Goldman Sachs Ukraine Nov 2013

8/10/2019 Goldman Sachs Ukraine Nov 2013

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November 22, 2013

Issue No. 13/37

CEEMEA Economics Analyst

Economics Research

CEEMEA Outlook: A year of cyclical desynchronisation

A DM-led global recovery, for the first time since 2008

Our outlook for 2014 sees an acceleration in global growth led by the US

and, to a lesser extent, the Euro area. Emerging market (EM) growth, on

the other hand, should pick up only marginally, impaired by structural and

cyclical headwinds. In this sense, we expect the global economic recovery

to be desynchronised, resulting in a narrowing of growth differentials in

favour of developed markets (DM).

CEEMEA recovery on track, led by Russia and CE-3

We forecast a further acceleration in CEEMEA growth in 2014 beyond the

acceleration we forecast for NJA and LatAm. Yet, we also expect the

growth differentials to DM to narrow for the CEEMEA region as a whole.

Within CEEMEA, we expect Russia, the CE-3 and Israel to lead the recovery.

We continue to see strong headwinds for the economies currently running

large external and domestic imbalances, and forecast sub-par growth in

South Africa, Ukraine and, especially, Turkey. Our forecasts are out of

consensus for particularly Russia (higher) and Turkey (lower).

Good inflation, bad inflation and reluctant rate hikes

We are also likely to see considerable divergence in inflation trends.

Inflation pressures should remain subdued in the CE-3 and Romania, while

Turkey, South Africa, Russia and, increasingly, Israel will face strongerpressures. Accordingly, we expect CEE central banks to reinforce

accommodative monetary conditions, and Turkey, Russia and Israel to hike

rates. In South Africa, we forecast that rates will remain on hold until 2015,

thanks to the sizeable output gap that opened up in recent years.

Market themes: All about growth and inflation differentials

Some of our market themes for 2014 will be familiar to our regular readers.

An inflation-less recovery in the CE-3 and Romania still seems highly

relevant to us and we remain bearish on the TRY and the ZAR. But our

main new theme for this year is the Russia/Turkey growth differentiation.

We also add two themes: an Inflationary recovery in Israel (in contrast to

the CE-3) and a more constructive view on South African equities (which isin essence the flipside to our bearish ZAR views).

We also initiate coverage of Romania, for which Andrew Matheny will be

responsible.

Ahmet Akarli+44(20)7051-1875 [email protected] Sachs International

Clemens Grafe+7(495)645-4198 [email protected] Goldman Sachs Bank

Magdalena Polan+44(20)7552-5244 [email protected] Sachs International

JF Ruhashyankiko+44(20)7552-1224 [email protected] Sachs International

Kasper Lund-Jensen+44(20)7552-0159 [email protected] Sachs International

Andrew Matheny+7(495)645-4253 [email protected] Goldman Sachs Bank

Mark Ozerov+44(20)7774-1137 [email protected] Sachs International

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certificationand other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc. Global Investment Research


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November 22, 2013 CEEMEA Economics Analyst

Goldman Sachs Global Investment Research 2

CEEMEA Outlook: A year of cyclical desynchronisation

From synchronised global slowdown to desynchronised global

recoveryThe early stages of the global recovery (2009-2010) were desynchronised. Most developed

market economies were facing intense balance sheet pressures, which restrained their

ability to generate strong and sustainable recoveries, notwithstanding the exceptional

policy stimulus provided by core central banks and respective governments. In contrast,

many EMs did not face the same type of balance sheet constraints, and so could respond

to policy stimulus. As a result, EM bounced back strongly from recession and led the global

recovery. Through 2009/2010 EM accounted for most of the growth generated in the global

economy (see Exhibit 3).

However, the desynchronised global recovery also created its imbalances. Strong,

domestic demand recovery in EM resulted in a steady deterioration in external balances

and unleashed strong inflationary dynamics. This prompted significant policy tightening in

a number of leading EM economies, particularly in places where the authorities eased

monetary and credit conditions aggressively (e.g., China and Brazil). Consequently, the EM

recovery started to lose steam from late 2010 onwards, at a time when the DM recovery

remained weak and fairly fragile. Moreover, the intensification of the Euro area crisis in

2011 generated strong demand and financial shocks. This led to an even more pronounced

and increasingly more synchronised slowdown in global economic activity. Global growth

fell steadily through 2011 and 2012, and hit a post-crisis low of 2.9% in 2013.

Exhibit 1:The global economy has slowed but a recovery is now underwayGlobal real GDP growth, yoy

Source: Goldman Sachs Global Investment Research

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GS Forecast


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DM to lead the way, as EM continue to face headwinds

Our new global macro forecasts suggest that 2014 is likely to mark an important inflection

point in the global economy in two important respects:

First, we expect the global economy to gather momentum going into 2014, return to its

long-term trend rate by 2015, and continue to grow at around 4% thereafter. Put differently,

we see scope for a more sustainable global recovery, through our forecast horizon.

