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Hungary and the Eurozone crisis: still vulnerable? Guillaume TRESCA EMEA Strategist [email protected] 09 September 2011 research.ca-cib.com Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. European sovereign debt crisis It’s the politics, stupid 09 September 2011 Europe took some major steps already this year… new • National fiscal frameworks by 2012 • Bond buybacks on secondary market • Pre-emptive intervention in « nonnew programme » countries • Recapitalisation of distressed MFI 3 Portugal Eurozone countries €78bn package (May 2011) Ireland Old and new loans: EFSF €440bn (+EFSM €60bn) IMF €80bn package (Nov. 2010) • Maturity extension from 7.5 to 15-30 years new • interest rate reduction from 4.5% to 3.5% Greece ( €250bn) First package (May 2010): €110bn 2nd package (July 2011): ESM -Takes over in 2013 - No senior status; - CACs new Private Sector Involvement - €37bn debt exchange - 4 options for banks - €12.6bn bond buybacks (21% haircut) 09 September 2011 • €109bn (of which 20bn for bank recap and 30bn guarantee to ECB for collateral eligibility) • €30bn privatisation • €50bn PSI • Marshall Plan: BEI and structural funds new …but more needs to be done 4 The 21 July ‘Euro deal’ failed to stabilise market sentiment for 3 main reasons: The required parliamentary approval implies that the larger and more flexible EFSF will not be operational before end-September. EFSF 2.0 would prove too small to bail out Spain and Italy should those two countries be cut off from capital markets. Concerns have risen over the French AAA rating following the US downgrade If the pressure rises to yet unprecedented levels, there would be basically two options to consider, with both of them facing strong political opposition: A (third) increase in the size of the EFSF, through larger state guarantees or a downgrade of the facility from AAA to AA The issuance of jointly-guaranteed Eurobonds A minimal Fiscal Union is politically difficult, but technically feasible Downgrade risks remain The crisis reached the (semi) core: CDS 5Y 120 12 AA AA bp 100 10 AA- 80 number of ratings changes (RHS) 60 A+ A 40 A- 20 BBB+ 0 Jan-10 8 avg. Gr+Ir+Po+Sp+It rating (LHS) 6 4 2 BBB Apr-10 Jul-10 Oct-10 Germany Source: Bloomberg, Crédit Agricole CIB 09 September 2011 Jan-11 Apr-11 France Jul-11 BBB- 0 Q2 05 Q2 06 Q2 07 Q2 08 Source: Bloomberg, Crédit Agricole CIB Q2 09 Q2 10 Q2 11 On the danger of self-fulfilling prophecies 5 Sovereigns can be solvent, yet illiquid. At current market rates, Greece, Ireland, Portugal and Spain are all on unsustainable public debt paths. Crucially, the 21 July deal did secure lower borrowing costs for Ireland and Portugal as well. We believe that PSI and debt restructuring should not be applied to other countries outside Greece. Pre-emptive restructuring is no panacea. Haircuts would not spare governments drastic primary balance adjustment efforts. Financial and political contagion risks are likely understated. Most countries are Too-Interconnected-Too-Fail. Debt restructuring potentially constraints the capacity of fiscal policy to run counter-cyclical policies Debt-to-GDP ratios at current market rates Debt-to-GDP ratios at pre-crisis market rates (2000-2009 average of 10-year yields) 180 %GDP 180 160 160 140 140 120 120 100 100 80 80 60 60 40 %GDP 40 10 11 12 Ireland 13 14 Portugal Source: Eurostat, Crédit Agricole CIB 09 September 2011 15 16 17 Spain 18 19 Italy 20 10 11 12 Ireland 13 14 Portugal Source: Eurostat, Crédit Agricole CIB 15 16 17 Spain 18 19 Italy 20 Greece – still lots of hurdles to clear 6 Deficit reduction is lagging this year Timing of debt exchange/rollover/ buybacks still uncertain + collateral issue GDP contraction to reach 5% instead of 3.8% Source: IIF, Crédit Agricole CIB 09 September 2011 A busy (and risky) second half… 7 Date 5-Jun 24-Jun 29-30 Jun 7 Jul German Federal Court unlikely to reject EFSF ECB expected to hint at a pause Obama to save us all? Portugal