BIG PICTURE: Working hard or hardly working? THEMES OF THE ...

Page

BIG PICTURE: Working hard or hardly working?

2-3

Demographic trends play a heavy hand in employment gains and could hold the key to understanding full employment and the responsiveness of wages.

THEMES OF THE WEEK US: What’s driving all the hiring? Job gains remain well above their long-run trend and continue to surprise to the upside, with five of the first seven employment releases this year beating consensus expectations.

4-5

US FOMC: Time for the re-balancing act July FOMC minutes signalled that the Fed intends to announce its balance sheet unwind at the upcoming September meeting, and revealed growing concern about the string of inflation disappointments.

6-7

Germany: Domestic tailwinds The German economy remains on track to meet our full-year GDP growth forecast of 2.0%, thanks to robust domestic demand. We tend to think that net trade will do little to support GDP growth though.

8-9

Italy: Debtor’s prism The spotlight may fall once again on Italy’s public finances in the coming months, should the ECB unwind QE. We examine the debt dynamics at play and model what an interest rate shock could mean for debt servicing costs.

10-11

Japan: Reshuffling political ambition We examine what the new political landscape (post cabinet reshuffle) may hold for PM Abe and his plans for constitutional reform, and cast our eye over who might succeed him as party head if he is not re-elected.

12-13

Brazil’s rates: Six in the mix We stop short of cutting our 7% rate call given lingering uncertainties, but see risks to the downside for our call. If the terminal policy rate in the current monetary easing cycle has a 6% handle though, it would come as no surprise at all.

14

Argentina: Primary colours The ruling Cambiemos coalition performed strongly in the primary election. Support for President Macri’s reform agenda can be considered solid. Better macroeconomic performance could help Cambiemos in October’s election.

15

South Africa: Taking stock The primary and secondary sectors of the economy have all made positive contributions to Q2 production-side GDP growth, it would appear. However, weak structural demand and policy uncertainty leave us underwhelmed.

16-17

South African inflation: Hitting the mid-point Headline CPI inflation is likely to have slowed to 4.5% y/y in July, the mid-point of the South African Reserve Bank’s 3-6% inflation target band, the first time this has happened since April 2015.

18

DATES AND DATA One-week calendar

19-20

Global inflation watch

Key data preview

21-23

Forecasts

28

Central bank watch

24-25

Recently published research

29

26-27

Contacts

30

Disclaimer

31

This weekly has been produced by the Market Economics team www.GlobalMarkets.bnpparibas.com

1

Please refer to important information at the end of the report.

Big picture: Working hard or hardly working? Author: Bricklin Dwyer Senior Economist, North America



Demographic trends play a heavy hand in employment gains and could hold the key to understanding full employment and the responsiveness of wages.



The prime-age workforce is strengthening in most developed markets, but the low level of participation in the US suggests that there could be some labour market slack remaining.



In Europe, the biggest problem is low participation from those 15-24 years old; in the US, it is the prime-age male population; in Japan, it is low overall population growth.

New York, BNP Paribas Securities Corp

Progress on growth and employment, not wages

Global economic growth has been fairly robust with the Eurozone being the most recent outperformer, relative to expectations, while Canada, the US and Japan are all running above what we perceive as trend, and Chinese growth is still elevated, output in Brazil is improving and Mexican growth looks to be holding up. Employment activity has followed a similar track, with the OECD’s current estimate for a harmonised G7 unemployment rate at the lowest level since estimates began in 1991 (Chart 1). Alongside better growth and employment, however, is the lack of wage acceleration on a global basis that has dampened expectations for the pace of removing monetary accommodation.

Structural vs cyclical influences in LFP

Demographics continues to play a pivotal role in labour force participation (LFP) rates, trends in employment and understanding why wage gains are limited. Across the G7, we see a clear influence in LFP from the ageing population, which is not expected to fade anytime soon. In addition to demographics, there is a behavioural or cyclical piece of LFP driven by the “shadow labour force” (defined as those who want a job, but are not actively seeking one), which responds to a tighter labour force as well as shifts in retirement plans, health problems, school enrolment and family responsibilities, among other circumstances. On this front, we have seen various responses to tighter labour markets.

Improvement in prime-age participation

The trend in developed economies has been an overall improvement in LFP, with the response from the US more latent. In the case of Japan, with a large structural decline in the labour supply, participation is up across all aged groups — particularly from its older generation as well as women. For Europe, the UK and the US, we have seen stagnation or a decline in participation from those aged 15-24 years old, while in both Europe and the UK, we have seen a surge in participation from workers aged 55-64 years old (Chart 2). In the US, we have seen a rebound from prime-aged women – particularly millennials – while overall participation remains depressed (Chart 3).

Now hiring!

In the US, the Beveridge Curve (job openings relative to the unemployment rate) is at its highest level of job openings and the lowest unemployment rate its nearly 20-year history. This suggests that job openings, which have become cheaper to advertise, are plenty, but there

Chart 1: Harmonised unemployment rates

Chart 2: Labour force participation of 55-64 years old

Source: OECD, Macrobond, BNP Paribas

Source: World Bank, Macrobond, BNP Paribas 17 August 2017

Macro Matters

2

www.GlobalMarkets.bnpparibas.com

seems to be a skills mismatch when trying to fill those positions. Moreover, with an overall low level of LFP, it looks like it could take a while for labour market slack to disappear, which is in contrast to the extraordinarily low level of the US unemployment rate. Young workers are a drag on Europe

While changes in LFP in Europe are positive and are mitigating the impact of an ageing population on trend growth, a less positive labour market development has been seen in recent years with the sharp fall in the participation rate of the 15-24-year-old age group, which has dropped by almost 5pp since 2008, notably more than in the US and UK. Moreover, at below 40%, the eurozone figure is 16-19pp lower than in the US and UK. Raising this figure is a key challenge for eurozone policymakers, especially given the unemployment rate for those aged 15-24 is almost 20%, meaning that only one-third of this group is employed.

Falling unemployment rates in Eurozone and UK

The rising trend in overall Eurozone and UK participation has not prevented their unemployment rates from falling sharply. At 4.4%, the UK unemployment rate is at its lowest in over 40 years, while the eurozone unemployment rate has fallen to 9.1% in June 2017, from a peak of 12.1% in mid-2013. The eurozone figure still shows some slack in the labour market.

Wages still lagging

Despite the low level of UK unemployment, wage growth there remains subdued (Chart 4). Possible explanations for this include the lagged impact of previous low inflation, the uncertainty surrounding Brexit leading to corporate sector caution, and the emergence of the “gig economy” effectively increasing the labour supply. Eurozone wage growth has also been relatively lacklustre, given the unemployment rate. However, as we highlight in Eurozone: Resurrecting the Phillips curve, if pay is measured on a per hour basis and one takes account of “speed-limit” effects (the rate of change in spare capacity in the labour market), recent low inflation and some external factors, then wages have behaved largely as one might have expected.

Japan is demographically challenged

Japan is the poster child for demographic challenges. The total number of employed people has steadily expanded in the past four years, despite dull population growth and the acceleration of Japan’s negative demographics (societal ageing and a low fertility rate). The improvement in the country’s labour force participation has primarily come from the 65-69 age group, which looks likely to crest in 2017, as baby-boomers steadily migrate into the 70+ age group.

Looking for labour in Japan

While the older generation in Japan has re-joined the labour force, wages have been sticky. Housewives and the older population have been joining the labour force to fill the void, which suggests that supply constraints are intensifying at the macro level, as the pool of latent labour steadily shrinks. While the tightness of the jobs market does point to upside risk, our baseline view remains that entrenched “zero inflation expectations” will prevent major acceleration in overall wage growth for the foreseeable future.

Joining the force with some resistance

People are being encouraged or forced to work for longer in Europe, Japan and the UK, while in the US, participation rates started at a higher level. From our perspective, there are three takeaways: (1) a skills mismatch between job openings and the shadow labour force could shift retirement plans for older folks. (2) Wage pressures could be limited, as the “Basement Generation” toss their game consoles and begin to work in entry level positions. (3) A further decline in the unemployment rate could find some resistance as labour shortages pull more people into the labour market.

Chart 3: Prime age workers

Chart 4: Employment compensation

Source: OECD, Macrobond, BNP Paribas

Source: Federal Reserve Bank of Atlanta, Macrobond, BNP Paribas 17 August 2017

Macro Matters

3


US: What’s driving all the hiring? Authors: Bricklin Dwyer



Job gains remain well above their long-run trend and continue to surprise to the upside, with five of the first seven employment releases this year beating consensus expectations.



Four sectors are substantially outperforming their historical run-rates: leisure and hospitality, construction, professional and business services, and manufacturing.



With our expectations for above-trend growth this year and next, we expect above-average job growth to continue as we see little scope for a productivity boom.

Senior Economist, North America Andrew Schneider Economist, North America New York, BNP Paribas Securities Corp

Job growth looked to slow at the end of 2016

Instead, it has remained strong

If labour force productivity fails to pick up, then the US economy will need more workers to get the same rate of output growth. At the end of 2016, job growth looked poised to slow. GDP growth for 2016 was just 1.5% y/y with monthly employment gains running just south of 200,000, as the unemployment rate looked to be below its natural rate and the supply of available workers was shrinking. Despite GDP growth averaging around 2.0% in the first half of 2017 (about 0.5pp above trend in our book), the pace of payrolls gains was nearly double their 1 breakeven pace – which the Fed estimates to be close to 50-110,000 – with an impressive 184,000 average monthly gain since January. Looking ahead, and into the weeds of what has been driving recent employment strength, it looks like we could see some slowing in job gains ahead, though without a boost to productivity growth, labour demand will be high. In order to get a sense of recent employment trends and the outperforming versus the underperforming sectors of the labour market, we plotted 12-month average job growth by th th sector against its longer-term performance (10-year average, along with the 25 and 75 percentiles of monthly gains) (Chart 1). Chart 1: Nonfarm payrolls

Source: Bureau of Labor Statistics, BNP Paribas

Broad-based sectoral outperformance

The plot shows broad-based recent strength, with all but three sectors’ recent averages above their longer-run averages (ie, most of the red dots are to the right of the black squares). First the underperformers: the three that stand out are retail, information, and state and local government (within Government). Retail is undergoing a well-covered upheaval in the face of online retailers: cashiers are being replaced by self-checkout computers and large online retailers continue to push traditional retailers out of business. The information sector has seen

1

http://www.frbsf.org/economic-research/publications/economic-letter/2016/october/trend-job-growth-where-is-normal/

17 August 2017 Macro Matters

4


heightened layoffs in telecom firms, as hiring in the tech space has kept losses limited. After undergoing a period of consolidation, state and local government hiring has slowed to a pace below its long-run average. Four standout sectors

Although all but the above sectors have shown recent strength, there are four sectors in which recent hiring has substantially exceeded their 10-year averages. These are: leisure and hospitality, construction, professional and business services, and manufacturing.

 Leisure and hospitality: Suggests healthier household balance sheets have likely helped

Leisure looks sustainably strong

allow for greater spending on leisure and hospitality – a trend likely to continue if the economy remains on solid footing with firm hiring and wages.

 Construction: Recent strength has mirrored strength in structures investment spending,

Construction likely to fade

which has averaged 8% q/q saar over the past four quarters – a trend we think could fade in the coming quarters.

 Professional and business services: The recent strength has appeared to be related to the

Professional services poised to slow, too

strength in construction hiring; the sub-sector with the largest recent outperformance has been architectural and engineering services – also looking likely to fade a bit.

 Manufacturing: The pickup is highly correlated to oil prices, and without further increases in

Manufacturing to slow, but follow oil prices

Monthly gains unlikely to snap back to trend

Productivity picks up, more hiring or GDP slows

oil prices, this momentum will likely fade. The 10-year average of the sector as a whole is notably negative, reflecting the effects of globalization and a structural shift in domestic manufacturing toward higher value-added/more automated processes. The recent hiring outperformance on the whole is reflective of (1) construction hiring related to strong structures investment spending; (2) manufacturing hiring related to a rebound in oil prices; and (3) leisure and hospitality hiring related to solid household income growth. As a whole, even if these sectors experience some fading in their outperformance, monthly employment gains look unlikely to snap back too far. When we consider labour force productivity in the US, the recent trend of around 1.0% (Chart 3) suggests that the economy continues to rely heavily on labour to generate faster output. Simply put, as GDP is the product of growth in the number of employees and their productivity, if we hold productivity constant, then we need more people to generate faster GDP growth. This suggests that, with continued monetary accommodation and some fiscal stimulus driving our forecast for GDP growth of around 2.4% for the second half of 2017 and around 2.5% y/y in 2018, growth would then have to come with either a healthy bout of productivity gains or more of an increase in the workforce (employment). In our view, the US is unlikely to get much more out of productivity, given the low levels of capital investment in the past decade, which suggests that demand for labour will remain high – pulling folks into the labour force – or GDP growth will have to slow.

