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Global Research

EMEA Economic Perspectives

Emerging EMEA Economic Outlook: 2019-20

Global backdrop: slower growth, monetary policy normalization, strong EUR

UBS expects a more challenging cyclical backdrop for Emerging EMEA in 2019-20: global GDP growth is projected to slow from 3.9% in 2018 to 3.6% in 2019 and then to stabilise around 3.7% in 2020. In particular, growth in the Eurozone — EMEA's most important trading partner — is likely to slow from 1.9% in 2018 to 1.6% in 2019 and 1.5% in 2020. UBS expects the Fed to raise rates to 3.25% by end-2019 (and stay there in 2020) and the ECB's first hike to be in December 2019 (by 20bps in the deposit rate) with a follow-up 70bps move in 2020, bringing the depo rate to 0.5%. Long-end yields are expected to rise in the Eurozone, while US 10Y should start to decline in 2020. UBS projects the EUR to appreciate to 1.23 by end-2019 and to 1.30 by end2020.

EMEA growth to slow to 1.6% in 2019, before rebounding to 2.6% in 2020

Broader EMEA (the Czech Republic, Greece, Hungary, Kazakhstan, Poland, Russia, South Africa, Turkey, Ukraine and the United Arab Emirates) GDP growth is likely to slow notably from 2.6% in 2018 to 1.6% in 2019, though this is mainly due to Turkey entering a recession. Growth should rebound to 2.6% in 2020 – which we believe is a speed limit. Poland remains the undisputed growth champion (3.8% in 2019E, 3.6% in 2020E). The UAE and Kazakhstan, two energy exporters, should grow around 3.0- 3.5% in the next two years, followed by Hungary and the Czech Republic with growth rates of 3.1-3.3%. GDP growth in Greece and Ukraine are forecast to reach 2.4-2.9%, while Russia and South Africa will likely get to 2% growth in 2020. Turkey will likely slow down most in 2019E (-0.8%), with a recovery to 2.3% in 2020E.

We are more pessimistic than consensus in 2019, but more optimistic in 2020

On aggregate, we are more cautious than the consensus growth forecasts for 2019 and more optimistic for 2020. We are more bullish on CE3 than consensus: by 0.2- 0.3pp in 2019 and by an even wider margin of 0.4-0.5pp in 2020. We are well ahead of consensus on Greece. In the case of Russia, we are a touch more pessimistic than consensus in 2019 (-0.1pp), but considerably more bullish for 2020 (+0.4pp). In Turkey, we are well below the consensus growth profile in both years (-1.0/-0.4pp) – though here the margin of error is probably the widest. We are more conservative with our growth projections in Ukraine and the UAE. In South Africa, we are more cautious than consensus for 2019 (-0.3pp).

Key EMEA themes and asset calls

We believe that the slower EMEA growth trajectory in 2018-2020 should actually improve the sustainability of growth in EMEA: this is true for external indicators (countries either have current account surpluses or small/declining deficits; with falling external debt-to-GDP ratios) and for government debt dynamics. With lighter investor positioning, the region's resilience to external shocks now looks better. Our rate call is significantly more dovish than the market pricing in Hungary (first hike only in Q4-19), somewhat dovish in Poland (first hike comes later in Q1 2020) and in Russia (fewer hikes and a re-start of cuts), and in line for the Czech Republic and South Africa. We like the CE3 currencies and the RUB, and thus the KZT, and forecast smaller depreciations (vs the 2018 FX moves) for the ZAR and the TRY. We are more optimistic than the forwards for all currencies (in CE3 vs EUR, the rest versus USD).

9 November 2018

Economics

EMEA Emerging

Gyorgy Kovacs

Economist gyorgy.kovacs@ubs.com +44-20-7568 7563

Anna Zadornova

Economist anna.zadornova@ubs.com +44-20-7567 4212

www.ubs.com/economics

This report has been prepared by UBS Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 53.

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Emerging EMEA

UBS Research THESIS MAP Emerging EMEA Economics – Outlook 2019-2020

PIVOTAL QUESTIONS Q: With global growth slowing in 2019-2020, can EMEA buck the global trend?

