JPM 2017-06-09 EMO Midyear

Completed 08 Jun 2017 10:02 PM EDT
Disseminated 08 Jun 2017 10:04 PM EDT

Emerging Markets Research
June 8, 2017
Mid-Year Emerging Markets Outlook and Strategy

EM assets to remain supported by stable
fundamentals and external environment
Key topics:
The drivers of the strong inflows supporting EM assets are changing in
nature, but show no signs of fading, as we explore key themes and risks for
2H17 to our current constructive stance. EM fixed income remains well- Contents
supported by stable fundamentals, with inflation still falling for high EM top trade recommendations 3
yielders, but with the tapering of DM central bank asset purchases and Market Outlook for 2H17 4
already low volatility among the key risks. OW positioning in EM is also EM Macro Outlook 14
consensus but EM capital inflows should benefit from widening EM-DM EM Technicals 20
growth differentials, supporting asset prices, even as EM valuations are not EM Local Markets Strategy 22
much of a support. EM Hard Currency Strategy 27
Stay OW in EM local markets, which should benefit the most from the EM Equity Strategy 30
duration and carry environment. Stay MW in FX and EM sovereign credit Appendix 32
and UW in EM corporates. Latin America 42
Eastern Europe, Middle East and Africa 56
Macro developments:
Emerging Asia 65
EM growth upgrades have lifted EM GDP and we expect a stable 4.4%
pace in 2017 and 2018, but a wild card for the EM growth outlook is Spreads and yields
Asset D1m YTD Level
political uncertainty with elections in many EM countries. EMBIGD Spread +1 -43 298bp
Lower oil prices pushes back on EM reflation, and the combination of EMBIG Return 1.63% 7.00%
GBI-EM Yield -16 -55 6.24
downside surprises in inflation, the weak outlook for energy and food
GBI-EM US$ Return 2.98% 10.83%
inflation and still negative output gaps will likely allow EM central banks to CEMBI Spread +15 -36 263bp
maintain easier policy stances. CEMBI Return 0.70% 4.99%
ELMI+ 2.03% 7.57% 364
The improvement in EM external accounts is likely complete, with
CDX.EM 5y -3 -46 195
improvements in non-oil current accounts likely having come to an end. 10y UST -20 -25 2.18%
Top trading themes: S&P 500 1.41% 8.68% 2,433
Oil (WTI) -1.53% -14.89% 45.72
We stay OW in local rates in our GBI-EM Model Portfolio focusing on high As of 6/07/17 COB
yielding markets. We are OW rates in Brazil, Colombia, Turkey and Russia,
and in Asia, hold outright long rates recommendations in India and
Indonesia local bonds. We are also UW rates in Thailand, Czech Republic
and Romania vs. OW Poland, while in outright trades we hold payers in
HUF (vs. ILS) and CZK, and receivers in SGD, HKD and Mexico TIIE. In
FX, we remain MW overall, but are OW EM Asia FX via OW MYR, but
hold long EUR/CNH in outright trades. In Latin America, we are OW ARS
(and short USD/ARS NDF) and OW CLP vs. UW COP. We remain MW
FX in EMEA EM, with OWs in CZK and TRY balanced with UW HUF Luis Oganes AC
and a new UW RUB position. (1-212) 834-4326
luis.oganes@jpmorgan.com
Stay MW EMBIGD and hold OWs in high-spread names (Ivory Coast,
Ghana, Cameroon, Ukraine, and Argentina) funded by UWs in low-spread J.P. Morgan Securities LLC
names, particularly in tight Asian credits (UW Philippines, as well as UW
quasi-sovereigns Sinopec and Petronas). Additionally we stay OW Jonny Goulden AC
Kazakhstan, Turkey, and Uruguay versus UW Bolivia and Peru. (44-20) 7134-4470
jonathan.m.goulden@jpmorgan.com
In EM corporates, we stay UW overall and think IG should outperform HY, J.P. Morgan Securities plc
while we have removed our regional OW in Latam, via reducing jonathan.m.goulden@jpmorgan.com
recommendations in Brazil. www.jpmorganmarkets.com
J.P. Morgan Securities plc

See page 70 for analyst certification and important disclosures, including non-US analyst disclosures.
This document is being provided for the exclusive use of David Nowakowski at BARING ASSET MANAGEMENT LIMITED (AGT).
J.P. Morgan Securities LLC Emerging Markets Research
Luis Oganes AC Emerging Markets Outlook and Strategy
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Contributing Authors
Global EM Research EMEA EM Local Market Strategy
Luis Oganes AC Saad Siddiqui AC
(1-212) 834-4326 (44-20) 7742-5067
luis.e.oganes@jpmorgan.com saad.siddiqui@jpmorgan.com
Jonny Goulden AC Anezka Christovova AC

(44-20) 7134-4470 (44-20) 7742-2630
jonathan.m.goulden@jpmorgan.com anezka.christovova@jpmorgan.com
Trang Nguyen AC Michael Harrison AC

(1-212) 834-2475 (44-20) 7134-5720
trang.m.nguyen@jpmorgan.com michael.p.harrison@jpmorgan.com
Vivian Graves AC
(1-212) 834-3921 EM Asia Local Market Strategy
vivian.m.graves@jpmorgan.com
Vasan Shridharan AC
Alex Mitchell AC
(65) 6882-2803
(44-207) 7421-1254
vasan.shridharan@jpmorgan.com
alexander.g.mitchell@jpmorgan.com
Jonathan Cavenagh AC
Lara Bes AC (65) 6882-8424
(1-212) 834-3947 jonathan.cavenagh@jpmorgan.com
lara.bes@jpmorgan.com
Arthur Luk AC
(65) 6882-1577
Economics arthur.luk@jpmorgan.com
Jahangir Aziz AC
(65) 6882-2461 EM Credit Research
jahangir.x.aziz@jpmorgan.com
Yang-Myung Hong AC
Haibin Zhu AC (1-212) 834-4274
(+852) 28007039 ym.hong@jpmorgan.com
haibin.zhu@jpmorgan.com
Alisa Meyers AC
Nora Szentivanyi AC (1-212) 834-9151
(44-20) 7134-7544 alisa.meyers@jpmorgan.com
nora.szentivanyi@jpmorgan.com
Zubair Syed AC
Sin Beng Ong AC (1-212) 834-5230
(65) 6882-1623 zubair.k.syed@jpmorgan.com
sinbeng.ong@jpmorgan.com
Ben Ramsey AC Equity Research

(1-212) 834-4308
benjamin.h.ramsey@jpmorgan.com Adrian Mowat AC
(852) 2800-8599
Nicolaie Alexandru-Chidesciuc AC
adrian.mowat@jpmorgan.com
(44-20) 7742-2466
nicolaie.alexandru@jpmorgan.com David Aserkoff AC
AC (44-20) 7134-5887
Anthony Wong
david.aserkoff@jpmorgan.com
(1-212) 834-4483
anthony.wong@jpmorgan.com Pedro Martins Junior AC
(55-11) 4950-4121
Latin America Local Market Strategy pedro.x.martins@jpmorgan.com
Carlos Carranza AC
(54-11) 4348-3425
carlos.j.carranza@jpmorgan.com
Diego Pereira AC
(1-212) 834-4321
diego.w.pereira@jpmorgan.com
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
EM top trade recommendations

EM Local Markets EM Hard Currency Markets
GBI-EM Model EMBIGD MP MW overall

Portfolio MW FX overall OW Bonds overall OW UW
Argentina Bolivia
Asia
Cameroon Peru
- GBI-EM Model
Portfolio FX Rates Ghana Petronas (Malaysia)
OW MYR UW Thailand Cote D'Ivoire Philippines
- Trades FX Rates Kazakhstan Sinopec (China)
Long EUR/CNH Long INR 4y GovSec (8.27% IGB Turkey
2020) Ukraine
Receive 1y1y SGD vs USD 6m Uruguay
LIBOR IRS
Receive 1y1y SGD vs EM Sovereign RV Long Short
{USD,EUR,JPY} 6m LIBOR IRS CEEMEA Buy Ukraine GDP Warrants
Pay THB 2s5s NDIRS Curve Buy SOAF 5 7/8% 22 Buy South Africa 5y CDS
Long IDR 20yINDOGB (FR72) LATAM Buy MEX 4 1/8% 26 Sell COLOM 4 1/2% 26
Receive 3s10s KTB Curve Flattener Sell COLOM 5y CDS Sell COLOM 4 1/2% 26
Pay HKD 1y IRS Buy BRAZIL 2 5/8% 23 Buy Brazil 5y CDS
ASIA Buy INDON 3 3/4 22 Sell PERTIJ 4 7/8 22
EMEA EM Sell Malaysia 5y CDS Buy Korea 5y CDS
- GBI-EM Model Buy PHILIP 5 1/2% 26 Buy Philippines 5y CDS
Portfolio FX Rates
Buy INDON 3 3/4% 22 Buy Indonesia 5y CDS
OW CZK, TRY OW Poland, Turkey, Russia
UW HUF, RUB UW Romania, Czech Republic CEMBI UW overall
- Trades FX Rates
Asia Long Short
Long 08-Dec-17 USD/RUB Receive 5y ILS IRS, pay 5y HUF IRS
call (59), spot reference: Pay 5y CZK IRS UOBSP 2.88% '27s CCAMCL 4.45% perp
57.00 STDCTY 7.25% '21s LPKRIJ 6.75% '26s
Long 10y Turkey nominal bonds (FX-
Long ILS vs. Basket (0.5 hedged) ADTIN 4% '26s CIKLIS 4.95% '26s
EUR, 0.5 USD) WOORIB 4.5% perp
Receive 5y PLN-EUR xccy basis
Long TRY/ZAR (10k DV01) VEDLN 7.125% '23s
Short 27-Nov-17 EUR/CZK
EMEA EM Long Short
forward (levels reference
fwds) AABAR 0.5% '20s
FBNNL 8% '21s
Latin America OSCHAD 9.625% '25s
- GBI-EM Model INVCOR 5% '27s
Portfolio FX Rates EAPART 6.875%'20s
OW ARS, CLP OW Brazil, Colombia
EAPART 6.75% '21s
UW COP
- Trades FX Rates Latam Long Short
Short 3M USD/ARS NDF Receive 5y1y TIIE FRA Banorte 5 3/4% due 31
Switch into Jun26 Mbono from Suzano 7% due 47
Nov42 Mbono Pemex 5 1/8% due 23 EUR
Receive Jan20 Pemex 3 3/4% due 24 EUR
Receive DI Jul22/Jan23 FRA vs. pay Pemex 5 1/2% due 25 EUR
the Jan23/Jul23 FRA
Pemex 4 7/8% due 28 EUR
Enter 2s5s steepeners
Pemex 5 1/2% due 21
Buy 2Y CLP/UF inflation breakevens
Pemex 4 7/8% due 22
Receive 3Y IBR
Pemex 5 3/8% due 22
Switch into 10Y UVR from 10Y TES
Pemex 6 7/8% due 26
Buy ARS local-law GDP warrant
Pemex 6 1/2% due 27
Buy Bonar 2020 (Badlar-linked bond)
Buy UYU 2028, sell NTNB 2030 Switch: Pemex 5 1/8% due 23 EUR Pemex 3.50% '23 $
Source: J.P: Morgan
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Market Outlook for 2H17 as UW quasi-sovereigns Sinopec and Petronas).

Additionally, we stay OW Kazakhstan, Turkey, and
Uruguay versus UW Bolivia and Peru. In EM corporates, we
Risks to our constructive EM views still stay UW overall and think IG should outperform HY, while
do not appear imminent we have removed our regional OW in Latam, via reducing
recommendations in Brazil.
Drivers of the strong inflows supporting EM asset prices
are changing in nature but show no signs of fading. The Exhibit 1: EM assets continue to perform well despite the recent
pressure on commodities
rally in EM assets since the beginning of 2017 was initially
driven by the easing of market concerns about the policy EM Equities 3.9%
17.8%
initiatives of the Trump administration following a campaign EM Local Markets (USD) 2.9%
10.8%
that had raised fears of higher US rates and protectionism. S&P 500 2.1%
8.7%
This enabled EM to partake in the rally across asset classes 1.8%
EM Frontier Markets 8.4%
fuelled by the global reflation narrative. Subsequently, the
European Equities -0.3%
fading of the Trump trade has led to a -5.2% YTD decline in 7.9%
the trade-weighted USD, and a drop in the 10yr UST yield to MSCI World (DM) Lcl 1.8%
7.8%
2.2% from a recent peak of 2.6% in March as US data has EM FX 1.9%
7.6%
recently been coming in below forecasts. This has provided 1.5%
EM Sovereigns (Hard Currency) 7.0%
more impetus to EM inflows that have reached $42bn YTD,
EM Local Markets (Local Currency) 1.1%
already matching the cumulative inflows registered in 2016 5.3%
as a whole even after the outflows triggered by the US EM Corporates (Hard Currency) 0.8%
5.0% Since May 1
election surprise last November. Given that EM assets have US HY 1.0%
4.7% YTD
already rallied significantly YTD (GBI-EM +10.8%, Japanese Equities 4.1%
EMBIGD +7.0% and CEMBI +5.0%, see Exhibit 1) and 4.6%
US HG 1.3%
consensus among participants in the asset class is already to 3.8%
be OW, we focus our mid-year outlook discussion in this Euro HY 1.1%
3.4%
report on the downside risks that EM investors should UST 0.8%
2.2%
monitor in 2H17 and into 2018. This analysis leaves us with Euro HG 0.5%
the view that the EM asset class will remain well supported 0.9%
-1.8%
JPM USD Index -5.2%
over the next few months despite fuller valuations,
prompting us to stay OW in EM local markets, which is the JPM Commodities -3.9%
-8.1%
sub-component of the asset class that should benefit the most -10% -5% 0% 5% 10% 15% 20%
from the duration and carry environment. Source: J.P. Morgan, Bloomberg
Stay OW EM local markets via OW local rates, MW in

FX but now OW in Asia FX, MW in sovereign credit and
2H17 assumptions and risks
UW in EM Corporates. We keep our OW in local rates in
our GBI-EM Model Portfolio and still focus this in high 1. EM growth fundamentals are stable and
yielding markets. We are OW rates in Brazil, Colombia, inflation is still falling for high yielders
Turkey and Russia in the Model Portfolio, and in Asia hold
outright long rates recommendations in India and Indonesia Most EM countries saw higher-than-expected growth in
local bonds. We are also UW rates in Thailand, Czech 1H17 and this may not be replicated in 2H17, but EM
Republic and Romania vs. OW Poland, while in outright fundamentals remain stable. The lift in our EM growth
trades we hold payers in HUF (vs ILS) and CZK, and forecast has been driven by broad-based upgrades in EMEA
receivers in SGD, HKD and Mexico TIIE. In FX, we remain EM and EM Asia following better-than-expected 1Q data.
MW overall, but are OW EM Asia FX via OW MYR, but But the positive surprises in EM growth that dominated in
hold long EUR/CNH in outright trades. In Latin America, we 1Q have already yielded to a more mixed picture in 2Q, and
are OW ARS (and short USD/ARS NDF) and OW CLP vs such divergences across and within regions will likely
UW COP. We remain MW FX in EMEA EM, with OWs in become more noticeable in the remainder of the year and
CZK and TRY balanced with UW HUF and a new UW RUB into 2018. For starters, China is downshifting from a strong
position. For EM sovereigns, we stay OWs in high-spread start of the year in which an import surge boosted
names (Ivory Coast, Ghana, Cameroon, Ukraine, and commodity markets and Asian industry, which suggests that
Argentina) funded by UWs in low-spread names, the slowdown in 2H17 will be concentrated in China and the
particularly in tight Asian credits (UW Philippines, as well rest of Asia. With external drivers of EM growth losing
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
steam as China deceleratespartly because of recent across EM remains well contained. As for headline inflation,
regulatory measures aimed at prompting deleveragingand our 2H CPI forecasts are flat or falling in almost every EM
Asia plateauing after the recent upswing, the hope is that country. Underlying inflation in the US, Euro area and Japan
domestic drivers take over instead. This already seems to be has disappointed in recent months and is expected to remain
happening in EMEA EM, where domestic demand is the low, indicating that global inflation pressures are also weak.
main growth driver not only in the CEE bloc but also in If we take this backdrop together with a view that oil prices
Russia and Turkey. For EM as a whole, we see sequential are expected to fall in 2018 (J.P. Morgan Brent oil forecast
GDP growth stabilizing in 2H17 to average 4.4%, the same for end-2018 was revised $10 lower to $45/bbl) then the
as the full year average for 2018. In other words, we project likelihood for a higher EM inflation path seems low.
EM growth to remain stable over the next 18 months. Moreover, output gaps across EM remain negative in most
countries (except CEE and ASEAN) which have resulted in
One wild card for the EM growth outlook is political a breakdown in the transmission of upstream inflation (PPI)
uncertainty and elections in many EM countries. Political through to downstream (CPI). With the exception of only
developments likely explain a great deal of the recently Nigeria and Turkey, we project all EM central banks to meet
disappointing data flow in South Africa, and may prevent respective inflation targets by end-2018. The majority of EM
Brazils growth from turning positive this year. Looking countries have come close to the end of their fiscal/monetary
ahead, politics will warrant close monitoring in Latin easing cycles, and while the residual lift from the easing
America, where countries accounting for 90% of regional measures will continue to feed through the economy, the
GDP will see presidential or legislative elections in the next room for significant monetary stimulus is limited to Russia,
year (Exhibit 2), which could limit the recovery of business Brazil, Colombia and Turkey.
and consumer confidence depending on their outcomes.
Exhibit 3: J.P. Morgan policy forecasts for December 2017 and what
Exhibit 2: EM election calendar 2017-2018 is priced-in by the markets
Policy changes forecast until year-end, in bp. CPI changes until year-end, in % points
Country Election for Date
JPM forecast Current Hikes or cuts JPM
Mongolia President 26 Jun 2017 CPI changes policy priced-in for the Dec-17
Gabon National Assembly 29 Jul 2017 Country until end 17 rate (%) next Dec-17 forecast
Venezuela Constituent Assembly 30 Jul 2017 ARS -6.3 26.25 - -425
Kenya President, Senate, National Assembly 8 Aug 2017 BRL -0.1 10.25 -128 -175
Angola National Assembly 23 Aug 2017 CLP 0.0 2.50 -7 -
Singapore President Sep 2017* COP -0.3 6.25 -114 -75
Nigeria Gubernatorial Sep 2017* MXN 0.04 6.75 33 25
Czech Rep. Chamber of Deputies 20 Oct 2017 PEN -0.8 4.00 - -50
Argentina Parliamentary Oct 2017* IDR 0.2 4.75 - On hold
Chile President, Senate, Chamber of Deputies 19 Nov 2017 MYR -1.3 3.25 13 On hold
South Africa ANC Elective Conference 16-20 Dec 2017 PHP 0.3 3.00 - On hold
Venezuela Local, Regional (delayed from 2016) Dec 2017* THB 0.8 1.50 1 On hold
Czech Rep. President 1Q 2018* HUF* 0.4 0.15 6 On hold
Russia President 18 Mar 2018 PLN -0.6 1.50 3 On hold
Colombia Legislative Mar 2018* RON 1.3 1.75 - -50
Hungary Parliamentary 2Q 2018* CZK 0.2 0.05 13 25
Colombia Presidential May 2018* ILS 0.2 0.10 2 On hold
Malaysia House of Representatives May 2018* RUB 0.0 9.25 -160 -75
Pakistan National Assembly May 2018* ZAR -0.5 7.00 -31 -25
Mexico President, Senate 3 Jun 2018 TRY** -2.5 11.98 -140 -48
South Korea Local Jun 2018* *Market pricing of most relevant market rate (3m BUBOR). JPM forecasts refer to policy rate.
**Market pricing of most relevant market rate. JPM forecasts refer to effective funding rate.
Brazil President, Congressional, Local Oct 2018* Source: National sources, J.P. Morgan
Poland Local 11 Nov 2018
Venezuela President 4Q 2018* Remaining policy easing with declining inflation should
Source: IFES and NDI. *date unconfirmed continue being supportive for high yield EM local rates
in 2H17. Easing over H2 should be supportive for local
Rate normalization remains only a 2018 issue for most rates, in our view, with J.P. Morgan economists forecasting
EM central banks as upward inflation pressures remain cuts in Argentina, Brazil, Turkey, Colombia, Russia and
muted. With the main exception of CEE, core inflation Peru and modest hikes in Czech Republic and Mexico. On
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
average, GBI-EM weighted policy rates are forecast to move Exhibit 4: The scale of the upcoming change in G4 central bank
43bp lower, or 29bp lower if we exclude Argentina, which is balance sheets
G4 central bank balance sheets, 12m change, USD bn
likely to see significant deceleration by the end of the year 3000 G-4 bn usd, 12m chg
(Exhibit 3). Inflation is also forecast to keep declining, with
2500
GBI-EM weighted 12M CPI expected to fall 0.39%-points
over 2H17, or 0.25%-points ex-Argentina (Exhibit 3). 2000
Although part of this easing seems to be priced-in, our view 1500
is that lower funding rates should keep local yields anchored 1000
and continue to favour carry positions over the second half
500
of the year.
0
2. DM central bank asset purchases are a -500

major risk for late 2017 or 2018, but not yet -1000
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
The size of potential changes in G4 central bank balance
Source: J.P. Morgan
sheets makes it the biggest risk for us to watch in 2H17.
G4 central banks have expanded around $2trn per year in
EM unlikely to be the epicentre of any CB-related
2016 and 2017, with this forecast by our economists to start
market weakness, given lower global positioning and
tapering from January 2018 as the ECB lowers further its
external imbalances improvements. While EM is likely to
pace of asset purchases and the Fed starts running off its
suffer along with other fixed income asset classes on any
bond holdings. The change in central bank net asset
sharp rise in core yields, we do not see it as being the
purchases should then be -$2.5trn over two years (Exhibit 4).
epicentre of market weakness as it was in 2013. The two
The Taper Tantrum in 2013 which started three years of
major differences for the asset class at this point are around
EM weakness, was over concern of the impact of the Fed
positioning and fundamental vulnerabilities. On positioning,
stopping its QE purchases, where from January 2014 the
while inflows into EM funds have notably picked-up this
pace of Fed asset purchases declined by $1.1trn over a 2-
year following outflows at the end of 2016, this is only a
year period. While there is academic debate about whether
recent phenomenon. Exhibit 5 shows cumulative 12-month
the flow or stock of the balance sheet is important for
portfolio flows into EM local debt markets. We have been
monetary conditions, for financial markets we see the impact
noting the uptick in the last few months in the buying of EM
of the flow (asset purchases) much more directly. The fact
local bonds by foreign investors, but looking at the last 12
that the ECB and BoJ are buying bonds at such a high pace
months makes this look more like the start of a process. By
seems to us to clearly impact global bond yields and credit
contrast, in 2013 the 12m pace of foreign investor buying
markets. This in turn filters through to other markets,
was over $200bn and that had been sustained for three years.
particularly risky fixed income such as EM, where the
In addition, EM fundamental vulnerabilities have been under
search for yield and scarcity of assets pushes investors to see
the microscope for 4 years and the slower growth combined
opportunities in EM that they might not otherwise have had
with weaker currencies have helped improve external
the appetite for. For these reasons, we will need to keep
imbalances (see Exhibit 24 later). Given the EM rally is not
monitoring core rate markets, but we do not think this will
based on a forecast of a very strong EM fundamental
hit markets until later in the year and do not think EM will
improvement, there seems less scope for disappointment.
be the epicentre this time around.
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 5: Fund flows into EM local debt have increased but the Exhibit 6: US and Eurozone core inflation has recently declined,
cumulative inflows do not compare to 2013 lowering any pressure on central banks to act quicker
Portfolio debt flows into EM local bonds, 12 cumulative, USD bn Eurozone and US inflation measures (% yoy)
300 Portfolio Debt Flows into EM Local Bonds, 12m cumulative Eurozone Core PCE (% yoy)
2.1
US Core PCE (% yoy)
250 1.9
200 1.7
150 1.5
100 1.3
50 1.1
0 0.9
-50 0.7
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
0.5
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Source: J.P. Morgan, IIF
Source: J.P. Morgan, IIF
Although the DM recovery story remains intact, growth
and inflation data are still not crossing the thresholds 3. Very low volatility leaves market vulnerable
that could prompt faster policy normalization for the to repricing on new risks in 2H17, calling for
next few months. Our global economists project global specific hedging and not position reduction
growth to sustain roughly 3% pace in the coming quarters
and note that even though this outcome would be as strong
The fall of volatility risk premia in recent monthsas
as any in the past six years, it would also represent a step
measured by implied volatility across a range of global
down of roughly a percentage point from the previous
expansions highs. While this shortfall largely reflects a financial assetshas been particularly striking. This is
weakening in the supply side of the economy related to because it takes place against a backdrop of heightened
demographic trends and weak productivity growth, demand global policy and political uncertainty (Exhibit 7). However,
dynamics can hardly be characterized as boom-like and are low financial market volatility is not completely divorced
certainly not generating undue inflation pressures anywhere. from macroeconomic fundamentals. The chart below, for
This has led markets to doubt whether the Fed will hike rates example, shows that the volatility of EM IP and inflation is
two more times this year as the dots plot suggests, or also hovering around multi-year lows, despite the heightened
whether inflation in Europe will accelerate sufficiently to policy uncertainty and volatile commodity prices (Exhibit
prompt the ECB to signal tapering intentions later this year. 8). An obvious catalyst which would inject volatility back
Although we do recognize that the possibility of higher DM into markets would be a potential tightening of global
rates are a key risk to watch for EM in 2H17 and in 2018, liquidity conditions as DM central banks taper asset
particularly if the Fed announces concrete plans to reduce its purchases, as discussed above. However, as such a catalyst
balance sheet or the ECB turns more hawkish, the reality is is unlikely in the very near term, we believe it is sensible to
that the DM data flow does not seem to be challenging such only selectively buy volatility in commodity currencies (via
policy stances for now, particularly as core inflation USD/RUB calls for example) as a portfolio hedge, rather
measures have recently declined (Exhibit 6). than positioning bearishly more generally.
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Exhibit 7: Global Economic Policy Uncertainty Indicator Exhibit 9: The last time markets were this technically bullish was just
Global Economic Policy Uncertainty Index of Baker, Bloom and Davis, with PPP-adjusted before a multi-year sell-off
GDP Weights, 3m moving average Rates
300 FX
1.5 120
12m cumulative EM fund inflows (right, $ bn)
250 100
1.0
80
200 0.5 60
40
150 0.0
20
100 -0.5 0
-20
50 -1.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -40
Source: J.P. Morgan, www.policyuncertainty.com -1.5 -60
Jun-09
Jan-10
Mar-11
May-12
Jun-16
Jan-17
Sep-07
Apr-08
Nov-08
Aug-10
Oct-11
Dec-12
Jul-13
Feb-14
Sep-14
Apr-15
Nov-15
Exhibit 8: EM Macro Volatilities
EM macro volatility is an equally-weighted average of annualized volatilities of EM IP Source: J.P. Morgan, EPFR, Bloomberg
manufacturing and EM inflation, 12m rolling window
7.0% 30%
EM Macro Volatility EM-VXY, right Better-than-expected EM-US growth differentials have
6.5% likely helped EM capital flows at the start of 2017. We
25%
6.0% have previously highlighted the link between EM-DM
5.5% growth differentials and broad capital flows into EM (EM:
20%
Its all about growth, J. Aziz & S.B. Ong, 13 Jun 2016). The
5.0%
narrative into 2017 had presumed a reflationary US but one
4.5% 15% with limited trade spillovers to the rest of the world. This
4.0% view biased the growth differential forecasts in favour of the
10% US. However, since then, Chinas growth has surprised to
3.5%
the upside, the asymmetry in US growth has turned benign
3.0% 5% and thus growth differentials have moved in favour of EM-
2000 2002 2005 2008 2010 2013 2016 US at least through 1Q17 (Exhibit 10). Subsequently, capital
Source: J.P. Morgan, Haver, Bloomberg
inflows into EM have resumed. Of note, of three EM regions
of LATAM, EMEA EM and EM Asia, the differentials have
4. EM OW positioning is consensus but EM moved most in favour of LATAM and EMEA EM, thus it
capital inflows should continue to see support should be no surprise that those regions have seen a
from EM vs US growth differentials in 2H17 commensurately larger share of inflows in 1Q17.
The last time investors were this OW in local markets, Exhibit 10: EM ex. CN-US growth differential and capital flows
with such large inflows, was just before the 2013-16 bear %-pt. % of GDP
market. Positioning in EM local markets and cumulative 6 10
inflows to EM dedicated funds were last all together at these 5 EM ex. CN less Capital flows
US growth
higher levels at the start of 2013 (Exhibit 9). EM dedicated
4
investor positioning in local markets as measured by our EM 5
Client Survey is therefore a risk given how consensus this is. 3
Balancing this, we have seen earlier that non-EM dedicated 2
investor buying of EM bonds has actually only recently 1
picked up and is not at worrying levels. 0
0
-1
-2 -5
02 05 08 11 14 17
Source: J.P. Morgan
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Jonny Goulden AC
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In 2H17, growth differentials continue to favour EM as a driving $6.2bn of portfolio inflows. A 10% move in VIX or
whole. However, we expect to see some decline of 1% move in EM growth forecast revisions have been far
differentials in EM Asia even as growth differentials more commonplace than a 1% uptick in EM-DM growth
continue to widen in favour of LATAM and EMEA in 2H17. differentials in the past few years.
Extrapolating from the growth forecasts, this would suggest
that LATAM and EMEA should continue to see larger EM portfolio flows appear to be lagging our model, as
capital inflows relative to EM Asia (Exhibit 11). outflows were material at the end of 2016, and a
normalization could see continued buying of EM debt
Exhibit 11: EM growth differentials by region and equity. The outlook for EM was hit by the US elections
%-pt., EM GDP growth less US in November, resulting in 4Q16 portfolio outflows of
8 -$38.bn (or a rolling 2q sum of -$42.5bn), undershooting our
model by a sizable -$48.9bn. Combining quarterly BoP data
6
with monthly IIF total net portfolio flows, we estimate net
EMEA portfolio outflows of around $5bn in 1Q17 in our sample of
4 EM Asia ex. CN less US
EM countries1, resulting in a 2-quarter sum of -$37.5bn as at
2 end 1Q17. This pace was undershooting our model by
0
around $25bn (Exhibit 12) and may help explain why
higher-frequency Q2 EM portfolio flows data has continued
-2 to come in strong, correcting some of this undershoot. It also
LATAM argues against large EM fund inflows being too much of a
-4
riskin fact our model shows broader portfolio flows into
10 11 12 13 14 15 16 17 18
EM have room to increase.
Source: National sources, J.P. Morgan
Exhibit 12: EM portfolio flows have undershot the model
Rolling to q sum of EM portfolio flows versus model fit, $bn
While EM capital flows track EM-DM growth
Shaded area shows the band of 1 standard deviation
differentials in the longer-term, portfolio flows are driven 200 Net EM Portfolio Flows (2q sum)
by shorter-term drivers such as risk appetite, changes in Fit
EM GDP revisions, and interest rate differentials. Our 150
model results suggest EM net portfolio flows1 exhibit 100
persistence, and are sensitive to shifts in risk appetite
50
(proxied by % change in VIX) and EM growth forecast
revisions. The persistence is evident in the statistical 0
significance of lagged portfolio flows and a high positive -50
coefficient of 0.68. Changes in EM growth revisions are also
important, particularly with consensus EM growth forecasts -100
having been revised by a cumulative 3% from 2013 to 2016. -150
Net portfolio flows tend to increase by $26.8bn for every 1% -200
move in EM GDP growth forecasts, so the growth revisions
Mar-03
Jun-05
Mar-06
Jun-08
Mar-09
Jun-11
Mar-12
Jun-14
Mar-15
Dec-03
Dec-06
Dec-09
Dec-12
Dec-15
Sep-04
Sep-07
Sep-10
Sep-13
in the past 3 years have explained about $80bn in portfolio Sep-16

