The Global Currency Investor A Quarterly Analysis of 50 World ...

The Global Currency InvestorA Quarterly Analysis of 50 World CurrenciesOctober 2011Nikko Asset Management Europe LtdConfidential – not for redistribution. This material may not be duplicated, quoted, discussed or otherwise shared with anyone other than the addressee(s)without the consent of Nikko AM and must be read in conjunction with the “Important Information” statement on the last page.

IntroductionIn last quarter‟s currency outlook we highlighted how currency markets remained in theshadow of the 2008 global financial crisis. This became even more apparent in Q3 2011as the markets gyrated between „risk on‟ „risk off‟ trades, sometimes in a violent fashion.The backdrop of the European sovereign debt crisis, ongoing political gridlock in respectto US fiscal deficit reduction and signs of a slowdown in global economic growth were theprime causes of concern. However, within currency markets significant developmentsadded to the uncertainty: Firstly, various emerging countries became anxious about thestrength in their currencies and the long-term damage this might cause. Secondly, theSwiss National Bank surprised the markets with a strong commitment not to allow theSwiss Franc to rise above a certain level against the Euro. This drawing a line in thesand has been an unequivocal success to date. However, these developmentsheightened a growing belief that adhering to fully floating exchange rates when suchlarge short-term capital flows swirl around the global financial system can have seriousramifications for domestic economic prospects.There is little doubt the global economy remains in a transition period and this is causingstrains in currency markets in two ways: Firstly, the demand for yield or safety is pushingexchange rates to levels which can cause damage to the underlying domestic economy.Secondly, many emerging markets, although benefitting from strong macro fundamentals,do not have the breadth and depth within their capital markets to cope with inwardinvestment flows on such a large scale. For this reason, although we remain veryconstructive on the secular outlook for many emerging market currencies, recent eventsare a timely reminder they will remain susceptible to high volatility due to the lack ofbreadth and liquidity within many of their financial systems.This continues to make currency forecasting a hazardous occupation in the short-termand is why many currency strategies which are reliant on momentum/carry themes havestruggled during 2011. Overlay this dimension with the added hazard of politicalinterference and the outcome will remain one of uncertainty for some time to come.Stuart KinnersleyChief Investment OfficerNikko Asset Management Europe2Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Regional Summary: Asia & Emerging EuropeAsiaAsia's closely managed currencies outperformed emerging markets generally in Q3, as they followed thetrajectory of the US dollar higher, especially against central and eastern Europe. As usual, the morefreely floating of the region's currencies saw the biggest move, with the Korean won and Indian rupee thebig losers in the quarter. The Chinese yuan, meanwhile, was the only currency in the region to riseagainst the US dollar, though it too fell against the resurgent Japanese yen.Currency Performance Versus JPY in Q3 2011 %CNYHKDPHPVNDTHBIDRMYRTWDSGDINRKRWRecommendationsPositiveIndonesia (IDR)Philippines (PHP)NeutralChina (CNY)Hong Kong (HKD)Taiwan (TWD)Thailand (THB)NegativeKorea (KRW)Vietnam(VND)Malaysia (MYR)Singapore (SGD)India (INR)-15 -13 -11 -9 -7 -5 -3 -1 1N/AEmerging EuropeUnsurprisingly, the deterioration in sentiment over whether Greece would ever be able to avoid default hitEurope-related emerging markets badly in Q3, with the larger, more liquid currencies falling at least 15%against the yen as markets started the factor in some possiblility a disorderly break up in the Eurozone.While the move brought some currencies in the region back to more attractive levels, the ongoing risk ofa further deterioration in sentiment concerning Greece should ensure that investors only tentativelyreturn to the region.Currency Performance Versus JPY in Q3 2011 %UAHKZTILSISKLTLLVLBGNCZKRONTRYRUBHUFPLN-23 -18 -13 -8 -3 2RecommendationsPositiveIsrael (ILS)Czech Rep. (CZK)Turkey (TRY)NeutralIceland (ISK)Kazakhstan (KZD)Latvia (LVL)NegativeRussia (RUB)Ukraine (UAH)Romania (RON)Poland (PLN)Bulgaria (BGN)Lithuania (LTL)Hungary (HUF)6Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Currency Reports: G49Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 80Nov 82Sep 85Jul 88May 91Mar 94Jan 97Nov 99Sep 02Jul 05May 08Mar 11COUNTRY REPORT: USAOutlook: NegativeS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable0-0.25% 0.37% 0.95% 1.92%Economy and Market OutlookData suggests that the US ran into a soft spot in Q2. Although both the bounce back in autoproduction and a boost from trade will be beneficial for Q3, the blow to confidence from theEuropean crisis and political brinksmanship in the US will likely weigh on sentiment for some timeyet and slow growth for some quarters yet. In the medium term fiscal tightening will create furtherheadwinds and this will prolong the period for which the economy will be operating below capacity.Employment growth has so far proven disappointing and these factors are unlikely to change this.The Federal Reserve thus remains extremely accommodative and is planning its next stage ofQuantitative Easing in the form of 'operation twist' where it will buy longer dated bonds to flatten theyield curve. There are some positive signs however with corporate balance sheets now extremelyhealthy and many companies sitting on large cash balances and debt with now long maturityprofiles. Consumer assets have been slowly rebuilding and although still well off their pre crisishighs are also now well above the lows. Before the recent turmoil survey data suggested that manycorporates were planning to increase both employment and investment and if sentiment stabilisesthese plans could well start to progress once again. The US dollar has remained volatile as focusflips between the US's extremely accommodative policies, problems in Europe and the dollar's safehaven status in times of crisis. The recent strong rally in the dollar has made us more cautioushowever and we have moved our outlook to negative.120115110105100959085807570USD/JPYUSD/EUR (RHS)1.61.51.41.31.21.11.0160140120100806040200Consumer Confidence2010 2011 (f) 2012 (f)Real Growth (%) 3.0 1.5 1.8CPI (%)* 1.7 2.5 0.9Current account (% GDP) -3.2 -3.1 -2.1Fiscal balance (% GDP) -10.3 -9.6 -7.9Government Debt (% GDP) 68.3 72.6 78.4Daily volumesUSDPoliticsPresident: Barack ObamaNext election: 2012The Democratic Party and Republican Partyare in massive conflict about the US budgetdeficit and debt levels with the 'Tea Party'members of the Republican Party adding asignificant wildcard factor to US politics.Economic legislation is now gridlocked withan increasingly polarised position betweenthe parties.FX Reserves*End of Year48.73bnSource: IMF, S&P, Bloomberg10Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Dec 00Dec 02Dec 04Dec 06Dec 08Dec 10COUNTRY REPORT: EurozoneOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable1.50% 1.55% 1.17% 1.89%Economy and Market OutlookAs with most major economies, economic data has recently pointed to moderation after the positiveperformance after exiting the financial crisis. Business surveys have showed a broad downturn withretail sales growth slowing. Consumption may also remain muted as consumer confidence remainsunder pressure given events in the periphery of the eurozone. With EU officials admitting therecovery remains fragile and sovereign debt levels are rising, calls have grown for action from thecentral bank. Further tightening now looks unlikely in the months ahead but calls for an imminentinterest rate cut may be misplaced. A number have called for a cut in October, the last meetingbefore the new President - Mario Draghi from the Bank of Italy - to avoid a subsequent move beingseen as politicised. With the last increase in July the ECB is likely to concentrate on liquiditymeasures with a re-imposition of the twelve month repo and covered bond purchases alreadymooted. Economic sentiment has clearly been impacted by Greek woes but with export demandremaining resilient and the trade weighted euro at the lower end of the range of recent years, thecentral bank will be wary that an improvement in the external environment could benefit theeurozone and again raise the threat of second round inflation pressures. With the situation inGreece pivotal, the health of the banking sector and therefore liquidity measures are likely to be theprimary focus of the central bank. Ratification of the expanded Stability Mechanism is progressingand looks likely to occur by mid-October allowing continued support for Greece. Further austeritymeasures have been enacted in Greece - and other countries - and the political will to maintain thecurrent eurozone and avoid default continues.1.551.501.451.401.351.301.251.201.15EUR/USDEUR/JPY (RHS)1404.0135130 3.01252.0120115 1.01100.0105100 -1.0CPI y/y %Unemployment Rate % (rhs)10.510.09.59.08.58.07.57.02010 2011 (f) 2012 (f)Real Growth (%) 1.8 1.7 1.1CPI (%)* 1.6 2.6 1.8Current account (% GDP) -0.5 -0.4 -0.2Fiscal balance (% GDP) -6.0 -4.3 -3.5Government Debt (% GDP) 85.1 88.7 90.5FX Reserves*End of Year213.8bnSource: Bloomberg, CitigroupPoliticsECB President: Jean-Claude TrichetNext election: n/aDespite fears spreading to other peripheraleconomies, the acceleration of a balancedbudget in Italy and measures in Greecesuch as a property tax collected via utilitybills shows the political commitment to fiscalconsolidation. This will be positive in themedium term but impacting short termgrowth in peripheral economies. Politiciansseem united in the belief that default wouldbring logistical problems, contagion andpotentially greater instability.11Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 09Jan 10Jan 11COUNTRY REPORT: JapanOutlook: NegativeS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AA- Negative Aa2 Negative0.10% 0.33% 0.34% 1.00%Economy and Interest Rate OutlookJapan's economy is still struggling to overcome the effects of the earthquake, tsunami and nuclearcrisis that hit the country in March. Though the worst affected prefectures account for only 4% ofJapan's GDP, the nation-wide malaise that followed the disaster could be somewhat more significantfor the long term economic outlook. For a start, the costs of rebuilding are forcing the country toaddress its fiscal problems, with new PM Noda already falling out of favour for attempting to risetaxes rather then increase debt to pay for reconstruction. The uncertain tax outlook will not beconducive for consumer spending, though certainly the re-build of the coastal towns and catch-up byfirms unable to export for months while the country's transport infrastructure was in chaos and powerwas being rationed. Inflation has managed to stay in positive territory for two months in a row,though this is expected to ease back over the course of time into mild deflation. Certainly, the rise ofthe yen post-crisis wont help in generating a consistently inflationary environment. The Bank ofJapan instituted a comprehensive asset purchase and liquidity easing programme in August, andhas returned periodically to the FX market in order to control the yen when appreciation pressuresrise. The Bank's actions, which suggest the 75 level in USD/ JPY is being seen as a 'line in thesand', do appear to be working for now, though a sharp rise in risk aversion from here would causerepatriations that would swamp the Bank's efforts to control the currency.105.0100.095.0USD/JPYEUR/JPY (RHS)1401300.50.0-0.5National CPI y/y %90.0120-1.085.0110-1.580.075.0100-2.0-2.570.090-3.02010 2011 (f) 2012 (f)Real Growth (%) 4.0 -0.4 2.5CPI (%)* -0.7 -0.3 -0.2Current account (% GDP) 3.6 2.1 2.6Fiscal balance (% GDP) -7.7 -9.0 -8.2Government Debt (% GDP) 111.6 121.7 129.8Daily volumesFX Reserves*End of YearSpot FXUSDN/aN/a1123 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Yoshihiko NodaNext election: 2013Noda became the country's sixth PrimeMinister in five years in early September afterhis predecessor, Naoto Kan, stood down in theface of harsh criticism of the management ofthe disaster. Noda's popularity appears to befollowing the same path of former incumbents,with opinion polls showing diminishing supportfor him after just one month in office. Noda hasstated an intention to raise taxes to pay forreconstruction of the north east of the country,something that is understandably unpopular.12Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10COUNTRY REPORT: UKOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable0.50% 0.95% 1.37% 2.43%Economy and Market OutlookThe UK economy has recently suffered from moderation in the global environment at a time of fiscaltightening. Growth forecasts are being downgraded as consumer confidence and the housingmarket remain muted and business surveys have retreated from the cyclical highs. With thenecessary fiscal tightening, the recovery is likely to remain sub-par. Export orders have declinedfrom the highs despite the currency, on a trade-weighted basis, having shown little improvementsince early 2009 after the sharp decline during the financial crisis. The level of the currency hasunderpinned growth and should continue to be supportive for export growth but muted domesticdemand and declining investment levels a strong recovery remains elusive. Medium term debt anddeficit dynamics should be positive given the fiscal tightening put in place by the currentgovernment but is likely to mean the unemployment rate remains elevated as the public sectorworkforce declines. This has suppressed consumer confidence leaving consumption muted and hasleft businesses cautious despite an improvement in liquidity levels. Rising inflation has caused realincome levels to fall but the central bank remains unlikely to move towards tighter policy in the nearfuture given the current outlook and an expectation that inflation moderates as we move through2012. Indeed speculation has arisen that quantitative easing may be extended to support theeconomy. Therefore with a period of sub-trend growth and easy monetary policy sterling is likely toremain under pressure on a trade-weighted basis. If tensions in the eurozone subside, allowing animprovement in confidence supporting global demand the UK may benefit through increased exportdemand supporting the currency in the medium term.0.960.940.920.900.880.860.840.820.80EUR/ GBPGBP/JPY (RHS)1651601551501451401351301251201156.05.04.03.02.01.00.0Harmonised CPI y/y %BoE Target Rate %2010 2011 (f) 2012 (f)Real Growth (%) 1.3 1.1 1.7CPI (%)* 3.3 4.4 2.6Current account (% GDP) -3.2 -2.0 -1.5Fiscal balance (% GDP) -10.2 -8.1 -6.2Government Debt (% GDP) 75.5 81.0 84.9FX Reserves*End of Year58.6bnSource: Bloomberg, CitigroupPoliticsPrime Minister: David CameronNext Parliamentary election: May 2015Unsurprisingly for the point in the electioncycle, the Labour party has maintained alead in opinion polls. However, the coalitiongovernment remains committed to fiscalreform and few cracks have yet to appearthreatening the fixed term. The small gap inpolls to the Labour party reflects the lack ofcredible policies of the opposition given theacceptance that finances could not beallowed to deteriorate unchecked.13Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Currency Reports: Asia14Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Sep 05May 06Jan 07Sep 07May 08Jan 09Sep 09May 10Jan 11COUNTRY REPORT: AustraliaOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable4.75% 4.84% 3.79% 4.22%Economy and Market OutlookSentiment in Australia has shifted drastically with the change in global sentiment and the robusteconomic outlook has shifted to concerns that global weakness would feed into commodity pricesand weaker Chinese growth. Markets are currently pricing in interest rate cuts in Australia but thisscenario looks extremely unlikely unless the global economy does move back into recession. TheAustralian dollar has fallen back sharply and this will already be of some concern for the RBA givenalready elevated inflation expectations. The labour market remains tight but with some structuralchanges as the high level of the currency sees job losses in the manufacturing sector but continuedincreases in commodity sectors making the economy ever more reliant on China in the longer term.Skills shortages remain a problem and this is feeding into rising wages. Given these