No. If anything, broader EMEA should slow notably from 2.6% in 2018 to 1.6% in 2019, though this is mainly due to Turkey entering a recession. Growth should rebound to 2.6% in 2020 – which we believe is a speed limit. Poland remains the undisputed growth champion (3.8% in 2019, 3.6% in 2020). Kazakhstan, the UAE, the Czech Republic and Hungary could grow around 3-3.5%. Greece and Ukraine could reach growth of 2.4-2.9%, while Russia and South Africa will likely get to 2% growth in 2020. Turkey will likely slow down most in 2019 (-0.8%) with a recovery to 2.3% in 2020.

Q: How much of UBS view on growth is shared by consensus?

UBS VIEW

EVIDENCE

WHAT'S PRICED IN?

UPSIDE/DOWNSIDE

RISKS:

On aggregate, we are more cautious than the consensus growth forecasts for 2019 and more optimistic for 2020. We are more bullish on CE3 than consensus: by 0.2-0.3pp in 2019E and by an even wider margin of 0.4-0.5pp in 2020E. We are well ahead of consensus in Greece. In Russia, we are a touch more pessimistic than consensus in 2019 (-0.1pp), but considerably more bullish for 2020 (+0.4pp). In Turkey, we are well below the consensus growth profile in both years (-1.0/-0.4pp) – though here the margin of error is probably the widest. Our growth forecasts in Ukraine and the UAE are also more conservative. In South Africa, we are more cautious than consensus for 2019 (-0.3pp).

Q: What are the key themes and asset calls to flag?

We are looking for more sustainable growth in EMEA as imbalances have reduced (outside South Africa). With lighter investor positioning, the region's resilience to external shock now looks better. Our rate call is significantly more dovish than the market pricing in Hungary (first hike only in Q4-19), somewhat dovish in Poland (first hike comes later in Q1 2020) and in Russia (fewer hikes and a re-start of cuts), and in line for the Czech Republic and South Africa. We like the CE3 currencies and the RUB, and forecast smaller depreciations (vs the 2018 FX moves) for the ZAR and the TRY. We are more optimistic than the forwards for all currencies (in CE3 vs EUR, the rest versus USD).

EMEA real GDP growth should decelerate further to 1.4% in 2019, with Turkey going through the sharpest slowdown. But even as the region recovers in 2020 it will struggle to grow faster than 2.5%.

Survey indicators and our own Lead Economic Indicator suggest a clear downside trend in growth.

Consensus is more optimistic on 2019 (mainly on Turkey) but assumes a more muted recovery in 2020.

Positive risks: de-escalation of trade war and more domestic reforms. Negative risks: political uncertainty, downside to Eurozone and Chinese GDP growth, and a stronger rise in global yields.

Figure 1: Difference between UBS growth estimates vs consensus (in pps)

0.6

0.4

0.2

0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2

Poland

Hungary

Czech Republic

Russia

Turkey

South Africa

 

 

 

 

2019

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: UBS. Consensus is as per the 15 October 2018 Eastern Europe Consensus Forecasts and Bloomberg

EMEA Economic Perspectives 9 November 2018

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Emerging EMEA Outlook

Key global factors for EMEA

What are the most important characteristics of the global framework for EMEA?

1)Late cycle in global economy — more challenging cyclical backdrop for EMEA. UBS expects global GDP growth to slow from 3.9% in 2018 to 3.6% in 2019 and then to stabilise around 3.7% in 2020. The deceleration in 2019 is widespread, with both the US and China being impacted by trade wars. In 2020 developed market (DM) growth is easing on the back of softer US (fading fiscal stimulus), the Eurozone (financial conditions start to tighten) and the UK (Brexit). In particular, the growth in the Eurozone — EMEA's most important trading partner — is likely to slow from 1.9% in 2018 to 1.6% in 2019 and 1.5% in 2020. This limits the ability of EMEA economies to find "additional" growth via exports.

2)Continued monetary policy normalization in the US and Europe. In the case of US monetary policy, UBS' US economics team calls for a cumulative 100bps in Fed rate hikes (including a hike in December 2018) to 3.25% by end-2019. This hiking path is likely to take the Fed's policy rate above neutral. The Fed tightening is important for the current account deficit countries in EMEA (South Africa and Turkey) as this could generate pressure on portfolio capital flows. Our European economics team expects the first deposit rate hike in December 2019 (by 20bps), with a follow-up 20bps move in March 2020. The ECB is then expected to pause for six months, before delivering two more rate hikes of 25bps each in September and December 2020, bringing the depo rate to 0.5%. The ECB's policy rate path is more relevant for the CE3 economies.

