EFTA01379450.pdf

11 December 2017 Special Report: EMFX Outlook 2018: Growth-led Revaluation CU The Colombian peso faces a challenging the macro picture via trade gap, inflation and fiscal (in domestic and external scenario. In addition to the the event of excise duty cuts) channels. We see RBI as already familiar twin deficits on the fiscal and current continuing with its asymmetric intervention bias, accounts, the Colombian economy faces a low- persisting on the bid in dollars with an eye to prevent confidence environment as well as a challenging overvaluation hurting growth. election ahead. Towards the end of 2017 growth has somewhat picked up and inflation has eased. In 2018 Another currency that would naturally fit in the camp of growth is likely to somewhat strengthen yet the peso's those more exposed to depreciation is the - on volatility is very sensitive to changes in the risk valuation and high inflation. However, it needs a perception of the Colombian economy. Therefore, the category apart as an adjustment currency such as the election-related headlines especially if connected to EGP. We maintain the view that it will play the role of Colombia's fiscal accounts could very likely trigger a nominal anchor - especially for wage negotiation is O1 bout of COP weakness followed by outflows due to - and that it will outperform forwards for a near Banrep's dovish stance and the increasingly double-digit margin (amid bouts of depreciation). challenging fiscal scenario up ahead. 3 Unlike the currencies mentioned above, ILS does We conclude our risk assessment with Ekl's election not have any major fundamental pressure points, as colonddi for ✓aaar. which ia <, full r)ne (chart below). growth is in reasonable shape and the current account We find it to be most binary for Brazil and Mexico in is in surplus. However, valuation and positioning are terms of changing economic policies, increasing major concerns, and drive our tactically bearish view on uncertainty hurting the investment climate, and fiscal the currency at these levels. In trade-weighted terms, slippage. While Colombia's election may fail to set the ILS is near its all-time strong levels, which has also country on a fiscally sustainable path, we expect pushed overvaluation to historical extremes (chart). On moves in that direction in Brazil and Mexico. To repeat, our DBeer and PPP metrics, ILS is around 10% however, these remain quite uncertain. overvalued, right at the top of the historical valuation range. There have been retracements from such The EM election calendar for 2012 is a full one stretched valuations in the past. Meanwhile, inflation remains low, which - combined with the strong Country Election for Month currency - opens the door for Bol FX intervention to Czech pick up. Republic President Jan-18 ILS is at historical extreme overvalued levels Russia President Mar-18 Malaysia House of Representatives Aug-18' Overvalued Mexico Congress and President Jul-18 Egypt President Feb-May 2018' Hungary Parliament Apr-May 2018' Thailand Parliament Nov-18 .6 Brazil President Oct-18 Colombia Congress Mar-18 Colombia President May-18 as Neer maeaennant• TM band OW Venezuela President No date yet' -Z0 San* Damn Beat Cv.'4? 0..04 0.1410 0.143 Ca./d Ott.sa Ocsaa Sastv Onict.• Sant INN. The best of the tailwind - structurally positive policy measures (GST, bank recap), policy easing, ratings upgrade, carry/vol - are already in the price, and will be hard pressed to drive further outperformance in 2018. The equity markets remain rich; bond inflows are restricted by access via FPI quotas, and likely to be pressured by concerns over fiscal slippage; and RBI is unlikely to be able to ease further in this rate cycle. Any upside to oil prices could be particularly damaging to Deutsche Bank Securities Inc. Page 9 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0076928 CONFIDENTIAL SDNY_GM_00223112 EFTA01379450