EU Greece EMU Event Portuguese general election EU Council summit (Euro Plus Pact) Relevance + +++ Greek vote on austerity measures ++ ECB meeting (25bp rate hike) +++ 13 Jul EU EU bank stress tests release ++ 21 Jul EU EU Council summit (Greek package + EFSF 2.0) +++ 5 Aug US US downgrade from S&P +++ 8 Aug EMU ECB starts buying Italian and Spanish bonds +++ 9 Aug US FOMC (ZIRP commitment until mid-2013) +++ 16 Aug FR-GE Franco-German summit ++ 26-28 Aug World Jackson Hole Symposium +++ 3 - 10Y Bond auctions +++ 30 Aug Italy 30 Aug Greece Fifth IMF Programme Review (delayed) Early Sep Greece Disbursement of 6th tranche for Greece (EUR8bn) 5Y Bond auction + 1 Sep Spain 4 Sep Germany 6 Sep Greece Germany, Holland and Finland hold a meeting on the Greek collateral issue + 6 Sep France Parliament sessions in France & Finland on EFSF contributions + 7 Sep Germany 8 Sep EMU +++ 8 Sep German elections in Mecklenburg-Vorpommern German Constitutional Court hearing on first Greek aid, EFSF +++ ECB meeting +++ US President Obama proposals on fiscal policy +++ 9 Sep Italy Italian parliament vote on fiscal consolidation package + 9 Sep Greece Greek bondholders to give their commitment to Greek debt exchange offers ++ 11 Sep Germany 12 Sep Greece 13 Sep Italy 14 Sep Ireland Parliament reconvenes in Ireland 15 Sep Spain Bond auction 15 Sep EU 16-17 Sep EU 18 Sep Germany 20 Sep US 23-25 Sep 09 September 2011 Country World German elections in Lower Saxony Fifth IMF Programme Review (tbc) ++ 5Y-plus Bond auctions ++ ++ Presentation to IMF board of first reviews in Portugal/Ireland Informal Eurogroup/EcoFin meetings German elections in Berlin FOMC ++ + +++ IMF-World Bank meeting in Washington 27 Sep Italy 2Y Zero coupon bond auction 28 Sep Italy Linker auction + + 29 Sep Germany Parliament session in Germany on EFSF changes ++ 29 Sep Italy 3 - 10Y Bond auctions ++ Greece – debt dynamics post 21 July deal 8 The second bailout package for Greece includes. EUR109bn of IMF/EFSF money (of which 20 bn for GGB buybacks, 35 bn to credit-enhance the new exchanged GGBs, 20bn for bank recapitalisation and 34 bn for deficit financing) EUR30bn of privatisations; EUR50bn of PSI; Marshall Plan: BEI and structural funds. Until the exact numbers are known for the debt exchange, the final impact on the debt dynamics looks uncertain The package should improve Greece’s fiscal position, provided that it is implemented in full including PSI, credit enhancement, privatisations, buybacks, and structural reforms. IIF projections point to a decline in the debt-to-GDP ratio from 2013 to around 120% by 2020. Greece: debt-to-GDP ratio official forecasts Greece: Debt Sustainability Matrix (PB to stabilise debt in 2013) Interest rates 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Nominal GDP growth 1.0 2.0 4.4 2.7 5.2 3.5 6.0 4.3 6.8 5.1 7.6 5.9 8.4 6.7 9.2 7.5 10.1 8.3 10.9 9.2 Source: Eurostat, Crédit Agricole CIB 09 September 2011 3.0 1.1 1.9 2.7 3.5 4.3 5.1 5.9 6.7 7.5 4.0 -0.5 0.3 1.1 1.9 2.7 3.4 4.2 5.0 5.8 5.0 -2.1 -1.3 -0.5 0.3 1.1 1.8 2.6 3.4 4.2 6.0 -3.6 -2.8 -2.0 -1.3 -0.5 0.3 1.0 1.8 2.6 Source: IIF, Crédit Agricole CIB Idée reçue – Greece has to default and/or to exit the Euro area 9 Concerns over a Greek default have intensified on: a) negative surprises on budget data (2010 revision+Q111 revenue slippage); b) a political shift towards a harder line in core countries (Germany, Finland). One merit of the restructuring debate is to try and address the underlying issue of solvency while making it clear that any financial support cannot come without conditionality. However, we view as completely irrational the option of Greece leaving the Eurozone. No Member State can be expelled from the EMU. Even if an exit is agreed upon, the country would have to leave the EU (Athanassiou ECB working paper 2009). The Greek banking system would likely be devastated, losing access to ECB refinancing. Regaining monetary sovereignty would leave Germany with a very strong Deutsch