Quarterly Currency Outlook - Emerging Markets MarketQuants Research Quarterly - 2019 Q1 - tac economics

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Quarterly Currency Outlook - Emerging Markets MarketQuants Research Quarterly - 2019 Q1 - tac economics
Emerging Markets
Quarterly Currency Outlook
MarketQuants Research
Quarterly - 2019 Q1
Completed on January 14, 2019

TAC ECONOMICS
www.taceconomics.com
Quarterly Currency Outlook – EM MarketQuant Research                                                                                                    2019 Q1

Content

1. Key background elements for EM currencies .............................................................................................. 4

2. Detailed Currency Outlook ............................................................................................................................. 5
   Summary tables ..........................................................................................................5
   Brazilian Real - BRL ......................................................................................................6
   Chinese Yuan - CNY ......................................................................................................7
   Indian Rupee - INR .......................................................................................................8
   Indonesian Rupiah - IDR ................................................................................................9
   Korean Won - KRW ..................................................................................................... 10
   Mexican Peso - MXN ................................................................................................... 11
   Polish Zloty - PLN....................................................................................................... 12
   Russian Ruble - RUB ................................................................................................... 13
   South African Rand - ZAR ............................................................................................. 14
   Turkish Lira - TRY ....................................................................................................... 15

3. Methodology .................................................................................................................................................. 16

TAC ECONOMICS
www.taceconomics.com                                                                                                                                              3
Quarterly Currency Outlook – EM MarketQuant Research                                                                    2019 Q1

    1. Key background elements for EM currencies

Our Quarterly Currency Outlook is driven by the                      well as to the corporate sector. In addition,
following global scenario on Emerging Markets and                    present pick up in global strategic tensions (trade
Developing Economies:                                                protectionism, Brexit, elections) could lead to
-    Economic deceleration is materializing for EM                   significant economic depression in EM.
     with headwinds from external factors (tightening
     in global USD liquidity, USD appreciation, trade
     tensions) and declining support from domestic                EUR/USD Markov Switching model
          Exhibit 1 - EUR/USD projections                          Exhibit 2 - EUR/USD Markov Switching model
     factors (monetary
          Expected         tightening,
                   large oscillations,    cyclical
                                       towards 1.15 downturn
                                                    in 2020H1
                                                                  Financial logic (bond yield differential) likely to prevail
                                                                   Financial logic (bond yield differential) likely to prevail
     in    investment        and     confidence,         policy
     uncertainties).

-    The broad cyclical downturn is expected to get
     worse post mid-2019 when the simultaneous
     slowdown in China and reversal in the US
     dampen world economic and financial dynamics.

-    However, exchange rate and policy adjustments
     initiated in 2018 in many among the large EM
     have created both resilience capabilities and
     policy space. Our quantitative tools also support
     the view that the 10 Key EM 1 would be able to
     better weather the cyclical storm, with more
     resilient currencies and the ability to stimulate
                                                                                                      Source: TAC ECONOMICS
     domestic demand as a reaction to external
     headwinds.      In   these     large     EM   however,
     vulnerabilities remain high for corporate and                EUR/USD Projections

     bank borrowers.

-    Mid-size    countries    and    those      substantially
     exposed to commodity prices would concentrate
     most of the larger risks, including pressures on
     currency rates, fiscal difficulties and down-
     pressures on activity.

-    The major risks to our central scenario are
     related to political and economic policies
     potentially   detrimental      to      businesses     and
     households’ confidence and investments. In
     particular, increasing difficulties for Chinese
     authorities to manage further the cyclical
                                                                                                      Source: TAC ECONOMICS
     slowdown could rapidly trigger “disorderly”
     adjustments to banks and financial markets, as

1
  China, India, Indonesia, South Korea, Brazil, Mexico,
Turkey, Russia, Poland, South Africa

TAC ECONOMICS
www.taceconomics.com                                                                                                             4
Quarterly Currency Outlook – EM MarketQuant Research                                               2019 Q1

2. Detailed Currency Outlook
    Summary tables
                               Exchange Rate Forecasts for June 2020
                                    (month average against Euro)

                                           Spot rate             Mixture model
                                         Jan. 8, 2018                    mode 75% confidence interval

Brazilian Real (BRL)                              4.26                       4.73                  3.9 – 5.8