Chart 2: GDP and employment growth

Chart 3: Labour productivity growth

Source: BLS, BEA, Macrobond, BNP Paribas

Source: BLS, BEA, Macrobond, BNP Paribas


5


US FOMC: Time for the re-balancing act Author:



The July FOMC minutes signaled that the Fed intends on announcing its balance sheet unwind at the upcoming 20 September meeting.



The minutes revealed growing concern about the string of disappointments in inflation, and gave explanations for why the weakness is still seen as “temporary”.



We continue to expect the Fed to announce the unwind of its balance sheet policy at its September meeting, and the next rate hike to occur in March 2018.

US Economics Team New York, BNP Paribas Securities Corp

This note was published as a Macro Snapshot on 16 August. September B/S unwind looks like a go

The July FOMC minutes suggested changes are afoot to the Fed’s balance sheet reinvestment policy at the upcoming 20 September meeting – with only “significant adverse developments” that could stand in their way. The minutes also revealed growing concern about the string of disappointments in inflation with a slew of explanations on why the weak prints are temporary and most participants still believe in the relationship between output and prices – notably the July FOMC meeting was held before the latest inflation disappointment (please see, US Inflation Watch: Still soft at the core). We continue to expect the Fed to announce the unwind of its balance sheet policy at its September meeting, while the outlook for the fed funds rate looks subject to realized inflation in the coming months. We continue to expect the Fed to remain on hold for the remainder of the year with the next rate hike coming in March 2018. Balance sheet policy

Several were prepared to announce in July

 As expected, the minutes appeared to confirm that the Committee is ready to announce its balance sheet unwind at the September meeting.

 After having already announced the details of their planned unwind at their June meeting, “several” participants were prepared to announce it at the July meeting, but, “most” preferred to defer that decision until an “upcoming meeting”.

 Participants “generally agreed” that implementation of the unwind would begin relatively soon, absent “significant adverse developments in the economy or in financial markets”.

Inflation Growing concerns over inflation

 The Committee was less confident that inflation will pick up over their forecast horizon. “Many” participants noted that much of the recent decline in inflation likely reflected idiosyncratic factors, but “several” indicated that the risks to the inflation outlook could be tilted to the downside.

 The minutes revealed a list of possible explanations for the low inflation prints: -

Diminished responsiveness of prices to resource pressures;

-

A lower natural rate of unemployment;

-

Possibility that slack may be better measured by labour market indicators other than unemployment;

-

Lags in the reaction of nominal wage growth and inflation to labour market tightening;

-

Restraints on pricing power from global developments and from innovations to business models spurred by advances in technology.

Economy Activity and labour market ok, but wages still tepid

 The Committee generally sees developments as in line with their outlook.  “Several” participants noted uncertainty around government policy that could be negatively impacting business spending and hiring plans.


6


 On wages, district contacts confirmed tightness in the labour market, but relayed little evidence of wage pressures. “A few” participants suggested that wage growth was being held down by compositional changes in employment associated with the hiring of less experienced workers at lower wages than those of established workers, a case made in a recent San Francisco Fed paper.

 Additionally, “a number” of participants suggested that the rate of increase in nominal wages was not low in relation to the rate of productivity growth and the modest rate of inflation – a point we have made as well (please see, US: Why is wage growth so low?). Rates Minutes dovish regarding rates outlook

 The Committee noted an easing in financial conditions, while a number of participants are growing uneasy about the impact of low longer-term interest rates and the risk that the yield curve could steepen abruptly or there could be excessive risk-taking (please see, Big Picture: The age of r-stardom).

 Despite this concern of financial stability, the July minutes were decidedly dovish when it

came to the rates outlook – mostly on account of greater downside risks to the inflation outlook.

 The Committee continues to believe that its shift in balance sheet policy will not have a

negative “announcement” effect on financial markets. However, a negative outcome could have an effect on the path of the fed funds rate.


7


Germany: Domestic tailwinds Authors:



The German economy remains on track to meet our full-year GDP growth forecast of 2.0%, supported by robust domestic demand.



The outlook for consumption remains strong, underpinned by tight labour market conditions and rising incomes, and weaker headline inflation pressures.



High capacity utilization, booming business sentiment surveys and very low interest rates suggest further broad-based strength in investment activity ahead.



While robust external demand will continue to support German exports over the coming quarters, a stronger euro is a clear downside risk to the pace of foreign sales.

Michal Dybula Chief Economist Central & Eastern Europe Bank BGŻ BNP Paribas SA

Lack of spare capacity limits the pace of growth

Domestic demand key for GDP dynamics now Firm backdrop and outlook for consumption

There is no general speed limit on German motorways, yet the pace of growth in the country seems to be facing one, at least at the moment. In Q2 2017 Germany’s GDP rose 0.6% q/q, below our and consensus expectations, and in line with the eurozone average. Although revisions to past GDP data have pushed up the annual growth figure to 2.1% in Q2, such a performance seems to be still well below what economic activity data (industrial production, construction output and retail sales) and the European Commission’s Economic Sentiment Index for April-June would suggest (Chart 1). According to the German Statistics Office, the key reason preventing a faster pace expansion is foreign trade, which “had a downward effect on growth because the increase in imports was considerably stronger than that of exports”. We tend to think that in the coming quarters as well, net trade will, on average, do little to support German GDP growth; a positive output gap implies that import growth should outpace that of exports (Chart 2). As result, Germany’s huge trade and current account surpluses, especially in relation to GDP, are likely to continue to moderate over the coming quarters, in our view. Although final GDP data and the breakdown of national accounts for the second quarter will only be published in late August, the German Statistics Office noted that GDP growth was chiefly driven by domestic demand, both consumption and investments. The bounce in retail sales during April-June suggests that private consumption growth accelerated sharply to probably close to 2.0% y/y (Chart 3). A strong labour market underpinned by swiftly rising employment points to a robust increase in earnings, even given relatively moderate wage growth. Moreover, with German headline inflation subsiding in Q2, real disposable income growth is likely to have accelerated over the past few months. The rise in EUR/USD and the likelihood that the oil price rises only gradually should also boost consumers’ purchasing power in 2018. The outlook for private consumption therefore remains strong, consistent with current buoyant consumer confidence surveys.

Chart 1: GDP growth and activity data

Chart 2: Positive output gap implies stronger imports

Source: Federal Statistics Office, EC, Macrobond, BNP Paribas

Source: Federal Statistics Office, EC, OECD, IMF, Macrobond, BNP Paribas


8


Broad-based strength in capital spending

Beyond consumption, investment activity also strengthened in Q2. According to the German Statistics Office, the acceleration in capital spending was broad-based, including outlays on construction (Chart 4), machinery and equipment, as well as other fixed assets. High capacity utilization in the manufacturing sector and stronger business sentiment argue for robust growth in productive investments over the coming quarters; growing difficulties in hiring skilled workers may additionally boost spending on technology as an alternative to employing labour, although this is not a given. Meanwhile, very low nominal and real interest rates and rising real estate prices point to ongoing strength in construction activity.

Robust external demand vs. a stronger EUR

In addition to domestic developments, the global backdrop for the German economy has also improved over the past few months. Nominal foreign sales of goods and services rose by 6.4% y/y in Q2, suggesting also an acceleration in the export growth rate in national accounts statistics. Although manufacturing exports orders in the PMI survey ticked down slightly in June and July, they remain consistent with a very strong growth in the near term at least (Chart 5). Over the medium term, we expect external demand to continue supporting the outlook for German exports, although the recent strengthening of the euro and expected further exchange rate appreciation are clearly downside risks to the pace of foreign sales growth.

GDP on course for a 2% rise in 2017

The robust performance in H1 2017 and the firm outlook, especially for domestic demand components, suggest that Germany’s GDP growth is likely to meet, or even beat, our full-year forecast for 2.0% expansion. Certainly, the elevated levels of some confidence-based surveys, such as the Ifo and the European Commission’s economic sentiment index, remain consistent with robust growth in the near term, although the more objective PMI surveys suggest some moderation is possible (Chart 6). More fundamentally, over the medium term, as the output gap is already positive, we expect that the German economy is likely to increasingly face speed-limit effects. These could prevent net trade contributing positively to growth despite robust global conditions, if Germany resorts to imports to make up for its lack of capacity.

Chart 3: Consumption bounce in Q2

Chart 4: Accelerating investments

Source: Federal Statistics Office, Macrobond, BNP Paribas

Source: Federal Statistics Office, Macrobond, BNP Paribas

Chart 5: Robust export performance

Chart 6: Some moderation ahead?

Source: Federal Statistics Office, Markit, Macrobond, BNP Paribas

Source: Ifo Institute, Markit, Macrobond, BNP Paribas


9


Italy: Debtor’s prism Author:



With the ECB likely to unwind some of its monetary stimulus, Italian public finances may once again fall under the spotlight in the coming months.



We expect interest rates to rise, reflecting a further reduction in the ECB’s QE and political uncertainty ahead of the general election in Italy.



The long average maturity of public debt and a low implied interest rate should protect Italian public finances against rises in market rates in the short term.



Medium term, though, with Italy struggling with subdued growth and weak domestic price pressure, a protracted shock in funding costs might complicate debt management.

Clemente De Lucia Eurozone Economist BNP Paribas London branch

This is an abbreviated version of our desknote, Italy: Debtor’s prism, dated 16 August. What would an end to QE mean for Italian yields?

The prospect of a removal (albeit gradual) of monetary accommodation in the eurozone implies the risk of a resulting widening of peripheral spreads, especially for Italy. The picture is mixed, in our view: as we flagged in our recent note, Italy’s growth: Post-boost reboot, a positive combination of loose fiscal and monetary policy has improved Italy’s growth outlook considerably of late. However, ahead of the general election, political uncertainty is set to remain high at the time we expect the ECB to scale back its asset purchase programme. While we expect interest rates on Italy’s sovereign debt to rise in the coming quarters, we do not foresee any major funding problems. However, with several rigidities limiting the economy’s potential output growth rate, protracted sharp increases in interest rates could complicate the government’s debt management in the medium to longer term, in our view.

Implied interest rate at a record low

Limited short-term impact on public finances from an end to QE Italy has benefited significantly from the ECB’s asset purchase programme. Since 2012, debtservicing costs have consistently fallen: as a percentage of GDP, interest payments have declined to their lowest level since the launch of the euro. The implied interest rate (ie, the ratio of the interest expenditure over the stock of debt, which can be interpreted as the average coupon) was a record low 3% in 2016.

Interest rates set to rise over the next two years…

We expect interest rates to increase over the next couple of years, reflecting (i) the ECB ending its QE programme and (ii) Italy’s domestic political uncertainty – albeit only modestly, as the economic environment has discernibly improved and the authorities are tackling some of the most acute issues facing the banking sector, reducing considerably sector risk. We expect the yield on the 10y BTP to rise to 2.8% by the end of this year and to 3.3% by the end of next year, remaining at that level in 2019. Compared with the levels seen through much of H1 2017, our assumption implies an increase of around 100bp before the end of 2018 on 10y yield securities.

…but no funding problems for Italy

Assuming, for simplicity’s sake, a parallel shift in the whole yield curve, such an increase would cause no significant funding problems for Italy, our analysis suggests. Indeed, as the average maturity of the debt is about seven years and the implied interest rate is at its lowest level on record, any increase in market rates would affect the implied interest rate of the debt and debtservicing costs only progressively. In particular, we assume that bonds expiring in the coming years would be replaced with securities of the same initial maturity at an interest rate equal to our rate forecasts. Moreover, we assume that the government deficit would be financed with the issuance of 7y securities, ie, equal to the current average maturity of debt.

Debt-servicing costs to keep falling

With the fiscal stance moving from expansionary this year to broadly neutral in 2018 and 2019 (ie, no change in the structural primary balance), we found that a 100bp upward shift in the yield curve would not alter the dynamics of debt-servicing costs and the implied interest rates, which would continue to fall from 2016’s 3% level. The public debt ratio would decline from 132.8% of GDP this year to 131.1% in 2019, we estimate.

Buffers against a sharp increase in interest rates

The relatively long average maturity of debt and the low implied interest rate of the debt should protect Italian public finances even in the event of a sharper increase in interest rates than we envisage in our central scenario. We find that a shock of 150bp to our base case – equivalent to a shock of 250bp to the average of 2.2% recorded by the 10y BTP in the first half of 2017 – 17 August 2017

Macro Matters

10


would leave, other things being equal, debt-servicing costs and implied interest rates roughly unchanged over the next couple of years. This suggests to us that there are sufficient buffers in the short term to protect public finances from an increase in interest rates. Without a protracted rate rise, the debt ratio looks set to decline longer term If interest rates remain in line with our base case, we expect Italy’s debt ratio to decline in the medium to longer term. Our base case assumes: the yield curve remains unchanged at the end2019 level over the next decade, with the yield on the 10y BTP at 3.3%; a neutral fiscal stance; and subdued nominal GDP growth (averaging 1.8% growth for 2020–30). We take a rather conservative approach on medium-term nominal growth because several rigidities still constrain potential output growth, and inflation is set to stay subdued as Italy regains competitiveness versus its eurozone peers, muffling domestic price pressures. In this scenario, despite subdued growth, we project a decline in the debt ratio to 121.1% of GDP by 2030 (Chart 1).

