vk.com/id446425943

Goldman Sachs

EM Macro Navigator

*Link to full publication:

EM Outlook 2019: A

narrow path to

performance

We lay out the macro and market themes that we think will drive performance across asset classes in Emerging Markets in 2019. The uncertain macro environment warrants an incrementally cautious EM outlook that emphasizes idiosyncratic stories and relative value more than ‘global beta’ trades. That said, if growth outside the US can modestly improve alongside slowing growth in the US and a sturdy Fed hiking cycle, EM assets have a narrow path to positive performance.

1.A look back: ‘global growth down’ mattered as much as ‘US rates up’

2.A look ahead: modest headline gains; focus on relative value

3.EM equities: sharp sell-off overstates steady earnings

4.EM FX: more value, decent carry, waiting for the growth

5.EM local rates: mind the gap between highand low-yielders

6.EM credit: back to fair, but balance sheet vulnerabilities loom

vk.com/id446425943

Goldman Sachs

EM Macro Navigator

*Link to full publication: LatAm 2019 Macro Outlook: An Underwhelming Uneven Recovery

An Underwhelming Uneven Recovery

The year that is about to end was not particularly kind to the larger economies in Latin America (LatAm). The hopefulness generated at the end of 2017 of a firmer and broader cyclical recovery in 2018 faded as the year progressed. A sharp downward correction in EM asset prices and a number of idiosyncratic developments in some of the largest economies (e.g., Argentina and Brazil) contributed to a significant extent to the disappointing 2018 performance. Overall, LatAm is projected to grow less in 2018 (1.5%) than the already-lackluster performance in 2017 (1.7%). The macroeconomic environment is expected to improve in 2019, but only slightly so. The forecasted modest acceleration of real GDP growth, to 2.2%, is expected to be driven by just a handful of economies (those that underperformed expectations the most in 2018), and with significant cross-country heterogeneity.

Gradual Monetary Policy Normalization Where Rates are Below Neutral

A less accommodative external backdrop will likely lead central banks with below-neutral policy rates (Brazil, Chile, Colombia, Peru) to gradually normalize monetary conditions throughout 2019. Mexico is expected to hold the policy rate unchanged at a restrictive 8.00% through 2019, with the risk of short-term additional hikes.

Fiscal Consolidation Needed to Prevent Tightening of Financial Conditions

The forecasted modest acceleration of real GDP growth in 2019 takes place off an admittedly low comparison base, and is contingent on the implementation of disciplined investment-friendly macro policies, which in most places involves further progress towards fiscal consolidation, particularly in Argentina and Brazil. It is also contingent on keeping policy uncertainty and political risk contained.

Exhibit 11: LA-IT6 Real GDP Growth Forecasted to Accelerate Modestly in 2019

Real GDP Growth, % yoy

vk.com/id446425943

Goldman Sachs

EM Macro Navigator

*Link to full publication: Brazil 2019 Macro Outlook: A New Administration to Deal with Old Challenges

The 2019-20 macro and financial outlook for Brazil remains challenging and complex, but admittedly more hopeful than in recent years. The economy has been underperforming since 2014, and the year that is about to end was not a remarkable one:, with very modest below-trend growth, weak investment spending, a persistent double-digit unemployment rate, insufficient progress on the fiscal consolidation front leading to further deterioration of the public debt dynamics, and disappointing progress on the reform agenda (Congress failed to approve a number of fiscally relevant bills, including a stripped-down social security reform).

It was also a socially and politically turbulent year. A crippling 11-day truckers’ strike in May brought the economy to a halt, sapping consumer and business sentiment, and political noise picked up significantly with the criminal conviction and subsequent imprisonment and ineligibility of former President Lula to run for president. Finally, the country went through a very divisive and polarizing election campaign. In the event, right-wing former army captain and lawmaker Jair Bolsonaro (PSL) won the presidential election by a comfortable double-digit margin over the left-wing PT candidate. President-elect Bolsonaro capitalized on voters’ desire for change/renewal and deep-rooted rejection of traditional political structures to secure a clear mandate and build a respectable political base in Congress. The new government will be sworn in on January 1, 2019 and the new legislature will be seated on February 1st.

Markets reacted positively to the outcome of the presidential, congressional and local elections. On the macro front, we expect: real GDP growth to exceed 2% for the first time since 2013, low and stable inflation, gradual normalization of monetary policy, a strong balance of payments, and gradual progress towards fiscal consolidation. In our assessment, key for markets and short-term asset price direction will be whether the new administration succeeds in securing congressional support to approve a social security reform. Failure to do so would heighten concerns about the sustainability of the debt dynamics, which in turn would most likely precipitate a sharp asset price correction.

President-elect Bolsonaro will face complex legacy macroeconomic issues (an unsustainable fiscal position, low potential real GDP growth, and a very closed and unproductive economy) and will need to carefully navigate and manage old and new political and social challenges. In our assessment, the elected president will face significant tests in three main areas: social, political, and economic, and the performance of the economy will most likely be a function of how well those are navigated.

vk.com/id446425943

Goldman Sachs

EM Macro Navigator

*Link to full publication: CEEMEA Outlook — Stabilisation at weaker levels

nThe economic backdrop for EM economies has deteriorated significantly during the course of 2018: (1) global growth has slowed, from 5% to 3½%, according to our global Current Activity Indicator (CAI); (2) global and EM financial conditions have tightened, driven by a reappraisal of US rate prospects; (3) oil prices rose by close to 30% to mid October; and, (4) tariffs and the risk of a ‘trade war’ have weighed on confidence.

nAgainst this tougher backdrop, there has been a marked deterioration in the performance of CEEMEA economies: in Turkey, high frequency data point to a sharp contraction in output, and inflation is running at 25%yoy; in South Africa, GDP data suggest that the economy has also fallen into recession (although we think the data exaggerate the underlying weakness of activity); in Russia, growth has been damaged by the escalation in sanctions, and, in the CEE-4, activity has remained relatively unscathed so far, but we expect it to moderate on a sequential basis.

nWhile growth in CEEMEA has slowed significantly, our impulse analysis suggests that the worst of the downturn is now behind us and that the trough in activity is likely to occur in 2019Q1. We expect the sharp fall in oil prices since mid October to boost growth and lower inflation, supporting our relatively dovish views on monetary policy in 2019. Though Turkish growth appears likely to remain weak, we expect that the bulk of the downturn will have occurred in 2018H2. Similarly, we expect Russian growth to recover once the impact of the VAT increase in 2019Q1 is absorbed and South Africa to benefit from faster reform momentum following the national elections (which we expect in May). In our view, the risks to future growth and to asset prices for the region as a whole are broadly balanced.

nLooking beyond the current cyclical weakness, our medium-term forecasts imply a relatively optimistic view of potential growth across most of CEEMEA and, reflecting the long-term convergence in CEEMEA inflation rates, our terminal rate forecasts are typically below the forwards. There are some notable changes in our structural views on Russia and Turkey, in particular. In Russia, we believe that growth is likely to be increasingly driven by fiscal and quasi-fiscal policies and geared towards higher investment rates. In Turkey, our modal forecast is for a recovery that will be slower and shallower than previous recoveries, reflecting ongoing stress to balance sheets.