concernscounterbalancing external weakness it is likely that the RBA will now keep interest rates unchangedfor the rest of the year and move to a more neutral outlook. There remains potential for higherinterest rates in 2012 if expectations for global growth recover, though. The correction in theAustralian dollar appears to have removed some of the large investor position in the currency andprovides a more constructive positioning picture. We remain positive but with the caveat that if thenegative sentiment towards global growth gets more traction the Australian dollar could well fallfurther from current levels.1.21.11.00.90.80.70.60.5USD/AUDJPY/AUD13012011010090807060506.56.05.55.04.54.03.5Unemployment Rate %2010 2011 (f) 2012 (f)Real Growth (%) 2.7 1.8 3.3CPI (%)* 2.7 3.7 3.8Current account (% GDP) -2.7 -2.2 -4.7Fiscal balance (% GDP) -4.9 -3.9 -1.9Government Debt (% GDP) 4.4 7.7 9.4Daily volumesUSDPoliticsPrime Minister: Julia GillardNext election: 2014Prime Minister Julia Gillard is coming underincreasing pressure with her handling ofchanges to the Migration Act the latestcontroversial issue. Speculation is now rifethat she will be faced with a leadershipchallenge in coming months with someparty members wanting a return of KevinRudd.FX Reserves*End of Year28.49bnSource: IMF, S&P, Bloomberg15Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: ChinaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AA- Stable Aa3 Positive6.56% 3.13% 3.71% 3.86%Economy and Market OutlookChina‟s economic growth slowed marginally to 9.5% y/y in Q2 (from 9.7% in Q1) on robust industrialexpansion. The economy has shown more signs of policy-led moderation in Q3. Fixed assetinvestment grew by 23% y/y in August, down from 25% in July. Industrial production growth alsofell to 13.5% y/y in the month from 14% in July. In addition, property markets in most majorChinese cities have started to cool down. The external sector has been resilient so far this yearand become more balanced as the current account surplus narrowed. However, merchandiseexports will face a more challenging environment in the coming months as economic activity in theEurozone and the US remain weak. On the other hand, CPI stayed at high level at 6.2% y/y inAugust, down marginally from 6.5% in July, due to elevated pork prices. As controlling inflationremains top priority on the government's agenda, the Central Bank has raised the policy rate againand also did the same for the reserve requirement ratio - the amount of cash that commercial banksare required to deposit with the central bank - to manage ample liquidity in the market. Thegovernment will stand firm on the current tightening stance until inflation is clearly under control.The Chinese Yuan (CNY) rose moderately against the US dollar in Q3 as the economy stayed ontrack and current account surplus remained sizeable. The Central Bank has shown more flexibilitytoward currency appreciation in response to imported inflation.7.8USD/ CNYJPY/ CNY (RHS)0.09010.08.0CPI ex food y/y %CPI y/y %7.30.0806.04.02.06.80.0700.0-2.06.30.060-4.02010 2011 (f) 2012 (f)Real Growth (%) 10.3 9.0 8.3CPI (%)* 4.6 4.0 2.8Current account (% GDP) 5.2 4.4 3.7Fiscal balance (% GDP) -1.7 -1.5 -2.3Government Debt (% GDP) 20.3 19.6 18.7Daily volumesSpot FXUSD3.5 bnPoliticsPresident: Hu JintaoNext election: 2012China's relationship with the Philippinesremains difficult as the dispute over theSouth China Sea continues, despite a briefvisit by President Benigno Aquino to Chinain September. Philippines said it wouldwork with Japan to seek to ensure free andsafe passage in the area.FX Reserves*End of Year3,197.49bnSource: IMF, S&P, Bloomberg, Deutsche Bank16Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: Hong KongOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sept-2011]Rating (LC) AAA Stable Aa1 Positive0.50% 0.28% 0.76% 1.25%Economy and Market OutlookHong Kong‟s GDP growth slowed to 5.1% y/y in Q2 on weakened merchandise exports andmoderating services exports. So far, the job market has remained buoyant in Q3 as theunemployment rate eased further to 3.2% in June-August period. Retail sales also inched up by22.4% y/y in July, from 22.2% in June. In addition, the "HKD6,000 Scheme", the government's oneofffiscal relief to give every adult permanent resident HKD6,000, will be supportive of privateconsumption in the near term. However, the economy has seen signs of global headwinds asexternal demand slows. August export growth dropped to 6.8% y/y, from 9.3% in July, asconsumption data in the US remained soft and China is experiencing policy-led moderation.Inflation rose quickly in Q3 as housing and food prices rose fast. CPI came in at a surprisingly high7.9% y/y in July and remained at 5.7% in August, the strongest level for more than 3 years. AsHong Kong imports most of its goods from China, which itself is fighting inflation, and the HongKong dollar (HKD) maintains gradual depreciation against CNY, inflationary pressure will remainbuoyant in the short term.Hong Kong maintains a huge current account surplus as service exports remain strong,supplemented by substantial FX and fiscal reserves. The currency peg continues to serve as anessential source of stability, so the Hong Kong Monetary Authority (HKMA) has repeated itsdetermination to defend the mechanism.7.8USD/ HKD 12m forwardJPY/ HKD (RHS)10.08.06.0Unemployment % CPI y/y %9.04.07.88.02.00.07.0-2.07.76.0-4.02010 2011 (f) 2012 (f)Real Growth (%) 6.8 6.8 5.5CPI (%)* 2.9 4.1 4.8Current account (% GDP) 6.2 4.7 3.8Fiscal balance (% GDP) 4.2 2.9 3.0Government Debt (% GDP) 0.6 1.1 1.7Daily volumesSpot FXUSD279.40bnPoliticsChief Executive: Donald TsangNext election: 2012Hong Kong's Chief Secretary Henry TangYing Yen has resigned to consider runningin elections when the current ChiefExecutive's five-year term ends next June.He faces competition from Leung Chunying,who will also stand down from Tsang'sadvisory body. It is believed that bothcandidates are acceptable for China.FX Reserves*End of Year335.63bnSource: IMF, S&P, Bloomberg, Deutsche Bank17Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: IndiaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10yRating (LC) BBB- Positive Ba1 Stable[30-Sep-2011]6.50% 8.10% 8.38% 8.35%Economy and Market OutlookIndia's economy is slowing at a fairly sedate pace, with limited action from the Reserve Bank of Indiathus far being inadequate to deal with the country's inflation problem. Economic growth was 7.7%year-on-year in Q2 2011, only slightly weaker than the previous quarter. With India relativelyinsulated from the wider global economy, the weakness being seen in the US and Europe currentlyshould have only a modest effect on Indian economic growth. Inflation has been an ongoing issue;driven by strong domestic growth, and by supply-side problems in food and fuel, wholesale priceshave consistently stuck around the 10% y/y mark throughout 2011. The Bank is trying to get to gripswith the problem, having continued to raise main policy rates in recent months despite clear signs ofa weakening global economy. The Bank's actions are showing through in weaker credit growth,which will further be reflected in weaker economic growth and inflation going forward. Fiscal policy isfar less impressive, with the government pointedly failing to take advantage of the strong economy topush through with reforms. As a result, India's budget deficit remains a yawning hole in the country'scredibility. Given the lack of foreign investment in the domestic bond market, this is not a hugeproblem for government finances, but India's sloppy fiscal record underscores concerns thatpoliticians in the country are far too relaxed about the country's prospects, and as a result, the Indianrupee continues to compare poorly as a destination for EM investors.55.0USD/INRJPY/INR (LHS)0.6525.020.0Wholesale price fuel & light y/y %50.015.010.00.555.045.00.0-5.0-10.040.00.45-15.02010 2011 (f) 2012 (f)Real Growth (%) 8.0 8.5 7.5CPI (%)* 10.4 9.7 6.5Current account (% GDP) -2.8 -2.6 -2.5Fiscal balance (% GDP) -8.2 -8.3 -7.3Government Debt (% GDP) 68.9 65.7 64.7Daily volumesFX Reserves*End of YearSpot FXUSD4-6 bn750 mln-1.2 bn316 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Manmohan SinghNext election: 2014The UPA coalition has proven disappointingin its second term, failing to make anysubstantive reforms and undermined byaccusations of corruption. Internationally,the country is faring somewhat better, withthe now fairly clear evidence of Pakistanisponsorship of terrorism in Afghanistan andIndia helping to cement India-US relations.18Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: IndonesiaOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BB+ Stable Ba1 Stable6.75% 6.08% 6.37% 7.07%Economy and Market OutlookIndonesia's economy continues to chart its own course, with economic growth looking verycomfortable at 6.5% in Q2 (the same pace as the previous quarter) and inflation, by Indonesianstandards, quite low at under 5%. The domestic economy, largely shielded from the externalenvironment, has retained a momentum as the country slowly develops from a very low startingpoint. The problem of persistent power outages has been solved, which is a fillip for economicgrowth, while a fairly healthy banking sector continues to offer credit to corporates. Further reformwould be welcome, and significantly raise Indonesia's potential growth toward the 10% rate, but thefailure of the President to push on with his reform agenda in his second term has been a hugedisappointment. Nevertheless, the macro environment is positive, and the recent fall in CPI below5% is welcome - taking it to just below the centre of Bank Indonesia's 4-6% target. Shouldinflationary pressures remain subdued, scope will open up for Bank Indonesia to cut policy ratesmodestly in 2012.Indonesia still has a relatively tightly controlled capital account, and lack of liquidity in its domesticmarkets leads to occasionally sharp moves in the Indonesian rupiah (IDR) when risk appetite falls.This occurred in September 2011, when worsening confidence led to a flight to safety from EM, anda fall of close to 10% in USD/ IDR. Nevertheless, Bank Indonesia has plenty of firepower to supportthe currency, and Indonesia's positive fundamentals mean that it will remain an attractive EMinvestment.13,00012,000USD/IDRJPY/IDR (RHS)14013014.012.010.0CPI inflation y/y %11,0001208.010,0001106.09,0001004.02.08,000900.02010 2011 (f) 2012 (f)Real Growth (%) 6.1 6.5 6.2CPI (%)* 7.0 5.0 5.5Current account (% GDP) 5.6 3.0 3.5Fiscal balance (% GDP) -0.6 -1.5 -1.3Government Debt (% GDP) 26 24.2 22Daily volumesFX Reserves*End of YearSpot FXUSD700 mn386 mn125 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Bambang YodhoyonoNext election: 2014Yodhoyono was returned to office with alarge majority in the 2009 Presidentialelection, providing him with a strongmandate to push on with economic reformand elimination of corruption. However, hissecond term has seen increased tensionswithin the coalition, undermining thePresident's desire for further changes.Furthermore, the DP party of Yodhoyonohas itself become mired in a corruptionscandal, further weakening the reform drive.19Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: MalaysiaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) A Stable A3 Stable3.00% 3.26% 3.41% 3.71%Economy and Interest Rate OutlookMalaysia‟s economy, while slowing in the face of a weaker global environment, remainsfundamentally sound. Growth of 4.0% y/y in Q2 2011 was the weakest so far in this cycle, drivenmainly by exports. However, there are some signs that the economy is slowly shifting away fromdependence on exports to domestic demand, and the government's laudable EconomicTransformation Programme (FTP) is a key driver of this (the FTP seeks to place Malaysia amongstthe group of high-tech, value-added economies such as South Korea and Taiwan) . Limited budgetgiveaways, such as a half-month bonus for civil service staff, should help keep the domesticeconomy ticking over in the months ahead (as well as indicating an impending election, see below).With inflation largely now under control, the central bank, Bank Negara Malaysia, is expected tohold the policy rate at 3% for some time.With Malaysia's reform programme having made significant gains at a time when other emergingeconomies have been content to free ride on positive sentiment, the long term outlook for the ringgit(MYR) is positive. That said, shorter term the authorities will maintain tight control on the currencyas the country for now remains wedded to the need to maintain export competitiveness.3.83.6USD/MYRJPY/MYR (RHS)4.54.020.015.010.0Industrial production y/y %3.43.23.55.00.0-5.03.03.0-10.0-15.02.82.5-20.02010 2011 (f) 2012 (f)Real Growth (%) 7.2 4.7 5.5CPI (%)* 2.1 3.0 2.0Current account (% GDP) 11.5 11.7 8.8Fiscal balance (% GDP) -5.6 -4.3 -3.9Government Debt (% GDP) 53.1 51.9 50.4Daily volumesFX Reserves*End of YearSpot FXUSD500-800 mn300 mn138 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Najib RazakNext election: 2013The Sarawak by-election returned the BNcoalition back to state government, though afall in its share of the vote meant that therewas little celebration. The victory increases atthe margins the chances that the GeneralElection will take place in 2011 as thegovernment does not want to miss theopportunity to capitalise on its relatively strongpolling position, thanks at least in part toprogress on reform.20Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Mar 05Nov 05Jul 06Mar 07Nov 07Jul 08Mar 09Nov 09Jul 10Mar 11COUNTRY REPORT: New ZealandOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable2.50% 2.83% 3.96% 4.42%Economy and Market OutlookThe Reserve Bank of New Zealand (RBNZ) decided to leave its official cash rate unchanged at2.50% at the September meeting and is now likely to keep interest rates at that level for some timegiven concerns about the global environment. Governor Alan Bollard has stated that the centralbank is 'comfortable' with the current policy rate. Q2 GDP data showed the economy growing by1.5% y/y but with growth at a minimal +0.1% in Q2 itself, well below forecasts. Growth wasnegatively impacted by the construction industry which contracted by 4.3%, as well as a drag fromnet exports. These factors should reverse in the second half of the year and start to contribute toGDP once again as the rebuilding of earthquake struck areas gathers pace. The central bankcontinues to believe that the currency is overvalued at current levels as it has tracked the Australiandollar higher but has not had the same terms of trade improvement that Australia has experiencedgiven it‟s soft commodity export sector. Earthquake related issues still cloud the picture for theRBNZ as factors like rising rents due to a short term displacement of families into rentedaccommodation after their homes were destroyed are boosting inflation but will drop out as homesare rebuilt and the demand for rental units falls again. On balance and given the global outlook andhigh level of the currency the RBNZ is very likely to take a pro growth stance and be cautious aboutraising interest rates until well into 2012. We are neutral on the currency based on it's strongcorrelation with the Australian dollar.1.00.90.80.70.60.50.4USD/NZDJPY/NZD1201101009080706050403020.015.010.05.00.0-5.0-10.0-15.0House Prices y/y %2010 2011 (f) 2012 (f)Real Growth (%) 1.7 2.0 3.8CPI (%)* 4.0 0.8 5.0Current account (% GDP) -4.1 -3.9 -5.6Fiscal balance (% GDP) -5.8 -5.9 -3.1Government Debt (% GDP) 3.3 7.8 11.0Daily volumesSpot FXUSD9-10bnPoliticsPrime Minister: John KeyNext election: 2011Despite the election later in the year thegovernment have passed an austeritybudget with NZD5bn in spending cuts.Recent opinion polls suggest strong supportfor the ruling New Zealand National Partybutwith support dipping from the highs.FX Reserves*End of Year20.08bnSource: IMF, S&P, Bloomberg, Barclays21Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: PhilippinesOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BB+ Stable Ba2 Stable4.50% 3.10% 5.25% 6.56%Economy and Interest Rate OutlookThe Philippine economy remains in fairly healthy shape. While Q2 GDP growth was disappointingat 0.6% q/q (2.4% annualised) in Q2 2011, but growth remains fundamentally sound, with domesticgrowth underpinned by fairly robust credit growth and strong overseas worker remittances, whichhave helped to stabilise the balance of payment position. The public finances have also beenbrought under control, as President Aquino has stamped down on government spending thatattracts corruption. This is having a very positive impact on the headline budgetary figures though itmay at