Base case: debt ratio declines over 2020–30

The fiscal effort seems manageable. Under such a scenario, we would expect the primary balance to average 2.2% of GDP between 2020 and 2030, in line with the average recorded between the launch of the euro and the outbreak of the financial crisis. Protracted shock in funding costs could cause problems

A protracted shock of 150bp on our base case, stabilising the 10y at 4.8% over 2020–30, would cause the debt ratio to ease somewhat between 2020 and 2025, according to our calculations. Thereafter it would return to its 2020 level over the following 5 years, leaving, on average, the debt ratio broadly stable over the next decade (Chart 2). Such a result may look reassuring at first glance. Note, however, that as the analysis is based on all other factors being equal, it does not take account of the negative impact of higher interest rates on GDP growth and inflation. Under such an interest-rate shock, nominal GDP growth would likely fall well below 1%, and the combination of higher interest rates and lower nominal GDP growth would likely push the debt ratio higher in the medium term, which could in turn push interest rates up further and, in a vicious circle, further worsen growth prospects. To conclude, the long average maturity of public debt and the low implied interest rate of the debt should provide a sufficient buffer for Italian public finances to counter negative shocks caused by a sharp increase in interest rates over the short term, our analysis suggests. Any increase in interest rates would affect public finances only progressively. However, with growth prospects set to remain subdued, a protracted shock in market rates could complicate debt management in the medium term. Were structural reforms to boost potential output and cut the stock of debt, this would likely improve debt dynamics, although no clear winner at the next general election might rein in appetite for reforms and make it harder to ensure the debt ratio improves.

Chart 1: Debt dynamics – base line (% of GDP)

Chart 2: Debt dynamics – protracted shock (% of GDP)

135

135

130

130

125

125

120

120

115 2015

2017

2019

2021

2023

2025

2027

115 2015

2029

Base line for 2020–30 (average)

2017

2019

2021

2023

2025

2027

2029

Protracted 250bp shock on interest rates, 2020–30

Nominal GDP growth rate (%)

1.8

Nominal GDP growth rate (%)

Primary balance (% of GDP)

2.2

Primary balance (% of GDP)

2.2

Budget balance (% of GDP)

–1.3

Budget balance (% of GDP)

–2.3

Implied interest rate on debt (%)

2.9

Implied interest rate on debt (%)

3.6

Public debt (% of GDP)

2020

2030

130.2

121.1

Public debt (% of GDP)

Source: BNP Paribas projections

1.8

2020

2030

131.0

131.2

Source: BNP Paribas projections 17 August 2017

Macro Matters

11


Japan: Reshuffling political ambition Author:



Support for the government has picked up after the recent cabinet reshuffle, but the approval rating is still lower than the disapproval rating.



There may be a snap election before the opposition can reorganise. We view this as unlikely though as the LDP’s seat count could be hit, ending Abe’s hopes of reforming the constitution.



We suspect that Abe is still targeting a third term as LDP head and implementing constitutional reform. To this end, he may keep fiscal policy loose.



Abe’s re-election as LDP head seems unlikely at this juncture though. While conditions are fluid, former Foreign Minister Kishida seems to have a leg-up in the race to succeed Abe.

Ryutaro Kono Head of Economics, Japan Chief Japan economist Hiroshi Shiraishi Senior Japan economist BNP Paribas Securities (Japan) Limited

Public support for the government rebounds …

Public support for the government has picked up by 5 points on average, having fallen sharply on allegations of cronyism levelled against Prime Minister Shinzo Abe and his close allies, coupled with ill-judged comments by cabinet ministers and LDP lawmakers, according to opinion polls conducted after the 3 August cabinet reshuffle. The removal from the cabinet of certain ministers (previously caught up in scandal allegations or deemed incompetent by the public) and the inclusion of individuals who in the past have been openly critical of Abe’s policies appear to have resonated with the public.

… but Abe’s prospects of a third term look slim

That said, approval ratings remain in the 35%-45% range, and most polls show that disapproval ratings exceed approvals. This is partly because the latest cabinet reshuffle has done little to install fresh faces in Abe’s government: many veteran lawmakers were appointed to cabinet positions to ensure a ‘steady hand’ on policy. More fundamentally, though, simply changing the composition of the cabinet won’t lead to a major improvement in public support, when the main cause for concern is the trustworthiness of the prime minister himself, we argue. The Abe regime now seems to be out of immediate danger. However, if support for the government remains at its current level, the prospects of his winning a third term as LDP head in September 2018 look slim. After all, the LDP needs a president capable of leading it to victory at the Lower House election, which must be held by the end of next year.

There is talk of Abe calling a snap election …

There are whispers in political circles that Abe may dissolve the Lower House this September for a general election in October – the rationale being that, even though support for the government is low, if the election is held before the opposition can reorganise itself into a credible alternative, the LDP stands a good chance of success. And if Abe can lead the LDP to a clear victory, he could win a third term as party head. Such a scenario certainly cannot be ruled out, in our view.

… but a general election would be a gamble

However, were Abe to call a snap election in the near future, the LDP’s seat count could well fall sharply, as, even in the absence of a credible alternative to the LDP, floating voters could vent their disapproval at the ruling party by voting for anyone but the LDP. Even if the ruling coalition maintains its majority in the Lower House though, its seat count could take a sharp hit, possibly leading to talk that Abe should take responsibility for the poor showing by resigning. For the prime minister, an early snap election looks a gamble, in our view.

Abe hasn’t abandoned constitutional reform

Further, Abe’s quest to revise the constitution will stall if the pro-revision camp (ie, the ruling coalition and pro-revision opposition parties) were to lose their two-thirds majority in the Lower House. Despite recent signs that he may have softened his stance on reforming the constitution – at a press conference on 3 August Abe said that “the schedule is not fixed”, and he moved Fumio Kishida, a critic of reforming the constitution quickly, from the post of foreign minister to LDP policy chief – it is hard to imagine that he has given up on constitutional reform so easily.

Has Abe reached a deal with Kishida?

While pure speculation on our part, the fact that Abe and Kishida met privately for almost two hours prior to the cabinet reshuffle could suggest that some kind of deal may have been reached. What was discussed is not known, of course, but Kishida, a post-Abe hopeful, reportedly asked to be named as the party’s policy chief, as this would take him out of the 17 August 2017

Macro Matters

12


cabinet and free him up to establish his credentials for party leadership. However, while Abe’s position within the LDP is now weaker, it is hard to imagine him agreeing unconditionally to Kishida’s requests. Abe probably made it a pre-condition that he continue to support his cabinet, and cooperation in pursuing constitutional reform may have been part of the deal. Conceivably, in exchange for his cooperation, Abe may have promised to support Kishida’s eventual bid for the post of LDP president when he decides to step down. Will there be more fiscal stimulus, as always?

Of course, as things stand, it is unlikely that the prime minister has completely given up on running for a third term as LDP head. Abe is probably looking for a way to achieve both re-election as LDP president and constitutional reform. One way of doing this may be to curry favour with fiscal largesse.

The economy is showing cyclical strength

Economically, Japan’s is doing well – for now: it is in full employment, and the recently released preliminary GDP report for Q2 shows that the economy surged by an annualised 4.0% q/q. While such a robust tempo is unlikely to last, as a number of temporary factors are involved, the economy is performing well cyclically. As such, the government is unlikely to implement a major fiscal stimulus package centred on public investment to prop up near-term demand.

Talk of education bonds is likely to resurface

However, the government and the ruling coalition are intent on making education free from preschool age through to college, and the prime minister has indicated that he would like free education to be made part of the constitution. This is, in part, because the ruling coalition does not have the two-thirds majority in the Upper House needed to reform the constitution without the cooperation of the Japan Innovation Party, which has called on free education to be enshrined in the constitution. The idea of financing this by issuing “education bonds” was thought to have been dead in the water following criticism that this would only create a burden on future generations. However, with Abe indicating in a recent speech that such bonds should not be ruled out, the scheme is now being reconsidered by the government and the LDP.

Kishida is the front runner to succeed Abe …

In any event, as so much depends on public sentiment, the outlook for both constitutional reform and Abe’s re-election as LDP head is very uncertain. At this juncture, though, Abe’s bid for a third term as LDP president looks problematic, in our view. Based on recent reshuffles, Kishida seems to have a leg-up in the race to succeed Abe by virtue of the backing that he might receive from the prime minister himself and from Abe’s faction of the LDP (its largest group). While Abe had been grooming two protégés from his faction for future party leadership – former Education Minister Hakubun Shimomura and former Defence Minister Tomomi Inada – previous controversies have put paid to their prospects of succeeding him.

… but he is not overly popular with the public

Kishida is not particularly popular with the public though. For example, in a recent Nikkei Shimbun survey on who is suitable to be prime minister, he was ranked fourth, winning only 9% of the vote. While the public’s perception of Kishida could pick up, if support for the Abe government continues to fall, Kishida could conceivably also suffer due to his cooperation with the prime minister.

LDP heavyweight Ishiba is also a possible successor

First in the aforementioned survey with 22% of the vote came Shigeru Ishiba, a party heavyweight and former minister (defence, economic renewal), who has been a vocal critic of the prime minister since leaving Abe’s cabinet last year; Abe came second in the survey, with 17% of the vote. Ishiba is particularly popular with non-LDP voters. Although his support base within the LDP is rather weak, if support for the Abe government continues to languish, and if the opposition reorganises into a credible alternative to govern the country, the LDP could opt to make Ishiba its leader to attract the floating voter.

Who else could succeed Abe?

Other possible candidates to succeed Prime Minister Abe include Seiko Noda and Taro Kono. Noda has been critical of Abe’s policies in the past, but Abe still asked her to join the cabinet as Internal Affairs Minister this time. While her support base within the LDP is not strong, her candidacy to succeed Abe could win more backing from the LDP’s mainstream than that of Ishiba, as she showed her flexibility by accepting the prime minister’s offer. Appointing her head of the party would make Nodo Japan’s first female prime minister. Kono is a straight-speaking reformist, who has voiced doubts about the current monetary easing and the government’s fiscal policy. Although a maverick persona within the LDP, he was made Foreign Minister during the recent reshuffle. Hailing from the Aso faction, the LDP’s second largest group, Deputy Prime Minister/Finance Minister Aso could back a Kono leadership bid. 17 August 2017

Macro Matters

13


Brazil’s rates: Six in the mix Authors: Marcelo Carvalho Head of Emerging Market Research, Latam



Our terminal policy interest rate call of 7% was once bold, but it’s now quite popular.



Alas, our econometric work shows cyclical factors could pull rates down to a 6%-handle.



All told, while we have not yet changed our terminal rate call, six is now in the mix.

Banco BNP Paribas Brasil SA Gustavo Arruda

This note was published as a standalone desknote on 14 August.

Economist Banco BNP Paribas Brasil S.A.

Our once-bold terminal rate call is now popular

In May 2016, we radically changed our forecasts in light of a change in government. Our end2017 interest rate call of 9% at the time was met with much scepticism (please see, Brazil: And now for something completely different). Since then, the market consensus forecast has steadily drifted our way. In fact, having been chased by consensus, we subsequently cut our terminal rate call to 8% (see Brazil’s rates: Aim lower), and then to 7% (see Brazil’s rates: The magnificent seven). Again, our once-bold rate call has become quite popular now (see Chart 1).

Risks are biased to rates falling below 7%, we think

That worries us. While we love becoming consensus, we hate being consensus. For now, we stop short of cutting our rate call yet again, given lingering uncertainties. Still, we strongly think risks around our 7% rate call are biased to the downside, not upside. We would not be surprised at all if the terminal policy rate in the current monetary easing cycle has a 6% handle.

We see strong cyclical reasons for rates to tank

We see strong cyclical reasons for our rate call. First, Brazil’s real interest rates have averaged roughly 5% over the past 10 years. With prospective inflation in the 3%-4% range, even a “neutral” real interest rate of about 5% would imply a neutral nominal rate in the 8%-9% range.

Big output gap; anchored inflation expectations

Second, policy rates swing well beyond “neutral” over the cycle. In easing cycles, rates should fall below neutral. This is especially true today, given the huge output gap left by Brazil's worst recession on record, and longer-run inflation expectations that are remarkably re-anchored back to target, now that policymakers have managed to re-build previously lost credibility.

