cs emerging markets quarterly - q2 2012

8/2/2019 CS Emerging Markets Quarterly - Q2 2012

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ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER

IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.

Emerging Markets Quarterly

Q2 2012

The EM worlds short-term growth indicators have become more encouraging

over the past two months. Most importantly, the forward-looking PMI new orders

data for the EM world as a whole have bounced somewhat from their low point

in late 2011. However, the backward-looking IP growth numbers for the EM

world have yet to show a convincing bounce. When we exclude the volatile

figures for India, Thailand and Singapore from our aggregate EM growth

measure, we find that sequential worldwide EM IP growth remained largelystable at about 5% between April 2011 and January 2012.

Our measures of three-month headline and core inflation for the EM world as a

whole have continued to trend down in recent months. We saw divergent

patterns in different EM countries in the second half of 2011 when local food

and energy prices rose substantially in some countries in response to currency

depreciation, but data for the first two months of 2012 show a tendency for

inflation to come back down again in those countries.

14 March 2012Fixed Income Research

http://www.credit-suisse.com/researchandanalytics

Research Analysts

Kasper Bartholdy

+44 20 7883 4907

[email protected]

Berna Bayazitoglu

+44 20 7883 3431

[email protected]

Alonso Cervera

+52 55 5283 [email protected]

Dong Tao

+852 2101 7469

[email protected]

See inside cover for full list of analysts


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14 March 2012

Emerging Markets Quarterly 2

T h i s p a g e i s i n t e n t i o n a l l y l e f t b l a n k .


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14 March 2012


Indonesia: All about inflation 110Korea: Growth has troughed, rates on hold 115Malaysia: Outperform till the next election? 120Philippines: Promising signs emerging 124Singapore: Higher wage growth ahead? 128Taiwan: Emerging from a technical recession 132Thailand: Investment leads the way 137Long-term sovereign FX debt ratings 141Key websites 143Previous publications 149Key dates 157Gross financing needs for 2012 162Balance of payments financing needs 163Government funding needs 176Quarterly and annual forecasts for developed countries 186Summary macroeconomic data for developed countries 187Summary macroeconomic data 192


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14 March 2012


Moderately encouraging EM PMI data alongsidestability in EM core inflationSummaryOverview: The EM worlds short-term growth indicators have become more encouraging

over the past two months. Most importantly, the forward-looking PMI new orders data forthe EM world as a whole have bounced somewhat from their low point in late 2011(Exhibit 1). However, the backward-looking IP growth numbers for the EM world have yetto show a convincing bounce. When we exclude the volatile figures for India, Thailand andSingapore from our aggregate EM growth measure, we find that sequential worldwide EMIP growth remained largely stable at about 5% between April 2011 and January 2012(Exhibit 2).

Our measures of three-month headline and core inflation for the EM world as a wholehave continued to trend down in recent months. We saw divergent patterns in different EMcountries in the second half of 2011 when local food and energy prices rose substantiallyin some countries in response to currency depreciation, but data for the first two months of2012 show a tendency for inflation to come back down again in those countries.

Exhibit 1: The EM worlds PMI indices for neworders have move up from their 2011 lows in themost recent months, especially in non-Japan Asiaand Latin America

Exhibit 2: Sequential EM industrial productiongrowth remained stable in January 2012 (on ameasure that excludes the volatile figures for India,Thailand and Singapore from the calculation), butthe PMIs indicate that EM growth is about to bounce

Seasonally adjusted regional indices for PMI new orders. See the footnotebelow regarding the GDP-weighting of country-specific observations. PMI neworders indices are lead indicators for sequential industrial production growth.

The dark thick line shows (using the left hand scale) the annualized % change inthe seasonally adjusted industrial production level for the EM world as a wholeduring the last three months. The line with the diamonds shows the samegrowth concept for the EM world excluding India, Thailand and Singapore. Theother two lines show PMI new orders indices (using the right hand scale).

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EM IP, 3m% ann.* (left scale)EM IP ex-IN, SG, TH, 3m% ann.* (left scale)EM new orders** (right scale)Global new orders (right scale)

*Observations for 13 countries were taken into account and weighted by the countries 2010nominal GDP. The countries are listed in footnotes of Exhibits 7-9.

Source: PMI Premium, Haver Analytics, Credit Suisse

*Observations for 20 countries (listed in footnotes below Exhibits 7-9) were weighted by thecountries 2010 nominal GDP. The figures were seasonally and workday-adjusted. **Theindex takes into account PMI readings for Brazil, Mexico, Czech Republic, Hungary, Poland,Russia, South Africa, Turkey, China, India, Korea, Singapore and Taiwan..

Source: PMI Premium, Haver Analytics, Credit Suisse

Growth: The forward-looking PMI new orders index for the EM world rose encouraginglyin December and January and remained at the new and moderately higher level inFebruary, suggesting that some strengthening of the sequential IP growth figures shouldbecome visible in the forthcoming data releases (Exhibits 1 and 2) it isnt truly visible atthis stage. While our three-month measure of growth in industrial production (IP) for theEM world as a whole bounced sharply in December 2011 and January 2012 after stayingin a narrow range at an unsatisfactory low level for nearly a year (Exhibits 2 and 5), thisreflects temporarily extra-ordinarily high month-on-month figures for India, Thailand andSingapore. If we exclude those figures from the aggregates, we find that EM IP growthremained stable in Q4 2011 and in January 2012 (the latest available observation).

Kasper Bartholdy

+44 20 7883 4907

[email protected]

Natig Mustafayev+44 20 7888 1065

[email protected]

While backward-

looking IP growth for

the EM world is yet to

bounce notably,

the PMI data suggest

that it will


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14 March 2012


The growth trends differ across regions. China has just released revised IP figures for the

past year. The updated series shows a gradual decline in Chinas three-month annualized

rate of IP growth to 8.4% in February 2012 from 12.7% in the middle of 2011 and 19.8% at

the end of 2010 (Exhibit 10). In non-Japan Asia outside of China (an area in which India

and Korea are the largest economies), the annualized three-month rate of IP growth

jumped massively into positive territory in December 2011 and January 2012, under the

influence of one-off factors that are discussed below. In the EMEA area, annualized three-

month IP growth slowed sharply to about 1% in January 2012 from more than 8% in late2011. In Latin America, Brazils IP growth remains very weak but Mexicos has bounced.

Inflation: After remaining stable for a few months, our measures of three-month EM

headline and core inflation resumed their decline in the three months from December to

February, helped by particularly large falls in inflation in China and India (Exhibit 3). Three-

month inflation in the rest of the EM world rose notably towards the end of last year but

came off again in January and February (Exhibit 4). This reflects in part the temporary

impact (on food and energy price inflation) of last years EM currency depreciation against

the dollar and the euro an effect that has subsequently been mostly reversed.

Exhibit 3: Our sequential measure of EM headline

inflation has been declining since December afterremaining stable for a few months

Exhibit 4: : In the EM world outside of China andIndia, a spike in food inflation drove up headline

inflation in late 2011, but headline inflation fell backagain in January and February 2012

Annualized % change in the seasonally adjusted CPI indices for the EM worldas a whole over the last three months

Annualized % change in the seasonally adjusted CPI indices for the EM worldexcluding China and India over the last three months

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Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-120

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Food CPI

Core CPI**

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Food CPI

Core CPI**

*For headline inflation, 31 countries are taken into account and weighted by their 2010nominal GDP. These countries are listed in the footnotes for Exhibits 27-29. Argentina is notincluded. For India, the index used is the WPI. **For core inflation (defined here to be thechange in the CPI index excluding food, energy, alcohol and tobacco), 21 countries are takeninto account and weighted by their 2010 nominal GDP. These countries are listed in thefootnotes for Exhibits 27-29. For India, the index used is the WPI.

Source: Haver Analytics, the BLOOMBERG PROFESSIONAL service, Credit Suisse.

* For headline inflation, the same 31 countries are taken into account as in Exhibits 27-29excluding China, India and Argentina. The countries are listed in footnotes to the latter charts.**For core inflation (defined here to be the change in the CPI index excluding food, energy,alcohol and tobacco), we use the same subset of EM countries as in Exhibit 22, but excludingIndia and China.


Exchange rates: Most EM currencies have recovered a lot of ground against the dollar

and the euro so far this year. At this stage only a short list of EM countries has currencies

which in REER terms remain more than 3% cheap to the levels that prevailed in mid-

2011: Hungary, Brazil, Israel, Mexico, Poland, Romania and India.

Sequential EM

inflation continued

to decline in

December 2011 and

January 2012

Recovering EM

currencies


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14 March 2012


PMIs signaling stronger sequential growth mainly in Asia

The most recent PMI data (Exhibits 7- 9) suggest better EM output trends in the months

ahead, especially in Asia and Latin America. We find it particularly noteworthy that the

Chinese PMI new orders data have risen significantly from recent lows (Exhibit 10). Right

now the PMI data probably give a more reliable impression of the underlying growth trends

than does the figure for annualized three-month IP growth (the run-rate) for the EM world.