Second, in the earlier stages of this recovery, particularly through 2014 and to some extent

in 2015, we expect DM to lead the way on growth, for the first time since the start of the

global financial crisis in 2008. In this context, we expect a more tangible recovery in the

Euro area, but ultimately the DM recovery is dominated by the (forecast) normalisation of

the US economy, with underlying economic growth settling at a higher, 3%-3.5% plateau

from mid-2014 onwards. Meanwhile, EM growth remains relatively muted at around 5.5%-

6.0%, with limited trend acceleration during the forecast horizon. As such, the growth

differential between EM countries and advanced countries is expected to decline to 3.1pp

in 2014, the lowest it has been since 2002, and remain below 3.5pp across the forecasting

horizon and 150bp below the average over the last decade.

Desynchronised recovery to reinforce EM differentiation

A desynchronised, DM-led global recovery will likely reinforce some of the differentiation

themes we have been highlighting for the EM complex. On the one hand, it implies an

improvement in external demand conditions, which have been a drag on EM growth over

the past couple of years. Small open, export-oriented EM economies, with direct exposure

to the Euro area (e.g., the CE-3) and importantly to the US (e.g., Mexico and Israel) would

be ideally positioned to benefit from this external demand impulse.

On the other hand, a DM-led recovery would also generate headwinds, mainly through the

financial channel. We do expect core central banks to continue to keep short-end rates

firmly anchored through 2014 and most of 2015, and to start gradually normalising

monetary policy in 2016 and 2017. However, we also expect core rates markets (particularlyin the US and Germany) to continue to price in a more favourable growth outlook, leading

not only to a steady increase in long-end (10-year) rates but also to a possible bear

flattening (from the belly) of the respective DM yield curves (see Showtime for the DM

recovery, Global Economics Weekly13/38, November 20, 2103).

Exhibit 2:DM to lead the recovery for the first time since

2008EM vs. DM annual growth

Exhibit 3:EM contribution to global recovery will be

more limitedEM vs DM contribution to the global growth

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

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DM EM

GS Forecast

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EM DM

GS Forecast


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The resulting market pressures may not be as acute as in mid-2013, when the Feds

tapering signal took the market by surprise a factor that likely amplified subsequent

market volatility. With the US term premium now fairly priced (in our view), any re-pricing

of the US yield curve is likely to be more gradual and more immediately dependent on the

US growth outlook. Thus, the potential pressures generated by rising yields should be

somehow better mitigated by a parallel improvement in the global growth outlook (The

anatomy of the EM rates sell-off, Emerging Markets Macro Daily, August 29, 2013). Inaddition, EM economies with stronger balance sheet structures and more robust, credible

institutional and policy frameworks would probably be able to absorb the likely pressures

better. However, as the experience of 2013 has amply demonstrated, EM economies that

have accumulated large domestic and external imbalances are likely to be susceptible to

resulting BoP pressures and face stronger headwinds over the next couple of years.

Exhibit 4:Leveraged EM will be more sensitive to rising global interest ratesUS yield pass-through effect on EM bond yields


In sum, the DM-led recovery will likely generate strong push (demand) and pull (financial)

forces that could result in an increasingly more differentiated medium- and longer-term

outlook within the broader EM complex. Key differentiation themes here could be BoP

strength and policy anchors. Looking out to 2014 and beyond, we believe these

differentiation themes will also define the outlook for the CEEMEA region.

Taking stock of our 2013 CEEMEA forecasts

Last year when we were laying out our 2013-2016 forecasts for the first time, we arguedthat CEEMEA would see a broad-based economic recovery, with little inflation pressure

over the next couple of years. Our main rationale was that the large financial and demand

shocks generated by the Euro area crisis were likely to reverse going into 2013, and that

would allow for a strong rebound, particularly in places that had been disproportionately

affected by the crisis (see CEEMEA Outlook: Plenty of green shoots, with little inflation,

CEEMEA Economics Analyst12/12, November 29, 2012). Importantly, the recovery would

not be immediately inflationary, thanks to the output gaps that had opened up over the

past couple of years.

20%

25%

30%

35%

40%

45%

50%

Hungary

Poland

Turkey

SouthAfrica

CzechRep

Israel

Russia

Colombia

Brazil

Mexico

Indonesia

India

Thailand

SouthKorea

Malaysia

Taiwan

US yield pass through estimates

CEEMEA Avg = 36%

LATAM Avg = 30% AEJ Avg = 29%


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Exhibit 5:A nascent CEEMEA recovery started in 2013Quarterly yoy GDP growth: CEEMEA Ex Russia vs. Russia


The inflation-less recovery theme applied particularly well to the Euro area-exposed CE

economies. The CE-3 and Romania were ideally positioned to benefit from a likely

normalisation in Euro area demand and financial conditions. The output gaps set a solid

foundation for recovery and were able to absorb potential inflation pressures, allowing

local central banks to continue to provide strong monetary accommodation. In Turkey, we

also saw scope for a fairly strong economic recovery and thought that the (moderate)

output gap could provide a disinflationary buffer in early stages of the cyclical recovery.