We estimate a monetary Taylor-rule for Brazil

In order to gauge the role played by cyclical factors in determining Brazil’s policy rate, we have estimated econometrically a Taylor rule for Brazil. It shows Brazil’s expected monetary policy reaction function in response to the output gap (growth deviations from potential) as well as to the inflation gap (deviations of inflation expectations from official targets).

Simple equation explains reaction function well

The fit of the model is significant – in fact, deviations from actual policy rates from the model’s prediction during the latter years of the Dilma Rousseff administration illustrate how monetary policy during those days was much looser than objective conditions would justify.

For the terminal policy rate outlook, six is in the mix

All things considered, taking into account cyclical prospects for inflation and growth, our Taylorrule model currently indicates that the policy rate could easily fall to the 6%-7% range, supporting our view that risks around our current 7% terminal rate call are to the downside. In sum, when it comes to prospects for the terminal rate call, six is now in the mix.

Chart 1: End-2018 policy rate forecasts (%, per annum)

Chart 2: Selic rate and Taylor-rule estimates (%, per annum)

11.5

30.0

11.0

27.5

10.5

25.0

10.0 9.5 9.0

22.5

Average consensus

BNPP Taylor rule (%, a.r.)

20.0

BNP Paribas forecast

17.5 15.0

8.5

12.5

8.0

10.0

7.5 7.0 May

Selic rate (%, a.r.)

7.5 Jul

Sep 16

Nov

Jan

Mar

May 17

5.0

Jul

03

Source: BCB, Macrobond, BNP Paribas Follow us on Twitter: @MCarvalhoEcon Economic desknote

04

05

06

07

08

09

10

11

12

13

14

15

16

17

Source: BCB, Bloomberg, BNP Paribas 17 August 2017

14


Argentina: Primary colours Author Florencia Vazquez Economist BNP Paribas Sucursal Buenos Aires



The ruling coalition Cambiemos performed strongly in the primary election.



Support for President Macri’s reform agenda can be considered solid.



Better macroeconomic performance could help Cambiemos in October’s election.

This note was published as a standalone desknote on 14 August. President Macri’s ruling coalition, Cambiemos, achieved a strong victory in the national primaries (PASO) on Sunday. Indeed, Cambiemos managed to attract the most votes at the national level for the Lower House, results that look much better than what the polls had suggested in recent days. In particular, the technical tie between Cambiemos and Frente Unidad Ciudadana in the province of Buenos Aires’ senator race was a surprise, as polls in general had placed former President Kirchner ahead. Mrs Kirchner obtained less votes than what her party had attracted in the province in the 2015 election.

Strong performance by Cambiemos in the PASO

As we have highlighted, the relevance of the mid-term election lies not so much in its potential to change the composition of congress. Rather, the mid-term election is seen as a referendum on the policy agenda President Macri has implemented so far. Support for Cambiemos’ agenda remains strong

The performance of Cambiemos in the primary election can probably be seen as a sign of steady support for its reform agenda. The Macri Administration may even feel tempted to accelerate the pace of fiscal adjustment a bit. However, we caution that any potential change should probably be modest. After all, the chosen gradual strategy to correct the large inherited imbalances seems to be paying off, judging by the weekend’s electoral results.

Upbeat 2018 gross fixed investment outlook

We think the mid-term election results are particularly relevant for the investment outlook. On the back of these primary election results, we reinforce our conviction that gross fixed investment, which is estimated to have been accelerating healthily of late, will improve further in 2018 (Chart 1). We expect real GDP to expand 3% this year and reach a stronger 4% in 2018.

Strong growth, moderate inflation until October

Through October, we believe the economic performance will improve a bit more. Indeed, we forecast real GDP growth in excess of 4% y/y near term, as gauged by the monthly proxy for activity (Chart 2). Inflation will likely stand at a monthly average of close to 1% near term. If anything, economic performance could give an additional boost to the ruling coalition’s already strong PASO performance in the mid-term election.

Cambiemos likely Unemployment is about to add seats in Congress

While Cambiemos will likely add seats in both chambers in October’s election, President Macri’s Administration will still need to negotiate with the opposition in order to pass legislation during the last two years of its time in office as no single party will control congress. But, the strong performance suggested by PASO results should reinforce its negotiating position. In particular, the biggest loser will probably be the Peronist Party that has 16 seats at stake in the Senate this year.

Chart 1: Gross fixed investment and imports (% y/y) 60

1

Chart 2: Monthly GDP proxy (% y/y, 3m MA)

40

8

30

6

Capital goods imports 40

Fixed investment (RHS)

20

20

2

0

0

-10

-20

-2

-20

-40 -60 2005

-4

-30

2007

2009

2011

2013

2015

2017

Midterm election

4

10

0

1

-6 Jan 13

-40

1

Jan 14

Jan 15

Jan 16

Jan 17

1

Dot is BNPP’s Q2 forecast; Source: Indec, Macrobond, BNP Paribas

Shaded area shows BNPP forecasts; Source: INE, Macrobond, BNP Paribas 17 August 2017

Macro Matters

15


South Africa: Taking stock Author:



South Africa’s primary and secondary sectors look to have contributed positively to Q2 GDP growth, though there is little to get excited about, given weak structural demand and policy.



Mining and manufacturing production levels are yet to surpass their pre-global financial crisis highs, keeping capex replacement weak and inventory turnover and demand poor.



A more positive backdrop of external activity is helping, though not enough to change our view that the negative output gap and weak labour market will persist for the next two years.

Jeffrey Schultz Senior Economist BNP Paribas Securities SA

This article was first published as a desknote on 15 August 2017.

Primary and secondary sector growth in Q2…

South Africa’s agriculture, mining and manufacturing sectors all seem to have contributed positively to Q2 production-side GDP growth. A record maize harvest following last year’s drought should see another double-digit gain in quarterly agricultural activity after climbing 22.2% q/q saar in Q1. Mining activity also remained in positive territory for the second straight quarter (up 2.6% q/q saar), helped by still healthy terms of trade, which remains more than 18% higher than a year ago. Helpfully, we now also expect the manufacturing sector to have registered its first positive quarterly contribution to GDP in a year, thanks to a gain in production growth in Q2 of more than 6.0% q/q saar.

…but little to enthuse over

While these figures remain supportive of our current call for around a 2.0% q/q saar gain in Q2 GDP growth, other data caution that there is little to get excited about on the supply-side of the economy. Manufacturing PMIs recently hit an eight-year low in July (42.9) and, according to the Bureau for Economic Research, around three-quarters of domestic manufacturers continue to cite the weak political environment as a constraint to investment. Furthermore, in level terms, both mining and manufacturing activity have yet to surpass their pre-global financial crisis highs (Chart 1). It has long been a concern of ours that lack of both confidence and fixed investment in key supply-side sectors is holding back the country’s potential growth rate; we estimate it to have slipped below 1.5% today from the 3.0% annualised potential enjoyed in the mid-2000s (see South Africa: Lifting the lid on the economy, 3 August 2015).

Capex replacement unable to outpace depreciation

A closer look into the trends in capex replacement ratios (defined as the ratio between total capital expenditure and the book value of existing fixed assets) in the mining and manufacturing sectors is instructive and highlights that new capex is still not keeping up with the depreciation and amortisation of existing fixed assets (Chart 2). This trend is not new to the mining sector where capex replacement ratios have been in steady decline since 2009 and today are a worrisome 57.8% lower than their pre-global financial crisis (GFC) peak. While we were previously encouraged that the manufacturing industry had experienced some improvement in its capex replacement ratios from 2013 to early 2016, most of these gains have been eroded in recent quarters; capex replacement ratios today are around a third lower than the mid-2000s.

Chart 1: Mining and manufacturing activity is uninspiring

Chart 2: Capex replacement ratios are falling 0.06

Manufacturing production (6mma, index, SA) 115

Mining capex replacement ratio (4QMA) Manufacturing capex replacement ratio (4QM A)

Mining production (6mma, index, SA)

110

0.05

105 100

0.04

95 90

0.03

85

0.02

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

80

Source: Stats SA, BNP Paribas

Source: Stats SA, BNP Paribas estimates 17 August 2017

Macro Matters

16


South Africa unable to harness global IP rebound

A more favourable global environment for industrial production growth (see Big Picture: Blue skies for global manufacturing, 27 July 2017) is therefore clearly not being harnessed by domestic mining or manufacturing. This largely relates to issues specific to South Africa, namely ongoing political and policy uncertainty and persistently weak domestic demand, we believe.

Insufficient demand behind underutilisation

On the latter, according to Statistics South Africa, while capacity utilisation in the manufacturing sector is not out of kilter with its long-term average (80.8% in Q1 2017), more than 60% of the underutilisation of production capacity can be explained by “insufficient demand”. This is still about 7pp lower than at the height of the global financial crisis, but is nearly 20pp higher than the lows experienced in late 2006. Indeed 2016 was the first year since the 2009 global financial crisis that South Africa saw a net move lower in real inventories.

An alternative measure of IP demand?

An alternative way of assessing domestic demand pressures is to calculate a ‘days inventory outstanding’ (DIO) ratio for both the mining and manufacturing sectors using Stats SA’s quarterly financial statistics. (DIO measures the number of days it takes for a sector’s inventory to turn over. It is calculated as (average inventory x 365 days)/industry cost of sales). A steady move lower in this ratio implies a faster conversion of stock into sales which should ultimately translate into faster inventory build-up; a higher ratio implies a slower conversion. Interestingly, the mining sector has managed to lower this ratio since the financial crisis (Chart 3). This is less about higher inventory turnover rates, however, than about the higher cost of sales resulting from a sharp rise in input costs (electricity and labour), which has outpaced the growth in inventory holdings, in our view.

Less need for inventory build is bad news for GDP

Conversely, in the case of manufacturing, the DIO ratio has tracked broadly sideways since the crisis, before picking up sharply from early 2014. While input costs have also stayed high throughout this period, it seems that manufacturers have kept up a firm pace of inventory accumulation in spite of weakening demand. The trend could perhaps highlight a strategy by local manufacturers to build up an inventory ‘buffer’ in the event of prolonged strike activity, which some large manufacturing sub-sectors have witnessed in prior years. As the South African labour market and labour union strength have weakened considerably in recent years (with very little appetite to strike as the latest NUMSA wage negotiations in the steel and engineering sectors have shown), we would expect the DIO in manufacturing to decline in the coming quarters. This all suggests to us, therefore, that lower rather than higher inventory accumulation is likely to occur in the medium term, which is likely to be negative for growth.

Policy malaise looks set to continue

Finally, on the policy front, a plethora of legal challenges related to South Africa’s highly controversial mining charter is a strong proxy for the uncertainty supply-side sectors are facing today. Lack of clarity in key industry regulation on economic transformation, the labour market (national minimum wage, collective bargaining etc) and future ownership of mineral rights are all weighing heavily on industrial output and investment. Sadly, we see little end to this policy malaise until after the African National Congress’s elective conference in December, where the party’s new leaders will be chosen. Even after this conference, we think it will be difficult for the new leader to effect any kind of immediate meaningful turnaround in the country’s economic fortunes. As such, we continue to see the economy running a negative output gap until at least 2019. We estimate GDP growth of 0.7% in 2017, 1.3% in 2018 and 1.5% in 2019.

Chart 3: Days inventory outstanding – mining 340

Chart 4: Days inventory outstanding – manufacturing

Days Inventory Outstanding - Mining & quarrying (2Q MA)

165

Linear ( Days Inventory Outstanding - Mining & quarrying (2Q MA)) 320

160

300

155

Days Inventory Outstanding - Manufacturing (2Q MA) Linear ( Days Inventory Outstanding - Manufacturing (2Q M A))

150

280

145 260 140 240

135

220 200 2007

130

2008

2009

2010

2011

2012

2013

2014

2015

2016

125 2007

2017

Source: Stats SA, BNP Paribas Calculations

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: Stats SA, BNP Paribas Calculations 17 August 2017

Macro Matters

17


South African inflation: Hitting the mid-point Author:



CPI inflation is likely to have slowed to the mid-point of the South African Reserve Bank’s 3-6% inflation target band in July.



A further moderation in food prices, a return to fuel price deflation and lower electricity tariffs will be the major drivers behind the lower July print.



We expect core CPI inflation to slow to 4.7% in July, with a further structural slowdown likely in the medium term, in light of the persistent negative output gap and lower unit labour costs.



In this environment, we see scope for the SARB to deliver a cumulative 100bp in rate reductions this cycle, which would leave real rates close to our r* estimate of 1.5%.

Jeffrey Schultz Senior Economist BNP Paribas Securities SA

This note was published as a standalone desknote on 15 August. Inflation to hit the SARB’s target mid-point in July

July CPI inflation figures are scheduled for release on Wednesday 23 August. We are expecting a below consensus headline CPI print of 4.5% y/y after the CPI slowed to 5.1% in June. If correct, this will be the first time since April 2015 that inflation has slowed to the mid-point of the South African Reserve Bank’s (SARB) 3-6% inflation target range.