outflows. Global volatility (or risk appetite) is also a key Source: J.P. Morgan
driver and every 1% increase in VIX tends to drive outflows
of $0.69bn, so a 10% move higher in VIX could result in 5. EM valuations are still not a strong driver,
$6.9bn of portfolio outflows. We proxy interest rate but not a reason to be short either
differentials by looking at the difference between GBI-EM
yields and 5-year UST yields, and find that lagged interest
EM fixed income valuations have not been much of a
rate differentials also have driven portfolio flows, with every
support for EM investors since Q1. EM assets prices hit
100bp move higher resulting in $9.3bn of portfolio inflows.
their cycle lows in January/February 2016, with EM spreads
The EM-DM growth differential is also statistically
206bp tighter and EM FX 10% stronger on aggregate since
significant, but the magnitude does not suggest high
sensitivity, with every 1%pt pick-up in growth differentials then. This revaluation was largely a 2016 phenomenon with
EM risk premia declining as it became clearer that the worst
1 of the EM fundamental vulnerabilities had passed. The sell-
Our EM net portfolio flows sample is comprised of Poland, Hungary, Czech
Republic, Romania, Russia, South Africa, Turkey, Israel, Brazil, Mexico, Colombia,
off after the November 2016 US election, created some risk
Chile, Argentina, India, Indonesia, Korea, Malaysia, Thailand and Taiwan. We use premia again, but by February 2017 this was mostly gone as
quarterly BoP data.
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
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EM markets rebounded. This has mean that for the last Exhibit 13: Average EM FX BEER valuations broadly fair
%pts REER deviation from fair value (+ve = expensive, -ve = cheap)
quarter at least valuations have not been much of a support
for EM investors. Some valuation comparisons to DM 6
markets (DM real yields and DM credit spreads) still show 4
some reason for asset allocators to move money to EM on 2
the basis that they dislike valuations in these other markets
0
even more, but this is hardly a strong valuation argument. As
we approach H2, the valuation picture is largely unchanged. -2
EM FX on aggregate looks fair value, having come into the -4
year slightly cheap in EMEA EM and Latam. EM spreads -6
are still 60bp expensive according to our models, although
-8
this is less expensive than it was earlier in the year when Mar-07 Sep-08 Mar-10 Sep-11 Mar-13 Sep-14 Mar-16
VIX was higher and US rates curves were steeper. EM local
EM Asia LATAM EMEA
real yields have come lower but still arguably show the best
valuations within EM on a historical basis. All told, EM Source: J.P. Morgan
valuations continue not to offer a strong support for EM
investors, but are also not so stretched that it is worth being For EM local rates, real yields have moved steadily lower
short, in our view. in recent quarters and EM nominal rates have
compressed vs. DM. We head into the second half of the
EM FX valuations have moved back closer to fair value year still OW local rates in our GBI-EM Model Portfolio,
as we approach mid-year. Across the 3 regions our but valuations have also become less compelling. The 10Y
Behavioural Equilibrium Exchange Rate (BEER) models real yields for GBI-EM countries (10Y nominal benchmark
(see here) suggest EM FX valuations are, on average, deflated by 12M CPI) were at 2.02% in April, which is one
of the lowest levels seen since April 2013 and 120bp lower
broadly fair. Over the past 12 months EM currencies have
than in December 2016 (Exhibit 14). Meanwhile, EM yields
generally been playing catch up with improved fundamentals
continued compressing relative to DM yields, with the GBI-
which have boosted fair value estimates. For LATAM and
EM vs. GBI-DM spread now at 448bp which is the lowest
EMEA EM, this fundamental backdrop could improve level seen in 2 years (Exhibit 15), although on a longer
further on the back of wider growth differentials in 2H17, horizon still can help explain why non-EM investors see
although developments in commodity markets and yield better value in EM vs DM yields.
differentials could pose constraints. For EM Asia, growth
differentials arent expected to improve further but a number Exhibit 14: GBI-EM yields have continued moving lower in recent
of economies still have large current account surplus months and are at one of the lowest levels since the taper tantrum
positions. In LATAM, despite the renewed focus on the GBI-EM weighted 10Y benchmark yield deflated by 12M CPI
domestic political outlook, our estimate suggests BRL is 3.5 10Y real yield for GBI-EM (10Y benchmark less
close to fair value. In EMEA EM, TRY remains the cheapest current 12M CPI)
but the gap is narrowing, while PLN remains the most 3.0
overvalued. In EM Asia, the biggest shift has been in CNY,
with the actual REER now around fair value estimates after 2.5
an extended period of overvaluation.
2.0 2.02
1.5
1.0
Dec10 Dec11 Dec12 Dec13 Dec14 Dec15 Dec16 Dec17
Source: J.P. Morgan, Bloomberg
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Jonny Goulden AC
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Exhibit 15: The GBI-EM vs. GBI-DM spread compressed to 2y lows Exhibit 16: EM sovereign credit is still meaningfully wider than post-
Spread between the GBI-EM GD and the GBI-DM, in bp crisis tights, whereas EM corporate credit touched new post-crisis
GBI EM - GBI DM 8-Jun-17 tights in May
Current spreads versus the post-financial crisis tights, bp
700
EMBIGD HY +128
Euro HY +128
600
EMBIGD +65
US HY +46
500 489 Euro IG +40
EMBIGD IG +35
400 CEMBI HY +31
JULI ex-EM +25
300 NEXGEM +25
Current vs. post-GFC tight
CEMBI +17
200 CEMBI IG +6
Jun03 Mar06 Nov08 Aug11 May14 Feb17
Source: J.P. Morgan - +20 +40 +60 +80 +100 +120 +140
Source: J.P. Morgan
EM sovereign spreads are still tight on our valuation
models, but crossover investors may continue to focus on Normalising for compositional and fundamental shifts,
the more modest retracement of EMBIGD spreads EMBIGD does not look like it needs to retrace much
relative to other credit assets. Our long-term fair value further. While the 65bp pick-up of the EMBIGD versus the
EMBIGD spread model has suggested spreads are too rich tights reached in April 2010 may at first glance suggest a
for some time, but the tightness has decreased recently, to buying opportunity, there are compositional changes in
around -60bp currently versus a peak of -100bp in mid- addition to fundamental shifts to normalise for. Since April
April. The richness is explained by a lack of meaningful 15, 2010 when post-crisis EMBIGD tights were reached, the
constituents of the EMBIGD have shifted toward a greater
recovery in EM GDP levels and EM-DM GDP differentials,
number of countries and issuers, with many debut issuers
as well as debt levels which continue to rise. Meanwhile,
typically with higher spreads. The number of countries has
market variables in our model have helped justify tighter
increased from 39 to 65 and the number of issuers increased
levels, as global volatility and core rates have remained from 57 to 142 over the past 7 years. Even among long-
persistently low. Despite having overshot versus standing members, many large issuers have seen a
fundamentals and market variables, EMBIGD spreads may deterioration in credit quality, with Russia, Brazil, Turkey
remain attractive in the context of global credit, with and South Africa having lost IG status in the past 3 years.
EMBIGD spreads having some room to retrace versus post- Furthermore, the share of quasi-sovereigns within the
financial crisis tights, whereas the CEMBI reached new EMBIGD, which often trade wider than their underlying
tights recently. EMBIGD spreads at 298bp are still 65bp sovereigns, has also risen steadily with greater issuance from
wider than the post-crisis tights of 234bp (Exhibit 16), wholly state-owned companies, which made up 16% of the
standing at the 24th percentile versus the post-crisis range. index in 2010, versus 23% currently. One way of comparing
In comparison, the CEMBI touched new post-2008 tights of spreads through time is to normalise for the changes in
246bp in May, with both the IG and HY components not far rating, as ratings have been declining. The ratio of EMBIGD
from the tights. Outside of EM, European HG, US HG, spread to rating has been declining, so ratings-adjusted
European HY and US HY range between the 7th and 22nd spreads have been trend-tightening. In fact, if we adjust
percentiles. While European HG at the 22nd percentile does EMBIGD spreads for ratings (using a log relationship,
not appear too far behind the EMBIGD in term of relative Exhibit 17), the previous tights of 2010 would equate to a
cheapness, EMBIGD spreads at 298bp are much higher than spread of 330bp, about 30bp above the current spread. In
European IG spreads of 68bp. other words, EMBIGD spreads are about 30bp tighter than
they were at the post-financial crisis tights, once we adjust
for ratings.
11
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Jonny Goulden AC
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Exhibit 17: The ratio of EMBIGD spread to rating is lower than the a systemic risk to EM at this stage (Impact of Chinas
tights in 2010, suggesting richness versus fundamentals financial stability tightening on markets, May 22).
Log EMBIGD spreads divided by average rating score
Log EMBIGD Spread / Rating
2010 Log Spread Adjusted Tights 900 Reinforcing this bias is the improved capital flow
0.34 EMBIGD (rhs) backdrop. Better than expected growth, widening yield
800
differentials and capital flow restrictions leave the forecast
0.32 700 for aggregate China outflows in 2017 now at USD300bn,
0.30 600 versus USD500bn previously and ~USD650bn average in
2015-16. The BoP should still remain in deficit (USD130bn)
0.28 500
but this should be a significant improvement on the
400 USD390bn average in 2015-16. A smaller BoP deficit will
0.26
300 reduce the liquidity drain from the domestic economy,
0.24 implying less need for open market operations, and, in turn,
200
lower money rates. The 7-day repo rate is seen averaging
0.22 100 3.25% in 2H17, versus an estimated 3.40% in 2Q17 (China:
0.20 0 Lower capital outflows to reduce pressure on CNY and
money market rates, June 5). CNY depreciation pressures
should moderate and we see USD/CNY at 6.94 by year-end,
Source: J.P. Morgan little changed from the end 2016 level.
For EM corporates, spreads are also tighter than what Exhibit 18: China capital flows and BoP: less headwinds in 2017
would be expected based on fundamentals. The average USDbn
credit rating of the CEMBI is one notch lower at Baa3/BBB- 400
than at the previous post-financial crisis tights in 2011, with
Inflow
lower EM growth and lower commodities prices. In 200
addition, corporate leverage ratios have risen significantly
across regions and most sectors, though they have been 0
stabilizing in recent quarters. Average duration has
shortened by about half a year, but we do not think this -200
would be enough to offset the fundamental factors. We see
-400 Outflow
the technical support that has driven markets to these spreads
as coming from two main sourceslocal investors in Asia -600
and DM investors who are looking for a pick-up in yield
given the low rate environment. Asian investors continue to -800
support bonds from their own region, with Chinese investors 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f
becoming more active recently. This has been accompanied Source: J.P. Morgan
by a steady rise in the weight of Asia/China in the index. In
this sense, the future behaviour of onshore investors in 7. Commodity prices assumed to maintain
China could be a variable. European investors look to have their volatile range, with lower daily
increased their allocation as well, though there is some correlations to EM asset prices
uncertainty in the sustainability of this demand especially if
there is a reversal in the easy monetary policy. Both metals and oil prices have seen significant swings over
Q2, although without the impact on EM markets that such
6. China financial conditions tightening is moves used to cause in the past. Our analysts assume the
unlikely to derail broader markets broad volatile range for oil and metals will continue over the
next 12 months (Exhibit 19), which we think will continue to
Concerns around tighter financial conditions in China mean low daily correlations to EM asset classes. Iron ore
have moderated over the past month, as interbank rates prices have been particularly impacted by tightening
have fallen from the highs seen in early May. While financial conditions in China, (Impact of Chinas financial
tighter financial conditions should lead to modest slowdown stability tightening on markets, May 22), but as long as
in credit growth (mainly via missing shadow credit) and
markets see this volatility as being driven less by
softening in growth outlook for the remainder of the year
fundamental developments such as growth rates in China,
(China Macro & Financials: Impact of shadow-bank
the impact on overall EM asset prices will likely remain
tightening on credit growth, May 25), it is unlikely to trigger
12
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Jonny Goulden AC
(44-20) 7134-4470
lower. For oil, inventory levels have not declined as forecast

and prices have swung within a $44-56/bbl range for most of
the last 12 months (a 27% price range). However, as noted in
prior EMOS publications, the correlation of EM assets to oil
has declined to close to zero after the OPEC decision in
December. It seems that as long as we have a form of OPEC
agreement that can prevent very low prices (sub-$30/bbl)
then EM markets should see the tail-risk from oil as being
removed and so are likely to trade less on the daily volatility.
Any higher risk of much lower prices is therefore the risk to
monitor, with our commodities analysts assuming the
volatile range to continue.
Exhibit 19: J.P. Morgan commodity price forecast

2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18
Brent ($/bbl) 53 56 57 48 43 44 45
WTI ($/bbl) 50 53 54 45 40 41 42
Copper ($/mt) 5,686 5,500 5,400 5,300 5,400 5,400 5,100
Iron ore ($/mt) 62 58 62 - - - -
Gold ($/oz) 1,244 1,250 1,230 1,240 1,260 1,330 1,350
Source: J.P. Morgan Commodities Research. Iron ore forecast for 2018 is $65/mt.
13
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Jonny Goulden AC
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EM Macro Outlook Nevertheless, with the exception of a few countries,

growth is likely to slow in 2018. First, from the external
side, after a better-than-expected 1Q driven by capex activity
The positive show goes on but at a in both the US and Euro area, our DM economists foresee a
steadier pace significant deceleration in the pace of capex growth starting
in 2Q17. This, together with tepid domestic demand in
EM growth upgrades lift GDP to 4.4% in 2017 and 2018. Japan, marks a marked slowdown in the pace of G3 growth.
Over the course of 1H17, EM growth forecast upgrades have The extent of the 1Q surprise makes payback inevitable;
accelerated as post-US election fears related to tightening therefore, we are unlikely to see a boost to EM due to
financial conditions and trade protectionism have faded external factors. Second, on the domestic front, as
(Exhibit 20). At the aggregate level, EM growth is now fiscal/monetary stimulus in 2017 is expected to be limited,
expected to reach 4.4% in 2017, which is 0.2%pt higher policy-related boost to activity in 2018 should be that much
relative to the forecast that we had for this year at end of less (Exhibit 22).
2016, with the higher GDP growth expected in EM Asia and
EMEA EM outweighing the downward revisions in Latin Exhibit 22: EM policy stance not expected to shift significantly
America. High-frequency datawith the exception of Latin Left: %p.a. policy rate less CPI right: headline fiscal balance
America where we have been disappointedhave been 2.0 0.0
tracking our 2Q GDP forecast, with EM PMI tracking
steadily above 50 (Exhibit 21). More broadly, in a number of 1.5 -0.5
countries both monetary and fiscal policies were eased over
-1.0
late 2015 and in 2016, the lagged effect of which is 1.0
benefitting activity in 2017. -1.5
0.5
Exhibit 20: More upward growth revisions than downward in EM -2.0
%-pts change in J.P. Morgan 2017 GDP forecast 0.0
-2.5
EM real policy rate (LHS)
2.0 -0.5 -3.0
EM fiscal balance (RHS)
1.0 Revisions to 2017 GDP -1.0 -3.5
(since Dec 2016) 10 11 12 13 14 15 16 17 18
0.0
Source: J.P. Morgan
-1.0
Lower oil prices pushes back on EM
-2.0 reflation
TH
ZA
EM
SG
RO
PL
CZ
TR
TW
CL
MY
HU
EC
HK
KR
PH
MX
CN
RU
AR
CO
BR
PE
VE
ID
IN
Source: J.P. Morgan. EM aggregate excludes Venezuela and Argentina. EM core inflation remains subdued and lower oil prices
could bring headline lower in 2018. Throughout this year,
Exhibit 21: EM PMI readings are in line with our view of stable growth CPI inflation has been coming in softer than expected. The
Left: EM PMI, index; right: EM GDP %q/q, saar. Dot on chart denotes 2Q projection. story that we have reiterated to explain the disconnect
61 12 between rising growth momentum and softer inflation is that
59 GDP= -17.4+0.44*PMI negative output gaps and the weakness in domestic demand
10 limit the pricing power for downstream firms. This prevents
Rsq= 0.65 Std Err= 0.79
57
the pass-through of upstream inflation through to the
8
55 consumer level. Most of the downside surprises we have
53 6 seen in 1H17 have been the result of lower-than-expected
energy prices. If we take this backdrop together with a view
51
4 that oil prices are expected to fall further (J.P. Morgan Brent
49 oil forecast for end-2018 was revised $10 lower to $45/bbl)
EM PMI (LHS) 2
47 then the risk for EM inflation appears to be to the downside.
EM GDP (RHS) In some countries, the pass-through of global food prices to
45 0
2010 2011 2012 2013 2014 2015 2016 2017 inflation has also been less than expected. As a result of our
forecast changes, we now see end-2017 inflation 0.2%pt
Source: J.P. Morgan
lower than projected at the start of the year.
14
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Jonny Goulden AC
(44-20) 7134-4470
Exhibit 23: EM core inflation remains subdued and lower oil prices countries. However, our forecasts suggest that bulk of the
could bring headline lower in 2018 readjustment has likely completed and current accounts are,
%oya, shaded area denotes forecast
on the whole, expected to remain the same or deteriorate
4.4 8 slightly next year. A main factor that could significantly
Headline CPI
alter our current account projections is the prevailing oil
Core CPI 6
4.0 price. Based on our previous work, at the regional level,
PPI (RHS) EMEA EM is the most sensitive to oil price changes, and
4 due to the high composition of oil exporters in the region,
3.6
would be negatively impacted by oil price falls (Exhibit 25).
2
In contrast to this EM Asia would see an improvement in
3.2 external balances with lower oil prices, whereas Latin
0
America would have offsetting factors due to the equal
2.8 presence of oil exporters and importers.
-2
Exhibit 24: How the Fragile Five have changed

2.4 -4
Change over 2012 to 2016
2013 2014 2015 2016 2017 2018
6 20
CAB (%-pts GDP) Growth (%-pts) REER (right scale - %)
Source: J.P. Morgan
15
4
The downside surprises in inflation, the weak outlook for 10
energy and food inflation and still negative output gaps 2
5
will likely allow EM central banks to maintain easier
policy stances. EM policymakers will have to balance 0 0
closing output gaps and lower oil (and possibly food) prices. -5
On balance, the risk is biased towards more easing or -2
holding for longer. Indeed, with the exception of only -10
Nigeria and Turkey, we project all EM central banks to meet -4
-15
respective inflation targets by end-2018. Consequently, the
-6 -20
only EM central banks expected to hike rates this year are in
Brazil India Indonesia South Africa Turkey
the Czech Republic and Mexico. Elsewhere, we have either
Source: J.P. Morgan
seen the first rate hike projection pushed back or additional
rate cuts being penciled in, such as in India and South Exhibit 25: Oil price impact on current accounts is relatively
Africa. We retain our easing cycles in Brazil, Colombia, symmetric at the regional level
Peru, Russia and Turkey. Despite these added rate cuts EM %pt change in current account balance (% of GDP) relative to $30/bbl oil scenario
real interest rate should remain not only positive but also 1.5
more elevated than the average over 2010-16.
1.0
External rebalancing act complete, unless
0.5
oil has a part to play
0.0
The improvement in EM (non-oil) current accounts has
-0.5
likely come to an end. While the substantial decline in the
level of oil prices has caused significant deterioration in the -1.0
external balances of oil exporters, non-oil economies have
seen improvements in their current account positions as a -1.5
result of cheaper oil but also a result of external rebalancing.
In particular, the current accounts of the fragile five -2.0
economies have seen sustained improvement in recent years, $10 $50
in part due to weakening domestic demand suppressing
imports but also greater focus of policymakers to reduce the EM Asia EMEA EM Latin America
size of external vulnerabilities including sizeable FX Source: J.P. Morgan
adjustment except perhaps in India. To a certain extent, this
trend has been followed by other non-oil exporting
15
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Jonny Goulden AC
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Do political risks cloud the fundamental of the Lower House, Deputy Rodrigo Maia, would take over
outlook? as a caretaker president and call an indirect election held by
Congress in 30 days. The lack of a consensus name to
replace President Temer increases the probability that he
Near-term political risks are mainly concentrated in the
would remain president for longer, but the political
Latin America region, while a handful of DM elections
landscape is definitely more uncertain now. Hence, we now
could shift global risk sentiment. Thus far, 2017 has been
attribute a low probability of the pension reform passing in
marked by a series of political scandals in Brazil, South
its current form and we expect the deterioration in the
Africa and South Korea. Repercussions continue to be felt
political backdrop to increase uncertainty and jeopardize the
from these idiosyncratic events and the Brazilian economy
economic recovery. Thus, we have trimmed our GDP
has probably been the worst impacted. Elections in
forecasts for this year to 0% from 0.6% and for next year to
Argentina, Chile and potentially Venezuela this year have
1.8% from 2.2%. We also raised our expectation for the
the possibility to alter the path and sustainability of current
SELIC terminal rate to 8.5% (from 8.25%). It is important to
policies (discussed in detail below). Next year, the focus will
note however, the improvements in domestic fundamentals,
remain on Latin America, with general elections in Mexico
with CAD now at 1% of GDP (from a peak of 4.4% in April
and Brazil. Outside of EM, important elections in the UK,
2015), inflation at 4.1% (from 10.7% in January 2016) and
France and Germany will set the tone for intra-European
better perceived governance with a high-quality economic
politics in the medium term, as well as for Brexit
team that has made the economy more resilient to face the
negotiations. While the direct impact of disruptive European
current crisis, in our view.
elections (hung parliament, defeat of the status quo) on EM
economies would likely be limited, a shift in global risk
sentiment would impact EM. This external risk to EM is low In Chile, November presidential elections could galvanize
given that our European economists expect the incumbents medium-term domestic demand growth. The scenario of a
to win in their respective elections. policy change toward a more market friendly government
agenda remains likely with former President Piera
consistently heading the presidential polls. According to the
In Argentina, the October legislative elections should be
latest CEP survey, Piera holds 23.7% of vote intention,
the main political event of the year. Although no major
expanding his advantage over Senator Guillier at 12.8%. The
change is expected to take place in Congressas the Senate
left-of-center candidate Sanchez positions herself as the third
will remain under Peronist control and Lower House
favorite candidate, with a still low 4.8% of voting intentions.
fragmented we believe the election outcome will indeed
While we view improved political prospects as a catalyst for
be relevant for investors to reassess the likelihood of a more
growth, we dont expect investment to gain momentum until
aggressive structural reform agenda in the next two years.
the end of the year, once the electoral uncertainty dissipates
With economic activity growing back again and lower 2H17
so that private investors could better gauge prospects of TFP
inflation expectations, we believe there is currently a 70-
enhancing reforms in the next period.
75% probability of Argentinas constructive narrative to
survive the mid-term elections. That said, we still front key
uncertainties (candidates will be announced on June 24). In Mexico, state elections point to a tight presidential
Two key factors that we believe will determine electoral race next year; PRI unlikely to retain the presidency. The
success are i) the share of the national vote, and ii) the State of Mexico election was seen by some as a barometer of
winner of Province of Buenos Aires. next years presidential election. The interpretation of its
results suggests three things: the PRI continues to lose
ground, AMLO is a serious contender in next years
In Brazil, political uncertainty is blurring the base-case
presidential election and a PAN-PRD alliance could seal a
scenario. The release of the details of J&F executives plea
victory for these two parties in next years presidential race.
bargain agreement with audio and video files involving
The PRI only won the election with 34% of votes, nearly
President Temer, Senator Aecio Neves and former
half the share obtained in past elections. AMLOs Morena
congressman Rocha Loures led to a significant deterioration
came in very close despite this being its first major state
of the political stability since mid-May. The damage to
election. With the State of Mexico being the largest
Temers ability to govern seems significant at this point, in
electorate nationwide, this validates claims of strong support
our view, rendering it more difficult to approve the pension
for AMLOs party. Finally, the PAN-PRD alliance has
reform, and even threatening his ability to remain in power
yielded very positive results over the past few years (doing
up to the end of his mandate. Against this backdrop, part of
so again in Nayarit and Veracruz this year) and could be
the focus has shifted also to the possibility of his succession
heavily pondered as an option for the presidential race. We
at a time when the Electoral Court (TSE) just resumed the
think that the presidential race will most likely be contended
trial on illegal financing in the 2014 presidential campaign.
Should President Temer be removed or resign, the speaker
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between Morena and the PAN (possibly in conjunction with EM Asia: 2H17 flatter external demand
PRD) to the detriment of the PRI.
The 2H17 narrative for EM Asia pencils in a plateauing
In Venezuela, the ongoing political crisis took an in the external demand cycle amid softening US capex
unexpected turn when President Maduro in early May and easing growth in China. This, however, would be
announced a popular and communal Constituent offset by the smartphone cycle which should see a turn up by
Assembly to rewrite the constitution. The move appears to the end of 2Q17. As we mark the view to the data, there
have been aimed at defusing pressure from opposition street appears to be some loss of momentum in the April trade and
protests and international diplomatic scrutiny on the one May manufacturing PMIs. In particular, the dip in US
hand, while on the other paving the way through a quasi- durables demand and importsthough not yet a source of
constitutional/ quasi-electoral process for Maduro to concernbears watching. Similarly, with Chinas growth
indefinitely remain in powernotwithstanding minority expected to ease in 2Q17 and beyond, the prior 1Q17
status in public opinion. As it stands, the Constituent impulse from China could also fade, as is embedded forecast
Assembly will be constituted in a July 30 election that will trajectory. Thus, for the forecast to track, US durables
elect 543 delegates selected from heavily Chavista demand would need to turn up soon, failing which there
municipalities and corporatist sectors. In our view, the could be some downside risk to growth in 2Q17 and
Assembly seems likely to be constituted amid very low possibly beyond.
participation and highly questionable legitimacy.
Subsequently, it will likely take its time to write the new More broadly, in the past year, EM Asias output gains
constitution, trying to buy time for Maduros popularity to have been the strongest since 2012. Typically one would
sufficiently recover before his 2018 term expires in order to expect strong output gains to lead to firmer labor markets
try to railroad through the new magna carta. Again, the main and higher utilization rates, thus increasing overall domestic
risk to this already uncertain scenario seems to be a rejection activity. However, available evidence through 1Q17
from within Chavismo, especially if it gains traction from suggests that earlier links between output, labor, and growth
the armed forces. have loosened. In fact, non-manufacturing growth appears
lackluster, which has weighed on overall GDP despite the
In South Africa, a surprise start of a technical recession, firming in manufacturing. The limited impulse in the non-
fanning concerns that political and policy uncertainty are manufacturing sector suggests that the traditional income
an increasing drag on growth. The striking 2%q/q (saar) links between manufacturing and the other sectors may be
contraction in tertiary sector activity marked a significant fraying. If these trends persist, they could have wider-
departure from its previous pattern of resilience. A squeeze ranging implications, not just for growth but also for
on real disposable income explains part of the softness, utilization rates. Indeed, although unemployment rates have
while political and policy uncertainty likely also presented a been broadly steady across the region, other measures of
drag on growth, particularly given the very unusual 1.2% slackemployment growth and hours workedsuggest
decline in the finance, real estate and business services underlying softness. Similarly, capacity utilization rates
sector, even as fundamental support for businesses remained outside of tech have been sliding. The implication is that
intact. Fears of downward pressure on ratings and potential core inflation will remain broadly muted, reflecting the
cabinet reshuffle were elevated in 1Q17, and these concerns limited pass-through due to relatively weak domestic
were realized on 31 March, with the removal of finance pricing power.
minister Gordhan, and related ratings downgrades to sub-
investment grade (in hard currency) by S&P and Fitch in EMEA EM: high yielders in easing mode
early April. As the national debate on state capture continues
and further allegations remain headline news, business
Growth rebound at start of 2017 was broad-based in the
sentiment is unlikely to improve near-term. Relatedly, the
EMEA EM region and we look for robust growth in the
National Executive Committee of the ANC considered a
2H17. The revival in economic activity was driven mostly
debate on Zumas presidency, yet resolved to leave the
by domestic demand rather than exports. Fixed investments
leadership issue to be addressed at the December ANC
generally expanded in the region, while in the case of CEE
elective conference instead. The end-June ANC policy
countries the rebound was strongest as it came after a series
conference may provide some clarity on the current radical
of quarterly contractions. Domestic demand is being
economic transformation debate and the October fiscal
supported by common factors like the tightening of labor
update may perhaps address fears of loosening the fiscal
markets and higher oil prices in the case of oil exporters, but
anchor (and further ratings downgrades), yet it is not likely
it is also based on idiosyncratic factorssuch as lower
that political uncertainty eases before December when the
political risk in Turkey and fiscal stimulus in some CEE
ANC leadership issue is settled.
countries. Near-term growth prospects in the EMEA EM
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region remain healthy based on hard data for April and Assuming a benign political trajectory remains a base-case
surveys for May. We see the string of PMIs as broadly in outlook, and acknowledging particular uncertainty in the
line with our 2Q forecast, while robust surveys for the Euro regions two largest economies, the context for this political
area signal some upside risks to the regional growth outlook. cycle is decent momentum behind a domestic demand-
The pace of economic activity in 2H17 will likely remain driven recovery.
healthy around the average for 1H17, but generally softer
than 1Q17 with the notable exception of Russia which Growth overall remains subdued, but domestic demand
benefits from monetary easing and higher crude prices. The should pick up in 2H across Latin America, with the
regional slowdown is driven by a combination of factors: exception of Mexico where we expect growth to rotate
a) first quarter was generally stronger than initially expected towards net exports. Strong disinflation is helping to lift
and thus some payback is likely, especially in the CEE real wages in several economies. Additionally, most of the
region, and b) growth is expected to ease in the Euro area region was in easing mode in 1H, either unwinding a tighter
and China and this should provide less of a boost from monetary stance or as a countercyclical measure to support
external demand. subpar growth. Both of these trends should begin to bear
fruit in 2H. After a protracted recession, Brazils recovery is
Inflation is not showing signs of acceleration during expected to gain traction led by domestic demand as the
2H17 despite the robust growth and tightening of labor CBs easing cycle comes to a close. 1Q growth in Brazil
markets. This would allow central banks to continue easing surprised to the upside on the back of a record agricultural
or stay on hold during 2H17, excluding the Czech Republic harvest, but otherwise showed weak underlying demand. We
where we see a hike in 4Q17. We see headline and core expect 2Q17 to contract as payback for 1Q, but 2H should
inflation in high yielders slowing quite substantially, except engender a recovery. The highly uncertain political situation
in Russias case where the strengthening in consumer and reform outlook remain wild cards for our forecast. In
demand may produce some upward pressure on inflation Argentina, likewise, disinflation should raise real wages
towards year-end. The CBR may continue easing at a enabling consumption to stage a recovery. Meanwhile, more
moderate pace of 25bp for three more times this year. As for idiosyncratic factors drive the more positive 2H outlook in
Turkey, the political pressure on the CBRT to lower rates Peru and Chile, where growth underperformed in 1H.
has eased significantly in recent months and the central bank Political uncertainty from Chiles presidential election
has maintained a hawkish rhetoric. We therefore have should keep growth subdued, but pent-up momentum could
pushed back the expected timing of easing to December lift 4Q as the uncertainty dissipates. Mexico is the notable
from September as this would allow the CBRT to be exception in Latin America, where we expect growth to cool
confident that improvements in inflation dynamics are and rotate from domestic demand to net exports in 2H.
sustainable. Up until the moment the data showed a Although a sharp uptick in inflation and tighter monetary
technical recession in South Africa, the SARB was cautious policy from Banxico may weigh on consumption, stronger
in switching to an easing bias, in part due to concerns related external manufacturing demand should compensate growth
to the uncertain socio-political backdrop. Yet, the widening somewhat.
negative output gap, the moderation in wage growth and the
benign core inflation readings are likely to tilt the SARB to Most of Latin Americas disinflation should have played
implement modest policy easing in 4Q17 (25bp) and 1Q18 out, prompting regional central banks ease off their
(another 25bp). Low yielders are benefiting from what dovish biases in 2H. Inflation in Brazil and Colombia
seems to be a flat Phillips curve, but some countries are should trough within their respective target ranges in 3Q,
more exposed than others due to large wage hikessee before heading higher by year-end. In Brazil, disinflation
Romania and Hungary. We expect a 20bp hike from the and weak activity should prompt the BCB to continue easing
CNB in 4Q17 as core inflation is on a clear accelerating in 2H. But the interplay with recent political uncertaintys
trend. impact on the reform agenda caused us to revise up our
terminal rate by 25bp to 8.50% by September, and
Latin America: seeking momentum ahead introduces some uncertainty on the easing pace, as well. An
of a big political wave increasingly negative output gap and disinflation should lead
Colombias CB to ease rates to 5.5% by August. We
introduced two more cuts in Peru taking the policy rate to
Looking ahead to the second half, the outlook for much
3.50% amid downside risks to growth. The tone in Argentina
of the region will be increasingly a function of domestic
has shifted more cautious amid stubborn inflation and
and international confidence related to election cycles.
expectations that have precluded the BCRA from resuming
Chilean presidential elections and key Argentina
its easing cycle in 1H. We see cuts resuming in June from
parliamentary elections take place in 4Q17. Colombia,
the current 26.25% to 22% by year-end alongside the
Mexico and Brazil all see presidential elections in 2018.
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expected disinflation path. The outlier in the region remains

Mexico, where inflation accelerated in 1H, mainly due to
transitory factors from gasoline price hikes, MXN pass-
through and moderate demand pressures. The inflation spike
should peak in 3Q, before easing somewhat by year-end.
Banxico has been in hiking mode with an eye on external
dynamics, but more so, on inflation with the aim of keeping
longer-term expectations anchored. The Board now seems
comfortable with the outlook, and we look for one more
25bp hike in June before rates are kept on hold at 7%.
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EM Technicals to follow returns. However, non-EM dedicated buying of

EM local bonds remains strong (Exhibit 27) and we see this
demand for EM bonds persisting in 2H17 as it is longer-term
Strong retail demand reliant on returns, and more cyclical having only recently risen from multi-year
but non-dedicated buying stays strong lows.
EM bond inflows remain robust, having totalled Exhibit 27: Non-EM dedicated buying of EM local bonds is currently
around pre-taper-tantrum levels
+$41.4bn YTD, driven by hard currency bond inflows US$bn. The proxy for non-EM dedicated buying of EM local bonds is the sum of the official
(+$26.2bn). The pace of retail and strategic inflows in the data on foreign investor buying less the inflows into EM local ccy bond funds
first five months of 2017 was the fastest since 2013, and 30 EM local ccy fund inflows (3m ma)
total EM fixed income flows are now just $1.6bn shy of Proxy for Non-EM Dedicated buying of EM local bonds (3m ma)
25
2016 full-year inflows (+$42.7bn). Cumulative hard
20
currency bond inflows YTD are tracking at their fastest pace
15
since 2012, and the pace of local currency bond inflows
YTD is the highest since 2013. While hard currency inflows 10
continue to be favoured by investors, the share of local 5
currency inflows in total EM bond inflows has increased to 0
36% (from 21% last year, see Exhibit 26). The share of ETF -5
inflows of total retail fund inflows remains high at 27% (EM -10
bond ETF AUM is only 10% of the EM bond retail -15 Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
universe), and daily ETF data shows a record pace of
inflows in recent trading sessions. Strategic flows in 1Q17
were modest (+$2.4bn), and we will be better able to Source: J.P. Morgan, IIF, EPFR Global
estimate 2Q17 strategic inflows as part of our June JPM EM
Client Survey. EM sovereign issuance remains at all-time highs and is
expected to continue at a fast pace in 2H17, with our full-
Exhibit 26: Investors continue to favour hard currency bonds, but the year forecast now standing at $143.1bn. EM sovereign
share of local currency inflows has increased to 36% this year issuance has been running at a record pace so far in 2017
Annual EM fixed income flows, US$bn with gross issuance reaching $87.8bn, around $16bn more
120 Hard Local than this time last year and already surpassing every
100 previous full-year total except for 2014 and 2016. The
80 record rate of sovereign issuance can largely be attributed to
60
the continuation of two themes which first emerged in 2016:
1) considerably larger issuance from the MENA region on
40 the back of persistent lower oil prices, and 2) Argentinas
20 return to the international bond market following the
0 resolution of its longstanding dispute with holdout creditors.
We revise our full-year gross issuance forecast modestly
-20
higher since the last EMOS to $143.1bn (+$1.6bn), although
-40 there were numerous changes at the country level, with
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: J.P. Morgan, EPFR Global
revisions higher largely due to issuance we previously didnt
expect (Egypt +$1.5bn, Oman +$2bn), and Malaysia being
Retail inflows will likely slow for the balance of the year the largest reduction (-$4bn to $1bn) where we see less need
should our return forecasts materialize. EM fixed income to issue in hard currency this year than previously. The
inflows YTD of +$41.4bn are tracking close to our full year sovereigns with the largest expected issuance for the
forecast, but we expect the pace of inflows to moderate in remainder of the year are Saudi Arabia ($6bn), Indonesia
2H17 as volatility from rates and US policies potentially ($4.5bn) and Abu Dhabi ($4bn) (see appendix for full
weighs on demand. We acknowledge that risks are to the country breakdown). Net financing (gross issuance less
upside, particularly for local currency bond inflows, which coupons and amortizations) has also been elevated so far this
remain lower than hard currency bond inflows. Our return year, with YTD total cashflows of $47.9bn resulting in net
forecasts point to modest figures for the rest of the year, with issuance of $39.9bn. The overall EM sovereign cashflow
flat to slightly negative returns for EM credit, and around profile for this year is front-loaded with full-year cashflows
3% of additional returns for the GBI-EM. This means retail of $84.3bn implying 57% of total cashflows have already
flows could slow, as our flows model shows that flows tend occurred. Therefore, despite the pace of gross issuance
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slowing down to $55.3bn between now and year-end, we see Exhibit 29: EM Corporates: Net financing still modest
further net issuance of +$18.9bn between now and year-end (US$ bn) 2015 2016 2017YTD 2017F
which will serve as a supply headwind for EM technicals for Gross issuance (a) 240 321 208 380
the remainder of the year, in our view. Estimated cash flows (b = c+d) 190 204 132 257
Amortizations (c) 102 118 94 173
Exhibit 28: EM sovereign issuance and cashflows
2017 Coupons (d) 88 86 39 84
US$bn 2013 2014 2015 2016 YTD 2017F Net issuance (e = a-c) 138 203 115 206
Gross issuance (a) 67.4 92.9 85.8 128.8 87.8 143.1 Net financing (f = a-b = e-d) 50 117 76 122
Estimated cash flows (b = Tender/Buyback/Calls (g) 38 55 28 55
c+d) 61.3 79.9 85.0 72.3 47.9 84.3
Net issuance after tender/buyback/call (j
Amoritizations (c) 26.5 37.8 43.9 26.7 26.3 36.8 100 148 86 151
= e-g)
Coupons (d) 40.6 42.1 41.1 45.6 21.6 47.4 Net financing after
12 62 48 67
tender/buyback/call (k = f-g)
Net issuance (e = a-c) 40.9 55.1 41.9 102.0 61.5 106.3
Source: J.P. Morgan
Net financing (f = a-b = e-d) 6.6 13.0 0.8 56.5 39.9 58.9
Source: J.P. Morgan
Primary market activity in EM corporate external bonds

has also been elevated at $208bn YTD driven by
Asia/China, but net financing remains manageable. Our
2017 supply forecast of $380bn implies about $172bn of
gross issuance for the rest of the year. Asia accounts for
more than 60% of the YTD supply with $131bn, out of
which $87bn is from China. The region should continue to
dominate new issuance as we expect another $114bn this
year. Supply from the other regions remains relatively low at
around $20-30bn YTD, with about $20bn remaining in each
for the rest of the year. Cashflows have also been strong
YTD at $160bn, out of which $94bn came from maturities
and $28bn from early redemptions through tender/buyback/
calls, resulting in $48bn of net financing YTD. This is again
mainly from Asia with $61bn net financing, whereas it is
about flat for Middle East & Africa ($1bn) and negative for
EM Europe (-$8bn) and Latin America (-$6bn). For full-year
2017, our gross supply forecast of $380bn along with
scheduled cashflows of $257bn and an upwardly revised
unscheduled cashflow (tenders/calls) assumption of $55bn
leads to net financing of $67bn. We maintain our view that
this should not be a major burden on EM corporate
technicals as the net financing level is still relatively modest
compared to the $200bn+ levels in the past. Moreover, the
regional breakdown is biased towards Asia and China which
we estimate will account for $96 and $91bn of the net
financing, respectively.
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high yielders, although FX weakness (-1.7%) is set to reduce