However, we also believed that the Turkish recovery would prove ultimately unsustainable,

aggravating external imbalances and generating strong inflation pressures. This would

prompt the CBRT to tighten domestic monetary conditions, which had eased significantly

through 2012H2. On the other hand, Russia and Israel did hold up reasonably well through

the Euro area crisis, thanks to the resilience of domestic demand. We expected both

economies to continue to perform well, growing close to trend, while keeping inflation

pressures in check. Finally, we expected idiosyncratic political headwinds and economic

imbalances to continue to hold back growth in South Africa and Ukraine.

Exhibit 6:while inflation pressures remained relatively subdued, except in Turkey andRussia


0

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Russia

CEEMEA EX Russia

GS Forecast

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2006 2007 2008 2009 2010 2011 2012 2013

Russia TurkeyPoland Czech RepublicHungary IsraelSouth Africa

GS Trim core inflation (yoy)


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In retrospect, the inflation-less recovery theme in the CE-3 and Romania unfolded broadly

in line with our expectations, except in that the recovery came a little later than we had

initially anticipated and on the back of more aggressive domestic monetary easing. In

Turkey, the initial recovery was quite strong and was largely underpinned by the strong

monetary stimulus provided by the CBRT, which eased rates more than we had initially

expected. In Israel, South Africa and Ukraine, our forecasts were also broadly in line,

although in all three actual growth rates turned out to be slightly weaker than we hadforecast. Finally, the most significant downside growth surprise came in Russia, with

underlying GDP growth falling sharply to 1.5% in 2013 from 3.4% in 2012, due both to

external and domestic factors. Growth in China in particular turned later than expected,

fiscal and quasi-fiscal spending was lower and the structural reforms being undertaken

proved more disruptive than we had anticipated. The downside surprise in Russian growth

dragged down the CEEMEA growth average significantly, to 2.3% in 2013, below the 2.7%

posted in 2012. That, however, disguises somewhat the improvement in the CEEMEA (ex-

Russia) growth average towards 2.7% in 2013, from 2.3% in 2012.

Exhibit 7:EM sell-off put pressure on currencies undermined by high leverage and inflationTrade Weighted CEEMEA Exchange Rates, 14 May 2013=100


What we did not fully account for was the sell-off in US rates. We noted that the

normalisation of the US economy and of US monetary policy could create strong

headwinds for the leveraged economies in our region (particularly for Turkey, South Africaand Ukraine). However, we thought this could become a more dominant market force later

in 2014 and 2015, when we expected US growth rates to return to 3%-3.5% on a more

sustainable basis, prompting the Fed to start gradually withdrawing excess policy stimulus.

Again in retrospect, the market was quicker and more aggressive in re-pricing the US curve,

which was in fact driven by a (surprise) hawkish shift in the Feds tone rather than by a re-

pricing of the US growth outlook. This led to serious market volatility. But pressures did

emerge in places where we thought the macro imbalances were more concerning.

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May-13 Jun-13 Jul-13 Aug-13

TRY CZK RUB

HUF ZAR ILS

PLN


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CEEMEA recovery led by Russia and CE-3, and dragged down by

Turkey

Looking forward into 2014 and 2015, we see scope for further recovery. Our new CEEMEA

growth forecasts show acceleration towards 2.9% in 2014 and further to 3.4% in 2015, up

from 2.3% in 2013. As such, we expect the growth differential to advanced economies to

decline from 1.1pp to 0.7pp. This stands in contrast to our forecasts for other EM regions,which show a more muted growth acceleration and a more visible compression in growth

differentials against DM.

Exhibit 8:CEEMEA growth forecasts, 2013-2017


However, this is somewhat misleading, as the bulk of the forecast CEEMEA acceleration

comes from Russia and the CE-3/Romania, where we expect GDP growth to pick up

towards 3% and 2.5% in 2014 respectively, and then further to 3.6% and 2.8% in 2015.

Excluding Russia, CEEMEA growth becomes more comparable with the forecast trends in

NJA and LatAm. In this context, it is important to note that Turkey drags down the regional

average, as growth slows sharply from 4.5% in 2013 to 2.0% in 2014 and further to 1.8% in

2015, while Israel and South Africa see moderate growth acceleration, from a low 2013

base (Exhibit 8).

CEEMEA differentiation themes: Global drivers

The desynchronised DM-led recovery will generate strong pull and push factors for theCEEMEA region, which will affect respective economies in different ways, depending on

their exposures to DM demand and the degree of domestic and external imbalances.