Lower food, fuel and electricity all helping …

As we highlighted in South Africa: Disinflation nation, most of the slowdown in CPI inflation is likely to have been driven by a further moderation in food prices, a return to fuel price deflation and lower administered price inflation from a much lower electricity tariff granted to Eskom by the energy regulator earlier this year (+2.2% versus the original 8% increase granted).

… but structurally lower core CPI the bigger theme

100bp in cumulative rate reductions likely this cycle

We also expect core inflation (CPI less food, non-alcoholic beverages, fuel and energy prices) to have slowed to 4.7% y/y from 4.8% in June. The disinflation observed in core CPI inflation this year has been significant, having slipped by more than a full percentage point since the start of the year. We believe this is more of a structural than a cyclical phenomenon and is driven by the persistence of a negative output gap, crimped corporate profitability and hence a more subdued pass-through of a weaker currency into broader price pressures. Further, as we found in South African inflation: Deflating expectations, unit labour cost growth, which slowed to below 5% in Q1, looks unlikely to spike higher anytime soon considering the stark weakness in the labour market and our view that the country’s previously strong labour union movement has been fractured by messy political battles (Chart 2). As such, we now also expect core inflation to slow to 4.4% by year-end (from our previous estimate of 4.6%) and into H1 2018. In an environment where South Africa’s policy and growth malaise looks set to continue (see South Africa: Taking stock) and a persistently weak cycle is likely to weigh on inflation in the medium term, we think that the SARB will continue to deliver successive rate cuts this year. We maintain our view for two more 25bp rate reductions in September and November and have added an additional 25bp rate cut in January 2018. With the SARB’s estimate of r* (neutral real rate) likely to be around the 1.5% mark, considering a weak potential growth outlook, we think that a cumulative 100bp in cumulative rate reductions this cycle is more than justified and will do little to dent the bank’s seemingly inviolable credibility. Chart 2: Unit labour costs – structurally and cyclically lower

Chart 1: Headline and core CPI heading lower 9.0

Headline CPI (% y/y)

SA nominal unit labour costs, formal non-agri economy (% y/y)

Core CPI

14.0

Forecast

SA 'economy-wide' ULC (% y/y)

Forecast

8.0 12.0

Total com pens ation of em ployees /Real GDP

7.0 10.0

6.0

8.0

5.0

6.0

4.0

4.0

3.0 2.0 2009

2010

2011

2012

2013

2014

2015

2016

2017

2.0 2008

2018


Gros s earnings in form al, non-agri econom y/Real non-agri GVA

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: SARB, BNP Paribas 17 August 2017

Macro Matters

18


Economic calendar: 18 – 25 August HIGH-INCOME ECONOMIES GMT

Local

Fri 18/08

Sun 20/08

Wed 23/08

Thu 24/08

Fri 25/08

Sat 26/08

Macro Matters

Sovereign debt to be rated by Fitch

Ireland

Sovereign debt to be rated by DBRS

Belgium

Sovereign debt to be rated by DBRS

08:00

10:00

Eurozone

14:00

10:00

US

14:15

10:15

15:00

17:00

13:00

15:00

Italy

14:00

16:00

Germany

16:30

18:30

Mon 21/08 Tue 22/08

Previous Greece

Current account (sa): Jun

Forecast

Consensus

EUR 30.1bn

-

-

93.4

93.0

94.0

Univ. of Michigan sentiment (prel) : Aug Dallas Fed’s Kaplan speaks in Dallas, TX

Germany

Merkel holds election campaign rally near Hannover Prime minister Gentiloni attends economic conference in Rimini Merkel answers questions at town hall by RTL television Bavarian CSU Party Head Seehofer Interviewed by ARD TV

Germany

German Finance Ministry publishes monthly report

Germany

09:00

11:00

ZEW expectations: Aug

17.5

-

-

09:00

11:00

ZEW current assessment: Aug

86.4

-

-

16:00

18:00

Merkel's Chief of Staff gives speech on integration

08:00

10:00

Manufacturing PMI: Aug

56.6

56.6

-

08:00

10:00

Services PMI: Aug

55.4

55.1

-

08:00

10:00

Composite PMI: Aug

55.7

55.7

-

10:30

12:30

Germany

13:05

09:05

US

13:00

09:45

Markit US Manufacturing PMI (sa, p): Aug

53.3

53.0

-

15:00

10:00

New home sales (saar): Jul

610k

600k

613k

14:00

10:00

New home sales (sa) m/m: Jul

0.8%

-1.6%

0.4%

06:45

08:45

France

Manufacturing confidence

109

110

-

07:00

09:00

Spain

GDP (final) q/q: Q2

0.9%

0.9%

-

07:00

09:00

GDP (final) y/y: Q2

3.1%

3.1%

-

08:30

09:30

GDP (prel) q/q: Q2

0.2%

0.3%

0.3%

08:30

09:30

GDP (prel) y/y: Q2

2.0%

1.7%

1.7%

12:30

08:30

Initial claims

232k

240k

-

14:00

10:00

Existing home sales (saar): Jul

5.52m

5.60k

5.56mn

14:00

10:00

Existing home sales (sa) m/m: Jul

-1.8%

1.4%

0.6%

15:00

17:00

Germany

06:45

08:45

France

Consumer confidence

104

101

-

23:30

08:30

Japan

Core CPI national y/y: Jul

0.4%

0.5%

0.5%

23:30 (24/08)

08:30

Core CPI Tokyo y/y: Aug

0.2%

0.2%

0.3%

06:00

08:00

GDP (final) q/q: Q2

0.6%

0.6%

-

06:00

08:00

GDP (final) y/y: Q2

2.1%

2.1%

-

08:00

10:00

Ifo business climate: Aug

116.0

116.2

-

08:00

10:00

Ifo current conditions: Aug

125.4

125.8

-

08:00

10:00

Ifo expectations: Aug

107.3

107.3

-

12:30

08:30

Durable goods orders (sa, prel) m/m: Jul

6.4%

-5.0%

-5.7%

12:30

08:30

Durable goods ex-transport (sa p) m/m: Jul

0.1%

0.8%

0.5%

12:30

08:30

Core cap goods shipments ex-air (p) Jul

0.1%

-0.8%

-

Eurozone

UK US

Germany

US

US

Merkel on Newspaper Panel on the West's future Dallas Fed’s Kaplan speaks to Oil Group in Midland, TX

Schaeuble campaigns for Merkel in Western Germany

24-26 Aug., Kansas City Fed hosts annual Jackson Hole Policy Symposium,

19

17 August 2017 www.GlobalMarkets.bnpparibas.com

Economic calendar: 18 - 25 August CEEMEA Fri 18/08

Tue 22/08

Wed 23/08

Thu 24/08

GMT

Local

12:00

14:00

07:00

08:00

09:00

10:00

09:00

10:00

12:00

14:00

Previous Poland

Hungary

Consensus

4.5%

6.0%

8.4%

Construction output y/y : Jul

11.6%

9.5%

13.3%

Real retail sales y/y : Jul

5.8%

7.4%

7.4%

PPI y/y : Jul

1.8%

2.2%

2.0%

Gross wages y/y: Jun

12.9%

13.0%

13.8%

NBH meeting and rate decision

0.90%

0.90%

0.90%

South Africa CPI m/m: Jul

Poland

Forecast

Industrial production y/y : Jul

0.2%

0.2%

0.3%

CPI y/y: Jul

5.1%

4.5%

4.6%

Core CPI m/m: Jul

0.4%

0.5%

0.5%

Core CPI y/y: Jul

4.8%

4.7%

4.7%

Unemployment rate: Jul

7.1%

6.9%

7.0%

MPC minutes (July meeting)

LATAM Fri 18/08

GMT

Local

12:30

08:30

12:30 12:30

Previous

1.5%

08:30

GDP q/q Q2

0.18%

0.8%

0.7%

08:30

Current account balance Q2

USD -1.0bn

USD -0.7bn

USD -1.3bn

Budget balance: Jul

ARS-57.0bn

ARS-38.9bn

-

26.25%

26.25%

-

GDP y/y: Q2 (f)

1.8%

1.8%

-

0.6%

0.5%

-

11.0%

-

-

3.1%

2.4%

-

-0.18%

0.39%

-

2.78%

2.72%

-

Argentina

7-Day Repo Reference rate

Thu 24/08

Fri 25/08

Consensus

0.13%

Tue 22/08

Wed 23/08

Forecast

GDP y/y Q2

Chile

1.0%

13:00

08:00

13:00

08:00

GDP q/q: Q2 (f)

13:00

08:00

GDP nominal y/y: Q2

13:00

08:00

Economic activity IGAE y/y: Jun

12:00

09:00

12:00

09:00

IBGE inflation IPCA-15 y/y: Aug

13:30

10:30

Current account balance: Jul

USD1.3bn

USD-5.0bn

-

13:30

10:30

FDI: Jul

USD4.0bn

USD5.5bn

-

13:00

08:00

Mexico

4.1%

2.6%

-

19:00

16:00

Argentina

19:00

16:00

13:30

10:30

Brazil

Credit report: Jul

14:00

08:00

Mexico

14:00

08:00

14:00

Mexico

Brazil

IBGE inflation IPCA-15 m/m: Aug

Retail sales y/y: Jun Trade balance: Jul

USD-0.7bn

Economic activity index y/y: Jun

-

3.3%

4.2%

-

Bi-weekly CPI y/y

6.59%

6.49%

-

Bi-weekly CPI

0.25%

0.22%

-

08:00

Bi-weekly core CPI y/y

4.95%

5.06%

-

14:00

08:00

Bi-weekly core CPI

0.06%

0.24%

-

15:00

09:00

Central bank monetary policy minutes

13:00

08:00

Unemployment rate: Jul

3.3%

---

13:00

08:00

Unemployment rate s.a.: Jul

3.3%

-

14:00

09:00

Current account balance: Q2

USD-6.9bn

-

Mexico

Release dates and forecasts as of close of business prior to the date of publication; (p) = preliminary; (r) = revised Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies

For our four-week calendar, please click here Macro Matters

20


Key data preview: North America US: Michigan consumer sentiment (Aug, prelim)

BNP Paribas forecast: Edging down Aug (p)

Jul

Jun

May

93.0

93.4

95.1

97.1

University of Michigan index

RELEASE DATE: Friday 18 August  We expect the University of Michigan consumer sentiment index to tick down to 93.0 from its second-half estimate of 93.7.  The index has trended downwards since May, driven by falling expectations (consumers’ appraisal of current conditions has remained robust).  We believe the run-up in sentiment has likely passed its peak, although the index will likely stay relatively elevated – at least in the short term.

Source: University of Michigan, Macrobond, BNP Paribas

US: Durable goods orders and shipments (Jul)

BNP Paribas forecast: Pullback % m/m Durable goods orders

Jul (f)

Jun

May

Apr

-5.0

6.4

0.0

-0.8

Ex-transportation

0.8

0.1

0.8

-0.4

Core capital goods shipments

-0.8

0.1

0.3

0.2

RELEASE DATE: Friday 25 Aug  We expect a sizable decline in durable goods orders in July, largely driven by an expected retracement in non-defence aircraft orders.  We project non-transportation orders to be solid for the month, based on improved oil prices and still-elevated survey measures.  Core capital goods shipments (non-defence ex aircraft), which usually pick up in the latter part of the quarter, are likely to decline for the month. Source: Census Bureau, Macrobond, BNP Paribas

Key data preview: Japan Japan: CPI inflation (July)

BNP Paribas forecast: Slightly faster Core CPI excluding energy

2.0 1.5

(% y/y)

1.0 0.5 0.0 -0.5 -1.0

Core CPI

-1.5 -2.0

2010

2011

2012

2013

2014

2015

2016

2017

% y/y Core CPI CPI

Jul (f) 0.5 0.4

Jun

May

Apr

0.4 0.4

0.4 0.4

0.3 0.4

RELEASE DATE: Friday 25 August  Based on the Tokyo CPI data for July, we estimate that the national core CPI for that month will have improved by 0.1pp to 0.5% y/y.  The improvement will be due to a base effect slightly boosting energy prices and the new core CPI turning positive for the first time in five months, with a rise of 0.1%. The rise is thanks to a rebound in the price of household durables and overseas package tours.  Rising energy prices should continue to bolster the core CPI until autumn.