the margins impact growth and put a brake on needed public sector investment. Debtmanagement is improving too, with a debt swap of peso-denominated bonds into longer maturitiesimproving the country's debt profile, while new debt issuance is increasingly in peso rather thanforeign currency, reflecting increased investor confidence in the currency. The sustainedimprovement in finances has opened the door to ratings upgrades, with both Fitch and Moody'sraising the country's rating in June, leaving it one notch below investment grade.CPI inflation recently breached Bangko Sentral Philipinas' 5% target ceiling, but the Bank isconfident that inflation will fall. That, in addition to concerns that higher domestic rates would promptcarry-related inflows, has kept the Bank from raising the policy rate for some months, preferringinstead to tighten policy via commercial bank's reserve requirements.50USD/PHP0.6012.0CPI inflation y/y %48JPY/PHP (RHS)10.0460.558.06.0440.504.0422.0400.450.02010 2011 (f) 2012 (f)Real Growth (%) 7.6 4.5 4.8CPI (%)* 3.1 4.8 3.2Current account (% GDP) 4.2 3.4 3.0Fiscal balance (% GDP) -3.5 -2.0 -2.5Government Debt (% GDP) 63.3 58.0 55.3Daily volumesFX Reserves*End of YearSpot FXUSD550 mn200-250 mn76.0 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Benigno Aquino IIINext election: 2016Aquino won a resounding victory in the 2010Presidential election on a pledge to root outcorruption. One of his first targets,ex-President Arroyo, has so far escaped anycharges, and will do her best to try toundermine the current President whileprosecutors pursue her. Aquino's policies havetaken a decidedly populist bent, part of whichis a move away from the previousAdministrations 'strong peso' policy.22Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: SingaporeOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable0.18% 0.22% 0.53% 1.62%Economy and Interest Rate OutlookWith an economy that is leveraged into trade, it is no surprise that the slowdown the globaleconomy is impacting Singapore's economic outlook. The sharp slowdown seen in in non-oilexports (see chart) in Singapore is one of the clearest indicators of the wider global malaise. Thedomestic economy remains fairly healthy, with large construction projects still ongoing and propertyprices still rising (albeit at a slowing pace), allowing the economy to expand at the lower end of the5-7% government forecast for 2011. Inflation has remained elevated , posting a new high of 5.7%y/y in August , with a rise in the cost of electricity and a hike in the price of car registration (anintended policy to limit car ownership) key contributors to the trend. Core inflation, however,remains well contained, allowing for more dovish policy guidance from the Monetary Authority ofSingapore (MAS). The Bank currently maintains an appreciation bias in the Singapore dollar'snominal effective exchange rate (SGD NEER) basket, but the market suspects that the bias will beweakened or abandoned altogether in coming months as the weakness in Singapore's exportsbecomes more evident.1.61.5USD/SGDJPY/SGD (RHS)857540.030.020.010.0Non-oil exports y/y %1.40.01.365-10.0-20.0-30.01.255-40.02010 2011 (f) 2012 (f)Real Growth (%) 14.5 5.5 4.0CPI (%)* 4.6 4.7 2.5Current account (% GDP) 22.2 17.4 16.7Fiscal balance (% GDP) -0.1 0.0 0.1Government Debt (% GDP) 106.0 107.0 109.0Daily volumesFX Reserves*End of YearSpot FXUSD3bnN/A249 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Lee Hsien LoongNext election: 2011The general election saw another win for thePAP, but the rise to 40% in the vote foropposition parties showed that the country isslowly moving away from one-party rule.Nevertheless, with 81 of the 87 seats inParliament still under the PAP's control, and aban on right of assembly, the country still issome way off of functioning as a full-bloodeddemocracy.23Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: South KoreaOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) A+ Stable A1 Stable3.25% 3.32% 4.03% 4.33%Economy and Interest Rate OutlookThe South Korean economy remains in good shape, despite the external slowdown. The economygrew by 0.9% quarter-on-quarter in Q2 '11, raising some concerns about the outlook, butnevertheless still solid. Export growth has slowed, but given the boost to Korea's exportcompetitiveness from the weaker won (which is close to the lows against the yen seen immediatelyfollowing Lehman) the country's exporters will continue to claim strong market share in thetechnology sector. Meanwhile the domestic economy shows little sign of being affected by theexternal environment, with luxury consumer goods sectors booming and the property marketrecovering strongly after the government cut taxes on homes. Inflation, as a result, has beensteadily creeping upward, and now poses something of a headache for the Bank of Korea (BoK),which in the face of the problems being seen in the US and Europe, does not want to risk tippingthe domestic economy into a significant slowdown. Given that, and given the fact that import pricesare a significant contributor to the overall inflationary picture, the Bank may decide to becometougher on management of the won. Doing so would not imperil the export sector, which willregardless continue to benefit from the cheapness of the currency (which is by far the weakest inthe region since the onset of the crisis in late 2007) while a stronger currency would empowerdomestic consumers and limit inflation. atthe same time.1,500USD/KRWJPY/KRW (RHS)16.050.040.030.0Industrial production y/y %1,30013.020.010.01,10010.00.0-10.0-20.09007.0-30.02010 2011 (f) 2012 (f)Real Growth (%) 6.2 4.0 3.5CPI (%)* 3.6 4.0 2.5Current account (% GDP) 2.8 1.9 1.7Fiscal balance (% GDP) 1.3 0.5 0.9Government Debt (% GDP) 31.9 31.0 31.0Daily volumesFX Reserves*End of YearSpot FXUSD6bn865.4mn313 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Lee Myung BakNext Presidential election: 2013Tensions between the North and South aresimmering following the confrontations seenearlier in the year, and there is tentativeprogress on restarting nuclear talks. WithParliamentary elections due in April 2012 andthe Presidential election in 2013, domesticpolitics will be the main focus of attention inthe country next year, though.24Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: TaiwanOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AA- Stable Aa3 Stable1.88% 0.90% 0.97% 1.27%Economy and Market OutlookTaiwan's GDP expanded by 5.02% y/y (revised) in Q2, down from 6.16% in Q1, as investment felland private consumption growth moderated. Taiwan's externally driven economy faced risingheadwinds in Q3 by weak economic activity in the US and the turmoil in the Eurozone, and thepolicy-driven slowdown in mainland China. Export growth moderated to 7.2% y/y in August, from17.6% in July. In addition, export orders rose by 5.3% y/y in August, down sharply from 11.1% inJuly, led by contraction in electrical machinery. This weaker-than-expected order book signals achallenging outlook in 2012. The unemployment rate still stayed low at 4.36% y/y in August, butmay rise as uncertainties grow. So far, inflation has been well behaved, with CPI at a muted 1.3%y/y in August, and the Central Bank has turned to a dovish stance to hold policy rate unchanged atits meeting in September on the back of rising global growth uncertainties, growing market volatility,and weak market confidence.The Taiwan Dollar (TWD) weakened substantially in September as risk appetite deteriorated, withoreign investors withdrawing more than US$10bn from the equity market, while the Central Banksoftened its monetary stance. The currency will remain under pressure in the short term if globaleconomic expectations worsen, though on a relative value basis the tight management of thecurrency would still mean itwould outperform regionally.3534333231302928USD/TWDTWD/ JPY (RHS)3.83.63.43.23.02.82.62.47.06.05.04.03.02.01.00.0-1.0-2.0-3.0CPI y/y %2010 2011 (f) 2012 (f)Real Growth (%) 10.8 4.5 5.0CPI (%)* 1.2 2.3 1.6Current account (% GDP) 9.4 8.0 8.0Fiscal balance (% GDP) -3.2 -2.5 -2.0Government Debt (% GDP) 40.3 41.6 42.9Daily volumesSpot FXUSD800mPoliticsPresident: Ma Ying-jeouNext election: 2012China-friendly veteran Taiwanese politicianJames Soong announced that he wouldalso run in the coming presidential election.However, his support rating is far behindincumbent President Ma Ying-Jeou andmain opposition leader Tsai Ing-wen.FX Reserves*End of Year400.29bnSource: IMF, S&P, Bloomberg, Deutsche Bank25Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: ThailandOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) A- Stable Baa1 Stable3.50% 3.60% 3.52% 3.65%Economy and Interest Rate OutlookThailand‟s economy has slowed somewhat in recent months, with the inevitable maturing of thebusiness cycle and the tsunami in Japan (whose companies have significant manufacturing plantoutsourced to Thailand) counting against economic growth. However, policy remains relativelyexpansionary, with the new Puea Thai government, under Yingluck Shinawatra, working hard todeliver on election promises (see below). Expansionary fiscal policy, combined with still relativelylow policy interest rates is helping the economy to see out a post-boom dip in 2011, while growthshould pick up next year. The Bank of Thailand edged interest rates up in a gradual mannerthrough much of this year in order to combat inflation, which accelerated to 4% y/y through thesummer. Inflation will remain elevated thanks to base effects for the remainder of this year, butshould ease of next. However, there remains some grounds for uncertainty given that thegovernment plans to increase subsidies for some products and eliminate them for others, as well asraising the minimum wage. This uncertainty is likely to keep the Bank of Thailand watchful for theforeseeable future.The Thai baht has been an underperformer regionally in 2011, though in recent weeks it hasperformed better, as it is closely managed against the now-resurgent US dollar. A continuation ofmarket turbulence would certainly be a positive for the baht against more volatile regionalcurrencies such as the Indonesian rupiah or Philippine peso.393735USD/THBJPY/THB (RHS)0.500.450.4010.08.06.04.0CPI inflation y/y %330.352.031290.300.250.0-2.0-4.0270.20-6.02010 2011 (f) 2012 (f)Real Growth (%) 7.8 3.6 5.0CPI (%)* 3.0 4.0 3.5Current account (% GDP) 4.6 4.2 4.0Fiscal balance (% GDP) -2.0 -2.9 -2.0Government Debt (% GDP) 28.3 28.0 26.4Daily volumesFX Reserves*End of YearSpot FXUSD450 mn300 mn181.9 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Yingluck ShinawatraNext election: 2015Yingluck Shinawatra, sister of ex-PMThaksin, came from a relative unknown toclinch a decisive victory in elections at theend of June. She has immediately set towork on realising populist promises likereducing fuel costs, providing medical coverfor the poor and free laptops for children.However, elements of the losing DP partyremain adamant that they will take thegovernment to court, arguing that Thanksin(who is banned from politics) played anactive role in the election campaign.26Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: VietnamOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BB Stable B1 Stable9.00% 13.60% 12.41% 12.67%Economy and Interest Rate OutlookPolicymakers in Vietnam have had a difficult time in trying to promote strong economic growthwithout prompting inflationary pressures. Economic growth has slowed under the weight of tightercredit conditions, which prompted the new Governor of the State Bank of Vietnam to cut the reverserepo rate by 1% in August . The Bank at the same time raised the US dollar reserve requirement todiscourage dollarisation of the economy - something that typically occurs when inflation starts to getout of control. The inflation rate has recently shot back up, and is now running about 20% y/y. Baseeffects alone should allow for the headline figure to fall significantly over coming months, givingcredibility to the central bank's efforts to promote growth by easing credit conditions. Nevertheless itis clear that Vietnam has some way to go before getting its macro dynamics into the stable framenow enjoyed throughout most other emerging markets.After consistent managed depreciations by the central bank against the US dollar (see chart), thelimited discount of the unofficial Vietnamese dong over the official rate suggests that, for now, thecurrency is around market fair value. That said with the inflation rate so volatile, it seems more thanlikely that the currency will continue to face depreciation pressure going forward.21,00020,000USD/VNDJPY/VND (RHS)28030.025.020.0CPI inflation y/y %19,00024015.018,00020010.05.017,0001600.02010 2011 (f) 2012 (f)Real Growth (%) 6.8 5.8 6.0CPI (%)* 11.8 19.0 9.2Current account (% GDP) -8.9 -7.5 -6.3Fiscal balance (% GDP) -7.0 -6.2 -6.4Government Debt (% GDP) 51.6 49.4 46.6Daily volumesFX Reserves*End of YearSpot FXUSD300mn4-12 mn11.8 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Nguyen Tan DungNext election: May 2015The relatively reformist Nguyen Tan Dung wasre-elected Prime Minister in July by theNational Assembly. He is seen as a relativemoderate. However, the elevation of theconservative Truong Tan Sang to Presidentsuggests that the liberal wing of the Party islosing some influence.27Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Currency Reports: Europe28Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 07Aug 08Aug 09Aug 10Aug 11COUNTRY REPORT: BulgariaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BBB Positive Baa2 Stable0.18% 3.65% 4.82% 5.43%Economy and Market OutlookEconomic activity continues to perform well, albeit at a slower pace, with a recovery in domesticdemand and gross capital formation on a firm footing. Strong export growth remains a key drivingforce behind the economic expansion; nonetheless, the pace has been eroded to some degree byelevated inflation, 4.1% y/y as of August, and an underperforming job market. Second quarter grossdomestic product advanced 2% q/q annualised, as compared to 3.3% in Q1 11, mirroring the globaleconomic slowdown. Going forward, the growth forecast for 2012 was as expected revisited downfrom 5% to a range of 3-4%, underpinning the uncertainties surrounding a potential downturn ineconomic activity in the Eurozone, Bulgaria‟s main trading partner, as some 60% of the country‟sexports are distributed across the common market. On a positive note, the robust recovery of GDP,sharp improvement on the current account balance sheet, a declining external debt ratio and prudentfiscal consolidation have significantly reduced the risk to macroeconomic and financial stability, whichresulted in an one-notch upgrade by Moody‟s of the country‟s long term local currency debt. Thegrade was raised to Baa2, the second lowest investment grade, form Baa3 with a stable outlook,which places Bulgaria on par with e.g. Brazil and Kazakhstan, and one step higher than Hungary orRomania. Bulgaria, the poorest of the European Union members, has cut fiscal spending in additionto an increased tax collection and is therefore set to close the 2011 fiscal year with a budget shortfallof 2.5% and targeted budget deficit of a mere 0.4% by 2014, which coupled with a low public debt anda widely spreading sovereign debt crisis in Europe, positions the country‟s fiscal stance favourablyrelative to its Eastern European peers going forward.1.97EUR/BGN 1 month forwardEUR/BGN20CPI y/y %1.9715101.9651.9601.95-52010 2011 (f) 2012 (f)Real Growth (%) 0.2 2.9 3.4CPI (%)* 2.2 4.2 3.3Current account (% GDP) -1.4 -3.0 -3.5Fiscal balance (% GDP) -3.9 -2.5 -2.2Government Debt (% GDP) 17.4 17.8 20.5Daily volumesSpot FXUSD1.3bnFX Reserves 15.40*End of YearSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Georgi ParvanovPrime Minister: Boiko BorisovOn July 26, the minority government ruledby Boiko Borisov, survived the third attemptof a non-confidence vote, as GERB, theruling party, failed to secure the EuropeanUnion approval to join the passport-freeSchengen zone. According to the EuropeanCommission, rampant corruption and heavypresence of organised crime were the keypoints of concern behind the refusal of thecountry's accession to the Schengen Zone.29Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10COUNTRY REPORT: Czech RepublicOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) A+ Positive A1 Stable0.75% 1.18% 1.96% 3.16%Economy and Market OutlookThe Czech economy has not been immune from the recent revisions to global growth forecastsgiven the importance of the export sector. This has led to sharp downward revisions to growthforecasts despite the economy performing relatively well