The IP run-rate for the EM world rose from 1.3% in November 2011 to 4.3% in December

and 9.3% in January1, as we show in the dark thick line in Exhibit 2. But it was inflated, most

significantly in January, by sharp one-off bounces in India, Thailand and Singapore. The

Indian figures are simply implausibly erratic, Thailands January observation reflects a sharp

and quick recovery from a flood-induced slump, and Singapores IP figures are rendered

very volatile by the special dynamics of the countrys pharma sector.

If we take those three countries out of our EM IP measure (see the thin line in Exhibit 2), we

are left with a series that shows sequential IP growth for the EM world remaining stable

continuously between April of 2011 and January of 2012. Although no growth bounce is as

yet visible in that series. IP growth has risen sufficiently impressively in Korea (Exhibit 11),

and Mexico (Exhibit 14) to offset weakening in China (Exhibit 10), Brazil (Exhibit 13),

Russia (Exhibit 15) and Turkey (Exhibit 16).

Exhibit 5: While three-month IP growth has continuedto weaken in EMEA and China in recent months, it hasrecovered sharply in other parts of Asia whileremaining largely unchanged (at zero) in Latin America

Exhibit 6: Three-month IP growth has recovered to adecently strong rate in the US and but hascontinued to decline (from very high levels) in China

Annualized % change in the industrial production level (sa) over the last threemonths preceding each observation point in the chart.

Annualized % change in the industrial production level (sa) over the last threemonths preceding each observation point in the chart.

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USEurozoneChina

*Observations for 19 countries were taken into account and weighted by the countries 2010nominal GDP. The countries are listed in footnotes of Exhibits 7-9.

Source: Haver Analytics, the BLOOMBERG PROFESSIONAL service, Credit Suisse


EM output growth is, in our view, likely to be supported in the coming quarters by the

already visible positive growth momentum in the US, a policy-induced bottoming out ofgrowth in China, recent central bank policy easing across much of the rest of the EM world,

and global commodity price stability. The main risk to this view is probably that the

assumed commodity price stability may not materialize. Higher global oil and food prices

could be a significant growth impediment.

1 To be exact, we define the run rate or the three-month growth rate as the annualized three-month moving average of themonth-on-month growth rates in the seasonally adjusted IP series.

Moderately stronger

PMI data point to a

pick-up in IP growth

in the coming

months

One-off strength in

parts of Asia has

pushed up

sequential IP growth

for the EM world,

but underlying

sequential IP growth

remained stable

through January

2012

We see moderately

stronger EM growth

in the coming

quarters


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14 March 2012


Exhibit 7: Latin America IP, mfgPMI and US ISM new orders

Exhibit 8: EMEA IP, mfg PMI andeuro zone new orders

Exhibit 9: NJA ex-China IP, mfgPMI and global new orders

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LatAm PMI**LatAm new orders**US new ordersLatAm IP, 3m% ann.* (rhs)

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EMEA mfg PMI**EMEA new orders**Eurozone new ordersEMEA IP, 3m% ann.* (rhs)

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NJA ex-China PMI**NJA ex-China new orders**Global new ordersNJA ex-Ch IP, 3m% ann.* (rhs)

*We weight data for five countries by these countries 2010nominal GDP: Argentina, Brazil, Chile, Colombia andMexico. Seasonally and workday-adjusted; annualized %change over three months. **We weight the PMIs for Braziland Mexico by their 2010 nominal GDP.

Source: Haver Analytics, Statistics Office, INEGI, PMIPremium, Credit Suisse

*We weight data for eight countries by these countries 2010nominal GDP: Czech Republic, Hungary, Poland, Romania,Russia, South Africa, Turkey and Ukraine. Seasonally andworkday-adjusted; annualized % change over three months.**We weight the PMIs for Czech Republic, Hungary, Poland,Russia, South Africa and Turkey by their 2010 nominal GDP.

Source: Haver Analytics, Statistics Office, PMI Premium,Credit Suisse

*We weight data for six countries by these countriesindustrial sector value added in 2010: India, Korea,Malaysia, Singapore, Taiwan and Thailand. Seasonally andworkday-adjusted; annualized % change over three months.**We weight the PMIs for China, India, Korea and Singaporeby their 2010 nominal GDP.

Source: Haver Analytics, Statistics Office, PMI Premium,Credit Suisse

Exhibit 10: China IP and mfg PMI Exhibit 11: Korea IP and mfg PMI Exhibit 12: India IP and mfg PMI

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China PMI**China new orders**China IP, 3m% ann.* (rhs)

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Korea mfg PMIKorea new ordersKorea IP, 3m% ann.* (rhs)

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India mfg PMIIndia new ordersIndia IP, 3m% ann.* (rhs)

*Seasonally and workday-adjusted; annualized % changeover three months.**We use the governments manufacturing PMI series.

Source: Credit Suisse, Haver Analytics, Statistics Office

*Seasonally and workday-adjusted; annualized % changeover three months.

Source: Haver Analytics, Statistics Office, PMI Premium

*FY2004=100, seasonally and workday-adjusted;annualized % change over three months.


Exhibit 13: Brazil IP and mfg PMI Exhibit 14: Mexico IP and mfg PMI Exhibit 15: Russia IP and mfg PMI

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Brazil mfg PMIBrazil new ordersBrazil IP, 3m% ann.* (rhs)

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Mexico mfg PMIMexico new ordersMexico producer confidence**Mexico IP, 3m% ann.* (rhs)

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Russia PMIRussia new ordersRussia IP, 3m% ann.* (rhs)



*Seasonally and workday-adjusted; annualized % changeover three months. **Diffusion index calculated by INEGIbased on Opinion Survey of the Mfg Sector. Mfg PMI is alsoproduced by INEGI

Source: Haver Analytics, Statistics Office




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14 March 2012


Exhibit 16: Turkey IP and mfg PMI

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Turkey mfg PMITurkey new ordersTurkey IP, 3m% ann.* (rhs)



Exhibit 18: S. Africa mfg outputand mfg PMI

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S. Africa mfg PMIS. Africa new ordersS. Africa mfg output, 3m% ann.* (rhs)

*Manufacturing production; seasonally and workday-adjusted;annualized % change over three months.


Exhibit 17: Industrial production growth by country% year-on-year change

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Jan 11 Feb 11

Latin America* 11.2 11.2 7.1 4.2 4.5 2.4 2.0 0.4 -0.1 na

Argentina(1) 13.1 9.4 6.8 5.9 4.4 5.8 4.5 2.1 -0.9 na

Brazil 18.2 14.3 8.0 3.3 2.8 0.6 0.0 -2.0 -3.4 na

Chile -5.8 6.1 6.8 5.4 14.5 7.4 4.4 2.0 3.6 naColombia 3.9 7.6 3.5 4.4 5.5 3.4 6.1 4.4 na na

Mexico 4.8 8.2 6.5 5.0 5.4 3.4 3.5 3.2 4.2 na

EMEA* 10.1 11.5 8.1 8.4 8.9 5.5 5.4 4.4 3.5 na

Czech Republic 6.9 11.5 10.7 11.9 12.3 9.1 3.7 3.1 3.1 na

Hungary 5.1 13.5 12.9 10.5 12.6 4.3 2.7 3.0 -0.4 na

Poland 10.2 12.5 11.9 9.8 9.0 5.4 5.7 7.5 9.1 na

Romania 4.3 6.8 4.5 6.3 11.4 4.0 5.5 2.2 1.2 na

Russia 9.5 10.9 6.5 6.7 6.0 4.8 5.0 3.3 3.8 na

South Africa 4.1 8.7 4.6 2.8 4.9 0.7 2.6 2.1 2.4 na

Turkey 17.3 13.8 10.0 12.1 14.4 8.0 7.6 6.4 1.4 na

Ukraine 11.2 13.3 9.0 11.5 10.3 8.5 9.2 3.3 2.0 na

Non-Japan Asia* 20.7 16.3 12.1 12.3 12.4 10.8 10.2 7.8 7.0 na

NJA excl China 22.4 16.9 9.8 10.6 8.9 5.1 4.0 -0.5 -1.3 na

China 19.8 15.9 13.5 13.3 14.4 13.9 13.8 12.8 11.4 11.4

India(2) 14.0 9.6 6.8 8.6 7.9 7.0 3.2 1.1 6.8 na

Korea 25.7 18.8 10.9 11.8 10.4 7.1 5.3 5.0 -2.0 na

Malaysia 10.7 10.6 4.2 3.7 2.4 -1.6 2.0 2.8 0.3 na

Singapore 37.2 45.3 13.7 25.7 19.0 -3.8 8.9 9.3 -8.7 na

Taiwan 48.8 29.7 18.8 17.7 15.3 7.1 3.4 -4.0 -16.5 na

Thailand 31.2 17.6 9.8 2.6 -2.2 -2.5 1.8 -34.2 -15.2 na

EM World* 16.8 14.4 10.3 9.8 10.3 8.2 7.6 5.6 5.1 na

(1) Argentinean IP data are privately collected by FIEL.(2) We use the IP series for India with the base year FY2004 = 100.*The regional aggregate is calculated by weighting each countrys IP data by its 2010 nominal GDP.