Improvement in DM demand conditions will help support further economic

recovery, across CEEMEA. CEEMEA as a whole has limited exposure to US demand and

will therefore not benefit as much from the normalisation of the US economy as LatAm

and NJA with the possible exceptions of Israel and Nigeria (Exhibit 9). For the region,

continuing (if still gradual) recovery in the Euro area will be a more important dynamic, and

should help reinforce nascent economic recoveries across the region, but particularly in the

highly Euro area-exposed CE-3 and Romania.

2013 2014 2015 2016 2017

Czech Republic -1.5 1.7 2.4 2.6 2.4

Hungary 1.1 1.8 1.9 2.2 1.9

Israel 3.4 3.7 4.0 3.6 3.2

Nigeria 6.5 7.0 6.2 5.8 5.5

Poland 1.4 2.9 3.2 3.4 3.2

Romania 2.4 2.7 3.1 3.2 3.5

Russia 1.5 3.0 3.6 3.6 3.7

South Africa 2.2 2.8 3.4 3.6 3.5

Turkey 4.5 2.0 1.8 5.8 5.0

Ukraine -1.2 0.4 5.0 3.7 4.2

CEEMEA 2.3 2.9 3.4 3.9 3.8

CEEMEA Ex-Russia 2.7 2.9 3.3 4.0 3.8

NJA 6.1 6.4 6.7 6.7 6.7

LATAM 2.7 2.8 3.4 3.6 4.0

EM 5.2 5.3 5.8 6.0 6.0

DM 1.2 2.2 2.5 2.5 2.5

GDP (%,yoy)


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Exhibit 9:CEEMEA more exposed to Euro area than US demandTrade flows in value added terms

Source: OECD-WTO, IMF, Goldman Sachs Global Investment Research * Gross exports as a share of GDP for Ukraine and

Nigeria

However, external financial shocks will adversely affect economies running

large imbalances. Turkey, South Africa and Ukraine will likely continue to face BoP

pressures over the next few years. This years FX depreciation and demand adjustments

will help address some of these imbalances in all three countries and result in some

improvement in external balances through 2014. However, further adjustments will be

necessary to ensure external sustainability in Ukraine and Turkey and, to a lesser extent, in

South Africa. This will, in turn, constrain their ability to generate domestic-demand-led

recoveries to a large extent, and force them onto a sub-par growth trajectory over the next

two years.

Exhibit 10:Turkey, South Africa and Ukraine are still running large imbalancesCurrent account in Q2 2013 vs. improvement since Q2 2012

Source: Haver Analytics, Goldman Sachs Global Investment Research

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US final demandEZ final demandUK, Denmark and Sweden final demands

China final demandJapan final demand

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CA, % of GDP, Q2 2013

yoyimprovementin CA (ppt)

Turkey

Ukraine

Mexico

South Africa Chile

Poland

Czech Republic

Korea

Taiwan

Israel

Hungary

China

Philippines

Malaysia

Russia

Argentina

Colombia

Thailand

Peru

India Brazil

Indonesia


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Exhibit 13:CEEMEA FX forecasts 2014 and 2015-2017


Policy credibility to play a crucial role. Countries like South Africa, the Czech Republic

and Poland, with a history of a fairly predictable and stable policy framework, and

countries like Romania that operate inside an IMF program, will probably be able to cope

with financial shocks better. Turkey, Hungary and Ukraine may be running varying degrees

of credibility risk, given the less orthodox and less predictable policy frameworks they have

adopted in recent years.

The most interesting case in CEEMEA is Russia, in our view. Policy credibility has not been

one of Russias strongest points in recent years. However, this is slowly changing, with the

overall policy frameworks of the CBR and the Russian Ministry of Finance becoming far

better organized. This has already had a positive impact on domestic fixed income markets,

which have held up relatively well during the recent EM sell-off. Russias current reform

program, which is arguably the most ambitious in recent history and within the broader

EM complex, could help further governance systems and transparency both in the public

and in the corporate sector, and thus bolster investor confidence. Of course, the pace, exact

content and subsequent implementation of actual reforms will hold the key to realising this

potential. Yet, the governments close focus on reforms is encouraging, and this underpins

our more constructive view on Russias equity market (see below).

CEEMEA market themes for 2014

Within this broad framework, we see a number of more specific macroeconomic/market

themes:

Intra-CEEMEA desynchronisation - Russia vs Turkey: This is a new and key

market theme for the year ahead. Our growth forecasts differ the most and are

most out of consensus with respect to the two largest economies of the region:

Turkey and Russia. We expect Turkey to enter an extended period of below-par

growth to address its well-documented imbalances of above-target inflation and

large external leverage. The adjustment process will be undermined by an

extended, two-year election cycle, which could increase the risk of policy mistakes

along the way. Meanwhile, we expect the Russian economy to accelerate towards

its trend growth rate of 3.5% by 2015 on the back of improving external and

especially domestic demand (particularly investment and public-sector

expenditure) conditions. As discussed above, we expect gradual reform and a

sustained improvement in the overall policy framework. This creates a clear

tension between the two equity markets, and sets the ground for Russian

outperformance.