compared to its regional peers. Businessand consumer confidence have moderated, moving leading indicators lower as has industrialoutput, but the purchasing managers' index remains in expansionary territory. With the recentmoderation, the prospect of interest rate increases has been pushed further into 2012 withcomments from the central bank implying that monetary policy could be eased given the risks fromthe external environment. Despite an increase in VAT in the new year, inflation is expected toremain close to the central bank's 2% target level with nominal and real wage growth muted limitingconsumption as the unemployment rate is notably higher than before the financial crisis. Theinterest rate outlook is likely to have a greater impact on the currency but its positive performancerelative to its regional neighbours should continue. It has benefited in the recent environment as thegovernment has remained committed to reducing the budget deficit which has so far progressed asplanned. The growth slowdown will exert pressure to reduce spending further but low debt levelsand commitment to progress should maintain support for the currency, particularly relative to othercountries in the region.The positive debt and deficit dynamics and firm investment should remain supportive for the koruna,particularly within the current environment.29.528.527.526.525.524.5EUR/ CZKCZK/JPY (RHS)5.35.14.94.74.54.34.114.012.010.08.06.04.02.00.0CPI y/y %23.53.9-2.02010 2011 (f) 2012 (f)Real Growth (%) 2.3 2.1 1.5CPI (%)* 1.5 2.0 2.4Current account (% GDP) -3.7 -3.5 -3.6Fiscal balance (% GDP) -4.7 -4.5 -3.9Government Debt (% GDP) 39.0 41.0 44.0Daily volumesSpot FXUSD750mPoliticsPresident: Petr NecasNext election: May 2014The coalition holds a majority and remainscommitted to fiscal reform. Tensions couldre-emerge if the slowdown gathers pace butthe VAT increase, pension reforms andreductions in welfare payments shouldallow progress towards the target of a 3%deficit in 2013 to continue.FX Reserves*End of Year43.4bnSource: Bloomberg, Citigroup30Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10COUNTRY REPORT: DenmarkOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10yRating (LC) AAA Stable Aaa Stable[30-Sep-2011]1.55% 1.29% 1.28% 2.08%Economy and Market OutlookThe Danish economy continues to lag that of the eurozone but the most recent quarter showed astronger outturn than expected, avoiding a return to recession. The improvement has been drivenby higher public spending with private consumption still weak, declining further during the quarter.With inventories also acting as a boost, the underlying outlook of a muted upturn remains.Unemployment has stabilised but remains close to the cyclical high leading consumer confidencelower in line with the moderation globally in recent months. Despite an improvement in householdbalance sheets the uncertain environment is depressing consumption as indicated by slower retailsales and declining credit card transactions. The outgoing government had put in place plans toreduce the budget deficit but the change of administration threatens this process. The SocialDemocrats, returned to power after a decade, campaigned on a platform of tax rises for the wealthyand increased public spending. However, other parties have committed to supporting previousplans to raise the retirement age and reform pensions which may force the new prime minister (PM)to renege on election promises or risk the swift fall of the new government. The new PM's assertionshe will not "jump on the austerity bandwagon" raises the probability of political headline risk butshould not have too great an impact on the krone. With inflation expected to moderate given theeconomic environment, the central bank is likely to continue to move policy in line with theEuropean Central Bank. The currency has recently firmed given the positive debt and deficitcomparisons to other Western European nations, allowing the central bank to maintain healthyreserve levels which should be supportive were the parity to come under pressure.7.57.57.57.57.47.4EUR/DKKDKK/JPY (RHS)19181716157.06.05.04.03.02.01.0Harmonised CPI y/y %Unemployment Rate (%)7.4140.02010 2011 (f) 2012 (f)Real Growth (%) 2.1 1.5 1.7CPI (%)* 2.3 2.7 2.0Current account (% GDP) 5.4 5.2 4.8Fiscal balance (% GDP) -2.9 -4.1 -4.6Government Debt (% GDP) 44.0 46.0 49.0Daily volumesFX Reserves*End of YearSpot FXUSD15bn81.8bnSource: Bloomberg, CitigroupPoliticsPresident: Helle Thorning-Scmidt (elect)Next election: Sep 2015An early election was called resulting in achange of government from a centre-right tomore left-oriented government, with thecountry's first female Prime Minister,despite the former PM's party gaining oneseat and the new premier's party losing aseat. The new government's narrow victory,with only a three seat majority, implies thecoalition may be fragile. The previousausterity may also be impacted given theelection promises of spending.31Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: HungaryOutlook: NegativeS&P Moody's Rates Policy 3m 5y 10yRating (LC) BBB- Neg Baa3 Neg[30-Sep-2011]6.00% 6.10% 7.20% 8.26%Economy and Market OutlookDuring the latest MPC meeting, the Hungarian Monetary Policy Makers, as expected, kept all ratesunchanged, maintaining a somewhat dovish overtone. Newly released data confirms thatHungary‟s economy stalled in Q2 as global growth faltered. The composition of GDP confirms thateconomic activity continues to rely largely on net exports, whereas domestic demand is somewhatsuppressed. The Purchasing Manager's Index, a forward looking indicator of economic activity, fellto 50.1 in August - suggesting that the economy is close to stalling. The most alarming aspect is thechange in composition of the index. The new export orders metric, which was on an upward trendfor the past few months, finally started to reflect the continued deterioration in German businessconfidence indicators. In August, new export orders fell to 51.4 after fluctuating at 55-60 levels sincethe beginning of 2011. As for inflation, the CPI index has risen to 3.6% in August from 3.1% in July,mainly on the back of the negative base effect and 3% in fuel prices. Inflation is expected to remainwell anchored at slightly above target level of 3% for months to come, with the year-end estimateclose to 3.9%. With regards to the currency, Hungarian forint came under pressure, losing groundboth to the dollar and the euro, albeit the magnitude of its relative weakening was disproportionallymilder than some other currencies in the region. The direction of the currency move is set to bedictated by the euro/dollar trend, with uncertainties relating to the FX-loan proposal potentiallyadding some volatility in the short term.325EUR/ HUFHUF/JPY(right hand side)0.557.0CPI y/y %6.53000.506.05.52750.455.04.52500.404.03.52250.353.02010 2011 (f) 2012 (f)Real Growth (%) 1.2 1.7 1.5CPI (%)* 4.7 3.3 3.9Current account (% GDP) 2.1 2.2 1.7Fiscal balance (% GDP) -4.3 2.0 -3.6Government Debt (% GDP) 80.2 76.1 75.5Daily volumesSpot FXGovt bondsUSD1.2bn1.25bnFX Reserves 48.23*End of YearSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Viktor OrbanIn September, the ruling party proposed anearly repayment of FX loans fixed at theexchange rate 20% below the currentmarket price. At a first glance, the moveappears to force lenders to swallow FXloses, potentially hurting lending, growthand public finances in the process. Themost likely outcome of this proposal, in theevent of its final approval, is that theultimate burden will be shouldered by thoseborrowers who were not in a position toparticipate in the early repayment schemein the first place.32Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Sep 05May 06Jan 07Sep 07May 08Jan 09Sep 09May 10Jan 11COUNTRY REPORT: IcelandOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10yRating (LC) BBB- Stable Baa3 Stable[30-Sep-2011]4.50% 4.10% 3.72% 6.96%Economy and Market OutlookIceland continues to make solid progress although Q2 GDP data showed a contraction in growth,highlighting the continued volatility in data as the economy emerges from recession. Wages inIceland have continued to accelerate and reached 8% year on year in August. This is now wellahead of inflation which is at 5% and is rebuilding household disposable incomes. The central bankincreased the policy interest rate by 0.25% in June to take the overnight rate to 4.50% and furtherinterest rate increases are likely once the situation in Europe calms. The IceSave issue (the disputebetween Iceland, the UK and the Netherlands about who is responsible for the payment todepositors of the collapsed Landsbanki internet bank) should draw to a close in coming months asthe assets of Landsbanki are now more than the amount to be paid. Iceland has launched aUS$1bn Eurobond which has been met with double the required demand and came at a yield of4.99%. Forecasts for government debt have now been revised significantly lower than at the peakof the crisis. The onshore Krona has been strengthening in recent months versus the Euro. Movesby the central bank to remove foreign investors via FX auctions initially went well with the centralbank buying Krona from foreigners and selling them to domestic pension funds. The last auctionhowever saw little buying interest due to European worries and further auctions are now unlikelyuntil the risk environment improves.210190170150130110907050USD/ISKEUR/ISK2520151050CPI y/y% Overnight Rate %2010 2011 (f) 2012 (f)Real Growth (%) -3.5 2.5 2.5CPI (%)* 2.4 6.2 2.9Current account (% GDP) -10.2 1.9 3.2Fiscal balance (% GDP) -5.4 -4.1 -2.3Government Debt (% GDP) 62.6 67.1 65.6Daily volumesSpot FXUSDPoliticsPrime Minister: Johanna SiguroardottirThe government continues to push for EUand eventual Euro entry but support forthese issues is waning as the economystarts to regain strength. So far thegovernment appears to be extremely soliddespite various issues that have causedspeculation that another election wouldhave to be called.FX Reserves*End of Year6.95bnSource: IMF, S&P, Bloomberg, Barclays33Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jan 08May 08Sep 08Jan 09May 09Sep 09Jan 10May 10Sep 10Jan 11May 11COUNTRY REPORT: IsraelOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AA- Stable A1 Stable3.00% 2.86% 3.76% 4.62%Economy and Market OutlookThe Israeli economy continues to decelerate, in line with the tightening seen earlier on in the yeardomestically and the slowdown in the US and Europe. The good news for Israel is that growth isslowing from a strong pace, and that the authorities have plenty of ammunition to help out, ifnecessary. Furthermore, the discovery of huge gas fields in the Israeli Mediterranean is anotherfillip to the Israeli economy, and was a principal reason why the country's sovereign rating wasupgraded by S&P in September.With little evidence of slack forming in the economy yet, though (June's unemployment rate wasanother cyclical low of 5.7%), inflation is yet to show real signs of cooling substantially.Nevertheless, the Bank of Israel in September cut the policy interest rates to 3.0%, citing thepotentially serious slowdown in the global economy. The fiscal accounts remain solid, and with thegovernment targeting a deficit of less than 3% of GDP, budgetary dynamics are not likely tobecome a significant issue for the bond market.The Israeli shekel has weakened against both the yen and US dollar over the past three months,but the move is thanks to generalised risk aversion rather than concern over Israel itself. With thecountry's economic fundamentals remaining sound, only worries over a resumption of conflictfollowing attempts to grant nation status to the Palestinian territories (see below) is preventing theILS from significantly outperforming its EM peers.4.54.3USD/ILSJPY/ILS6.005.756.05.0CPI Inflation y/y %4.05.504.03.83.53.33.05.255.004.754.503.02.01.00.02010 2011 (f) 2012 (f)Real Growth (%) 5.1 4.5 3.0CPI (%)* 2.6 2.9 2.6Current account (% GDP) 6.7 0.0 -0.6Fiscal balance (% GDP) -3.7 -3.0 -2.0Government Debt (% GDP) 74.6 71.6 68.4Daily volumesFX Reserves*End of YearSpot FXUSD1.5 bnN/a78.1 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Benjamin NetanyahuNext election: N/aIsrael's relationship with erstwhile alliesEgypt and Turkey has deterioratedmarkedly following recent border incidentsand the start of the Arab spring. Israel'saggressive attitude towards both countrieshas annoyed even the US to the point ofpublic criticism of their diplomacy. At thesame time the bid by the PalestinianAuthority to push the UN to vote on nationstatus for Palestine is further isolating Israel(and the US).34Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: KazakhstanOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BBB+ Stable Baa2 Negative7.50% 1.75% N/a N/aEconomy and Market OutlookOn the back of strong industrial and agricultural output, persistently high and rising commodity pricesand rising mining production, the Kazak's GDP has recorded a respectable 7% expansion in the firstpart of the year. Going forward, the growth in the second half of the year is expected to moderate dueto a recent slowdown in private consumption, downturn in external demand globally and stagnant oilprices. Robust growth to date, elevated retail sales stemming from strong wage growth coupled withhigher global soft commodity prices have all fuelled inflationary pressures in the economy, whichprinted in July 12.8% on the annualised basis. The favourable weather conditions, and in turngreater harvests, coupled with softer domestic demand are expected to mitigate some of theinflationary pressures felt in the economy earlier this year, bringing the year-end CPI to around 7-7.5%. With respect to the balance of payment, a windfall of oil related revenues and a strong growthin mining production significantly improved terms of trade, with the current account surplus printingUSD4.8bn in Q1 and year-end forecasts currently at 6% of GDP. Lead by the FDIs into the miningsector, the net capital inflows are expected to continue in the second part of the year, nonetheless asrepeatedly voiced by Governor of the Central Bank, the tenge will not be allowed to appreciaterapidly. Despite a strong revival of economic activity in the country thus far, the banking systemremains burdened by a high volume of non-performing loans, 32.9% of total loans in the system as ofend-July. This is further exacerbated by a virtually non-existent private credit growth, which in turnadversely effects investment activity in the country. Notably, private investments in Kazakhstan grewon year average only 0.3% in the first half of 2011.250.0230.0EUR/KZTJPY/KZT2.001.8010.09.0CPI y/y %210.01.608.0190.01.407.0170.01.206.0150.01.005.02010 2011 (f) 2012 (f)Real Growth (%) 7.0 6.5 5.9CPI (%)* 7.8 8.4 7.2Current account (% GDP) 4.3 6.8 5.4Fiscal balance (% GDP) 1.5 1.8 1.7Government Debt (% GDP) 10.7 12.9 13.0Daily volumesFX Reserves*End of YearSpot FXUSD200 - 300 mn35bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Nursultan NazarbayevKazakh‟s foreign policy has made concertedefforts at further closing ties with neighbouringcountries in a bid to encourage economicdevelopment and improve terms of trade.Economic and security links with Russia andBelarus remain strong, especially now, sincethe initiation of the custom union between thecountries in 2010. Importantly, the abundanceof hydrocarbons in the country, has led toimproved links with China, as the latterattempts to secure the access to variousnatural resources in order to fuel its economicexpansion in the future.35Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: LatviaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BB+ Positive Baa3 Positive3.50% 0.40% N/A N/AEconomy and Market OutlookIn stark contrast to the majority of European markets, the retail confidence indicator remains inpositive territory suggesting potential economic expansion moving forward. This recovery in domesticdemand stems predominantly from rising consumer confidence triggered by improving labourconditions, higher wages and more active lending by banks. The recovery domestic demand, whichnext to resilient exports is the most important driver of economic activity, has led to a noticeableimprovement in growth dynamics, which on a seasonally adjusted basis rose from 1.3% in the firstquarter, to 9.1% in Q2. On the back of a strong economic performance in H1 11, an estimate for theyear-end statistic was revised upwards to a range of 4.5-5.0%, with growth subsequently easing toaround 3.5% in the following year. On the fiscal front, resulting from an appropriate mix of revenuerising and costs cutting measures, coupled with cyclical factors, the 2011 government