Exhibit 19: Poland IP andmanufacturing PMI

Exhibit 20: Hungary IP andmanufacturing PMI

Exhibit 21: Czech Republic IP andmanufacturing PMI

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Poland mfg PMIPoland new ordersPoland IP, 3m% ann.* (rhs)

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Hungary mfg PMIHungary new ordersHungary IP, 3m % ann.* (rhs)

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Czech mfg PMICzech new ordersCzech IP, 3m % ann.* (rhs)



*PMI series from Hungarian Association of Logistics,Purchasing and Inventory Management (HALPIM); Seasonallyand workday; annualized % change over three months.

Source: Haver Analytics, Statistics Office




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14 March 2012


EM inflation generally looking benign

Our aggregate measure of three-month inflation for the EM world as a whole remains on a

declining trend this is true both for core and for headline inflation. A number of EM

countries saw a bounce in inflation in late 2011 on the back of substantial currency

depreciation. But this process was reversed in early 2012. Aggregate EM headline inflation

measured by the three-month annualized run-rate2 generally fell slowly and

continuously between November 2010 and September 2011, stabilized betweenSeptember and November 2011, and then declined again in December 2011, January and

February 2012 (Exhibit 22). An important influence on the decline in the global EM inflation

figures has been a sharp fall in inflation in China, driven by stabilization of local pork prices

(Exhibit 39).

Core inflation remains notably well-behaved in most countries. Our sequential annualized

three-month measure (the run-rate) of core inflation for the EM world excluding China

and Indiahovered in a narrow range of about 5.0%-5.5% between April and December

2011, but fell in the first two months of 2012 to reach 3.8% in February (Exhibit 23).

Interestingly, our measure of the run-rate of Chinas core inflation fell almost all the way to zero

in November and December after having hovered at much higher levels earlier in 2011. This is

consistent with the longer-term experience, which suggests that food inflation, which has recently

fallen sharply in China, is an important influence on that countrys core inflation. However, the run-

rate measure of Chinas core inflation picked up moderately to 1.7% in February from its recent

low of 0.4% in December 2011.

From a forward-looking perspective, we think it makes sense to expect the impact of

currency depreciation on inflation to continue to be reversed in response to the recent

strengthening of many EM currencies, and to expect the recent sharp decline in food price

inflation in China to be a one-off effect that will depress headline inflation less and less

over time.

Exhibit 22: Our sequential measure of EM headlineinflation declined in January and February after

remaining stable for a few months

Exhibit 23: In the EM world outside of China andIndia, a spike in food inflation drove up headlineinflation in late 2011, but this effect has been

reversed in January and February 2012Annualized % change in the seasonally adjusted CPI indices for the EM worldas a whole over the last three months

Annualized % change in the seasonally adjusted CPI indices for the EM worldexcluding China and India over the last three months

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Core CPI**

*For headline inflation, 31 countries are taken into account and weighted by their 2010nominal GDP. These countries are listed in the footnotes for Exhibits 27 -29. Argentina is notincluded. For India, the index used is the WPI. **For core inflation (defined here to be thechange in the CPI index excluding food, energy, alcohol and tobacco), 21 countries are takeninto account and weighted by their 2010 nominal GDP. These countries are listed in thefootnotes for Exhibits 27-29. For India, the index used is the WPI.


* For headline inflation, the same 31 countries are taken into account as in Exhibits 27 - 29excluding China, India and Argentina. The countries are listed in footnotes to the latter charts.**For core inflation (defined here to be the change in the CPI index excluding food, energy,alcohol and tobacco), we use the same subset of EM countries as in Exhibit 22, but excludingIndia and China.


2 These statements are based on our estimate of sequential inflation for the EM world as a whole. We refer to our measure ofsequential inflation as "the run-rate of consumer prices" defined as the annualized % change during the most recent threemonths in the GDP-weighted average of seasonally adjusted price indices for the EM countries.

EM headline

inflation has

generally continued

to fall in recent

months

Core inflation

remains well

behaved


11/210

14 March 2012


Exhibit 24: World oil prices Exhibit 25: World grain prices Exhibit 26: World metals pricesBrent: level and % yoy change in the US$ price Grain price index*: level (2005=100) and % yoy

change in the US$ priceLMEX US$ price index for metals: level (2005=100)and % yoy change

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%yoy chg (right axis)

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Source: the BLOOMBERG PROFESSIONAL service * Index that attributes equal weight to US wholesale prices forwheat, corn, soy and rice prices measured in US$

Source: the BLOOMBERG PROFESSIONAL service

Source: the BLOOMBERG PROFESSIONAL service

Exhibit 27: Latin AmericaCPI inflation*

Exhibit 28: Emerging Europe, MiddleEast and Africa CPI inflation*

Exhibit 29: Non-Japan AsiaCPI inflation*

Annualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa)

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* The aggregates in this chart exclude Argentina. The 8countries that are taken into account and weighted by 2010nominal GDP are Brazil, Chile, Colombia, Ecuador, Mexico,Panama, Peru and Venezuela.

** Core inflation excludes food, energy, alcohol and tobacco; only

for a selected subset of four of the eight Latin American countrieslisted above. These are Brazil, Chile, Mexico and Peru.

Source: Haver Analytics, the BLOOMBERGPROFESSIONAL service, Credit Suisse

* The 12 countries that are taken into account and weighted by2010 nominal GDP are Czech Republic, Egypt, Hungary,Israel, Kazakhstan, Nigeria, Poland, Romania, Russia, SouthAfrica, Turkey and Ukraine.

** Core inflation excludes food, energy, alcohol and tobacco;

only for nine EMEA countries listed above. These are CzechRepublic, Hungary, Israel, Kazakhstan, Poland, Romania,Russia, South Africa and Turkey.


* The 11 countries that are taken into account and weighted by2010 nominal GDP are China, Hong Kong, India, Indonesia,Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand andVietnam. For India, the price index used is the WPI.

** Core inflation excludes food, energy, alcohol and tobacco;

only for eight non-Japan Asian countries listed above. Theseare China, Hong Kong, India, Korea, Philippines, Singapore,Taiwan and Thailand.


Exhibit 30: Brazils CPI inflation Exhibit 31: Mexicos CPI inflationExhibit 32: Czech RepublicsCPI inflation

Annualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa)

-5

0

5

10

15

20


-10

0

10

20

30

40Headline CPI (left axis)Core CPI* (left axis)Food CPI (right axis)

-5

0

5

10

15

20


-10

0

10

20

30


-5

0

5

10

15

20


-10

0

10

20

30


*Index calculated by Credit Suisse: excludes food andbeverages, fuels and energy and fuels for personal transport.

Source: Haver Analytics, IBGE, Credit Suisse

*Index calculated by Credit Suisse: excludes food andbeverages, tobacco, electricity and fuels.

Source: Haver Analytics, Banxico, Credit Suisse

*Index calculated by Eurostat: excludes food, energy,alcohol and tobacco.

Source: Haver Analytics, Eurostat, Credit Suisse


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Exhibit 33: Hungarys CPI inflation Exhibit 34: Polands CPI inflation Exhibit 35: Russias CPI inflationAnnualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa)

-10

-5

0

5

10

15

20


-20

-10

0

10

20

30


-5

0

5

10

15


-10

0

10

20


-5

0

5

10

15

20

25


-10

0

10

20

30

40


*Index calculated by Eurostat: excludes food, energy,alcohol and tobacco.


*Index calculated by Eurostat: excludes food, energy, alcoholand tobacco.


*Index calculated by Credit Suisse: excludes food, alcohol,tobacco, gasoline and utilities.

Source: Haver Analytics, Credit Suisse

Exhibit 36: South AfricasCPI inflation Exhibit 37: Turkeys CPI inflation Exhibit 38: Israels CPI inflationAnnualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa)

-5

0

5

10

15

20

Jan-08 May-09 Sep-10 Jan-12

-10

0

10

20

30


-10

-5

0

5

10

15

20

25


-20

-10

0

10

20

30

40

50Headline CPI (left axis)Core CPI* (left axis)*Food CPI (right axis)

-10

-5

0

5

10

15

Jan-08 May-09 Sep-10 Jan-12

-20

-10

0

10

20

30Headline CPI (left axis)Core CPI* (left axis)*Food CPI (right axis)

*Index calculated by Credit Suisse: excludes food and non-alcoholic beverages, electricity and other fuels, petrol,alcohol and tobacco.

Source: Haver Analytics, Statistics South Africa, CreditSuisse

*Index excluding food, energy, alcohol, tobacco and gold.

Source: Haver Analytics, Turkstat, Credit Suisse

*Index as calculated by Credit Suisse: excludes food,energy, alcohol and tobacco.

Source: Haver Analytics, Central Bureau of Statistics,Credit Suisse

Exhibit 39: Chinas CPI inflation Exhibit 40: Indias WPI inflation Exhibit 41: Koreas CPI inflationAnnualized % 3-month change in the WPI (sa) Annualized % 3-month change in the CPI (sa) Annualized % 3-month change in the CPI (sa)

-6

0

6

12

18


-12

0

12

24


-10

0

10

20

30


-15

-5

5

15

25

35

45Headline WPI (left axis)Core WPI* (left axis)Mfg ex-food WPI** (left axis)Food WPI (right axis)

-6

0

6

12

18


-12

0

12

24


*Index as calculated by Credit Suisse: excludes food andenergy.