Source: MIC, BNP Paribas

Key data preview: CEEMEA South Africa: CPI (July) 9.0

BNP Paribas forecast: Lower

Headline CPI (% y/y)

% y/y CPI

Core CPI

8.0 7.0 6.0 5.0 4.0 3.0 2.0 2009

2010

2011

2012

2013

2014

2015

2016

2017

Jun

May

Apr

5.1

5.4

5.3

RELEASE DATE: Wednesday 23 August  We expect headline CPI inflation to have slowed to 4.5% y/y in July from 5.1% in June. This will mark the first time that headline inflation has hit the mid-point of the SARB’s 3-6% inflation target band since April 2015.  Lower food prices, a return to fuel price deflation and lower electricity tariffs will be the main drivers behind the lower July print. We also expect core CPI inflation to slow to 4.7% in July from 4.8%, highlighting the structural slowdown in underlying inflation thanks to the persistent negative output gap and lower unit labour costs.


Macro Matters

Jul 4.5

21


Key data preview: Latam Chile: Real GDP (Q2)

BNP Paribas forecast: Acceleration

15

%q/q, saar

BNP Paribas forecasts

y/y

10 5 0 -5 Q1 2010

Q1 2013

Q1 2016

% change Real GDP, q/q (sa) Real GDP, y/y

Q2 (f) 0.8 1.5

Q1 0.2 0.1

Q4 -0.3 0.5

Q3 0.8 1.8

RELEASE DATE: Friday 18 August  Based on evidence from the monthly real GDP proxy, real GDP growth is expected to have accelerated visibly in Q2. In year-on-year terms, we forecast a 1.5% expansion.  The annual GDP expansion is still estimated at a below-potential 1.5%. This reading masks a significantly stronger H2, when activity is expected to have advanced 2.1%, on average (this compares to a visibly lower 0.8% average advance in the first half of the year).

Source: BCCh, Macrobond, BNP Paribas

Argentina: Primary fiscal balance (Jul) BNPP 2017 forecasts

5% 4%

BNP Paribas forecast: On target Primary balance ARS bn % of GDP (last 12m)

Actual performance Official targets

3% 2% 1% 0%

Q1

Q2

Q3

Q4

Jul (f) -38.9 -4.2

Jun

May

Apr

-57.0 -4.1

-27.2 -4.0

-18.7 -4.0

RELEASE DATE: Tuesday 22 August  The primary fiscal deficit is expected to have inched up to 4.2% of GDP (on a 12-month sum basis) in July. Revenues are forecast to have advanced 30% y/y, based on tax revenue performance. And, we have pencilled in a 28% y/y primary spending expansion to the deficit forecast.  While authorities beat the H1 fiscal target, we think 2017’s H2 performance will not be as stellar. Still, we expect the annual 4.2% primary deficit target to be met.

Source: Ministry of Economy, Macrobond, BNP Paribas

Argentina: Policy rate (August 22) 23 22 21 20 19 18 17 16 15 14 13 12 11 10

BNP Paribas forecast: On hold % p.a. 7-day repo rate

Consensus CPI estimate 2017 eop (REM) BNPP CPI forecast 2017 (eop)

BCRA CPI target range for 2017: 12-17%

Jun 16

Sep 16

Dec 16

Mar 17

Jun 17

Aug 22(f) 26.25

Aug 8

Jul 25

Jul 11

26.25

26.25

26.25

RELEASE DATE: Tuesday 22 August  The central bank is expected to remain on hold at the monetary policy meeting next week. Inflation was high in July, mainly due to regulated and seasonal price increases, but the headline print stood below 2%, thus, beating market expectations. Monthly inflation will probably be visibly lower in August.  In H2 2017, BCRA should have room to cut rates. We expect the easing to start in late September, when core CPI inflation begins to show convincing signs of moderation. Given the volatility of inflation and the uncertainty related to being in the early stage of the inflation-targeting regime, BCRA will likely proceed gradually with any rate cuts.

Source: BCRA, Macrobond, BNP Paribas

Mexico: Economic activity proxy (Jun)

BNP Paribas forecast: Deceleration IGAE activity proxy (%, y/y)

Jun (f) 2.4

May 3.1

Apr -0.7

Mar 4.3

RELEASE DATE: Tuesday 22 August  The IGAE activity proxy is expected to be sustained by the tertiary sector and recovering manufacturing production; if confirmed, the 2.4% would render a 1.7% y/y expansion in Q2.  Nonetheless, results remain subdued due to the decline in oil output, construction sector activity (with public works hampered by fiscal consolidation) and agriculture.  Looking forward, we expect a gradual recovery in H2, driven by manufacturing and agriculture, while oil should be less of a drag as results from private explorers become clearer. Source: INEGI, Macrobond, BNP Paribas

Macro Matters

22


Key data preview: Latam (cont) Mexico: Retail sales (Jun)

BNP Paribas forecast: Moderation Retail sales (% y/y)

Jun (f) 2.6

May 4.1

Apr 1.4

Mar 6.1

RELEASE DATE: Wednesday 23 August  We expect annual retail sales to have grown 2.6% y/y in June, driven by strong consumer credit growth and record-high net formal job creation. This number would translate into a 2.7% expansion in Q2.  If we are correct about a 2.6% y/y print, this would mean a tempering from the uptick seen in May (4.1% y/y), as room for more robust consumption growth remains contained by timid growth in wages, which has been running below inflation.  H2 will likely maintain an underwhelming pace. But, if uncertainties ease and we see more stability in household earnings through job formalisation, results could support better economic activity. Source: INEGI, Macrobond, BNP Paribas

Argentina: Monthly real GDP proxy (June)

BNP Paribas forecast: Acceleration

EMAE, % y/y, 3m MA (RHS)

15

6

10

4

5

2

0

0

-5

-2

-10

-4

VAT, %y/y, 3m MA, CPI deflated

-15 Jan 12

Jan 13

Jan 14

Jan 15

Jan 16

Jan 17

-6

% change EMAE, y/y

Jun (f) 4.2

May 3.3

Apr 0.5

Mar 1.3

RELEASE DATE: Thursday 24 Aug  Economic activity growth is expected to have accelerated further in June, and we forecast a strong, 4.2% y/y expansion. If the forecast materialises, real GDP growth would have advanced another 1% q/q sa in Q2.  In addition to the early drivers of growth (the agriculture and construction sectors), industrial production has started to expand more recently, as well. We remain confident in terms of the upbeat growth outlook and reaffirm our 3% growth forecast for 2017. We expect further real GDP acceleration to 4% in 2018, amidst a context of solid investment supported by the likely strong official performance of Cambiemos in the October mid-term election.

Source: INDEC, Macrobond, BNP Paribas

Macro Matters

23


Central bank watch EUROPE Current rate (%)

Date of last change

Next change in coming six months

Refinancing rate

0.00

−5bp (10/3/16)

No change

Deposit rate

−0.40

−10bp (10/3/16)

No change

0.25

−25bp (4/8/16)

No change

Date of last change


Comments

No change

We expect the Fed to adjust its balance-sheet policy at its 20 Sept meeting with only “significant adverse developments” that could stand in their way. Weak inflation data and the likely end to Chair Yellen’s term will likely give the Fed pause on hiking rates until its March 2018 meeting. Early 2018, we expect to see a step-up in y/y inflation due to base effects, along with some possible fiscal stimulus, though the Fed will want to see this borne out before acting.

+25bp (12/7/17)

+25bp (25/10/17)

The BoC raised its policy rate by 25bp to 0.75% at its July meeting. With the economy projected to run above potential throughout the forecast horizon, there are probably more rate hikes in store. While the BoC has opted for a non-committal approach to the path for interest rates, we think the baseline path would be similar to the Fed’s and expect a 25bp rate hike in October.

Interest rate

Current rate (%)

Date of last change


Deposit rate

−0.10

−20bp (29/1/16)

No change

10-year rate

c.0%

(21/9/16)

No change

Interest rate

Current rate (%)

Date of last change


Comments

No change

M2 growth weakened to 9.2% in July, but M2 becomes less relevant when measuring liquidity supply as it is distorted by the WMP development. Better indicators are TSF, the weighted CIBI interest rate, O/N rate and 7-day repo. To balance financial regulation strengthening and stable economic growth, PBoC has carefully managed liquidity supply against changing market demand.

Interest rate

Comments

EUROZONE We expect the ECB will adjust its forward guidance in September by removing the reference to accelerating QE, followed by an announcement in October of a further scale-back of asset purchases, to EUR 30bn a month, effective from January.

UK Bank rate

We expect the Bank of England to keep its policy rate unchanged for the foreseeable future. The risks are tilted in the direction of policy tightening; a fresh fall in sterling is the main potential trigger.

NORTH AMERICA Interest rate

Current rate (%)

US

Fed funds target range

1.0 to 1.25

+25bp (14/6/17)

CANADA

Overnight rate

0.75

JAPAN Comments Recent data and exchange-rate movements suggest that the inflation rate will probably not rise even to 1% this year. As such, we expect the BoJ should keep its policy on hold for some time. There is a risk, however, that political pressure will build on the BoJ to start exiting from the current policy.

CHINA

1y bank deposit rate

1.50

−25bp (24/10/15)

CENTRAL AND EASTERN EUROPE, MIDDLE EAST AND AFRICA Interest rate

Current rate (%)

Date of last change


Comments

CZECH REPUBLIC

Repo rate

0.05

−20bp (1/11/12)

No change

Post the CNB’s 20bp rate hike at its August meeting, Governor Rusnok said that CZK developments will be key in terms of the timing of future policy moves. We look for the CZK to rise further in the coming months. So, to deliver a major part of the desired policy tightening, we expect interest rates to be kept on hold for rest of 2017 and H1 2018.

0.90

−15bp (24/5/16)

No change

The latest policy meeting reaffirmed that rates would probably stay on hold for a prolonged period. Although we see inflation accelerating swiftly in H2 2017, we do not expect policymakers to change their bias to be more hawkish this year.

HUNGARY Base rate


24


Central bank watch (cont) CENTRAL AND EASTERN EUROPE, MIDDLE EAST AND AFRICA (cont) Interest rate

Current rate (%)

Date of last change

1.50

−50bp (4/3/15)


Comments

No change

The lower inflation path (reflecting recent falls in oil prices and modest underlying price pressure) anticipated for 2017 in the central bank’s July projection, is likely to support a dovish policy bias in the months ahead. We see no case for an interest-rate hike until the end of 2017. A softer core price outlook (thanks to weaker unit labour costs) alongside lower food and fuel prices should see inflation undershooting SARB and consensus forecasts this year and next. Coupled with a weaker economic outlook, we expect the SARB to ease policy by a further 25bp in September and November and in January 2018.

POLAND Repo rate

SOUTH AFRICA

6.75

–25bp (20/7/17)

−25bp (Sep 2017)

8.00

+50bp (24/11/16)

No change

Overnight lending rate

9.25

+75bp (24/1/17)

No change

Late liquidity o/n lending rate

12.25

+50bp (26/4/17)

No change

Current rate (%)

Date of last change


Comments

Repo rate

TURKEY One-week repo rate

Inflation is likely to follow a volatile path for the rest of the year on the back of base effects. Apart from these, there is no fundamental disinflation story. We expect the CBRT to maintain its current policy unchanged and keep the marginal lending rate at its late liquidity rate of 12.25% for some time to come.

LATIN AMERICA Interest rate ARGENTINA

7-day repo rate

26.25

+150bp (11/4/17)

–75bp (27/9/17)

Following several high monthly CPI prints (lifted by regulated price hikes and food-price rises), the underlying downtrend in inflation became visible again in May. This should create room for the central bank to start cutting rates eventually. We now expect the first rate cut in September, as the BCRA has explicitly said that the core inflation rate remains uncomfortably high and will probably take some time to start easing policy.

9.25

−100bp (26/7/17)

−100bp (6/9/17)

At its 26 July meeting, the central bank signalled an intention to keep its ratecutting pace at 100bp next time, in September. We think the risks around our below-consensus terminal rate call of 7% remain to the downside.

2.50

−25bp (18/5/17)

No change

Chile’s central bank delivered its last 25bp rate cut in May and adopted a neutral bias. Despite downside surprises in inflation, we think the scenario in the last Monetary Policy Report remains valid. We forecast the BCCh to remain on hold until end-2017 and expect a rate-hiking cycle to start in 2018.

−25bp (31/8/2017)

The latest communiqués assumed a more cautious tone, as forecasts point to inflation accelerating above the target range set by BanRep and real rates falling. Nevertheless, as economic activity continues to decelerate, we expect one additional 25bp cut this year at the next meeting, for a year-end rate of 5.25%.

No change

It now appears that Mexico’s central bank is done hiking for the time being. While another policy-rate rise later this year cannot be ruled out if inflation prospects start to sour again, the board considers the current policy rate is consistent with inflation converging back to its 3% target.