end-2015 end-2016 end-2017

Forward Forecast Forward Forecast Forward Forecast

Czech Republic EUR/CZK 27.20 27.00 27.18 27.00 27.14 27.00 25.50 25.00 24.50

Hungary EUR/HUF 299.74 300.00 301.41 305.00 305.06 310.00 315.00 315.00 315.00

Israel USD/ILS 3.57 3.55 3.57 3.55 3.58 3.45 3.45 3.45 3.45Nigeria USD/NGN 162.65 160.00 171.22 165.00 185.93 185.00 205.00 225.00 245.00

Poland EUR/PLN 4.22 4.25 4.24 4.20 4.29 4.10 4.10 3.90 3.90

Romania EUR/RON 8.25 4.40 8.26 4.40 8.32 4.40 4.27 4.14 4.02

Russia USD/RUB 33.52 31.60 34.00 31.40 35.03 32.20 33.70 36.10 38.00

South Africa USD/ZAR 10.28 10.40 10.42 10.60 10.72 10.90 11.25 11.50 11.50

Turkey USD/TRY 2.06 2.10 2.09 2.20 2.18 2.40 2.50 2.30 2.20

Ukraine UAH/USD 8.58 9.20 8.96 10.30 9.68 10.30 9.80 9.60 8.90

12-Month Horizon

Forecast

3-Month Horizon 6-Month Horizon


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Exhibit 14:Strong growth divergence between Russia

and TurkeyGrowth differentials (quarterly, yoy % ) Turkey vs Russia

Exhibit 15:underpinned by stronger BoP positions

CA/GDP (RHS) and NIIP/GDP (LHS) Turkey vs Russia

Source: Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research

Still bearish on the TRY:This has been one of our top Conviction Views over

the past year and we believe it is still valid. The TRY has depreciated significantly

(by about 12% in trade-weighted terms) since April 2013 an adjustment that will

contribute to a rebalancing of the economy through 2014. However, the

imbalances were large to start with, and further TRY weakness is required to help

ensure long-term external sustainability. The CBRT has been tightening monetary

policy and will probably do more through 2014. But persistent (if moderating)

current account imbalances, wide inflation differentials, weak productivity growth

and a rapidly deteriorating growth outlook will continue to weigh on the TRY in the

coming months. We continue to forecast the TRY at 2.40 on a 12-month horizon,

although the pace of depreciation will depend largely on the robustness of theCBRTs policy response, as well as potential shifts in EM risk sentiment.

Exhibit 16:TRY to remain under depreciation pressure$/TRY, Spot, GS forecasts relative to forwards

Source: Bloomberg, Goldman Sachs Global Investment Research

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Turkey-Russia differential

Russia

Turkey

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Russia: NIIP Turkey: NIIP

Russia: CAD Turkey: CAD

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Current 3m 6m 12m

Market GS Forecast

USD/TRY


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Exhibit 17:Inflation pressures to re-intensify in IsraelCPI Inflation; realized and GS Fcast.

Exhibit 18: on the back of a tight labour market in 2014Israel unemployment rate and real wage growth

Source: Haver Analytics, Goldman Sachs Global Investment Research Source: Haver Analytics, Goldman Sachs Global Investment Research

Inflation-less recovery in CE-3 and Romania Part II: This is also last years

theme but it is still highly relevant. The Inflation-less recovery has played out to a

large extent in 2013, with CE-3 equity markets performing strongly and local rates

markets continuing to steepen, in response to central bank easing. However, it still

can define the improving outlook for the CE-3, as recovery gains further

momentum, against the backdrop of subdued inflation pressures and generally

accommodative monetary policy. However, we are more inclined to think of this as

an equity theme, given the extent of the rate market moves across CEEMEA and in

line with our more constructive views on EM equities in general. Stronger growth

and improved financial metrics could also be supportive of the CE-3 currencies,

particularly the PLN, although this is likely to be more of a theme for 2014H2, when

we expect the NBP to move to a tightening bias.

Inflationary recovery in Israel: Israel has weathered the Euro area crisis

reasonably well and continued to grow steadily over the past 12 months. The

slowdown in net exports was compensated largely by domestic demand growth,

reinforced also by natural gas production. There is currently no excess capacity in

the economy (we estimate a moderately positive output gap) and, as external

demand conditions improve and the economy changes gear through 2014, we

expect inflation pressures to become increasingly more apparent ultimately

prompting the BoI to withdraw the excess monetary stimulus it provided over the

past two years, which was also motivated by intensifying appreciation pressures

on the ILS. Our current rate forecasts are slightly above the forwards, but the

market can re-price the curve aggressively as inflation pressures become more

visible. We also maintain our long-held constructive ILS views, although we see

scope for increasingly aggressive BoI interventions.