Source: Haver Analytics, National Bureau of Statistics,Credit Suisse

*Index calculated by Credit Suisse: based on the WPIexcluding primary food articles, manufactured food products,fuel and power, beverages and tobacco.**Index calculated by Credit Suisse: based on the mfg WPIexcluding manufactured food products.


*Index calculated by Credit Suisse: excludes food and non-alcoholic beverages, alcohol and tobacco, electricity, gasand other fuels and fuels for transport equipment.

Source: Haver Analytics, National Statistical Office, CreditSuisse


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Exhibit 42: Emerging markets headline inflation

% year-on-year change in the CPI indices (WPI for India).

Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Dec 11 Jan 11 Feb 11

Latin America* 5.7 6.6 7.2 7.1 7.8 7.9 7.9 8.6 8.6 8.7 8.4 8.3

Argentina** 16.1 19.4 21.4 23.0 23.7 21.8 21.4 21.620.9 21.2 20.7 21.4

Brazil 4.2 4.9 5.1 4.6 5.6 6.1 6.6 7.1 6.7 6.5 6.2 5.8

Chile -1.9 -0.3 1.2 2.2 2.5 2.9 3.3 3.1 4.0 4.4 4.2 4.4

Colombia 2.4 2.0 2.1 2.3 2.7 3.3 3.0 3.5 3.9 3.7 3.6 3.6

Mexico 4.0 4.8 4.0 3.7 4.2 3.5 3.3 3.4 3.5 3.8 4.0 3.9

Panama 1.3 2.9 2.9 3.7 4.4 5.1 6.4 5.6 6.4 6.3 6.1 6.4

Peru 0.4 0.7 1.1 2.2 2.1 2.4 3.1 3.5 4.5 4.7 4.2 4.2

Venezuela 26.0 25.1 31.0 29.3 27.2 28.2 23.1 25.8 27.4 27.6 26.0 25.3

EMEA* 7.2 7.1 6.2 6.1 6.8 6.9 7.4 6.6 6.6 6.6 5.9 5.8

Czech Republic 0.4 0.7 1.2 1.9 2.1 1.7 1.8 1.8 2.4 2.4 3.5 3.7

Egypt 13.1 12.8 10.3 10.7 10.6 11.3 11.9 9.0 8.5 9.5 8.6 9.2

Hungary 5.2 6.0 5.3 3.8 4.3 4.2 4.0 3.4 4.1 4.1 5.5 5.9Israel 3.6 3.5 2.9 2.0 2.4 4.0 4.1 3.2 2.5 2.2 2.0 na

Kazakhstan 6.0 7.3 7.0 6.6 7.5 8.5 8.3 8.9 7.8 7.4 5.9 4.7

Nigeria 12.7 14.9 14.0 13.4 12.6 12.0 11.3 9.7 10.5 10.3 12.6 na

Poland 3.3 3.0 2.3 2.2 2.9 3.8 4.6 4.1 4.6 4.6 4.1 4.3

Romania 4.6 4.6 4.4 7.5 7.9 7.6 8.2 4.2 3.4 3.1 2.7 2.6

Russia 9.2 7.2 5.9 6.2 8.1 9.5 9.5 8.1 6.7 6.1 4.2 3.7

South Africa 6.0 5.7 4.5 3.5 3.5 3.8 4.6 5.4 6.1 6.1 6.3 na

Turkey 5.7 9.3 9.2 8.4 7.4 4.3 5.9 6.4 9.2 10.4 10.6 10.4

Ukraine 13.3 11.2 8.3 8.5 9.5 7.7 10.8 8.4 5.0 4.6 3.7 3.0

EM Asia* 1.4 3.4 4.0 4.2 5.0 5.6 6.1 6.4 5.3 4.7 4.7 3.9

EM Asia ex- China and India* 1.6 3.0 3.1 3.4 3.8 4.4 4.7 4.8 4.4 4.3 4.1 3.6

China 0.7 2.2 2.9 3.5 4.7 5.1 5.7 6.3 4.6 4.1 4.5 3.2

Hong Kong 1.6 2.1 2.8 1.6 2.7 3.8 5.2 6.4 5.7 5.7 6.1 na

India 4.5 9.6 10.5 9.3 8.9 9.6 9.6 9.7 8.9 7.5 6.6 7.0

Indonesia 2.6 3.7 4.4 6.2 6.3 6.8 5.9 4.7 4.1 3.8 3.7 3.6

Korea 2.4 3.0 2.6 2.9 3.2 3.8 4.0 4.3 4.0 4.2 3.4 3.1

Malaysia -0.2 1.4 1.7 1.9 2.0 2.8 3.3 3.4 3.2 3.0 2.7 na

Philippines 2.9 4.3 4.3 4.2 3.6 4.5 5.0 4.9 4.7 4.2 4.0 2.7

Singapore -0.8 0.9 3.1 3.4 4.0 5.2 4.7 5.5 5.5 5.5 4.8 na

Taiwan -1.3 1.3 1.1 0.4 1.1 1.3 1.6 1.3 1.4 2.0 2.4 0.3

Thailand 1.9 3.7 3.2 3.3 2.9 3.0 4.1 4.1 4.0 3.5 3.4 3.3

Vietnam 5.2 9.5 9.9 9.4 11.2 12.8 19.4 22.5 19.8 18.1 17.3 16.4

EM* 3.6 4.9 5.2 5.3 6.0 6.4 6.8 7.0 6.3 6.0 5.9 5.4

EM ex- China and India* 5.1 5.8 5.7 5.7 6.3 6.6 6.9 6.8 6.7 6.7 6.3 6.1

*The regional aggregates are calculated by weighting each countrys inflation data by 2010 nominal GDP.**For Argentina we use unofficial headline CPI data supplied by Haver Analytics.



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Exhibit 43: Emerging markets core inflation% year-on-year change in the CPI indices (WPI for India) excluding food, energy, alcohol and tobacco.

Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 20101 Dec 11 Jan 12 Feb 12

Latin America* 5.3 5.6 5.7 5.9 5.8 6.0 5.9 6.3 6.7 6.7 6.3 6.0

Brazil 4.6 4.8 4.7 5.0 4.9 5.4 5.6 6.1 6.4 6.4 5.9 5.5

Chile -1.3 -1.3 -0.2 1.6 2.0 2.2 2.4 2.1 2.9 3.3 3.2 3.5

Mexico 3.9 4.3 4.1 3.9 3.8 3.0 2.3 2.2 2.3 2.4 2.4 2.3

Peru 0.7 0.9 0.9 1.1 1.3 1.9 2.1 2.5 2.7 2.7 2.4 2.4

Venezuela 27.6 27.0 27.8 26.3 24.8 25.4 23.6 24.7 25.3 25.4 24.2 22.9

EMEA* 6.4 4.7 3.9 3.4 3.1 3.5 4.0 4.5 5.0 5.1 5.3 5.1

Czech Republic 0.3 -0.2 0.0 0.1 0.0 -0.3 -0.3 -0.2 0.3 0.5 1.5 1.8

Hungary 5.2 5.0 4.0 1.6 1.5 1.4 1.7 1.7 2.2 2.2 3.5 3.9

Israel 4.1 3.5 3.2 2.3 2.1 3.3 3.2 2.9 2.6 2.2 1.9 na

Kazakhstan 9.8 9.1 7.7 6.8 6.5 6.2 5.7 5.9 5.1 5.5 5.0 3.8Poland 2.7 2.2 1.2 0.9 0.9 1.3 1.9 2.1 2.8 3.2 2.8 2.8

Romania 5.4 2.6 3.0 4.8 4.7 4.6 3.7 2.5 2.6 2.8 2.9 2.9

Russia 10.1 6.2 4.5 4.1 4.1 4.6 5.2 5.8 5.9 5.9 6.1 5.9

South Africa 6.2 5.0 3.8 3.0 3.0 2.7 3.1 3.6 3.6 3.7 4.2 na

Turkey** 4.0 4.4 5.3 4.1 2.7 3.6 4.8 6.2 8.0 8.1 8.4 8.1

EM Asia* 0.1 1.3 2.0 2.1 2.6 3.4 3.5 3.6 3.0 2.7 2.6 2.2

EM Asia ex- China and India* 1.0 1.2 1.5 1.7 1.9 2.2 2.5 2.8 2.7 2.7 2.7 2.3

China*** -0.6 0.3 0.9 1.1 1.5 2.2 2.4 2.4 1.9 1.6 1.6 1.4

Hong Kong 1.0 0.2 0.9 -0.6 1.7 3.0 4.1 6.8 5.6 5.7 6.1 na

India 1.8 5.3 7.2 6.9 8.2 9.4 8.9 8.7 7.4 6.6 5.8 5.0

Indonesia**** 4.4 4.0 3.8 4.1 4.3 4.3 4.6 4.9 4.4 4.3 4.3 4.3

Korea 2.3 2.3 1.9 1.9 1.7 2.2 2.7 2.7 2.8 2.9 2.6 2.5

Philippines*** 2.8 3.5 3.9 4.0 3.4 3.5 3.6 3.5 3.7 3.4 3.4 na

Singapore 0.3 0.5 2.4 3.3 4.7 5.9 4.9 5.8 5.5 5.6 4.6 na

Taiwan -1.2 -0.3 0.0 0.5 0.6 0.6 0.8 0.7 0.7 0.5 1.6 -0.8

Thailand -0.9 -0.3 0.7 1.1 1.0 0.8 0.5 0.5 0.5 0.5 0.5 0.4

EM* 2.6 2.9 3.2 3.2 3.4 4.0 4.1 4.4 4.3 4.1 4.0 3.7

EM ex- China and India* 4.7 4.2 4.0 3.9 3.8 4.1 4.4 4.8 5.1 5.2 5.1 4.8

*The regional aggregates are calculated by weighting each countrys inflation data by 2010 nominal GDP.**Official core excluding energy, food, beverages, tobacco and gold.***Core inflation measured by CPI exc. food and energy.****Official core inflation measured by CPI exc. food (volatile good) and energy, fuel, transportation and water supply (administered commodities).