Mark and a high risk of contagion. Exposure to Greek public debt by bank nationality Eurozone break-up: costs outweigh benefits PROS GERMANY - No further bailouts CONS - Stronger currency weighing on export growth - National monetary policy. Lower inflation. - Contagion to the banks’ balance sheets - Likely recessions in the main trading - Lower borrowing costs (flight-to-safety) partners EXITING COUNTRY - Currency devaluation. Temporary rise - Bank runs, capital outflows, no access in price competitiveness. to global debt markets - IMF support in case of debt restructuring - QE? - Likely restructurings of the sovereign and the banks - Exit of the EU - Negative impact of currency devaluation in the long-run - Higher inflation 09 September 2011 140 USDbn 120 100 80 Q2 2010 Q3 2010 60 40 20 0 Greece Germany France Source: BIS, Crédit Agricole CIB Other EMU Italy Spain Ireland and Portugal on track, so far 10 News from Ireland in particular, and from Portugal to a lesser extent (despite some slippage), have been encouraging since the beginning of their programme. The main risk, in our view, remains on nominal GDP growth in the current environment. Ireland’s public debt dynamics under extreme scenarios 140 Portugal’s public debt dynamics under extreme scenarios (central + EUR20bn additional net bank recapitalisation) %GDP 130 120 140 %GDP (nom. GDP 2.5%; IR 5.5%; PB 0%) 130 (nom. GDP 3.5%; IR 6.5%; PB 0%) 120 110 110 100 100 (nom. GDP 6%; IR 5%; PB +1%) 90 (nom. GDP 5%; IR 4.5%; PB +2%) 90 80 80 10 11 12 13 14 15 16 17 18 19 20 10 Source: Eurostat, Crédit Agricole CIB 09 September 2011 13 14 15 16 17 18 19 20 Portugal: Debt Sustainability Matrix (PB to stabilise debt in 2013) Ireland: Debt Sustainability Matrix (PB to stabilise debt in 2013) Interest rates 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 12 Source: Eurostat, Crédit Agricole CIB Source: Eurostat, Crédit Agricole CIB Nominal GDP growth 1.0 2.0 2.1 1.0 2.6 1.5 3.1 2.1 3.6 2.6 4.1 3.1 4.7 3.6 5.2 4.1 5.7 4.6 6.2 5.1 11 central case (nom.GDP 4%; IR 5%; PB +1% + EUR6bn privatisations) central case (nom.GDP 5.5%; IR 5.5%; PB +1.0%) 3.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.6 4.1 4.0 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 5.0 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 6.0 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 Interest rates 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Nominal GDP growth 1.0 2.0 1.3 0.3 1.8 0.8 2.3 1.3 2.8 1.8 3.3 2.3 3.8 2.8 4.3 3.3 4.8 3.8 5.4 4.3 Source: Eurostat, Crédit Agricole CIB 3.0 -0.7 -0.2 0.3 0.8 1.3 1.8 2.3 2.8 3.2 4.0 -1.7 -1.2 -0.7 -0.2 0.3 0.7 1.2 1.7 2.2 5.0 -2.7 -2.2 -1.7 -1.2 -0.7 -0.2 0.2 0.7 1.2 6.0 -3.6 -3.1 -2.7 -2.2 -1.7 -1.2 -0.7 -0.2 0.2 ECB rates – time for a break 11 The ECB will have to re-assess the fundamental outlook for activity and price conditions in the Euro area. As a result of downside risks to activity and, to a lesser extent, lower inflation risks, the Governing Council is likely to leave policy rates on hold in the near-term. We expect no more rate hike for this year. A rate cut is highly unlikely in our view unless the Eurozone falls back into recession and deflation risks re-emerge. The rates normalisation process could resume in H2 2012, with a tightening bias moving into 2013, provided that economic growth picks up and the situation stabilises in the sovereign debt markets. Falling leading indicators… 3.0 … no longer consistent with ECB rate hikes std dev. 50 bp 64 2.0 60 1.0 25 56 0.0 -1.0 0 52 -25 48 -2.0 -3.0 -4.0 44 -5.0 -50 -6.0 99 00 01 02 03 PMI composite 04 05 06 07 08 Econ. Sentiment Index 09 10 11 Eurocoin Source: Markit, European Commission, Crédit Agricole CIB (business confidence surveys are normalised over the 1999-2007 period) 09 September 2011 40 change in Repo rate Eurozone PMI composite -75 99 00 01 02 03 04 Source: Markit, Crédit Agricole CIB 05 36 06 07 08 09 10 11 12 Ouzo crisis: Hungary is not immune 09 September 2011 Hungary: