5 155.0 160.0 164.0 168.0 172.0 175.0 180.0
Taiwan 1.9 2.0 2.5 2.2 2.5 2.4 2.2 1.0 1.3 1.3 1.3 1.3 1.3 1.3 30.80 30.80 30.80 30.60 30.50 30.20 30.20
Thailand 3.6 4.3 4.5 5.0 5.0 4.7 4.5 1.0 2.0 2.3 3.0 3.0 3.0 3.0 32.50 31.00 33.75 33.50 33.50 33.00 32.50
Vietnam 6.4 6.6 6.9 6.9 6.9 6.9 6.8 3.6 3.7 4.5 5.3 5.4 5.5 5.7 23,000 22,800 22,600 22,200 21,500 20,900 20,100
MENA
Bahrain 2.3 2.3 2.5 2.7 3.0 3.0 3.0 1.3 1.8 1.5 2.0 2.0 2.0 2.0 0.38 0.38 0.38 0.38 0.38 0.38 0.38
Egypt* 4.1 4.0 4.6 5.8 6.0 6.3 6.6 23.3 27.8 9.5 8.6 8.0 8.0 8.0 17.85 18.50 19.00 19.50 20.00 23.00 25.40
Iraq 1.0 3.0 4.0 4.0 4.5 4.9 6.0 0.6 1.0 1.5 1.5 1.5 1.8 2.5 1,182 1,182 1,182 1,182 1,182 1,182 1,182
Jordan 2.4 2.8 3.6 4.0 4.1 4.3 4.4 3.8 3.1 3.0 3.0 2.6 2.6 2.6 0.71 0.71 0.71 0.71 0.71 0.71 0.71
Kuwait -0.5 1.5 2.7 3.0 3.0 3.2 3.5 2.9 3.2 3.0 2.5 2.5 2.5 2.5 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Lebanon 1.5 2.5 3.2 3.8 4.0 4.0 4.0 4.5 3.0 3.5 4.0 4.0 4.0 4.0 1,508 1,508 1,508 1,508 1,508 1,508 1,508
Oman 0.6 1.9 2.3 3.0 3.5 3.8 4.0 1.8 2.0 1.6 2.0 2.0 2.0 2.0 0.39 0.39 0.39 0.39 0.39 0.39 0.39
Qatar 2.3 2.8 2.9 3.5 3.5 3.8 4.3 1.7 2.0 2.5 3.0 3.0 3.0 3.0 3.64 3.64 3.64 3.64 3.64 3.64 3.64
Saudi Arabia -0.5 1.6 2.0 3.0 3.5 3.5 2.6 0.4 2.5 3.0 3.3 3.2 3.1 2.0 3.75 3.75 3.75 3.75 3.75 3.75 3.75
Turkey 4.7 3.9 3.9 3.8 4.0 4.0 4.0 10.0 8.5 7.5 6.5 6.5 6.3 5.7 3.50 3.70 3.90 4.00 4.10 4.50 5.00
UAE 0.9 2.6 3.1 4.0 3.2 3.4 3.5 2.7 3.2 3.4 4.3 3.9 3.3 3.0 3.67 3.67 3.67 3.67 3.67 3.67 3.67
Africa
Angola 2.0 4.0 5.0 6.3 6.3 6.3 6.3 25.0 15.0 10.0 6.5 6.5 6.5 6.0 205.0 210.0 214.2 218.5 222.9 241.2 266.3
Botswana 2.9 3.5 3.8 4.2 4.5 4.5 4.5 3.3 3.1 3.2 4.6 5.7 5.5 5.0 10.23 10.16 10.40 10.53 10.52 10.84 11.96
Cameroon 4.0 5.0 5.0 5.3 5.3 5.3 5.3 2.5 2.5 2.5 2.5 2.5 2.5 2.5 538 517 538 521 512 505 505
Cte dlvoire 7.5 7.5 7.0 7.0 6.5 6.5 6.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 538 517 538 521 512 505 505
The Gambia 4.0 4.5 5.0 4.8 4.5 4.5 4.0 7.5 7.5 6.0 6.0 7.0 7.0 6.0 48.70 53.40 57.30 59.00 61.00 69.00 82.00
Ghana 5.9 6.5 7.5 4.5 5.4 5.1 4.5 11.6 9.4 8.6 12.1 14.0 12.7 11.3 4.60 5.35 5.80 5.90 6.20 7.30 9.60