BRAZIL

Selic overnight rate

CHILE Overnight rate

COLOMBIA

Overnight rate

5.50

−25bp (27/7/17)

7.00

+25bp (18/5/17)

MEXICO

Overnight rate

Source: BNP Paribas, TEB, national central banks, BGZ BNP Paribas


25


Global inflation watch Table 1: BNP Paribas inflation forecasts

2016 2017(1) 2018(1)

Eurozone Headline HICP Ex-tobacco HICP Index % m/m % y/y Index % m/m % y/y 100.2 0.2 100.2 0.2 101.7 1.5 101.6 1.5 102.9 1.1 102.7 1.1

Q1 2017 Q2 2017 Q3 2017(1) Q4 2017(1) Q1 2018(1) Q2 2018(1) Q3 2018(1) Q4 2018(1)

101.0 102.0 101.7 102.3 102.0 103.0 103.0 103.7

-

1.8 1.5 1.4 1.3 1.0 1.0 1.2 1.4

100.9 101.9 101.6 102.2 101.8 102.9 102.8 103.5

-

Jan-17

100.5

Feb-17

100.8

-0.8

1.8

100.4

-0.9

0.4

2.0

100.8

0.4

Mar-17 Apr-17

101.7

0.8

1.5

101.6

0.8

102.0

0.4

1.9

102.0

0.4

May-17

101.9

-0.1

1.4

101.8

Jun-17

102.0

0.0

1.3

Jul-17 Aug 17(1)

101.4

-0.5

101.7

Sep 17(1) Oct 17(1)

1.7 1.5 1.4 1.2 0.9 1.0 1.1 1.3

France Headline CPI Ex-tobacco CPI Index % m/m % y/y index % m/m % y/y 100.2 0.2 100.2 0.2 101.2 1.0 101.2 1.0 102.1 0.9 102.1 1.0 100.7 101.3 101.3 101.5 101.5 102.2 102.3 102.6

-

1.7

100.4

-0.2

2.0

100.5

0.1

1.5

101.2

0.6

1.8

101.3

0.1

-0.1

1.4

101.3

101.9

0.0

1.2

1.3

101.3

-0.5

0.2

1.5

101.6

102.1

0.4

1.5

102.2

0.1

1.3

Nov 17(1)

102.2

0.0

Dec 17(1)

102.5

0.3

Jan 18(1)

101.4

Feb 18(1)

100.7 101.3 101.2 101.5 101.5 102.2 102.3 102.6

-

1.3

100.4

-0.2

1.4

244.2

0.6

2.5

242.8

0.6

2.5

1.2

100.5

0.1

1.2

244.5

0.1

2.8

243.6

0.3

2.7

1.1

101.1

0.6

1.1

243.8

-0.3

2.4

243.8

0.1

2.4

1.2

101.2

0.1

1.1

244.2

0.2

2.2

244.5

0.3

2.2

0.0

0.8

101.3

0.0

0.8

243.8

-0.1

1.9

244.7

0.1

1.9

101.3

0.0

0.7

101.3

0.0

0.7

243.8

0.0

1.6

245.0

0.1

1.6

1.3

101.0

-0.3

0.7

101.0

-0.3

0.7

244.0

0.1

1.7

244.8

-0.1

1.7

0.3

1.4

101.5

0.5

0.9

101.5

0.5

0.9

244.6

0.2

1.8

245.1

0.1

1.8

102.0

0.4

1.4

101.3

-0.2

0.9

101.3

-0.2

0.9

245.2

0.2

1.7

245.6

0.2

1.7

102.1

0.1

1.3

101.4

0.1

1.0

101.4

0.1

1.0

245.6

0.2

1.6

245.6

0.0

1.6

1.4

102.1

0.0

1.4

101.4

0.0

1.1

101.4

0.0

1.0

246.3

0.3

1.7

245.5

-0.1

1.7

1.1

102.3

0.3

1.1

101.7

0.3

1.1

101.7

0.3

1.1

246.9

0.2

1.7

245.5

0.0

1.7

-1.1

0.9

101.2

-1.1

0.8

101.2

-0.6

0.7

101.1

-0.6

0.7

247.2

0.1

1.3

245.9

0.2

1.3

101.7

0.3

0.9

101.6

0.3

0.8

101.5

0.3

1.0

101.5

0.3

0.9

247.7

0.2

1.3

246.8

0.4

1.3

Mar 18(1)

102.9

1.2

1.2

102.7

1.2

1.1

102.0

0.5

0.8

102.0

0.5

0.8

247.8

0.0

1.7

247.8

0.4

1.7

Apr 18(1)

102.9

0.0

0.9

102.8

0.0

0.8

102.1

0.1

0.9

102.1

0.1

0.9

248.8

0.4

1.9

249.2

0.5

1.9

May 18(1)

103.0

0.1

1.1

102.9

0.1

1.0

102.2

0.1

0.9

102.2

0.1

0.9

249.1

0.1

2.1

250.0

0.3

2.1

Jun 18(1) Updated Next Release

103.1

0.1

1.1 102.9 Aug 17

0.1

1.1

102.2

0.0

0.9 102.2 Aug 11

0.0

0.9

249.5

0.2

2.3 250.7 Jul 14

0.3

2.3

Aug flash HICP (Aug 31)

1.2 0.9 0.9 1.0 0.8 0.9 1.0 1.0

1.2 0.9 0.8 1.0 0.8 0.9 1.0 1.1

US CPI urban SA CPI urban NSA Index % m/m % y/y Index % m/m % y/y 240.0 1.3 240.0 1.3 244.7 2.0 244.7 2.0 250.3 2.3 250.2 2.3 244.1 243.9 244.6 246.3 247.6 249.1 251.0 253.4

Aug flash CPI (Aug 11)

-

2.6 1.9 1.7 1.7 1.4 2.1 2.6 2.9

243.4 244.7 245.2 245.5 246.9 249.9 251.5 252.7

-

2.5 1.9 1.7 1.7 1.4 2.1 2.6 2.9

Aug CPI (Sep 14)

Source: BNP Paribas, national statistics offices; (1) forecasts

Chart 1: Eurozone HICP inflation

Chart 2: US CPI inflation

Source: Macrobond, Eurostat, BNP Paribas

Source: Macrobond, BEA, BNP Paribas

Eurozone headline HICP inflation was stable at 1.3% y/y in July, while core inflation inched up to 1.2% y/y from 1.1% in June. Eurozone core inflation has been volatile of late. Smoothing out the month-on-month volatility, the six-month average suggests, however, that core inflation is clearly on an upward trend. Although some volatility may persist, we see core inflation remaining on a gentle upward trend over the coming months, as domestic price pressures filter through into consumer prices.

US CPI inflation disappointed for a fifth straight month in July, with core CPI rising by 0.1% m/m (0.11% unrounded) and headline rising by the same amount on account of flat food and energy prices. The disappointment in core CPI took a similar form to recent months, with core goods prices falling and core services price increases remaining softer than they were last year. Within core services, rent and OER were both firm, but were offset by a 4.2% m/m drop in lodging away from home prices, enough pull month-on-month core CPI to 0.1% from what otherwise would have been 0.2%.

GIW

26


Table 2: BNP Paribas inflation forecasts

2016 2017(1) 2018(1) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2017 2017 2017(1) 2017(1) 2018(1) 2018(1) 2018(1) 2018(1)

Core CPI SA Index % m/m % 99.7 100.2 100.9 -

Japan y/y -0.3 0.5 0.7

Core CPI NSA Index % m/m % 99.7 100.2 100.9 -

y/y -0.3 0.5 0.7

Headline CPI Index % m/m % 100.7 103.4 106.3 -

UK y/y 0.6 2.7 2.8

RPI Index % m/m 263.1 272.1 281.0 -

% y/y 1.7 3.4 3.3

100.0 100.1 100.3 100.5 100.8 100.9 100.9 101.2

-

0.2 0.4 0.8 0.8 0.8 0.8 0.7 0.6

99.7 100.2 100.4 100.6 100.5 101.0 101.0 101.2

-

0.2 0.4 0.8 0.8 0.8 0.8 0.7 0.6

102.0 103.2 103.7 104.7 105.1 106.1 106.6 107.4

-

2.2 2.8 2.8 3.2 3.0 2.8 2.8 2.5

267.7 271.5 273.2 275.9 277.2 280.6 282.2 284.2

-

Jan-17

100.0

0.2

0.1

99.6

-0.2

0.1

101.4

-0.5

1.9

265.5

-0.6

2.6

Feb-17

100.0

0.0

0.2

99.6

0.0

0.2

102.1

0.7

2.3

268.4

1.1

3.2

Mar-17

100.0

0.0

0.3

99.8

0.2

0.3

102.5

0.4

2.3

269.3

0.3

3.1

Apr-17

100.0

0.0

0.3

100.1

0.3

0.3

102.9

0.4

2.7

270.6

0.5

3.5

May-17

100.1

0.1

0.5

100.3

0.2

0.4

103.3

0.4

2.9

271.7

0.4

3.7

Jun-17 Jul 17(1)

100.1

0.0

0.4

100.2

-0.1

0.4

103.3

0.0

2.7

272.3

0.2

3.5

100.2

0.1

0.6

100.2

0.0

0.7

103.3

0.0

2.7

271.7

-0.2

3.2

Aug 17(1)

100.3

0.1

0.8

100.4

0.2

0.8

103.8

0.4

2.8

273.7

0.7

3.5

Sep 17(1)

100.4

0.1

0.9

100.5

0.1

0.9

104.2

0.4

3.0

274.3

0.2

3.6

Oct 17(1)

100.5

0.1

0.9

100.7

0.2

0.9

104.5

0.3

3.2

274.9

0.2

3.8

Nov 17(1)

100.5

0.0

0.8

100.6

-0.1

0.8

104.7

0.2

3.3

275.7

0.3

3.9

Dec 17(1)

100.6

0.1

0.8

100.6

0.0

0.8

105.1

0.4

3.1

277.0

0.5

3.7

Jan 18(1)

100.7

0.2

0.7

100.3

-0.3

0.7

104.5

-0.6

3.1

275.0

-0.7

3.6

Feb 18(1)

100.8

0.1

0.8

100.4

0.1

0.8

105.2

0.6

3.0

277.8

1.0

3.5

Mar 18(1)

100.9

0.1

0.9

100.7

0.3

0.9

105.5

0.3

2.9

278.7

0.3

3.5

Apr 18(1)

100.8

-0.1

0.8

101.0

0.3

0.9

105.8

0.3

2.9

279.9

0.4

3.5

May 18(1)

100.9

0.0

0.8

101.1

0.1

0.8

106.1

0.3

2.7

280.6

0.2

3.3

Jun 18(1) Updated Next Release

100.8

0.0

0.7 101.0 Jul 28

-0.1

0.7

106.3

0.2

2.9 281.3 Aug 15

0.3

3.3

Jul CPI (Aug 25)

Source: BNP Paribas, national statistics offices;

(1)

3.0 3.6 3.4 3.8 3.5 3.3 3.3 3.0

Aug CPI (Sep 12)

Forecasts

Chart 3: Japanese CPI inflation

Chart 4: UK CPI inflation

Source: Macrobond, Statistics Japan, BNP Paribas

Source: Macrobond, ONS, BoE, BNP Paribas

In June, the national core CPI (excludes fresh food) was unchanged from May with a reading of 0.4% y/y, as energy price growth came in at 4.9%, virtually identical to May’s figure (5.1%). Meanwhile, the new core CPI (also excludes energy), which the BoJ focuses on, remained at 0.0% for a third straight month. Based on the Tokyo CPI for July (this report precedes the nationwide figures by one month), we project that the national index that month should pick up 0.1 point and rise by 0.5%. The new core CPI should return to positive growth for the first time in five months, rising 0.1% thanks to a rebound by household durables and overseas package tours.

UK headline CPI inflation was stable at 2.6% y/y in July, 0.1pp lower than the market consensus. The downward surprise was mainly driven by core inflation remaining unchanged at 2.4% y/y, compared with expectations for 0.1pp pickup. Looking at the breakdown, core goods inflation increased further, reaching its highest level since 2010, largely driven by the lagged impact past GBP depreciation. The more domestically-generated service price inflation, meanwhile, declined slightly on the month. Subdued services price inflation likely owes something to moderating domestic demand and the softening of wage growth of late. Beyond monthly volatility, we expect UK headline inflation to continue trending higher, mainly driven by imported inflation, and breaching 3% towards year-end.

