Quarterly Currency Outlook - Emerging Markets MarketQuants Research Quarterly - 2019 Q1 - tac economics
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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 Technical questions / hotline TAC ECONOMICS team is available for any economic, financial, technical questions and requests at the following e-mail address: hotline@taceconomics.com Customer relation For any question relative to your subscription, please contact us by e-mail at taceconomics@taceconomics.com Tel +33 (0)299 39 31 40 Web: http://www.taceconomics.com TAC ECONOMICS www.taceconomics.com 17
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