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-1%

0%

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5%

6%

07 08 09 10 11 12 13 14 15

BoI Inflation TargetyoyF'cast (yoy)

CPI inflation (yoy, in %)

4%

5%

6%

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9%

10%

11%

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Real wage growth (yoy), lhsReal wage growth (6mma), lhsUnemployment, rhs

Real Wage growth

Average productivitygrowth per worker(1996Q1-2013Q2)

Unemployment rate


14/20



Exhibit 19:ZAR weakness could help support equity market

Source: Haver Analytics, Goldman Sachs Global Investment Research

FX weakness and stronger equity returns in South Africa: In South Africa,

the bond market tends to provide the primary shock, while the currency serves as

the transmission mechanism and equities act as a stabilising force. During the

2013 sell-off, this pattern was quite clear: the bond sell-off weakened the Rand and

this, in turn, improved the attractiveness of a significant number of dual-listed

stocks and of companies with large revenues in hard foreign currencies. Their

outperformance led to a strong equity rally during the bond sell-off. Such a

mechanism could prove useful again, as the Fed tapering seems ineluctable and

similar shocks could occur again. Despite the relatively high PE ratio in SouthAfrica (relative to other EM), there could be some scope for further equity

performance.

Ukraine and the bail-out:Ukraine has successfully muddled through the past

two years without macroeconomic adjustment, as the current account deficit has

widened to 8% of GDP and FX debt repayments have been a drag on reserves,

which have fallen by nearly 50% to US$21bn and close to 2.5 months of import

cover. However, with a very considerable external financing gap for 2014 a

current account deficit of some 7% of GDP and public FX debt repayments of 5%,

amounting to around US$20bn and likely without market access in a world of

rising UST yields, we think Ukraine is fairly unlikely be able to continue with the

same strategy until presidential elections in March 2015. Our view remains that

lower reserves will eventually generate pressure on the Hryvnia, which in turn will

ultimately lead the authorities to re-engage with the IMF, agree to a loan

agreement and devalue the UAH by around 30%. However, long-standing strong

opposition in the government to policy conditionality will likely imply a rocky road

to an IMF deal. Hence, we maintain a cautious outlook on Ukrainian sovereign debt

and believe that the NDF market may be under-pricing devaluation risks.

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Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

USDZAR

Equity return

Index(1/1/2013=100)

GS forecast(Trend of USDZAR depreciation)

2013: highest equity return (local currency)and worst FX performance across EM


15/20



The risks to our views and where we could be wrong

The risks to our views arise largely from two key factors. First, the DM, and particularly the

Euro area, recovery may not come through as strongly as we currently forecast. This could

compromise the nascent CEEMEA recoveries, particularly in the CE-3, Romania and Israel.

Second, forward guidance provided by core central banks may prove to be less effective

and result in a bear-flattening of the core yield curves. This could create significant market

volatility and again undermine the recoveries we forecast across CEEMEA. This risk would

obviously have a disproportionate adverse impact on the leveraged CEEMEA economies

running larger imbalances, namely Turkey, South Africa and Ukraine.

However, it is very likely that a materialisation of either of these risks would prompt core

central banks to provide strong monetary accommodation, which could quickly help

reverse initial financial shocks and alleviate potential BoP pressures. Local central banks

would also respond by providing monetary stimulus for longer (CE-3, South Africa and

Israel) and/or by easing monetary conditions (Turkey). This would result in further

steepening of respective yield curves and (perversely) help stabilise more vulnerable

currencies.

We also see a number of idiosyncratic risks, mostly related to politics. The political risks are

clear in the Ukraine, where we forecast that the country will eventually engage with the IMF.

However, there is an important presidential election coming up in spring 2015, which may

undermine the authorities ability to agree to IMF conditionality and force the leadership to

take risks. In Russia, while there is no election, the effort to execute deep reforms are not

without risks and can lead to significant short-term volatility in markets and individual

asset prices.

In the CE-3, Hungary will also hold elections in spring 2014. The election currently does not

seem to be heavily contested, as the current Fidesz government is comfortably leading in

the polls (despite some loss of popularity). However, in the run-up to elections increasingly

unorthodox policies and potential slippages could undermine investor confidence, leading

to market volatility. Poland faces four elections (European, municipal, presidential and

parliamentary) in 2014-2015. The governing coalition is lagging in the polls, which

increases the risk that the structural reform agenda is diluted, undermining long-term fiscal

stabilisation. Romania will hold presidential elections towards the end of next year. This

could be more a case of policy risks reducing as polls suggest that the election will end the

difficult cohabitation between the president and the government.

Lastly, Turkey will go through a prolonged two-year election cycle, starting with municipal

elections in March 2014, presidential elections in August 2014 and general elections in mid-

2015. This process could be prone to intense political noise and policy slippage.

CEEMEA Macro Team


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Macroeconomic, interest rate and exchange rate forecasts

Policy Rate Forecasts

Exchange Rate Forecasts

Global interest and exchange rate forecasts

Source for all tables: Goldman Sachs Global Investment Research, Bloomberg.