Kenya 4.5 4.6 5.4 7.2 7.3 7.2 7.0 8.8 5.6 7.3 6.7 7.0 6.9 6.2 104.5 107.7 109.0 110.0 111.2 116.0 117.0
Nigeria 1.2 3.5 4.1 6.0 6.0 6.0 7.0 16.5 9.9 7.1 6.2 7.5 8.3 7.9 365.0 420.0 430.0 440.0 460.0 550.0 650.0
Sierra Leone 6.3 7.1 7.8 7.5 7.0 6.2 4.4 13.6 8.9 7.9 6.7 6.5 7.1 6.2 8,156 9,031 9,672 10,296 10,656 11,389 11,894
South Africa 0.5 1.5 2.0 4.0 4.1 4.3 4.5 5.2 4.9 5.1 5.7 5.7 5.5 5.0 13.20 13.10 13.60 13.80 13.80 14.50 16.50
Tanzania 6.0 6.5 7.0 7.2 7.0 7.0 7.0 5.5 5.2 5.4 6.0 6.0 6.0 6.0 2,250 2,320 2,360 2,420 2,570 2,680 2,800
Uganda 5.2 5.9 5.8 6.2 9.0 7.0 5.5 5.5 4.1 6.3 6.4 6.5 5.6 5.0 3,650 3,820 4,000 3,950 4,010 4,200 4,400
Zambia 4.3 5.6 7.0 7.2 7.3 7.2 7.0 6.4 5.1 7.0 7.0 7.0 7.0 7.0 9.40 10.20 10.60 11.00 11.40 12.80 14.00
Europe
Czech Republic 3.3 2.8 2.4 2.2 2.2 2.2 2.0 2.4 2.2 2.1 2.0 2.0 2.0 2.0 21.31 19.69 21.88 20.34 20.00 20.00 20.00
Hungary 3.4 3.1 3.0 2.8 2.7 2.7 2.4 2.3 2.7 3.0 3.0 3.0 3.0 2.6 254 228 254 237 229 229 229
Poland 3.8 3.4 3.0 2.8 2.8 2.7 2.5 2.1 2.3 2.6 2.5 2.5 2.5 2.2 3.48 3.19 3.57 3.35 3.25 3.25 3.25
Russia 1.8 1.9 1.8 2.0 2.0 2.2 2.2 3.9 3.7 4.0 4.0 4.0 3.2 3.0 58.00 60.00 60.00 61.00 62.00 66.00 70.00
Latin America
Argentina 3.0 3.6 3.2 5.0 5.0 5.0 5.0 25.0 15.0 10.0 15.0 10.0 10.0 10.0 17.00 17.00 16.00 16.50 16.00 15.00 14.00
Brazil 0.9 2.2 2.4 3.0 3.5 3.5 3.5 3.0 4.0 4.5 5.0 4.8 4.8 4.8 3.15 3.30 3.25 3.25 3.25 3.50 4.00
Chile 1.9 2.3 5.0 4.5 4.0 4.0 4.0 2.7 3.4 4.0 3.7 3.5 3.5 3.5 610 625 660 680 700 750 800
Colombia 2.0 2.6 2.9 4.5 4.5 4.5 4.5 5.5 4.5 3.7 4.0 4.0 4.0 4.0 3,300 3,000 3,000 3,200 3,400 4,000 4,500
Mexico 2.2 2.0 1.7 3.5 4.0 4.0 4.0 5.5 3.5 3.3 3.5 3.5 3.5 3.5 17.75 18.00 17.00 17.00 17.00 17.00 18.00
Peru 3.6 4.7 6.0 5.5 5.5 5.5 5.5 3.3 3.3 3.6 3.2 3.5 3.5 3.5 3.40 3.50 3.60 3.70 3.80 4.10 4.50
* Bangladesh, Pakistan, and Egypt: Figures are for fiscal year ending in June of year shown in column heading; FX forecasts are for calendar year periods
** India: Figures are for fiscal year starting in April of year shown in column heading; FX forecasts are for calendar year periods
^ Inflation: Core PCE deflator used for US