EM Local Markets Strategy total returns. On a regional basis, the greatest returns are
expected from Asia (+2.7%), with FX losses the lowest to
GBI-EM Model Portfolio: We are OW year-end (-0.5%). EMEA EM is expected to return +2.0% for
bonds and MW FX heading into 2H17 the rest of 2017, led by carry (+3.3%) and duration (+0.7%)
gains. Latin America is expected to provide the weakest
Our OW duration positions in the GBI-EM Model contribution to total GBI-EM GD USD returns (+1.7%),
Portfolio are concentrated in high yielders, while FX despite having the greatest forecast carry returns regionally
allocations are mixed. In local rates, our positions are largely (+4.3%), mainly due to FX weakness (-2.0%). At the country
unchanged since the last Emerging Markets Outlook and level, Brazil is expected to deliver the greatest total returns for
Strategy publication. In Latin America, we continue to hold the rest of 2017 (+5.6%), while the greatest underperformance
long Brazil and Colombia, and remain UW Thailand in EM is forecast for Colombia (-1.9%). The largest local returns are
Asia. In EMEA EM, we hold OWs in high yielders Turkey expected from South Africa (+8.3%), and Czech Republic is
and Russia, and have moved MW CEE duration by taking forecast to deliver the greatest FX returns (+2.4%).
Hungary to MW (from UW); we are now UW Czech
Exhibit 30: We expect a further +2.1% of total gains for GBI-EM GD
Republic and Romania vs. OW Poland. In FX, we remain To year-end forecasted returns for GBI-EM GD USD
MW overall, but have shifted allocations. In EM Asia, we Spot FX Duration Carry Total
5%
turned MW IDR (from UW), leaving us OW EM Asia FX via
OW MYR. In Latin America, we are MW BRL (from OW), 4%
OW CLP (from MW), UW COP (from MW) and MW PEN 3% 2.7%
(from UW), taking Latin America FX to MW (from OW). In 2% 2.1% 2.0% 1.7%
EMEA EM, we remain MW FX, with OWs in CZK and TRY 1%
balanced with UW HUF and a new UW RUB position (from 0%
MW). -1%
-2%
For the rest of 2017, we forecast a further +2.1% of total
-3%
GBI-EM GD USD returns. Year-to-date, GBI-EM GD has GBI-EM Global Asia EMEA EM Latin America
returned +11.0% in USD terms, led by Latin America Diversified
(+12.2%), making it one of the strongest performing asset Source: J.P. Morgan
classes in 2017. We anticipate further gains of +2.1% for the
remainder of the year, driven by carry returns (+3.5%) from
Exhibit 31: GBI-EM Model Portfolio recommendations and returns
GBI-EM GD Stats Model Portfolio Allocation GBI-EM GD Returns YTD MP Excess Returns YTD
Bond FX (bp)
Market
Index Index Index Contribution Value FX Bond FX
Weight Yield Duration to Duration Weight Position View View USD Local FX Bonds FX Total
GBI-EM 100% 6.24% 5.04 0.20 +6.57% +0.96% OW N 10.8% 5.3% 5.2% +3.2 -16.3 -13.1
EM Asia 24.25% 5.01% 5.77 (0.10) -1.89% +0.96% UW OW 8.8% 5.1% 3.5% -4.3 +2.9 -1.4
EMEA EM 42.82% 6.29% 4.82 0.20 +5.80% - OW N 11.2% 4.4% 6.5% +1.7 -1.8 -0.1
Latin America 32.94% 7.24% 4.80 0.10 +2.66% - OW N 12.1% 6.8% 5.0% +5.9 -17.4 -11.6
Indonesia 9.81% 7.21% 6.45 - - - N N 10.2% 8.8% 1.3% - -1.8 -1.8
Malaysia 6.92% 3.93% 5.05 - - +0.96% N OW 8.7% 3.2% 5.3% - +4.5 +4.5
Philippines 0.34% 4.97% 7.12 - - - N N 6.6% 6.1% 0.4% -1.4 +0.1 -1.3
Thailand 7.17% 2.37% 5.48 (0.10) -1.89% - UW N 7.6% 2.4% 5.2% -2.9 - -2.9
Czech Republic 2.26% 0.28% 5.78 (0.025) -0.43% +1.00% UW OW 9.5% -0.2% 9.7% -0.7 +3.7 +2.9
Hungary 4.44% 1.91% 4.31 - - -1.25% N UW 8.9% 1.7% 7.0% -2.6 -7.8 -10.4
Poland 9.81% 2.68% 4.15 0.05 +1.21% - OW N 15.5% 3.1% 12.0% +3.0 -3.9 -0.9
Romania 2.91% 2.65% 3.96 (0.025) -0.63% - UW N 7.7% 1.5% 6.1% -3.8 -0.2 -4.0
Russia 6.54% 7.66% 3.72 0.10 +2.64% -0.75% OW UW 13.9% 6.3% 7.2% +5.2 +4.4 +9.6
Turkey 8.10% 10.42% 3.45 0.10 +3.01% +1.00% OW OW 5.5% 6.2% -0.7% +1.5 +3.7 +5.2
South Africa 8.76% 9.16% 7.23 - - - N N 12.6% 5.5% 6.7% -0.8 -1.7 -2.6
Argentina 1.26% 14.10% 3.94 - - +1.00% N OW 17.1% 18.5% -1.2% - +1.4 +1.4
Brazil 10.00% 10.04% 3.03 0.05 +1.65% - OW N 6.9% 7.4% -0.5% +2.8 -8.1 -5.3
Chile 1.66% 3.38% 2.84 - - +1.00% N OW 3.6% 3.3% 0.3% - -2.1 -2.1
Colombia 7.72% 6.01% 4.93 0.05 +1.01% -2.00% OW UW 11.5% 7.8% 3.4% +3.9 +1.0 +4.9
Mexico 10.00% 7.17% 5.54 - - - N N 19.0% 5.2% 13.1% -0.8 -6.4 -7.2
Peru 2.30% 5.62% 7.59 - - - N N 12.8% 9.8% 2.7% - -3.4 -3.4
Source: J.P. Morgan; YTD statistics as of June 7 COB
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EM Asia local markets: Stay OW FX in a cheap on a variety of metrics (PPP/Balassa-Samuelson

framework/ NIIP stabilization) and policy makers may not be
low carry/low vol environment averse to further strength. We also retain our long EUR/CNY
trade; again on valuation differentials.
Over the past four weeks, our Asian activity surprise
indicator has given up half of the gains it recorded in the In Asia rate and bond markets, we are UW in the GBI-
previous month (Exhibit 32). However, that has hardly been EM Model Portfolio given the countries included in the
a dampener for foreign portfolio flows into the region. index but have a more neutral stance and more mixed set
NJA-10 aggregate foreign equity holdings have raised of trades in the region more broadly. We stay long short-
another USD110bn q-t-d to a stock of ~14.5% of GDP from to-medium Indian government bonds, long 20yr Indonesian
~14.0% in Mar-17 and 12.7% in Dec-16. Meanwhile, government bonds and long SGD IRS 1y1y versus USD
cumulative foreign bond holdings in the NJA-5 markets of 1y1y) balanced with mildly hawkish US FOMC rate trades
Korea, India, Indonesia, Malaysia and Thailand have surged through paid 1yr HKD swaps and Underweight Thai bonds in
to USD280bn from USD260bn in Mar-17 and the Dec-16 the GBI-EM Model Portfolio. We also scaled into a Korean
local trough of USD242bn. The topping-out in China money treasury 3s-10s flattener at 58bps on 23rd May. Whilst we
market rates, a further decline in market pricing of the acknowledge the KTB curves steepness is in part because of
terminal Fed policy rate after back-to-back dovish CPI prints, the supplementary budget announced by the new government,
and the pro-European French Presidential election outcome, history suggests the private sector could respond by saving
have all been contributory factors. more in line with the Ricardian equivalence, thereby capping
growth.
It is difficult to currently position against capital flows
into EM Asia and EM as a whole. For one, at ~5.0% yoy, Exhibit 32: EM Asia activity surprise index stalls
global nominal GDP growth in USD terms is roughly where it
index
should be both in momentum terms and level terms, and 20
provides no cause for either inflationary or deflationary 0
concerns. Secondly, a historical analysis of US business -20
cycles and domestic profits evolution suggests the current -40
expansionapproaching its ninth yearcould well last for at
-60
least another six quarters and has the potential to exceed the
-80
120-month record of the 1991-2001 expansion. Thirdly,
whilst Chinese authorities are more focused on financial -100
stability and controlling debt buildup, any monetary and -120
regulatory tightening will probably stay calibrated and not to Jul-11 Jan-13 Jul-14 Jan-16
Asia EM activity surprise index
the exclusion of growth, at least on this side of the important
Source: J.P. Morgan
political gathering in 4Q17.
Exhibit 33: Outright trade recommendations for EM Asia
As supportive as these factors are, a correction is always Open Recommendations for EM Asia Rates
possible. The 12mth carry on the JPM ADXY currency index Entry Date Entry
has halved since the start of the year to ~1.5% even as market Long INR 4y Gov Sec (8.27% IGB 2020) 2/5/2016 7.59
indicators of volatility globally appear low relative to Receiv e 1y 1y SGD v s USD 6m LIBOR IRS 3/20/2017 -26
theoretical constructs measuring Economic Policy Receiv e 1y 1y SGD v s {USD,EUR,JPY} 6m LIBOR IRS 3/20/2017 30
Uncertainty (such as the Baker, Bloom & Davies Composite Pay THB 2s5s NDIRS Curv e 11/4/2016 29
Index). Furthermore, the 5y1m USD OIS at ~1.9% is already Long IDR 20y INDOGB (FR72) 5/19/2017 7.57
pricing a terminal rate well below the 3.0% level indicated by Receiv e 3s10s KTB Curv e Flattener 5/23/2017 58
Pay HKD 1y IRS 5/12/2017 0.98
the FOMC members March blue dots. Whilst current US
inflation is undershooting the target, the decline in the Open Recommendations for EM Asia FX
unemployment rate to below NAIRU may make the Fed wary Entry Date Entry
of committing a Type 2 error more than ever before in this Long EUR/CNH 5/9/2016 7.4250
cycle; in other words, it may not want to miss inflation in
hindsight. Against such a backdrop, our EM Asia strategy Recently Closed Recommendations
stance is to focus on valuation dislocations and seek balance. Close PNL
Date Entry Exit (%/pts)
Short THB vs basket (CNH, JPY, EUR,
Stay OW Asia FX in the GBI-EM Model Portfolio, via the 5/24/2017 100 99.65 0.35%
USD)
MYR (held since 3rd February). We see MYR as still Source: J.P. Morgan
23
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Jonny Goulden AC
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EMEA EM local markets: Bullish high- to pare back UW positions in local bonds to MW, but
selectively retain UW and payer positions which would have
yielding bonds, with differentiated FX a high beta to any upside surprise to inflation or a bund
positioning tantrum. Our favored receiver in low yielders remains in ILS
rates, where low inflation and trend currency appreciation,
EMEA EM macro factors remain more favorable for high alongside a potential global bond index inclusion this year,
yielders, but we remain cautious on political and should lead to rates outperformance.
commodity headwinds. Our portfolio strategy across both
the GBI-EM Model Portfolio and outright trades in EMEA We make the following changes to our rates and bond
EM has been anchored in a bullish view of high yielding local trades given the factors discussed above:
bonds against low yielders. Accordingly, we have been OW
Turkey and Russia local bonds, against a net UW position Pare back UW in CEE duration to MW, by cutting
low yielding bonds in Central and Eastern Europe. In FX, we Hungary to MW (from UW), and reducing the size of UW
have also had a preference for being OW TRY, with a more positions in Romania and Czech Rep. Hold OW in Poland
cautious approach to commodity exporters (ZAR and RUB). local bonds.
Low financial market volatility, contained core yields, and
disinflation remain supportive of OW positions in high Outright trades: Simplify IRS trades by taking profits on
yielding bond markets. However, we pare back our bearish receive 5y ILS vs. 5y EUR, and take losses on pay 5y
positions in CEE rates, given a lack of obvious near-term HUF vs 5y EUR. Enter new 5y ILS receiver vs 5y HUF
catalysts for a repricing higher of core rates. In FX, we payer.
recommend buying RUB vol, both as a portfolio hedge
against a rise in vol, but also due to idiosyncratic factors. FX Strategy: Remain MW, by holding OW in TRY and
CZK, UW in RUB and HUF. In high yielding markets, our
For the second half of the year, we are focused on the preferred currency to be long is TRY, given relatively cheap
following market drivers: valuations, a hawkish central bank and high nominal and real
yields. We are more cautious on the currencies of commodity
Globally, our base case is that core yields remain range- exporters, as terms of trade are unlikely to move in favor of
bound through the summer. Key risks for CEE include a ZAR and RUB in coming months. Additionally, we think any
re-run of 2015s bund tantrum as the ECB prepares to return of generalized financial market volatility in coming
taper its balance sheet in 2018, which is likely to take months is likely to be most detrimental to commodity
place around the same time as the Fed announces currencies. As such, we recommend buying RUB vol via
modalities of its own balance sheet reduction strategy. USD/RUB call options. Directionally, we think RUB is
vulnerable to weakening over the summer as the current
Commodities prices have been faltering, and keep us account seasonally deteriorates, and move UW RUB in the
cautious on commodity currencies. Oil prices have been GBI-EM Model Portfolio. In CEE, our favored currency
faltering, and iron ore prices continue to grind lower. We remains CZK, given relatively cheap valuations and support
do not have high hopes for a significant commodity price from the CNB, which is likely to be the first central bank in the
rebound in the second half of the year. region to raise its policy rate in 4Q17. We do not think there is
much scope for appreciation of PLN from current levels,
Regionally, the CEE reflation theme is intact, but headline
especially as the NBP turns more dovish, nor for HUF where
inflation is range-bound for now, which should temper
the central bank is actively resisting currency appreciation
market moves in the near term.
pressures by depressing interbank rates.
In high yielders, we think disinflationary pressures in
Turkey, Russia and South Africa are to continue, which
fundamentally support rates markets in these countries.
Rates Strategy: OW Russia and Turkey; long 10-year

TurkGBs, hold receiver in ILS IRS vs. payer in HUF IRS;
hold payer in 5y CZK IRS. In Russia, Turkey and South
Africa our economists see headline inflation falling in the
remainder of the year, with rate cuts penciled in all of these
markets. This is fundamentally positive for local bonds.
However, politics is likely to loom large in both Turkey and
South Africa, and is the most significant idiosyncratic risk to
monitor in these markets. In CEE rates, we think it is sensible
24
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Jonny Goulden AC
(44-20) 7134-4470
Exhibit 34: EMEA EM outright Trade Recommendations

Outright trades - Entry Entry Current Review
Target
Rates Date level level Point
Receive 5y ILS
IRS, pay 5y HUF 08-Jun-17 30bp 30bp 70bp 5bp
IRS
Pay 5y CZK IRS 31-Mar-17 0.70% 0.82% 1.00% 0.50%
Long 10y Turkey
nominal bonds 17-Mar-17 11.01% 10.48% 10.00% 10.75%
(FX-hedged)
Receive 5y PLN-
EUR xccy basis 24-Feb-17 23.5bp 26bp -5bp 35bp
(10k DV01)
Outright trades - Entry Entry Current Review
Target
FX Date Level level Point
Long 08-Dec-17
USD/RUB call (59),
08-Jun-17 3.76% 3.76% - -
spot reference:
57.00
Long ILS vs.
Basket (0.5 EUR, 19-May-17 3.7980 3.7483 3.60 3.85
0.5 USD)
Long TRY/ZAR 26-Apr-17 3.6950 3.6537 3.90 3.60
Short 27-Nov-17
EUR/CZK forward
25-Nov-15 26.6883 26.2564 26.00 27.25
(levels reference
fwds)
Source: J.P. Morgan, as of 08-June-17, 3pm
25
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Jonny Goulden AC
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Latin America local markets: Stay OW seem heavy (see Latin America Local Markets Compass,
Carranza et al, 5 Jun 2017).
rates, take advantage of uneven
commodity price action via OW CLP, Exhibit 35: Stay OW rates with inflation forecasted to fall and CBs set
OW ARS and UW COP to cut rates
Changes in inflation and policy rates until year end based on J.P. Morgan economic forecasts
100 25 4
Latin America fundamentals continue to support a more 0 0
constructive stance in rates rather than FX, in our view, 0
and we move into 2H with bullish duration positions in -14 -33
-100 -50
Brazil and Colombia, while neutral FX. For FX, the uneven -75 -84
commodity price action and increase in volatility has led to -200
-175
relative value opportunities, which we express via moving -300
OW CLP and UW COP in the GBI-EM Model Portfolio and
-400 Monetary policy
selling 3M USD/ARS NDF (in addition to our existing OW changes until year end;
ARS in the GBI-EM Model Portfolio). Mexico state election -500 -425
bp
preliminary results show a victory for the PRI which might -600
soften some short-term political concerns. Though we revise
-700 -630
MXN forecasts now expecting a stronger MXN, we still find
AR BZ CO CL PE MX
more value in Mexican rates rather than FX going into 2H.
Source: J.P. Morgan
Falling inflation and CB easing justify an OW in rates via

Exhibit 36: Open LatAm Rates trades
Brazil and Colombia into 2H. April CPI marked a 10-year Entry Entry
low level for Brazil inflation, with IPCA-15 moving to a 3% Outright trades Last Link
Date level
handle and BCB delivering 100bp cuts. We continue to MX Receive 5y1y TIIE FRA 7Mar17 8.00% 7.42% link
believe that fundamentals are strong enough to withstand MX
Switch into Jun26 Mbono from
10Nov16 0.47 0.21 link
political volatility and with J.P. Morgan economists Nov42 Mbono
forecasting 175bp of cuts into 2H we stay OW rates in the BZ Receive Jan20 7Dec16 11.70% 10.02% link
GBI-EM Model Portfolio. While Colombias BanRep Receive DI Jul22/Jan23 FRA vs. pay
BZ 22Mar17 43bp 138bp link
the Jan23/Jul23 FRA
delivered a 25bp cut last week with observed CPI and CL Enter 2s5s steepeners 7Apr16 36bp 69bp link
inflation expectations continuing to decline, momentum for
TES should remain firm with 75bp cuts still expected and CL Buy 2Y CLP/UF inflation breakevens 5Jun17 2.71% 2.69% link
inflation forecast to move 65bp lower (Exhibit 35). Elsewhere CO Receive 3Y IBR 22Sep16 5.97% 4.87% link
in the region we stay neutral. Mexico saw MXN 75 billion of CO Switch into 10Y UVR from 10Y TES 1May17 3.10% 3.39% link
Mbono outflows since the end of March, most of which was
AR Buy ARS local-law GDP warrant 18Oct16 10.30 10.50 link
in the 5y tenors and shorter, and we hold 5y1y TIIE receivers
expecting Banxico to end the tightening cycle soon. AR Buy Bonar 2020 (Badlar-linked bond) 10Apr17 23.19% 23.13% link
U Buy UYU 2028, sell NTNB 2030 9Feb17 13bp -204bp link
In FX, we position OW CLP and ARS while UW COP, Entry Entry
Model Portfolio allocations Last Link
and revise MXN forecasts stronger following state Date level
elections. The uneven commodity price action has opened CO OW Local Rates 28Jun16 7.45% 5.99% link
space for relative value opportunities in Latin America FX in BZ OW Local Rates 23Mar16 13.11% 10.16% link
our view. The CLP is trading cheap to our short-term Source: J.P. Morgan, Bloomberg
valuation models and positioning seems to favor a bullish
stance with favorable terms-of-trade dynamics. The ARS sold
off following the BRL spike and is now looking cheap to our Exhibit 37: Open LatAm FX trades
Entry Entry
models with USD/ARS supply from harvest exporters Outright trades Last Link
Date level
remaining firm. We move UW COP with unattractive AR Sell 3M USD/ARS NDF 5Jun17 16.78% 16.74% link
valuations and a deteriorating oil outlook. Finally, we revise Entry Entry
higher (stronger) the MXN forecast, now expecting the Model Portfolio allocations Last Link
Date level
USD/MXN at 18.50 by December from 19.80 before. The AR OW ARS 17Mar17 15.56 16.00 link
preliminary PRI victory will likely soften short-term political CL OW CLP 5Jun17 669 669 link
concerns which, combined with external risks, should bode
CO UW COP 5Jun17 2896 2891 link
well for a more constructive outlook on the peso. We stay
Source: J.P. Morgan, Bloomberg
neutral MXN in the GBI-EM Model Portfolio as positions
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We have been recommending buying bond-CDS basis in

EM Hard Currency Strategy countries where basis levels have fallen meaningfully as a
consequence of a prolonged low-vol environment resulting
EMBIG Model Portfolio: Stay MW with a in CDS tightening more than bonds. Over the past few
preference for high-yielders months, there has been a broad-based trend of bond-CDS
basis declining as CDS has outperformed bonds. Bond-CDS
in EM has structurally been positive for some time (i.e., CDS
A lack of catalysts to alter the current risk environment
is generally wider than cash bonds), so we focus the
will likely see EMBIGD spreads continuing to stay range-
opportunities in places where basis levels are low relative to
bound, and we stay MW and hold our spread target of
their respective historical ranges, as few countries actually
300bp at end-2017. Range-bound spreads and higher UST
have negative basis. We think the risk-on environment
yields as in our base case would see modest losses to year-
coupled with persistently low volatility has meant fewer new
end, driven by Treasuries with YTD returns already at 7%.
hedges being put on in CDS, as well as existing CDS
Every 25bp of tightening in the EMBIGD would result in an
protection being unwound, resulting in larger tightening of
additional return of 1.7%. We continue to favor a mix of OWs
CDS spreads than cash bonds. However, bond-CDS basis is a
in high-spread names funded by UWs in low-spread names,
mean-reverting relationship, so we recommend buying cash
particularly in tight Asian quasi-sovereigns which also serve
bonds and buying CDS protection in places where levels
as cheap hedges against China risks. We maintain our OW
appear extreme. We recommended buying basis in the
stance in Sub-Saharan Africa with OWs in Ivory Coast,
Philippines and Indonesia, in addition to existing trades in
Ghana and Cameroon. Elsewhere in EMEA EM, we stay
South Africa and Brazil; in Colombia, we recommend the
OW Kazakhstan, where weve once again upgraded 2017
opposite by selling 5y CDS and selling Colombia 26s (see
growth, and OW Ukraine (and hold GDP warrants), where
here).
carry remains attractive and with an IMF program still
developing. We hold our OW Turkey despite the recent
Exhibit 38: EMBIGD 2017 return expected at 6% if 10y UST reaches
flare-up in geopolitical risks related to Qatar, as a catch-up 2.75% and EMBIGD remains around 300bp
trade given the combination of a post-referendum political EMBIGD 10-year UST yield (%)
calm and a more market-friendly central bank offering the STW (bp) 2.00 2.25 2.50 2.75 3.00 3.25 3.50
right conditions for a reversal of the significant 200 17.5 15.9 14.2 12.5 10.9 9.2 7.5
225 15.9 14.2 12.6 10.9 9.2 7.6 5.9
underperformance in the past year. In Latin America, we stay
250 14.3 12.6 10.9 9.3 7.6 5.9 4.3
OW Argentina and OW Uruguay, which are balanced by 275 12.6 11.0 9.3 7.6 6.0 4.3 2.6
UWs in Bolivia and Peru. Our UWs are concentrated in tight 300 11.0 9.3 7.7 6.0 4.3 2.7 1.0
Asian credits, including UW Philippines, as well as UW 325 9.4 7.7 6.0 4.4 2.7 1.0 -0.6
350 7.7 6.1 4.4 2.7 1.1 -0.6 -2.3
quasi-sovereigns Sinopec and Petronas. 375 6.1 4.4 2.8 1.1 -0.6 -2.2 -3.9
400 4.5 2.8 1.1 -0.5 -2.2 -3.9 -5.5
Source: J.P. Morgan
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Exhibit 39: EMBIGD Model Portfolio recommendations and returns
Portfolio Returns YTD Portfolio Attribution YTD
Benchmark Return 6.846% Market position return (bp): -12
Portfolio Return 6.994% Credit selection return (bp): 27
Portfolio Outperformance
Portfolio Outperformance (bp): 15 (bp): 15
As of June 07, 2017 Since Initiation YTD Changes & Returns

Spread Spread
Current Initiation Chg vs Spread Chg vs Spread Carry Credit
Credit selection returns View Position Spread Duration Date EMBIG Chg EMBIG Returns Returns Returns
(bp) (bp) (bp) (bp) (bp) (bp)
Argentina OW 1.30% 396 6.9 11-Feb-16 105 (57) (16) (1) 1 (0)
Cameroon OW 0.50% 424 5.5 7-Mar-17 (78) (82) (78) 2 0 2
Ghana OW 0.60% 529 4.7 7-Mar-17 (87) (90) (87) 3 0 3
Ivory Coast OW 0.85% 379 6.4 11-May-17 (16) (13) (16) 1 0 1
Kazakhstan OW 0.60% 195 9.8 31-Mar-17 7 2 7 (0) (0) (0)
Turkey OW 1.10% 287 7.7 26-Apr-17 (2) (6) (2) 0 (0) 0
Ukraine OW 1.00% 566 4.5 9-Feb-17 (54) (78) (54) 2 1 3
Uruguay OW 0.70% 189 11.1 31-Mar-17 (16) (21) (16) 2 (0) 1
Bolivia UW -0.40% 210 6.3 20-Nov-15 29 126 166 2 0 3
Peru UW -1.80% 136 11.4 9-Feb-17 3 (22) 3 (1) 1 (1)
PETMK (Malaysia) UW -1.56% 101 5.9 11-May-17 (8) (5) (8) (0) 0 (0)
Philippines UW -1.69% 99 9.3 31-Mar-17 10 5 10 1 0 2
SINOPE (China) UW -1.20% 118 5.6 11-May-17 (4) (1) (4) (0) 0 0
Lithuania NR
Sri Lanka NR
Closed position returns (bp): 12 Current Credit selection return (bp): 15
Source: J.P. Morgan
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EM corporates: Technical strength and in Vale and Suzano from the country and Pemex in the
region. In CEEMEA, we continue to focus on specific
resilience to be put to test in 2H pockets of opportunities with quasi-sovereign support stories
and situational plays, while our biggest OW in the region
EM corporate returns at 5.0% YTD are higher than US remains in Turkish credits.
credit but lagging other EM asset classes following a rise
in credit/country-specific situations over the past month. We maintain our global EM corporate HY default
After reaching a post-crisis tight of 246bp in mid-May, forecast at 2.1% despite some recent surprises, remaining
CEMBI Broad is 20bp wider at 265bp led by the HY segment on track to post the lowest default rate in 6 years. EM
which corrected by 33bp. Credits such as Noble, Reliance corporate credit metrics remain in the early stages of healing,
Communications, and IBA had significant price drops while with 1Q17 marking the 3rd quarter of sequential
Brazil and Qatar country segments underperformed on (geo-) improvement. Recovery in commodities has underpinned that
political issues. Strong technical support has so far limited to a large extent, although the recent correction in commodity
spillover from these situations, and we do not expect this prices may stall the progress to some degree. Nevertheless,
dynamic to change in the near term given the continued we continue to expect high-single-digit top-line growth and
inflows and modest net financing. Nevertheless, we could see modest reduction in gross leverage from the 2016 peak of
incremental pressure on spreads if additional idiosyncratic 3.1x. Agrokor and IBA were not in our original default
situations develop. More broadly, the cut in commodity price forecasts and pose an upward risk to our EM Europe default
forecasts is a challenge, given that the related sectors have not forecast. We believe that even if the risks from these and
reacted that much to the decline in prices. Another question is other newly stressed situations materialize, the global EM
whether the low market volatility can be sustained, especially corporate HY default rate may only rise to 2.5%, which is
in light of the possibility of DM central bank tightening in the still below our stress case scenario of 2.9%. However, market
second half of the year. Apart from a potential turn in risk expectations look to be too optimistic as CEMBI Broad HY at
sentiment, there could also be technical pressure if European 408bp implies only about 1% default rate.
investors switch out of EM corporates since they have been a
meaningful source of demand. We expect some of the Exhibit 40: EM corp HY default rate forecast for 2017 unchanged at 2.1%
European money to be longer-term strategic allocation which Ex. 100% Quasis Inc. 100% Quasis
should keep such funds more sticky, but there could still be 2016 2017YTD 2017F Stress Case 2016 2017F
some partial unwinding from opportunistic investors. The Asia 1.0% 0.3% 2.0% 2.5% 0.9% 1.9%
likelihood of large market moves reminiscent of the taper EM Europe 3.6% 1.7% 2.1% 1.8% 3.4% 1.0%
tantrum in 2013 seems to be low at the moment, but current Latin America 9.2% 0.0% 2.6% 3.6% 8.5% 15.1%
MENA 5.7% 1.1% 3.4% 4.7% 4.8% 3.0%
spread levels do not leave much room for error.
% EM HY bonds 5.1% 0.6% 2.1% 2.9% 4.9% 6.7%
Source: J.P. Morgan
Looking at the balance of the year, we maintain our UW
stance although in the near-term we expect the strong
Our 2017 return expectation for the CEMBI Broad is
technicals to provide stability. CEMBI Broad at 265bp has
moved closer to our end-2017 spread target of 275bp and is 4.6%, which implies a small negative return in 2H. This is
likely to remain range-bound over the next month or two. due to UST yields with the end-2017 forecast for the 7-year
While the sustained technical support is likely to limit large about 60bp higher than currently, whereas spreads are quite
spread widening, we think technicals will be put to test by close to our 275bp target. If UST yields remain at current
risk factors in the second half. Hence, we would expect levels or if most of the rise is offset by tighter spreads, total
incremental underperformance versus other EM asset classes return for the year could turn out to be another robust 7-8%.
and US credit. We think the IG segment should hold up better
Exhibit 41: CEMBI Broad 2017 return expected at 4.6%
but see more risk for HY. This is especially so in Asia, where
CEMBI 7-year UST yield (%)
IG should continue to track US HG whereas HY could be STW (bp) 1.80 2.05 2.30 2.55 2.80 3.05 3.30
more vulnerable to idiosyncratic situations and developments 175 12.8 11.7 10.5 9.4 8.3 7.2 6.2
in China related to liquidity tightening and onshore investor 200 11.6 10.4 9.3 8.2 7.1 6.0 5.0
behavior. In Asia, we prefer to go down the capital structure 225 10.4 9.2 8.1 7.0 5.9 4.8 3.8
such as AT1 of select banks (BOC, ICBC, Woori, Nanyang, 250 9.2 8.1 6.9 5.8 4.7 3.6 2.6
DBS) that may benefit from official support and corporate 275 8.1 6.9 5.8 4.6 3.5 2.5 1.4
300 7.0 5.8 4.6 3.5 2.4 1.3 0.3
hybrids with 5% step-up (CHPWCN, CITLTD, CCCC,
325 5.9 4.7 3.5 2.4 1.3 0.2 -0.8
CRCC) or those with resets (SINOCH, CKHH). We took off 350 4.8 3.6 2.5 1.3 0.2 -0.8 -1.9
our preference for Latin America in May following the rise in 375 3.7 2.6 1.4 0.3 -0.8 -1.9 -2.9
political uncertainty in Brazil, but maintained selective OWs Source: J.P. Morgan
29
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Jonny Goulden AC
(44-20) 7134-4470
target is now 870 (KOSPI 3000) while KOSPI broke its ten-
EM Equity Strategy year upper trading bound of 2150 in April. This KOSPI
momentum is attracting trend-following CTAs (KOSPI
Fundamentals tracking the bull case unbound, Mowat et al, 29 May 2017). Meanwhile, price and
fundamental momentum (EPS revisions) remain positive and
As we approach 2H17, fundamentals in EM are still the market technicals are improving with a broadening of
tracking our bull case (MSCI EM 1100, +8%). The key gains from tech, telecoms and financials. Our sense, from
driver is positive EPS revisions with MSCI EM 2017E EPS client feedback and US$2billion of redemptions in Korean
+9% YTD while the global macro environment is benign. US domestic mutual funds, is that this is not a euphoric top of the
core PCE has declined from 1.8% to 1.5% and with it bond market move as it has been a year of policy and political
yields and the dollar. Our preferred style is relative EPS uncertainties (US trade policy, North Korea, THAAD tensions
growth and revisions, plus low relative forward P/E. Key OW with China and the impeachment of President Park).
markets are Korea, China, Russia and Chile and our high
conviction sector call is OW tech (Exhibit 45). We are OW Russia, a value market, in part to offset some
of the growth bias implicit in our China IT OW. Russia
We forecast 2017 EPS growth to be 20%oya leading to a remains the cheapest major EM market on both a dividend
new EM bull market (Exhibit 42). From 2011-15, the asset yield and a P/E basis. In addition, Russia trades at a discount
class had failed to deliver EPS growth, a core fundamental, to its own long-term history in terms of P/E (13% discount to
which made markets more vulnerable to risk-off events. The its 10-year average, 25% discount ex-energy) and dividend
earnings recession during the same period was driven by a yield (a whopping 61% discount to its long-term average
synchronized tightening cycle in 2011, which led to reduced dividend yield). Consensus growth for MSCI Russia is
demand and as capacity planned in 2009-10 came on stream, 10%/16% in 2017/18, and the index has seen positive EPS
it reduced pricing power and increased interest costs. In revisions to 2017 EPS YTD. According to our model, a 10%
addition, the decline in commodity prices had hit resource rise in oil drives a 19% rise in consensus Russian energy EPS
companies profits along with reduced terms of trade, leading and its 95% R-squared. With oil trading sub-$50 along with
to weaker EM currencies. Therefore, with 2016 being the first the political tension in the GCC, there could be significant
year of premium growth since 2011 (EM EPS growth was upside due to the oil price. We also note widespread investor
8%oya vs. 2%oya in DM) and positioning and inexpensive skepticism over the future of oil prices as we hear far more
relative valuations possibly increasing potential returns, we about shale in the US than long-term demand growth or
see clients taking the risk of investing in emerging equity shrinkage in big oil capex since 2015. Investor positioning in
markets for premium EPS growth. Russia has begun to shift while GEM funds remain OW and
with shares outstanding in RSX, the biggest Russia ETFs are
Exhibit 42: 2017E and 2018E EPS revisions down 16% from the peak.
120
We are OW China and Korea IT and neutral Taiwan IT.
115 2018 IT is the best performing sector YTD, outperforming EM by
11%. IT makes up 25% of MSCI EM with 11 out of the EM
110 top 25 stocks being tech/internet names. We see that they are
benefitting from passive flows into ETFs and from the
105
rotation out of commodities/old economy. However, the key
pushback on tech is that valuations are high. Korea IT is 0.9
SD below and Taiwan IT is at its 10-year average forward P/E.
100
At this point in the memory and display cycle, we would
2017 expect valuations to be inexpensive, but Korean IT is arguably
95 cheap. Better shareholder value policy, notably treasury share
cancellation, should lead to a structural rerating. On the other
90 hand, China internet is a high-valuation, high-growth sector.
Feb-16 Jun-16 Oct-16 Jan-17 May-17 Its forward P/E, at 29x, is more than triple the MSCI China
Source: J.P. Morgan, IBES, 25 May 2017.
ex-internet P/E of 9x. While Chinese internet stocks are at a
modest premium to their US counterparts (Exhibit 44), this
Our MSCI Korea year-end target is now 770 from 655
lack of a valuation discount is a clear risk if the market begins
(KOSPI 2600). This assumes that Samsung Electronics
to doubt high secular growth and/or Chinas risk premium
treasury share cancelation leads to 2018 EPS integer at 78.5,
increases.
which is much higher than our previous assumption of 66 and
an end-2017 P/E of 9.8 (previously 10). The new bull case
30
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
We tactically downgraded Brazil from OW to Neutral on Exhibit 43: Korea tech hardware P/E relative to US tech hardware
18 May as the political scandal involving President Temer PE (Rel) Average +1SD -1SD
1.7
raises concerns about the prospects of his reform agenda.
The focus is now on the TSE trial and whether or not 1.5
president Temers mandate is going to be cut short. Despite 1.3
the political uncertainty, foreign inflows into Brazil have been
robust. Within Brazil, we are neutral financials (previously 1.1
OW) and OW on materials and energy. 2017E EPS integer for
0.9
Brazil has been revised up by +1% over the past month led by
materials (+9%). Finally, Brazil earnings remain depressed 0.7
while the market is trading on 1.5 P/BV, well below the long-
term average of 1.7 (Tactically bringing Brazil from OW to 0.5
07 08 09 10 11 12 13 14 15 16 17
neutral, Mowat et al, 18 May 2017). Source: J.P. Morgan, IBES, May 2017.
Key risks to our strategy include high internet/e-commerce Exhibit 44: Software & Service valuation comparison
valuations, weakening in tech demand, North Korea, China China US Relative
shadow banking tightening, Brazils progress on reform and Current forward P/E 29.7 27.6 1.08
G4 central bank balance sheet adjustment. ten-year average 29.2 20.2 1.46
No. of SD +0.1 +1.9 -1.1
Source: MSCI, IBES, Datastream, 2 June 2017.
Country asset allocation:
OW: China, Korea, Russia and Chile

UW: Thailand, Mexico and Turkey
Exhibit 45: Emerging markets strategy heat map OW sectors in light green, UW sectors in red
KR. Others India Fin. SA Mat. SA Others Philippines
India IT
India Energy Russia Fin.
Korea CD China Fin. SA Financials Thailand
India HC India Mat.
Ex Banks Russia Energy
Taiwan IT Korea IT Korea Ind. India CD India Others
China IT SA CD Indo. others
Korea Mat. India CS Chile UAE
China CS Brazil MX Others Qatar Indo. Fin.
Korea Fin.
Financials MX Financials Turkey Fin.
China Banks China CD
Taiwan Mat. Korea CS Brazil CS Mexico CS Turkey others Malaysia
China
Taiwan Taiwan Ch. Energy Ch. RE Brazil Others MX Materials Poland
Telecom
Others Financials Ch. Others Ch. Utilities Ch. Ind. Brazil M&E MX Telecom Hunga. & CZ Greece
Source: J.P. Morgan Strategy, MSCI, Datastream. For color/black and white print, red/dark grey indicates UW, green/light grey indicates OW, and white indicates Neutral. Area of the sector indicates weight in
MSCI EM. We exclude countries with <0.5% weight of MSCI EM Index. Among smaller markets we are N Peru and N Colombia.
31
J.P.
J.P. Morgan
Morgan Securities
Securities LLC
LLC Emerging Markets Research
Anthony Wong
(1-212)
(1-212) 834-4483
834-4326 June 8, 2017
anthony.wong@jpmorgan.com
Jonny Goulden AC
(44-20) 7134-4470
Growth and Inflation Outlook and Forecasts