Chinese Yuan (CNY)                                7.84                       8.36                  7.8 – 9.0

Indian Rupee (INR)                                80.2                       80.6                76.7 – 84.2

Indonesian Rupiah (IDR)                         16,182                  17,557            14,853 – 20,424

Korean Won (KRW)                                 1,289                      1,296              1,070 – 1,539

Mexican Peso (MXN)                                22.2                       25.5                24.0 - 26.9

Polish Zloty (PLN)                                4.31                       4.37                   4.2 - 4.6

Russian Ruble (RUB)                               76.7                       94.0               80.5 – 108.4

South African Rand (ZAR)                          16.0                       17.7                16.4 – 19.0

Turkish Lira (TRY)                                6.29                       6.02                  5.6 – 6.4

                                Cross-Rates Forecasts for June 2020
                                         (month average)

             BRL       CNY     INR      IDR        KRW    MXN        PLN        RUB     ZAR         TRY

   USD       4.06      7.19    69.3    15,110     1,116   21.9       3.75       80.9    15.2        5.18

   EUR       4.73      8.36    80.6    17,557     1,296   25.5       4.37       94.0    17.7        6.02

   BRL                 1.77    17.0     3,710     273.9   5.39       0.92       19.9    3.74        1.27

   CNY       0.57               9.6     2,101     155.1   3.05       0.52       11.24   2.12        0.72

   INR       0.06      0.10             217.9      16.1   0.32       0.05       1.17    0.22        0.07

   IDR       0.00      0.00    0.00                0.07   0.00       0.00       0.01    0.00        0.00

   KRW       0.00      0.01    0.06     13.5              0.02       0.00       0.07    0.01        0.00

   MXN       0.19      0.33    3.16     688.3      50.8              0.17       3.68    0.69        0.24

   PLN       1.08      1.91    18.4     4,014     296.4   5.83                  21.5    4.04        1.38

   RUB       0.05      0.09    0.86     186.9      13.8   0.27       0.05               0.19        0.06

   ZAR       0.27      0.47    4.56     993.2      73.3   1.44       0.25       5.32                0.34

   TRY       0.79      1.39    13.4     2,916     215.3   4.24       0.73       15.6    2.94

TAC ECONOMICS
www.taceconomics.com                                                                                        5
Quarterly Currency Outlook – EM MarketQuant Research                                                 2019 Q1

Brazilian Real - BRL
 The combination of (1) persistence of a WatchList                   TAC ECONOMICS Projections
 Indication pointing to prolonged high vulnerability         (Mixed econometric and RiskMonitor approach)
 for the exchange rate up to 2021Q2, (2) potential
                                                                          Spot      June     Dec.      June
 international financial turbulences and (3)
                                                                         Jan. 8     2019     2019      2020
 expected upward pressures on prices in the near-
 term suggest that volatility will remain high during        EUR/BRL       4.26     4.58      5.05     4.73
 2019 and a further depreciation up to USD/BRL 4.0-
 4.2 is likely starting from 2019H2.

 Econometric Projections
 Brazilian capital markets were under heavy political
 influence over the past months, with substantial capital
 inflows before President J. Bolsonaro’s election. With
 stable domestic interest rates and increasing global risk
 aversion, the USD/BRL depreciated again to 3.91 in mid-
 Dec. 2018. Since Bolsonaro has taken offices on Jan. 1,
 2019, the Brazilian Real has resumed its reappreciation
 to USD/BRL 3.71 on Jan. 8, 2019.
 Selic rate has remained stable so far but our policy
 reaction function and the likely increase in inflation
 during 2019 suggest a tightening process around mid-
 2019, with a magnitude directly related to the potential
 international financial turbulences.

 RiskMonitor Analysis
 Brazil’s average Economic & Financial Risk rating has
 registered a visible improvement in 2018Q3, to 48.3
 from 49.8 in Q2 and continuing a movement initiated in
 2016. This decline in Risk rating mostly reflects a large
 improvement in the Growth Balance (positive reversal
 of the current account for two years).
 A detailed examination of our range of risk metrics
 supports a much more cautious view for later horizons.
 Indeed, the recent reduction in short-term horizon’s
 Risk rating (46.1 for the less than 1-year horizon) has
 expanded the gap with longer-term Risk rating, which
 stays at an elevated level (52.5 for 3 to 5 years).
 Uncertainties are reinforced by the persistence of a
 WatchList Indication pointing to prolonged high
 vulnerability for the exchange rate up to 2021Q2.