Forecasts Selected interbank rates by tenor

2017 2018 2019 2020
End-period Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4
USD LIBOR
FFTR 1.50 1.75 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
1M 1.50 1.75 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.10
3M 1.65 1.90 2.15 2.10 2.10 2.10 2.10 2.15 2.15 2.20
6M 1.90 2.15 2.30 2.25 2.20 2.20 2.20 2.25 2.30 2.40
12M 2.25 2.50 2.50 2.45 2.40 2.40 2.45 2.50 2.60 2.75
SGD SIBOR
1M 1.10 1.25 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40
3M 1.30 1.45 1.60 1.60 1.60 1.60 1.60 1.60 1.60 1.60
6M 1.45 1.60 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75
12M 1.60 1.75 1.90 1.95 1.95 1.95 1.95 1.95 1.95 1.95
HIBOR
1M 0.60 0.75 0.95 1.20 1.20 1.30 1.40 1.40 1.40 1.50
3M 0.85 1.00 1.20 1.40 1.50 1.50 1.60 1.60 1.65 1.70
6M 1.10 1.25 1.50 1.65 1.65 1.65 1.70 1.70 1.80 2.00
12M 1.50 1.70 1.90 1.90 1.90 1.90 2.00 2.00 2.10 2.45

Reference tables Asia

Economy
Private Government Exports of Imports of
Size Population Investment FX reserves
consumption spending goods goods
(USD bn) (mn) (% of GDP) (USD bn, latest)
(% of GDP) (% of GDP) (% of GDP) (% of GDP)
Bangladesh 221.4 160.2 67.5 12.5 30.1 16.2 21.4 33.4
China 11,193.6 1,382.7 39.2 14.4 44.2 18.7 14.2 3,091.5
Hong Kong 316.6 7.3 66.0 9.9 21.7 192.5 190.2 407.9
India 2,263 1,299 58.8 11.7 27.1 19.2 20.6 402.5
Indonesia 932.7 261.9 55.5 8.2 32.2 20.9 19.3 122.1
Malaysia 296.8 31.7 55.0 12.6 25.8 67.2 60.8 100.5
Pakistan 304.0 207.8 81.8 11.9 14.2 8.3 17.8 14.3
Philippines 304.3 104.2 73.7 11.2 23.8 27.5 36.1 71.8
Singapore 297.0 5.5 36.5 11.3 24.9 172.2 146.3 267.1
South Korea 1,580.0 51.4 50.8 14.9 32.5 54.8 55.1 384.84
Sri Lanka 82.4 21.2 67.0 13.0 29.0 13.9 24.4 7.7
Taiwan 529.6 23.3 52.8 14.3 20.9 62.8 50.7 444.5
Thailand 401.3 65.9 50.7 17.1 24.3 52.6 43.8 192.2
Vietnam 205.3 92.6 68.0 6.3 24.7 85.6 84.8 37.5
Source: National statistics offices, CEIC, Bloomberg, Standard Chartered Research
Policy
Politics and fiscal policy Monetary policy
Date of next
Date of next Type of Policy Explicit Key monetary
budget
election election objectives inflation target policy tools
announcement
Ensuring growth and 5.5% Repo and reverse
Bangladesh Jan-2019 Parliamentary Jun-2018
price stability (FY18) repo rates
Stable economic growth and 1Y benchmark
China Late 2017 Party Congress Mar-2018 3.0%
structural reforms deposit rate
Linked Exchange Rate
Hong Kong 2020 Legislative Council Q1-2018 Exchange rate stability NA
System
Price stability, while 4+/-2% in
India May-2019 Parliamentary Feb-2018 Repo rate, CRR
maintaining focus on growth medium term
7-day reverse repo rate,
overnight deposit facility