Real GDP Real GDP Inflation Inflation
%oya 2017 %q/q saar % Dec/Dec 2017 %oya
2016 2017 2018 Potential 1Q 2Q 3Q 4Q 2016 2017 2018 1Q 2Q 3Q 4Q
Developed markets 1.6 2.0 1.7 1.5 1.6 2.6 1.9 1.8 1.3 1.8 1.9 2.0 1.8 1.9 1.8
Emerging Markets 3.9 4.4 4.4 4.7 4.8 4.3 4.4 4.4 3.3 3.4 3.4 3.0 2.9 3.0 3.1
EM Asia 5.9 6.0 5.6 6.0 6.1 5.8 5.8 5.9 2.2 2.2 2.7 1.9 1.8 2.2 2.2
EMEA EM 1.6 2.2 2.4 2.8 2.3 2.3 2.1 1.9 5.3 5.7 4.9 5.1 4.9 4.7 4.6
Latin America* -0.8 1.3 2.3 2.4 3.1 1.1 1.9 2.4 5.0 4.4 3.9 4.8 4.3 3.9 4.2
EM Asia 5.9 6.0 5.6 6.0 6.1 5.8 5.8 5.9 2.2 2.2 2.7 1.9 1.8 2.2 2.2
China 6.7 6.7 6.2 6.8 6.9 6.6 6.4 6.4 2.1 1.9 2.6 1.4 1.5 1.9 1.9
Hong Kong 2.0 2.8 2.0 2.8 2.8 1.6 0.8 0.8 1.2 3.6 2.4 0.5 1.6 1.5 3.4
India 7.1 7.2 7.4 7.3 5.5 7.4 7.9 8.5 3.4 4.0 4.5 3.6 2.5 3.1 3.6
Indonesia 5.0 5.1 5.3 5.0 5.2 5.0 5.0 5.0 3.0 4.6 3.0 3.6 4.3 4.6 4.5
Korea 2.8 2.8 2.5 2.9 4.3 2.2 2.8 2.5 1.3 1.5 2.0 2.1 2.0 2.2 1.5
Malaysia 4.2 5.2 4.4 4.0 7.5 3.4 4.5 4.2 1.8 2.9 1.2 4.3 4.3 4.5 3.7
Philippines 6.9 6.4 6.6 5.0 4.3 7.2 6.7 7.8 2.6 3.2 3.0 3.2 3.3 3.6 3.4
Singapore 2.0 2.6 2.4 1.8 -1.3 2.6 1.4 1.4 0.2 1.3 1.4 0.6 1.1 1.3 1.3
Taiwan 1.5 2.3 2.0 2.3 3.8 1.0 2.4 2.2 1.7 0.6 1.7 0.8 0.5 1.0 0.3
Thailand 3.2 3.5 3.2 2.0 5.2 3.5 3.5 3.0 1.1 0.8 1.8 1.3 0.4 1.0 0.8
Latin America* -0.8 1.3 2.3 2.4 3.1 1.1 1.9 2.4 9.8 6.7 5.4 4.8 4.3 3.9 4.2
Argentina -2.3 3.1 3.3 2.5 4.1 5.9 5.7 4.2 39.3 21.2 14.8 34.3 24.6 22.2 21.1
Brazil -3.6 0.0 1.8 2.0 4.3 -1.0 0.4 1.5 6.3 3.9 4.4 4.9 3.7 2.9 3.7
Chile 1.6 1.4 3.1 2.8 0.7 2.4 3.1 5.2 2.7 2.7 2.9 2.8 2.5 2.2 2.5
Colombia 2.0 1.8 3.0 3.5 -0.9 3.0 3.5 3.5 5.7 4.0 3.9 5.1 4.4 3.9 4.2
Ecuador -1.5 1.5 -1.2 2.3 4.0 -3.0 -4.0 -4.0 1.2 0.8 1.4 0.9 0.7 0.6 0.8
Mexico 2.3 2.0 2.2 2.5 2.7 1.3 1.6 2.0 3.4 5.9 3.2 5.0 5.8 5.8 5.6
Peru 3.9 2.6 4.4 4.0 0.6 2.0 5.0 6.0 3.2 2.2 3.0 3.4 3.3 3.1 2.4
Uruguay 1.8 2.5 3.2 2.5 3.0 2.0 2.5 2.5 8.1 7.3 7.0 7.4 6.1 6.3 7.1
Venezuela -15.0 -5.0 -1.5 1.5 -3.0 -10.0 0.0 -3.0 900.0 650.0 180.0 1052.0 1167.1 973.1 751.3
EMEA EM 1.6 2.2 2.4 2.8 2.3 2.3 2.1 1.9 5.3 5.7 4.9 5.1 4.9 4.7 4.6
Croatia 2.9 3.0 2.9 2.0 0.2 1.0 0.7 1.1 1.4 1.6 1.1
Czech Republic 2.4 3.1 2.8 2.6 5.4 2.8 3.0 2.9 2.0 2.2 2.2 2.4 2.1 2.3 2.1
Egypt 4.3 3.8 3.9 4.0 14.0 29.7 14.5
GCC 2.1 1.0 2.0 3.4 0.0 0.0 0.0
Hungary 2.0 4.0 3.5 2.5 5.4 4.5 4.0 4.0 1.8 2.3 2.2 2.6 2.2 2.6 2.4
Israel 4.0 3.2 3.5 3.5 1.4 1.6 1.6 2.4 -0.2 0.9 1.4 0.4 0.6 -0.1 0.8
Kazakhstan 1.0 3.5 3.7 3.0 8.5 6.6 6.1 7.8 7.4 7.3 7.1
Nigeria -1.5 1.3 1.8 4.0 18.6 15.9 16.7
Poland 2.7 4.0 3.5 3.0 4.5 3.5 3.5 3.5 0.8 1.2 2.0 2.0 1.8 1.9 1.6
Romania 4.8 5.0 3.5 3.5 7.1 3.9 4.1 2.6 -0.5 1.9 3.0 0.1 0.6 1.3 1.7
Russia -0.2 1.2 1.4 1.1 1.7 1.5 1.8 1.8 5.4 4.1 4.6 4.6 4.1 4.1 4.1
Serbia 2.6 2.9 3.2 3.0 1.6 2.4 2.8
South Africa 0.3 0.5 1.0 2.0 -0.7 0.8 2.0 0.8 6.7 4.6 5.2 6.3 5.3 5.0 4.7
Turkey 2.9 3.2 3.1 3.5 0.8 3.2 1.2 0.8 8.5 9.2 7.5 10.2 11.1 9.9 9.9
Ukraine 2.3 2.9 3.6 3.5 12.4 9.4 6.6 13.9 12.8 13.1 9.5
Source: J.P. Morgan. *Includes only inflation targeters.
32
J.P.
J.P.Morgan
MorganSecurities
SecuritiesLLC
Anthony WongAC
Luis Oganes Emerging Markets Outlook and Strategy
(1-212)
(1-212)834-4483
834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Debt and Fiscal Forecasts

Fiscal balance General Gvt Debt External Debt*
(% GDP) (% GDP) (% GDP)
2016 2017 2018 2016 2017 2016 2017
Emerging Markets -3.5 -3.4 -3.5 46.6 47.8 24.4 23.2
Emerging Asia -2.5 -2.8 -3.1 47.2 48.8 17.3 16.9

China -3.0 -3.5 -4.0 46.8 49.3 11.0 10.8
Hong Kong 3.7 0.6 0.6
India -3.5 -3.2 -3.0 66.0 65.9 23.4 23.2
Indonesia -2.7 -2.5 -2.6 27.6 28.4 31.1 29.7
Korea 1.0 1.5 1.0 37.3 37.5 32.5 30.7
Malaysia -3.1 -3.0 -2.9 55.8 55.0 65.9 63.8
Philippines -2.4 -2.9 -3.0 35.7 33.8 25.4 23.9
Singapore
Taiwan -1.1 -1.2 -1.5 38.2 37.3 41.8 43.0
Thailand -3.0 -3.5 -4.0 43.7 44.5 25.8 24.8
EMEA EM -4.7 -3.6 -3.4 36.1 36.9 36.7 33.6

Croatia -0.8 -1.1 -0.9 84.2 81.9 86.2
Czech Republic 0.6 -0.4 -0.5 37.2 37.0 72.7 87.0
Egypt -12.0 -10.5 -9.3 97.1 100.4
GCC -9.4 -5.0 -4.9
Hungary -1.7 -2.4 -2.5 74.1 72.8 103.0 93.1
Israel -2.1 -2.3 -2.3 62.2 62.5 28.4 26.2
Kazakhstan -4.1 -6.3 -3.2 25.5 27.0 118.1 100.0
Nigeria -3.8 -2.5 -2.4 14.4 17.7 9.8 11.3
Poland -2.4 -3.0 -3.0 54.4 54.7 70.9 65.0
Romania -3.0 -3.1 -4.2 37.7 37.8 55.2 53.1
Russia -3.4 -2.4 -2.7 17.0 17.1 40.4 32.7
Serbia -1.3 -0.7 -0.5 72.9 71.0 71.7 69.0
South Africa -3.4 -3.1 -2.8 50.5 52.4 44.1 43.0
Turkey -1.1 -2.1 -1.7 31.6 29.2 52.1 54.7
Ukraine -7.7 -6.4 -2.2 81.2 84.7 125.6 122.1
Latin America -5.8 -5.5 -4.8 58.8 60.1 35.1 33.3

Argentina -6.0 -5.3 -4.5 60.7 60.9 32.1 32.8
Brazil -8.9 -8.6 -7.6 75.3 80.1 37.2 33.0
Chile -2.8 -3.3 -2.8 19.8 22.5 59.0 54.2
Colombia -4.0 -3.6 -3.1 44.2 43.7 43.6 42.2
Ecuador -5.7 -3.8 -3.2 35.9 38.3 26.3 27.5
Mexico -2.6 -2.4 -2.1 48.1 48.5 26.1 25.0
Peru -2.6 -3.2 -3.5 25.3 25.5 33.9 32.1
Uruguay -3.7 -3.3 -3.0 63.0 64.0 56.0 55.9
Venezuela -10.0 -8.0 -6.0 35.2 - 89.8 87.8
Source: J.P. Morgan, IMF, World Bank. *Includes public and private sector debt.
33
J.P.Morgan
J.P. MorganSecurities
SecuritiesLLC
Luis Oganes
Anthony WongAC Emerging Markets Outlook and Strategy
(1-212)834-4483
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
EM Monetary Policy Forecasts
Current End of Period Forecast (%pa)

(%pa) Next change 3Q17 4Q17 1Q18 2Q18
Developed 0.41 0.62 0.62 0.62 0.74
Emerging 5.03 4.93 4.86 4.82 4.83
EM Asia 4.09 4.06 4.06 4.06 4.07
China 4.35 On hold 4.35 4.35 4.35 4.35
Hong Kong 1.25 16 Jun 17 (+25bp) 1.75 1.75 1.75 2.00
India 6.25 On hold 6.00 6.00 6.00 6.00
Indonesia 4.75 On hold 4.75 4.75 4.75 4.75
Korea 1.25 On hold 1.25 1.25 1.25 1.25
Malaysia 3.00 On hold 3.00 3.00 3.00 3.00
Philippines 3.00 On hold 3.00 3.00 3.00 3.00
Taiwan 1.38 On hold 1.38 1.38 1.38 1.38
Thailand 1.50 On hold 1.50 1.50 1.50 1.50
EMEA EM 6.79 6.85 6.62 6.32 6.29
Czech Rep. 0.05 4Q 17 (+20bp) 0.05 0.25 0.50 0.50
Hungary 0.90 1Q 19 (+20bp) 0.90 0.90 0.90 0.90
Israel 0.10 1Q 18 (+15bp) 0.10 0.10 0.50 0.75
Nigeria 14.00 On hold 14.00 13.50 13.00 13.00
Poland 1.50 Jun 18 (+25bp) 1.50 1.50 1.50 1.75
Romania 1.75 Feb 18 (+25bp) 1.75 1.75 2.25 2.75
Russia 9.25 Jun 17 (-25bp) 8.75 8.50 8.25 8.00
South Africa 7.00 Nov 17 (-25bp) 7.00 6.75 6.50 6.50
Turkey* 11.77 Dec 17 (-50bp) 12.00 11.50 10.50 10.00
LatAm 7.99 7.37 7.13 7.13 7.14
Brazil 10.25 26 Jul 17 (-75bp) 9.00 8.50 8.50 8.50
Mexico 6.75 Jun 17 (+25bp) 7.00 7.00 7.00 7.00
Chile 2.50 Jul 18 (+25bp) 2.50 2.50 2.50 2.50
Colombia 6.25 30 Jun 17 (-25bp) 5.50 5.50 5.50 5.50
Peru 4.00 8 Jun 17 (-25bp) 3.50 3.50 3.50 3.75
Source: J.P. Morgan. *Effective rate is a weighted average of the ON lending rate and the 1-week repo rate and changes on a daily basis.
34
Alex
Luis Mitchell
Lara Oganes
Bes AC Emerging Markets Outlook and Strategy
(44-20)
(1-212) 7742-1254
834-4326
834-3947 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Sovereign and Corporate Issuance and Cashflows

EM Sovereigns
US$bn 2013 2014 2015 2016 2017 YTD 2017F

Gross issuance (a) 67.4 92.9 85.8 128.8 87.8 143.1
Estimated cash flows (b = c+d) 61.3 79.9 85.0 72.3 47.9 84.3
Amoritizations (c) 26.5 37.8 43.9 26.7 26.3 36.8
Coupons (d) 40.6 42.1 41.1 45.6 21.6 47.4
Net issuance (e = a-c) 40.9 55.1 41.9 102.0 61.5 106.3
Net financing (f = a-b = e-d) 6.6 13.0 0.8 56.5 39.9 58.9
Source: J.P. Morgan
EM CorporatesUS$ billions 2015 2016 2017 2017F

Gross issuance (a) 240 321 208 380
Estimated cash flows (b = c+d) 190 204 132 257
Amortizations (c) 102 118 94 173
Coupons (d) 88 86 39 84
Net issuance (e = a-c) 138 203 115 206
Net financing (f = a-b = e-d) 50 117 76 122
Tender/Buyback/Calls (g) 38 55 28 55
Net issuance after tender/buyback/call activities (j = e-g) 100 148 86 151
Net financing after tender/buyback/call activities (k = f-g) 12 62 48 67
Source: J.P. Morgan
GBI-EM Global Diversified Return Forecast

Full Local
Carry and Duration to YE Spot FX to YE To year- 2017 Yield Spot Spot Return
year Return
end YTD to year end
Country 2017 Current Forecast to year end Current Forecast
GBI-EM Global Diversified 2.1% 11.0% 13.3% 6.22% 6.17% 3.8% -1.7%
Brazil 5.6% 6.6% 12.5% 10.04% 9.80% 6.4% 3.27 3.300 -0.8%
South Africa 4.2% 13.0% 17.7% 9.14% 8.70% 8.3% 12.79 13.30 -3.8%
Indonesia 4.0% 10.3% 14.8% 7.21% 7.00% 5.4% 13295 13475 -1.3%
Turkey 3.9% 6.7% 10.9% 10.29% 9.70% 7.9% 3.51 3.65 -3.7%
Malaysia 3.8% 8.5% 12.5% 3.93% 3.80% 2.9% 4.27 4.23 0.9%
Argentina 3.1% 0.2% 3.3% 13.92% 14.00% 7.6% 16.01 16.70 -4.1%
Philippines 2.7% 6.4% 9.3% 4.97% 4.90% 3.3% 49.56 49.85 -0.6%
Chile 2.3% 3.5% 5.9% 3.38% 3.70% 1.0% 668.50 660.00 1.3%
Russia 1.6% 14.4% 16.2% 7.67% 7.00% 7.6% 56.65 60.00 -5.6%
Romania 1.0% 8.0% 9.1% 2.61% 3.10% -0.3% 4.05 4.00 1.4%
Poland 0.8% 15.6% 16.5% 2.68% 3.00% 0.2% 3.72 3.70 0.6%
Mexico 0.7% 18.9% 19.8% 7.14% 7.50% 2.0% 18.26 18.50 -1.3%
Peru 0.3% 12.7% 13.1% 5.63% 5.75% 2.3% 3.27 3.33 -1.9%
Czech Republic 0.1% 9.3% 9.4% 0.29% 0.70% -2.2% 23.37 22.83 2.4%
Thailand -0.1% 7.7% 7.6% 2.39% 2.50% 0.7% 33.97 34.25 -0.8%
Hungary -1.1% 8.8% 7.6% 1.91% 2.40% -1.0% 273.71 274.00 -0.1%
Colombia -1.9% 12.0% 9.9% 5.98% 6.00% 3.3% 2895 3050 -5.1%
-10% -5% 0% 5% 10%
Source: J.P. Morgan
35
J.P. Morgan Securities LLC
plc Emerging Markets Research
Alex Oganes
Lara
Luis Mitchell
Bes AC Emerging Markets Outlook and Strategy
(44-20) 834-3947
(1-212) 7742-1254
834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
EM Asia Sovereign Issuance Forecast

2017 Gross
Issuance MoM 2017 Issuance YTD 2017 Gross 2017 2017 2017 Total
US$mn Forecast Forecast Revision Issuance Coupons Amortizations Cashflows
Bangladesh - - - - - -
China - - - 17 - 17
Fiji - - - 13 - 13
Hong Kong 1,000 - 1,000 35 - 35
Indonesia 7,500 - 3,000 2,711 1,000 3,711
India - - - - - -
Malaysia 1,000 (4,000) - 104 - 104
Maldives 200 200 200 - - -
Mongolia 600 - 600 153 - 153
Pakistan 1,000 - - 368 750 1,118
Papua New Guinea - - - - - -
Philippines 835 - 835 1,435 523 1,958
South Korea 1,000 - 1,000 259 - 259
Sri Lanka 1,500 - 1,500 555 - 555
Thailand - - - - - -
Vietnam 1,000 - - 116 - 116
EM Asia 15,635 (3,800) 8,135 5,765 2,273 8,038
Source: J.P. Morgan
Latin America Sovereign Issuance Forecast

2017 Gross
Issuance MoM 2017 Issuance YTD 2017 Gross 2017 2017 2017 Total
US$mn Forecast Forecast Revision Issuance Coupons Amortizations Cashflows
Argentina 10,800 - 7,403 2,984 7,805 10,789
Aruba - - - 12 - 12
Bahamas - - - 58 - 58
Barbados - - - 42 - 42
Belize - - - 46 - 46
Bermuda - - - 36 - 36
Bolivia 1,000 - 1,000 77 - 77
Brazil 3,000 (1,000) 1,000 2,428 247 2,675
Chile 2,500 - - 220 - 220
Colombia 3,000 - 2,500 1,569 1,650 3,219
Costa Rica - - - 259 - 259
Dominican Republic 1,705 - 1,200 707 251 958
Ecuador 3,000 1,000 3,000 937 - 937
El Salvador 601 - 601 434 - 434
Guatemala 500 (200) 500 133 - 133
Honduras 700 - 700 103 - 103
Jamaica 500 - - 399 175 574
Mexico 2,000 - 493 2,873 - 2,873
Panama 1,200 - 1,200 695 - 695
Paraguay 500 - 500 175 - 175
Peru - - - 808 - 808
Suriname - - - 51 - 51
Trinidad & Tobago - - - 102 - 102
Uruguay 1,050 - - 737 500 1,237
Venezuela* 5,000 - 5,000 3,032 - 3,032
Latin America 37,056 (200) 25,096 18,918 10,627 29,545
Source: J.P. Morgan. Note: Venezuela $5bn YTD corresponds to the 36s issued in a private placement to the Central Bank on Dec 29, 2016 that we expect will trade in the secondary market during the
course of the year.
36
J.P. Morgan Securities LLC
plc Emerging Markets Research
Alex
Lara Mitchell
Bes
(44-20) 834-3947
(1-212) 7742-1254
834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
EMEA EM and Global EM Sovereign Issuance Forecast

2017 Gross MoM 2017 Issuance YTD 2017 Gross 2017 2017 2017 Total
US$mn Issuance Forecast Forecast Revision Issuance Coupons Amortizations Cashflows
Albania - - - 29 - 29
Angola - - - 213 250 463
Armenia - - - 66 - 66
Azerbaijan - - - 59 - 59
Bahrain 2,000 - 600 622 - 622
Belarus 800 - - 72 - 72
Bulgaria 1,000 - - 235 1,067 1,302
Cameroon - - - 71 - 71
Congo - - - 21 26 47
Cote d'Ivoire 1,000 (800) - 245 88 333
Croatia 1,650 - 1,332 741 1,500 2,241
Czech Republic - - - 400 - 400
Egypt 7,000 1,500 7,000 438 - 438
Ethiopia - - - 66 - 66
Gabon - - - 144 161 305
Georgia - - - 34 - 34
Ghana - - - 354 199 553
Hungary 1,000 - - 1,082 1,729 2,811
Iraq 1,000 - - 157 - 157
Israel 2,374 - 2,374 370 - 370
Jordan 500 - 500 120 - 120
Kazakhstan - - - 333 - 333
Kenya - - - 182 - 182
Kuwait 8,000 - 8,000 - - -
Latvia 1,085 85 1,085 153 1,000 1,153
Lebanon 3,500 - 3,000 1,273 2,511 3,784
Lithuania 1,457 707 1,457 502 700 1,202
Macedonia - - - 65 - 65
Montenegro - - - 58 - 58
Morocco 1,000 - - 225 562 787
Mozambique - - - - - -
Namibia - - - 67 - 67
Nigeria 2,500 - 1,500 131 - 131
Oman 7,000 2,000 7,000 300 - 300
Poland 5,000 - 1,615 2,025 2,606 4,631
Qatar - - - 972 2,000 2,972
Romania 3,300 - 1,855 870 - 870
Russia 3,000 - - 2,696 3,648 6,344
Rwanda - - - 27 - 27
Saudi Arabia 15,000 - 9,000 749 - 749
Senegal 1,100 600 1,100 75 - 75
Serbia 1,000 - - 329 100 429
Slovakia 1,000 - - 182 1,123 1,305
South Africa 2,000 - - 799 141 939
Tanzania - - - 39 - 39
Tunisia 905 - 905 66 - 66
Turkey 8,750 1,500 6,250 3,528 3,935 7,463
Ukraine 1,000 - - 1,005 - 1,005
United Arab Emirates 5,500 - - - - 909
Abu Dhabi 4,000 - - 101 - 101
Dubai 1,000 - - 208 600 808
Sharjah 500 - - - - -
Zambia - - - 237 - 237
EMEA EM 90,421 5,592 54,572 22,732 23,946 46,678
All EM 143,112 1,592 87,804 47,415 36,845 84,261
Source: J.P. Morgan
37
Lara Oganes
Luis Bes AC Emerging Markets Outlook and Strategy
834-3947
(1-212) 834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Exchange Rate End-of-Period Forecasts versus US Dollar

versus USD Sep 17 Dec 17 Mar 18 Jun 18 Forwards Sep 17 Dec 17 Mar 18 Jun 18
EUR 1.08 1.15 1.15 - EUR 1.13 1.14 1.14 1.15
JPY 108 105 105 - JPY 109 108 108 106.87
GBP 1.26 1.32 1.31 - GBP 1.30 1.30 1.30 1.31
AUD 0.72 0.71 0.69 - AUD 0.75 0.75 0.75 0.75
CAD 1.40 1.38 1.36 - CAD 1.35 1.34 1.34 1.33
NZD 0.65 0.63 0.62 - NZD 0.72 0.72 0.71 0.71
CHF 0.99 0.91 0.90 - CHF 0.96 0.95 0.94 0.94
NOK 8.61 8.00 7.83 - NOK 8.48 8.45 8.43 8.40
SEK 8.80 8.22 8.13 - SEK 8.64 8.58 8.52 8.47
EMEA EM Sep 17 Dec 17 Mar 18 Jun 18 EMEA EM Sep 17 Dec 17 Mar 18 Jun 18
ILS 3.50 3.45 3.45 3.35 ILS 3.52 3.51 3.49 3.47
CZK 24.31 22.83 22.70 22.37 CZK 23.19 23.03 22.83 22.68
PLN 3.94 3.70 3.70 3.66 PLN 3.73 3.73 3.72 3.72
HUF 289 274 274 272 HUF 272 271 270 268.49
RON 4.26 4.00 4.00 3.97 RON 4.05 4.03 4.02 4.01
RUB 59.00 60.00 61.50 61.50 RUB 58.21 59.18 60.02 60.78
TRY 3.55 3.65 3.75 3.75 TRY 3.66 3.74 3.82 3.90
ZAR 13.20 13.30 13.30 13.30 ZAR 13.05 13.23 13.39 13.57
Latin America Sep 17 Dec 17 Mar 18 Jun 18 Latin America Sep 17 Dec 17 Mar 18 Jun 18
ARS 16.20 16.70 17.25 17.55 ARS 16.92 17.67 18.33 19.02
BRL 3.28 3.30 3.30 3.35 BRL 3.35 3.40 3.45 3.49
CLP 670 660 655 650 CLP 672 674 675 677.05
COP 2975 3050 3150 3150 COP 2964 2993 3018 3044.62
MXN 18.40 18.50 18.50 18.80 MXN 18.59 18.85 19.09 19.34
PEN 3.30 3.33 3.38 3.40 PEN 3.31 3.33 3.36 3.38
VEF* 3000 5000 5000 5000 VEF - - -
UYU 28.70 29.20 28.80 29.10 UYU - - -
EM Asia Sep 17 Dec 17 Mar 18 Jun 18 EM Asia Sep 17 Dec 17 Mar 18 Jun 18
CNY 6.88 6.94 7.00 7.00 CNY 6.84 6.88 6.91 6.94
HKD 7.79 7.80 7.81 7.81 HKD 7.77 7.75 7.73 7.71
INR 65.50 66.00 66.00 66.50 INR 65.16 65.80 66.36 66.96
IDR 13400 13475 13525 13600 IDR 13454 13584 13706 13837
KRW 1120 1130 1140 1145 KRW 1122 1119 1115 1111
MYR 4.25 4.23 4.23 4.25 MYR 4.26 4.27 4.28 4.28
PHP 49.65 49.85 50.10 50.10 PHP 49.74 49.86 49.97 50.12
SGD 1.38 1.39 1.40 1.40 SGD 1.38 1.38 1.37 1.37
THB 34.10 34.25 34.40 34.50 THB 34.03 34.02 33.99 33.97
TWD 30.10 30.20 30.30 30.40 TWD 29.94 29.77 29.58 29.40
*Refers to DICOM rate, formerly SIMADI
Source: J.P. Morgan
38
Lara Bes
(1-212) 834-3947
834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Asia and Latin America Credit Ratings

S&P Moody's Fitch Recent S&P Action Recent Moody's Action Recent Fitch Action
Rating Outlook Rating Outlook Rating Outlook Rating Date Outlook Date Rating Date Outlook Date Rating Date Outlook Date
China AA- Neg A1 Stable A+ Stable 16-Dec-10 31-Mar-16 24-May-17 24-May-17 6-Nov-07 15-Oct-13
Fiji B+ Stable B1 Pos NR - 1-May-15 1-May-15 21-Apr-09 6-May-16 NR -
Hong Kong AAA Neg Aa2 Stable AA+ Stable 16-Dec-10 31-Mar-16 24-May-17 24-May-17 25-Nov-10 25-Nov-10
India BBB-u Stable Baa3 Pos BBB- Stable 25-Feb-11 26-Sep-14 22-Jan-04 9-Apr-15 1-Aug-06 12-Jun-13
Indonesia BBB- Stable Baa3 Pos BBB- Pos 19-May-17 19-May-17 18-Jan-12 8-Feb-17 15-Dec-11 21-Dec-16
South Korea AA Stable Aa2 Stable AA- Stable 7-Aug-16 7-Aug-16 18-Dec-15 18-Dec-15 6-Sep-12 22-Jul-16
Malaysia A- Stable A3 Stable A- Stable 8-Oct-03 27-Jul-11 16-Dec-04 11-Jan-16 8-Nov-04 22-Jul-16
Mongolia B- Stable Caa1 - B- Stable 19-Aug-16 19-Aug-16 30-Mar-17 - 22-Nov-16 22-Nov-16
Pakistan B Stable B3 Stable B Stable 31-Oct-16 31-Oct-16 11-Jun-15 11-Jun-15 17-Sep-15 15-Sep-15
Philippines BBB Stable Baa2 Stable BBB- Pos 8-May-14 8-May-14 11-Dec-14 11-Dec-14 27-Mar-13 22-Jul-16
Singapore AAAu Stable Aaa Stable AAA Stable 25-Feb-11 2-May-08 14-Jun-02 14-May-03 14-May-03 7-Mar-08
Sri Lanka B+ Neg B1 Neg B+ Stable 14-Sep-10 10-Mar-16 27-Jul-11 20-Jun-16 29-Feb-16 9-Feb-17
Taiwan AA-u Stable Aa3 Stable AA- Stable 25-Feb-11 11-Jun-10 20-Jul-99 24-May-06 12-Oct-16 12-Oct-16
Thailand BBB+ Stable Baa1 Stable BBB+ Stable 31-Oct-06 9-Dec-10 26-Nov-03 28-Oct-10 8-Mar-13 22-Jul-16
Vietnam BB- Stable B1 Pos BB- Pos 23-Dec-10 6-Jun-12 29-Jul-14 28-Apr-17 3-Nov-14 18-May-17
Source: Bloomberg
Argentina B Stable B3 Pos RD Stable 4-Apr-17 4/4/2017 21-Apr-16 6-Mar-17 31-Jul-14 5/10/2016
Barbados CCC+ Neg Caa3 Stable NR - 3-Mar-17 3-Mar-17 9-Mar-17 9-Mar-17 NR -
Belize B- - B3 Stable NR - 23-Mar-17 - 11-Apr-17 11-Apr-17 NR -
Bolivia BB Neg Ba3 Neg BB- Stable 15-May-14 25-May-17 8-Jun-12 10-Jun-16 13-Jul-16 13-Jul-16
Brazil BB*- - Ba2 Neg BB Neg 22-May-17 - 24-Feb-16 26-May-17 5-May-16 5-May-16
Chile AA- Neg Aa3 Stable A+ Neg 26-Dec-12 26-Jan-17 16-Jun-10 16-Jun-10 1-Feb-11 13-Dec-16
Colombia BBB Neg Baa2 Stable BBB Stable 24-Apr-13 16-Feb-16 28-Jul-14 28-Jul-14 10-Dec-13 10-Mar-17
Costa Rica BB- Neg Ba2 Neg BB Stable 25-Feb-16 25-Feb-16 9-Feb-17 9-Feb-17 19-Jan-17 19-Jan-17
Cuba NR - Caa2 Pos NR - NR - 23-Apr-14 10-Dec-15 NR -
DomRep BB- Stable B1 Pos BB- Stable 20-May-15 20-May-15 22-Apr-10 29-Jun-16 18-Nov-16 18-Nov-16
Ecuador B Stable B3 Stable B Neg 12-Aug-15 12-Aug-15 19-Dec-14 19-Dec-14 18-Oct-13 25-Aug-16
El Salvador CC Neg Caa1 Stable CCC - 5-May-17 5-May-17 13-Apr-17 13-Apr-17 10-Apr-17 -
Guatemala BB Neg Ba1 Stable BB Stable 17-Jul-06 27-Oct-16 1-Jun-10 30-Jun-16 20-Jun-14 20-Jun-14
Honduras B+ Pos B2 Pos NR - 20-Jul-15 18-Jul-16 24-May-16 24-May-16 NR -
Jamaica B Stable B3 Stable B Stable 6/3/2015 3-Jun-15 21-Nov-16 21-Nov-16 11-Feb-16 11-Feb-16
Mexico BBB+ Neg A3 Neg BBB+ Neg 12/19/2013 23-Aug-16 5-Feb-14 31-Mar-16 8-May-13 9-Dec-16
Nicaragua B+ Stable B2 Stable B+ Stable 2/11/2016 11-Feb-16 13-Jul-15 10-Jul-15 16-Dec-15 16-Dec-15
Panama BBB Stable Baa2 Stable BBB Stable 2-Jul-12 2-Jul-12 31-Oct-12 31-Oct-12 2-Jun-11 2-Jun-11
Paraguay BB Stable Ba1 Stable BB Stable 11-Jun-14 15-Jun-16 20-Mar-15 20-Mar-15 29-Jan-15 29-Jan-15
Peru BBB+ Stable A3 Stable BBB+ Stable 19-Aug-13 19-Aug-13 2-Jul-14 2-Jul-14 23-Oct-13 23-Oct-13
T&T BBB+ Stable Ba1 Stable NR - 21-Apr-17 21-Apr-17 25-Apr-17 25-Apr-17 NR -
Uruguay BBB Stable Baa2 Neg BBB- Stable 5-Jun-15 30-May-17 29-May-14 22-Jun-16 7-Mar-13 22-Jul-16
Venezuela CCC Neg Caa3 Neg CCC - 9-Feb-15 9-Feb-15 13-Jan-15 4-Mar-16 18-Dec-14 -
Source: Bloomberg
39
Lara Bes
(1-212) 834-3947
834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
EMEA EM and Developed Markets Credit Ratings

Angola B Neg B1 Neg B Neg 12-Feb-16 12-Aug-16 29-Apr-16 29-Apr-16 23-Sep-16 23-Sep-16
Bahrain BB- Stable Ba2u Neg BB+ Stable 9-Dec-16 9-Dec-16 4-Mar-16 14-May-16 28-Jun-16 28-Jun-16
Botswana A- Neg A2 Stable NR - 15-Feb-10 29-Apr-16 12-Mar-01 24-Nov-11 NR -
Bulgaria BB+ Stable Baa2 Stable BBB- Stable 12-Dec-14 12-Dec-14 22-Jul-11 22-Jul-11 10-Nov-08 22-Jul-16
Croatia BB Stable Ba2 Stable BB Stable 24-Jan-14 16-Dec-16 11-Mar-16 10-Mar-17 8-Aug-14 27-Jan-17
Czech Republic AA- Stable A1 Stable A+ Stable 24-Aug-11 24-Aug-11 12-Nov-02 8-Dec-08 4-Mar-08 22-Jul-16
Egypt B- Stable B3 Stable B Stable 15-Nov-13 11-Nov-16 7-Apr-15 7-Apr-15 19-Dec-14 19-Dec-14
Estonia AA- Stable A1 Stable A+ Stable 13-Jan-12 19-Oct-12 26-Jun-07 31-Mar-10 5-Jul-11 5-Jul-11
Gabon NR - B1 Neg B+ Neg NR - 29-Apr-16 29-Apr-16 8-May-15 6-May-16
Georgia BB- Stable Ba3 Stable BB- Stable 22-Nov-11 22-Nov-11 6-Oct-10 11-Mar-16 15-Dec-11 17-Apr-15
Ghana B- Stable B3 Stable B Neg 24-Oct-14 24-Oct-14 19-Mar-15 23-Sep-16 17-Oct-13 28-Mar-14
Hungary BBB- Stable Baa3 Stable BBB- Stable 16-Sep-16 16-Sep-16 4-Nov-16 4-Nov-16 20-May-16 20-May-16
Israel A+ Stable A1 Stable A+ Stable 9-Sep-11 2-May-13 17-Apr-08 17-Apr-08 11-Nov-16 11-Nov-16
Jordan BB- Neg B1 Stable NR - 20-May-13 22-Apr-16 26-Jun-13 26-Jun-13 NR -
Kazakhstan BBB- Neg Baa3 Neg BBB Stable 17-Feb-16 17-Feb-16 22-Apr-16 22-Apr-16 29-Apr-16 29-Apr-16
Kenya B+ Stable B1 Stable B+ Neg 19-Nov-10 14-Oct-16 7-Nov-12 7-Nov-12 12-Dec-07 14-Jul-16
Kuwait AA Stable Aa2 Neg AA Stable 20-Jul-11 20-Jul-11 4-Mar-16 14-May-16 4-Sep-08 4-Sep-08
Latvia A- Stable A3 Stable A- Stable 30-May-14 30-May-14 13-Feb-15 13-Feb-15 20-Jun-14 20-Jun-14
Lebanon B- Stable B2 Neg B- Stable 1-Nov-13 2-Sep-16 16-Dec-14 16-Dec-14 14-Jul-16 14-Jul-16
Lithuania A- Stable A3 Stable A- Stable 11-Apr-14 11-Apr-14 8-May-15 8-May-15 25-Jun-14 25-Jun-14
Morocco BBB- Stable Ba1 Pos BBB- Stable 23-Mar-10 16-May-14 25-Jun-07 24-Feb-17 19-Apr-07 22-Jul-16
Nigeria B Stable B1 Stable B+ Neg 16-Sep-16 16-Sep-16 29-Apr-16 29-Apr-16 23-Jun-16 25-Jan-17
Oman BBB- Neg Baa1 Stable BBB Stable 17-Feb-16 11-Nov-16 26-Feb-16 14-May-16 3-Jan-17 3-Jan-17
Poland BBB+ Stable A2 Neg A- Stable 15-Jan-16 2-Dec-16 12-Nov-02 14-May-16 18-Jan-07 22-Jul-16
Qatar AA Neg Aa2 Neg AA Stable 5-Jul-10 3-Mar-17 14-May-16 14-May-16 6-Mar-15 6-Mar-15
Romania BBB- Stable Baa3 Stable BBB- Stable 16-May-14 16-May-14 6-Oct-06 11-Dec-15 4-Jul-11 22-Jul-16
Russia BB+ Pos Ba1 Stable BBB- Stable 26-Jan-15 17-Mar-17 22-Apr-16 17-Feb-17 9-Jan-15 14-Oct-16
Saudi Arabia A-u Stable A1 Stable A+ Stable 17-Feb-16 17-Feb-16 4-Mar-16 14-May-16 22-Mar-17 22-Mar-17
Serbia BB- Pos Ba3 Stable BB- Stable 16-Jan-15 16-Dec-16 17-Mar-17 17-Mar-17 17-Jun-16 17-Jun-16
South Africa BB+ Neg Baa2 *- Stable BB+ Stable 3-Apr-17 3-Apr-17 3-Apr-17 6-May-16 7-Apr-17 7-Apr-17
Tunisia NR - Ba3 Neg B+ Stable 18-Dec-13 - 25-Nov-13 22-Nov-16 3-Feb-17 3-Feb-17
Turkey BBu Neg Ba1 Neg BB+ Stable 20-Jul-16 27-Jan-17 23-Sep-16 17-Mar-17 27-Jan-17 27-Jan-17
Ukraine B- Stable Caa3 Stable B- Stable 19-Oct-15 19-Oct-15 19-Nov-15 19-Nov-15 11-Nov-16 11/11/2016
UAE NR - Aa2 Neg NR - NR - 4-Mar-16 14-May-16 NR -
Zambia B Neg B3 Neg B Neg 1-Jul-15 18-Mar-16 19-Apr-16 19-Apr-16 28-Oct-13 24-Feb-16
Source: Bloomberg
Australia AAAu Neg Aaa Stable AAA Stable 25-Feb-11 6-Jul-16 21-Oct-02 13-Nov-03 28-Nov-11 28-Nov-11
Austria AA+ Stable Aa1 Stable AA+ Stable 13-Jan-12 29-Jan-13 24-Jun-16 24-Jun-16 13-Feb-15 13-Feb-15
Belgium AAu Stable Aa3 Stable AA- Stable 13-Jan-12 28-Feb-14 16-Dec-11 16-Dec-11 23-Dec-16 23-Dec-16
Canada AAA Stable Aaa Stable AAA Stable 29-Jul-02 18-May-07 3-May-02 24-May-06 12-Aug-04 22-May-07
France AAu Stable Aa2 Stable AA Stable 8-Nov-13 21-Oct-16 18-Sep-15 18-Sep-15 12-Dec-14 12-Dec-14
Germany AAAu Stable Aaa Stable AAA Stable 13-Jan-12 13-Jan-12 29-Apr-93 28-Feb-14 10-Aug-94 6-Nov-07
Greece B- Stable Caa3 Stable CCC - 22-Jan-16 22-Jan-16 25-Sep-15 25-Sep-15 18-Aug-15 -
Iceland A Stable A3 Stable BBB+ Pos 17-Mar-17 17-Mar-17 1-Sep-16 1-Sep-16 24-Jul-15 13-Jan-17
Ireland A+ Stable A3 Pos A Stable 5-Jun-15 5-Jun-15 14-May-16 14-May-16 5-Feb-16 5-Feb-16
Italy BBB-u Stable Baa2 Neg BBB Stable 5-Dec-14 5-Dec-14 13-Jul-12 7-Dec-16 21-Apr-17 21-Apr-17
Japan A+u Stable A1 Stable A Stable 16-Sep-15 16-Sep-15 1-Dec-14 1-Dec-14 27-Apr-15 27-Apr-17
Netherlands AAAu Stable Aaa Stable AAA Stable 20-Nov-15 20-Nov-15 5-May-98 7-Mar-14 10-Aug-94 11-Jul-14
New Zealand AA Stable Aaa Stable AA Stable 29-Sep-11 29-Sep-11 21-Oct-02 13-May-99 29-Sep-11 26-Jan-16
Norway AAA Stable Aaa Stable AAA Stable 9-Jul-75 28-May-09 30-Sep-97 13-May-99 13-Mar-95 18-Dec-07
Portugal BB+u Stable Ba1 Stable BB+ Stable 18-Sep-15 18-Sep-15 25-Jul-14 25-Jul-14 8-Jul-14 4-Mar-16
Spain BBB+ Pos Baa2 Stable BBB+ Stable 2-Oct-15 31-Mar-17 21-Feb-14 19-Feb-16 25-Apr-14 25-Apr-14
Sweden AAAu Stable Aaa Stable AAA Stable 23-Jan-14 23-Jan-14 4-Apr-02 15-Nov-03 8-Mar-04 18-Dec-07
Switzerland AAAu Stable Aaa Stable AAA Stable 17-Feb-11 1-Dec-03 29-Jan-82 15-Nov-03 10-Aug-94 11-Jun-07
United Kingdom AAu Neg Aa1 Neg AA Neg 27-Jun-16 27-Jun-16 22-Feb-13 24-Jun-16 27-Jun-16 27-Jun-16
United States AA+u Stable Aaa Stable AAA Stable 5-Aug-11 10-Jun-13 2-Aug-11 18-Jul-13 21-Mar-14 21-Mar-14
Source: Bloomberg
40
Luis Oganes
Lara Bes AC Emerging Markets Outlook and Strategy
(1-212) 834-3947
834-4326 June 8, 2017
Jonny Goulden AC
(44-20) 7134-4470
Local Currency Ratings (GBI-EM Broad Countries)