 Consensus Projections
 end-of-period value against Euro*
                 Mean Divergence          Max        Min

 Jan. 2019        4.29           6%         4.4       4.1

 Mar. 2019        4.28          11%         4.5       4.1

 Dec. 2019        4.46          16%         4.9       4.2

 June 2020        4.55
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                          6
Quarterly Currency Outlook – EM MarketQuant Research                                                  2019 Q1

Chinese Yuan - CNY
 The country remains affected by a WatchList                          TAC ECONOMICS Projections
 Indication suggesting a high vulnerability to sudden         (Mixed econometric and RiskMonitor approach)
 shocks on the currency. Our central scenario is a
                                                                          Spot      June      Dec.      June
 significant but controlled economic slowdown and
                                                                         Jan. 8     2019      2019      2020
 a further 5%-10% depreciation of the CNY against
 the USD.                                                    EUR/CNY      7.84      7.82      8.86      8.36

 Econometric Projections
 GDP growth has slowed in 2018Q3 (+6.5% y/y), with
 lower growth for investment spending and moderating
 consumer spending. In 2018Q4, retail-sale dynamics
 have been negatively affected by the decline in car
 sales, amplified by the end of fiscal subsidies. Monetary
 policy transmission is constrained by declining
 confidence and expectations, and persistent liquidity
 injections have not prevented a modest pick-up in
 interbank rates. This in turn has supported the CNY
 exchange rate, in parallel with markets’ over-reactions
 to US-China dialogue.
 Our central scenario for China outlook is one of
 significant but controlled economic slowdown and a
 further 5%-10% depreciation of the CNY against the
 USD, but a vicious circle of more rapid economic
 deceleration despite supportive policies and increasing
 worries on the financial sector could create conditions
 for a more disorderly process.

 RiskMonitor Analysis
 The average Economic & Financial Risk Rating of China
 remained stable at an “intermediate” level around 43-C.
 The overall stabilization is associated with higher risks
 on activity, then exchange rate and a much lower
 reading for payment. The metrics support a scenario of
 an increase in risk materialization during 2019. This is
 consistent with our expectations of simultaneous
 deterioration in our Fundamental Balances for Growth
 (rapidly declining current account surplus, slowing GDP
 growth) and Liquidity (declining Fx reserves). The
 country remains affected by a Watch List Indication
 suggesting a high vulnerability to sudden shocks, on the
 currency but also indirectly on economic activity.

 Consensus Projections
 end-of-period value against Euro*

                 Mean Divergence          Max        Min

 Jan. 2019          7.9          3%         8.0       7.8

 Mar. 2019          8.0          5%         8.2       7.8

 Dec. 2019          8.3         11%         8.8       7.8

 June 2020          8.4
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                           7
Quarterly Currency Outlook – EM MarketQuant Research                                                   2019 Q1

Indian Rupee - INR
 Despite the currency overvaluation, low inflation                     TAC ECONOMICS Projections
 and good economic performance should support                  (Mixed econometric and RiskMonitor approach)
 the Rupee in the medium-term.
                                                                           Spot      June      Dec.      June
 Models suggest the Indian Rupee to stabilize just                        Jan. 8     2019      2019      2020
 above USD/INR 70.0 (EUR/INR 80 in 2020Q2).
                                                              EUR/INR      80.2      75.7      82.4      80.6
 Econometric Projections
 The Indian Rupee has been highly volatile since its
 historical low (74.4 against USD on Oct. 9),
 reappreciating by +6.5% in Oct.-Nov. thanks to
 contraction in oil prices, then depreciating (-3% to
 USD/INR 72 on Dec. 18) due to renewed global and
 domestic policies uncertainties.
 Inflation has corrected sharply in the last few months
 (+2.3% y/y in Nov.); indeed, food prices are receding on
 the back of improving physical and digital agricultural
 markets infrastructures. After hiking twice its key policy
 rate (+25bp each in June and Aug. 2018 to 6.50%), the
 RBI has paused its monetary tightening thanks to
 reduced inflationary pressures. Yet, in spite of potential
 bouts of currency depreciation and rapid pass-through
 on domestic prices (mostly fuel), S. Das, the new RBI
 Governor, could initiate a more accommodative stance
 in the coming quarters.