Source: Haver Analytics, National authorities, Credit Suisse


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EM currencies: responding to a pickup in global risk appetiteMost EM currencies weakened against the dollar in the second half of last year during thebouts of global stock market weakness. But most have recovered strongly so far this year.

Generalized additional strengthening of the EM currencies against the dollar will probablyrequire continued softening of global market concerns about the fate of the euro zone andcomfort that global oil prices do not rocket up from the current levels and hinder the

incipient global growth recovery. We think some further EM currency appreciation is likely.But it will be important for currency investors to think carefully about the choice of fundingcurrency for EM FX positions given the risk that the dollar will continue to strengthenagainst the euro and the yen in response to the (relative) buoyancy of US growth data.

The latest results from our currency valuation model are shown below in Exhibit 44. Themodel doesnt necessarily work well as a short-term trading guide, but it takes into accounteach countrys long-term relationship between the real effective exchange rate and thefollowing variables: productivity growth, terms of trade changes and real interest ratelevels (see Valuation of emerging markets currencies, Credit Suisse, 14 January 20113).

The currencies that currently appear particularly cheap relative to the model estimates offair value are those of Ukraine, Poland, Kazakhstan, Chile, Peru and six countries innon-Japan Asia: India, Taiwan, China, Hong Kong, Korea and Malaysia.

The currencies that look expensive relative to the models fair value estimates are thoseof Colombia, Brazil and the Czech Republic.

Exhibit 44: Deviation of 12 March 2012 REERs from the fair-value estimates*Number of standard deviations

-3

-2

-1

0

1

2

3

Colombia

CzechRep.

Brazil

Singapore

Egypt

Philippines

Venezuela

Turkey

Argentina

Indonesia

Russia

Thailand

S.Africa

Israel

Romania

Mexico

S.Arabia

Hungary

Chile

Malaysia

Kazakhstan

Korea

HongKong

Taiwan

China

Peru

Poland

Ukraine

India

REER is more than one standard deviation stronger than the "fair value" REER

REER is within (+/-) one standard deviation of the "fair value" REER

REER is more than one standard deviation weaker than the "fair value" REER

* January 2012 REER was used for Israel and Peru. ** Argentinas REER for the period starting from January 2005 was estimated using unofficial inflation data supplied by Haver Analytics.

Source: Credit Suisse

A simpler and less adequate valuation model is one that focuses exclusively on the real(i.e., inflation-adjusted) effective (i.e., trade-weighted) exchange rate (REER). A possible

valuation guide from this model comes from a comparison of the current REER level with

the average REER level in the past five years. This comparison is shown in the fourth

column of Exhibit 45 below. At this stage only a short list of EM countries has currencies

in REER terms remain more than 3% cheap to the levels that prevailed in mid-2011,

includes Hungary, Brazil, Israel, Mexico, Poland, and India.

3 The model's estimated coefficients were recalibrated in June 2011 by incorporating 2010 data into the sample.

Signs of life in the EM

currencies in the early

months of 2012
http://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=868383151&source_id=em&serialid=iXsC4IH%2b7GFcH%2fLMGJs7U2uhJN9ipyNfiCwC%2bYrCvHk%3dhttp://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=868383151&source_id=em&serialid=iXsC4IH%2b7GFcH%2fLMGJs7U2uhJN9ipyNfiCwC%2bYrCvHk%3d


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14 March 2012


Exhibit 45: Percentage change in the real effective exchange rate*

Real effective exchange rate appreciation is represented in this table by a positive percentage change

12 March 2012

% chg 12 Mar2012 over 13

Feb 2012

% chg 12 Mar2012 over 14

Mar 2011

% chg 12 Mar2012 over 1yr

average


average


average


average1 month chg 1 year chg

Argentina** 0.5 10.7 -21.6 -10.4 -14.4 -35.9

Brazil -5.0 -4.9 -1.9 13.1 34.7 25.9

Chile 0.2 1.6 2.9 6.2 11.1 9.0

China 0.4 5.9 6.3 12.4 16.2 23.1

Colombia 1.3 8.6 5.1 19.7 32.1 30.8

Czech Republic 1.4 -1.7 0.3 5.5 15.9 38.7

Egypt 0.8 6.7 1.8 20.1 25.1 34.7

Hong Kong 0.8 0.7 -1.8 -6.3 -14.9 -21.4

Hungary -1.1 -7.5 -5.6 -5.4 -1.6 11.8

India -1.0 -5.0 -5.1 6.5 10.6 15.9

Indonesia -0.2 -1.9 -1.8 5.5 14.3 11.2

Kazakhstan 0.4 5.8 4.2 5.8 12.3 32.0

Korea 0.8 1.2 0.5 -9.8 -9.7 -11.8

Malaysia 1.0 0.5 0.9 3.4 3.1 -3.2

Mexico 0.6 -4.2 0.2 -1.1 -5.5 -1.6

Nigeria 1.5 3.7 4.6 10.5 23.3 35.1

Philippines 0.6 3.0 3.1 6.4 16.7 13.3

Poland 1.5 -2.0 -2.2 -3.5 -1.4 9.8

Romania 0.0 -4.1 -1.2 -6.1 2.0 18.5

Russia 1.8 2.4 7.0 15.0 29.8 66.6

Saudi Arabia 1.4 5.5 1.8 6.4 1.8 -2.7

Singapore 0.4 3.0 6.7 12.4 14.1 11.0

South Africa 2.8 -5.3 -2.5 7.2 5.8 -5.0

Taiwan 1.1 -1.4 -0.2 -3.4 -8.8 -18.2

Thailand 1.8 0.0 -0.2 1.6 9.5 5.0

Turkey -1.2 -3.0 -10.7 -5.7 4.0 17.6

Ukraine 0.8 5.3 0.3 -3.9 -3.7 6.3

United Kingdom -0.2 1.6 2.1 -8.0 -13.6 -14.6

United States 0.6 1.7 -3.3 -6.7 -12.9 -12.0

Euro 0.0 -3.6 -3.0 -7.8 -6.0 -8.8

Japan -5.4 -3.4 -3.5 5.0 -1.4 -10.2

*Inflation-adjusted, trade-weighted exchange rate; figures in bold are more than one standard deviation from the average REER change acrossthe included countries** Argentinas REER for the period starting from January 2005 was estimated using unofficial inflation data supplied by Haver Analytics



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Exhibit 46: Argentinas REER* Exhibit 47: Brazils REER* Exhibit 48: Chiles REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

70

90

110

130

150

170

190

210

Feb-97 Feb-02 Feb-07 Feb-12

70

90

110

130

150

170

190

210

40

50

60

70

80

90

100

110

12Mar97 12Mar02 12Mar07 12Mar12

40

50

60

70

80

90

100

110

90

100

110

120

130

140

12Mar97 12Mar02 12Mar07 12Mar12

90

100

110

120

130

140

* Argentinas REER for the period starting from January 2005was estimated using unofficial inflation data supplied by HaverAnalytics


*Inflation-adjusted, trade-weighted data




Exhibit 49: Chinas REER* Exhibit 50: Colombias REER* Exhibit 51: Czech REER*

1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

80

85

90

95

100

105

110

12Mar97 12Mar02 12Mar07 12Mar12

80

85

90

95

100

105

110

85

95

105

115

125

135

145

12Mar97 12Mar02 12Mar07 12Mar12

85

95

105

115

125

135

145

100

115

130

145

160

175

190

12Mar97 12Mar02 12Mar07 12Mar12

100

115

130

145

160

175

190







Exhibit 52: Egypts REER* Exhibit 53: Hong Kongs REER* Exhibit 54: Hungarys REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

7080

90

100

110

120

130

140

150

12Mar97 12Mar02 12Mar07 12Mar12

7080

90

100

110

120

130

140

150

90

100

110

120

130

140

150

160

12Mar97 12Mar02 12Mar07 12Mar12

90

100

110

120

130

140

150

160

110

125

140

155

170

185

200

12Mar97 12Mar02 12Mar07 12Mar12

110

125

140

155

170

185

200








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14 March 2012


Exhibit 55: Indias REER* Exhibit 56: Indonesias REER* Exhibit 57: Kazakhstans REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