CEEMEA Main Macro Forecasts

2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

Czech Republic -1.2 -1.5 1.7 2.4 2.6 2.4 3.3 1.4 0.6 1.9 2.1 2.0

Hungary -1.7 1.1 1.8 1.9 2.2 1.9 5.7 1.8 1.3 3.0 3.3 3.3Israel 3.4 3.4 3.7 4.0 3.6 3.2 1.7 1.6 2.5 3.0 2.5 2.1

Nigeria 6.5 6.5 7.0 6.2 5.8 5.5 6.5 6.5 7.0 6.2 5.8 5.5Poland 2.1 1.4 2.9 3.2 3.4 3.2 3.7 1.0 2.0 2.0 2.3 2.4

Romania 0.7 2.4 2.7 3.1 3.2 3.5 3.3 4.1 2.0 2.3 2.2 2.4

Russia 3.4 1.5 3.0 3.6 3.6 3.7 5.1 6.5 5.5 5.1 4.7 4.4

South Africa 2.5 2.2 2.8 3.4 3.6 3.5 5.7 5.8 5.9 5.8 5.6 5.7Turkey 2.2 4.5 2.0 1.8 5.8 5.0 8.9 7.6 7.7 7.2 6.1 6.5

GDP (%yoy) Consumer Prices (%yoy)

Current Q4 13 Q1 14 Q2 14 Q3 14 2015 2016 2017

Czech Republic 2-week repo rate 0.05 0.05 0.05 0.05 0.05 0.50 1.25 1.25Hungary 2-week deposit rate 3.40 3.00 3.00 3.00 3.00 4.25 4.50 4.50

Israel Repo rate 1.00 1.00 1.00 1.00 1.25 2.50 3.00 4.00

Nigeria Monetary policy rate 12.00 12.00 12.00 11.50 11.50 10.50 10.50 9.00

Poland 7-day intervention rate 2.50 2.50 2.50 2.50 2.50 3.50 3.50 3.50

Romania 1-week repo rate 4.00 4.00 3.75 3.75 3.75 3.75 4.00 4.25

Russia Min 1-week repo rate 5.50 5.50 5.50 5.50 5.50 6.00 6.50 6.50

South Africa Repo rate 5.00 5.00 5.00 5.00 5.00 6.50 8.50 8.50

Forecast (%, eop)

3-Month Horizon

Current* Forward* Forecast Forward* Forecast Forward* Forecast

Czech Republic EUR/CZK 27.23 27.20 27.00 27.18 27.00 27.14 27.00

Hungary EUR/HUF 297.98 299.74 300.00 301.41 305.00 305.06 310.00Israel USD/ILS 3.56 3.57 3.55 3.57 3.55 3.58 3.45

Nigeria USD/NGN 158.65 162.65 160.00 171.22 165.00 185.93 185.00

Poland EUR/PLN 4.19 4.22 4.25 4.24 4.20 4.29 4.10

Romania EUR/RON 4.45 8.25 4.40 8.26 4.40 8.32 4.40

Russia USD/RUB 32.99 33.52 31.60 34.00 31.40 35.03 32.20

South Africa USD/ZAR 10.14 10.28 10.40 10.42 10.60 10.72 10.90

Turkey USD/TRY 2.02 2.06 2.10 2.09 2.20 2.18 2.40

Ukraine UAH/USD 8.22 8.58 9.20 8.96 10.30 9.68 10.30

* Close 21 November 13

6-Month Horizon 12-Month Horizon

Current* Forward* Forecast Forward* Forecast Forward* ForecastInterest Rates (%)

Euro Area 3M 0.17 0.23 0.20 0.25 0.20 0.31 0.20

10Y 1.77 2.14 2.30 2.22 2.40 2.38 2.55

US 3M 0.24 0.25 0.30 0.27 0.30 0.36 0.30

10Y 2.79 2.99 3.00 3.11 3.15 3.35 3.40

Exchange Rates

EUR/$ 1.35 1.35 1.38 1.35 1.40 1.35 1.40

EUR/ 136.09 136.02 135.24 135.97 144.20 135.84 149.80

EUR/CHF 1.23 1.23 1.25 1.23 1.28 1.23 1.28

EUR/ 0.83 0.83 0.82 0.83 0.83 0.84 0.85

*Close at 22 Nov 2013. We are currently using Mar 2014, Jun 2014, and Dec 2014 contracts for 3-month forward rates.