still vulnerable, remember one year ago 13 Vulnerability index Eastern Europe looks like the most vulnerable region, only partly due to the trade exposure to Europe. Asia and LatAm are safer with strong economic recovery based on domestic demand. Eastern Europe ahead Arithmetic average EM average Asia Latam Central Europe MEA EM members of G20 BRICs 09 September 2011 2.46 2.20 2.28 3.44 2.23 2.29 2.29 Vulnerability ranking (from riskiest to safest) Hungary 3.68 Czech rep. 3.45 Romania 3.41 Poland 3.21 Vietnam 3.21 Ukraine 3 South Africa 2.89 Turkey 2.87 India 2.55 Morocco 2.53 Brazil 2.52 Kazakhstan 2.47 Mexico 2.44 Russia 2.41 Israel 2.31 Malaysia 2.27 Egypt 2.21 Philippines 2.2 Indonesia 2.17 Korea 2.15 Thailand 2.13 Taiwan 2.03 Singapore 2 Argentina 1.88 Hong Kong 1.85 UAE 1.84 China 1.69 Saudi Arabia 1.57 Hungary: where are the risks coming from? 14 A highly leverage banking sector Despite the credit crunch, the banking sector is still printed high credit-to-deposit ratio, 133%, which suggests that the leveraging is still significant and so the sector could be very sensitive to another bout of risk aversion The external debt threat Very high external debt which has hardly declined Significant portfolio inflows -> share of foreigners in bond market has steadily increased High FX government debt (roughly 38%) The Hungarian external debt threat 160 Credit-to-deposit ratio: a leveraged banking sector %GDP 140% Hungary: 133% 140 120% 120 100% 100 80% 80 60% 60 40 40% 20 20% 0 0% RUB TRY CZK RON PLN KZT UAH HUF E Europe MEA Asia Latam Source: Moody’s, Bloomberg, DataStream, Crédit Agricole CIB 09 September 2011 Ouzo crisis: Hungarian bank exposure is not worrying 15 Key channel is external bank funding Any EZ debt restructuring would trigger tensions in the European System. But the Vienna Initiative has made things smoother. Leveraged banking sector. CEE bank banks exposed to EU Periphery banks Hungary is not the worst one. Some local subsidiaries of foreign banks are funded from domestic sources. But leveraged banking sector. But any freeze of interbank markets would be disastrous CEE banks are exposed 0.2% 0.0% 0.0% 0.0% 0.0% Source: Bloomberg, BIS, Crédit Agricole CIB Czech Republic Estonia Latvia Russia Hungary Poland Turkey Romania Bulgaria 09 September 2011 2.7% 0.3% 0.2% 0.0% 0.0% 0.0% Czech Republic 1.7% 0% Estonia 4.3% 5% 17.1% Latvia 10% 18.7% Hungary 12.5% 15% CEE claims on Greece as % of total foreign claims Russia 20% 38.3% Poland 25% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Turkey CEE claims on Greece as % GDP Romania 29.8% 30% Bulgaria 35% Hungary: Highly sensitive to the Eurozone slowdown A very opened economy 16 Automotive sector is slowing down (auto sales) Highly sensitive to the EU slowdown 4.5 Boosted by Germany but… mn, annual rate seasonally-adj. 4.0 3.5 Exports are dragging higher the economy 3.0 Export revenue posted double digit growth 2.5 It boosts IP sector but it should slow in the remainder of the year 2.0 The slack is unlikely to be filled by the private consumption 1.5 1.0 Automotive, the backbone of the Central Europe recovery 0.5 05 06 07 08 Allemagne 90% 77% 11 Espagne Italie 40% 35% 70% 30% Germany: 26% 60% 25% 50% 20% 40% 15% 30% 10% 21% 20% 5% UAE Mexico Brazil Philippines India Indonesia Saudi Egypt Korea Argentina Israel China Taiwan Thailand South EU Turkey East. Eur. Ukraine Asia Malaysia USA Vietnam Middle East Morocco Africa Russia Japan Romania LatAm 0% Singapore 2% Kazakhsta 1% Hong 1% Poland 1% 0% Czech 0% 4% Hungary 10% France 10 Exports to EU : Hungary highly sensitive (% of GDP) Exports structure (%exports) 80% 09 Source: Bloomberg, Moody’s, Credit Agricole CIB 09 September 2011 The German economy is not immune to the confidence shock 17 The sovereign debt crisis and the fears of a US double-dip have weighted on business confidence. The German IFO in particular suffered a ‘reality check’ in August, although current conditions remain supportive. German GDP slowed down sharply in