 RiskMonitor Analysis
 The Economic & Financial Risk rating has stabilized at a
 favorable level (37.3-B in 2018Q3) owing to very low
 level of risk on structural (Growth and Debt) and
 Liquidity Balances. Overall, risks are concentrated on
 the short-term horizon with potential bouts of steep
 currency volatility and ongoing slowdown in the
 momentum of domestic demand.
 On the Foreign Exchange Balance, the plunge in forex
 reserves quality after 2018Q1 indicates that the
 reversal in forex reserves comes from substantial cross-
 border capital flows. The Indian Rupee is modestly
 overvalued despite the large currency depreciation in
 2018 (-16% against USD between Jan. and Oct.). With
 the recent re-appreciation, potential currency
 adjustment is increasingly likely in the short-term.

 Consensus Projections
 end-of-period value against Euro*

                 Mean Divergence          Max        Min

 Jan. 2019         82.1         10%       87.0       78.9

 Mar. 2019         83.3         12%       88.1       78.4

 Dec. 2019         86.2         17%       94.0       79.5

 June 2020         86.4
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                            8
Quarterly Currency Outlook – EM MarketQuant Research                                                    2019 Q1

Indonesian Rupiah - IDR
 The Indonesian economy is currently well oriented                      TAC ECONOMICS Projections
 with strong domestic demand and low inflationary               (Mixed econometric and RiskMonitor approach)
 pressure. However, after a relative stable period in
                                                                            Spot      June      Dec.      June
 2019H1, the Indonesian Rupiah could start
                                                                           Jan. 8     2019      2019      2020
 depreciating due to lower oil price.
                                                               EUR/IDR    16,182    15,962    18,485    17,557
 Our models suggest the USD/IDR close to 15,100 in
 2020H1 (EUR/IDR 17,500).

 Econometric Projections
 The depreciating trend of the Rupiah has ceased until
 Oct. 2018 (up to USD/IDR 15,290); then policy efforts by
 the Central Bank BI (adequate liquidity, tightening
 stance) have led to a rapid reappreciation in November
 (-6.6% to about USD/IDR 14,500 in mid-Dec.). Further
 currency volatility is very likely because of ongoing
 global trade and financial tensions.
 The BI has hiked its key policy rate (+25bp to 6.0%), third
 consecutive hike, because of weakening currency and
 deteriorating current account. The BI will continue to be
 vigilant about forex stability, without necessarily
 tightening further its monetary stance in the first
 quarters of 2019.
 However, our scenario for oil prices suggests Brent
 prices hovering around 50$/bl at the end of 2019 and
 early 2020. It should weigh on the Rupiah starting in the
 second half of 2019.

 RiskMonitor Analysis
 The Economic & Financial Risk ratings has steadily
 improved since 2017, reaching the low risk category
 (39.7-B in 2018Q3) due to strong domestic demand with
 managed inflationary pressures.
 On the Foreign Exchange Balance, further move into
 the unsustainable overvaluation quadrant is due to
 significant outflows of volatile short-term capital, while
 the gradual depreciation of the Indonesian Rupiah until
 October 2018 has not been sufficient to reduce the mild
 currency overvaluation, as competing currencies,
 notably in Asia, have also weakened in parallel.

 Consensus Projections
 end-of-period value against Euro*

                 Mean Divergence           Max        Min

 Jan. 2019       16,652           9%     17,518    16,002

 Mar. 2019       16,867          13%     17,981    15,801

 Dec. 2019       17,509          16%     18,981    16,248

 June 2020       17,529
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                             9
Quarterly Currency Outlook – EM MarketQuant Research                                                 2019 Q1