budget is set tofall short of 4.2% of GDP, which compares favourably with a 7.9% deficit recorded in 2010. Goingforward, a further fiscal adjustment of approximately LVL 100million is needed in order to contain the2012 budget shortfall within the 3% threshold level, as prescribed by the Maastricht Treaty in theprocess of euro adoption. Post elections, a new government is expected to maintain its course in thecommon currency accession process, despite the recent intensification of criticism directed at theeuro. As for price stability, the inflationary pressures have risen sharply, stemming mainly from supplysidefactors, with headline CPI peaking at 5% in May, and recovering subsequently to 4.3% in July.Given softening demand pressures in Latvia and globally, headline CPI is set to decline further toaround 3.5% by year-end.1,2001,0008006004002000EUR/ LVL 12m ForwardJPY/LVL0.750.700.650.600.550.500.455.04.03.02.01.00.0-1.0-2.0-3.0-4.0-5.0CPI y/y %-2000.40Politics2010 2011 (f) 2012 (f) President: Andris BērziņšThe outcome from the recent election, whichReal Growth (%) -0.3 4.8 3.4took place on September 17, produced noCPI (%)* -1.4 2.4 3.7 major 1.8 upset. The Harmony Centre, supportedCurrent account (% GDP) 5.5 2.9 0.8 by Latvia's Russian minority, is expected toFiscal balance (% GDP) -7.8 -4.5 -2.3remain outside the government, despitewinning 31% of the 100-seat government.Government Debt (% GDP) 39.9 39.6 40.5 The most likely result is the creation of theDaily volumesUSDmultiparty coalition formed of Zatlers' ReformSpot FX829mn Party, PM Dombrovskis' Unity Party andNationalist Alliance, which respectivelygained 22, 20 and 14 seats, with PresidentFX Reserves7.43bn Andris Bērziņš nominating a candidate a*End of YearSource: IMF, S&P, Bloomberg, Barclays prime minister atthe beginning of October.36Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: LithuaniaOutlook: NeutralS&P Moody's Rates Policy 3m 2y 10y[30-Sep-2011]Rating (LC) BBB Stable Baa1 Stable2.25% 1.84% 2.44% 4.49%Economy and Market OutlookResilient exports and a greater than expected revival in domestic demand have led to improvedgrowth dynamics. Newly released data showed an upward revision of the Q2 GDP growth to 6.3%y/y. Despite some weakening in economic activity, as Q1 growth oscillated at around 6.9% y/y, thesecond quarter figure comes on the back of a much weaker base effect. Going forward, the growthperformance is unlikely to be sustained in 2012, as the first sign of a slowdown in exports is on thehorizon. Looking at the growth dynamics, private consumption grew by 6.7% y/y, which comparesfavourably to the decline of 8.2% in the corresponding period last year. In turn, exports of goodsand services, a key component of economic revival in the latter part of 2010 and first quarter of2011, has recently seen some softening, declining form 25.2% during January-March months to14.6 per cent during the subsequent quarter. Similarly, gross fixed investments recorded a decentsecond quarter growth of 23.1% y/y, although this was noticeably down from 41% in the first period.On a positive note, the labour market in Lithuania is showing signs of recovery, with unemploymenton a steady downward trend, the first time since early 2008. According to the Lithuania StatisticsOffice, the number of unemployed people declined by 41,600 in the second quarter translating to a14% drop y/y and average rate of unemployment of 15.5%. On the monetary front, the currencyboard remains intact, despite the global crisis, providing a strong policy anchor and credible exitstrategy for euro adoption. Headline inflation, in turn, having peaked at 5% in May, hassubsequently recovered to 4.4% in August with further softening pressures, due to the weakening ofglobal demand, expected in the near term.4,000EUR/ LTL 12m ForwardJPY/LTL3.55.0CPI y/y %3,0002,0003.03.01,0002.51.00-1.0-1,0002.0Politics2010 2011 (f) 2012 (f) Prime Minister: Andrius KubiliusReal Growth (%) 1.3 5.8 4.7Next parliamentary election: October 2012The upcoming elections are likely to resultCPI (%)* 3.1 3.3 3.3 in 1.8 the replacement of the incumbentCurrent account (% GDP) 1.9 0.2 -0.6 government formed of the TS-LKD, withFiscal balance (% GDP) -8.1 -5.5 -3.0 one of the opposition parties, therebycontinuing the trend on the political arenaGovernment Debt (% GDP) 37.4 42.8 44.8seen since the independence in 1990. AsDaily volumesUSDfor the fiscal budget, Lithuania is on a solidSpot FX829mn path to reduce the 2012 budget shortfall to3.8% from 5.3% this year; however,additional adjustments are required in orderFX Reserves7.43bn to bring deficit below the 3% level as stated*End of YearSource: IMF, S&P, Bloomberg, Barclaysin the Maastricht Treaty by 2013.37Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10COUNTRY REPORT: NorwayOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10yRating (LC) AAA Stable Aaa Stable[30-Sep-2011]2.25% 3.03% 1.99% 2.41%Economy and Market OutlookHaving initially lagged the upturn in many other European economies, an improvement inmomentum coupled with higher house prices and solid levels of debt growth had led the centralbank to tighten policy. Further tightening was expected through 2012 but changes in expectationsfor then external environment imply that further interest rate increases may now be delayed until thelatter part of 2012. The Norwegian economy has not been immune to global moderation. Despitethe purchasing managers' index maintaining expansionary levels and the unemployment rateeasing lower, consumer confidence has retreated from the cyclical highs with retail sales growthslowing. With consumption expected to be one of the main drivers of the continued expansion of themainland economy, risks are increasing for growth projections. With inflation expected to remainbelow the central bank's target rate the possibility of interest rate cuts exists but is likely to need anacceleration of the downturn given concerns about credit growth. Given the inflation outlook, thecentral bank seems willing to tolerate a weaker currency and has commented that a Swiss stylesolution is unlikely and that monetary policy measures would be taken with the key policy rate the"relevant instrument". In an environment of risk aversion the Norwegian krone is likely to continue tosuffer from its lower liquidity relative to other developed markets. However, support should appearonce stability returns to global markets given the strong budget position and the likelihood of acontinuation of monetary tightening - although this may be from lower levels, particularly againstother developed market European currencies.10.09.59.08.58.07.5EUR/ NOKNOK/JPY (RHS)17.016.516.015.515.014.514.013.513.012.512.08.06.04.02.00.0-2.0CPI y/y %Deposit Rate %2010 2011 (f) 2012 (f)Real Growth (%) 0.3 2.3 2.3CPI (%)* 2.4 1.6 2.2Current account (% GDP) 12.8 16.3 16.0Fiscal balance (% GDP) 10.6 12.0 12.5Government Debt (% GDP) 60.0 60.0 60.0FX Reserves*End of Year48.6bnSource: Bloomberg, CitigroupPoliticsPresident: Jens StoltenbergNext election: Sep 2013Poor results at the local elections couldintroduce some instability to the governingcoalition with the Prime Minister's partygaining at the expense of the junior party.This may delay planned regionalgovernment reform. Despite the strongbudget position due to oil revenues, futurespending plans may become a morecontentious issue as Norway approaches"peak oil", particularly if sub-trend growthpersists.38Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: PolandOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) A Stable A2 Stable4.50% 4.66% 5.28% 6.00%Economy and Market OutlookFinal Q2 GDP data was revisited upwards from 4.2% to 4.3% y/y with domestic demand remainingthe main engine of growth and net export contributions largely suppressed. Fixed investmentspending has risen to 7.8% in Q2 y/y from 6% in the previous quarter, receiving some support frompublic infrastructure spending ahead of the 2012 Euro Cup. Private consumption, in turn, stayedlargely flat at 0.9 q/q sa. Relatively strong growth driven by domestic purchases as well as aweakening zloty both effectively prevent a disinflationary trend in the country, albeit fruit andvegetable prices have seen some softening in recent months globally. During the latest MPCmeeting, monetary policy makers‟ dovish stance was reiterated and rates were kept on hold, aswaning global demand is anticipated to have a knock on effect on growth rates in H2 11, effectivelycurbing lingering inflationary pressures in the process. Although growth remained strong in Q2,early indicators for Q3 point to a slowdown, with PMI down to 51.8 in August and weakeremployment growth data coming from labour markets (unemployment at 11.7% in July). Hence,due to the current uncertain climate, the rates are expected to be kept on hold at least until the endof the year. As for the currency, the zloty came under pressure, in the current risk averseenvironment, losing ground both to the dollar and the euro. On the back of a strong positivecorrelation to the euro, the direction of the currency move in the short term is set to be determinedby further uncertainties relating to the euro zone, with a potential mild depreciation against thecommon currency in the event of rapidly deteriorating external conditions, movement away from theEM assets and flight to quality.4.74.54.34.13.93.7EUR/PLNJPY/PLN4.504.003.503.002.505.55.04.54.03.53.02.52.01.5CPI y/y %3.52.00Politics2010 2011 (f) 2012 (f) President: Bronislaw KomorowskiReal Growth (%) 3.8 3.8 3.0 Prime MinisterNext elections: parlamentary, October 2011CPI (%)* 3.1 3.5 2.5 1.8Current account (% GDP) -4.5 -5.0 -5.1Fiscal balance (% GDP) -7.9 -5.5 -3.8Government Debt (% GDP) 55.0 56.0 56.4Daily volumesFX Reserves*End of YearSpot FXUSD1.3bn106bnSource: IMF, S&P, Bloomberg, BarclaysThe intensification of political risk, Ahead ofthe parliamentary elections, is largelyexpected, as recent polls show a minor lossof support for the ruling Civic Platform.There is little doubt that the currentadministration has the highest chance of reelection,however, the question of winingthe majority of seats in parliament is yet tobe answered.39Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Dec 00Dec 02Dec 04Dec 06Dec 08Dec 10COUNTRY REPORT: RomaniaOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10yRating (LC) BBB- Stable Baa3 Stable[30-Sep-2011]6.25% 5.96% 5.67%Economy and Market OutlookThe major risk for Romania remains the external environment given the export led recovery. Withrecent softer global data, growth forecasts have been reduced for this year but the expansion is stillexpected to continue to gather pace through 2012. Consumption has so far been subdued butdemand may now improve. Unemployment has fallen leading to an improvement in wage growthwhich, coupled with the reduction in inflation, is allowing a boost to real incomes. Retail sales haverecently improved and the growing possibility of an interest rate cut in the coming year couldsupport sentiment as long as export and industrial output growth remain positive. Inflation hasrecently fallen, leaving it close to the central bank's target range, due to positive base effects fromlast year's VAT rise coupled with an improvement in food prices. Further expected inflationimprovement plus the external environment may allow an interest rate cut but the central bank islikely to remain cautious. The government is committed to eliminating some subsidies and raisingadministered prices and the central bank will also be concerned strong wage growth could impactthe inflation outlook. The government remains committed to budget deficit reduction with the recentIMF review commenting the program remains on track but the current market environment ismaking the privatisation program harder to pursue and further reform is needed in the state ownedsector. The currency has recently suffered through concerns related to ownership of part of thebanking sector by Greek banks but the central bank has the resources to support them. Theimproving growth outlook, government commitment to reform and the central bank's successfulmanagement of the currency should underpin the leu from current levels.4.4EUR/RONRON/JPY (RHS)3240CPI y/y %Policy Rate %4.330294.2204.126104.02302010 2011 (f) 2012 (f)Real Growth (%) -1.3 1.5 2.6CPI (%)* 8.0 6.2 4.1Current account (% GDP) -4.2 -4.2 -5.0Fiscal balance (% GDP) -6.7 -4.9 -3.6Government Debt (% GDP) 35.0 37.0 37.0Daily volumesFX Reserves*End of YearSpot FXGovt bondsUSD500mn/a45.8bnSource: Bloomberg, Consensus Forecasts, CitiPoliticsPrime Minister: Emile BocNext election: Nov 2012Presidential : Dec 2014Reform of the state owned sector is theimportant priority for the government whichhas shown continued commitment toreducing the budget deficit. Privatemanagement needs to be introduced,reduction of outstanding payments inarrears need to managed and restructuringto allow the sale of stakes and supportfiscal consolidation.40Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: RussiaOutlook: NegativeS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BBB+ Stable Baa1 Stable8.25% 5.51% 7.91% 8.98%Economy and Market OutlookDespite weakening external demand and a recent slowdown in industrial production, economicactivity continues to perform well with recovery in domestic demand on a firm footing. Inflationdecelerates at a moderate pace, with the consumer price index dropping by 20bps m/m in August,thus bringing the headline CPI down to 8.2% y/y from 9.0% in July. The disinflationary trend isexpected to decline somewhat, in months to come. This is mainly the result of a weaker currencyand the absence of a strong base effects, which, next to a fall in fruit and vegetable prices was a keycontributor behind the August CPI favourable result. Faltering external demand had an adverseimpact on the commodity prices, which expectedly pushed the ruble into the upper part of the basketcorridor, i.e. the territory where the CBR is likely to intervene to mitigate further currencydepreciation. The regulators are set to sell USD100-USD150million of dollars and euros daily andcould increase that amount to around USD400-USD500 million should the ruble persist to hoveraround Rub37.00 level versus the basket. The ruble‟s recent weakness against other majorcurrencies has once again brought to the fore the risk associated with the ongoing reliance onnatural resource sectors in growth generation. Consequently, forecasts for the GDP growth rateshave recently been marked down to 4% and a mere 3.5% from 4.5% and 4.1% in 2011 and 2012,respectively. Furthermore, the intensification of political risk relating to the parliamentary elections inDecember and the presidential elections in March is expected to add to the currency risk, especiallyas the United Russia party that formulates the current administration continues to lose popularityaccording to recent independentpolls.42.040.038.036.034.032.0RUB vs Basket (55%USD/45% EUR)JPY/RUB40.0038.0036.0034.0032.0012.011.010.09.08.07.06.0CPI y/y %30.030.005.0Politics2010 2011 (f) 2012 (f) President: Dmitry A. MedvedevPrime Minister: Vladimir V. PutinReal Growth (%) 4.00 4.29 4.08Next presidential election: 2012CPI (%)* 8.80 7.50 7.10 1.8Current account (% GDP) 4.80 4.60 3.30Fiscal balance (% GDP) -3.50 -1.10 -2.10Government Debt (% GDP) 11.70 11.70 12.10Daily volumesSpot FXUSD17mnFX Reserves 532.00*End of YearSource: IMF, S&P, Bloomberg, BarclaysOn September 24, during the congress ofthe United Russia Party, the incumbentpresident Medvedev called upon rulingparty to endorse Prime Minister Putin forpresident in 2012. This effectively paves theway for Putin to return to the presidentialchair allowing him to remain in power until2024, as changes made to the constitution,during his recent years as prime minister,lengthen the presidential term to 6 years.41Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10COUNTRY REPORT: SwedenOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable2.00% 2.51% 1.44% 1.74%Economy and Market OutlookThe krona has suffered from uncertainty about the global environment given the openness of theeconomy and the attendant strength of the economic rebound as the global economy recoveredfrom the financial crisis. Economic growth was not forecast to repeat its recent very strongperformance with a more moderate pace expected in the coming years, but recent data has causedfurther downgrading of forecasts. The purchasing managers' index has quickly moved to indicatepossible contraction with retail sales growth falling as real wages show little gain. Theunemployment rate has moved a little higher with consumer confidence declining, implying furthermoderation in consumption .The central bank has