Q2 (to +0.1% QoQ), but this came after a very strong performance in Q1 (+1.3% QoQ) and the first indication for Q3 are consistent with a modest rebound. The two main pillars of German ‘boom’ remain in place as both exports and investment in machinery and equipment have risen further in Q2. In our central case, we look for a deceleration in German GDP growth to 1.4% in 2012, from 2.9% this year. German Q2 GDP still strong on average German confidence surveys suffer a ‘reality check’ std dev. 4 3.0 3 2.0 2 1.0 1 0.0 0 -1.0 -1 -2.0 -2 -3.0 IFO -3 -5.0 2008 ZEW -5 00 01 02 03 04 05 06 Source: Markit, ZEW, Cesifo, Crédit Agricole CIB 09 September 2011 GDP -4.0 PMI manuf. -4 QoQ % 07 08 09 10 11 2009 Private consumption 2010 Investment Source: Destatis, Crédit Agricole CIB Net exports 2011 Inventories Hungary: a convalescent economy 18 Hungary is lagging the global recovery The economy will likely post a meager 2% in 2011-12 Well below the 6.3% EM growth expected Nasty Q2, Q3 should not be better according to PMIs data Exports is the only driver and it will slowdown The good 2010’s performance will not be replicable Muted domestic demand will not offset the exports slowdown Fiscal measures impact? Activity: it is better but not the old good days 20 YoY% GDP level is far from pre-crisis levels. 60 130 15 55 10 5 120 45 115 -5 Poland Czech 110 -10 Industrial production -15 Hungarian PMI (rhs) 40 Jun-06 Jun-07 Hungary 105 35 -20 -25 Jun-05 Romania 125 50 0 base 100=2005 Jun-08 Jun-09 Jun-10 30 Jun-11 100 95 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: HSO, PSO, RSO, CZO, Crédit Agricole CIB 09 September 2011 And the domestic demand is still muted 19 Muted domestic and private demand The FX loan burden The domestic demand will not be enough to offset the export slowdown No strong rebound expected 90 % of total loan 80 230 HUF depreciates 210 70 Unemployment still high even it is improving 60 % of FX loan 50 CHF/HUF (rhs) New fiscal measures may cap demand? Ricardian equivalence 40 Higher savings due to the pension system reform 30 Credit is capping the domestic demand rebound 10 190 170 20 150 0 Jun-04 Hammered banks and the new tax levy will not favor credit supply Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 130 Jun-11 Credit growth far from its pre-crisis level. Source: NBH, HSO, Bloomberg, Crédit Agricole CIB FX loans issue resolved? Not yet… Domestic demand will not be enough 70 % Consumer credit Employment market: still convalescent % retail sales (rhs, yoy%) 60 50 retail sales growth = 0 000' 10 % unemployment (thousands) 8 550 6 500 12 450 10 4 14 private wages (3mmm, yoy%,rhs) 40 2 30 0 400 8 20 -2 350 6 300 4 -4 10 -6 0 -10 Jun-05 -8 Low credit growth, retail sales still negative 09 September 2011 Jun-07 Jun-09 -10 Jun-11 250 200 Jun-01 tax changes Jun-03 Jun-05 Jun-07 Jun-09 2 0 Jun-11 Budget deficit: it is not yet over but it is not Greece 20 The March reform is on track but the real test is ahead Markets have bought the fiscal reform and the pension assets have secured the 2011 financing Still implementation risks. It will be crucial But for how long? Important is the 2012 budget discussions Exposed to market sentiment Short term gain, long term pain IMF and EU reimbursement will kick in 2012-13 But for how long? Important is the 2012 budget discussions Budget: it is better but for how long? Foreign holding of HGB is getting higher (% total) YoY% 20 HUF bn 0 expenditures 15 12m rolling budget balance (rhs) revenue -200 10 -400 5 -600 -800 -5 -1000 -10 -1200 -15 Jun-08 Jun-09 Jun-10 -1400 Jun-11 Source: NBH, Bloomberg, Crédit Agricole CIB 09 September 2011 Eurozone convergence: not yet for sure 21 Eurozone Convergence Index 0.60 0.58 0.56 0.54 0.52 0.50 0.48 0.46 0.44 0.42 0.40 Jun-03 Czech Rep Hungary Poland 0.43 signals in the past Euro convergence Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Hungary is lagging Czech Republic Hungary Poland Romania not before 2014 >2020 no rush but still desire 2015, wants