Korean Won - KRW
 The dynamics of the CNY and expected slowdown in                    TAC ECONOMICS Projections
 activity could weigh on the KRW in 2019H2. Overall,         (Mixed econometric and RiskMonitor approach)
 the models suggest an erratic path against the EUR
                                                                         Spot      June      Dec.      June
 up to early 2020 to EUR/KRW 1,300 in 2020Q2.
                                                                        Jan. 8     2019      2019      2020
 Econometric Projections
                                                             EUR/KRW    1,289     1,191     1,372     1,296
 The Korean Won has oscillated around USD/KRW 1125
 due to ongoing trade tensions between China and US.
 Short-term fluctuations are likely to persist, and a
 weaker Won should strengthen the competitive
 advantage of the already strong export sector. Bank of
 Korea (BoK) has unexpectedly raised its policy rate on
 Nov. 30, 2018 (+25bps to +1.75%) to curb escalating
 domestic debt, especially in the housing market, and
 adjust to the impact of monetary policy normalization
 in advanced economies.
 GDP growth has reduced in 2018Q3 (+2.0% y/y from
 +2.8% in Q2) to its lowest level in the past nine years.
 Going forward, increase in minimum wages (+16% in
 2018 and +11% in 2019) and in government spending
 should support domestic demand.

 RiskMonitor Analysis
 The Economic & Financial Risk rating has suddenly
 spiked in 2018Q3 (to 41.9-C), this degradation is
 corroborated by a new Watch List Indication on
 Economic Activity, which highlights a vulnerability to a
 significant shock on the business cycle for the period
 2018Q3-2020Q2. Indeed, downturn in our leading
 indicator of economic activity, coupled with trade
 tensions between China-U.S. and expected recession in
 Japan (end-2019), portends a risk of sharp reduction in
 economic growth (from mid-2019) which would
 translate into strong pressures on the Korean Won and
 on the banking sector (because of high domestic debt).
 On the Foreign Exchange Balance, while the Korean
 Won continues to be neutrally valued, the forex
 reserves quality remains insufficient due to sizeable
 short-term speculative and banking flows, this
 combination entails substantial currency volatility, as
 registered since July 2018.

 Consensus Projections
 end-of-period value against Euro*
                Mean Divergence           Max        Min

 Jan. 2019       1,289           4%      1,311      1,257

 Mar. 2019       1,298           8%      1,351      1,248

 Dec. 2019       1,352          17%      1,494      1,265

 June 2020       1,364
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                        10
Quarterly Currency Outlook – EM MarketQuant Research                                                       2019 Q1

Mexican Peso - MXN
 Mexican Peso enjoys a very favorable exchange rate                        TAC ECONOMICS Projections
 competitiveness. However poor foreign exchange                    (Mixed econometric and RiskMonitor approach)
 reserves portend currency volatility and the cyclical
                                                                                Spot     June      Dec.      June
 reversal in the US suggest further depreciation to
                                                                               Jan. 8    2019      2019      2020
 USD/MXN 22.0 in 2020.
                                                                  EUR/MXN       22.2     23.4      26.8      25.5
 Econometric Projections
 Following a modest appreciation of the Mexican Peso in
 Sept. 2018, the currency has depreciated (+7.0% against
 USD to around USD/MXN 20-20.5) given the
 uncertainties in domestic economic reforms, rapid
 fluctuations in oil prices and tensions on financial
 markets. Inflationary pressures have mildly decelerated
 (+4.7% y/y in Nov. 2018) due to decrease in energy, food
 and beverage prices. However, inflation is expected to
 remain above the official target (+3.0%) given the pass-
 through effects of weak exchange rate. After pausing its
 tightening cycle since July 2018, the Central Bank has
 hiked its overnight interbank rate again (+25bp to +8.0%
 in Nov. 2018), given the consolidation in inflationary
 pressures (especially persistently strong core inflation).
 The revision of projections compare to the latest
 publication in Oct. 2018 is very limited. The Mexican
 Peso should progressively depreciate to USD/MXN 22.0
 in early-2020, i.e. above EUR/MXN 25.0.

 RiskMonitor Analysis
 The Economic & Financial Risk rating has continued to
 edge upwards in 2018Q3 (to 34.9-B), predominantly
 due to the ongoing degradation in the Foreign
 Exchange Balance. In addition, Mexico continues to face
 uncertainties on USMCA ratification (ex-NAFTA),
 domestic policy stance of the new government along
 with volatility in global oil prices, all likely to keep risks
 at its current level if not higher. On the Foreign
 Exchange Balance, although the weak Mexican Peso
 enjoys a very favorable exchange rate competitiveness;
 the forex reserves quality is poor given the sizeable
 short-term capital (in & out) flows, hence portending
 further currency volatility as already evidenced in 2018.