tightened policy throughout 2011 but has nowbecome more cautious about the outlook. Previous expectations of continued tightening have beenscaled back with surveys showing little increase in interest rates over the next two years. Inflationexpectations are also muted. Moderation in inflation is expected, to a little above the central bank'starget rate over the coming two years. With fading impacts of previous fiscal stimulus and anincreased focus on the external environment, the central bank's concerns about wage rises arelikely to dissipate somewhat allowing the possibility of a reversal of some of the previous tighteningif conditions are seen to deteriorate further. The external environment is likely to exert a very stronginfluence on the krona in the coming months but medium term support should remain. Positive debtand deficit situations, a continuation of the reform agenda, a relatively healthy banking sector and alikely improvement of the economic outlook as global sentiment improves should combine tounderpin the krona.12.011.511.010.510.09.59.08.5EUR/ SEKSEK/JPY (RHS)14.013.513.012.512.011.511.010.510.06.05.04.03.02.01.00.0-1.0-2.0CPI y/y %Deposit Rate %2010 2011 (f) 2012 (f)Real Growth (%) 5.4 4.6 2.5CPI (%)* 1.3 3.1 2.4Current account (% GDP) 6.1 5.9 5.9Fiscal balance (% GDP) 0.0 0.5 1.2Government Debt (% GDP) 39.4 36.0 32.0FX Reserves*End of Year40.9bnSource: Bloomberg, CitigroupPoliticsPresident: Fredrik ReinfeldtNext Parliamentary election: Sep 2014The reform agenda should continue andwith general consensus on broad policymeasures there currently appears littlethreat to the process. There is a desire toreduce the dependence on the generouswelfare state with steady changes toimprove the incentive to work. The desire toreduce the state's majority holdings in anumber of large companies to open up theprivate sector may slow given thegovernment's recent defeat in parliament.42Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 98Jan 01Jan 04Jan 07Jan 10COUNTRY REPORT: SwitzerlandOutlook: NegativeS&P Moody's Rates Policy 3m 5y 10yRating (LC) AAA Stable Aaa Stable[30-Sep-2011]0.00% 0.02% 0.39% 0.94%Economy and Market OutlookRisk aversion, caused by aversion uncertainty about the global outlook and ongoing events in theeurozone, has led the Swiss franc sharply higher in recent months. This prompted the central bankto move interest rates to zero with bond yields moving to negative levels. The strength of thecurrency has led to sharp revisions for export and investment prospects, with inflation also expectedto show little upward pressure from its current low level. With the leading indicator also turningsharply lower in recent months, the situation unexpectedly spurred the central bank into bold action.Having previously mooted the idea of pegging the currency, in September it intervened and statedthat the franc would be capped at 1.20 versus the euro being prepared to buy foreign currency inunlimited amounts. Like a number of other central banks, the central bank sees the currencystrength as potentially destabilising carrying the risk of deflationary developments. Although still inexpansionary territory, the purchasing managers' index has decelerated sharply this year withconsumer confidence also declining as expectations for the economic climate in the year aheaddeteriorate. Even though the unemployment rate has fallen towards levels pertaining before thefinancial crisis, consumers' job security has fallen in recent months with planned purchases alsodeclining implying private consumption will remain muted. With public consumption also expected tobe subdued, growth is likely to be under pressure as - despite some recent weakening following thecentral bank's move - the trade weighted currency remains elevated after the strong rise since thestart of 2008.1.61.51.41.31.21.11.0EUR/ CHFCHF/JPY (RHS)110.0 3.0105.02.52.0100.0 1.595.01.00.590.0 0.085.0 -0.5-1.080.0-1.575.0 -2.0Leading IndicatorLibor Target Rate % (rhs)4.03.53.02.52.01.51.00.5--0.5-1.02010 2011 (f) 2012 (f)Real Growth (%) 2.7 2.0 1.5CPI (%)* 0.7 0.5 0.6Current account (% GDP) 14.6 12.2 10.3Fiscal balance (% GDP) 0.5 0.4 0.1Government Debt (% GDP) 55.0 52.7 51.2FX Reserves*End of Year232.5bnSource: Bloomberg, CitigroupPoliticsPrime Minister: n/a, Federal CouncilNext election: Oct 2011Presidential : Dec 2011The consensual style politics of the sevenmember Federal Council implies continuityafter the election. Recent polls corroboratethis with the two main parties showingsmall gains. More attention is likely to bepaid to fiscal measures to support theeconomy given the impact of currencystrength.43Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 07Aug 08Aug 09Aug 10Aug 11COUNTRY REPORT: TurkeyOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BB+ Stable Ba2 Stable5.75% 7.90% 8.87% 9.61%Economy and Market OutlookTurkey's economy is undergoing a fairly rapid slowdown from what were unsustainable levels ofgrowth in 2010 and he first half of 2011. Growth of 11.6% y/y in Q1 11 was followed up by 8.8% inQ2, and Q3 data should show further significant easing. The slowdown has been driven by acombination of weaker export growth and a tightening of credit standards at home thanks tooversight by the banking regulator, while the Central Bank of Turkey (CBT) has apparently beenfocusing on using monetary policy as a tool to manage a weaker exchange rate (having cut thepolicy rate in August) rather than inflation. That said, the Bank has been correct in its expectationfor inflation to remain contained, despite some clear concerns that the economy was coming upagainst capacity constraints. Unemployment, for example, is at a new cycle low of 9.2% - typicallythe lowest it tends to get in Turkey. While the subsequent depreciation of the lira (TRY) and stillbuoyant domestic food prices will keep inflation elevated, again making it difficult for the Bank tomeet is year-end target of 5.5%.Fiscal policy is not a great concern, though it is disappointing that, some months after the election,the issue of adopting a fiscal rule has not come back to the fore. However, market participants havein retrospect been impressed by the Central Bank's series of policies to reduce the current accountdeficit via a weaker currency without jeopardising inflation, and have, as a result, become far lessnegative of late on the TRY. We are inclined to agree that the Bank has been surprisingly deft - anda little lucky - in weakening the TRY before wider risk aversion took hold in mid-August .2.01.91.81.71.61.51.41.31.21.11.0USD/ TRYEUR/TRY (RHS)2.702.602.502.402.302.202.102.001.901.8014.012.010.08.06.04.02.00.0CPI y/y %2010 2011 (f) 2012 (f)Real Growth (%) 9.0 7.1 3.3CPI (%)* 6.4 8.1 7.1Current account (% GDP) -6.6 -9.1 -6.6Fiscal balance (% GDP) -3.5 -2.1 -3.3Government Debt (% GDP) 42.2 39.0 38.5Daily volumesFX Reserves*End of YearSpot FXUSD1.3bn1bn87.2 bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPrime Minister: Tayiip ErdoganNext election: 2015Turkey's foreign policy is becoming moreeastward leaning, as it seeks to shape theregion in its own image. As part of theprocess it has publicly distanced itself witherstwhile ally Israel, using the row over thekilling of Turkish nationals by Israeli securitypersonnel on a ship heading for Gaza as ameans to put significant distance betweenthe two nations. While a short term pointscorer for Arab sentiment, this doesthreaten to degrade relations with the US.44Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: UkraineOutlook: NegativeS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) B+ Stable B2 Stable7.75% 9.38% N/A N/AEconomy and Market OutlookEconomic activity in Ukraine, which relies heavily on the exports of metals, has continued to performwell. Some slowdown in both the agricultural and manufacturing sectors, however, was noted, whichadversely impacted growth figures for Q2 11 with a preliminary result of 3.8 % q/q expansion asopposed to 5.3 % in Q1 11. Despite a recent softening in growth patterns, good harvests areexpected to boost the economy going forward, bringing the 2011 growth rate to a respectable 4.2%.As for the balance of payments, a recent drop in agricultural exports has expectedly had an adverseeffect on terms of trade causing some widening of the current account deficit in July with acumulative shortfall of USD574mn in the period and the year-end estimate at 3.5% of GDP. Theexchange rate is expected to hover around UAH8 versus the dollar, given the size of FX reserves,which currently stands at USD38bn, albeit increased future volatility will be allowed reflecting thecentral bank‟s further attempts to pave the way towards a more flexible currency. The consumer priceindex, has recently fallen, with August results printing a negative 0.4% m/m bringing the headline CPIdown to 8.9% from 10.6% in July. This disinflationary effect stems mainly from softer food prices,coupled with a strong base effect given a near 50% hike in gas tariffs in August 2010. Theinflationarytrend is set to remain subdued in the near term, with some pick up expected in Q4 and year-endestimate anticipated to be around 9.5%. On the fiscal front, the preliminary 2012 budget draftassumes the deficit will narrow to 2%, which is slightly above the government‟s initial estimate of1.5%, but well within the level of 2.3% as prescribed by the International Monetary Fund. Incomparison, the forecast for the metric in the current period will remain ata negative 2.8%.13.012.512.011.511.010.510.09.59.08.58.0EUR/UAHJPY/UAH12.0011.0010.009.008.007.006.0018.016.014.012.010.08.06.04.02.00.0CPI y/y %Politics2010 2011 (f) 2012 (f) President: Viktor YanukovychDespite progress being made with respectReal Growth (%) 4.2 4.7 4.8to the implementation of the pensionCPI (%)* 8.8 7.5 7.1 reform, 1.8 which remains the last keyCurrent account (% GDP) -2.1 -2.8 -3.5 requirement behind the IMF financing nextFiscal balance (% GDP) -5.7 -2.8 -2.0to the issue regarding the gas tariffs, thedisbursement of the delayed USD3bnGovernment Debt (% GDP) 40.1 39.3 39.4 tranches of the stand-by arrangementDaily volumesUSDwithout the fulfilment of the latter, isSpot FXN/aunlikely. The risk associated with financingthe current account deficit, however,remains limited, as the IMF loan wasFX Reserves36.37bn intended solely for the replenishment of the*End of YearSource: IMF, S&P, Bloomberg, Barclays buffer funds.45Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Currency Reports: The Americas46Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Sep 05May 06Jan 07Sep 07May 08Jan 09Sep 09May 10Jan 11COUNTRY REPORT: ArgentinaOutlook: NegativeS&P Moody's Rates Policy 3m 5y ($) 10y ($)[30-Sep-2011]Rating (LC) B Stable B3 Stable11.50% N/a 12.56% 13.36%Economy and Market OutlookPolitics is going to play an increasingly important role in the outlook for Argentina in coming monthswith the almost certain re-election of Christina Kirchner. If she is reflected then significant economicreform is extremely unlikely and a continued build of the current problems facing the economy islikely to continue with the added worry of currency depreciation as a tool to boost Argentina'scompetitiveness which continues to be eroded by very high inflation. Capital controls are likely to beincreased to prevent individuals and companies moving money offshore and further state assetseizures are possible. With this backdrop the prospect of seeing the much needed investment inArgentina is close to zero and this will lead to increasing bottlenecks and problems in electricitygeneration. Growth should thus moderate more quickly than currently expected, especially if globalcommodity prices fall further. Fiscal issues could once again start to be problematic in 2012 withmany forecasters expecting a growing fiscal deficit even with optimistic growth forecasts. Offshorerates have leapt higher in recent weeks to over 10% and this is stabilising the currency versus theUS dollar. If the global outlook remains uncertain however we would now class the risk of a sharpdepreciation in the currency as high once the election is over. We remain negative on the outlook.5.95.44.94.43.9USD/ARSEUR/ARS1412108Headline Inflation y/y %3.462.942010 2011 (f) 2012 (f)Real Growth (%) 9.2 8.0 4.6CPI (%)* 10.9 11.0 11.0Current account (% GDP) 0.8 -0.3 -0.9Fiscal balance (% GDP) -1.6 -2.0 -1.9Government Debt (% GDP) 47.8 40.7 36.7Daily volumesSpot FXUSD500mPoliticsPresident: Christina KirchnerElections: October 2011Polls now suggest that Kirchner is almostcertain to be re-elected at the comingOctober election after a 50% vote in theAugust primary elections. If re-elected sheis now expected to push for constitutionalreforms that would remove the current 2term limit on election and allow her to standagain in the 2015 election.FX Reserves*End of Year45.77bnSource: IMF, S&P, Bloomberg, Barclays47Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: BrazilOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10yRating (LC) BBB+ Stable Baa2 Stable[30-Sep-2011]12.00% 10.94% 11.91% 12.02%Economy and Market OutlookThe Brazilian economy grew at an extremely rapid pace in 2010 and is now in the process ofmoderating with growth expected to slow to between 3.5-4.5% in 2011. The economy is now clearlyhitting capacity constraints with full employment in major cities and growing skills shortages which isfeeding into rapid service inflation and rising inflation expectations. In industry there are nowbottlenecks developing due to insufficient investment in ports, airports and rail/transport. This isconstraining both exports and imports as facilities are insufficient to cope with further increases.The government hope to push forward a large investment programme but require private sectorinvolvement which may be difficult. Inflation is now a growing problem and credit growth remainshigh. Despite this the central bank shocked markets by reducing interest rates at the Septembermeeting from 12.5% to 12%. This move appears to be part of increased co-operation between thecentral bank and government and a shift towards economic management via fiscal policy to reduceinterest rates in the medium term in order to decrease the problem of foreign portfolio inflows. Thisinterest rate cut saw the Brazilian Real come under considerable pressure as the European crisissaw a sharp move lower in emerging market currencies generally. If this is sustained the centralbank will be forced to act given already elevated inflation concerns. This will almost certainly startwith intervention in FX markets and could ultimately lead to them either reducing anti-foreignertaxes or even increasing interest rates once again.2.7USD/ BRLJPY/ BRL (LHS)0.0425.0Swap rate %2.50.0320.02.32.11.91.70.030.020.0215.010.05.01.50.010.02010 2011 (f) 2012 (f)Real Growth (%) 7.5 3.8 3.6CPI (%)* 5.9 6.3 4.5Current account (% GDP) -2.3 -2.3 -2.5Fiscal balance (% GDP) -2.9 -2.5 -2.8Government Debt (% GDP) 40.2 38.6 37.5Daily volumesSpot FXUSD2bnPoliticsPresident: Dilma RouseffThe new Rouseff government is proving tobe very different than the Lula government.Dilma is a more serious leader and has adeeper understanding of issues.Crackdowns on crime in the country appearto be having some success but a lot offurther work is needed.FX Reserves*End of Year350.43bnSource: IMF, S&P, Bloomberg48Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Sep 05May 06Jan 07Sep 07May 08Jan 09Sep 09May 10Jan 11COUNTRY REPORT: CanadaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable1.00% 1.20% 1.40% 2.16%Economy and Market OutlookThe economic recovery in Canada has now been thrown into turmoil by the problems rocking theUS. Markets have already now shifted towards speculation that the Bank of Canada will be forcedto quickly cut interest rates to support growth and central bank comments have turned significantlymore cautious in recent weeks reinforcing the change in sentiment. Despite this huge change inoutlook economic data suggests that GDP data is rebounding and growth is expected to be inexcess of 2% annualised in Q3. Inflation data has been stronger than expected with headlineinflation accelerating to a 3.1% y/y rate in August and core accelerating to 1.9% y/y. If global growthdoes weaken then inflation should start to moderate in coming months, but if sentiment turns out tobe overdone then the Bank of Canada could be taking a risk with inflation if they act pre-emptively.Given that interest rates are already very low by historical standards the most likely scenario thusappears that the central bank will maintain interest rates at current levels for a period of time whilstthey wait for more clarity. They will be especially concerned that a cut could reignite house pricesand see consumer debt