to join 2016 at best not in view 2015 at best 2015 is too optmist 3 0 2 1 Budget balance (% of GDP) 2011 EC estimate -4.6 -4.7 -6.6 -4.9 Public sector debt (% of GDP) 2011 EC estimate 43.5 77.8 57.3 35.8 HICP inflation (YoY%, average over past 12 months) 1.5 4.4 2.6 6.5 +460 +310 +360 No No No Government EUR entry date Crédit Agricole CIB estimate of EUR entry date Maastricht criteria met (out of 5) 10Y bond/bund spread (bp, 12-month average) FX stability (Member of ERM II) 09 September 2011 +107 No Source: Bloomberg, Crédit Agricole CIB 22 Rates and FX: bumpy road ahead 09 September 2011 Rates outlook: It is an FX story 23 NBH on the side lines It front-loaded rates hikes in Q4 10 and 11 Mild inflationary pressures: Inflation increase was an excuse to hike It is targeting inflation but FX and risk aversion are the monetary drivers finally Rates on hold through 2011 but be aware of any surprising rate move! Higher inflation due to external factors – food and energy prices Domestic demand pressures are limited but core inflation is rising Wage increases remain moderate The central bank seems to have a slight tightening bias. Market is now pricing in far-fetched cuts Building inflationary pressures 25 10 YoY% bp today forecast 9 inflation forecast core inflation 8 1m ago 3m ago 0 7 6 5 -25 4 3 2 -50 1 0 Jul-07 1m Jul-08 09 September 2011 Jul-09 Jul-10 Jul-11 Jul-12 2m 3m 6m 9m Sources: Bloomberg, Credit Agricole CIB 12m Inflation is not an issue 24 EM policy rates: how low is too low? Real policy rates (current - %) 6% 4% China and Brazil: not the most at risk Turkey: rates far below their precrisis level ZAR BRL CNY RON 2% TRY 0% MXN CZK RUB -2% -4% -6% -1200 HKD SAR M ost EM CBs could quikly fall behind the curve, should global commodity prices surge -1000 -800 -600 INR -400 SGD -200 0 200 Policy rates: current vs. beg-2008 (nom inal - bp) Inflation (QoQ saar) 14% 12% 10% 8% 6% 4% 2% 0% -2% 06 07 08 09 10 11 Source: Bloomberg, DataStream, Credit Agricole CIB 09 September 2011 HUF: it is a risk aversion story 25 Past strong performance is far-fetched Improvement as the government said nothing while the environment has not changed Not really hurt by the MENA turmoil Strong expectations about the fiscal package Crystal ball and risk aversion A scoop: we do not have a model In a worse case scenario, a spike above 300 is likely It should remain above 270 until the parliamentary approval of the Greek package ratification Structural issues stil cap the appreciation trend FX liabilities Long term deficit issue Widening of the CA deficit as the domestic demand will pick up CACIB forecast for Central Europe Central Europe 06-Sep Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Czech Rep. EUR/CZK 24.4 24.0 24.0 23.8 23.8 23.8 Hungary EUR/HUF 277 268 268 268 268 268 Poland EUR/PLN 4.22 3.95 3.95 3.90 3.90 3.90 Romania EUR/RON 4.25 4.20 4.20 4.20 4.20 4.20 Sources: Bloomberg, Credit Agricole CIB 09 September 2011 HUF: it is a risk aversion story 26 Room for appreciation is limited (REER term) Capital flows to Ems are back 1400 Private capital f low s to EMs (total) FDI Commercial bank lending 25% 1200 20% REER: now vs. Average (mid-07 to mid-08) 15% 1000 10% 800 5% 600 0% IIF forecasts USD Bn 400 -5% 200 -10% 0 -15% -200 -20% BRL IDR ZAR RON HUF RUB THB CZK PLN TRY 95 KRW 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Risk aversion and HUF 295 EURHU 60 EURHUF 290 50 VIX (rhs) 285 280 40 275 30 270 265 20 260 10 255 250 Jan-10 0 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Sources: Bloomberg, Credit Agricole CIB 09 September 2011 CHF: it is a risk aversion story, as well! 27 CHF: Widening peripheral bond spreads to provide further lift Widening European bond spreads have lifted CHF Risk aversion demand CHF sensitivity: a 1% widening in Spain-German 10Y bond spread = 3.86% CHF NEER 170 CHF Index % 3.5 160 CHF NEER Appreciation potential until September 3.0 150 Spread Spain Germany 10Y (rhs) Can Switzerland take the currency pain? 