 Consensus Projections
 end-of-period value against Euro*
                  Mean Divergence            Max        Min

 Jan. 2019          23.2            7%       24.1       22.4

 Mar. 2019          23.0          10%        24.3       22.0

 Dec. 2019          24.1          14%        25.9       22.4

 June 2020          24.4
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                              11
Quarterly Currency Outlook – EM MarketQuant Research                                                  2019 Q1

Polish Zloty - PLN
 The PLN remains highly vulnerable to speculative                     TAC ECONOMICS Projections
 capital flows as illustrated by the volatility in forex      (Mixed econometric and RiskMonitor approach)
 reserves accumulation in recent quarters.
                                                                          Spot      June      Dec.      June
 Poland’s sensitivity to international financial                         Jan. 8     2019      2019      2020
 turbulences should lead to bouts of volatility on the
                                                             EUR/PLN      4.31      4.40      4.33      4.37
 currency, even though the PLN should remain in a
 large range EUR/PLN 4.3-4.4 until mid-2020.

 Econometric Projections
 After registering an appreciating trend over 2017Q1-
 2018Q1 (-6% against EUR), the Polish Zloty has
 depreciated towards EUR/PLN 4.3 in 2018Q3.
 Notwithstanding significant sensitivity to international
 financial turbulences, leading to potential bouts of
 volatility, the currency should remain in a large range
 EUR/PLN 4.3-4.4 until the beginning of 2020. The
 Central Bank (NBP) continues to keep its interest rate
 unchanged (+1.5% since March 2015). The expected
 temporary slowdown in economic growth and
 manageable inflation with declining oil prices suggest
 that the NBP should keep its interest rate unchanged
 over the coming months.

 RiskMonitor Analysis
 The Economic & Financial Risk rating has declined in
 2018Q3, at an average level (46.0-C), with most
 Fundamental Balances at moderate risks level; thanks
 to robust economic performances, Poland has
 improved its position on the Growth, Cyclical and
 Banking System Balances.
 The trajectory of Poland has slightly deteriorated on
 both Liquidity and Foreign Exchange Balances; the
 small improvement in exchange rate competitiveness
 (with the currency continuing depreciating against USD
 close to 3.8 in Dec. 2018) but volatile forex reserves
 accumulation in recent quarters (USD 108bn in 2018Q3,
 covering 5 months of imports) is reflected through poor
 forex reserves quality. Therefore, the currency remains
 highly vulnerable to speculative capital flows.

 Consensus Projections
 end-of-period value against Euro

                Mean Divergence           Max        Min

 Jan. 2019        4.28         2.8%       4.32       4.20

 Mar. 2019        4.28         3.5%       4.35       4.20

 Dec. 2019        4.26         9.4%       4.50       4.10

 June 2020        4.22
                                    Source: Consensus Inc.

TAC ECONOMICS
www.taceconomics.com                                                                                         12
Quarterly Currency Outlook – EM MarketQuant Research                                                 2019 Q1

Russian Ruble - RUB
 Despite a restored competitiveness of the currency                  TAC ECONOMICS Projections
 after the 2018 adjustment (about -20% against               (Mixed econometric and RiskMonitor approach)
 USD), the sensitivity to oil prices with Brent moving
                                                                         Spot      June      Dec.      June
 back to 50$/bl in 2019 will put unavoidable
                                                                        Jan. 8     2019      2019      2020
 downward pressure on the Ruble.
                                                             EUR/RUB     76.7      74.0      93.9      94.0
 Econometric Projections
 After the Russian Ruble’s steep fall (-21% against USD
 between April and September 2018), the currency has
 hovered around USD/RUB 66.0 until early 2019.
 Central Bank of Russia has raised its key rate in Dec.
 2018 (+25bps to 7.75%), a second increase this year,
 given growing inflationary pressures, volatile external
 conditions and planned VAT hike.
 Our scenario for oil prices suggests Brent prices
 hovering around 50$/bl at the end of 2019 and early
 2020. It will weigh on the Ruble until 2020 in a context
 of global financial tensions

 RiskMonitor Analysis
 After five quarters of rapid increase, the Economic &
 Financial Risk rating has improved in 2018Q3 (42.5-C)
 thanks to a more favorable exchange rate
 competitiveness. Meanwhile persisting geopolitical
 tensions (Ukraine-Russia crisis and international
 financial sanctions) and pressures on global oil prices
 are likely to maintain risk levels. Also, overall Risk
 ratings has been mildly revised upward because of
 higher principal repayments for 2017 (USD 100bn
 against earlier figures of 69bn).
 On the Foreign Exchange Balance, the Russian Ruble
 has regained competitiveness in 2018Q3 (due to a +15%
 depreciation against USD between Q1 and Q3) moving
 further into a neutral valuation range. Yet, the currency
 should continue to face further adjustment given the
 geo-political tensions and ongoing US monetary
 tightening.

