Tuesday, January 26, 2010

CEEMEA Investor Sovereign Credit, Rates & FX

Sovereign Credit, Rates & FX

Caution is warranted, but we stay long risk
• CEEMEA credit still offers attractive opportunities in high-beta (i.e., Ukraine) and improving credits (i.e., Dubai). Compelling RV trades are also available (i.e., Poland 2025 and Naftogaz 2014).

• Local rates present interesting opportunities to receive rates, as some front ends are pricing too
much compared to MS monetary policy forecast (i.e., Poland and South Africa). Not time to pay yet, but some pre-positioning is warranted in Turkey.

• Fundamental drivers – recovering growth, improving BoP trends, some proactive monetary tightening – should keep regional FX markets well supported (PLN, ILS, RON and KZT).

Better fundamentals shield CEEMEA from the Greek Odyssey Concerns over Greek debt sustainability have caused increased volatility for risky assets, and market participants have tried to assess if CEEMEA credits are natural targets of contagion. We do not expect this to
materialise. Greece is coping with concerning debt dynamics caused by idiosyncratic factors. CEEMEA countries have stronger fundamentals. Only extreme credit scenarios, which would put all the EU accession processes at risk, could generate considerable selling pressures in CEEMEA, in our view. We do not envisage this scenario as some viable solutions are available to
the Greek government.

China tightening: Source of short-term volatility, but good medium-term news Tighter monetary policy aiming to stabilise the strong Chinese economy is likely to add some short-term volatility. However, the fundamental strength of the Chinese economy is intact, according to our economists, and we expect this to be overall supportive for CEEMEA in the medium term (i.e., a growth/commodities price mix that would be supportive for both importers and exporters).

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