12-Month Horizon3-Month Horizon 6-Month Horizon


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Conviction Macro Views

Turkey: Structurally bearish on the TRY

We maintain our fundamental, bearish TRY views. We forecast the

$/TRY at 2.1, 2.2 and 2.4 in 3, 6 and 12 months, and 2.5 in 2015. The

TRY remains undermined by large (external and domestic) imbalances,and is therefore still susceptible to external shocks. This means that

the exchange rate will have to undergo a significant adjustment as the

core central banks move closer to normalising policy over the next few

years. However, in the short term, BoP pressures may ease, helping

the TRY to appreciate. In particular, the postponement of the Fed

taper from September further out to December (and possibly beyond)

and the CBRTs more hawkish policy stance may help provide

additional support to the TRY posing downside risk to our short-term

$/TRY forecasts. But ultimately this would reverse a healthy FX

adjustment and render it more challenging to rebalance the economy.

Over the medium term, fundamental pressures are likely to continue to

drive the TRY weaker.

Turkey: USD/TRY

Source: Bloomberg.

Israel: Structurally constructive on the Shekel;

Hiking cycle on the horizon

We continue to hold a long-term (structural) constructive view on the

Shekel and maintain our 12-month 3.45 USD/ILS forecast. This view is

underpinned by Israels strong macro fundamentals and the continued

improvement in the current account (partially driven by the natural gas

production from the Tamar field). Furthermore, we also expect the

Bank of Israel (BoI) to begin a gradual hiking cycle in 3Q2014 (50bp in2014 and 100bp in 2015). This should provide additional support to the

currency, notwithstanding that the Bank will likely attempt to dampen

resulting appreciation pressures, via its US$3.5bn low cost Gas FX

intervention program for 2014. The BoIs highly accommodative

monetary policy stands in clear contrast to the low degree of slack in

the domestic economy. CPI inflation surprised on the upside in

October (1.8%yoy, up from 1.3% in September) and we expect the

deterioration in the inflation outlook to continue in 2014, following an

improvement in exports and economic activity. We believe that this,

combined with a rise in exports and continued concern about the

housing market, will trigger a hiking cycle. Currently, market pricing is

more dovish than the trajectory implied by our rate forecasts.

Israel: USD/ILS

Source: Bloomberg.

1.25

1.35

1.45

1.55

1.65

1.75

1.85

1.95

2.05

09 10 11 12 13

USD/TRY

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

07 08 09 10 11 12 13

ILS/USD


18/20


19/20



Russia: Cautious on the Ruble and constructive on

equities and credit

Russian growth is set to improve in the coming quarters, driven by a

more supportive external environment, less fiscal drag and easier

financial conditions (as dividends from the CBRs disinflation policy

transmit to lower inflation expectations and risk premia and,ultimately, lower real interest rates). With consumption growth

remaining strong, albeit declining marginally, and exports picking up,

we expect investment to follow suit, after several quarters of weakness

while the ongoing destocking comes to an end. Importantly, we think

the Russian policy framework is becoming more rules-based and

predictable, and that structural reforms are gradually gaining traction

with investors. We think the context of a country with low debt,

improving growth and declining inflation should be supportive of the

equity market, especially in sectors that are geared toward exports. In

addition, for many of the same reasons, we maintain a constructive

view on Russian sovereign credit. While an improving growth

environment would also generally be supportive of the countryscurrency, in this case we think there are important reasons why the

Ruble is likely to continue to underperform. First, the CBR has stated

that it intends to improve the monetary transmission mechanism by

working to push interbank rates down by 50-100bp towards the policy

rate. While it has employed several tools in its attempt to do so, in our

view, the remaining constraint is bearish local sentiment towards the

Ruble, coupled with the CBRs FX interventions, which the Bank

intends to abandon by end-2014. In our view, the logical next step is to

accelerate and complete the move towards a flexible Ruble by May

2014, and this should precipitate a weakening in the currency.

Russia: Strong macro fundamentals supporta tighter CDS spread

Source: Bloomberg.

Nigeria: Structurally bearish on the Naira, but short-term constructive on carry and neutral on

sovereign credit

Nigeria belongs to our Africa 11 list of economies with the highest

growth potential in the region, but it also has significant vulnerabilities

to EM risk appetite and oil shocks. Hence, we are fundamentally

bearish on the Naira. However, in the short term the authorities

(supported by high oil prices) will likely hold the peg in the NGN/USD

155 +/- 3% range. FX pressures have eased in the past month and the

current spot (NGN/USD 159) is back within that range. This implies

attractive carry for investors in the tradable local debt markets, with

the benchmark 10-year yield around 12.6%. We are more neutral on

Nigerian sovereign credit, which is priced at a premium relative to its

global EM peers (like Africas average). This premium can broadly be

explained by better macroeconomic factors, which suggests that

Nigerian Eurobonds are currently priced in line with macro

fundamentals.

Nigeria: Strong structural real appreciation

Source: Bruegel.

100

150

200

250

300

350

11 12 13

5y CDS Spread

50

100

150

200

250

300

95 97 99 01 03 05 07 09 11 13

Trade-weightedreal exchange rate(Jan-95 = 100)

Naira realappreciation


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Disclosure Appendix

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