Parliamentary and
Indonesia 2019 H2-2018 Price stability 3.0-5.0% rate (FASBI), overnight
presidential
lending facility
(repo) rate
Sustainable growth and
Malaysia 2018 Parliamentary Oct-2017 NA Overnight policy rate
monetary stability
Price and financial stability; Overnight deposit,
Pakistan H1-2018 Parliamentary May-2018 6%
supporting growth lending rate; repo rate
Overnight repo, reverse
Low and stable inflation and 2-4%
Philippines 2019 Local/senatorial Q4-2017 repo and special
sustainable economic growth (2016, 2017)
deposit account rates
Price stability and SGD NEER policy
Singapore 2020 Parliamentary 2018 NA
sustainable economic growth band
Local government Price stability and
South Korea Jun-2018 Dec 2017 2.0% 7-day repo rate
elections financial stability
2020 Ensuring growth and Inflation in mid- Repo and reverse
Sri Lanka Parliamentary Nov-2017
(expected) price stability single digits repo rates
Local government Promoting growth and
Taiwan Nov-2018 Q4-2017 NA Rediscount rate
elections ensuring price stability
Mid-2018
Thailand Parliamentary Oct-2017 Price stability 1-4% 1-day repo
(expected)
National Party
Vietnam 2021 Nov-2017 (est.) Price stability About 5% Refinance rate
Congress

Reference tables MENA

Economy
Government Fiscal FX reserves Exports of Imports of
Size Population FX reserves
debt balance (months of goods goods
(USD bn) (mn) (USD bn, latest)
(% of GDP) (% of GDP) imports) (% of GDP) (% of GDP)
Bahrain 34.3 1.3 82.1 -8.3 1.3 43.0 43.3 1.7
Egypt 332.3 91.5 96.9 -12.3 6.0 5.7 17.4 36.1

Iraq 192.8 36.1 63.8 -8.2 9.5 28.3 29.0 41.4
Jordan 38.7 9.8 95.1 -6.2 6.4 20.9 48.4 11.1
Kuwait 111.0 4.3 11.1 -13.8 7.1 48.5 23.9 31.9
Lebanon 51.9 6.0 147.1 -8.9 21.3 7.2 35.2 41.6
Oman 63.2 3.9 44.0 -13.7 12.5 43.2 33.6 17.4

Qatar 152.5 2.6 50.1 5.4 9.0 44.5 17.7 24.4
Saudi Arabia 646.4 31.7 12.7 -16.1 27.0 27.4 18.9 487.0
Turkey 857.4 79.8 30.0 -2.6 5.2 17.8 23.2 86.5
UAE 349.0 9.9 21.2 -4.3 3.1 93.0 66.0 89.2

Source: National sources, US Census Bureau, World Bank, IMF, Standard Chartered Research
Social indicators and monetary policy

Social indicators (latest available) Monetary policy
Female
Youth Unemployed with
participation
unemployment rate tertiary education
(% of female Exchange rate regime Key monetary policy tools
(% of total labour (% of total
working-age
force aged 15-24) unemployed)
population)
1-week depo facility;
Bahrain 39.4 10.9 32.0 Conventional peg
overnight repo rate
Overnight deposit, lending
Egypt 24.0 42.0 31.1 Managed float
rate

Iraq 14.5 34.6 NA Conventional peg Policy rate
Jordan 16.0 28.8 NA Conventional peg 1-day repo/deposit
Conventional peg to a
Kuwait 43.4 19.4 9.6 Discount rate
basket
Lebanon 24.0 20.7 29.7 Stabilised arrangement 21-day repo
Oman 28.3 19.0 NA Conventional peg 1-day repo
Overnight deposit, lending