 Consensus Projections
 end-of-period value against Euro*

                 Mean Divergence          Max        Min

 Jan. 2019        76.6           7%       80.4       75.0

 Mar. 2019        76.4          18%       83.6       69.8

 Dec. 2019        78.2          12%       83.0       73.5

 June 2020       79.69
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                        13
Quarterly Currency Outlook – EM MarketQuant Research                                                  2019 Q1

South African Rand - ZAR
 The combination of limited economic growth,                          TAC ECONOMICS Projections
 current account deficit, decline in foreign exchange         (Mixed econometric and RiskMonitor approach)
 reserves, decrease in commodity prices and
                                                                          Spot      June      Dec.      June
 persistent sensitivity to international turbulences
                                                                         Jan. 8     2019      2019      2020
 points to the depreciation of the Rand towards
 USD/ZAR 15.3 or EUR/ZAR 17.7 in 2020Q2.                      EUR/ZAR     16.0      15.5      18.4      17.7

 Econometric Projections

 After the past depreciation, the USDZAR oscillated
 around 14.3 in 2018Q4. The Central Bank raised its
 policy rate by +25bp to 6.75% in November. Further rate
 hikes are likely in 2019 given the macro-prudential risks.
 After two quarterly negative prints (“technical
 recession”), the GDP growth expanded by +0.6% y/y in
 2018Q3, supported by consumption and exports.
 Inflation increased slightly to +5.2% in November 2018.
 Combined with our adjusted Brent price projections,
 inflation is unlikely to breach the official target range
 (3%-6%).
 The Rand is likely to remain volatile due to the
 combination of limited economic growth, expanding
 current account deficit, nascent decline in foreign
 exchange reserves, probable decrease in commodity
 prices and persistent sensitivity to global investor
 sentiments towards emerging markets.

 RiskMonitor Analysis

 The Economic & Financial Risk rating has gradually
 decline, to 45.4-C in 2018Q3, consistent with the past
 rating trends, i.e. upward trend but short-term
 adjustment. It reflects the slight improvement in the
 short-term balances but still inherent structural
 weaknesses that would take time to address (unlikely
 before the May 2019 national elections).
 The     past    South    African   Rand    depreciation
 (concentrated in 2018Q2) improved the exchange rate
 competitiveness toward a slight undervaluation
 indication. Therefore, the forex reserves quality has
 remained insufficient owing to significant speculative
 capital flows, which portends further currency volatility.

 Consensus Projections
 end-of-period value against Euro*

                 Mean Divergence          Max        Min

 Jan. 2019         16.1         12%       17.3       15.4

 Mar. 2019         16.4         17%       17.7       14.9

 Dec. 2019         16.6         32%       20.2       14.8

 June 2020         16.8
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                         14
Quarterly Currency Outlook – EM MarketQuant Research                                                  2019 Q1

Turkish Lira - TRY
 Our Watch List Indication suggests an economic                       TAC ECONOMICS Projections
 recession in 2019, therefore we maintain a                   (Mixed econometric and RiskMonitor approach)
 substantial TRY risk premium.
                                                                          Spot      June      Dec.      June
 However, reduced pressures on inflation and high                        Jan. 8     2019      2019      2020
 interest rates should support the Turkish Lira close
                                                              EUR/TRY     6.29      5.67      6.62      6.02
 to EUR/TRY 6.0 in 2019 and 2020H1.

 Econometric Projections

 TRY has re-appreciated in 2018H2 given reduced
 concerns over global EM assets and lower oil prices.
 The CBRT (Central Bank of Republic of Turkey) has kept
 its policy rate (one-week repo auction rate) unchanged
 at 24% in December 2018. Policy rate cuts cannot be
 ruled out ahead of local elections in March 2019.
 However, the reduced pressures on inflation dynamics
 are still insufficient to expect change in monetary
 policy. Earlier than-expected easing may create
 renewed pressures on the USD/TRY, thus making the
 CBRT extremely cautious over its decisions.
 High interest rates should support the Turkish Lira in
 the medium term, despite a sharp slowdown in
 economic activity in 2019.