picking up once again. Political concerns have reduced following theelection of a majority government in recent elections. The currency has benefited from the generalrally in commodity related currencies and the general weakness in the US dollar but has then fallenduring the recent global volatility. There is limited upside to the Canadian dollar from current levelsbutthe strengthening economy should also provide some downside support.1.41.31.21.11.00.90.80.70.6USD/CADJPY/CAD140130120110100908070609.59.08.58.07.57.06.56.05.55.0Unemployment Rate %2010 2011 (f) 2012 (f)Real Growth (%) 3.2 2.1 1.9CPI (%)* 2.2 2.6 2.0Current account (% GDP) -3.1 -3.3 -3.8Fiscal balance (% GDP) -5.6 -4.3 -3.9Government Debt (% GDP) 32.2 34.9 36.8Daily volumesPoliticsPrime Minister: Stephen Harper.Election: 2015The May election returned StephenHarper's Conservative Party but as amajority government. This resolves years ofpolitical instability in Canada. Majorchanges are not expected however with theparty expected to continue its relatively slowpace of policy implementation.FX Reserves*End of YearUSD49.86bnSource: IMF, S&P, Bloomberg49Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Sep 05May 06Jan 07Sep 07May 08Jan 09Sep 09May 10Jan 11COUNTRY REPORT: ChileOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AA Stable Aa3 Stable5.25% 4.99% 4.87% 5.09%Economy and Market OutlookThe economy continues to grow strongly but the outlook is now clouded by the global turmoil giventhat Chile is a relatively open economy with significant exposure to global demand via its copperexports. Copper has fallen sharply but to a historically very high level, if the global economy doesmove into recession then further sharp falls would be expected and this would dramatically changethe growth picture in Chile. Estimates are that a 10% move in copper prices effects GDP byapproximately 0.4%. Historical data shows an economy that is moderating but to still robust levelsof growth with the economic activity index for July (a key indicator of growth) running at 4% y/y.Chile continues to have an enviable fiscal position and thus the government are in a strong positionto run a countercyclical fiscal policy on any downturn. The central bank have maintained interestrates at 5.25% at their recent meeting and are now likely to keep interest rates on hold for sometime with the direction of the next move depending entirely on how the global picture plays out. ThePeso continues to look very attractive given the expectation for a growing current account surplus incoming years but again this is reliant on global copper prices. The central bank has beenintervening in the currency quite aggressively when the peso was strengthening, however, so hassignificant firepower if it decides to support the currency on any downward move in EM FX globally.With very few investors in the market the Peso is a good defensive currency with reasonable levelof interest and we thus continue to keep a positive outlook.800750700650600550500450400350USD/CLPJPY/CLP8.07.57.06.56.05.55.04.54.05,0004,5004,0003,5003,0002,5002,0001,5001,0005000Copper exports USDm2010 2011 (f) 2012 (f)Real Growth (%) 5.2 6.5 4.7CPI (%)* 1.5 3.1 3.1Current account (% GDP) 1.9 0.1 -1.5Fiscal balance (% GDP) -0.3 1.4 1.6Government Debt (% GDP) -2.4 -2.7 -7.6Daily volumesSpot FXUSD1.5bnPoliticsPresident: Sebastian PineraNext election: 2014Inflation worries have eroded Pinera'spopularity ratings as well as controversyover his sales of various companies. Pollssuggest his popularity is at rock bottom withthe majority of the electorate now sayingthey 'believe little if anything' that he says.FX Reserves*End of Year36.37bnSource: IMF, S&P, Bloomberg50Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Sep 05May 06Jan 07Sep 07May 08Jan 09Sep 09May 10Jan 11COUNTRY REPORT: ColombiaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BBB+ Stable Baa3 Stable4.50% 4.68% 6.53% 7.53%Economy and Market OutlookThe economic outlook in Colombia continues to look bright although the country will not be immunein the event of further global turmoil. Q2 GDP data showed the economy growing by 5.2% year onyear and retail sales data for July showed an 11.8% year on year rate of growth. Without the globalworries the central bank would undoubtedly be continuing to increase interest rates up to 5% andpossibly higher but, given the global backdrop they have now paused at 4.50% and are likely tomaintain this stance until they have more clarity. If the world does experience another downturn thekey transmission mechanism into the Colombian economy would be via commodity prices. Fiscalreform carried out in 2010 should provide the government with substantial flexibility in this scenarioto provide a stimulative fiscal boost. Inflation has proved to be stubbornly sticky above 3% and therisk that the central bank will take by holding interest rates is that if global growth doesn't moderatethe economy will start to build inflationary pressures once again given that it is already now at fullcapacity. The Peso has fallen back but is close to the governments 'equilibrium rate' of 1,900 to theUS dollar and as one of the best performing currencies in the region over the last few years we takea neutral stance on the currency even though we are optimistic about the economic outlook. Wewould look to purchase the currency on any under performance.2,600.02,400.02,200.02,000.01,800.01,600.0USD/COPJPY/COP35333129272523211917159.08.07.06.05.04.03.02.01.00.0Headline Inflation y/y %2010 2011 (f) 2012 (f)Real Growth (%) 4.3 4.9 4.5CPI (%)* 3.2 3.1 3.1Current account (% GDP) -3.1 -2.6 -2.5Fiscal balance (% GDP) -3.1 -3.0 -1.5Government Debt (% GDP) 28.1 29.2 28.4Daily volumesSpot FXUSD1bnPoliticsPresident: Juan Manuel SantosNext Election: 2014There are no major policy changesexpected although potentially Colombia islooking at ways to follow the model of Chileand aggressively pay down governmentdebt in coming years. Corruption continuesto dog issues with Santos facing criticismover his shortlist choice for prosecutorgeneral.FX Reserves*End of Year29.75bnSource: IMF, S&P, Bloomberg51Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 05Sep 05May 06Jan 07Sep 07May 08Jan 09Sep 09May 10Jan 11COUNTRY REPORT: MexicoOutlook: PositiveS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) A Stable Baa1 Stable4.50% 4.32% 5.43% 6.61%Economy and Market OutlookMexico is now benefiting from significant investment from the US as a sharp contraction in the gapbetween Mexican and Chinese labour costs, combined with higher transportation costs have seenMexico become a much more appealing source of production for US firms. The downside to thishowever is that Mexico and the peso (MXN) have been hard hit by the deterioration of US growthforecasts following the downgrade of the US credit rating from AAA by S&P. This rapid change insentiment has seen the MXNsell off significantly which makes Mexico even more competitive. TheMexican central bank believes that it didn't reduce interest rates sufficiently during the financialcrisis and this latest external shock now raises the prospect that they will choose to actpre-emptively and use the opportunity to cut rates. A 50 basis point cut, probably via two separatemeetings is thus now likely in coming months. Baring a US recession Mexican GDP should grow bybetween 3-4% in 2011 although PMI data released towards the end of the month suggests thatmanufacturing is already slowing. Domestic demand should remain reasonably strong for somequarters to come though as historical job gains have given the consumer some spending power.Political concerns could become more of an issue in 2012 with the election scheduled for July.16.015.014.013.012.011.010.09.0USD/MXNJPY/MXN0.180.140.108.07.06.05.04.03.02.0Unemployment Rate %2010 2011 (f) 2012 (f)Real Growth (%) 5.4 3.8 3.6CPI (%)* 4.4 3.3 3.0Current account (% GDP) -0.5 -1.0 -0.9Fiscal balance (% GDP) -4.3 -3.2 -2.8Government Debt (% GDP) 39.3 39.3 40.0Daily volumesPoliticsPresident: Felipe CalderonElection: July 2012Social issues are increasing in Mexico withhigh profile shootings and the ongoing drugwar increasingly spilling over into thepolitical arena. This is now resulting inincreased co-operation between Mexicoand the US to try to stop the flow of gunsentering Mexico from the US border.FX Reserves*End of YearUSD136.45bnSource: IMF, S&P, Bloomberg52Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 08Jun 08Nov 08Apr 09Sep 09Feb 10Jul 10Dec 10May 11COUNTRY REPORT: PeruOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BBB+ Stable Baa3 Stable4.25% 4.14% 6.38% 6.50%Economy and Market OutlookAfter extremely strong growth in 2010 economic growth is expected to moderate in 2011 withgrowth being hit by the unexpected election of left wing Presidential candidate Ollanta Humala andthen by the sharp change in global sentiment. Central bank statements appear to indicate that thebank is looking to act pre-emptively to support growth and thus interest rate cuts could occur incoming meetings with some commentators now talking about 75 basis points in interest rate cuts incoming months. The central bank also appears to be comfortable looking through any short terminflation issues if they believe that the risks to the economy from external factors are sufficient.Peru continues to look in a solid position within the region with a budget surplus and small currentaccount deficit. The authorities have been determined to control their currency in a very tight rangeversus the US dollar as they regard US policy to depreciate the dollar as a short term event anddon't believe that currency volatility is helpful to their economy. So far this policy has worked welland there is little reason to believe that their effective US dollar creeping peg will change any timesoon. This makes Peru a very defensive currency but with some dangers given that the authoritieshave the potential to take extreme measures against foreign investors whom they regard asspeculators.3.33.23.13.02.92.82.72.62.5USD/PENJPY/PEN3.93.73.53.33.12.92.72.51614121086420-2-4Peru GDP y/y %2010 2011 (f) 2012 (f)Real Growth (%) 8.8 6.2 5.6CPI (%)* 2.1 3.3 2.5Current account (% GDP) -1.5 -2.7 -2.8Fiscal balance (% GDP) -0.4 0.6 0.9Government Debt (% GDP) 24.5 21.5 19.2Daily volumesFX Reserves*End of YearSpot FXGovt bondsUSD400m40m43.57bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Ollanta HumalaNext election: April 2016The election of Humala has surprisedmarkets and is potentially worrisome giventhe potential for him to cause a deteriorationin the fiscal position if he pursues socialistpolicies. So far however his policies havebeen very credible and this has seen somerecovery in local confidence.53Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Currency Reports:Africa and Middle East54Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 09May 09Sep 09Jan 10May 10Sep 10Jan 11May 11Sep 11COUNTRY REPORT: BotswanaOutlook: NeutralS&P Moody's Rates Policy 3m 2y 7yr[30-Sep-2011]Rating (LC) A Stable A2 Stable9.50% 6.62% 7.10% 8.20%Economy and Market OutlookBotswana's economy has recently been severely impacted by public sector strike action. Roughly90,000 public sector workers went on strike for 8 weeks, demanding 16% pay increases from thegovernment- which has frozen increases for 3 years. Although the strike has now been suspended,pending further negotiations with the government, the sheer length of it is likely to significantlyimpact 2011 growth. This is largely due to a significant drop in household consumption, given thegovernment's "no work no pay" policy. Household consumption, which accounts for 60% of GDP isnow forecast to grow 7% in 2011 versus 9% previously. Despite the industrial action, other parts ofthe economy have improved. Increasing global demand for diamonds has boosted the miningsector, which is now expected to double export revenues by 2015 to $288mio. However, risingglobal fuel prices need to be carefully watched. In Botswana, higher fuel prices often lead tosignificantly lower mining production. In terms of monetary policy, the central bank continues toleave interest rates on hold, despite inflation remaining above their target band. The recent publicsector strike will likely ease inflationary pressures in the months ahead and provide the central bankwith more scope to leave rates on hold at their current 9.5% level. Evidence of this is alreadybeginning to show, with m/m inflation starting to fall. Diamond exports continue to dominate theeconomy, and will likely continue to do so in the years ahead. Lack of diversification continues toremain the dominant concern.8.98.47.97.46.96.45.95.4USD/BWP (lhs)JPY/BWP9.598.587.576.565.5516.014.012.010.08.06.04.0CPI y/y %2010 2011 (f) 2012 (f)Real Growth (%) 7.2 4.8 5.4CPI (%)* 7.4 8.9 7.7Current account (% GDP) -5.1 -3.8 0.1Fiscal balance (% GDP) -9.9 -5.7 -4.7Government Debt (% GDP) 15.9Daily volumesFX Reserves*End of YearSpot FXGovt BondsUSD15mio64mio9bnSource: IMF, S&P, Bloomberg, Barclays, BMIPoliticsPresident: Ian KharmaNext election: 2014The government continues to receive strongpraise for its high levels of governance.Officials remain committed to controllingspending, in efforts to close the deficitcreated by the crisis. However, thehandling of the public sector strikes hasattracted significant criticism. The rulingparty needs to tread carefully if it is to avoidlosing widespread support.55Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 09May 09Sep 09Jan 10May 10Sep 10Jan 11May 11Sep 11COUNTRY REPORT: EgyptOutlook: NegativeS&P Fitch Rates Policy 3m 1y 10y[30-Sep-2011]Rating (LC) BB Stable BB+ Stable8.25% 12.43% 13.63% 15.00%Economy and Market OutlookThe macro situation in Egypt remains weak, as ongoing political risk and elevated uncertaintycontinue to weigh on growth prospects. With large-scale protests ongoing, and the possibility of asmooth democratic transition becoming increasingly unlikely in the near term, there appears to bemore downside risks to growth in the months ahead. Despite this, the most recent GDP data showsthe economy rebounding into positive territory. After contracting -4.3% y/y in Q1 growth printed at0.4% y/y in Q2. Clearly growth at this level is considerably weaker than levels witnessed before thepolitical crisis, and remains below the level required to absorb the millions of new entrants into thelabour markets every year. Inflation remains on a downward trend, falling to 8.5% y/y in Augustversus 11.8% y/y the month prior. Despite acknowledging the existence of greater risks to growththan to higher inflation, the central bank remains reluctant to cut interest rates, and will likely leaverates on hold at the next policy meeting. Although the worst is likely behind, there remainsconsiderable challenges ahead for Egypt. The most important component is the emergence of astable government, which will need to be able to present and implement a clear macro frameworkgoing forward.6.16.05.95.85.75.65.55.4USD/EGP (lhs)JPYEGP8.58.07.57.06.56.05.55.04.54.019.017.015.013.011.09.07.05.0CPI y/y %2010 2011 (f) 2012 (f)Real Growth (%) 5.1 0.5 2.6CPI (%)* 10.3 10.4 10.0Current account (% GDP) -1.9 -2.3 -2.2Fiscal balance (% GDP) -7.7 -9.5 -10.6Government Debt (% GDP) 14.9 22.0 23.0Daily volumesFX Reserves*End of YearSpot FXUSD50mio21bnSource: IMF, S&P, Bloomberg, Barclays, BMIPoliticsPresident: Currently under military rule.Next election: 2011The upcoming elections are expected tohappen in stages. The head of the electioncommission stated that voting for the lowerhouse will happen between November andJanuary. The reinstatement of emergencylaw, and the will of many political parties tochange the electoral system remain asmajor challenges. Thus the weeks aheadwill likely be volatile from a politicalperspective.56Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 08Jun 08Nov 08Apr 09Sep 09Feb 10Jul 10Dec 10May 11Oct 11COUNTRY REPORT: GhanaOutlook: NeutralS&P Moody's Rates Policy 3m 1y 5y[30-Sep-2011]Rating (LC) B+ Stable BB Stable12.50% 9.37% 11.20% 14.54%Economy and Market OutlookAt the beginning of the quarter the central bank made the unexpected decision to cut interest rates50bp to 12.5%. There were several reasons behind the cut,; firstly the Central Bank claims inflationexpectations to be firmly anchored, secondly, consumer confidence remains weak, and lastly andperhaps most importantly the Central Bank continues to resent the commercial banks‟ reluctance topass on lower lending rates to consumers. The rate cut looks slightly questionable in the face of awave of positive economic data recently released in Ghana. For instance, H1 fiscal revenues wereabove target, private sector credit growth is picking up, and non performing loans are