3)Long-end yields rising in the Eurozone, US 10Y starts to fall back in 2020. UBS expects 10Y Bund yields to increase to 0.85% by end-2019 and to 1.10% by end-2019; while the 10Y US Treasury yields should rise to 3.40% by end-2019, before easing back to 2.80% by end-2020.

4)UBS expects the EUR to appreciate against the USD. UBS projects the EUR to appreciate to 1.23 by end-2019 and to 1.30 by end-2020.

5)UBS expects oil prices to stay close to current levels at low $70s per barrel of Brent. While comfortable for oil exporters (i.e. Russia), this oil profile does not imply much relief for energy importers — in particular Turkey is unlikely to notably benefit as energy imports comprise both fuel and gas, where the latter is yet to fully reflect the past oil price gains. The disinflationary impact of oil prices could matter more in CE3, where the stronger EUR and some easing from the high base of H2 2018 could cause an outright y/y fall in retail petrol prices in H2-2019. In the cases of Turkey, South Africa and Russia, while the recent high y/y fuel inflation readings should come lower, petrol price inflation is unlikely to turn negative.

EMEA Economic Perspectives 9 November 2018

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Emerging EMEA Growth outlook: faltering in 2019, with some rebound in 2020

We expect GDP growth in our broadly defined Emerging EMEA region — consisting of the Czech Republic, Greece, Hungary, Kazakhstan, Poland, Russia, South Africa, Turkey, Ukraine and the United Arab Emirates — to slow further to 1.6% in 2019 from 2.6% in 2018. This is dominated by our call that Turkey will enter into a recession in 2019 (-0.8%). This is going to be the lowest growth for EM EMEA since 2015, when Russia fell into recession. On a more positive note, growth is likely to bounce back to 2.6% in 2020. However, by and large, we think EMEA's capacity to grow is likely to approach its potential by 2020. We think there are three broad trends that limit the scope for EMEA growth in the medium-term.

1)Growth in CE3 economies – the Czech Republic, Hungary and Poland

should have plateaued at 4.3% and 4.1% in 2017 and 2018

(unweighted average). Our forecasts imply a slowdown to 3.3-3.4% in the next two years. These countries have been one of the growth engines in EMEA. We have three reasons to believe that this growth performance is likely to ease in the coming years. First, the absorption of EU funds from

the 2014-2020 Budget framework should have had its peak impact on GDP growth in 2017/18 (reflecting a poor 2016) and the effect in the next two years is going to be smaller. Second, with the decelerating Eurozone GDP growth, CE3 ability to use exports to leverage growth higher is not there. Third, the acute tightness of the labour markets across the region will have to start to bite into companies' profitability, among other issues, and is thus likely to act as a break on growth.

2)We see two major economies, Russia and South Africa, struggling to get growth above 2% structurally. While for different reasons, both countries seem to suffer from sluggish investments, though with very different demographic profiles. Russia's GDP acceleration to 2.1% in 2020 is aided by the fading away of the VAT hike in 2019; we also assume government infrastructure investment plans start to make an impact. In South Africa's case we expect GDP growth in 2019/20 to benefit from some of the government's policies and also forecast some recovery in corporate and foreign investments.

3)Turkey may face difficult policy choices in terms of how best to manage the 2019 recession. We believe that — as our concern lies with private sector indebtedness — there could be trade-offs between the speed of the recognition of corporate issues (and bank NPLs) and the ability to generate a quick rebound after the recession. As we argue later we do not think that the current "growth model" could generate a strong bounce in 2020. As the recognition of bad debt is likely to spread over time we find it difficult to imagine that growth could go back to anywhere near the 6.8% average of 2010-2017.

Broader EMEA should produce a V-shaped growth trajectory in 2018-2020 due to the sharp slowdown in Turkey in 2019. However, growth in the stronger years is just likely to be around 2.6%

EMEA Economic Perspectives 9 November 2018

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Poland will continue to hold the "growth champion" title based on our forecast in all of the years during 2018-2020. Poland remains the sole country that should see its economy expanding at a rate in excess of 3.5%: we expect 3.8% in 2019 and 3.6% in 2020. In second place, we found a group of four countries. The UAE and Kazakhstan, two energy exporters, should grow around 3.0-3.5% in the next two years, followed by Hungary and the Czech Republic with growth rates of 3.1- 3.3%. These economies are still expected to grow at a solid pace in both years. GDP growth rates in Greece and Ukraine are likely to be not far behind with 2.4- 2.9% in the next two years. As we discussed above, Russia and South Africa have similar growth profiles, with GDP growth capped around 2% (1.5% in 2019 and 2.1% in 2020) — though with very different drivers. Turkey should be a clear outlier because of the 2019 recession (-0.8%), but we think the recovery in 2020 is also barely going to lift its GDP growth rate above Russia and South Africa's pace.