 RiskMonitor Analysis

 The aggregate Economic & Financial Risk rating slightly
 deteriorated in 2018Q3 to 51.8–C. It is consistent with
 the current rebalancing of the economy with gradual
 improvement in external imbalances and less currency
 concerns, thereby the aggressive tightening of the
 Central Bank (CBRT) translated into activity contraction
 (unavoidable recession in the near term).
 The improvement in the Foreign Exchange Balance
 conceals a higher liquidity risk. Despite the Turkish Lira
 appreciation in 2018H2 (+16.5% against USD since Sept.
 2018), the past depreciation has improved the
 exchange rate competitiveness toward undervaluation,
 but it also negatively impacts the forex reserves quality
 (massive capital outflows owing to risk aversion).

 Consensus Projections
 end-of-period value against Euro*

                 Mean Divergence          Max        Min

 Jan. 2019          6.3         16%         7.1       6.0

 Mar. 2019          6.6         17%         7.3       6.2

 Dec. 2019          7.4         31%         8.3       6.0

 June 2020          7.4
                                    Source: Consensus Inc.
 *The divergence index does not include the divergence on
 EUR/USD.

TAC ECONOMICS
www.taceconomics.com                                                                                         15
Quarterly Currency Outlook – EM MarketQuant Research                                                         2019 Q1

3. Methodology

This document and the analysis on currency                     country-risk assessment RiskMonitor. This tool is
projections are based on the combination of two                based on non-linear relations between economic
different sets of quantitative tools, associated with          variables and degree of specific imbalances, and
in-depth qualitative review and process of                     between such imbalances and degree and nature of
“challenging the models”.                                      risk, and is based on datamining techniques that do
                                                               not require scenario construction on explanatory
A first set of quantitative tools uses traditional             variable. RiskMonitor outputs including an Exchange
econometric equations relating nominal exchange                Rate Risk Rating, the level of which is associated with
rates (against the USD or EUR depending on the                 a non-gaussian distribution of probability for the
monetary / fx regime adopted by local authorities or           exchange rate. RiskMonitor also provides Early
de facto) with underlying macroeconomic variables              Warning Signals for unexpected / systemic shocks,
usually considered as having a large impact on EM              including on the currency value.
currencies: this includes notably growth differential
(with mature economies) and outlook, inflation and             The econometric equations and RiskMonitor outputs
interest rates (including levels, changes and gaps             are providing two different sets of probability
with US), sensitivity to overall risk appetite / aversion,     distribution at the 18-month ahead horizon. The
and commodity or oil prices. Estimations are                   overall quantitative result and currency projection is
calibrated on a long period (at least early 2000s) in          based on a mixed model combining the two sets of
order to capture as best as possible trends and                probabilities with equal weighting.
underlying forces. The robust estimate is afterwards
associated with Monte Carlo simulations based on               Finally, the quantitative results are commented, and
observed ranges for explanatory variables and                  sometime nuanced, by the more qualitative / policy
incorporating covariances across variables.                    driven analysis on currency development and
                                                               outlook.
The second set of quantitative measures is based on
outputs from TAC ECONOMICS’ proprietary tool for

Disclaimer

These assessments are, as always, subject to the disclaimer provided below.

This material is published by TAC ECONOMICS SAS for information purposes only and should not be regarded as
providing any specific advice. Recipients should make their own independent evaluation of this information and
no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our
consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this
information is believed to be reliable, it has not been independently verified by TAC ECONOMICS and
TAC ECONOMICS makes no representation or warranty (express or implied) of any kind, as regards the accuracy
or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising
in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views,
forecasts, or estimates are solely those of TAC ECONOMICS, as of this date and are subject to change without
notice.

TAC ECONOMICS
www.taceconomics.com                                                                                               16
Quarterly Currency Outlook – EM MarketQuant Research                                                   2019 Q1

Your contacts at TAC ECONOMICS

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TAC ECONOMICS
www.taceconomics.com                                                                                           17
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