60

70

80

90

100

12Mar97 12Mar02 12Mar07 12Mar12

60

70

80

90

100

20

35

50

65

80

95

110

12Mar97 12Mar02 12Mar07 12Mar12

20

35

50

65

80

95

110

130

152

174

196

218

240

12Mar97 12Mar02 12Mar07 12Mar12

130

152

174

196

218

240







Exhibit 58: Koreas REER* Exhibit 59: Malaysias REER* Exhibit 60: Mexicos REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

50

60

70

80

90

100

110

12Mar97 12Mar02 12Mar07 12Mar12

50

60

70

80

90

100

110

65

75

85

95

105

12Mar97 12Mar02 12Mar07 12Mar12

65

75

85

95

105

85

100

115

130

145

12Mar97 12Mar02 12Mar07 12Mar12

85

100

115

130

145







Exhibit 61: Nigerias REER* Exhibit 62: Philippines REER* Exhibit 63: Polands REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

50

70

90

110

130

12Mar97 12Mar02 12Mar07 12Mar1250

70

90

110

130

85

95

105

115

125

135

12Mar97 12Mar02 12Mar07 12Mar1285

95

105

115

125

135

190

212

234

256

278

300

12Mar97 12Mar02 12Mar07 12Mar12190

212

234

256

278

300








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14 March 2012


Exhibit 64: Romanias REER* Exhibit 65: Russias REER* Exhibit 66: Saudi Arabias REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

50

70

90

110

130

12Mar97 12Mar02 12Mar07 12Mar12

50

70

90

110

130

80

100

120

140

160

180

200

220

12Mar97 12Mar02 12Mar07 12Mar12

80

100

120

140

160

180

200

220

75

80

85

90

95

100

105

110

12Mar97 12Mar02 12Mar07 12Mar12

75

80

85

90

95

100

105

110







Exhibit 67: Singapores REER* Exhibit 68: South Africas REER* Exhibit 69: Taiwans REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

96

100

104

108

112

116

120

12Mar97 12Mar02 12Mar07 12Mar12

96

100

104

108

112

116

120

50

60

70

80

90

100

110

12Mar97 12Mar02 12Mar07 12Mar12

50

60

70

80

90

100

110

64

68

72

76

80

84

88

92

12Mar97 12Mar02 12Mar07 12Mar12

64

68

72

76

80

84

88

92







Exhibit 70: Thailands REER* Exhibit 71: Turkeys REER* Exhibit 72: Ukraines REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

60

70

80

90

100

110

120

12Mar97 12Mar02 12Mar07 12Mar1260

70

80

90

100

110

120

80

97

114

131

148

165

12Mar97 12Mar02 12Mar07 12Mar1280

97

114

131

148

165

90

112

134

156

178

200

12Mar97 12Mar02 12Mar07 12Mar1290

112

134

156

178

200








20/210

14 March 2012


Exhibit 73: United Kingdoms REER* Exhibit 74: United States REER* Exhibit 75: Euro zones REER*1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation 1990=100; an up-move indicates real appreciation

70

75

80

85

9095

100

105

110

12Mar97 12Mar02 12Mar07 12Mar12

70

75

80

85

9095

100

105

110

85

90

95

100

105

110

115

120

12Mar97 12Mar02 12Mar07 12Mar12

85

90

95

100

105

110

115

120

68

72

76

80

84

88

92

96

12Mar97 12Mar02 12Mar07 12Mar12

68

72

76

80

84

88

92

96







Exhibit 76: Japans REER*1990=100; an up-move indicates real appreciation

78

88

98

108

118

128

138

12Mar97 12Mar02 12Mar07 12Mar12

78

88

98

108

118

128

138




21/210

14 March 2012


Latin America


22/210

14 March 2012


Argentina: More interventionism, less growth The governments interventionism in the economy has increased significantly

over the past quarter. Three months ago, when President Cristina Kirchner was sworn

in for a new term, she signaled a moderation in policy, referring to a fine-tuning of the

model. We still think that her government is committed to some of the initiatives that it

announced late last year, such as the reduction of the fiscal deficit (by lowering the

subsidy bill) and the moderation of wage inflation. However, the government is also

implementing a number of less desirable measures, in our view, aimed at fostering

domestic production and investment: import controls, quasi-restrictions on the payment

of dividends by corporations and banks, and rhetorical attacks and political pressure

against the repatriation of profits by foreign-owned companies.

We think that the governments efforts to influence domestic economic activity

may backfire and, thus, we are now less optimistic about the growth outlook.

Unsurprisingly, some of the recent measures are already having negative

consequences. For example, there is anecdotal evidence of shortages of and/or higher

prices for a number of consumer products (which may also be dampening consumer

sentiment) and for intermediate and capital goods imports (which are disrupting the

chain of production). Business sentiment likely weakened in the past few weeks on

persistent speculation about a takeover by the federal government of one of the foreign-owned oil companies operating in Argentina. Regional political allies of the Kirchner

government are also putting pressure on foreign companies to invest more, particularly

in the oil and gas sector. The government seems to think that its measures and political

pressure will result in higher investment by the private sector. However, we see the risk

of the opposite: that all these maneuvers will discourage the large investments that

Argentina needs to sustain high GDP growth rates over the medium term.

We still expect the national accounts to show real GDP growth of 5% in 2012, but

the actual expansion of the economy is likely to be lower. Three months ago, we

thought that true real GDP growth would be in line with the official reading, and we saw

upside risk to our growth projection. We now think that true real GDP growth in 2012

will be 3%, or at most 4%. We are more pessimistic about the growth outlook not only

because of the growing interventionism but also because this years cereal and grainsharvest will be smaller than expected (because of the late 2011/early 2012 drought) and

economic activity in Brazil (Argentinas main trading partner) will be weaker. However,

we do not expect true GDP growth below 3% because fiscal and, particularly, monetary

policy remains expansionary and could be loosened further if needed to stimulate

economic activity. In our base case scenario for GDP growth in 2012 as reported in the

national accounts, we see consumer spending rising 6% and gross fixed investment

expanding 8% (down from 11% and 17%, respectively, in 2011).

The issues with the Argentine macro data will likely remain unresolved for the

foreseeable future. We do not expect the government to deal, in a meaningful way,

with the underreporting of inflation because of the high political, financial and legal costs

that might arise from formally acknowledging that inflation is much higher than is

officially reported. Similarly, we do not think the government will acknowledge asignificant slowdown of GDP growth in 2012, even if that could save it from making the

payment on the GDP warrant in 2013. In a context where other economies in the region

are growing at a relatively decent pace, despite the slowdown in the developed

economies, we do not think the Kirchner government would be willing to pay the political

price of admitting that, on her watch, Argentina underperformed the region, while the

financial benefit of this admission would not materialize until December 2013.

Carola Sandy

+1 212 325 2471

[email protected]


23/210

14 March 2012


We still think the government wants to see a moderation of consumer and wageinflation in the months ahead. Last year, we thought that the government would resortto tighter fiscal and monetary policy to drive CPI inflation (as measured by the privatesector) down to 15%-20% from the current level of about 20%-25%. However, monetarypolicy is now as loose as it was in mid-2011, as nominal interest rates have fallen againwhile inflation has remained stable. Given the proposed changes to the central bankscharter, which should receive full congressional approval by early April, monetary policy

may play an ever larger role in the economy and, thus, we do not envision tightermonetary conditions in the foreseeable future. Tighter fiscal policy and the governmentsefforts to cap wage increases at about 20% in the upcoming wage negotiations, alongwith the expected slowdown in domestic demand, may help prevent inflation from risingfurther but, at this point, we no longer expect it to decline.

We still expect the federal government to post a primary fiscal surplus of about2% of GDP in 2012, consistent with a nearly balanced budget. In 2011, the federalgovernment posted a 1.7% of GDP overall fiscal deficit as the electoral processpressured primary spending. We think that the government wants to maintain the so-called pillars of its model large fiscal and trade surpluses, the accumulation ofinternational reserves and a relatively weak real exchange rate and, thus, it iscommitted to posting a primary surplus in line with the 2.5% of GDP assumption of the2012 budget bill. The bulk of the fiscal adjustment in 2012 should come from a reductionof the subsidy bill, which exceeded 5% of GDP last year.

The restrictions on imports will probably be only partially effective in preventing asharp deterioration of the trade surplus. We project that the merchandise tradesurplus, on an FOB/FOB basis, will fall to $10bn in 2012 from about $13.7bn in 2011 (onan FOB/CIF basis, this would be equivalent to $6bn in 2012, down from $10bn in 2011).Our projection assumes that agricultural commodity prices remain flat in 2012 whilevolumes fall 5%. We think that industrial exports will continue to grow, albeit at a moremodest pace, and expect that the dollar value of exports in 2012 will be flat relative to2011. Due to the restrictions in place and the expected slowdown in domestic activity,import growth should slow to about 6% in dollar terms in 2012, down from 31% in 2011.We project a worsening of the current account to a deficit of 0.2% of GDP in 2012 froman estimated 0.4% of GDP surplus in 2011.