rapidlydeclining. Following the rate cut at the beginning of the quarter the central bank has met twicemore, electing on both occasions to leave interest rates on hold. Despite the Central Bank's dovishoutlook on inflation, prices are likely to tick up by year end, likely leading to a fairly swift reversal ofthe recent rate cut. Oil production continues in earnest, with output levels steadily rising. Revenuesare expected to boost the current account by approximately $3.5-4.1bio by 2013. GDP growth hasreceived a strong boost, thanks to strong oil production, printing at 33.5% y/y in Q2 versus 23% theprevious quarter. This puts Ghana on target to achieve 14%+ growth in 2011. In light of healthygrowth, and improved macro stability, Fitch Ratings affirmed Ghana's B+ long term foreign and localcurrency issuer default ratings with a stable outlook during the quarter. The cedi deprecated againstthe yen during the quarter, but remained somewhat stable when compared to its EM peers.1.71.61.51.41.31.21.1USD/GHS (lhs)JPY/GHS0.0220.0200.0180.0160.0140.0120.01023.021.019.017.015.013.011.09.07.05.0CPI y/y %2010 2011 (f) 2012 (f)Real Growth (%) 7.7 15.1 7.9CPI (%)* 8.6 11.4 12.0Current account (% GDP) -8.0 2.2 0.9Fiscal balance (% GDP) -7.3 -5.7 -3.4Government Debt (% GDP) 19.2 16.7Daily volumesSpot FXUSDPoliticsPresident: John Atta MillsNext election: 2012With the 2012 election looming thepresidential race is heating up. Althoughincumbent Atta Mills has secured hisposition as the National DemocraticCongress presidential candidate, he is notlikely to have an easy ride ahead of him.FX Reserves*End of Year4.5bnSource: IMF, S&P, Bloomberg, Barclays, BMI57Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 08Jun 08Nov 08Apr 09Sep 09Feb 10Jul 10Dec 10May 11Oct 11COUNTRY REPORT: NigeriaOutlook: NeutralS&P Moody's Rates Policy 3m 1y 5y[30-Sep-2011]Rating (LC) B+ Stable BB Stable9.25% 7.34% 10.46% 12.50%Economy and Market OutlookDuring the quarter the Central Bank of Nigeria continued on its path of aggressive tightening, andraised interest rates to 9.25%, bringing the cumulative total for the year to 300bps. At the mostrecent MPC meeting the accompanying statement expressed a familiar message; suggesting thecontinued presence of inflationary pressures, and further questioning the government's fiscalstance. Importantly, the most recent statement made strong remarks on the desirability of positivereal interest rates. It appears the CBN‟s primary desire for positive real rates is not to pleaseholders of local savings accounts, but to attract further foreign bond holders-(whom the CBNbelieves are attracted to +ve real rates) thus helping support the naira and consequently inflation.Since beginning the tightening cycle (Sept 2010) the committee has had some success incontrolling inflation. Both headline and core inflation slowed y/y in August to 10.5% and 10.9%respectively, but are likely to tick up slightly- likely prompting further rate hikes before year end. Thecommittee continues to target single digit headline inflation for year end- but will likely facedifficulties, given buoyant economic growth combined with rising food and electricity prices. Duringthe quarter both the oil and non-oil sectors of the economy continued to perform strongly, despiteincreased security concerns. The most recent GDP print shows the economy expanding at a brisk7.7% pace in Q211, versus 6.6% the previous quarter. The recent violence in Nigeria has largelybeen confined to the northern and middle-belt regions, leaving the Niger Delta unaffected. However,going forward, the threat of renewed violence in the Delta remains the biggest concern.163.0161.0159.0157.0155.0153.0151.0149.0147.0145.0USD/NGN (rhs)JPYNGN22021020019018017016015014017.015.013.011.09.07.05.0CPI y/y %2010 2011 (f) 2012 (f)Real Growth (%) 7.9 7.8 7.6CPI (%)* 11.7 11.4 9.9Current account (% GDP) -0.4 1.6 1.5Fiscal balance (% GDP) -4.9 -2.2 -1.5Government Debt (% GDP) 2.3 3.8 3.4Daily volumesSpot FXUSD55mnPoliticsPresident: Jonathan GoodluckNext election: 2015Security concerns remain the biggestpolitical threat. The government desperatelyneeds to develop a plan to address the rootcauses of violence in the country.Encouragingly, since the attacks, PresidentGoodluck has held a series of high-profilemeetings to discuss what has been dubbed"urgent and drastic" measures to addressNigeria's security challenges.FX Reserves*End of Year44bnSource: IMF, S&P, Bloomberg, Barclays, BMI58Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 08Jan 09Jan 10Jan 11COUNTRY REPORT: Saudi ArabiaOutlook: NeutralS&P Moody's Rates Policy 3m 12m 10y[30-Sep-2011]Rating (LC) AA- Stable Aa3 Stable0.25% 0.62% 0.86% N/aEconomy and Market OutlookThe Kingdom's isolation from the outside world has been sharply brought to focus by the ArabSpring. Whereas elsewhere public protest has led to at the very least liberal concessions to quellanger, in Saudi Arabia the authorities has maintained its grip through mainly through hugegovernment spending (in 2011 some USD130 billion will be spent, 30% of the entire GDP of theprevious year). With oil prices remaining fairly healthy, and with Saudi having ratcheted upproduction in July, the country can easily afford the splurge, and economic growth will benefitaccordingly from the increased spending and oil production. Inflation remains under control, mainlythanks to an increasing subsidy on food prices.Thanks to its tight US dollar peg, the Saudi Riyal (SAR) rallied on a trade weighted basis toward theend of Q3 2011. The currency retains an implicit but hardly expected appreciation bias in the forwardmarket. The plan for a Gulf Co-operation Council (GCC) currency remains a long term goal for theSaudi Arabian Monetary Authority, but after a number of years of slippage, and with Europe's singlecurrency problems all too plain, appetite for a pan-Gulf currency is understandably waning.3.83.8USD/SAR 1 year forwardUSD/SAR12.010.0CPI inflation y/y %3.88.03.76.03.74.03.72.03.70.02010 2011 (f) 2012 (f)Real Growth (%) 3.8 5.6 3.5CPI (%)* 5.3 5.5 4.5Current account (% GDP) 15.4 24.6 15.6Fiscal balance (% GDP) 6.7 6.4 4.8Government Debt (% GDP) 10.2 8.0 8.0Daily volumesFX Reserves*End of yearSpot FXGovt bondsUSD7.5bnN/a517 bnSource: Jadwa Investment, Citi, BloombergPoliticsHead of state:al-SaudKing Abdullah bin Abdel-AzizSaudi Arabia has been generally successful inpreventing the protests seen elsewhere in theArab world, thanks to a combination ofgiveaways and the threat of a violent securitybacklash should trouble occur (as shown bySaudi involvement in the crackdown onprotests in Bahrain earlier in the year). Assuch, the country has made virtually no effortto liberalise in the face of public discontent.59Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 09Apr 09Jul 09Oct 09Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11COUNTRY REPORT: South AfricaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) A Stable A3 Stable5.50% 5.57% 6.87% 8.30%Economy and Market OutlookDuring a quarter of increased volatility across global markets the rand along with its EM peersweakened significantly against the yen. The SARB at their monetary policy meeting left interestrates on hold at 5.5%, and cited increased concerns surrounding global growth going forward.Domestic data remains weak, with the supply side suffering in particular. The PMI sunk well below50 in July and August, and manufacturing production contracted by 6% y/y in July. Althoughinflation remains contained at this stage, a significantly weaker rand raises the risk that inflationstarts to uptick, possibly forcing the SARB to raise rates earlier than perhaps necessary, choking analready weak recovery. Despite dovish comments at the most recent policy meeting, at this stage aweaker rand certainly limits the SARB‟s ability to provide further stimulus by way of a rate cut.Worryingly, consumer confidence, which held up relatively well in H1 2011 has declined sharply inQ3 to a two year low. This clearly raises concerns around the future level of household spending,the largest contributor to real GDP growth in the past five quarters. Similarly, the sharp decline inlevels of business confidence during the quarter suggests the prospects for a continued recovery infixed investment remain bleak. Despite this, a combination of high wage settlements, manageableinflation and low policy rates will likely sustain consumption expenditure at reasonable levels for theremainder of the year.11.010.510.09.59.08.58.07.57.06.56.0ZAR CurncyJPYZAR Curncy0.120.120.110.110.100.100.090.090.080.080.0710.09.08.07.06.05.04.03.02.0CPI y/y %2010 2011 (f) 2012 (f)Real Growth (%) 2.8 3.5 4.0CPI (%)* 3.5 6.1 5.7Current account (% GDP) -2.8 -3.3 -3.4Fiscal balance (% GDP) -5.3 -5.1 -4.5Government Debt (% GDP) 41.5 42.7 41.7Daily volumesFX Reserves*End of YearSpot FXUSD4-5bn48.6bnSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Jacob ZumaNext Election: 2014The recent wave of industrial action will notonly pose downside risks to growth, butalso intensify feelings among foreigninvestors that policy uncertainly is rising.Julius Malema- the ANC youth leader is nothelping matters with his calls fornationalisation of the mining sector. Hisongoing disciplinary hearing by the ANC isnot helping matters. If acquitted, Malemacould pose a serious threat to Zuma at thenext election.60Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 09Apr 09Jul 09Oct 09Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11COUNTRY REPORT: UgandaOutlook: NeutralS&P Fitch Rates 3m 2y 10y[30-Sep-2011]Rating (LC) B+ Stable B Stable17.41% 15.21% 13.23%Economy and Market OutlookAt the end of Q3, the Central Bank reformed its monetary policy framework to meet the newchallenges faced by the economy. This included a shift toward inflation targeting, moving away fromthe previous quantitative controls on the money supply. A new policy rate was installed, to bereviewed on a monthly basis in an attempt to control run-away inflation. Since its introduction, thecentral bank has opted to raise the benchmark rate by a total of 700bps, quickly establishing itself astrong reputation as a serious inflation targeter. Despite increasing the benchmark rate some 700bpinflation remains stubbornly high, printing at 28% y/y in September, well above the stated target of5%. The sharp increase comes largely as a result of stubbornly high food prices and a weakeningcurrency. The shilling has lost about a quarter of its value against the dollar during 2011, greatlyincreasing the price of imported goods. In the months ahead Uganda faces a deterioratingeconomic environment, given high inflation and a depreciating currency. In light of this, Fitch, theratings agency revised Uganda's long term rating to stable from positive. Uganda has long beenexpected to benefit from the discovery of oil. However, at this stage the government's continuedfailure to settle tax disputes with offshore exploration companies mean that the prospect of oilrevenues look somewhat distant.3,100.02,900.02,700.0USD/UGX (lhs)JPY/UGX403525.020.0CPI y/y %2,500.02,300.02,100.0302515.010.01,900.01,700.01,500.020155.00.02010 2011 (f) 2012 (f)Real Growth (%) 6.9 6.4 8.8CPI (%)* 3.1 16.8 10.2Current account (% GDP) -10.5 -12.0 -9.7Fiscal balance (% GDP) -2.9 -7.7 -5.7Government Debt (% GDP) 19.7Daily volumesSpot FXUSDPoliticsPresident: Yoweri MuseveniNext election: 2016Food insecurity will likely be the biggestissue facing Uganda in the months ahead,due to adverse weather conditions pushingup prices. Thus the country may experienceshortages, which could lead to a degree ofunrest. The government has called on theMinistry of Agriculture to boost production inthe more fertile parts of the country, and isstock piling food where possible.FX Reserves*End of Year3.3bnSource: IMF, S&P, Bloomberg, Barclays, BMI61Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 09Apr 09Jul 09Oct 09Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11COUNTRY REPORT: UAEOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) NR Aa2 Stable1.00% 1.48% 2.25% 3.10%Economy and Market OutlookThe UAE has been economically resurgent in 2011, with the country enjoying something of a safehaven status thanks to the political problems regionally and economic problems globally. Therationalisation of Government Sponsored Enterprises (GSEs) has also done a lot to re-buildconfidence in both Dubai and the wider UAE, underlined by the fact that the Government of Dubai10 year issue of US$ 500 million in June oversubscribed by 3 times. The improving environment forcredit has helped to boost the non-oil sector of the economy, as has a resumption in tourists to theEmirates (as opposed to countries like Egypt), while Abu Dhabi continues to pump oil in order tohelp alleviate the shortfall of Libya. Inflation remains low despite the pick up in the economy, withapartment rental prices likely to act as a cooling factor on overall inflation for some time to come.Forward markets continue to price in little likelihood of a change in currency policy at any time in thenear future, with the 12 month forward closely shadowing the peg to the US dollar. The UAE pulledout of the first phase of GCC single currency implementation in 2009, and there's little to suggestthat it is edging back toward monetary union now.3.723.713.703.693.683.673.663.653.64USD/AED 1yr forwardUSD/AED7.06.05.04.03.02.01.00.0-1.0CPI inflation y/y %2010 2011 (f) 2012 (f)Real Growth (%) 3.2 3.8 3.5CPI (%)* 0.9 2.5 2.9Current account (% GDP) 8.3 10.3 8.5Fiscal balance (% GDP) -1.3 6.4 6.0Government Debt (% GDP) 12.9 11.0 9.4Daily volumesFX Reserves*End of YearSpot FXGovt bondsUSDN/aN/a55 bnSource: IMF, Deutsche Bank, CitiPoliticsPresident: Sheikh Khalifa bin Zayed al-NahyanNext election: N/aSheikh Khalifa, the ruler of Abu Dhabi,enjoys strong support among the otherleaders of the Emirates. The UAE hasresponded to the uprisings elsewhere in theMiddle East by increasing the voting baseof nationals in the Federal National Council,an advisory board to the Sheikhs.62Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Mar 09Jun 09Sep 09Dec 09Mar 10Jun 10Sep 10Dec 10Mar 11Jun 11Sep 11COUNTRY REPORT: ZambiaOutlook: NeutralS&P Fitch Rates 3m 1y 10y[30-Sep-2011]Rating (LC) B+ Stable B+ Stable8.25% 15.03% 15.40%Economy and Market OutlookDuring the quarter the country underwent its presidential elections where Michael Sata defeatedincumbent President Rupiah Banda. Although S&P during the month affirmed Zambia's B+ foreignand local currency long-term ratings, uncertainties remain over potential new government policy.One of the more closely watched policy decisions is the government's stance on the reintroductionof withholding tax- which will affect the mining companies in particular. Another move attractingcontroversy was President Sata's decision to dismiss the Central Bank Governor, clearly creatingmonetary policy uncertainty. Clearly the government needs to tread carefully if it is to maintainpositive relations with the many vital foreign investors. Although there are risks of bigger changesto come, economic fundamentals remain strong. Despite a decline in copper prices, the metal'svalue remains at historically high levels. Thus the monthly dollar value of Zambian copper exportshave actually increased roughly 28% y/y in the first seven months of the year. Copper revenues inZambia have long been the subject of dispute, given the mining companies' actions to keeprevenues offshore. Thus to date, Zambia has been unable to benefit from copper to the full extentthat it perhaps deserves. Sata has pledged to overhaul the sector, promising much improved levelsof transparency and governance and has already ordered all copper exports to be sent through thecentral bank. Although some of Sata's changes may have unnerved foreign investors' sentiment,they should be viewed as positive for Zambia in the long run.6,000USD/ZMK (lhs)JPY/ZMK7017.0CPI y/y %5,5005,00065605515.013.011.09.04,500507.04,000455.02010 2011 (f) 2012 (f)Real Growth (%) 6.8 7.3 7.1CPI (%)* 7.9 8.1 10.0Current account (% GDP) 3.9 6.8 7.2Fiscal balance (% GDP) -2.5 -1.7 -0.8Government Debt (% GDP) 10.6 12.1 14.5Daily volumesSpot FXUSD30mioPoliticsPresident: Michael SataNext election: 2016The September elections saw Michael Sataclaim victory over incumbent Rupiah Bandain the Presidential elections. Bandaaccepted defeat , and asked his supportersto recognise Sata as president. Initiallythere were fears over the future of themining industry, given Sata's pre-electionpledge to increase taxes on the sector.FX Reserves*End of Year2.7bnSource: IMF, S&P, Bloomberg, Barclays, BMI63Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.

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