Poland remains the undisputed growth champion (3.8%, 3.6%). Kazakhstan, the UAE, the Czech Republic and Hungary could grow around 3-3.5%. Greece and Ukraine could reach growth of 2.4-2.9%, while Russia and South Africa will likely get to 2% growth in 2020. Turkey will likely slow the most in 2019 (-0.8%) with a recovery to 2.3% in 2020

Is this view out of consensus? On aggregate for EMEA, we are more pessimistic than the consensus growth forecasts for 2019 and more optimistic about 2020. However, the aggregate masks important trends when we look at individual countries or regions. We are more optimistic about the cyclical outlook in CE3 than the market consensus in both 2019-20: by 0.2-0.3pp in 2019 and by an even wider margin of 0.4-0.5pp in 2020. We are well ahead of consensus in Greece (0.5-1.1pps). In the case of Russia, we are a touch more pessimistic than consensus in 2019 (-0.1pp), but considerably more bullish for 2020 (+0.4pp). In Turkey, we are well below the consensus growth profile in both years (-1.0/- 0.4pp) – but the uncertainty about the economic downturn is very significant, and thus any forecast comes with a wide uncertainty band around it. Our growth forecasts in Ukraine and the UAE are also more conservative (-10bps to -40ps). In South Africa, we are more cautious than consensus for 2019 (-0.3pp) and in line in 2020. In Kazakhstan, we more a touch more positive in 2019 (+20bps), but pessimistic by the same margin for 2020 (-20bps).

Figure 2: EMEA real GDP forecasts

We are more cautious than consensus growth for 2019 – largely reflecting our Turkey view. However, we are more optimistic in 2020, driven by our more bullish growth forecasts for CE3 and Russia

 

 

New GDP forecasts, %

 

Consensus, %

 

UBS vs consensus

 

2017

2018F

2019F

2020F

2018F

2019F

2020F

2018F

2019F

2020F

 

 

 

 

 

 

 

 

 

 

 

Poland

4.6

4.7

3.8

3.6

4.7

3.6

3.2

0.0

0.2

0.4

Hungary

4.0

4.5

3.2

3.1

4.3

3.2

2.6

 

 

 

0.2

0.0

0.5

Czech Republic

 

 

 

 

 

 

 

 

 

 

4.3

3.1

3.3

3.1

3.1

3.0

2.6

0.0

0.3

0.5

Russia

1.5

1.6

1.5

2.1

1.8

1.6

1.7

 

 

 

-0.2

-0.1

0.4

Turkey

7.4

3.6

-0.8

2.3

3.2

0.2

2.7

 

 

 

0.4

-1.0

-0.4

South Africa

1.3

0.5

1.5

2.1

0.8

1.8

2.1

 

 

 

-0.3

-0.3

0.0

 

 

 

 

 

 

 

 

 

 

 

EMEA 6

3.6

2.6

1.4

2.5

2.6

1.7

2.3

0.0

-0.3

0.2

 

 

 

 

 

 

 

 

 

 

 

United Arab Emirates

0.8

2.5

3.0

3.5

2.5

3.3

3.6

0.0

-0.3

-0.1

Kazakhstan

4.1

3.8

3.5

3.1

3.7

3.3

3.3

 

 

 

0.1

0.2

-0.2

Ukraine

2.5

3.4

2.5

2.8

3.3

2.9

3.1

 

 

 

0.1

-0.4

-0.3

Greece

1.4

2.0

2.4

2.9

2.1

1.9

1.8

 

 

 

-0.1

0.5

1.1

 

 

 

 

 

 

 

 

 

 

 

EMEA – broader

3.3

2.6

1.6

2.6

2.6

1.9

2.4

0.0

-0.3

0.2

 

 

 

 

 

 

 

 

 

 

 

Source: Haver, UBS. Consensus is as per the 15 October 2018 Eastern Europe Consensus Forecasts and Bloomberg

EMEA Economic Perspectives 9 November 2018

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