2.5 140 2.0 A 50% decrease in competitiveness 130 But Switzerland is different->balance of payments peculiarities, luxury goods are less price sensitive, significant importer 120 Swiss bank intervention -> rate cuts, swap liquidity auctions 100 Sep-08 1.5 1.0 110 0.5 0.0 Sep-09 Sep-10 Forecasts (CHF and HUF) 06-Sep Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Switzerland EUR/CHF 1.20 1.20 1.28 1.30 1.34 1.38 Hungary EUR/HUF 277 268 268 268 268 268 CHF/HUF 231 223 209 206 200 194 Sources: Bloomberg, Credit Agricole CIB 09 September 2011 4.0 CHF: the SNB is not doomed to fail but… 28 The SNB decision to set the minimum exchange rate against the EUR at 1.20 is a brave step It will accumulate rather than run down its FX currency reserves. Therefore, it does not face a constraint in terms of scale on this front. Switzerland is not facing an inflation threat Most in the market would accept the CHF had become overvalued More credible than a peg. The SNB has had some modest success already using other forms of intervention. Invariably, the SNB also faces a number of problems. A “line in the sand” which will be an inevitable target for the market to test the ECB’s resolve. A more opaque target may not have had the same announcement effect, but it could have allowed for greater flexibility The SNB is not just fighting against the market, it is fighting against peripheral fundamentals Initial success does not mean lasting success. The announcement effect has been large today for a market caught the wrong way 09 September 2011 29 Forecasts 09 September 2011 Forecasts - Macroeconomics 09 September 2011 USA JAPAN EUROZONE Germany France Italy Spain Greece Norway Sweden Switzerland Canada Australia New Zealand United Kingdom Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam Latin America Argentina Brazil Mexico Emerging Europe Czech Republic Hungary Poland Russia Romania Turkey Africa & Middle East Algeria Egypt Kuwait Lebanon Morocco Qatar Saudi Arabia South Africa United Arab Emirates Tunisia Total Industrialised countries Emerging countries Real GDP (YoY. %) 10 11 12 3.0 1.6 1.8 4.0 -0.7 2.9 1.7 1.7 1.1 3.6 2.9 1.4 1.4 1.6 1.3 1.2 0.8 0.6 -0.1 0.6 0.4 -4.4 -4.5 -1.3 0.3 0.7 2.2 5.4 4.3 2.5 1.6 1.9 2.2 3.1 2.8 3.1 2.7 2.5 3.1 1.5 2.0 3.5 1.4 1.1 1.2 9.2 7.8 7.9 10.3 9.3 9.0 6.8 6.3 6.5 8.5 7.4 7.8 6.1 5.8 5.8 6.1 5.1 6.0 7.2 4.0 5.5 7.6 4.9 5.4 14.5 6.7 6.9 10.8 5.8 6.3 7.8 4.7 5.7 6.8 5.8 6.2 6.6 4.0 4.4 7.0 4.0 4.0 7.5 4.0 4.3 5.3 4.0 4.8 4.2 3.7 3.4 2.3 2.3 2.5 1.2 1.9 2.0 3.8 3.6 3.5 4.0 3.7 3.3 -1.3 1.5 2.9 7.5 5.0 4.0 4.2 4.2 4.3 4.1 4.1 4.3 5.2 1.9 4.0 3.2 3.5 4.4 7.5 1.3 6.0 3.2 3.5 4.4 14.0 15.8 6.0 3.8 5.5 4.4 2.5 3.5 4.0 2.0 3.4 3.8 3.4 1.0 3.0 4.9 3.7 3.9 2.7 1.4 1.8 7.6 6.3 6.4 10 1.3 -1.0 1.6 1.2 1.7 1.6 2.0 4.7 2.4 1.2 0.7 1.8 2.9 2.3 3.3 4.6 3.3 2.4 9.5 5.1 3.0 1.7 3.8 2.8 1.0 3.3 9.2 6.8 17.0 5.8 4.2 7.0 1.5 4.9 2.6 8.8 6.1 8.3 5.0 3.9 11.1 4.0 4.3 1.4 -2.2 5.3 4.3 1.0 4.4 3.1 1.2 5.3 CPI (YoY. %) 11 3.0 0.6 2.6 2.6 2.2 2.2 2.9 3.1 1.7 3.1 1.0 3.0 3.5 3.9 4.5 6.0 5.3 4.7 9.0 6.1 4.1 2.9 4.9 5.6 2.4 4.2 17.8 6.3 17.0 5.0 4.0 6.9 2.3 4.3 4.3 8.5 7.0 7.0 5.6 4.8 10.0 4.2 5.6 3.0 2.7 5.6 4.7 3.1 4.7 4.3 2.6 6.1 12 1.8 0.9 1.8 2.3 1.7 1.3 1.9 1.8 1.8 2.6 1.2 2.1 3.3 3.3 2.7 4.6 4.0 3.8 6.4 5.8 3.6 2.5 4.8 4.0 2.8 4.5 11.5 6.1 17.0 4.5 4.0 7.8 2.0 3.5 3.1 11.0 5.0 7.0 5.2 4.3 9.3 4.3 3.0 2.7 3.9 4.1 5.0 3.9 5.0 3.4 1.8 5.3 Current Account (% GDP) 10 11 12 -3.2 -3.3 -3.3 3.6 2.7 3.3 -0.4 -0.3 0.2 5.7 5.3 5.4 -1.7 -2.6 -1.2 -3.3 -2.7 -2.4 -4.6 -4.1 -3.6 -10.4 -7.4 -4.7 14.0 15.0 13.1 7.0 7.0 7.3 9.5 8.0 9.0 -3.1 -2.6 -2.3 -2.6 -3.5 -2.8 -2.3 -2.9 -2.7 -2.2 -1.6 -1.2 3.6 2.6 2.3 5.2 3.3 2.7 8.7 10.1 10.5 -2.8 -2.9 -2.8 0.9 1.5 1.7 2.8 2.8 3.1 12.8 11.5 11.6 4.4 4.2 3.5 22.2 23.8 23.6 9.4 8.2 8.3 4.6 3.6 3.9 -5.5 -5.5 -5.2 -1.2 -1.7 -1.8 1.5 1.5 1.1 -2.3 -3.0 -2.8 -0.6 -1.0 -1.5 0.5 -1.3 -2.6 -3.0 -2.8 -3.5 2.3 1.0 0.0 -2.6 -4.5 -4.0 4.8 3.0 0.0 -5.8 -6.9 -6.4 -5.0 -7.5 -7.0 4.2 4.2 5.3 4.2 5.6 4.1 0.3 0.4 1.8 32.1 29.1 28.3 -12.0 -15.0 -7.0 -5.4 -13.0 -9.0 13.0 29.0 34.8 9.5 9.7 9.9 -3.5 -4.0 -4.0 5.5 6.1 7.2 -1.5 -10.3 -3.3 0.6 0.1 0.1 -1.0 -1.1 -0.9 2.5 1.5 1.3 30 Forecasts – Policy rates 31 06-Sep Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 6.56 0.50 8.00 6.75 3.25 3.00 4.50 -0.34 1.88 3.50 9.00 6.56 0.50 8.25 6.75 3.50 3.00 4.75 -0.08 2.00 3.50 9.00 6.56 0.50 8.25 6.75 3.50 3.00 5.00 0.30 2.00 3.50 9.00 6.56 0.50 8.25 6.75 3.50 3.25 5.00 0.48 2.00 3.50 9.00 6.81 0.50 8.50 6.75 3.75 3.25 5.00 0.72 2.13 3.75 9.50 6.81 0.50 8.50 6.75 4.00 3.50 5.00 1.05 2.25 4.00 9.50 7.06 0.50 8.75 6.75 4.00 3.50 5.25 1.65 2.38 4.00 9.50 7.06 0.50 8.75 6.75 4.00 3.50 5.25 2.15 2.50 4.00 10.00 7.31 1.00 8.75 6.75 4.00 3.50 5.25 2.51 2.50 4.00 10.00 7.31 1.50 9.00 6.75 4.00 3.50 5.25 3.11 2.50 4.00 10.00 3M deposit Overnight/Selic Overnight rate 12.05 12.00 4.50 12.00 11.00 4.50 12.50 11.00 4.50 12.50 11.00 4.50 12.50 11.50 4.50 12.00 12.50 4.50 12.00 12.50 4.75 11.50 12.50 5.25 11.50 12.50 5.50 11.50 12.50 5.75 14D repo 2W repo 7D repo 2W repo O/N Deposit rate 1W repo rate 0.75 6.00 4.50 6.25 3.50 5.75 0.75 6.00 4.50 5.75 3.50 5.75 1.00 6.00 4.50 5.50 3.50 6.00 1.25 6.00 4.50 5.50 3.50 6.50 1.50 6.00 4.50 5.50 4.00 7.00 1.50 6.00 4.50 5.50 5.00 7.00 1.75 6.00 4.50 5.50 6.50 7.00 1.75 6.00 4.50 5.50 8.00 7.00 1.75 6.00 4.50 5.50 8.75 7.00 1.75 6.00 4.50 5.50 9.00 7.00 5.50 1.00 2.00 5.50 1.00 2.00 5.50 1.00 2.00 5.50 1.00 2.00 5.50 1.25 2.25 5.75 1.75 2.75 6.00 1.75 2.75 6.25 1.75 2.75 6.50 1.75 2.75 7.00 1.75 2.75 Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam 1Y lending rate Base rate Repo rate BI rate Call rate OPR Repo rate 6M SOR Redisc Repo Base rate Latin America Argentina Brazil Mexico Emerging Europe Czech Rep. Hungary Poland Romania Russia Turkey Africa & Middle East South Africa Repo UAE Repo Saudi Arabia Repo 09 September 2011 Jun-13 Sep-13 Dec-13 Forecasts – FX rates 06-Sep Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 1.32 USD Exchange rate Industrialised countries Euro EUR/USD 1.41 1.40 1.38 1.36 1.34 Japan USD/JPY 77 80 81 82 83 85 United Kingdom GBP/USD 1.61 1.57 1.59 1.58 1.58 1.57 Switzerland USD/CHF 0.79 0.86 0.93 0.96 1.00 1.05 Canada USD/CAD 0.99 0.950 0.935 0.930 0.920 0.900 Australia AUD/USD 1.06 1.06 1.07 1.08 1.09 1.10 New Zealand NZD/USD 0.83 0.82 0.82 0.83 0.84 0.84 Asia China USD/CNY 6.39 6.30 6.24 6.18 6.11 6.05 Hong Kong USD/HKD 7.79 7.77 7.77 7.77 7.77 7.77 India USD/INR 46.0 44.5 43.8 43.1 42.6 42.0 Indonesia USD/IDR 8558 8460 8420 8380 8340 8300 Malaysia USD/MYR 2.98 2.96 2.95 2.94 2.93 2.92 Philippines USD/PHP 42.4 41.5 41.2 41.0 40.7 40.5 1.23 Singapore USD/SGD 1.21 1.24 1.24 1.24 1.23 South Korea USD/KRW 1075 1040 1030 1015 1000 985 Taiwan USD/TWD 29.1 28.1 27.9 27.7 27.5 27.2 Thailand USD/THB 29.9 29.2 29.0 28.8 28.6 28.4 Vietnam USD/VND 20832 21400 22100 22100 22800 22800 Argentina USD/ARS 4.20 4.20 4.25 4.30 4.35 4.40 Brazil USD/BRL 1.64 1.70 1.70 1.70 1.75 1.80 Mexico USD/MXN 12.58 11.40 11.35 11.30 11.25 11.20 USD/ZAR 7.10 6.90 7.00 7.10 7.20 7.30 TRY/ZAR 4.02 4.06 4.38 4.44 4.50 4.56 Latin America Africa South Africa Emerging Europe Poland USD/PLN 2.98 2.75 2.78 2.79 2.82 2.84 Russia USD/RUB 29.40 30.59 29.42 30.79 31.65 32.26 Basket/RUB 34.85 36.10 34.45 35.78 36.49 36.90 USD/TRY 1.77 1.70 1.60 1.60 1.60 1.60 Czech Rep. EUR/CZK 24.4 24.0 24.0 23.8 23.8 23.8 Hungary EUR/HUF 277 268 268 268 268 268 Poland EUR/PLN 4.22 3.95 3.95 3.90 3.90 3.90 Romania EUR/RON 4.25 4.20 4.20 4.20 4.20 4.20 Turkey Central Europe 09 September 2011 32 Disclaimer Certification The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Guillaume Tresca, Frederik Ducrozet Disclaimer © 2011, CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK All rights reserved. This research report or summary has been prepared by Crédit Agricole Corporate and Investment Bank or one of its affiliates (collectively “Crédit Agricole CIB”) from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. 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