In the coming months, the government may seek to normalize relations withofficial and some private creditors. We still think that the government will seek aresolution of the countrys debt arrears with the Paris Club. We expect that thegovernment and its bilateral creditors will manage to narrow the gap between therescheduling terms proposed by Argentina and the Paris Club (the debt in arrearsamounts to about $9bn) and think there is a good chance that an accord will beannounced later this year, which may unlock bilateral financing. We also think thegovernment may try to settle the awards granted by the ICSID, as the non-payment ofthese claims could result in the US suspending trade benefits for Argentina under theGeneralized System of Preferences program. We do not expect the government to tapthe external bond markets in 2012 or to negotiate with holdout bondholders.

The government will likely maintain its FX policy of allowing only a gradual

nominal depreciation. We believe it will continue to use the nominal exchange rate asa nominal anchor of inflation, even if it is not an very effective one. We think thegovernment believes that a sharp depreciation of the peso in nominal terms wouldtranslate into higher inflation, a drop in domestic sentiment and capital flight. As long asthe Brazilian Real does not weaken sharply, the government is probably not tooconcerned about the erosion of competitiveness and growth. We expect the nominalexchange rate to end 2012 at 4.55 pesos per dollar. With the central banks FX reservesbeing used to service a large share of the debt, and as there may no longer be theabundance of dollars in the economy that was generated by the large current accountsurpluses of previous years, we expect the central banks gross stock of FX reserves toremain stable over the next two years, relative to its end-2011 level of $46.5bn.


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14 March 2012


Exhibit 77: Agricultural production Exhibit 78: Industrial productionMillions of tons; projections as of 9 March 2012 1993 = 100, seasonally adjusted

-10

10

30

50

70

90

110

99/00

00/01

01/02

02/03

03/04

04/05

05/06

06/07

07/08

08/09

09/10

10/11E

11/12F

OtherSun-flower s eedWheatCornSoy

80

90

100

110

120

130

140

150

160

170

Jan-94 Jan-00 Jan-06 Jan-12

The 2011/2012 harvest will

likely be about 5% smaller

than the previous years and,

thus, the agricultural sector

will no longer be one of the

drivers of growth.

In our view, whether industrialproduction stabilizes at current

levels or declines hinges not

only on the outlook for global

growth and domestic demand,

but also on whether the

government eases some of

the restrictions that are

creating distortions in the

economy. Source: USDA, Credit Suisse Source: Fiel, Credit Suisse

Exhibit 79: Consumer confidence

Exhibit 80: Bank lending to the private

sectorIncrease = more optimism % change yoy in nominal terms, 20-day moving average

20

30

40

50

60

Jun-01 Feb-04 Oct-06 Jun-09 Feb-12

-5

5

15

25

35

45

55

65

75

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Consumer loansCollateralized consumer loans *Commercial loans

Consumer confidence

remains relatively high,which bodes well for the

near-term outlook for

consumer spending. Real

interest rates are again very

negative, which keeps

consumer loans growing at

a fast pace.

Meanwhile, despite the

governments efforts to

encourage bank lending for

productive activities, the

growth of commercial loanshas collapsed in recent

weeks.Source: Universidad Torcuato Di Tella, Credit Suisse *Includes mortgage loans

Source: Central bank, Credit Suisse

Exhibit 81: Real GDP growthExhibit 82: Federal government fiscalbalance

Contributions to real GDP growth in percentage points % of GDP

-3

0

3

6

9

12

03 04 05 06 07 08 09 10 11F 12F

InvestmentPrivate cons umptionGovernment spendingNet exportsGDP growth

-1.5

-0.5

0.5

1.5

2.5

3.5

04 05 06 07 08 09 10 11 12F

Primary fiscal balance

Overall fiscal balance

Domestic demand should

continue growing in 2012,

but its expansion will likely

be lower than the level

reported in the official

statistics.We expect that the bulk of

this years projected fiscal

adjustment will come from a

reduction in the subsidy bill,

which exceeded 5% of GDP

in 2011.

Source: INDEC, Credit Suisse Source: Ministry of Finance, Credit Suisse


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14 March 2012


Exhibit 83: Consumer and wageinflation

Exhibit 84: Nominal exchange rate andcentral bank intervention in the FX market

% change year on year

0

5

10

15

20

25

30

Feb-07 May-08 Aug-09 Nov-10 Feb-12

Privately estimated CPIinflation

Consumers' expectations for12 month inflation

Wage inflation*

-4

-3

-2

-1

0

1

2

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

Central bank's monthly net FX

purchases ($bn, left axis)*

Nomina l exchange rate (ARS

per USD, right axis)

We no longer expect

inflation, as measured by

private sources, to decline

from its current 20%-25%

range in the foreseeable

future.

We expect the government

to continue with its policy of

allowing only a gradual

depreciation of the peso in

nominal terms. For the past

several weeks, the central

bank has again been a net

buyer of dollars in the FX

market.

*Average of private and public sector wages.Source: Universidad Torcuato Di Tella, Credit Suisse

Source: Central bank, Credit Suisse

Exhibit 85: REER Exhibit 86: Export and import growthIncrease = appreciation % change year on year

60

80

100

120

140

160

180

200

220

Oct-01 May-04 Dec-06 Jul-09 Feb-12

REER using the official

inflation data

REER using privately

estimated inflation

data

-40

-20

0

20

40

Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2012

Export volume

Export prices

Import value

Export and import growth

are likely to fall significantly

in 2012. The former on the

back of a smaller harvest,

stable prices for cereals and

grains, and a less

competitive exchange rate,

and the latter due to the

broad import restrictions

that the government has put

in place.

Source: Credit Suisse Source: INDEC, Credit Suisse

Exhibit 87: Foreign exchange cash flowsExhibit 88: Central banks stock ofinternational reserves

$ bn $ bn, as of 29 February 2012

-16

-12

-8

-4

0

4

8

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

Current accountNet FDIIFI loans ex. IMFFinancial sector and otherPublic s ector ex. IFI loansNon-financial private sector

25

30

35

40

45

50

55

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

GrossNet of

borrowing from

bilateral lenders

Net of borrow ing from bilateral lenders,

net of r eserve req. on USD deposits

Capital flight slowed in Q4

2011 and, based on

preliminary data, it has

declined further in the year

to date. However, domestic

sentiment regarding the

peso remains fragile.

Source: Central bank, Credit Suisse Source: Central bank, Credit Suisse


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14 March 2012


Argentina: Selected economic indicators

2005 2006 2007 2008 2009 2010 2011E 2012F 2013F

National accounts, population and unemployment

Real GDP growth (%) 9.2 8.5 8.7 6.8 0.9 9.2 9.1 5.0 4.5

Growth in real private consumption (%) 8.9 7.8 9.0 6.5 0.5 9.0 11.0 6.0 4.8

Growth in real fixed investment (%) 22.7 18.2 13.6 9.1 -10.2 21.2 17.4 8.0 8.0

Fixed investment (% of GDP) 19.8 21.6 22.6 23.1 20.6 22.8 24.6 25.3 26.1

Nominal GDP ($bn) 181.8 212.5 260.8 326.5 307.1 368.7 436.5 472.4 512.8

Population (mn) 38.6 39.0 39.4 39.7 40.1 40.5 40.9 41.3 41.7

GDP per capita ($) 4,711 5,452 6,626 8,216 7,653 9,100 10,673 11,438 12,297

Unemployment (% of labor force, end-year) (1) 10.1 8.7 7.5 7.3 8.4 7.3 6.7 6.5 6.5

Prices, interest rates and exchange rates

CPI inflation (%, December to December) 12.3 9.9 8.5 7.2 7.7 10.9 9.5 9.1 9.0

CPI inflation (%, average) 9.6 10.9 8.8 8.6 6.3 10.4 9.8 9.3 9.1

Exchange rate (ARS per USD, end-year) 3.03 3.06 3.15 3.45 3.78 3.98 4.30 4.55 4.80

Exchange rate (ARS per USD, average) 2.93 3.08 3.12 3.16 3.73 3.91 4.13 4.45 4.71

REER (% change, December to December) (2) 4.6 0.0 -9.0 6.8 -15.9 -3.6 2.2 0.5 0.0

Nominal wage growth (% year-on-year change, average) (3) 20.3 18.9 22.7 22.4 16.7 26.3 29.5 24.0 20.0

Central bank's 7 day repo rate (%, end-year) 6.00 8.30 10.30 13.00 11.50 11.50 11.50 11.50 11.50

Fiscal data

General government fiscal balance (% of GDP) 2.1 1.9 1.1 0.8 -1.6 0.4 -2.1 -0.6 -1.1General government primary fiscal balance (% of GDP) 4.4 4.0 3.4 2.8 0.8 2.2 0.2 1.8 1.6

General government expenditure (% of GDP) 27.0 27.9 31.4 32.8 36.6 37.7 40.8 40.5 41.0

Federal government primary fiscal balance (% of GDP) 3.7 3.5 3.2 3.2 1.5 1.7 0.3 2.0 1.8

Federal government fiscal balance (% of GDP) 1.8 1.8 1.1 1.4 -0.6 0.2 -1.7 -0.1 -0.6

Gross general government debt (% of GDP, end-year)(4) 88.5 81.6 71.1 57.4 61.7 51.2 44.4 42.8 40.7

Net general government debt (% of GDP, end-year)(4)(5) 84.0 72.5 63.6 51.1 47.9 37.3 30.5 27.7 26.3