Qatar 51.8 1.3 24.0 Conventional peg
rate; repo rate
Saudi Arabia 17.7 29.5 43.6 Conventional peg Reverse repo/repo rate
Turkey 28.1 17.7 13.9 Freely floating 1-week repo
UAE 46.0 10.0 33.2 Conventional peg Repo rate
Source: World Bank, IMF, Standard Chartered Research

Reference tables Africa

Economy
Government Exports of Imports of FX reserves
Size Population Investment
spending goods/services goods/services (USD mn,
(USD bn) (mn) (% of GDP)
(% of GDP) (% of GDP) (% of GDP) latest)
Angola 92.0 27.4 23.7 8.4 29.9 27.8 17,400
Botswana 10.9 2.2 33.9 21.3 56.9 45.7 5,236
Cameroon 30.9 23.7 21.3 20.1 21.3 23.9 1,570
Cte dIvoire 34.6 24.3 23.8 18.6 32.6 31.7 5,171
The Gambia 0.89 2.0 29.9 18.7 23.0 41.9 112
Ghana 42.8 27.6 25.4 24.4 40.2 47.2 5,910
Kenya 69.2 45.5 27.5 20.2 15.8 25.5 7,480
Nigeria 415.1 183.6 9.3 12.6 9.4 11.6 31,800
Sierra Leone 4.3 6.4 18.1 16.1 22.0 46.4 441
South Africa 280.4 55.9 33.0 19.5 30.4 30.2 42,298
Tanzania 46.7 48.6 19.6 27.6 20.6 25.8 4,414
Uganda 25.6 41.1 18.0 25.7 18.2 27.7 3,400
Zambia 20.6 16.7 24.0 38.4 34.2 37.0 2,400
Source: IMF/WEO, World Bank, Central Banks, Standard Chartered Research
Policy
Date of next
Date of next Type of Policy Explicit Key monetary
budget
election election objectives inflation target policy tools*
announcement
Reserve requirement,
Presidential and
Angola 2022 Oct-2017 Price stability Single-digit liquidity facilities, OMOs
legislative
and FX intervention
Presidential and Reserve requirement,
Botswana 2019 Feb-2018 Price stability 3-6%
legislative standing facilities, OMOs

Cameroon Oct-2018 Nov-2017 Price stability
legislative liquidity facilities
Cte dIvoire Oct-2020 Nov-2017 Price stability 2% +/-1ppt
legislative liquidity facilities, OMOs
The Gambia Dec-2021 Presidential Dec-2017 Price stability
Ghana 2020 Nov-2017 Price stability 8% +/-2ppt
legislative OMOs, FX swaps
Presidential Discount window rate,
Kenya Oct-2017 Jun-2018 Price stability 5% +/-2.5%
election re-run OMOs, cash reserve ratio
Presidential and Discount window rate,
Nigeria 2019 Dec-2017 Price stability Single-digit
legislative OMOs, cash reserve ratio
Sierra Leone Mar-2018 Presidential Nov-2017 Price stability Reserve requirement
South Africa 2019 Presidential Feb-2018 Price stability 3-6% OMOs, cash reserve ratio
Reserve requirement,
Presidential and
Tanzania Oct-2020 Jun-2018 Price stability 0-5% OMOS, intraday liquidity
legislative
facility
Presidential and OMOs, rediscount rate,
Uganda 2021 Jun-2018 Price stability 5%+/-3ppt
legislative cash reserve requirement
Zambia Aug-2021 Presidential Oct-2017 Price stability 6-8% OMOs, cash reserve ratio
* In addition to policy rate (note no policy rate for Tanzania); Source: EISA, National authorities, Standard Chartered Research