Brazil BB*- - Ba2 Neg BB Neg 22-May-17 - 24-Feb-16 26-May-17 5-May-16 5-May-16
Chile AA Neg Aa3 Stable AA- Neg 6-Aug-15 26-Jan-17 16-Jun-10 16-Jun-10 1-Feb-11 13-Dec-16
China AA- Neg A1 Stable A+ Stable 16-Dec-10 31-Mar-16 24-May-17 24-May-17 9-Apr-13 15-Oct-13
Colombia BBB+ Neg Baa2 Stable BBB Stable 5-Mar-07 16-Feb-16 28-Jul-14 28-Jul-14 22-Jul-16 10-Mar-17
Hungary BBB- Stable Baa3 Stable BBB- Stable 16-Sep-16 16-Sep-16 4-Nov-16 4-Nov-16 6-Jan-12 20-May-16
India BBB-u Stable Baa3 Pos BBB- Stable 25-Feb-11 26-Sep-14 20-Dec-11 9-Apr-15 1-Aug-06 12-Jun-13
Indonesia BBB- Stable Baa3 Pos BBB- Pos 19-May-17 19-May-17 18-Jan-12 8-Feb-17 15-Dec-11 21-Dec-16
Malaysia A Stable A3 Stable A- Stable 27-Jul-11 27-Jul-11 4-Sep-98 11-Jan-16 22-Jul-16 22-Jul-16
Mexico A Neg A3 Neg BBB+ Neg 19-Dec-13 23-Aug-16 5-Feb-14 31-Mar-16 22-Jul-16 9-Dec-16
Peru A- Stable A3 Stable A- Stable 19-Aug-13 19-Aug-13 2-Jul-14 2-Jul-14 23-Oct-13 23-Oct-13
Philippines BBB Stable Baa2 Stable BBB- Pos 8-May-14 8-May-14 11-Dec-14 11-Dec-14 22-Jul-16 22-Jul-16
Poland A- Stable A2 Stable A- Stable 15-Jan-16 2-Dec-16 18-Sep-02 12-May-17 22-Jul-16 22-Jul-16
Romania BBB- Stable Baa3 Stable BBB- Stable 16-May-14 16-May-14 6-Oct-06 21-Apr-17 22-Jul-16 22-Jul-16
Russia BBB- Pos Ba1 Stable BBB- Stable 26-Jan-15 17-Mar-17 22-Apr-16 17-Feb-17 9-Jan-15 14-Oct-16
South Africa BBB- Neg Baa2 *- - BB+ Stable 3-Apr-17 3-Apr-17 3-Apr-17 - 7-Apr-17 7-Apr-17
Thailand A- Stable Baa1 Stable BBB+ Stable 14-Apr-09 9-Dec-10 4-Sep-98 28-Oct-10 22-Jul-16 22-Jul-16
Turkey BB+u Neg Ba1 Neg BBB- Stable 20-Jul-16 27-Jan-17 23-Sep-16 17-Mar-17 22-Jul-16 27-Jan-17
Source: Bloomberg
Note: all rating tables are as of June 6th, 2017
RATING SCALE STANDARD TERMINOLOGY AND PROCEDURES

Moody's S&P Fitch Moody's S&P Fitch
Upper Investment Grade Aaa AAA AAA
Aa1 AA+ AA+
Not currently subject
Aa2 AA AA to change STABLE STABLE STABLE
Aa3 AA- AA-
A1 A+ A+
A2 A A Possible long-term change
OUTLOOK (+ or -) OUTLOOK (+ or -) OUTLOOK (+ or -)
A3 A- A- Likely to be put on review
Lower Investment Grade Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB- Likely change in short term REVIEW (+ or -) CREDITWATCH (+ or -) RATING WATCH (+ or -)
Non-Investment Grade Ba1 BB+ BB+
Ba2 BB BB
Ba3 BB- BB- UPGRADE / DOWNGRADE UPGRADE / DOWNGRADE UPGRADE / DOWNGRADE
Lower-Non-Investment Grade B1 B+ B+ AFFIRMED / STABLE AFFIRMED / STABLE AFFIRMED / STABLE
B2 B B
B3 B- B- Moody's ratings are qualified by outlooks and reviews while S&P and Fitch ratings are qualified by outlook and watches.
Caa1 CCC+ CCC+ A review/watch is indicative of a likely short-term movement.
Caa2 CCC CCC An outlook suggests that a review/watch or a long-/intermediate-term movement is likely.
Caa3 CCC- CCC-
Ca CC CC (+) positive outlook +* positive review/watch
C C C (-) negative outlook *- negative review/watch
Default SD RD WR Rating Withdrawn
D D
41
Diego W. Pereira AC (1-212) 834-4321 Mid-Year Emerging Markets Outlook and Strategy
diego.w.pereira@jpmorgan.com June 8, 2017
JPMorgan Chase Bank Sucursal Buenos Aires
Lucila Barbeito AC (54-11) 4348-7229
lucila.barbeito@jpmorgan.com
Latin America
Argentina B/B3/B authority entertains a 15.5% level as the one consistent with
the 17% headline CPI target ceiling, assuming a 22% increase
Economic activity reviving, focus on mid- in regulated prices. This implies that monthly core CPI should
term elections run at 0.93% on average in May-December, very close to the
headline print. This seems unlikely at the current real interest
Cyclical improvement to accelerate in 2Q17 rate level as it would imply a hefty deceleration when
Inflation is to ease in 2H17, but 2017 target is unlikely compared to the 1.8%m/m core CPI average increase
Fiscal consolidation to remain gradual registered in the first four months of 2017. In all, we maintain
December 2017 inflation forecast at 21.2%. We see BCRA
Cyclicals should continue to improve, supporting mid- resuming the easing cycle in June only if May CPI
term elections prospects. Macroeconomic cyclicals are a key deceleration is confirmed, driving the policy rate to 22% by
dimension to gauge the likelihood of the incumbent winning the end of this year.
the mid-term election in October, the main political event of
the year. Although no major change is expected to take place We expect the 2017 primary fiscal deficit to reach 4.4% of
in the Congress, as the Senate will remain under Peronist GDP (government targets 4.2%). The YTD primary deficit is
control and Lower House fragmented, we believe the electoral running at 0.6% of GDP by April. The government set the
result will have an impact on public confidence in the 1H17 primary fiscal deficit target at 2.0%, implying that the
sustainability of the changes pursued by Macris YTD primary deficit is running at 30.8% of the target (14% of
administration. The mid-term Congress election will be held the annual 4.2% primary deficit target). We maintain our 2017
on October 22nd, and the election will be preceded by primary fiscal deficit forecast at 4.4% of GDP, above the
primaries on August 13th. In addition, two provinces, governments 4.2% target. We believe the governments target
Corrientes and Santiago del Estero, will choose their for a 0.8%-pt of GDP reduction in economic subsidies looks
Governor in September, while thirteen provinces will elect ambitious, particularly in an election year. Therefore, we
local legislators. Two key factors that will determine electoral penciled in a more conservative stance, with economic
success are (i) winning the province of BA and (ii) increasing subsidies declining by 0.6%-pt of GDP in 2017, which explains
the number of seats in the Congress. For further details, please the 0.2%-pt of GDP gap with respect to the official target.
refer to our recent Argentina: 2017 Mid-term elections, whats
We believe BCRA will continue its informal FX
at stake?, May 16, 2017.
intervention program, conditional on the level of the
We continue to expect sequential activity momentum to exchange rate. The authority purchased US$100mn per day
accelerate in 2Q17, and keep 3.1% GDP growth for the between May 3 and May 17 (aggregate US$1.1bn purchases
year (although we flag downside risk). The statistics during the period), but interrupted interventions as Brazilian
bureau reported the March activity indicator, which political turmoil drove USD/ARS higher. Thus, it seems likely
increased 1.9%m/m sa, leaving the 1Q17 growth pace at that the BCRA will preserve its options by formalizing an FX
2.4%q/q, saar. The 1Q17 marked the third consecutive purchasing program amid resilient inflation, but that is not to
quarter of expansion; still it came below our quarterly say the BCRA wants to depreciate the ARS in an
forecast of 4.1%q/q, saar. In terms of annual growth, the opportunistic way. Indeed, the worst scenario for BCRA in the
economic activity indicator printed +0.8%oya in March, up near term, in our view, would be a sizable USD/ARS jump,
from a 2.1% plunge in February. Breaking down by sector, which would impact prices via FX passthrough.
construction, agriculture and financial services are driving
The financial authorities are likely to revise the financial
the overall activity recovery, while the manufacturing sector
program as the currency has proved stronger than
decelerated its contraction pace in March. We expect
expected. The financial program presented by the government
consumption to gain muscle in 2Q17 as inflation pressures
at the beginning of the year entertained a US$10bn issuance in
ease, and nominal wage and pension corrections start to kick
the external markets (US$7.4bn performed YTD) and a
in, prompting higher real disposable income.
US$14bn in the local markets (spit 50/50 between local and
The inflation spike experienced in February-April period hard currency; US$9.3bn performed on aggregate YTD).
has made the compliance with 2017 12-17% inflation However, the program will likely be revised in 2H17 to
target less likely. With YTD headline inflation running at account for a stronger ARS (the 2017 FX average level used
9.1%oya (through April), monthly inflation should average was18 back then). We expect external markets issuance to
0.88%m/m during the remainder of the year for BCRAs reach US$12bn (US$2bn above governments program) and
target to be met. Regarding core inflation, the monetary local currency debt issuance at US$14bn (US$7bn above).
42
Katherine Marney AC (1-212) 834-2285 Mid-Year Emerging Markets Outlook and Strategy
katherine.v.marney@jpmorgan.com June 8, 2017
Ben Ramsey (1-212) 834-4308
benjamin.h.ramsey@jpmorgan.com
Bolivia Ba3/BB/BB- As a result, public enterprises such as YPFB and ENDE

(electricity) accounted for a large 3.6% of GDP chunk of the
Pushing the envelope with twin deficits deficit, while the RLGs recorded a 1.5% deficit. According to
the IMF, a large portion has been financed by prior savings or
Growth buoyed by strong public investment, in the by loans from the Central Bank. Government debt remains
absence of a recovery in natural gas prices relatively low at about 34% of GDP, up from 30% in 2013,
...at the cost of large twin deficits for a third year to be although the nominal stock has risen from US$9.3bn to an
covered by gradually declining savings estimated US$11.6bn (including the last bond issuance) in the
Pressures to adjust could build with more balance same period. For 2017, the revised financing plan targets a
sheet deteriorationand ratings actions may loom still-wide 6.5% of GDP deficit.
Bolivia continues to rely on accumulated savings to The large imported component to the public investment
finance twin deficits to cushion the terms of trade shock program and low prices should keep current account
wrought by lower hydrocarbons prices. GDP growth in deficits (CAD) wide. Natural gas and other hydrocarbons
Bolivia decelerated modestly to 4.3% in 2016 from 4.9% in export revenues, more than half of Bolivias exports back in
2015. Consumption slowed to 3.1% from 5.8% in 2015, with 2013, now represent just 30%. Meanwhile, the authorities
public consumption dipping to 1.6% in 2016, while private have leaned heavily on public investment and consumption to
consumption also decelerated despite strong credit growth. boost growth. This mixture kept the CAD wide at 5.5% of
Investment expanded at a healthy 9.9%, buoyed principally by GDP in 2016 (similar to 2015) and down from a small surplus
the public infrastructure program. The authorities eye growth in 2013. Bolivia could register a CAD of close to 6% of GDP
at 4.7% in 2017, fueled by a fiscal impulse. A subdued gas this year given the subdued commodity price outlook. Indeed,
export outlook and execution risks to public investment could the 1Q17 trade deficit is already tracking wider due to sturdier
imply downside risks to growth, in our view. imports. Bolivia has a commercial agreement with Argentina
and Brazil that guarantees natural gas export volumes with
The execution of an ambitious public investment is central prices indexed to WTI, and better prices vs 2016, on average,
to the governments national development strategy plan could somewhat cushion external accounts. It is unclear
(PND) aimed at enhancing productive capacity and lifting whether either deal will be renegotiated upon expiration in
growth to above 4%. The authorities acknowledge that the 2019 and 2027, respectively.
investment program is needed to bridge the countrys
infrastructure deficit and diversify the economy. The program Against this backdrop, the dual fiscal/external imbalances
contemplates spending of US$49bn to be spent through 2020 have gradually drained reserves. International reserves
on industry, physical infrastructure and social programs. In its have fallen by a third since 2014, from US$15.1bn to a still
last Article IV review, the IMF highlighted that the authorities robust US$10.2bn by May 2017 (about 30% of GDP.)
are prepared to be pragmatic in implementing the PND Marchs issuance gave a temporary reprieve to the reserve
presumably to reduce spending if revenues underperform. drain, with levels staying stable since November. The
Among other sources, the PNDs financing plan (2016-2020) government has resisted adjusting the BOBs current 6.9/1
includes about US$3bn to be tapped externally. The latter peg in spite of the terms of trade shock sustained. Yet,
could signal more forays into markets by the sovereign after pressures for a gradual adjustment in fiscal spending and/or
last Marchs US$1bn issuance of the 2028s. the FX peg may build with further balance deterioration,
particularly if hydrocarbons revenues do not recover and as
NFPS deficits above 6% of GDP for a third straight year. savings are gradually worn down.
The NFPS fiscal deficit remained at a wide 6.6% of GDP in
2016. Hydrocarbons-related revenues dropped by more than Sovereign ratings on negative outlook. S&P at end-May
20%oya for a second year. While the government tightened its followed other rating agencies by placing their BB ratings for
belt to cut current expenditures (including forgoing payment Bolivia on negative outlook, citing the role of large and
of a second Christmas bonus,) public investment remained prolonged twin deficits in gradually weakening the
steady at over 17% of GDP. The central governments own sovereigns external balance sheet. Fitch and Moodys also
fiscal deficit was just 0.8% of GDP. Even so, public maintain negative outlooks on their BB- (Ba3) ratings. Given
enterprises and regional and local governments (RLGs) the outlook for more balance sheet deterioration amid elevated
continued to execute large public investment projects, in spite deficits, and few drivers to stabilize the outlook, we do not
of lower hydrocarbon royalties and other revenue payments. rule out a sovereign downgrade in the coming year.
43
Banco J.P. Morgan S.A. J.P. Morgan Securities LLC Emerging Markets Research
Cassiana Fernandez AC (55-11) 4950-3369 Vinicius Moreira AC (1-212) 834-4144 Mid-Year Emerging Markets Outlook and Strategy
cassiana.fernandez@jpmorgan.com vinicius.moreira@jpmorgan.com June 8, 2017
Banco J.P. Morgan S.A.
Cristiano Souza AC (55-11) 4950-3913
cristiano.souza@jpmorgan.com
Brazil Ba2/BB-/BB reversed in case the government approves some of the reforms
and the economy can grow 1.8%, however, this is still below
Political uncertainty blurring the scenario our previous 2.2% estimate.
The deteriorating political landscape may jeopardize Inflation continues to head south. A reduction in gasoline
the reform agenda prices coupled with a discount in electricity prices and the
Political uncertainty risks also delaying the economic amount of rain that continues to increase reservoirs could
recovery and we lowered our growth forecasts shave off about 0.3%-pt from this years inflation. Such
But the inflation scenario is still benign and the abrupt changes in two important prices added to the current
COPOM should continue their easing cycle, albeit benign trend for core inflation and cyclical prices now suggest
with a slightly higher terminal rate that IPCA can end this year at 3.9%. Next year, as long as the
same shocks are not observed, inflation could grow to 4.4%,
The deterioration in the political backdrop is threatening but still below the mid-point of the target.
the approval of reforms. The release of the details of J&F
executives plea bargain agreement with audio and video files We now expect the terminal SELIC rate to be 8.5%. The
involving President Temer, Senator Aecio Neves and former COPOM cut the SELIC rate by 100bp, as expected, in May.
congressman Rocha Loures has led to a significant However, the post-meeting statement was more hawkish than
deterioration in political stability since mid-May. The damage anticipated and clearly suggested a slowdown in the pace of
to Temers ability to govern seems significant at this point, in easing set for July. The Committee members also emphasized
our view, rendering it more difficult to approve the pension that the pace of monetary easing will continue to depend on
reform, and even threatening his ability to remain in power to the evolution of economic activity, the balance of risks,
the end of his mandate. Against this backdrop, part of the possible reassessments of the extension of the cycle, and on
focus has also shifted to the possibility of his succession at a inflation forecasts and expectations. On the one hand, we are
time when the Electoral Court (TSE) resumed the trial on skeptical about the governments ability to pacify the political
illegal financing of the 2014 presidential campaign. Should environment and pass difficult measures such as the pension
President Temer be removed, or resign, the speaker of the reform. However, we also see this situation weighing on
Lower House, Deputy Rodrigo Maia, would take over as a activity, with a potential disinflationary effect. This partially
caretaker president and call an indirect election to be held by offsets the impact of not passing the pension reform this year
Congress within 30 days. The lack of a consensus name to in the final SELIC rate of this cycle, meaning that the terminal
replace President Temer increases the probability that he will rate would not be much affected, though we do not believe
remain president for longer, but the political landscape is that will be the case for the structural rate. With that in mind,
definitely more uncertain now. Hence, we now attribute a low we now expect the terminal SELIC rate to be 8.5% from
probability of the pension reform passing in its current form 8.25%. In spite of the high uncertainty we believe the most
and we expect the deterioration in the political backdrop to likely scenario right now would be a 75bp cut in July,
increase uncertainty and jeopardize the economic recovery. followed by a 50bp cut in September, and a final 50bp cut in
October.
We see GDP stable this year and growing modestly in 2018.
Brazilian GDP rebounded significantly in 1Q. However, most External accounts are still the bright spot Trade balance
of the growth was due to specific effects, such as a positive continues to surprise on the upside, hitting new historical
surprise with the harvest (on the supply side) and inventories highs. Also, our revised scenario for growth should keep the
building (on the demand side). In this context, we expect a services and income deficits rather tamed. With that, we
return to the negative camp in 2Q, particularly as the expect the current account deficit at 0.6% of GDP in 2017,
increasingly uncertain political outlook likely contains down from 1.3% in 2016, and at 1.3% of GDP in 2018,
business and consumer sentiment recovery, with negative reinforcing our view that external accounts will remain solid.
impacts on activity. Also, credit conditions should be tighter
on the back of increased risk perception threatening the credit but fiscal accounts are still concerning. Despite the
recovery we were anticipating for households in the 2H, even significant compression in discretionary expenditure in the
though the Central Bank should not reverse its easing mode. first four months of 2017, the weak activity is still weighing
Against this backdrop, we trimmed down our growth forecasts on tax revenues. In that sense, we still see the budget freeze
and now expect GDP to remain stable in 2017. Next year, we needed to accomplish this years target as difficult to be
acknowledge that this uncertainty could be at least partially achieved and expect the primary deficit at 2.3% of GDP,
pushing gross debt to 75.5% of GDP.
44
Chile AA-/Aa3/A+ investment acceleration is for a dissipation in electoral

uncertainty, which should allow private investors to better
Subdued momentum going into elections gauge prospects of TFP enhancing reforms in the next period.
This could range from ironing out details of the fiscal reform
We expect lower real GDP growth at 1.4% in 2017
that are still pending, to the implementation of the labor
Subdued consumption and investment add downside reform, among a myriad of institutional changes that could
risk to 2Q17 suffer changes.
BCCh to remain on hold but we don't discard another
25bp cut if stagnation lingers Fiscal policy should prove less supportive in 2H17. As
highlighted by the BCCh technical staff in the latest monetary
We expect lower real GDP growth at 1.4% in 2017, from
policy meeting, the current pace of real public spending
1.8%, previously. The revised level is a bit above the center
growth seems unsustainable in 2H17, unless the fiscal
point of the revised BCCh target (1.0%-1.75%). In April, the
authorities decide to revise their fiscal objectives for the year.
monthly headline economic indicator (IMACEC) printed
On the other side, the external backdrop has been supportive,
+0.9%m/m sa, above our expectation (+0.1%m/m, sa) and
with a recovery in copper prices, while commerce has been
consensus (+0.2% m/m sa). Yet, the over-year-ago print also
benefitting from the ARS strength, which prompted a mini-
surprised expectations, but to the downside (+0.1%oya, versus
boom of exports (albeit the value added in this case is scarce
consensus +0.7%oya). The divergence is associated with the
as most goods are exported from Chile).
working days adjustment applied when correcting for
seasonality. The monthly upside sequential surprise was
We expect the BCCh will be on hold, but risk is skewed to
explained by the rebound in the mining sector (+15%m/m sa),
an additional 25bp cut if stagnation lingers. The BCCh cut
yet we highlight that non-mining activity, which we view as a
the reference rate 100bp to 2.50%, its lowest level since 2010,
better gauge of the underlying activity momentum, contracted
and removed the dovish bias it had introduced in December.
in April by 0.1% m/m sa, explained by the manufacturing
On the domestic front, the BCCh underscored that inflationary
sectors subdued performance, depicting a feeble domestic
pressures contained and inflation expectations are well
demand momentum.
anchored. Worth noting, removing the dovish bias does not
preclude further monetary policy accommodation in case
Subdued consumption and investment prospects add
activity stagnation lingers. Inflation is expected to hover
downside risk to 2Q17. At the current phase of the business
inside BCChs tolerance band in the next quarters and we
cycle, we scrutinize with detail the latest labor market
expect headline inflation at 2.7% by December 2017 and 2.8%
developments. Aprils labor report continued to depict a loose
in 2018. Currently, we see a scenario of the BCCh on hold in
labor market, with a stable participation rate and a relatively
the coming quarters, but the risk is clearly asymmetric, and
high unemployment rate. The unemployment rate printed
currently we see a 40% probability for the next move to be
6.7% (3mma), 0.4%-pt above the level posted one year ago.
another 25bp cut.
Job creation remains feeble (+1.4%oya) tilted to self-
employment rather than wage earners. The loose labor market
2H17 elections could prove a galvanizer for domestic
conditions prevent a consumption recovery. With job creation
demand growth, yet there is room for bit of skepticism.
below 2.0%oya, it seems difficult to see an acceleration of the
Former President Piera maintains the lead in the polls,
real wage mass to levels consistent with stronger consumption
followed by Senator Guillier, while the left-to-the-centre
momentum. The real wage mass explains pretty well overall
candidate Sanchez positions herself as the third favorite
consumption growth. Thus, at current growth levels, we dont
candidate. Former President Piera has consistently led the
expect to see consumption growth abandon the sub-3%
presidential polls, and according to the latest CEP survey
growth that has been in place since 2Q14.
appears with 23.7% of vote intention, 3.5%-pt more than in
the previous survey. He is also seen as the winner in the
Investment is unlikely to gain momentum until the end of
second round, although the difference with Alejandro Guillier
the year, once the electoral uncertainty dissipates. We feel
according to the CEP, is a rather close four point margin. With
cautious in extrapolating the observed behavior in regards to
respect to Senator Guillier, after a month of questioning his
equipment and machinery investment in 1Q17. Similarly to
leadership, the latest results of Adimark and CEP continue to
durable consumption, we think the better momentum in 1Q17
show him as the most competitive candidate to face Piera in
followed better performance during the quarter after quarters
a ballotage. Finally, the Frente Amplio candidate Sanchez
of subdued growth, rather than looking to brighter prospects
appears with 4.8% of voting intentions, still low for the blocs
going forward. We believe a necessary condition for sustained
aspirations despite having high positive candidate evaluation.
45
Ben Ramsey AC (1-212) 834-4308 Mid-Year Emerging Markets Outlook and Strategy
benjamin.h.ramsey@jpmorgan.com June 8, 2017
Katherine Marney AC (1-212) 834-2285
katherine.v.marney@jpmorgan.com
Colombia Baa2/BBB/BBB expect BanRep to continue the easing cycle with three more
25bp cuts to finish at a 5.5% policy rate by August. This call
A slower and more gradual adjustment is premised on our view that activity will be better in 2H, the
CAD will remain a bit wider than consensus expectations, and
Growth should improve after 1Qs disappointment
inflation expectations will be more challenged in 2H as the
BanRep to ease through midyear as inflation troughs headline moves higher. We acknowledge risks that BanRep
before heading higher in 2H could deliver another 50bp before the cycle is over or that a
Incremental narrowing in still-high twin deficits more dovish board could be deliver a lower terminal rate.
Election cycle coming into focus in 2H17
The current account deficit (CAD) saw a significant
GDP growth started off 2017 on a weak note, but the adjustment in 2016 aided by lower domestic demand, and
worst should have passed. 1Q17 printed a 0.9%q/q, saar any incremental narrowing should be less pronounced.
contraction leaving annual growth at 1.1%oya, well down We currently forecast a CAD at 3.9% of GDP for 2017, from
from the 1.6%oya recorded in 4Q16. After the disappointing 4.4% in 2016 and 6.4% in 2015. More supportive oil prices
start, we nudged down our full-year growth call to 1.8%, a this year on average will narrow the CAD, as imports start to
touch lower than 2% seen in 2016, but we still look for a recover on the margin. The trade deficit benefited from
sequential recovery across the balance of the year. The steep supportive oil and commodities prices in Q1, however,
1Q decline in consumption was likely temporary capturing stabilizing oil prices for the remainder of the year and better
payback for strong activity ahead of the 1Q17 VAT hikes. We import momentum should keep the trade balance from going
see scope for consumption to recover on the margin as real much lower. We also revised up our 2018 CAD forecast to
wages improve and credit eases, despite a lingering drag from 4% of GDP (from 3.7%) incorporating J.P. Morgans $10/bbl
the tax increase. While investment has disappointed, we think downward revision to oil prices for next year.
it should gain momentum supported by an expected bounce in
oil-sector capex. We also expect the first wave of 4G highway Fiscal targets revised up in spite of reform. Following
infrastructure to add to investment in 2017. guidance of the independent fiscal rule committee, the
government raised the deficit target for 2017 to 3.6% of GDP
The steady disinflation continues apace. Inflation slowed to (from 3.3% before). The 2018 cyclical deficit target was also
4.37% in May, dragged down by a favorable base effect for revised up to 3.1% of GDP from 2.7%. The authorities
food and tradables prices and an easing of the 1Q17 VAT estimate that the fiscal reform, passed in December last year,
impact. The disinflation should continue for two more would earn an additional 0.7% of GDP in revenues (compared
months, taking headline prices back within the target range by to a non-reform scenario) principally from the 3%-pt VAT
mid-year before inflation normalizes back to the top of the hike. Yet, lower growth is expected to drag on revenues and
target range. Our modal inflation path sees inflation reaching combined with a COP6.7trn budgetary addition passed in
a trough at 3.6% by July before base effects reverse and drive March for peace-related spending and other investment, the
prices above the target range and by September finishing a deficit is now expected to narrow less than previously planned.
touch above 4%. Stickier core prices may keep inflation from Junes medium-term fiscal plan should elaborate further on
converging with the 3% target in 2017, and also likely, in the expected pace of consolidation over the coming years, as
2018 as well. well as better define the scope of additional peace spending.
BanRep to continue easing through August. BanRep hiked Colombia will hold legislative elections in March 2018,
325bp in 2015-16 as strong supply shocks drove inflation followed by presidential elections in May (and if needed, a
close to 9%. As price shocks faded and growth softened, the second round in June). Ex-Santos VP, Vargas Lleras, who
authorities began an easing cycle in December, which by May stepped down in March, is an early frontrunner. Thus far, we
had dropped the policy rate from 7.75% to 6.25%. BanRep cut see little scope for a viable anti-system candidate who could
25bp in its May meeting, downshifting from 50bp in April; depart from the pro-market framework, but the Odebrecht
the previous three cuts in the cycle had all been at 25bp clips. scandal has opened a bit more the field. While the peace
The board is now fully staffed, with new director Hernandez process will be a campaign theme, the fast track
joining in the March meeting and Ocampo, the boards second implementation should allow much of the deal to take root
new director, joining in the May meeting. The board still before the next administration takes office. The fiscal rule
deems the ex-ante real policy rate to be contractionary and is may also be a campaign issue, since the next government must
concerned about the increasingly negative output gap. We in theory do the heavy lifting of consolidation.
46
Franco A Uccelli AC (1-305) 579-9415 Mid-Year Emerging Markets Outlook and Strategy
franco.a.uccelli@jpmorgan.com June 8, 2017
Costa Rica Ba2/BB-/BB taxes), the rise in expenditures was underpinned by both
higher current and capital spending, mostly in the form of
Economic resilience amid fiscal challenges transfers. The central government deficit printed at 5.2% of
GDP (US$2.9bn) in 2016, a touch lower than 5.7% of GDP
Trend growth continues to track potential (US$3.1bn) in 2015. In the absence of any material reforms,
Early numbers show no fiscal respite and constrained by legally and constitutionally mandated
Trade deficit little changed despite higher flows outlays that amount to 95% of total spending, the budget for
2017 envisages the deficit widening to 6.2% of GDP
Trend growth slows a touch in March. Trend growth in (US$3.7bn). However, supported by administrative measures
the monthly index of economic activity (IMAE) printed at designed to contain spending, and despite this being an
3.6%oya in March, down from 3.7% the month before election year, we forecast the shortfall to come in at a slightly
and 4.9% a year earlier. The March outcome, which was under-budget 5.9% of GDP (US$3.5bn) instead, before
supported by upticks in the professional activities, inching up to 6.0% of GDP (US$3.9bn) in 2018, also under a
miscellaneous activities, financial services, and public passive scenario.
administration sectors, and constrained by declines in the
construction, public utilities, hotels and restaurants, and Public debt stock inches up in January-February. Total
mining divisions, caused the 12-month trailing rate of public debt expanded 1.7% (US$575mn) to US$35.14bn in
expansion to ease slightly to 4.0% from 4.1% in February. the January-February period, driven by a 4.8% increase to
Real GDP expanded 4.3%y/y in 2016, a shade lower than US$11.09bn in external debt, which accounts for just under
4.7% in 2015, and the latest official forecast calls for it to one-third of the total, and, to a lesser extent, a more modest
expand 4.1%y/y in both 2017 and 2018, a shade higher 0.3% uptick to US$24.04bn in domestic debt. After growing
than growth potential of 3.9%, as recently estimated by by an average of nearly 18% per annum between 2010 and
the IMF. Recent values confirm that despite fiscal 2015, total public debt expanded 7.6% to US$34.56bn in 2016
uncertainty and bleak reform prospects, growth is from US$32.12bn in 2015, boosted by a 9.1% surge in
enjoying positive momentum. domestic debt and a 4.3% rise in external debt. As a
percentage of GDP, the public debt burden leaped to 60.2%
Annual inflation rises marginally in April. A 0.15% last year from 58.6% the year before. We expect the public
increase in the monthly CPI, which was a touch higher than a debt stock to rise by a further 8.9% to US$37.64bn, equivalent
0.09% uptick a year earlier, caused annual inflation to inch up to 62.3% of GDP, in 2017, as the fiscal deficit remains
to 1.64% in April from 1.58% in March. The April monthly elevated and financing needs are high.
reading was the result of increases in the transportation
(+0.81%m/m), housing and public utilities (+0.66%), and Trade deficit climbs slightly in January-April. The trade
entertainment (+0.35%) components of the CPI, which offset deficit inched up 0.8% to US$1.58bn (2.6% of GDP) in the
declines in the food and non-alcoholic beverages (-0.49%), January-April period from US$1.57bn (2.7% of GDP) a year
clothing and footwear (-0.04%), and alcohol and tobacco earlier, the result of a 4.8% rise to US$3.43bn in exports and a
(-0.02%) categories. We expect annual inflation to climb from 3.5% increase to US$5.01bn in imports. The shortfall
0.8% in 2016 to 2.9% in 2017, printing in line with the official narrowed 8.8% to US$5.41bn (9.4% of GDP) in 2016 from
3% (+/-1%) target range, bolstered by base effects and higher US$5.93bn (10.8% of GDP) in 2015, driven largely by lower
commodity prices. With price pressures remaining contained oil imports. The latest central bank (BCCR) forecast calls for
thanks to relatively low energy costs, inflation is currently not the trade gap to widen 14.4%y/y to US$6.19bn (10.2% of
one of the principal credit drivers in Costa Rica, unlike fiscal GDP) in 2017 and by a further 2.7% to US$6.35bn (9.7% of
weakness and uncertain reform prospects, which continue to GDP) in 2018, as economic growth stays healthy, commodity
capture the bulk of the markets concern. prices gradually recover, and external conditions normalize,
leading imports (particularly fuel and capital goods) to expand
Fiscal deficit widens a tad in January-April. The central at a faster clip than exports.
government deficit printed at 1.7% of GDP (US$1.0bn) in
January-April, a shade higher than 1.6% of GDP (US$910mn)
a year earlier, the result of a 7.2%oya increase in revenues and,
more importantly, a 9.3% surge in expenditures. While growth
in total revenues was bolstered by a sizable expansion in tax
collections (particularly income and, to a lesser extent, sales
47
Dominican Republic B1/BB-/BB- US$386mn (0.5% of GDP) in 1Q16. The favorable three-
month outcome, the fourth first-quarter surplus in a row, was
Solid fundamental prospects supported by sizable increases in remittance inflows
(+12.9%oya), tourism revenues (+9.9%), and merchandise
Growth remains healthy despite recent cooling exports (+5.0%). Boosted by higher gold exports and lower oil
Early fiscal results show scope for outperformance imports, the current account deficit (CAD) narrowed to
Remittances soar, tourism revenues leap US$1.1bn (1.5% of GDP) in 2016 from US$1.3bn (2.0% of
GDP) in 2015, recording its lowest level in eleven years. As
Real GDP prints healthy gains in 1Q17. Real GDP surged international energy prices gradually climb and non-oil
5.2%oya in 1Q17, a bit lower than 6.3% a year earlier. The imports strengthen (local consumption is heavily dependent
still robust expansion was supported primarily by the financial on imports of finished goods and inputs), we expect the CAD
services (+8.5%oya), agriculture (+7.5%), construction to widen to US$1.5bn (2.0% of GDP) in 2017, a level that
(+7.2%), hotels and restaurants (+6.6%), and communications would be more than adequately covered with foreign direct
(+6.4%) sectors, which more than offset small declines in the investment (FDI).
public administration and defense, mining (-0.6%), healthcare
(-0.5%), and public utilities (-0.3%) categories. Real GDP Remittances surge in 1Q17. Remittances swelled 12.8% to
swelled 6.6%y/y in 2016, slightly lower than 7.0% in 2015, US$1.45bn in 1Q17 from US$1.29bn in 1Q16, building on the
printing the highest growth rate in Latin America for a third favorable performance they posted in 2016, when they
consecutive year. Last years robust performance was climbed 6.1% to US$5.26bn (7.3% of GDP) from US$4.96bn
bolstered by double-digit growth in the mining (+26.5%y/y), (7.3% of GDP) in 2015. The bulk of remittances in the three-
financial services (+11.9%), healthcare (+10.1%), and month period originated from the US, which accounted for
agriculture (+10.0%) sectors, with no major economic nearly 72% of the total. While most Dominican remittances
division registering a contraction. We expect real GDP to are used to cover basic household needs such as shelter, food,
expand 5.5% in 2017, a shade higher than its estimated 5.0% clothing, health care, and education, empirical evidence
growth potential, underpinned by a buoyant tourism sector, suggests that a portion is also utilized to finance small
rising exports, surging remittances, strong FDI inflows, and businesses and other productive activities. Bolstered by
relatively low fuel prices. improved labor market conditions in the United States, and,
assuming only a moderate impact from Trump administration
Fiscal deficit halves in January-April. The central policies, we expect remittances to rise 5.6%y/y to US$5.56bn
government deficit halved to 0.5% of GDP (US$375mn) in (7.3% of GDP) in 2017 and by a further 4.4% to US$5.80bn
the January-April period from 1.0% of GDP (US$717mn) a (7.3% of GDP) in 2018.
year earlier, driven by a 2.5%oya increase in revenues (in
USD terms) and, more importantly, a 5.9% plunge in Tourism revenues swell in 1Q17. Supported by a 4.8%oya
expenditures (also in USD terms). Whereas the spike in increase to 1.50mn in foreign tourist arrivals, tourism receipts
revenues was prompted by a sizable leap in tax collections, surged 9.9% to US$2.0bn (2.6% of GDP) in 1Q17 from
lower spending was the result of a sharp decline in capex, as US$1.8bn (2.5% of GDP) in 1Q16. As in previous years,
current outlays were slightly higher. As consolidation efforts arrivals in the three-month period overwhelmingly originated
continued to yield positive results, the central government from North America (60%), followed by Europe (26%). The
deficit narrowed to 2.3% of GDP in 2016, its lowest level in number of foreign visitors leaped 6.2% to 5.13mn in 2016
nine years, from 2.4% of GDP in 2015, supported by an from 4.83mn in 2015, boosting tourism revenues 9.9% to
increase in the primary surplus to 0.5% of GDP last year from US$6.7bn (9.4% of GDP) last year from US$6.1bn (9.0% of
0.2% of GDP the year before. While the current government GDP) the year before. We expect tourist arrivals to increase
budget calls for the shortfall to print at 2.4% of GDP in 2017 6.8%y/y to 5.48mn in 2017, lifting tourism receipts 7.5% to
and 2.2% of GDP in 2018with the primary surplus US$7.2bn (9.5% of GDP). A Latinvex analysis of WTO data
continuing to inch up to 0.8% and 0.9% of GDP, found that the Dominican Republic leads Latin America in
respectivelywe believe there is some scope for tourism receipts as a percentage of GDP. Recent values
outperformance, given the year-to-date outcome, particularly confirm that the contribution of the tourism industry to the
if international oil prices remain relatively subdued. Dominican economy continues to edge steadily higher. In
fact, according to the World Travel & Tourism Council
CAS climbs a bit in 1Q17. The current account surplus (WTTC), the tourism sector directly and indirectly accounts
(CAS) inched up to US$391mn (0.5% of GDP) in 1Q17 from for more than 17% of GDP and nearly 16% of employment in
the country.
48
Katherine Marney AC (1-212) 834-2285 Mid-Year Emerging Markets Outlook and Strategy
katherine.v.marney@jpmorgan.com June 8, 2017
Ben Ramsey (1-212) 834-4308
benjamin.h.ramsey@jpmorgan.com
Ecuador B3/B/B end, Ecuador returned to markets in late May issuing new and
expensive 6- and 10-year US$1bn benchmarks.
Moreno takes the helm
Impressions are mixed whether Moreno will step out
Moreno takes office from a weak starting point and from below Correas shadow, or just be a placeholder for
with mounting economic challenges more of the same, weakened politically by a disputed
Constructive signals on the economic front, but little election, smaller AP majority in the legislature, and Correas
sense of urgency or specifics own domineering presence. Moreno was elected on a
Muddling through with a patchwork of financing platform that represented continuity of a model that looks
amid high deficits and low growth in 2017 unsustainable under the current external conditions. Thus far,
the incoming cabinet itself seems to reflect Morenos own
President Lenin Moreno took office May 24, marking the stamp, suggesting at least a break from complete continuity.
first transition under the Citizens Revolution after Political developments related to the Moreno-Correa
Rafael Correas ten years in power. Moreno, the official relationship and Morenos ability to set his own priorities
candidate, won a tight second-round election on April 2 may eventually prove critical to see if any policy adjustment
against right-wing opposition contender Guillermo Lasso. could be forthcoming.
The contested election may diminish Morenos initial quotient
of political capital, and raises concerns about a less stable On the economic front, there are some constructive signals,
political landscape ahead, especially as economic challenges but little sense of urgency or specifics, such as how to put
seem daunting. Morenos early moves for the most part have fiscal accounts on a more sustainable footing. New Finance
been about setting out his own agenda and piecemeal steps, Minister, Carlos de la Torre, voiced an intention to cut capital
rather than a broader overhaul. expenditure, reduce the longer-term fiscal deficit to a still high
3% of GDP and even pursue a potential liability management
More muddle-through for the economy. Ecuadors for some external debts. Yet, we will have to await more
economy closed 2016 with a burst of momentum, expanding specifics, such as an updated 2017 budget, to gauge the new
at 1.5%oya (+7%q/q, saar,) in 4Q16 as the Correa government administrations direction for fiscal policy. Morenos
leaned into the finish line ahead of elections and financing administration has sought to strike a more constructive tone
remained plentiful, though not cheap. A similar dynamic with the private sector by placing emphasis on promoting
likely played out in 1Q17. Starting in 2Q, we are looking for exports and increasing space for private investment. We also
three subsequent quarters of contraction, as Ecuador will be do not rule out more private participation in the oil sector
hard-pressed to defy the gravity of the ongoing terms of trade under the right conditions.
shock adjustment via ongoing borrowing. The carryover from
the prior years expansion into 2017 still lifts our full-year A key signal could be how bold Moreno decides to be on
growth call to 1.5%y/y. We assume that the economy the anti-corruption agenda. Some political observers think
continues to muddle through its deflationary adjustment with Moreno could surprise, and use the latter issue as a tool to
high fiscal deficits and a patchwork of financing sources to sideline some key Correa power players in order to establish
cushion the liquidity crunch. Risks to our call are mainly his own political identity and build up his own political capital.
linked to Ecuadors ongoing ability to find financing. Such a move from Moreno, if it were to occur, could be quite
turbulent. Since taking office Moreno and his political allies
The authorities estimate financing needs at 13% of GDP in have focused their energy on pursuing corruption allegations
2017 assuming a central government deficit at 4.3% of linked to the Odebrecht case, and establishing an anti-
GDP, down from a 5.7% deficit in 2016. Low growth and corruption council.
oil prices should limit the upward momentum on revenues,
aside from some potential one-off contributions from the sale With the election over and economic challenges mounting,
of public assets planned by the government. Cuts to capital an IMF program still seems to be an option, but not a Plan
expenditure, though not yet included, could be made to trim A. For now, the authorities seem to favor muddling through
the deficit if needed. However, rigidities in capex spending with only minor adjustments to current policies. That said,
could limit the available space to cut. Thus, we see more dollarization remains a binding constraint for the authorities.
potential for the deficit to drift upwards towards at least 6% of In this sense, we think the authorities may be more willing to
GDP, assuming financing sources are forthcoming. To this bite the bullet to tighten fiscal policy and undertake structural
adjustments under the Funds stewardship, if the sustainability
of the monetary regime were to come under more acute stress.
49
El Salvador Caa1/CC/CCC Public debt stock rises modestly in January-April. The

