EMEA Monthly: Keep calm and carry on

Deutsche Bank Markets Research Emerging Markets CEEMEA Special Report Economics Foreign Exchange Rates Credit Date 12 September 2017 EMEA Monthly: Keep calm and carry on ________________________________________________________________________________________________________________ Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Elina Ribakova Chief Economist (+44) 20 7547-1340 elina.ribakova@db.com Kubilay Ozturk Chief Economist (+90) 212 3170124 kubilay.ozturk@db.com Danelee Masia Economist (+27) 11 775-7267 danelee.masia@db.com Hongtao Jiang Strategist (+1) 212 250-2524 hongtao.jiang@db.com Christian Wietoska Strategist (+44) 20 754-52424 christian.wietoska@db.com Gautam Kalani, PhD Strategist (+44) 20 754-57066 gautam.kalani@db.com Himanshu Porwal Research Analyst (+44) 20 754-74234 himanshu.porwal@db.com Carlos Galindo Research Analyst (+44) 20 754-76269 carlos.galindo@db.com Twisha Roy Research Associate twisha.roy@db.com EMEA growth momentum remains strong and continues to trend higher, as indicated by our EMEA Macro Momentum Indicator (an aggregation of short-term indicators of real activity). Growth in CEE remains robust on the back of tight labour markets and accommodative macro policy mix. In Russia, faster than expected recovery in private consumption is likely to drive growth higher this year. South Africa’s 2017 growth outlook is marred by several credit downgrades and higher political uncertainty. In Turkey, economic activity remains strong though some deceleration in Q4 could be in the cards as effects of stimuli fade. Moreover, given Turkey’s structural bottlenecks, such as large external financing requirements, renewed TRY depreciation could propagate a negative feedback loop between real and nominal economy. In terms of monetary policy, we see Russia’s inflation coming down to just over 3% by end-2017 allowing for rates to come down to 8.0% by end-2017 and 6.5% by end-2018. We expect investors to increasingly revise down Russia’s terminal rate on lower expected potential growth and higher inflation targeting credibility. In Turkey, we expect CBT to keep funding tight until inflation comes back into single digit territory after last months’ disappointing print. In CEE, we see high risk that the CNB will go for the second hike this year, albeit we have tentatively penciled it in for early 2018. We believe the CNB is keen to move away from the ZLB given that domestic growth and inflation conditions are supportive. In South Africa, we see SARB cutting two more times by 25pbs, bringing total cuts to 75bps this year. Moving on to politics, Russian sanction debate has been postponed until later in the year when the US Treasury submits to congress the report on implications of extending sanctions to sovereign debt, financial derivatives and SOEs. In Turkey, political risk has subsided since the April referendum, but geopolitical unease, including on the relationship with the EU or Turkey’s stance on Syria is likely to remain. In South Africa, we are waiting for December when ANC will elect its leadership. Before then, markets will likely pay attention to rating agency decisions in November due to fiscal slippages to date. In our special reports this month, we first highlight the risks from buildup of EM debt post the GFC, especially in a scenario where DM central banks are aspiring towards gradual withdrawal of stimulus. We also provide an update of our EM Structural Performance Index, where we highlight which EMs score high on structural improvement and are thus poised for more sustained long-term improvement in inflows and growth potential. EMEA Fixed Income – still attractive? Despite the strong performance already seen across EM Fixed Income this year, variables for EM Fixed Income have not yet deteriorated enough to become concerned on risk-rewards in local assets. In fact, we argue that the improvements on inflation dynamics and the supply outlook as well as higher term premium offset the now richer valuation. We remain constructive on our asset class and see further room for an outperformance in H2-17. Nevertheless, we should also not ignore the deterioration in some variables – particularly “positioning. (For more on variables and valuation in EM Fixed Income please see our latest EM Fixed Income Scorecard – September 2017) Favourite positions: We highlight in particular Russia and Poland as our favourite positions while we are more cautious on FI in Turkey and keep a close eye on developme