Money supply and credit

Broad money supply (M2, % of GDP) 20.2 19.5 18.4 17.7 18.3 19.5 20.3 21.3 22.2

Broad money supply (M2, % year-on-year change) 25.1 18.4 17.1 22.6 14.5 34.5 30.0 22.0 20.0

Domestic credit (% of GDP) 30.7 26.6 24.7 22.2 23.5 25.3 27.3 27.7 27.9

Domestic credit (% year on year) 7.8 6.8 15.3 14.1 17.3 35.7 35.0 18.0 16.0

Domestic credit to private sector (% of GDP) 11.7 13.0 14.5 13.7 13.5 14.6 17.2 17.7 18.1

Domestic credit to private sector (% year on year) 32.1 37.4 37.8 20.5 9.5 36.1 46.7 20.0 18.0

Balance of payments

Exports (goods and non-factor services, % of GDP) 25.9 25.7 25.4 25.2 21.7 22.0 22.6 21.2 20.7

Imports (goods and non-factor services, % of GDP) 19.2 19.3 20.5 20.8 16.1 18.4 19.8 19.3 19.0

Exports (goods and non-factor services, % change in $ value) 18.0 16.1 21.6 23.9 -18.8 21.8 21.5 1.6 5.6

Imports (goods and non-factor services, % change in $ value) 25.0 17.7 29.9 27.4 -27.4 37.7 27.2 5.5 6.6

Net balance of factor income ($bn) (6) -7.3 -6.1 -5.9 -7.6 -9.0 -9.9 -10.1 -10.0 -10.3

Current account balance ($bn) 5.3 7.8 7.4 6.8 11.1 2.9 1.5 -0.8 -1.5

Current account (% of GDP) 2.9 3.7 2.8 2.1 3.6 0.8 0.4 -0.2 -0.3

Net FDI ($bn) 3.5 2.8 4.7 7.7 2.8 5.5 3.3 2.2 1.7

Scheduled debt amortization ($bn) (7) 4.7 2.4 2.5 2.3 1.7 1.7 1.6 1.7 1.6

Foreign debt and reserves

Foreign debt ($bn) (4) 127.7 124.4 139.5 150.6 146.2 140.6 142.9 142.3 140.7

Public ($bn) 79.3 76.6 85.7 90.1 91.6 79.6 81.9 81.3 79.7

Private ($bn) 48.4 47.8 53.8 60.5 54.6 61.0 61.0 61.0 61.0Foreign debt (% of GDP, end-year) 70.2 58.5 53.5 46.1 47.6 38.1 32.7 30.1 27.4

Foreign debt (% of exports of goods and services) 271.6 227.9 210.3 183.3 219.0 173.0 144.7 141.8 132.7

Central bank gross FX reserves ($bn) 28.1 32.0 46.2 46.4 48.0 52.2 46.4 47.0 47.5

Central bank net FX reserves ($bn) (8) 28.1 32.0 44.6 41.5 44.4 50.9 41.0 44.0 44.0

Central bank gross non-gold FX reserves ($bn) 27.2 30.9 44.7 44.9 46.1 49.7 43.2 43.7 44.2

(1) Starting in 2003, people participating in the Jefes de Hogar subsidy program are counted as employed; adjusting the data by Jefes de Hogar, the unemployment rate is 2-4 points higher.(2) Increase indicates appreciation. REER was estimated using the official inflation series. (3) Weighted average of wages in the formal and informal private sector, and the public sector. (4) Debt dataassumes that Paris Club debt is rescheduled in 2012. (5) Net of Brady guarantees (through 2003), the Bogar bond, government bonds held by Central Bank and by the social security agency (ANSES),and estimated government cash holdings. (6) For the 2002-2005 period, it includes notional interest paid on defaulted debt. (7) It includes only scheduled amortizations to multilaterals. (8) Net ofborrowing from the BIS and other bilateral lenders.

Source: INDEC, Central Bank, Ministry of Economy, Credit Suisse


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14 March 2012


Brazil: We expect additional Selic interest ratecuts of 125bps in Q2 2012 We expect real GDP growth of 2.5% in 2012 and 4.0% in 2013. Our forecasts are

lower than the median market expectations of 3.3% for 2012 and 4.2% for 2013. Ourprojection for 2012 assumes acceleration in economic activity from 0.3% qoq in

Q4 2011 to 0.8% qoq in Q1 2012 and 1.0% qoq in H2 2012. If our GDP growth forecastfor 1Q 2012 (which already assumes a significant downward bias) is correct, the marketconsensus forecast for growth in 2012 will be compatible with an average expansion of1.6% from Q2 2012 to Q4 2012. Such continuous growth was recorded in Brazil onlyfrom Q3 2006 to Q3 2008, in a scenario of very strong global growth and a significantexpansion in investments and industrial production.

Low industrial performance and investment expansion explains why growth willresume gradually in 2012. We believe 2012 GDP growth will be lower than the 4.5%average growth from 2004 to 2010. On the supply side, we expect industrial GDP toexpand 1.9% in 2012 versus the 3.8% average from 2004 to 2010. We are assumingthat industrial expansion will not be strong in 2012. We expect much of the growth indomestic demand to be met by imports expansion. While 55% of the rise in theconsumption of goods from 2003 to 2011 was met by local industry, imports accounted

for the total rise in consumption in 2011. Local inflation well above of that of Brazilstrading partners and the significant rise in the cost of labor in manufacturing explain thedeclining competitiveness of local industry. We expect investments to grow 5.3% in2012, higher than the 4.7% of 2011 but much less than the 9.2% average expansionfrom 2004 to 2010. Investments in machinery and equipment, which were responsiblefor an important part of the strong investment growth in the past several years, shouldcontribute much less to investment expansion in upcoming quarters.

We keep our expectation of a low unemployment rate in 2012 and 2013. Ourprojection of GDP growth of 2.5% in 2012 and 4.0% in 2013 is compatible with thedecline in the unemployment rate measured by the Monthly Employment Survey (PME),from 6.0% on average for 2011 to 5.8% in 2012 and 5.2% in 2013. We estimate that theGDP growth rate needed to keep unemployment stable has dropped from 3.3% in 2003to 2.0% in 2011. We project that growth in real wages will increase from 2.7% in 2011 to

3.2% in 2012 due to the continuation of low unemployment and the real increase in theminimum wage of 8.8% in 2012.

Most of the decline in annual IPCA inflation (benchmark used for inflationtargeting) at the beginning of the year resulted from lower food prices. We expectIPCA inflation to decline from 6.5% yoy in December 2011 to 5.3% in April. A highcomparison base (inflation of 0.80% on average from January to April 2011), lowercommodity price inflation, and a few non-recurring factors (e.g., municipal elections andthe change in the weighting structure of the IPCA index) have led to lower CPI inflation.We expect IPCA inflation to decline to 5.0% by the end of 2012 as a result of thefavorable prospects for non-services inflation (composed of inflation in food at home,industrial goods, and administered prices) and a decline in services inflation (due tolower inflation in prices linked to past inflation). The main risks to our forecast come fromthe dynamics of commodity prices (and their direct impact on food prices) and fromservices inflation, which is quite persistent and reached almost 10% yoy in 2011.

Despite the favorable outlook for consumer inflation in the short term, medianmarket expectations for IPCA inflation in the next few years increased sharply inQ1 2012. Most market participants believe IPCA inflation will not converge to the centerof the target range in the coming years. Median market expectations for IPCA inflation in2013 increased from 5.0% in December 2011 to 5.5% in March, while the marketforecast for 2014 and 2015 rose from 4.6% to 5.00% and from 4.5% to 4.8%,respectively. This jump in inflation forecasts (e.g., breakeven inflation and MarketReadout) makes it more difficult for IPCA inflation to converge to the center of the targetrange in the next few quarters.

Nilson Teixeira

+55 11 3841 6288

[email protected]

Iana Ferrao+55 11 3841 6345

[email protected]

Leonardo Fonseca

+55 11 3841 6348

[email protected]

Daniel Lavarda

+55 11 3841 6352

[email protected]

Tales Rabelo

+55 11 3841 6353

[email protected]


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14 March 2012


We expect the current easing cycle to total 400bps, with the Selic interest rate

(policy rate) reaching 8.50% at the end of May. The Monetary Policy Committee

(Copom) decided to cut the Selic basic interest rate by 75bps on 7 March, from 10.50%

to 9.75%, accelerating the pace of cuts in the current easing cycle from 50bps to 75bps.

Some market participants explain the acceleration as a way of containing local currency

appreciation by reducing the appeal of the local fixed-income market. However, we think

the decision to speed up the easing cycle was probably due to lower-than-expected

consumer inflation in January and February and, mainly, to the subdued growth in Q42011 and early 2012 (e.g., Januarys industrial production). These results were much

lower than expected by the government and most investors a few months ago. We are

now assuming additional cuts of 75bps on 7 April and 50bps on 30 May, with the Selic

reaching 8.50% and remaining at this level until the end of 2013. Given that we think

growth will surprise the government on the downside, we believe the probability of a

stronger easing cycle than we expect is not low.

Brazils external accounts remain sound, despite uncertainty surrounding the

global outlook. We ex

cs emerging markets quarterly - q2 2012

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