total public debt stock (NFPS + FPS + CB) climbed by a tepid
If not for remittances 1.5% to US$17.83bn in 1Q17, as half the proceeds of a
US$600mn global bond issued in February was used to repay
Trend growth exceeds potential, but remains soft domestic Letes (treasury bills). The debt stock rose 5.9% to
Preliminary results confirm fiscal deterioration US$17.56bn in 2016 from US$16.59bn in 2015, the result of
Remittances print double-digit gains nearly even spikes in domestic and external debt. The public
debt burden expanded in 2016, as growth in the debt stock
Trend growth slips a bit in March. Trend growth in the exceeded growth in nominal GDP. Indeed, the public debt-to-
monthly index of economic activity (IVAE) slowed to GDP ratio inched up to 65.5% last year from 63.7% the year
1.7%oya in March, its weakest level in 12 months, from 2.1% before. With growth in the debt stock poised to beat growth in
the month before and 1.9% a year earlier. The relatively soft nominal GDP once again in 2017, we expect the ratio to swell
March reading, which kept the 12-month moving average at to 67.2% (US$18.49bn), driven largely by protracted fiscal
2.4%oya for a third consecutive month, was supported by weakness. The combination of relatively low economic
relatively strong performances in the transport, warehousing, growth and high fiscal deficits continues to boost the public
and communications (+4.5%), retail, hotels, and restaurants debt stock to unprecedented levels, raising concerns about the
(+3.9%), and construction (+3.6%) sectors, and constrained sustainability of El Salvadors debt burden and weighing on
by declines in the public utilities (-18.6%) and, to a lesser its sovereign credentials.
extent, government services (-0.1%) divisions. According to
preliminary estimates, real GDP growth printed at 2.4% in Trade deficit is up a touch in January-April. The trade
2016, a shade higher than 2.3% in 2015, and is expected to deficit rose 2.7% to US$1.45bn (5.3% of GDP) in the
moderate slightly to 2.3% in 2017. While these growth January-April period from US$1.41bn (5.3% of GDP) a year
forecasts are somewhat low by regional standards, they are earlier, prompted by a 3.7%oya surge to US$1.85bn in exports
higher than El Salvadors growth potential, which at only and a 3.3% increase to US$3.30bn in imports. Nearly 37% of
1.8%, as recently estimated by the IMF, is currently the lowest El Salvadors exports and 20% of its imports were traded with
in Central America. neighboring Central American countries. The trade shortfall
moderated 8.3% to US$4.52bn (16.9% of GDP) in 2016 from
Fiscal balance swings to deficit in January-April. The non- US$4.93bn (18.9% of GDP) in 2015. Last years decline was
financial public sector (NFPS) balance swung to a US$51mn the result of a 2.7%y/y decrease in exports to US$5.34bn and
(0.2% of GDP) deficit in the January-April period from a a 5.4% drop to US$9.86bn in imports. With growth in imports
US$29mn (0.1% of GDP) surplus a year earlier, prompted by likely to exceed growth in exports as commodity prices
a 1.0%oya increase to US$2.00bn in revenues and, more recover somewhat, we expect the trade deficit to widen 10.6%
importantly, a 5.1% surge to US$2.05bn in expenditures y/y to US$5.00bn (18.2% of GDP) in 2017. Given El
(including pension payments). The NFPS shortfall shrank Salvadors lack of fuel deposits and relatively weak
from US$851mn (3.3% of GDP) in 2015 to US$750mn (2.8% manufacturing base, its external accounts are liable to remain
of GDP) in 2016, outperforming the 3.9%-of-GDP deficit vulnerable to fluctuations in commodity prices and subject to
budgeted for the period, limited by the governments inability a strong structural dependence on imports.
to secure funding, as congressional approval of a global bond
sale for financing purposes did not materialize until last Remittances swell in January-April. Remittances surged
November and the issue was not placed until February of this 10.6%oya to US$1.58bn in January-April from US$1.43bn a
year. While proceeds from the new bond enabled the year earlier, building on the positive performance posted in
government to address its immediate liquidity challenges, 2016, when they increased 7.2% to US$4.58bn from
given the relatively soft state of the economy and policy US$4.27bn in 2015. After peaking at 18.7% of GDP in 2006,
constraints stemming from its fully dollarized nature, we remittances steadily moderated to 15.7% of GDP in 2011,
expect El Salvadors fiscal outlook to remain fragile, with the before gradually rebounding to 17.1% of GDP last year.
likelihood of a material reduction in the deficit highly Bolstered by an ongoing recovery in the US labor market,
contingent on political, as well as economic considerations. where an estimated 2.5mn Salvadorans reside and work
Accordingly, we forecast the deficit to print at US$908mn mainly in the construction and hospitality sectors, and
(3.3% of GDP) in 2017. assuming only a moderate backlash against migrant workers
from the Trump administration, we forecast remittances to
expand 8.0%y/y to US$4.94bn (18.0% of GDP) in 2017.
50
Banco J.P.Morgan, S.A., Institucin de Banca Mltiple, Emerging Markets Research
J.P.Morgan Grupo Financiero Mid-Year Emerging Markets Outlook and Strategy
Gabriel Lozano AC (52-55) 5540-9558 June 8, 2017
gabriel.lozano@jpmorgan.com
Steven Palacio AC (52 55) 5382-9651
steven.palacio@jpmorgan.com
Mexico A3/BBB+/BBB+ initially played a hand, but more recently inflation is the main
focus. In our view, Banxicos aim has been anchoring
Slow growth, high inflation, tighter policy inflation expectations and preventing a broad contamination
of price dynamics stemming from adjustments in relative
GDP growth to slow and become more balanced in 2H
prices due to one-off shocks. So far, it appears to be working;
Inflation to remain well above the 3% target short-term as inflation expectations have ballooned, but
Banxico is nearing the end of a so-far 375bp hiking cycle longer-term ones remain stable. Inflation is likely to still tick
State elections signal tight presidential race next year higher in the coming months but should start converging
lower in 2H17 before falling sharply early next year, in our
Growth to turn slower, but more balanced. Going into the view. According to Banxicos latest communication, the Bank
year, nose-diving business and consumer sentiment pointed agrees with our projected inflation path and has hinted they
toward a sharp moderation in activity. US-driven political might be nearly done hiking rates. The ex-ante real policy rate
uncertainty, a steep increase in inflation and domestic political is already nearly tight amid weak activity and a widening
woes all contributed to the bleak outlook. As the year output gap. Additionally, the central bank discussed
progresses tail risk scenarios have fallen to the background thoroughly the convenience of signaling to the market that the
and activity has held up much better than feared. From an end of the hiking cycle was near. We think these discussions
initial GDP growth forecast of 1.3%oya early in the year, we are consistent with our view for one final rate hike. Under an
now see growth at 2% this year. 1Q activity was quite robust, alternative scenario, we believe that no more than two
and continued to show growth spearheaded by domestic additional hikes could be forthcoming.
demand. As we move into the 2H17, we look for domestic
demand to slow. External demand is likely to take up the Fiscal consolidation is on its way, might help avert credit
baton but only partly offset slowing domestic activity. The downgrade. The government has committed to achieve a
steep rise in inflation, currently at 6.2%oya, is expected to primary fiscal surplus, for the first time since 2008, in an
more noticeably weigh down consumption. This, in turn, attempt to stabilize and eventually bring down its debt ratio,
could hit domestically-driven services, which should be partly which has been increasing rapidly in the past years. Fiscal
cushioned by a tight labor market. As domestic demand slows, data suggest efforts are paying off and targets appear
we would expect external demand to rise as US trade and attainable. Factoring in transfers from the central banks
manufacturing activity pick up pace and global manufacturing operational surplus would actually imply even more ambitious
remains firm. From a supply-side perspective, the rise in targets could be attained. With this in mind, we think Mexico
external demand should boost manufacturing and externally- could avert a credit downgrade, although we still think a
driven services. downgrade is the more likely scenario.
Inflation has sharply accelerated but mostly driven by State elections point toward a tight presidential race next
transitory factors. Following two years of extremely benign year; PRI unlikely to retain the presidency. The State of
inflation outcomes, consumer prices showed a rather marked Mexico election was seen by some as a barometer of next
change of trend, accelerating sharply since the beginning of years presidential election. The interpretation of its results
the year. A 20% increase in gasoline prices, incipient demand- suggests three things: the PRI continues to lose ground,
side inflation pressures and passthrough from the pesos sharp AMLO is a serious contender in next years presidential
depreciation over the past few years have all contributed to election and a PAN-PRD alliance could seal a victory for
the steep rise. Furthermore, indirect effects from rising energy these two parties in next years presidential race. The PRI
prices have become visible lately, while raw food prices have only won the election with 34% of votes, nearly half the share
reverted to higher levels. As a result, inflation went from 3.4% obtained in past elections. AMLOs Morena came in very
late last year to 6.2% in May. We expect inflation to peak at close despite being its first major state election. With the State
6.3% by mid-year before easing toward 5.9% by year-end. We of Mexico being the largest electorate nationwide, this
expect a sharp drop off next year to around 3%, as transitory validates claims of strong support for AMLOs party. Finally,
price pressures subside. the PAN-PRD alliance has yielded very positive results over
the past few years (doing again so in Nayarit and Veracruz
Banxico to wrap-up hiking cycle with a last 25bp rate this year) and could be heavily pondered as an option for the
increase in June. Since late 2015, Banxico has hiked its presidential race. We think that the presidential race will most
policy rate 375bp to 6.75%. External factors (i.e., Brexit, US likely be contended between Morena and the PAN (possibly
policy normalization, US elections) and fiscal concerns in conjunction with PRD) in detriment of the PRI.
51
Panama Baa2/BBB/BBB (US$498mn) in 2017, 2.0% of GDP (US$1.19bn) unadjusted,

on stronger revenue than expenditure growth.
Growth strengthens, Canal revenues swell
Public debt stock climbs slightly in 1Q17. The stock of
Elevated Canal activity boosts growth meaningfully public debt expanded 1.7% to US$22.0bn in March
Lower capex underpins fiscal improvement (US$17.1bn external + US$4.9bn domestic) from US$21.6bn
Tourism receipts climb despite decline in visitors in December 2016. The increase was underpinned by a
1.2%YTD rise in external debt, which accounts for 78% of the
GDP growth strengthens in 1Q17. Real GDP swelled total, and a 3.3% uptick in domestic debt. Public debt rose
6.2%oya in 1Q17, its strongest level in eight quarters, up from 6.8% to US$21.6bn in 2016 from US$20.2bn in 2015, boosted
5.0% in 1Q16. The favorable first-quarter performance was by an 8.0%y/y rise in external debt and a more modest 2.8%
supported primarily by robust expansions in the transportation, uptick in domestic debt. Relative to nominal GDP, the public
warehousing, and communications (+10.4%) and wholesale debt burden inched up to 39.1% in 2016 from 38.8% in 2015.
and retail (+9.5%) sectors, which were driven in turn by Based on recent trends, we expect the stock of public debt to
elevated Canal cargo flows and toll revenues, port activity, climb 6.0%y/y to US$22.9bn in 2017, equivalent to 39.1% of
and re-exports from the Colon Free Zone, and constrained by GDP, more than 30%-pts lower than the 70.4% peak posted in
declines in the fishing (-8.0%) and, to a lesser extent, 2004.
agriculture (-1.0%) sectors. Real GDP grew 4.9%y/y in 2016,
one of the highest growth rates in Latin America, a bit lower Tourism revenues rise 2.8%y/y in 2016. Despite a 4.8%oya
than 5.8% in 2015, boosted by increased dynamism in the decrease to 2.19 million in tourist arrivals, tourism revenues
education, public utilities, and mining sectors, which more climbed 2.8% to US$4.26bn (7.7% of GDP) in 2016 from
than offset declines in fishing and manufacturing production. US$4.14bn (7.9% of GDP) in 2015, when they surged 12.8%
Based on recent trends, we expect real GDP to expand from US$3.67bn (7.5% of GDP) in 2014, bolstered by a
5.8%y/y in 2017 and by a further 6.1% in 2018, roughly in sizable 9.2% spike to 2.30 million in tourist arrivals. Based on
line with potential, bolstered by the expanded Canal and recent trends, and as tourism activity picks up, driven by
sizable investments in the energy, mining, and logistics stronger US demand, we expect tourism receipts to swell
sectors, two domestic processes that have shielded Panama 6.0%y/y to US$4.51bn (7.7% of GDP) in 2017. A Latinvex
from the adverse effects of external shocks. For several years, analysis of World Trade Organization (WTO) data found that
strong growth has been one of Panamas most important credit Panama leads Latin America in receipts per visitor. The latest
drivers, and the positive trend is likely to continue in the values confirm that the contribution of the tourism industry to
foreseeable future. the Panamanian economy remains quite strong. Indeed,
according to the World Travel & Tourism Council (WTTC),
Fiscal balance swings to surplus on lower capex. The non- the tourism sector directly and indirectly accounts for a
financial public sector (NFPS) balance swung to a surplus of comparatively high 16.2% of GDP and 16.1% of employment
0.3% of GDP (US$204mn) in 1Q17 from a deficit of 0.3% of in the country.
GDP (US$158mn) in 1Q16. The improvement was largely
driven by a sizable decline in capital expenditures to 0.7% of Canal toll revenues surge in 1Q17. Supported by a
GDP (US$427mn) in the January-March period from 1.6% of 22.7%oya surge in cargo tonnage traversing the Canal, toll
GDP (US$860mn) a year earlier, as total revenues were revenues leaped 16.6% to US$565mn in 1Q17 from
broadly unchanged and current spending rose a touch. Flat US$485mn in 1Q16. The positive performance marked a clear
revenues and lower expenditures enabled the primary balance departure from last years somber numbers, when a 3.3%y/y
to increase sharply to 1.1% of GDP (US$619mn) in the first drop in cargo tonnage caused toll receipts to contract 1.0% to
three months of 2017 from 0.4% of GDP (US$232mn) a year US$1.97bn (3.6% of GDP) from US$1.99bn (3.8% of GDP)
earlier. Complying with the deficit limit set by the Fiscal in 2015. Toll revenues are projected to strengthen markedly in
Responsibility Law (FRL), the adjusted (i.e., excluding the foreseeable future, boosted by a new toll structure that
transfers to the FAP sovereign wealth fund) NFPS deficit went into effect in April of last year and the inauguration of
narrowed to 1.5% of GDP (US$808mn) in 2016, 2.4% of the expanded Canal last June. Accordingly, we forecast toll
GDP (US$1.35bn) unadjusted, from 2.0% of GDP receipts to swell 10.0%y/y in 2017, lifting the tally to
(US$1.04bn) in 2015, 2.3% of GDP (US$1.21bn) unadjusted. US$2.17bn (3.7% of GDP).
We expect the adjusted fiscal gap to ease to 0.8% of GDP
52
Lucila Barbeito (54-11) 4348-7229
Peru A-/A3/BBB+ April due to the monthly deflation experienced in April

extended through May and the reversal of the food price leap
Swift policy reply to domestic headwinds that occurred in March due to adverse weather conditions. We
see inflation converging to 2.2% by December 2017, inside
Reconstruction program and fiscal stimulus underway the tolerance band of the BCRP (2%1%).
Still, we see GDP decelerating to 2.6% in 2017
BCRP has room to ease monetary conditions further BCRP has room to ease monetary conditions further as
the output gap is likely to continue widening in 2Q17.
Two main shocks have prompted a swift policy reaction. Admittedly, activity growth outperformed subdued
First, the government was hit by the Odebrecht corruption expectation for March at 0.7%oya versus a flat consensus
scandal that broke in December 2016, which has taken a toll estimate. Yet, the output gap, more relevant for monetary
on activity via the delay/suspension of key infrastructure policy, continues widening, and is running at levels similar to
projects. Second, the coastal el Nio, which brought the worst 1Q14 and 3Q15. With ebbing inflation pressures, we see the
flooding and landslides in decades, materially affected BCRP taking an even more determinate stance to support
infrastructure, and raised domestic food prices. activity. Indeed, as a simple plot of the output gap and the
deviation of the policy rate from its neutral level suggests the
The authorities set in motion a reconstruction program BCRP has around 50bp space to promote a demand
and fiscal stimulus through 2020. The government enacted a momentum revival amid a stable currency and supportive
fiscal package of 1.3% of GDP targeted at reconstruction external drivers. As we highlighted previously, the fiscal
needs and public investment. The authorities also relaxed the support via reconstruction and infrastructure may suffer from
near-term fiscal consolidation path, adding 3.2%-pt of GDP in execution delays, which is the reason why we believe that the
spending and fiscal deficit through 2020. The fiscal deficit BCRP should focus on the output gap that is likely to continue
was widened by 0.5%-pt of GDP to 3.0% this year, by 1.2%- widening in 2Q17, in our view.
pt to 3.5% next year, by 0.9%-pt to 2.9% in 2019 and by
0.6%-pt to 2.1% for 2020. We now call for a 25bp cut at the June 8 policy meeting,
followed by another 25bp cut in 3Q17 to a terminal rate
The 3.2% GDP fiscal push is to be financed with Treasury level of 3.5%. This level, together with the infrastructure and
savings and multilateral loans, without resorting to reconstruction plans in motion should be enough to drive
market financing. The Treasury has 17% of GDP in financial activity growth towards potential. As a risk scenario to our
savings, of which 4.2% of GDP is sourced from the fiscal modal call, if execution risks delay the kick in of
stabilization fund. The public debt is expected to reach 27.5% countercyclical fiscal policies on domestic demand, we would
of GDP next year, retracing in the following years to 26.2% of not discard an extra 25bp policy rate cut.
GDP by 2021.
Local currency bonds to become Euro Clearable next
Despite the government efforts and proactive fiscal policy month. The authorities announced that Soberanos will be euro
we see GDP decelerating to 2.6% in 2017, from 3.9% in clearable in July; a measure intended to increase local market
2016. The authorities estimate that the combined impact has depth and liquidity. They also clarified that Peru does not
taken a 1.5%-pt toll on GDP growth this year, partly offset by have the need to issue additional debt for the reconstruction
a more supportive external backdrop. Despite the policy swift program. We can see LMO though, likely swaps aimed at
reaction, we still see some delays and execution risks in increasing duration and/or exchange hard currency debt into
reconstruction plans due to legal Odebrecht related spillovers. local currency.
Yet, it is worth noting the institutional improvements in
regards to public spending execution (weekly meeting with
ministers provide timely execution information; pecuniary
penalties if under-execution). We see 2018 GDP growth
accelerating to 4.2%, above potential as the fiscal push kicks
in and steps up activity.
Inflation normalized after the Coastal El Nio supply

shock. Limas headline inflation dropped 0.42%m/m in May,
driving the last 12-month print to 3.04%oya, from 3.69% in
53
Uruguay BBB/Baa2/BBB- surprise, we revised our December 2017 inflation forecast

lower to 7.3% from 8.0%, previously. We are roughly in line
Developing the domestic financial market with consensus (as surveyed by BCU) with regard to 2017
inflation, while we hold a more constructive view on medium-
Uruguay is to issue local currency nominal bonds
term inflation trends. Our revised 2017 forecast stands 15bp
(GBI-eligible)
above the median consensus forecast, which is sitting
Inflation is back inside BCUs target range currently at 7.15% by December 2017. For 2018, consensus
Fiscal consolidation is tangible, by now expects inflation at 7.85%, while we forecast 7.0%.
The financial authorities initiated a roadshow to issue local The improvement of the fiscal accounts is tangible, by
currency global bonds, GBI-eligible. The aim is to increase now. Aprils fiscal result posted UYU1.3bn overall deficit,
financial openness of the economy and, therefore, reduce local driving the last 12-month headline gap to -3.4% of GDP, a
currency financial costs, which, in our view, are still too significant correction from the 3.9% deficit posted by 1Q17
elevated for an investment grade country. We have argued in and 3.8% in 4Q16. Worth noting, Marchs fiscal result was
the recent months that the cyclical improvement in activity affected by provisional spending advances due in April (0.2%-
together with the currency performance have been of utmost pt of GDP). Therefore, when correcting for the accounting
relevance to help the authorities prevent further fiscal slippage distortion, the fiscal consolidation in April came to be 0.3% of
and to drive inflation back to the central banks target range GDP. We expect the headline fiscal deficit to close 2017 at
after seven years of above-target prints. While the authorities 3.3% of GDP. This implies a 0.5%-pt correction from 2016
commit to the fiscal and monetary adjustments, they also see year-end level, under the belief that the authorities will be able
scope to pursue a second generation effort to de-dollarize the to contain demands for higher public spending coming from
public debt, a necessary condition, in our view, to encourage the governments lawmakers in the mid-year budget revision.
private sector de-dollarization and the development of local Back in mid-2016, the government was able to pass in
financial markets. Worth noting, the incentives are aligned for Congress several measures on the revenue and expenditure
both the monetary and fiscal authorities to embrace this task. side to help consolidate public accounts, with the goal of a
The development of a local currency yield curve is also a 2.5% of GDP consolidated deficit by the end of 2019.
necessary condition to increase monetary policy efficiency,
which so far looks limited given the high degree of local S&P revised BBB rating outlook to stable from negative; we
dollarization. On the fiscal side, developing a local curve see GDP growth at 2.5% and 3.2% in 2017 and 2018,
would allow not only the Treasury, but the state owned firms respectively, with upside risk in both cases. The rating agency
(SOEs) to finance in pesos, minimizing currency mismatches emphasized the expectation of gradual activity strengthening,
that have forced the authorities to implement macro prudential which will support income levels, revenue base, and fiscal
insurances that prove onerous in the long run. consolidation. We now expect Moodys to follow suit in
removing the negative outlook. We are constructive on the
Inflation is back in the BCUs target range (3%-7%) for cyclical recovery of the economy, as well as positive spillovers
the third consecutive month in the last seven years. The from the government decided effort to develop the domestic
last 12-month inflation ran at 5.58% by May. The monetary financial market amid disinflation and fiscal consolidation (see
authority struggled with the different cyclical phases, with Developing the domestic financial market amid disinflation and
demand pressures being the main culprit up to 2014 for the fiscal consolidation, May 8 for more details). In addition,
high inflation levels, and then FX passthrough took the lions ongoing negotiations for UPM to invest in another pulp mill
share of the last year prices acceleration. Granted, base (capex for around 10% of GDP) could boost real GDP by at least
effects have to do with the recent headline inflation 1%-pt per year, according to our calculations.
performance, but inflation expectations are also moving
lower. The monetary authorities seem committed to maintain BCUs FX intervention is expected to continue to prevent
a contractive monetary policy to ensure the disinflation is meaningful REER deviations from equilibrium. The
underway, a key condition to sustain investor appetite in local central bank has been intervening in the exchange rate market
currency nominal bonds. As discussed, inflation expectations to prevent the REER deviations from fundamental levels, and
have been declining, and real rates should follow suit. will continue to do so. A second derivative from intervention
Importantly, the monetary authorities recognize that the is that it is also aimed to prevent excess volatility on the
microstructure of local markets may explain the fact that long exchange rate market given its scale and depth, avoiding at the
term real rates look high on a fundamental basis, as market same time an adverse impact in monetary policy transmission
segmentation plays a role. Following downward inflation channels in light of high economy dollarization.
54
Ben Ramsey AC (1-212) 834-4308 Mid-Year Emerging Markets Outlook and Strategy
benjamin.h.ramsey@jpmorgan.com June 8, 2017
Venezuela Caa3/CCC/CCC risk to the government, the Assembly has deepened the
fissures in Chavismo. Attorney General Ortega Diaz has
No sign that the constitution is the solution again taken the lead, formally challenging the proposal to tear
up the 1999 constitutionseen as President Chavezs lasting
Maduro pivoted in the face of pressure to offer a legacy. Her position has been publicly supported by a
Constituent Assembly as an electoral solution smattering of institutionalist Chavistas, mainly ex-officials,
Neither the opposition nor the international but presumably representing the opinion of larger segments of
community has viewed this favorably the movement.
US sanctions loom, but only in the medium term if As it stands, the Constituent Assembly will be constituted
Maduro successfully avoids future elections in a July 30 election that will elect 543 delegates. Two-
thirds would be elected in direct elections, but with strong
A new hope or a phantom menace? Venezuelas ongoing overrepresentation of sparsely populated, more Chavista,
political crisis took an unexpected turn when President municipalities. The remainder would represent corporatist
Maduro in early May announced a popular and communal sectors defined and weighted to apparently favor pro-
Constituent Assembly to rewrite the constitution. The move government groups. Beyond the criticism that the body would
appears to have been aimed at defusing pressure from significantly stray from the constitutional enshrinement of
opposition street protests and international diplomatic scrutiny universal vote, the 2017 constitution goes against the
on the one hand, while on the other paving the way through a procedural precedent of Chavez 1999 Constituent
quasi-constitutional/quasi-electoral process for Maduro to Assemblynamely a referendum to sanction the process at
indefinitely remain in powernotwithstanding minority status the outset, and another referendum to approve the new
in public opinion. constitution at the end. Maduro finally recognized on June 1
that a consultative referendum would in fact take place before
Anything but normal elections Recall that there have the new Constitution could be approved, but opponents
been no elections in Venezuela since the opposition MUD reacted with skepticism. It seems that the Assembly is likely
coalition won a strong majority in the legislature (the National to be constituted amid very low participation and highly
Assembly, or AN) in December 2015. In 2016, government- questionable legitimacy. Subsequently it will likely take its
friendly courts and institutions eventually thwarted an time to write the new constitution, which would buy time for
opposition drive to hold a recall referendum on Maduros Maduros popularity to sufficiently recover before his 2018
mandate (see Venezuela: Holy momentum stopper, November term expires in order to try to force through the new magna
2016 for background), while state gubernatorial elections due carta. Again, the main risk to this already uncertain scenario
to take place by last December have been indefinitely seems to be a rejection from within Chavismo, especially if it
postponed. While the government had successfully used the gains traction from the armed forces.
Supreme Court (TSJ) to effectively neuter the AN last year,
the TSJ appeared to overreach on March 29, when it moved to In the meantime, the United States appears to be studying
explicitly assume the powers of the AN. That move elicited more and harsher sanctions. Since 2014, direct sanctions
strong international criticism and was rejected by Venezuelas have been on individuals in the Venezuelan government,
Attorney General, Luisa Ortega Diaz, who labeled it a break either related to alleged human rights abuses or alleged
in the constitutional order. The TSJ hastily and partially narcotics trafficking and/or money laundering. A June 4 report
reversed its ruling, but what the opposition calls an ongoing by Reuters revealed US officials are at least studying options
coup nonetheless sparked strong street protests that have to sanction Venezuelas energy sector, potentially impacting
lasted more than two months now. 755kbd of Venezuelan exports to the US and 84kbd imports
from the US, not to mention activity of US service providers
For Maduro, it seems the Constituent Assembly is both a and upstream JV partners inside Venezuela. The same article
mechanism to buy time now and maybe to stay in power says officials recognize the potential such a measure could
over the long term. Indeed, if successful it features the have to exacerbate the humanitarian crisis in Venezuela, as
elegant end-game solution to the existential problem of the well as to upset regional diplomacy. In our view, drastic
end of Maduros presidential term in January 2019, which sanctions are not imminent, and are only likely if and when
presumably would unavoidably necessitate elections. There the Maduro administration finally abandons all democratic
remains significant risk to Maduro, however, that this power pretext, avoiding the possibility of regime change via free and
play could backfire. The Assembly initiative has done little to fair elections in 2018.
calm street protests, and has not led the opposition to
participate in and legitimate a process that seems stacked to
favor pro-Maduro forces. Moreover, and perhaps a bigger
55
JPMorgan Chase Bank N.A, London J.P. Morgan Securities plc Emerging Markets Research
Branch Jessica Murray AC (44-20) 7742 6325 Mid-Year Emerging Markets Outlook and Strategy
Nora Szentivanyi AC (44-20) 7134-7544 jessica.x.murray@jpmorgan.com June 8, 2017
Eastern Europe, Middle East and Africa

Azerbaijan Ba1/BB+/BB+ Croatia Ba2, BB, BB
Delayed growth recovery Economy resilient amid political uncertainty