Reference tables Euro area and UK

Economy
10-year avg Fiscal C/A Exports of goods
Nominal GDP Public debt, balance, Household debt, balance, and services,
GDP Population growth % of GDP % of GDP % of GDP % of GDP, % of GDP
(EUR bn) (mn) (2007-16) (2016) (2016) (latest available)* (2016) (2016)
Germany 3,139.0 82.7 1.3 68.1 0.4 54.9 8.9 46.0
France 2,226.6 66.8 0.8 96.4 -3.0 64.3 -1.8 29.0
Italy 1,670.0 60.8 -0.6 133.0 -1.9 56.7 2.9 30.0
Spain 1,118.0 46.3 0.3 99.5 -4.1 77.8 2.6 33.0
Netherlands 690.0 17.0 0.8 63.0 -0.4 123.3 8.1 82.4
Belgium 421.0 11.3 1.1 107.0 -2.8 60.0 0.5 83.1
Austria 351.0 8.7 1.0 83.5 -1.1 51.6 2.7 53.4
Finland 213.0 5.5 0.1 65.4 -1.5 70.2 -0.7 35.3
Ireland 265.1 4.7 3.6 75.4 -4.8 89.2 8.2 121.0
Greece 174.8 10.9 -2.7 181.6 0.3 69.1 1.9 30.2
Portugal 184.4 10.3 -0.2 130.3 -2.1 90.5 1.6 40.4
UK 2,356.0 65.6 1.1 89.2 -4.0 92.4 -5.6 28.9
Russia^ 1,298.0 143.5 1.6 17.1 -3.9 1.7 25.0
Poland 426.6 38.3 3.5 53.6 -2.3 60.3 -0.2 48.6
Hungary 113.8 9.7 0.6 73.5 -1.8 51.3 5.4 85.3
Czech Republic 174.5 10.5 1.6 37.8 0.0 65.1 1.5 78.9
Source: EU Commission unless otherwise indicated; * OECD, ^ IMF

Reference tables Americas

Economy
Nominal Private Government Exports of Imports of
GDP Population consumption spending Investment goods goods FX reserves
(USD bn) (mn) (% of GDP) (% of GDP) (% of GDP) (% of GDP) (% of GDP) (USD bn, latest)
United States 18,569 326.4 68.7 17.8 15.9 12.0 14.7 42.5
Canada 1,529 36.6 57.9 21.3 22.2 31.9 33.6 74.8
Argentina 545.8 44.2 63.7 19.3 16.0 13.2 13.9 42.1
Brazil 1,796 211.2 62.5 20.6 15.8 13.9 12.7 372.4
Chile 247.0 18.3 64.9 14.1 22.0 27.7 28.5 38.0
Colombia 282.4 49.1 63.3 18.8 26.3 13.5 22.8 45.8
Mexico 1,046 130.2 69.6 12.3 22.6 36.1 38.8 165.2
Peru 192.1 32.2 62.8 13.6 23.5 22.3 23.6 61.0
Source: IBGE, DANE, INE, BCCh, INEI, BCRP, BCRA, INEGI, Banxico, IMF, World Bank, St Louis Fed, Census Bureau, STCA, Bloomberg, Standard Chartered Research
Policy
Date of next
Date of next Type of budget Policy Explicit inflation Key monetary
election election announcement objectives target policy tools
Maximum Federal funds target

Congressional Feb-2018 Long-run target of 2%
United States Nov-2018 employment and rate, unconventional
mid-terms (White House) (PCE inflation)
price stability policy (QE)
2% target, midpoint of Overnight

Canada Oct-2019 Parliamentary Q1-2018 Inflation target
1-3% range interest rate
Monetary stability,
12-17% (2017)
full employment,
Argentina Oct-2017 Municipalities Sep-2017 8-12% (2018) 7-day repo
equitable economic
5% +/- 1.5% (2019)
development
Price and financial 4.50% (+/-1.5%)

Brazil Oct-2018 Presidential Sep-2018 SELIC rate
stability 4.25% for 2019
Presidential and
Chile Nov-2017 Oct-2017 Price stability 3% Policy rate
legislative
Colombia May-2018 Presidential Q3-2018 Price stability 3% Intervention rate
Mexico Jul-2018 Presidential Q3-2018 Price stability 3% Policy rate
Presidential,
congress,
Peru Apr-2021 Q3-2018 Price stability 2% Policy rate
provinces and
municipalities