GDP growth outlook has deteriorated due to larger Domestic demand buoys 1Q17 GDP growth, in spite of
cuts to oil production and lower oil prices political and Agrokor concerns
The trade balance has improved sharply and we look European Commission gives green light to exit EDP
for the current account to return to a small surplus Political crisis temporarily defused, but remains to be
The return to recession has prompted us to cut our 2017 fully resolved
GDP forecast to -0.5% from +1%. After an encouraging
first two months, the expansion turned to contraction by 1Q17 GDP slowed to 2.5%oya, from 3.4% in 4Q16.
March and the GDP decline deepened to 1.2% by April. Growth was softer but domestic demand held up
Weaker oil-linked output has been the main culprit for this relatively well in the face of political uncertainty and
weak performance given that non-oil GDP growth expanded Agrokor-related noise. The drag on GDP came from the net
1.9% over the first four months of the year. The 9.5%oya drop exports as export growth was surpassed by import growth
in oil production and generally unstable performance reflects the latter is the result of domestic-demand driven growth,
continued adjustments to extraction under the OPEC oil curb particularly acceleration in import-intensive investments. We
deal as well as output stabilization efforts at the ACG field. forecast real GDP to increase 3%oya this year after
accelerating to 2.9% in 2016. Risks to our view are skewed to
We also lowered our growth forecasts for 2018 on the back the downside due to the ongoing Agrokor crisis against a
of the downward revision to J.P. Morgans oil price background of political instability.
forecast. With the OPEC deal now extended for another nine
months we think oil production could stay soft for an The European Commission (EC) recommended Croatias
extended period. Also, demand-side trends may not be exit from the Excessive Deficit Procedure (EDP) following
sustainable, given the backdrop of subdued lending activity, strong fiscal performance since 2015. The EDP was initiated
tight monetary conditions and continuing consolidation of the in 2014 at a time when the budget deficit, reaching 5.4%GDP,
banking system. With real wages still falling due to high had exceeded the 3% Maastricht threshold for six consecutive
inflation, consumption will probably not grow strongly years. Since 2014, stronger GDP growth has driven higher
enough to keep non-oil GDP growth much above 1%. government revenues. This, combined with constrained
External balances have improved significantly y/y thanks government expenditure, meant that the budget deficit shrank
to a strong rebound in export growth. We expect the C/A to to 0.8%GDP in 2016. The EC recommended exit from the
return to a small surplus this year on the back of further EDP on the basis that the fiscal outlook has stabilized across
recovery in oil prices, earlier manat weakening, which its forecast horizon. We expect the fiscal deficit to stay well
boosted non-oil exports and tourism receipts, import below the 3% Maastricht limit, at 1.1%GDP in 2017.
compression and lower dividend payments. The trade balance Government debt fell to 84.2% of GDP in 2016 (from
improved to 5.3% of GDP (12-month trailing basis) in April 86.7%GDP), and we see it on a downward trajectory. Croatia
from a low of 0.6% of GDP in 3Q16. Year-to-date exports are enjoys primary surpluses of about 2% of GDP.
up 41%oya, boosted by the recovery in crude oil prices y/y,
while imports are down 17%oya reflecting tepid domestic Recent months brought a political storm to Croatia; an
demand. We look for the current account to post a small opposition led no-confidence motion against the Finance
surplus of 0.5-1% of GDP this year. However, the scope for Minister resulted in the dismissal of most ministers,
further improvement in 2018 is limited by the weak oil price triggering a political crisis. As it stands, the majority of MPs
outlook (we assume Brent crude in the US$45-50/bbl range). are likely against early elections, yet it is unclear which
parties HDZ can rely on to form a majority. The PM will
Inflation has stabilized and is likely to fall to single digits shortly present, for parliaments approval, new ministers to
by year-end. Consumer price growth eased to 0.2%m/m in replace those that he dismissed in April. Parliaments
April from 1.5% in March while the annual CPI rate stabilized opportunity to vote on the new ministers is, in our opinion, a
at 14.5% thanks in part to the stronger manat. We expect vote of confidence in the new government. HDZ may fail to
inflation to slow gradually from here to 6.5-7% by year-end secure majority support, which could lead to snap elections.
on the back of base effects and manat appreciation. The bottom line is that the political crisis is temporarily
Disinflation could allow the CBA to lower its benchmark defused, but it remains to be fully resolved.
refinancing rate from the current 15%.
56
J.P. Morgan Securities plc JPMorgan Chase Bank N.A, London Emerging Markets Research
Jos Cerveira AC (44-20) 7742-3556 Branch Mid-Year Emerging Markets Outlook and Strategy
jose.a.cerveira@jpmorgan.com Yarkin Cebeci AC (44-20) 7134-7547 June 8, 2017
yarkin.cebeci@jpmorgan.com
Czech Republic A1/AA-/A+ Egypt B3/B-/B
Stars aligning for first rate hike in 4Q17 Continued commitment to the IMF program
GDP growth jumped in 1Q17 due to a rebound in Progress on the IMF-supported economic program
investment and underpinned by solid consumption has so far been quite positive
Core CPI has accelerated and is now above the target Inflation loses momentum as the first-round effects of
We expect the CNB to deliver a first 20bp rate hike in the currency weakness and subsidy cuts wane
4Q17 The CBE hiked rates to anchor inflation expectations
Investment rebound drives jump in 1Q17 GDP growth, Egypts IMF-supported economic program is off to a good
while consumption remains the sturdier underpin. The start and given the governments commitment to the
detailed GDP release revealed a large jump in investment program, we expect a relatively smooth implementation. A
(15.2%q/q saar) as the key driver of GDPs 5.4%q/q saar visiting IMF mission completed the first review of the
acceleration, also with a decent boost from public spending program in mid-May. The mission was very satisfied with the
(5.8%). Investments origin appears to be mostly private, with pace of fiscal consolidation and the structural reform
larger outlays of transport and machinery type fixed capital, momentum. All of the fiscal and monetary targets were met
whereas EU-funded public investment appears muted still. and the government managed to pass through parliament the
Household consumption slowed to 2.2%q/q saar (from 2.8%) important investment law aimed at easing doing business in
but more due to volatility in the series rather than a structural Egypt. The IMF also praises the 2017/18 budget based on a
slowdown. Household spending is growths main underpin, budget deficit of 9.1% of GDP, down from an expected 10.5%
and we expect it to remain so due to the low unemployment of GDP deficit in the 2016/17 fiscal year. The Executive
rate (3.4%) and real wage gains. Beyond the quarterly Board of the IMF is expected to meet and release the next
volatility, we expect a solid and well-supported expansion of credit tranche of US$1.25bn in the coming weeks.
3.1% in 2017 and 2.8% in 2018--slightly above potential. Encouragingly, despite the sharp currency weakness and the
monetary tightening delivered, GDP growth was 3.9%y/y in
Core inflation accelerated in April to 2.4%oya (from the first quarter of the year.
2.2%) even as headline decelerated to 2.0%oya, from
2.6% due mostly to volatile items. Unlike elsewhere in Inflation is peaking as the pass through from the sharp
Europe, the spike in vegetable and fruit prices of earlier in the currency weakness is fading. Yearly inflation has reached
year was not followed by a respite, so we had a bit of a lagged 31.5% as of April, but monthly inflation has been coming
effect with fruits and vegetables down 3.2%m/m and 1.4%, down manifesting the weakening in price pressures in recent
respectively. Core CPI, however, actually spiked to 2.4%oya months. In fact, the sequential improvement in inflation
(from 2.2%), as labor market tightness and solid growth start dynamics would have been more visible had there been no
gradually adding cost-push and demand pressures to prices. jump in food price inflation. As the first-round effects of the
The CNBs usual post-CPI commentary admits the rise in core currency weakness and subsidy cuts wane and as pricing
CPI was faster than anticipated, so although lower headline behavior shows the impact of the extra tightening, we expect
suggests downside risks to the official projection, we expect price pressures to continue to ease. However, the VAT hike
the CNB board to focus on the first aspect, downplaying the and further possible subsidy cuts should limit the extent of
deceleration in headline and emphasizing cores rise as driven this ease.
by a strong economy and a tight labor market
In an unexpected move, the Central Bank of Egypt hiked
Rising core and solid growth set the stage for first rate its policy rate by 200bp to 17.25% in May. This was, in
hike. The CNBs communication is very clear that the our view, a move to anchor the inflation expectations and
economy needs tighter monetary conditions, via currency and thus to mitigate the second round effects of the currency
rates, with the main uncertainty lying around the dosage and weakness. The strength in domestic demand (as evidenced
tradeoff between the two ingredients. We expect a first hike of by the strong 1Q GDP data) may be another reason for this
20bps in the main policy rate in 4Q17, after elections and hawkish move by the CBE. Thanks to the improvement in
when there is already better visibility on the ECBs plans. We inflation dynamics, we do not expect the CBE to hike rates
expect a cautious hiking cycle, so we pencil in only two further. Hikes could be on the table only in the unlikely case
further 25bp rate increases next year, in 1Q18 and 3Q18. of further currency weakness.
57
Yvette Babb AC (44-20) 7742-0634 Branch Mid-Year Emerging Markets Outlook and Strategy
yvette.babb@jpmorgan.com Nora Szentivanyi AC (44-20) 7134-7544 June 8, 2017
Ghana B3/B-/B Hungary Baa3/BBB-/BBB-
First signs of fiscal consolidation Loose monetary conditions to persist

1Q17 primary surplus supportive of fiscal The economy is on track for a 4% expansion this year,
consolidation in 2017 driven by domestic demand
Trade surplus of US$950mn in 1Q17 on strong NBH is likely to stay dovish as low oil prices keep CPI
commodity exports below 3% for an extended period
Possible extension of IMF program beyond April 2018
Growth performance remains strong heading into mid-
The central government achieved a primary surplus (0.4% year and we now expect with full-year GDP growth to
of GDP) and a cash deficit of 1.5% of GDP in 1Q17. Domestic reach 4%. 1Q GDP expanded 5.4% saar, picking up from
revenue reached 4.0% of GDP versus the target of 4.6% of 3.0% ar in 4Q16, while over-year-ago growth accelerated to
GDP, largely driven by under-collection of taxes on income 4.2% from 1.6%. April activity data signaled a weaker start to
and property (0.2% of GDP below target). Import duties and 2Q, as expected, but the May surveys point to continued
non-tax revenue also fell short of the budget targets. This was strong GDP growth momentum, in line with our forecast for a
more than offset by lower-than-expected expenditure at 5.2% 4-5%q/q saar gain in 2Q. For example, the manufacturing
of GDP versus programed expenditure of 6.1% of GDP, due PMI reached a new high of 62.1 in May and the April-May
largely to lower-than-anticipated capital expenditure (52% of average 1.5 points higher than the one for 1Q17. The GDP
target) and grants to other government units (63% of target). details showed strong contributions from domestic final sales,
While subsequent quarters will prove more critical, given the as well as inventories. Fixed investment surged 40%q ar and
administration effectively only started implementation of its accounted for the bulk of the 1Q expansion in both sequential
policies in 2Q17, we see the data for 1Q as broadly supportive and oya terms, while household consumption decelerated
for the prospect of fiscal consolidation in 2017. temporarily, in our viewto 1.1% ar from a 3% pace in
2H16. The investment recovery looks broad-based, supported
Trade balance improved vastly, reaching a surplus of by both the public and private sector and spread across both
US$950mn in 1Q17 (2.2% of GDP) from a deficit of construction and machinery spending. Although 1Q GDP
US$675mn a year earlier. Despite the fall in cocoa prices, growth printed close to our forecast, revisions to previous
cocoa exports increased by US$225mn to US$875mn quarters prompted us to revise up our 2017 forecast by 0.4%-
compared to the previous quarter on favorable forward sales pts to 4% but we still look for growth to slow to 3.5% in 2018.
agreements. In addition, both gold and oil exports improved
sharply (gold associated with volume, and oil with higher The NBH remains dovish and we expect loose monetary
prices). We expect increased Sonkofa production in 2H17 to conditions to persist through 2018. As expected, the
provide further upside to oil revenue. International reserves monetary council (MC) retained its easing bias at its May
reached the highest level in six years at US$6.5bn, from meeting, while reiterating its intention to maintain the current
US$5.5bn a year earlier. As a result, we expect the BoG to level of the base rate (0.9%) and loose monetary conditions for
continue its direct intervention in the foreign exchange market an extended period. Any meaningful monetary tightening, for
to stem volatility and upside risks to US$/GHS. We see room example via higher interbank rates or hikes in the interest rate
for continued improvement in the performance of the external corridor, remains unlikely for at least another year, and base
sector, remaining strong on the back of improved FDI inflows rate hikes are unlikely before 2019, we think. We believe the
and further volume growth in exports. NBHs preference will be to stay a few steps behind the ECB
given its desire to avoid FX appreciation. We also think the
The conclusion of the fourth review of the ongoing IMF NBH will be the last one in the CEE region to raise interest
program will be the next important event. A potential rates. Inflation eased to 2.1%oya in May from 2.2% in April
extension of the program beyond April 2018 is likely to due to slowing fuel inflation and we expect inflation to average
bolster market participant confidence. This, in addition to the 2.5%oya in 2H17 as lower oil prices offset the expected
prospect of further disinflation in 2017 (JPMe of 11.2% in acceleration in core inflation. We look for core inflation to
December 2017 from 13% in April 2017), and more limited pick up towards 3% by year-end from 2.1% in May. In 2018,
issuance of government securities, is in our view likely to we expect inflation to hold close to 2.5% still below the
support government bondsalbeit the sharp move in yield NBHs 3% target assuming oil prices remain in the US$45-50/
witnessed in 4Q16 is unlikely to be repeated in the short term. bbl range, while core inflation looks set to rise to 3.2%.
58
JPMorgan Chase Bank N.A, JPMorgan Chase Bank N.A, Emerging Markets Research
London Branch London Branch Mid-Year Emerging Markets Outlook and Strategy
Yarkin Cebeci AC (44-20) 7134-7547 Nicolaie Alexandru-Chidesciuc AC June 8, 2017
yarkin.cebeci@jpmorgan.com (44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com
Israel A1/A+/A+ Kazakhstan Baa3/BBB-/BBB
The recovery in inflation remains modest Growth is booming

Growth momentum remains strong thanks to strong Growth has accelerated faster than expected and we
labor market, low rates and recovering exports see no sign of slowdown
Inflation rises but remains below the official External position is improving as well, but slowly and
target range C/A deficit will likely remain in place over 2017-2018
The BOI is firmly in wait and see mode
We are turning more bullish on Kazakh economic growth.
Growth momentum remains strong thanks to the GDP growth for 1Q17 was stronger than we expected
continued improvement in labor market conditions, low (3.4%oya vs. 2.7%) and thus we revise 2017 growth higher to
interest rates and recovering export demand. Although 3.5% from 3.1%. Regarding 2018, we have taken a
GDP growth slowed down to 1.4% q/q saar in 1Q17 from conservative approach by incorporating the new J.P. Morgan
4.7% in 4Q16, this was just a temporary slowdown and high forecast for Brent prices ($45/bbl average in 2018 from $55
frequency data show recovery in 2Q. Private consumption has previously) and thus see GDP growth at only 3.7%. Growth
been the main driving force behind growth in recent quarters. in services accelerated to 2%oya from 1% in 4Q and, taking
Given the continued improvement in labor market conditions, into account further gains in the retail sector and
strong nominal wage growth, depressed energy prices and transportation, we would see growth in services accelerating
near zero interest-rate environment, we see little reason to this quarter. The most impressive performance came from the
expect a change in this trend in 2017. Encouragingly, GDP industrial sector, where growth moved sharply higher:
data showed an 11%q/q saar expansion in exports which 5.8%oya in 1Q from 3.6% in 4Q and -3% in 3Q. This strong
confirm the view that Israeli exports are increasingly performance is on the back of higher oil output from
dominated by high value-added hi-tech sectors which do not Kashagan oil field and the relatively low base from last year.
get hit by currency strength. Hence, we remain confident on Kazakhstan is unlikely to significantly participate in an
our GDP growth forecast of 3.2% for 2017. extension of the OPEC/non-OPEC oil deal and thus crude
output will either remain elevated or continue to increase
Inflation rises but still remains below the target range. during 2H17, in our view. Our forecast revision is supported
Yearly inflation rose to a 0.7% from -0.2% in the first four by April data showing fast acceleration in growththe short-
months of the year but is still below the 1-3% official target term economic indicator covering about 65% of the economy
range. As the upside pressure coming from robust domestic has sharply accelerated to 7.1%oya in April from 6.8% in
demand and the likely strengthening in wage pressures are March and industrial output is in double-digit territory.
offset by shekel strength, increased competition in the
economy and government measures towards lowering the cost C/A deficit has narrowed in 1Q17, both vs. 4Q16 and on a
of living, we see inflation rising only marginally to 0.9% by rolling basis. Based on NBK data, the C/A deficit reached
the end of the year. As a result of the downward revision in -US$1.1bn in 1Q from -US$2.9bn in 3Q. This is a clear
the oil price assumption, we have scaled down our 2018 indication that external shortfall is likely to improve in 2017
inflation forecast to 1.4% from 1.9%. from 2016 with help from rising oil prices and larger oil output.
The strong improvement in 1Q versus 4Q is also explained by
The BOI remains firmly in wait and see mode. The BOI seasonal factors. On a rolling basis, the deficit fell marginally
has been keeping its key interest rate unchanged at 0.1% for to US$8.4bn from US$8.5bn. Trade balance increased visibly
more than two full years. Importantly, the Bank sounds to US$10.9bn from US$9.4bn in 4Q16. This was possible due
unfazed by the strength in economic activity and has adopted to rising exports as both oil prices and volume of oil exports
a rather neutral tone in its latest interest rate note. We has increased, while imports slowed from the previous quarter.
maintain our expectation for a first rate hike of 15bp in Our full-year forecast for 2017 is for a C/A deficit of about
1Q2018. A sudden rise in wage pressures could bring the hike US$4.1bn, about half the US$8.5bn in 2016. At the same time,
forward while continued shekel strength could make the BOI total FX reserves consolidated further in April and reached
reluctant to react even in 1Q. In the meantime, the BOI is US$92.8bn from US$92.5bn. The NBK has cut the key rate
likely to continue with sporadic FX interventions to restrain twice this year and more easing is likely as inflation has come
currency strength. down, expectations are falling, exchange rate is stable and the
CBR continues to lower its main rate. We look for the base rate
to reach single-digit territory.
59
Yvette Babb AC (44-20) 7742-0634 Branch Mid-Year Emerging Markets Outlook and Strategy
yvette.babb@jpmorgan.com Nora Szentivanyi AC (44-20) 7134-7544 June 8, 2017
Nigeria B1/B/B+ Poland A2/BBB+/A-
Things are tough, but the worst is behind us Goldilocks scenario extended
Changes in FX regime give rise to optimism GDP growth is robust and above potential but the risk
CBN to keep liquidity tight for now to support of exceeding the 2.5% inflation target is still limited
the Naira The NBP remains in wait-and-see mode and risks are
Import compression and export growth to support tilting towards a delay in the hiking cycle to 2019
CA, while financial outflows to slow
We expect GDP growth to stabilize close to its current 4%
A broad shift in monetary policy stance and recent pace. Sequential GDP expanded 4.5%q/q saar in 1Q17 after
amendments to the exchange rate regime supports a more an already strong 7% ar in 4Q16, while over-year ago growth
constructive view on the prospect for financial inflows. picked up to 4% from 2.7%. The stronger outturns and
Indeed, monetary policy in our reading is now reverting to upward revisions to past data have prompted another upward
more conventional measures with effective monetary policy revision to our full-year GDP forecast to 4% from 3.8% last
tightening this year, a departure from last years expansionary month and 3.5% at the start of the year. These growth rates
measures. At the same time, fiscal policy is shifting to a more are above our estimate of Polands potential of just below 3%;
expansionary stance. These combined measures should we think the output gap turned positive at the turn of 2016/17.
support growth in the non-oil economy. This is in part also as Domestic demand has led the recovery, while net exports
the most recent amendment to the exchange rate regime likely dragged on growth due to strong import demand. Private
substantially reduces foreign exchange shortages, which had consumption grew strongly again (5.7% ar) and we expect
been a key drag on the economy. Notwithstanding the more consumer spending to remain robust in the rest of the year
constructive view on economic fundamentals, political despite fading impetus from the child subsidy scheme,
uncertainty is unlikely to fade in the run up to 2019 elections supported by the strength of the labor market. Capex
given concerns about the presidents health. registered a modest recovery in 1Q (1.2% ar), driven mainly
by the public sector (mainly construction) and we expect
The cyclically adjusted fiscal balance for the consolidated business spending to join the rebound in 2H17. April activity
government reached -10.5% of non-oil GDP in 2016, from data and surveys point to some moderation in growth
-11.9% in 2015, implying a fiscal drag in 2016 of 1.4% of momentum to a 3-4% ar pace, in line with our forecast.
non-oil GDP. This is not surprising given the slow approval
of the budget and challenges in implementing expenditure Inflation is likely to stabilize below 2% in 2H17 and,
measures. We expect the cyclically-adjusted fiscal deficit to assuming oil prices stay low, probably through most of
widen to 12.3% of non-oil GDP from 10.5%, which implies a 2018. After accelerating sharply through February, inflation is
fiscal impulse of 1.7% of non-oil GDP in year ahead. Under stabilizing just below 2%, thanks to reversal of negative base
the 2017 budget (which is likely to be signed into law in June) effects in energy, falling oil prices and correction of food
the government is seeking to achieve a 9% real increase in prices after the earlier negative supply shock. We look for
consolidated government spending and a 5% increase in non- inflation to hover in the 1.5-2% range in 2H17 and end the
oil revenues. year below the NBPs 1.5-3.5% target range, again on base
effects, before re-accelerating in 2Q18. Core inflation is still
The central bank has tightened monetary conditions in at moderate levels (0.9%oya in April) but is likely to pick up
recent months with a pickup in liquidity draining OMOs and gradually through 2017-18 on the back of a widening positive
FX sales, even as the monetary policy rate and cash reserve output gap. We expect core and headline inflation to re-enter
requirement (CRR) remained unchanged at 14% and 22.5%, the NBPs target band sustainably only in mid-2018. An
respectively. These measures have contributed to higher overshoot of the 2.5% target looks unlikely as volatile items
interbank rates and government yields. The combination of exert downward pressure and headline inflation is likely to be
high nominal rates and changes to the FX market will, in our below core inflation in early 2018 as a result. Following the
view, be associated with increased foreign portfolio inflows, revision to J.P. Morgans oil price forecasts, we cut our 2018
while capital outflows are likely to slow. The CA is likely to CPI forecast to 1.7% from 1.9%. We expect 50bp of base
benefit from marginally improved export volumes and hikes in 2H18, to 2%, but risks are tilted towards a delay to
subdued imports. We see the central bank maintaining higher 2019 given the more benign inflation profile. The NBP
amounts of FX sales in this context. appears unfazed by above-potential GDP growth in part
because growth is seen slowing in 2018.
60
JPMorgan Chase Bank N.A, J.P. Morgan Bank International LLC Emerging Markets Research
London Branch Anatoliy A Shal AC (7-495) 937-7321 Mid-Year Emerging Markets Outlook and Strategy
Nicolaie Alexandru-Chidesciuc AC anatoliy.a.shal@jpmorgan.com June 8, 2017
(44 20) 7742-2466
heya
Romania Baa3/BBB-/BBB- Russia Ba1/BB+/BBB-
NBR dovish despite fiscal risks In a sweet spot of moderate inflation and
The central bank aims to calibrate its policy to accelerating growth
regional rather than domestic developments Growth surprised to the upside in 1Q and maintained
Fiscal policy is the largest risk this and next year; solid momentum into 2Q
previous stimulus supports strong GDP growth Inflation slowed faster than expected early in the year,
but momentum has been rising recently
We expect the NBR to stay on hold this year, hike the CBR front-loaded some cuts, currency strength
policy rate only in 1Q18, still ahead of NBP and the ECB.
provides room for further easing
Since early April, the NBR governor has linked key rate hikes
to similar moves in Poland, and the risk is for a delay in the
Russias recovery has strengthened and broadened. GDP
start of the hiking cycle. The NBR governor seems to be very
surprised to the upside in 1Q, rising 0.5%oya and an estimated
concerned with potential RON appreciation in case monetary
1.7%q/q saar, while April activity data were equally strong.
conditions are tightened well in advance of other CE-4 central
The recovery is broadening to non-tradable sectors of the
banks. Further, taking into account the dovishness, we expect
economy, in our view, as domestic demand is picking up pace.
to see the start of narrowing in the interest rate corridor to
Capital investment rose 2.3%oya in 1Q, while retail sales
200bp from 300bp currently only in October or later. We
showed four consecutive months of increases from the start of
forecast headline CPI accelerating gradually during 2017, but
the year. Both consumer and business confidence firmed,
most likely remaining the lowest in the CE-4 region at
spelling upside risks to our 2017 growth forecast of 1.2%.
1.9%oya (NBR has 1.7%) at the end of this year. As base
That said, J.P. Morgans new oil price forecastBrent crude
effects and the impact from administrative decisions fade in
now seen at $45/bbl instead of $55prompted us to cut
early 2018, we look for CPI to jump to around 3% and remain
Russias 2018 growth forecast to 1.4% from 1.6%.
above that level for most of the year. Core inflation is
accelerating as well due to pressure from tight labor markets,
Inflation decelerated more rapidly than expected, but the
a positive output gap and large public (and private) sector
recent data point to rising momentum. Inflation slowed to
wage hikes. GDP growth surprised the NBR to the upside in
4.1%oya in April-May, stopping just short of formally
both 4Q16 and 1Q17, when it accelerated to 5.7%oya; we
reaching the CBRs 4% target. The rapid disinflation was
forecast 2017 GDP growth at 5% from 4.8% last year.
helped by substantial strengthening of the currency in the past
half a year and favorable food price dynamics following two
Fiscal slippage remains the biggest risk for Romania, in years of rich local harvest and low global food inflation.
our view; we now expect EDP to be launched in spring However, sequential momentum firmed in May and the
2018. There is a substantial risk of rating downgrades as well
inflation outlook has turned less favorable, in our view. The
as all rating agencies mentioned fiscal as one of the main
output gap has nearly closed and the recovery in consumer
risks. The likelihood that the budget deficit exceeds 3% of
demand may start exerting upward pressure on inflation in
GDP this year is significant, in our view, but authorities can
2018. Adverse weather conditions so far this year may affect
limit the damage by cutting on investments. However,
local crops and hence food inflation. Finally, a worsening oil
considering that the unified wage bill was approved by
price outlook implies some ruble weakness and, hence, higher
parliament this week (all public-sector wages are hiked by
inflation in 2018. We expect inflation to average 4.2% in 2017
25% in January 2018 and by another 20% for health and
before accelerating to 4.7% next year.
education in March), we now see the 2018 budget deficit at
4.2% of GDPwe believe some measures will be taken to
Strong currency, low inflation and declining inflation
contain budget expansion, but not enough to stay close to 3%
expectations allowed the CBR to front-load rate cuts. The
of GDP. Given that the 2016 budget deficit was 3% of GDP
CBR cut the key rate by a total of 75bp in March-April,
and 2017 is likely to surpass this level, we believe that the
delivering more than the market expected. Ruble strength and
European Commission will launch EDP based on its forecasts
a high level of real policy rate should give the CBR comfort to
for 2018- 2019. Budget execution for January-April shows a
continue with policy easing in the coming months, although
surplus of 0.2% of GDP on a cash basisbetter than last year,
rising inflation risks will probably prevent the central bank
when the budget was balanced. Yet, the result was achieved
from being too aggressive. We anticipate another 175bp in
by delaying reimbursement of VAT.
cuts by end-2018.
61
JPMorgan Chase Bank N.A, J.P. Morgan Securities plc Emerging Markets Research
London Branch Jos Cerveira AC (44-20) 7742-3556 Mid-Year Emerging Markets Outlook and Strategy
Yarkin Cebeci AC (44-20) 7134-7547 jose.a.cerveira@jpmorgan.com June 8, 2017
yarkin.cebeci@jpmorgan.com
Saudi Arabia A1/A-/A+ Serbia Ba3/BB-/BB-
Fiscal performance recovers fast Strong fiscal despite weak growth in 1Q17
Despite the oil production cuts, growth should remain GDP growth slows at the start of 2017 due to bad
positive thanks to stronger sentiment weather
Fiscal consolidation is off to a good start. The first April hard data prints show a solid
The fall in inflation will likely be temporary. underlying rebound in 2Q17, once seasonally adjusted
Fiscal execution is on track to beat the 1.3% of GDP
Growth is expected to decelerate further but remain in budget deficit target
positive territory as oil production cuts get offset by the
modest rebound in non-oil output in 2017. Thanks to a GDP growth slows in the beginning of 2017, mainly due to
modest recovery in the last quarter, GDP growth reached bad weather. The pace of growth in the Serbian economy fell
1.4% in 2016. Although this figure was much lower than in sharply in 1Q17 to 1.2%oya, from 2.5% the previous quarter.
previous years, it was encouraging to see any growth at all in More than a structural slowdown, we believe that the weaker
a period of depressed oil prices. The oil sector will continue to figures reflect, to a large extent, weather-related distortions
be a drag on growth especially after the recent OPEC decision that disconnect the headline figures from a more benign
to extend the cuts in oil production this year. We expect non- underlying picture. The impact of one of the coldest and driest
oil growth to pick up after the government decision to winters in decades is very visible in the most weather
reinstate the public servants allowances and bonuses. This sensitive sectors, agriculture and construction, which
decision should bolster consumer confidence and support combined shaved 1%-pt from 1Q17 GDP growth (from a total
stronger growth in consumer-facing sectors. Easing liquidity 1.3%-pt deceleration). From the expenditure side of GDP, this
conditions also support growth. As evidenced by the 7.5%y/y is seen in a jump in imports, not only of fuel but also
increase in point of sales volume in the first four months of electricity, given that the bad weather has reportedly
the year, demand has already been recovering. Hence, we hampered coal transportation to the main producing facilities.
remain comfortable with our 2017 GDP growth forecast of Looking ahead, the first available hard data for April points to
0.6%. We revised down the 2018 forecast to 1.0% from 1.4% a solid underlying rebound. Our own seasonally adjusted
due to lower oil price forecast. series of IP and retail trade data show rebounds of 9 and
10%oya levels, respectively, in April from 2% and 6% in
Fiscal consolidation continues despite lower oil production. March, suggesting a good starting point for a rebound in 2Q.
Thanks to strong revenue collection and especially to
spending discipline, the kingdoms budget deficit narrowed by Budget execution outperforming again. Outperformance
72%y/y in 1Q17. Saudi Arabia is planning to bring down its relative to budgetary targets has been a solid feature in the last
budget deficit from 12.8% of GDP in 2016 to 8.1% this year 2-3 years, with the budget gap being rapidly cutbeyond the
and further to zero by 2010. Although the balanced budget IMF programs ambitionsfrom 6.6% of GDP in 2014 to
target looks aggressive, any success in narrowing the deficit 1.3% in 2016. Year-to-date execution suggests the
should be well received by the international investors and the government may well beat its very conservative 1.7% of GDP
1Q performance was quite encouraging in this regard. deficit target, as our tracking exercise currently points to a
0.7% deficit, in line with our forecast. Tax revenues are up
Yearly inflation has receded to negative territory but we 8.1%oya, benefitting from a pickup in corporate tax collection
expect price pressures to recover thanks to likely FX pass (+31.6%oya), income tax (+7.6%oya) and VAT (+5.4%oya).
through and planned tax hikes. For the first time in 12 years, One puzzling aspect is the sharp fall (-18.5%oya) in domestic
headline inflation has shifted to negative territory and VAT collection, particularly when contrasted with the
currently stands at -0.6%. Currency strength (resulting from strengthening momentum for consumption and solid growth in
the peg to the US$) and weak domestic demand were the main other consumption related taxes (excises were up 9.8%oya)
factors behind this. We expect this trend to reverse as This was offset by very strong import VAT growth (+17.1%),
domestic demand and sentiment picks up after the which is likely related to the high energy imports due to the
reinstatement of civil and military allowances and bonuses. In harsher-than-usual winter. On the expenditure side, spending
addition, the US dollar has lost almost all its post-election fell 1.3%oya, mainly representing lower capital spending.
gains, and as a result imports prices are set to increase for the Current spending categories were rather stable, with wages up
import-dependent country. 1.6%oya and goods and services up 3.0%oya.
62
JPMorgan Chase Bank, N.A., JPMorgan Chase Bank N.A, Emerging Markets Research
Johannesburg Branch London Branch Mid-Year Emerging Markets Outlook and Strategy
Sonja Keller AC (27-11) 507-0376 Yarkin Cebeci AC (44-20) 7134-7547 June 8, 2017
sonja.c.keller@jpmorgan.com yarkin.cebeci@jpmorgan.com
South Africa Baa2/BBB-/BBB- Turkey Ba1/BB/BB+
Technical recession to prompt reluctant The CBRT restores some credibility

policy easing Growth prospects have improved thanks to stronger
A drop in tertiary sector momentum prompted a sentiment and fiscal stimulus
1Q17 GDP contraction with technical recession Inflation is peaking but will likely remain high
SARB to tilt to policy easing with 25bp in rate cuts in Fiscal easing should reverse as measures expire
November and March, notwithstanding risks
Political dynamics in the spotlight with ratings risks as Growth prospects have improved significantly and urged
changes made to Finance Ministry in cabinet reshuffle us to revise up our 2017 GDP growth forecast to 3.2%
from 2.6%. A number of factors have been responsible for
We have marked down our growth forecast to 0.5% this the improvement in domestic sentiment and hence in growth
year, though the recession likely will remain shallow. GDP prospects, the first one being the decline in political noise or
declined 0.7%q/q, saar in 1Q17, marking a technical more concretely the diminishing risk of early elections after
recession, as momentum in the tertiary sector surprisingly the April referendum. Also influential has been the prudence
dropped amid broad-based weakness. In our view, South exhibited by the central bank and the resulting lira stability.
Africas economy is grappling with three strong headwinds Fiscal stimulus packages introduced by the government and
which cloud the outlook, namely a drop in real household the credit guaranty mechanism were also instrumental. Finally,
income, fiscal tightening with broader policy and political following Russias decision to lift the ban on travel to Turkey,
uncertainty, and a negative credit impulse. The GDP report tourism performance started recovering at a faster than
signals risks from slowing wage growth, which places expected pace. Hence, although interest rates remain high and
substantial pressure on consumers and, eventually, likely also some of the fiscal measures will expire in 2H, we see growth
on tax receipts. reaching 3.2% this year and 3.1% in 2018.
A benign inflation outlook should provide the SARB with Inflation is peaking off, but will likely remain above the
sufficient room to ease policy. Headline inflation dropped 10% mark until the end of the year; we see the CBRT
from 6.1%oya to 5.3% in April, helped by lower food and start easing in December. Yearly inflation fell to 11.7% in
transport inflation, and core inflation also eased further to May from 11.9% in April. The passthrough from FX
4.8% in April. Core disinflation is largely driven by lagged weakness seen in the last months of 2016 is coming to an end
pass-through from a more than 20% rise in REER since 1Q16. and hence its impact on core inflation is fading. However, the
Further substantial food disinflation and a tick lower in core fact that the easing is quite modest shows the risks associated
inflation should help bring headline inflation down to 4.6% in with stronger inflation inertia. Our end-2017 CPI forecast
December. The SARB has been hesitant to adopt an easing remains unchanged at 9.2% but the 2018 CPI forecast is cut to
bias, in part due to elevated risks from an uncertain socio- 7.3% due to lower oil price assumption. Governor Cetinkaya
political backdrop and potential event risks, yet the widening has stated many times that the monetary policy would stay
output gap, evidence of wage moderation and very benign tight until there is significant improvement in inflation
core inflation readings are likely tilt the SARB to implement dynamics. Importantly, the political pressure on the CBRT for
modest policy easing in 4Q17 and 1Q18. lower rates has eased significantly in recent months. Hence,
we have decided to push back our call for the start of
Political dynamics and ANC succession remain in the monetary easing to December from September.
spotlight: The NEC considered a debate on Zumas
presidency, yet according to local press reports has resolved to Fiscal performance will likely recover in 2H. The stimulus
leave the leadership issue to be addressed in December. The packages the government introduced in the pre-referendum
upcoming ANC policy conference in June, the ANC elective period have weakened Turkeys fiscal performance
conference in December 2017 as well as the fiscal MTBPS significantly in the first four months of the year. Given the
update in October are seen as key events by markets. The associated costs (higher rates, crowding out of the private
downside surprise in GDP growth and lower-than-expected sector etc.), we do not think the government can continue with
tax buoyancy risk fiscal slippage, with ratings agencies likely such fiscal easing for long. We see the budget deficit
focusing on whether momentum in structural reforms returns, surpassing the 2.5% of GDP mark in midyear but returning to
and whether fiscal consolidation is reaffirmed in October. 2.1% of GDP by year-end.
63
JPMorgan Chase Bank N.A, J.P. Morgan Securities plc Emerging Markets Research
London Branch Yvette Babb AC (44-20) 7742-0634 Mid-Year Emerging Markets Outlook and Strategy
Nicolaie Alexandru-Chidesciuc AC yvette.babb@jpmorgan.com June 8, 2017
(44 20) 7742-2466
Ukraine Caa3/B-/B- Zambia B3/B/B
Ongoing recovery needs more reforms External shocks ease, policy adjustment
Growth prospects remain solid with domestic and underway
external support Fiscal consolidation to emerge in 2H17 supported by
IMF is waiting the approval of sizable economic and IMF program
judicial reforms Bank of Zambia is likely to ease policy further
The IMF review mission ended on a positive note, but the Economic reform agenda to receive support from IMF
Fund was clear that the authorities need to deliver on and other development partners. The Zambia government is
reforms to receive more cash. The IMF team believes that seeking to conclude discussions with the IMF on a potential
the near-term growth outlook is positive and that decisive IMF program, with the Executive Board likely to consider the
implementation of structural reforms is critical to achieving program in 3Q17. This program will focus largely on fiscal
stronger and sustainable growth. The reforms the IMF reforms and reducing the pace at which public debt has been
emphasized are: pension and land reform, measures to speed growing. We expect the governments financing for the
up the privatization process and concrete results in remainder of the fiscal year to be met with increased
anticorruption efforts (see full press release here). We concessional borrowing under this program. We note that the
continue to believe that Ukrainian parliament will deliver on amount of arrears clearance envisaged in 2017 and changes in
pension reform, privatization and corruption by mid-July composition of domestic debt (including a reduction in the
2017, and that it will probably partially deliver on land reliance on bank borrowing) will inform the prospects for
reform. It thus remains likely that Ukraine receives the next issuance in the local market.
tranche in September. Should some reforms be delayed into
September, Ukraine will likely receive the cash only in 4Q17. The Bank of Zambia cut the policy rate by 150 bps to
12.5% and the statutory reserve ratio by 150bp to 14.0%.
We are comfortable with our call of 2.9% for GDP growth The BOZ maintains its benign inflation expectations, despite
this year as 1Q flash was largely as expected. Economic the upward adjustment of utility prices. The BOZ expects
activity slowed to 2.2%oya from 4.8%oya recorded in 4Q16. inflation to remain below 9.0% in 2017 and within the target
The slowdown is due to two factors: 1) The last quarter of range of 6-8% over the medium term. This is largely informed
2016 was an exception as agricultural output had a strong by favorable food inflation in the coming months, which the
positive contribution and 2) 1Q17 was significantly impacted BOZ believes will largely offset the impact of electricity
by the economic blockade that started in late January. Despite prices. We see a slightly higher inflation profile, with inflation
these negatives, sequential growth was only -0.3%q/q (sa) reaching 9.1%oya in December 2017.
after a strong 1.9% in 4Q16. April data was mixed, with IP
coming weak at -6.1%oya from -2.7%, due to the hit from the Export volume growth and financial support to
economic blockade and fewer working days. Retail trade government to support balance of payment in 2H17. The
slowed in April from March, but growth remains strong CA reached a surplus of US$26.3mn in 1Q17, according to
supported by real wages growing in excess of 20%. Retail preliminary data released by the BOZ, from a deficit of
trade came in at 6.1%oya from 8.7% in March. For 2018, we US$161mn in 4Q16, supported by strong export performance.
look for GDP growth to accelerate to 3.6% with support from While copper prices have fallen from the peak of
reforms and easier monetary conditions. US$6,145/MT in February 2017, we remain optimistic that
volume growth in copper will underpin a relatively strong
Inflation moved lower in April, but over the near term we performance in the trade balance moving forward. Financial
should see stabilization rather than further disinflation. inflows are furthermore likely to accelerate in the remainder
CPI reached 12.2%oya in April from 15.1% in March. The of the year on the back of increased development support,
move lower came on the back of strong base effects in utility which will lift international reserves (US$2.3bn in March
prices (natural gas prices), while food inflation continued to 2017). We see limited upside to US$/ZMW in the near term in
accelerate, reaching 8.7%oya from 7.4% in March. Core this context.
inflation remains stable at 6.3%oya and this suggests to us that
headline CPI will slowly move lower once supply-side shocks
fade away. This would allow NBU to continue lowering the
key rate.
64
JPMorgan Chase Bank, N.A., Hong Kong Emerging Markets Research
Haibin Zhu AC (852) 2800-7039 Carol Wei Liao (852) 2800-2801 Mid-Year Emerging Markets Outlook and Strategy
haibin.zhu@jpmorgan.com carol.w.liao@jpmorgan.com June 8, 2017
Grace Ng (852) 2800-7002 Marvin M Chen (852) 2800-7692 JPMorgan Chase Bank, N.A., Mumbai Branch
grace.h.ng@jpmorgan.com marvin.m.chen@jpmorgan.com Sajjid Z Chinoy AC (91-22) 6157-3386
sajjid.z.chinoy@jpmorgan.com
Toshi Jain (91-22) 6157-3387
Emerging Asia toshi.jain@jpmorgan.com
China A1/AA-/A+ India Baa3/BBB-/BBB
Focus on financial risks RBI opens door to future easing