Disclosures appendix
Recommendations structure
Standard Chartered terminology Impact Definition
Positive Improve
Issuer We expect the fundamental credit profile of the
Stable Remain stable
Credit outlook issuer to <Impact> over the next 12 months
Negative Deteriorate
Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations
among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may
or may not include price targets.
Credit trend distribution (as of 26 September 2017)

Coverage total (IB%)
Positive 6 (16.7%)
Stable 302 (24.2%)
Negative 92 (34.8%)
Total (IB%) 400 (26.5%)
For recommendations history from both Research and other departments within SCB in the past 12 months, please see
https://www.sc.com/en/banking-services/market-abuse-regulation-disclosures/.
For other information of any securities referred to herein are available upon request to scgr@sc.com.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views
expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject
securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or
indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of
recommendations is a factor in the performance appraisals of analysts.
Chong Hoon Park, Kathleen B. Oh is/are employed as an Economist(s) by Standard Chartered Bank Korea and authorised to provide views on
Korean macroeconomic topics only.

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Sarah Hewin 17:50 GMT 26 September 2017
Chief Economist, Europe

Standard Chartered - Global Focus-Q4-2017

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l Global Research l

Global Focus Q4-2017

Is this as good as it gets?

All rights reserved. Standard Chartered Bank 2017

Real GDP growth, 2017 forecasts (%)

Is this as good as it gets?

Figure 1: Global real GDP growth

Politics and shocks

Could there be a positive shock in US politics?

Figure 2: The US economy is operating at capacity

Brexit and Trump are a much-needed wake-up call for Europe

Korea The human factor and the importance of communication

In such an environment the main risk is a miscommunication or miscalculation that

We expect no further escalation in the GCC

The threat of extremism in Southeast Asia

Figure 1: Radical Islamic movements have spread throughout Asia

Source: BBC, IPAC, Carnegie Council, Standard Chartered Research

Risks have spread across Asia

Southeast Asia in focus

IS has led to increased cross-border logistical, ideological and training cooperation

Figure 2: A sampling of attacks attributed to Islamist groups in Southeast Asia

Indonesia Jakarta 14 24 May 2017

Philippines Marawi 103 23 May 2017

Myanmar/Bangladesh Border 9 October 2016

Philippines Davao 14 3 September 2016

Bangladesh Dhaka 20 July 2016

Malaysia Kuala Lumpur 8 28 June 2016

Indonesia Jakarta 24 14 January 2016

Geopolitics does not help

Extremist Islamic groups represent a formidable challenge for Southeast Asias

Asia Watching for dovish surprises

Monetary policy India and Indonesia in focus

Chinas 19th Party Congress dominates the agenda

Market outlook Too much, too soon for the CNY

Asia Top charts

Asia Macro trackers

Source: CEIC, Standard Chartered Research

Source: CEIC, Standard Chartered Research

Figure 3: Current account Surpluses narrowed across most of Asia in H1-2017

Source: CEIC, Standard Chartered Research

Figure 5: Food inflation has remained benign

Source: CEIC, Standard Chartered Research

Source: CEIC, Standard Chartered Research

Australia Fewer worries

2017 2018 2019 6%

Policy rate (%)* 1.50 2.00 3.00 1%

Policy Still accommodative, but less concerned

Bangladesh Steady as she goes

Policy Reforms required for higher medium-term growth

out of 189 countries in 2016). Bangladeshs institutional framework is weak. For

Politics Alliances shaping up for 2019 elections

Market outlook Maintain Neutral outlook on T-bonds

China Get the party started

Figure 1: China macroeconomic forecasts Figure 2: Export growth is losing steam

2017 2018 2019 100 Trade balance Exports Imports 100

Pivoting towards a neutral policy stance

significantly in July and August.

A busy political calendar for the next six months

President Xi Jinping is widely expected to consolidate power during the Party

CNY REER is consistent with fundamentals

Hong Kong Riding the tailwinds

Policy Still-flush liquidity suppresses HIBOR for now

Aggregate Balance, a gauge of interbank liquidity, to c.HKD 180bn by late October