Activity data point to softening but still decent growth RBI slashes inflation forecasts and thereby opens the
in 2Q door for easing; this adds conviction to our 25bp rate
cut call for August
Negative impact from financial tightening and credit
slowdown to be more apparent in 2H GDP data reveals the economic slowdown pre-dated
demonetization and intensified in the second half
CNY depreciation bias fades, capital outflow pressure
expected to ease modestly We expect GDP growth to remain flat in 2017-18 as
agricultural growth mean-reverts and investment
Economic activity shows signs of modest easing after weighed down by stressed banking assets
stronger-than-expected performance in 1Q. IP disappointed NEER appreciated 4% in 2017 on strong capital flows
in April, falling 0.4%m/m sa. Other data pointed to moderated
export activity in April, and softening manufacturing and RBI tilts dovish, adding conviction to our call of easing
private investment on the domestic front. The comforting later in the year. The RBI kept policy rates on hold in June,
news is that retail sales, infrastructure, and real estate FAI but cut its inflation forecasts, thereby opening the door for
growth remained solid. Going into May, the early signals have modest easing later in the year. The MPC was surprised by the
been mixed, as the two separate PMI series moved in different quantum of the inflation undershoot, but said it wanted to be
directions. The NBS manufacturing PMI stayed unchanged (at sure that the benign trajectory endures before easing rates.
51.2), while the Caixin/ Markit manufacturing PMI weakened The policy adds conviction to our call for a 25bp cut later this
(to 49.6, vs. 50.3 in April). Overall, recent data support our year, and even raises the possibility of 50bp of cumulative
view of some softening, but still decent growth in the easing from here on.
economy, penciling in 6.6% q/q saar GDP growth in 2Q (vs.
GDP revisions create a consistent macro-economic
6.9%q/q saar in 1Q), and average 6.4%q/q saar during 2H.
narrative. 1Q17 GDP declined sharply to 6.1%oya from
7.0%oya in 4Q16. Core GVA (GVA ex-agri, ex-government
Financial deleveraging remains in focus. Financial stability
spending) revealed that growth was slowing sharply even
tightening measures include increases in wholesale funding
before demonetization (from 8.4% in 2Q16 to 6.7% in 3Q17)
cost and tightened (macro- and micro-) prudential measures to
and the slowdown intensified after demonetization. The GDP
crack down on speculative financial transactions and
data now create a consistent macroeconomic narrative of
regulatory arbitrage. It has caused significant reactions in the
slowing growth, which ties in with core-core inflation
financial market, and a modest slowdown in credit growth
softening by 100bp over last year.
mainly via missing shadow credit excluded in official
statistics. The negative impact of a credit slowdown will be Expect growth to remain flat in FY18. We expect FY18
reflected in the activity data down the road (as in our growth (year-ending March, 2018) growth to remain flat at 7.2% from
forecast), given that some offsetting factors (frontloaded fiscal 7.1% in FY17 as investment is weighed down by stressed
spending and strong land sales in 1Q and a decline in real assets in the banking system, agricultural growth mean reverts
lending rate for corporates due to PPI-reflation) will fade. to 2% from the near 5% last year, and the consolidated fiscal
impulse remains contractionary. The only upside risks we see
With adjustments to the CNY daily fixing regime, CNY to growth come from a sustained pick-up in exports.
depreciation expectations fade. With the addition of a
counter cyclical factor to the CFET daily fixing, it is likely The nominal effective exchange rate (NEER), after
that the CNY exchange rate will become more stable going remaining stable for two years, appreciates by 4% on
forward. The development is consistent with our latest revised strong capital flows. Capital flows remained strong in 2017
USD/CNY forecast (year-end forecast of 6.95, the same as thus far, making the INR amongst the top performing EM
end-2016), which no longer perceives a depreciation bias for currencies. This resulted in NEER appreciation of 4% in 2017,
CNY for full-year 2017.The change in market expectations in contrast to the last two years when NEER remained flat
will affect capital flow and balance of payments dynamics. (average appreciation of 1.3% per year). In FY18 we expect
Given the more benign outlook, we now forecast capital the current account deficit to widen to 1.5% of GDP from
outflows for 2017 at US$300bn versus US$500bn previously 0.9% of GDP in FY17, but expect the BoP to be in a
and the ~US$650bn average in 2015-16. comfortable surplus on strong capital inflows.
65
JPMorgan Chase Bank, N.A., Singapore Branch Emerging Markets Research
Sin Beng Ong AC (65) 6882-1623 Mid-Year Emerging Markets Outlook and Strategy
sinbeng.ong@jpmorgan.com June 8, 2017
Indonesia Baa3/ BBB- /BBB- Malaysia A3/A-/A-
Policy providing positive buffer Cyclical turn, policy stabilizes

Indonesias 1Q17 real GDP data depict solid exports Forecast looks for some softening in 2H17 amid easing
and government spending external demand; core inflation in focus after stronger
Underlying macroeconomic trend remains GDP data
constructive, hinging on stable commodity prices; Deposits and FX reserves have stabilized, suggesting
China in focus that FX measures have eased outflow pressures
Bank liquidity increases; notable turn in transactional
deposits The J.P. Morgan narrative for Malaysia penciled in
cyclical stabilization for this year, coupled with an
We expect credit cycle to turn in 2H17, but liquidity
improvement in the external position following Bank Negara
conditions should stay supportive, reflecting policy bias
Malaysias (BNM) amendments to the Foreign Exchange
Administration (FEA) in December, reflected in our forecast
Indonesias 1Q17 real GDP data depict a turn in domestic
for a rise in FX reserves this year (see Malaysia Data Watch
demand, and exports building on the momentum apparent
0120: Cyclical turn, watching FX reserves and M2, January
in 4Q16. As we move into 2Q17, we forecast a gentle pickup
20). Moreover, the view had been that, despite the rise in
in sequential growth to a trend-like 5%q/q, saar. We premise
headline inflation, relatively lackluster domestic demand
this view on stability in commodity prices and volumes,
would limit pricing power at the household level, thus keeping
which we do not expect to provide a similar impulse to 2010-
underlying inflation modest. So far, while the narrative is
2012years of very strong commodity demand. We expect
generally on track, 1Q17 GDP surprised materially to the
government infrastructure investment to pick up later in the
upside, especially in terms of private consumption. However,
year, which should boost construction investment.
the high-frequency consumption data do not fully resonate
with the strength of private consumption conveyed in the
The credit data have yet to reflect any pickup given the
national accounts data. For this reason, we continue to hold
recent stabilization in growth, with credit approvals down
the view that underlying price pressures are quiescent and that
in 1Q17 even as liquidity increased last quarter, due in
BNM will thus remain on hold throughout this year.
large part to the tax amnesty-related inflows in 4Q16.
Modest credit growth has helped keep overall liquidity
The April monetary and FX reserves data suggest that
conditions stable. However, as non-performing loans have
both net FX reserves and narrow money have stabilized.
peaked and the investment cycle is broadening, we believe it
We take this positively, implying that the December
is just a matter of time before credit conditions loosen and the
amendments to the FEA regulations to reduce outflows are
credit cycle turns. At this juncture, it is not clear whether the
working (see Malaysia: Looking for stabilization after 1Q17
weakness in approvals is due to soft demand or to still-tight
outflows, May 5). This thus places Malaysia on a more stable
credit conditions.
financial footing compared to late last year. Of note, the
recently stronger correlation between foreign fixed income
However, to the degree that the demand for bank credit
flows and net FX reserves suggests that domestic outflows,
gains momentum, it could raise the loan-to-deposit ratio
which had been large between 2014 and 2015, have slowed.
and thus marginally reduce excess liquidity, as had been
This likely is due to a combination of improved sentiment
the case in the past. However, the revealed policy bias
and administrative oversight. This policy objective of
suggests that easy liquidity conditions should continue, helped
stabilizing financial markets also likely explains BNM
by the shift in July this year to reserve requirement averaging.
intervention. BNM engaged in US$13.9bn of US$ buy-sell
The upshot is that easy liquidity conditions are likely to be
on its FX forward book between November and April. This
maintained for the foreseeable future.
operation had the two-fold impact of both providing BNM
access to US$ from onshore banks, thus buffering spot FX
reserves, and temporarily injecting MYR liquidity into local
banks, which likely helped lower cross-currency swap
funding costs for the MYR.
66
JPMorgan Chase Bank, N.A., JPMorgan Chase Bank, N.A., Emerging Markets Research
Hong Kong Mumbai Branch Mid-Year Emerging Markets Outlook and Strategy
Marvin M Chen AC (852) 2800-7692 Sajjid Z Chinoy AC (91-22) 6157-3386 June 8, 2017
marvin.m.chen@jpmorgan.com sajjid.z.chinoy@jpmorgan.com
Toshi Jain (91-22) 6157-3387
toshi.jain@jpmorgan.com
Mongolia Caa1/B-/B Pakistan B3/B-/NR
IMF program provides BOP relief Riding on high growth but wrinkles emerge
Commodity recovery drives 1Q17 growth surprise Growth to be at a 10-year high led by CPEC-related
investments and accommodative monetary policy
IMF approves financial support, opening doors for
other lenders; fiscal discipline bears watching Meeting budgeted fiscal deficit target challenging;
risk of fiscal policy becoming expansionary
Presidential elections to be held this month, but
Inflation to rise, but not to levels that would force
limited impact on policy outlook
SBP to increase rates
Going with the commodity flow, 1Q17 economic growth Current account deficit widened on higher imports,
remains robust. After entering recessionary territory in the but central bank has kept USD/PKR rate stable
first three quarters of 2016, growth rebounded strongly in FY17 growth expected to print at a 10-year high. We
4Q16, led by a rebound in commodity prices and exports estimate real GDP growth in FY17 (year-ending June 2017) to
which has extended into 1Q17. Mongolias 1Q17 economic rise to a 10-year high of 5.3% from 4.7% in FY16, primarily
growth came in at 4.2%oya, versus 7.8% growth in 4Q16 driven by public and private investments, particularly in the
and 1% growth for the full year 2016. Domestic infrastructure and power sectors led by CPEC-related
consumption returned to positive growth, rising 1.1%oya in investments. Further an easing of monetary conditions, better
1Q17, following three quarters of contraction. Meanwhile, energy supply, and a recovery in major crops have all
goods exports surged 41%oya in the first four months of the facilitated the expansion. Between July, 2016 and March
year, led by commodities. Given the cooling in commodity 2017, the large-scale manufacturing sector clocked growth of
markets, in particular in China, commodity exports and 5.1% compared to 4.6% in the corresponding period last year.
overall growth in Mongolia will likely see some payback in
the coming quarters. Our forecast for 2017 growth stands at Risk of expansionary fiscal policy in 2016-17. The Budget
1.5%oya. provided for fiscal consolidation of 0.8% of GDP in FY17
that would have reduced the deficit to 3.8% of GDP.
IMF deal approved, balance of payments challenges However, in 9-month FY17, the deficit was already 3.7% of
fade in the near term. After multiple delays, the IMF GDP versus 3.4% of GDP in the corresponding period last
executive board approved the three-year Extended Fund year. Thus, it could be challenging for the government to
Facility on May 25, with an immediate disbursement of achieve the budgeted fiscal deficit target; given the run-rate,
about US$39mn. The approval removes a long-standing fiscal policy could even become expansionary in 2016-17.
liquidity concern for Mongolia, although continued fiscal State Bank of Pakistan (SBP) likely to be on hold, as
discipline and reform in the coming years bear watching. inflation, though rising, not expected to rise to
Meanwhile, following the IMF announcement, the Asian uncomfortable levels. Given growth acceleration, inflation
Development Bank has also announced support of increased in the last few months. CPI inflation, which was
US$1.2bn over four years. Total lending from all partners 3.7%oya in Dec-16, rose to 4.8%oya in Apr-17. While
is expected to be about US$3.5bn, in addition to the PBOC inflation has increased, its much below its historical average,
swap line of Rmb15 billion. The IMF projects Mongolias and does not suggest an overheating economy. As growth
FX reserves to reach close to US$4bn by the end of the accelerates over the coming months, we expect inflation to
three years, compared to US$1.3bn in 2016. rise. However, we do not expect inflation to surge to a level
that would force the SBP to raise rates for now.
Presidential election expected to have little impact on
outlook, given the solid majority in Parliament. Sharp rise in imports resulted in wider current account
Presidential elections are scheduled for June 26, but the deficit (CAD) but USD/PKR unchanged. The CAD for 10
outcome will likely have a limited impact on the policy months of the year rose sharply from US$2.4bn to US$7.2bn
outlook, given that the presidential veto power can be (2.7% of GDP) mainly due to a growth-induced rise in
overruled by the solid MPP majority in Parliament. The imports even as exports contracted. Thus, despite larger
three main parties in Mongolia (MPP, DP and MPRP) have capital inflows, the balance of payments turned to negative
announced their candidates, and campaigning will begin in US$2bn from positive US$0.9bn in the corresponding period
the coming weeks. last year. In spite of this, SBP has kept the USD/PKR rate
stable. FX reserves are still at US$17.4bn, equivalent to
about five months of imports
67
Singapore Branch Seoul Branch Mid-Year Emerging Markets Outlook and Strategy
Nur Raisah Rasid AC (65) 6882 7375 Jiwon Lim AC (82-2) 758-5509 June 8, 2017
raisah.rasid@jpmorgan.com jiwon.c.lim@jpmorgan.com
Seok Gil Park (82-2) 758-5396
seok.g.park@jpmorgan.com
Philippines Baa2/BBB/BBB- South Korea Aa2/AA/AA-
A stable growth story hereon Export-domestic demand gap narrows

Expecting modest growth pickup in 2H17 as domestic Growth to moderate in 2Q17, following solid rise
investment cycle hints at early signs of slowing in 1Q
Watching balance of payments dynamics, we expect Exports losing earlier steam while domestic demand
risks surrounding financial flows to abate improving
BSP has recently turned slightly hawkish as Bank of Korea to stand pat, focusing more on
inflationary pressures continue to mount household debt
Economic growth in the Philippines has held up well Koreas growth likely to slow down in 2Q17. After a brisk
relative to the tepid growth across most of EM Asia in acceleration of real GDP growth to 4.3% q/q saar in 1Q17, we
recent years. While domestic demand continued to add to expect the growth to moderate to 2.2% in 2Q, mainly due to a
growth in 1Q17, the details were mixed, with the bulk of the slowdown in manufacturing output and exports. Aprils non-
slowing in headline GDP reflecting a deceleration in fixed farm all-industry output growth already slowed, dragged
investment. Meanwhile, the growth drag from net exports down by manufacturing. Conversely, service sector output and
owing to the surge in imports in recent quarters moderated domestic demand conditions are gradually recovering as one-
somewhat last quarter. By implication the current account off drags including political uncertainty and geopolitical
should stabilize this year, halting the downtrend that has been noises should eventually fade, narrowing the sharp divergence
in place since 2015. All told, the deceleration in growth between exports and domestic consumption. On balance, we
momentum does little to change our view on the broad expect the real GDP growth to reaccelerate in 3Q, with
economic narrative in the Philippines. However, as a result of exports bouncing modestly amid a continued recovery of
the softer-than-expected 1Q17 print, we have trimmed our domestic demand and better support from fiscal policy.
2017 full-year growth projection to 6.4% y/y from 6.8%.
Consumer inflation expected to breach 2%oya level by 3Q,
The overall balance of payments dynamic in the but temporarily. While the strong cost-push factors in 4Q16
Philippines bears watching as it has led to nominal FX from global commodity prices eventually turned neutral,
movements, even as underlying drivers have shifted over demand-side inflation pressure remained stable. Excluding
the past decade. Since its US$3.8 billion peak in 4Q14, the controlled prices from core CPI, three-month sequential price
current account surplus has been on a narrowing trend. In gains stepped back to 1.6%3m/3m saar in May, after briefly
2017, we project the current account to widen to 0.8% of GDP accelerating to 2.3% during 1Q. Although we expect demand-
from 0.2% in 2016 due mainly to firming external demand side inflation pressure to remain subdued, we still expect
even as inflows from overseas Filipino worker remittances headline inflation to stay around 2%oya by 3Q, mainly from
and the BPO sector slow. The risk is that the current account the base effect that should remain inflationary up to August.
surplus may be smaller than our initial expectations should
export momentum falter through 2H17. Recent capital flow Monetary policy sidelined, while extra fiscal spending is
developments point to a more positive financial account this expected in 2H. The new government submitted a
year as headwinds surrounding financial flows appear to have supplemental budget plan (in the order of Won11.2 trillion) to
ebbed. Alongside the stabilization of the current account, the National Assembly, but the political environment does not
these capital flow developments will likely boost the overall looks favorable yet, amid stand-offs during the nomination of
balance of payments. high-level officials. In any case, we expect the government to
neutralize the fiscal contraction by increasing fiscal
In its latest monetary policy meeting, the BSPs tone expenditure more than planned, either through a
shifted toward a more hawkish bias out of concern that supplementary budget or depleting underutilized spending
the build-up in inflationary pressures may be incompatible (see Korea: Reality check on 2017 fiscal stance, GDW,
with current monetary policy settings. Food price advances April 28). Meanwhile, we expect the Bank of Korea to stand
have remained relatively soft, but increases in administrative pat for the rest of year, with rising concerns about household
costs since the start of the year have left inflation tracking at credit growth. In our view, the Bank of Korea will delay a
the upper bound of BSPs target range. While we do not see shift to a hawkish bias until domestic consumption settles into
an imminent need to tighten monetary conditions, BSPs tone a meaningful recovery.
could turn more hawkish in the coming months.
68
Mumbai Branch Singapore Branch Mid-Year Emerging Markets Outlook and Strategy
Sajjid Z Chinoy AC (91-22) 6157-3386 Benjamin Shatil AC (65) 6882-2311 June 8, 2017
sajjid.z.chinoy@jpmorgan.com benjamin.shatil@jpmorgan.com
Toshi Jain (91-22) 6157-3387
toshi.jain@jpmorgan.com
Sri Lanka Baa3/BBB-/BBB- Thailand Baa1/BBB+/BBB+
Chipping away at macroeconomic stability Tracking a patchy recovery

Agreement reached on second review of the current Activity recovering in Thailand through early 2017,
Fund program, as the Inland Revenue Act is prompting GDP forecast upgrade
presented in Parliament Further acceleration contingent on broadening of
FX reserves were at a seven-year low in April; we growth drivers
expect CBSL to continue with calibrated depreciation Marking down CPI as food prices continue to soften;
CBSL to remain cautious, with any rise in inflation 2Q likely the trough in inflation trajectory
likely to be met with rate hikes Policy reaction to NEER strength evolving
Growth expected to decelerate further to 4.2% in 2017
from 4.4% in 2016 The incoming data from Thailand continue to point to a
recovery in demand. This has prompted a moderate upgrade
Agreement reached on second review of Fund program as to our GDP growth profile for the rest of the year. Our
Inland Revenue Act presented in Parliament. Staff-level forecast hinges on sustained expansionary fiscal policy
agreement was reached on the second reviewsubject to alongside stabilization in external demandthese supports
government presenting Inland Act in parliamentbefore should combine with an ongoing recovery in household
approval by the IMF Executive Board. The Cabinet approved balance sheets to keep growth on an even keel into 2H17.
the Inland Revenue Act, clearing the way for it to be
presented to Parliament. Even as the recovery in activity has gained traction in
recent months, price pressures have been unusually tame.
FX reserves at a seven-year low in April; we expect CBSL Softening CPI inflation has largely reflected the
to continue with calibrated depreciation: FX reserves hit a disinflationary impact of a fall in food pricesunusual given
seven-year low of US$5bn, equivalent to just three months of rising global food inflation through late 2016. However,
import cover in April. The balance of payments was in a recent weakness in the prices of key soft commodities,
deficit of US$0.5bn in 2016 due to a reduction in capital including crude palm oil, suggests food prices could remain
inflows even as the current account deficit remained flat at weak through 2H17, but we expect 2Q to mark the trough in
2.3% of GDP. However, in recent months, the trade deficit the headline inflation trajectory. We now expect headline CPI
has also widened as imports have outpaced exports. On the inflation to average around 1.0%oya this year, down from a
back of these external pressures, CBSL has engineered a previous forecast of 1.4%oya.
calibrated depreciation, allowing the USD/LKR to depreciate
by 5% since August, and we expect this policy to continue. With growth risks largely balanced and price pressures
contained, there appears to be no urgency for monetary
CBSL to remain on guard; any rise in inflation likely to be policy to be adjusted in either direction. But the central
met with rate hikes. As per the National Consumer Price bank has continued to express discomfort with a rising
Index, headline inflation slowed in April to 8.4% from 8.6% in nominal effective exchange rate, prompting a rise in verbal
March, and core inflation softened to 5.9% in April from 7.0% intervention, as we had expected.
in March. Consequently, CBSL kept rates on hold in its May
review. That said, with inflation still elevated and private sector Sustained intervention and subsequent sterilization have
credit growth still running close to 20%, we expect the CBSL also led to continued shifts on the central banks balance
to stay vigilant and hike further if CPI inflation re-accelerates. sheet, even as overall domestic liquidity conditions look more
stable. Indeed, while liquidity remains ample, commercial
Growth to decelerate further to 4.2% in 2017 from 4.4% lending rates had barely budged, prompting a request for
in 2016. After the sharp but expected fall from 4.8% in 2015 lower rates from the MoF, resulting in a 25bp-50bp cut even
to 4.4% in 2016, we expect growth to decline further to 4.2% as the policy rate remained unchanged.
in 2017. The primary factors behind the growth slowdown in
2016 were a large fiscal drag of 2.0% of GDP, monetary
tightening of 100bp, and weak agriculture growth. In 2017 we
expect GDP growth to decelerate further to 4.2% on the back
of continued fiscal consolidation and monetary tightening.
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Disclosures
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts
are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies,
with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's
compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in
this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was
made in good faith and that the views reflect their own opinion, without undue influence or intervention.
Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in securities
issued by Woori Bank (WOORIB).
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Woori Bank
(WOORIB) within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Woori Bank (WOORIB).
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment banking
clients: Woori Bank (WOORIB).
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
entity(ies) as clients, and the services provided were non-investment-banking, securities-related: Woori Bank (WOORIB).
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and the
services provided were non-securities-related: Woori Bank (WOORIB).
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services from
Woori Bank (WOORIB).
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in
the next three months from Woori Bank (WOORIB).
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other
than investment banking from Woori Bank (WOORIB).
Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Woori Bank
(WOORIB).
J.P. Morgan Securities plc (J.P. Morgan) is acting as Joint Bookrunner for Woori Bank on its Basel III-Compliant Additional Tier 1
Perpetual Subordinated Notes issuance as announced on 8 May 2017. J.P. Morgan will be receiving fees for so acting. J.P. Morgan and/or its
affiliates may perform, or may seek to perform, other financial or advisory services for Woori Bank and/or its affiliates and may have other
interests in or relationships with Woori Bank and/or its affiliates, and receive fees, commissions or other compensation in such capacities. This
research report and the information herein is not intended to serve as an endorsement of the proposed transaction or result in procurement,
withholding or revocation of a proxy or any other action by a security holder. This report is based solely on publicly available information. No
representation is made that it is accurate or complete.
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Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium
reports and all J.P. Morgancovered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing
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Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we
expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.]
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Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts
(or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this
stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable,
the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K.
small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market
index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts
coverage universe can be found on J.P. Morgans research website, www.jpmorganmarkets.com.
J.P. Morgan Equity Research Ratings Distribution, as of April 03, 2017

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 43% 46% 11%
IB clients* 51% 49% 31%
JPMS Equity Research Coverage 43% 50% 7%
IB clients* 66% 63% 47%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating
category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies,
please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P.
Morgan representative, or email research.disclosure.inquiries@jpmorgan.com.
Woori Bank (WOORIB) - J.P. Morgan Credit Opinion History
Date Action Rating/Designation Ticker/ISIN
Issuer 29 Apr 15 Withdrawn Not Rated WOORIB
Issuer 15 Apr 16 Restored Neutral WOORIB
Issuer 14 Oct 16 Upgrade Overweight WOORIB
4.5% perp21c * 20 Oct 16 Initiate Overweight US98105HAE09
4 1/2% ' 15 29 Apr 15 Terminate Not Covered US98105GAF90
4 3/4% ' 16 29 Apr 15 Terminate Not Covered US98105GAG73
4.75% '24 15 Apr 16 Initiate Overweight US98105HAC43
4.75% '24 18 Nov 16 Downgrade Neutral US98105HAC43
5 7/8% ' 21 29 Apr 15 Withdrawn Not Rated US98105HAB69
5 7/8% ' 21 14 Oct 16 Restored Neutral US98105HAB69
5.0% 45/20c 15 Apr 16 Initiate Neutral US98105HAD26
6.208% ' 37 29 Apr 15 Withdrawn Not Rated USY9695NBR36
6.208% ' 37 17 Feb 17 Not Covered USY9695NBR36
7% ' 15 29 Apr 15 Terminate Not Covered US98105GAE26
7.63% ' 15 29 Apr 15 Terminate Not Covered USY9695NDG52
*Indicates representative/primary bond/instrument.
The table(s) above show the recommendation changes made by J.P. Morgan Credit Research Analysts in the subject company and/or
instruments over the past three years (or, if no recommendation changes were made during that period, the most recent change). Notes:
Effective April 11, 2016, J.P. Morgan changed its Credit Research Ratings System. Please see the Explanation of Credit Research Ratings
below for the new definitions. The previous rating system no longer should be relied upon. For the history prior to April 11, 2016, please call 1-
800-447-0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
Explanation of Emerging Markets Sovereign Research Ratings System and Valuation & Methodology:
Ratings System: J.P. Morgan uses the following issuer portfolio weightings for Emerging Markets sovereign credit strategy: Overweight (over
the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark credit returns);
Marketweight (over the next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or
benchmark credit returns); and Underweight (over the next three months, the recommended risk position is expected to underperform the
relevant index, sector, or benchmark credit returns). NR is Not Rated. In this case, J.P. Morgan has removed the rating for this security because
of either legal, regulatory or policy reasons or because of lack of a sufficient fundamental basis. The previous rating no longer should be relied
upon. An NR designation is not a recommendation or a rating. NC is Not Covered. An NC designation is not a rating or a recommendation.
Recommendations will be at the issuer level, and an issuer recommendation applies to all of the index-eligible bonds at the same level for the
issuer. When we change the issuer-level rating, we are changing the rating for all of the issues covered, unless otherwise specified. Ratings for
quasi-sovereign issuers in the EMBIG may differ from the ratings provided in EM corporate coverage.
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Valuation & Methodology: For J.P. Morgan's Emerging Markets Sovereign Credit Strategy, we assign a rating to each sovereign issuer
(Overweight, Marketweight or Underweight) based on our view of whether the combination of the issuers fundamentals, market technicals,
and the relative value of its securities will cause it to outperform, perform in line with, or underperform the credit returns of the EMBIGD index
over the next three months. Our view of an issuers fundamentals includes our opinion of whether the issuer is becoming more or less able to
service its debt obligations when they become due and payable, as well as whether its willingness to service debt obligations is increasing or
decreasing.
J.P. Morgan Sovereign Research Ratings Distribution, as of April 3, 2017
Overweight Marketweight Underweight

Global Sovereign Research Universe 20% 61% 20%
IB clients* 30% 48% 80%
Note: The Sovereign Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the table above.
Explanation of Credit Research Valuation Methodology, Ratings and Risk to Ratings:

J.P. Morgan uses a bond-level rating system that incorporates valuations (relative value) and our fundamental view on the security. Our
fundamental credit view of an issuer is based on the company's underlying credit trends, overall creditworthiness and our opinion on whether
the issuer will be able to service its debt obligations when they become due and payable. We analyze, among other things, the company's cash
flow capacity and trends and standard credit ratios, such as gross and net leverage, interest coverage and liquidity ratios. We also analyze
profitability, capitalization and asset quality, among other variables, when assessing financials. Analysts also rate the issuer, based on the rating
of the benchmark or representative security. Unless we specify a different recommendation for the companys individual securities, an issuer
recommendation applies to all of the bonds at the same level of the issuers capital structure.
We use the following ratings for bonds (issues) and issuers: Overweight (over the next three months, the recommended risk position is
expected to outperform the relevant index, sector, or benchmark); Neutral (over the next three months, the recommended risk position is
expected to perform in line with the relevant index, sector, or benchmark); and Underweight (over the next three months, the recommended risk
position is expected to underperform the relevant index, sector, or benchmark). J.P. Morgan Emerging Markets Sovereign Research uses
Marketweight, which is equivalent to Neutral. NR is Not Rated. In this case, J.P. Morgan has removed the rating for this particular security or
issuer because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating no longer should
be relied upon. An NR designation is not a recommendation or a rating. NC is Not Covered. An NC designation is not a rating or a
recommendation.
For CDS, we use the following rating system: Long Risk (over the next three months, the credit return on the recommended position is
expected to exceed the relevant index, sector or benchmark); Neutral (over the next three months, the credit return on the recommended
position is expected to match the relevant index, sector or benchmark); and Short Risk (over the next three months, the credit return on the
recommended position is expected to underperform the relevant index, sector or benchmark).
Implicit in a J.P. Morgan credit rating is the analysts consideration of the underlying risks to the investment thesis. Risks may reflect
company-specific, industry-specific, and, when relevant, macro factors. These factors are given weight to the extent that they impact a
companys cash flow and leverage metrics, for example.
J.P. Morgan Credit Research Ratings Distribution, as of April 03, 2017

Overweight Neutral Underweight
Global Credit Research Universe 25% 59% 16%
IB clients* 62% 62% 58%
Note: The Credit Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the table
above.
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may
not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and
trading securities held by a research analyst account.
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Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors,
including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
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Mid-Year Emerging Markets Outlook and Strategy

J.P. Morgan Securities plc

Jonny Goulden AC Anezka Christovova AC

Trang Nguyen AC Michael Harrison AC

Ben Ramsey AC Equity Research

EM top trade recommendations

GBI-EM Model EMBIGD MP MW overall

Market Outlook for 2H17 as UW quasi-sovereigns Sinopec and Petronas).

Stay OW EM local markets via OW local rates, MW in

2. DM central bank asset purchases are a -500

Source: J.P. Morgan, www.policyuncertainty.com -1.5 -60

in the past 3 years have explained about $80bn in portfolio Sep-16

lower. For oil, inventory levels have not declined as forecast

Exhibit 19: J.P. Morgan commodity price forecast

EM Macro Outlook Nevertheless, with the exception of a few countries,

Exhibit 24: How the Fragile Five have changed

expected disinflation path. The outlier in the region remains

EM Technicals to follow returns. However, non-EM dedicated buying of

Primary market activity in EM corporate external bonds

high yielders, although FX weakness (-1.7%) is set to reduce

EM Asia local markets: Stay OW FX in a cheap on a variety of metrics (PPP/Balassa-Samuelson

Rates Strategy: OW Russia and Turkey; long 10-year

Exhibit 34: EMEA EM outright Trade Recommendations

Falling inflation and CB easing justify an OW in rates via

We have been recommending buying bond-CDS basis in

As of June 07, 2017 Since Initiation YTD Changes & Returns

OW: China, Korea, Russia and Chile

Growth and Inflation Outlook and Forecasts

Debt and Fiscal Forecasts

Emerging Markets -3.5 -3.4 -3.5 46.6 47.8 24.4 23.2

Emerging Asia -2.5 -2.8 -3.1 47.2 48.8 17.3 16.9

EMEA EM -4.7 -3.6 -3.4 36.1 36.9 36.7 33.6

Latin America -5.8 -5.5 -4.8 58.8 60.1 35.1 33.3

EM Monetary Policy Forecasts

Current End of Period Forecast (%pa)

Sovereign and Corporate Issuance and Cashflows

US$bn 2013 2014 2015 2016 2017 YTD 2017F

EM CorporatesUS$ billions 2015 2016 2017 2017F

GBI-EM Global Diversified Return Forecast

EM Asia Sovereign Issuance Forecast

Latin America Sovereign Issuance Forecast

EMEA EM and Global EM Sovereign Issuance Forecast

Exchange Rate End-of-Period Forecasts versus US Dollar

Asia and Latin America Credit Ratings

EMEA EM and Developed Markets Credit Ratings

Local Currency Ratings (GBI-EM Broad Countries)

RATING SCALE STANDARD TERMINOLOGY AND PROCEDURES

Bolivia Ba3/BB/BB- As a result, public enterprises such as YPFB and ENDE

Chile AA-/Aa3/A+ investment acceleration is for a dissipation in electoral

El Salvador Caa1/CC/CCC Public debt stock rises modestly in January-April. The

Panama Baa2/BBB/BBB (US$498mn) in 2017, 2.0% of GDP (US$1.19bn) unadjusted,

Peru A-/A3/BBB+ April due to the monthly deflation experienced in April

Inflation normalized after the Coastal El Nio supply

Uruguay BBB/Baa2/BBB- surprise, we revised our December 2017 inflation forecast

Eastern Europe, Middle East and Africa

Delayed growth recovery Economy resilient amid political uncertainty

Czech Republic A1/AA-/A+ Egypt B3/B-/B

Ghana B3/B-/B Hungary Baa3/BBB-/BBB-

First signs of fiscal consolidation Loose monetary conditions to persist

Israel A1/A+/A+ Kazakhstan Baa3/BBB-/BBB

The recovery in inflation remains modest Growth is booming

Nigeria B1/B/B+ Poland A2/BBB+/A-