GIW

27


Economic forecasts (GDP and CPI inflation) Table 1: GDP growth forecasts (% y/y)

Change since last Global Outlook

Forecasts

Previous forecasts

2014

2015

2016

2017

2018

2019

2017

2018

2017

2018

US

2.4

2.6

1.6

2.3

2.6

1.3

0.0

0.1

2.3

2.5

Eurozone

1.2

1.9

1.7

2.1

1.6

1.3

0.2

0.0

1.9

1.6

China

7.3

6.9

6.7

6.6

6.4

6.5

0.4

0.0

6.2

6.4

Japan

0.3

1.1

1.0

1.2

1.0

0.2

-0.2

0.0

1.4

1.0

UK

3.1

2.2

1.8

1.5

1.0

2.1

0.0

0.0

1.5

1.0

Poland

3.3

3.8

2.7

3.8

2.6

2.4

0.6

0.0

3.2

2.6

South Africa

1.6

1.3

0.3

0.7

1.3

1.5

-0.5

-0.1

1.2

1.4

Brazil

0.5

-3.8

-3.6

0.5

3.0

2.5

-0.5

0.0

1.0

3.0

Mexico

2.2

2.6

2.3

2.0

1.5

2.5

0.5

-0.5

1.5

2.0

Source: BNP Paribas, national statistics offices, national central banks

Table 2: CPI inflation forecasts (% y/y)

Change since last Global Outlook

Forecasts

Previous forecasts

2014

2015

2016

2017

2018

2019

2017

2018

2017

2018

US

1.6

0.1

1.3

1.9

2.3

2.8

-0.1

-0.2

2.0

2.5

Eurozone

0.4

0.0

0.2

1.5

1.1

1.6

-0.1

-0.3

1.6

1.4

China

2.0

1.4

2.0

1.8

2.3

2.5

-0.9

-0.2

2.7

2.5

Japan

2.7

0.8

-0.1

0.4

0.6

0.5

-0.7

-0.4

1.1

1.0

UK

1.5

0.1

0.6

2.8

2.8

2.4

0.0

0.0

2.8

2.8

Poland

0.0

-0.9

-0.6

2.2

2.1

2.1

-0.4

-0.3

2.6

2.4

South Africa

6.1

4.6

6.3

5.0

4.7

5.3

-0.4

-0.4

5.4

5.1

Brazil

6.3

9.0

8.8

3.6

4.0

4.2

-0.5

-0.3

4.1

4.3

Mexico

4.0

2.7

2.8

5.7

4.0

3.3

-0.3

0.3

6.0

3.7

Source: BNP Paribas, national statistics offices, national central banks

Macro Matters

28


Recently published research Central and Eastern Europe, Middle East and Africa – click here for access to all desknotes on this region South African inflation: Hitting the mid-point

Jeffrey Schultz

15 August

South Africa: Taking stock

Jeffrey Schultz

15 August

Germany: Could Central Europe boost wages?

Michal Dybula

11 August

Central Europe: Is manufacturing past its peak?

Michal Dybula

4 August

China – click here for access to all desknotes on this country Xingdong (XD) Chen

China: To retain growth within the desired range

17 August

Europe – click here for access to all desknotes on this region Italy: Debtor’s prism

Clemente De Lucia

16 August

Eurozone: Resurrecting the Phillips curve

Dominic Bryant

10 August

Bank of England: Hoping for stability

Dominic Bryant

3 August

Italy’s growth: Post-boost reboot

Clemente De Lucia

2 August

Global – click here for access to all global desknotes Big Picture: The age of r-stardom

Bricklin Dwyer

10 August

Big picture: USD down, EM up

Marcelo Carvalho

Big picture: Blue skies for global manufacturing

Paul Mortimer-Lee

27 July

Ryutaro Kono

21 July

Japan: Why, despite full employment, does monetary and fiscal stimulus continue? Ryutaro Kono

14 July

3 August

Japan – click here for access to all desknotes on this country Japan: The reality of “Abe the all-powerful”

Ryutaro Kono, Hiroshi Shiraishi

Japan: To have and to hold

14 July

Latin America – click here for access to all desknotes on this region Argentina: Primary colors

Florencia Vazquez

14 August

Brazil’s rates: Six in the mix

Marcelo Carvalho

14 August

Chile: Inflation dynamics turning against further cuts

Florencia Vazquez

14 August

Mexico: A guide to NAFTA talks

Marcelo Carvalho

9 August

Brazil’s Congress: Now back to reforms

Marcelo Carvalho

4 August

US and Canada – click here for access to all desknotes on this region US FOMC: The president’s board

Bricklin Dwyer

10 August

US debt limit: Scare me again?

Bricklin Dwyer

3 August

US: What took the pay out of payrolls?

Paul Mortimer-Lee

27 July

US: Consumption concerns

Paul Mortimer-Lee

20 July

For further research, please see: Macro Matters

Macro Matters

Global Outlook Q3 2017: Steady ahead

Economic research Global rates plus

29

FX weekly

EM strategy plus 17 August 2017 www.GlobalMarkets.bnpparibas.com

Market coverage Economist

Coverage

Legal entity

Phone

Paul Mortimer-Lee

Chief Market Economist and Head of US Economics


1 212 841 3709

Luigi Speranza

Head of European Economics and Global Markets Research Analytics & Production

BNP Paribas London branch

44 20 7595 8322

Dominic Bryant

Eurozone, UK


44 20 7595 8502

Gizem Kara

Eurozone


44 20 7595 8783

Clemente De Lucia

Eurozone, Italy, France


44 20 7595 8842

Stefan Ubovic

Eurozone, Spain


44 207 595 8760

Hélène Baudchon

France

BNP Paribas SA

33 1 58 16 03 63

Bricklin Dwyer

US, Canada


1 212 471-7996

Andrew Schneider

US, Canada


1 212 841 2281

Ryutaro Kono

Head of Global Markets Research, Japan

BNP Paribas Securities (Japan) Limited

81 3 6377 1601

Hiroshi Shiraishi

Japan


81 3 6377 1602

Azusa Kato

Japan


81 3 6377 1603

Xingdong (XD) Chen

Head of Global Markets Research, China

BNP Paribas(China) Limited

86 10 6535 3327

Jacqueline Rong

China

BNP Paribas(China) Limited

86 10 6535 3363

Wike Groenenberg

Head of Emerging Markets Research, CEEMEA & APAC BNP Paribas London branch

44 207 595 8746

Michal Dybula

Chief economist, Central and Eastern Europe

Bank BGŻ BNP Paribas SA

48 22 697 2354

Rafal Staroscik

Central Europe

Bank BGŻ BNP Paribas SA

48 22 566 9567

Jeffrey Schultz

South Africa

BNP Paribas South Africa Branch

27 11 088 2144

Nic Borain

South Africa, Politics

BNP Paribas South Africa Branch

27 83 460 9906

Serhii Yahnych

Chief economist, Ukraine

JSC Ukrsibbank BNP Paribas Group

380 44 537 5082

Taras Datsenko

Ukraine

JSC Ukrsibbank BNP Paribas Group

380 44 230 4854

Marcelo Carvalho

Head of Emerging Markets Research, Latam

Banco BNP Paribas Brasil S.A.

55 11 3841 3418

Florencia Vazquez

Argentina, Chile

BNP Paribas Sucursal Buenos Aires

54 11 4875 4363

Gustavo Arruda

Brazil


55 11 3841 3466

Luiz Eduardo Peixoto

Mexico, Colombia, Brazil


55 11 3841 3494

Production

Location

Legal entity

Phone

Jessica Bakkioui

London


44 20 7595 8478

Elina Talvitie

London


44 20 7595 2588

Louise Bylicki

New York


1 212 471 6479

Editorial

Online BNP Paribas Market Economics Fixed Income Website

BNP Paribas Global Fixed Income Website www.globalmarkets.bnpparibas.com Bloomberg Fixed Income Research

BPGR

Market Economics

BPEC

Mobile Mobile Markets

Macro Matters

30


Legal Notice This document has been written by both independent and non-independent research teams of BNP Paribas; it does not purport to be an exhaustive analysis, and may be subject to conflicts of interest resulting from their interaction with sales and trading teams which could affect the objectivity of this document. This document is non-independent research for the purpose of the UK Financial Conduct Authority rules. For the purposes of MiFID non-independent research constitutes a marketing communication. This document is not investment research for the purposes of MiFID. It has not been prepared in accordance with legal requirements designed to provide the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. STEER™ is a trade mark of BNP Paribas. This document constitutes a marketing communication and has been prepared by BNP Paribas for, and is directed at, (a) Professional Clients and Eligible Counterparties as defined by the European Union Markets in Financial Instruments Directive (2004/39/EC) (“MiFID”), and (b) where relevant, persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, and at other persons to whom it may lawfully be communicated (together “Relevant Persons”) under the regulations of any relevant jurisdiction. Any investment or investment activity to which this document relates is available only to and will be engaged in only with Relevant Persons. Any person who is not a Relevant Person should not act or rely on this document or its content. Securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The information and opinions contained in this document have been obtained from, or are based on, public sources believed to be reliable, but there is no guarantee of the accuracy, completeness or fitness for any particular purpose of such information and such information may not havebeen independently verified by BNP Paribas or by any person. None of BNP Paribas, any of its subsidiary undertakings or affiliates or its members, directors, officers, agents or employees accepts any responsibility or liability whatsoever or makes any representation or warranty, express or implied, as to the accuracy and completeness of the information or any opinions based thereon and contained in this document and it should not be relied upon as such. This document does not constitute or form any part of any offer to sell or issue and is not a solicitation of any offer to purchase any financial instrument, nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on, in connection with any contract or investment decision. To the extent that any transaction is subsequently entered into between the recipient and BNP Paribas, such transaction will be entered into upon such terms as may be agreed by the parties in the relevant documentation. Information and opinions contained in this document are published for the information of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. In providing this document, BNP Paribas does not offer investment, financial, legal, tax or any other type of advice to, nor has any fiduciary duties towards, recipients. Any reference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribas group company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material contained in this document even where advised of the possibility of such losses. All estimates and opinions included in this document are made as of the date of this document. Unless otherwise indicated in this document there is no intention to update this document. BNP Paribas and its affiliates (collectively “BNP Paribas”) may make a market in, or may, as principal or agent, buy or sell securities of any issuer or person mentioned in this document or derivatives thereon. Prices, yields and other similar information included in this document are included for information purposes howevernumerous factors will affect market pricing at any particular time, such information may be subject to rapid change and there is no certainty that transactions could be executed at any specified price. BNP Paribas may have a financial interest in any issuer or person mentioned in this document, including a long or short position in their securities and/or options, futures or other derivative instruments based thereon, or vice versa. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any person mentioned in this document. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any person referred to in this document. BNP Paribas may be a party to an agreement with any person relating to the production of this document. BNP Paribas, may to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before the document was published. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from or in relation to any person mentioned in this document. Any person mentioned in this document may have been provided with relevant sections of this document prior to its publication in order to verify its factual accuracy. The information presented herein does not comprise a prospectus of securities for the purposes of EU Directive 2003/71/EC (as amended from time to time). This document was produced by a BNP Paribas group company. This document is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to this. UK: In the UK, this document is being communicated by BNP Paribas London Branch. 10 Harewood Avenue, London NW1 6AA; tel: +44 20 7595 2000; fax: +44 20 7595 2555- www.bnpparibas.com. Incorporated in France with Limited Liability. Registered Office: 16 boulevard des Italiens, 75009 Paris, France. 662 042 449 RCS Paris. BNP Paribas London Branch is lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR). BNP Paribas London Branch is authorised by the ECB, the ACPR and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. BNP Paribas London Branch is registered in England and Wales under no. FC13447. France: This report is produced and/or is distributed in France by BNP Paribas SA and/or BNP Paribas Arbitrage. BNP Paribas SA is incorporated in France with Limited Liability (Registered Office: 16 boulevard des Italiens, 75009 Paris, France, 662 042 449 RCS Paris, www.bnpparibas.com) is authorized and supervised by European Central Bank (ECB) and by Autorité de Contrôle Prudentiel et de Résolution (ACPR) in respect of supervisions for which the competence remains at national level, in terms of Council Regulation n° 1024/2013 of 15 October 2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions. BNP Paribas Arbitrage is an unlimited liability company, whose registered office is 160/162 boulevard Mac Donald 75019 Paris, registered with the Paris Trade and Companies Registry under number 394 895 833. It is authorised and supervised by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers in France. 31

Germany: This report is being distributed in Germany by BNP Paribas S.A. Niederlassung Deutschland, a branch of BNP Paribas S.A. whose head office is in Paris, France. 662 042 449 RCS Paris, www.bnpparibas.com). BNP Paribas Niederlassung Deutschland is authorized and lead supervised by the European Central Bank (ECB) and by Autorité de Contrôle Prudentiel et de Résolution (ACPR) and is subject to limited supervision and regulation by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in respect of supervisions for which the competence remains at national level, in terms of Council Regulation n° 2013/1024 of 15 October 2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions as well as Council Directive n° 2013/36/EU of 26 June, 2013 and Section 53b German Banking Act (Kreditwesengesetz - KWG) providing for the principles of shared supervision between the national competent authorities in case of branches and applicable national rules and regulations. BNP Paribas Niederlassung Deutschland is registered with locations at Europa Allee 12, 60327 Frankfurt (commercial register HRB Frankfurt am Main 40950) and Bahnhofstrasse 55, 90429 Nuremberg (commercial register Nuremberg HRB Nürnberg 31129). Belgium: BNP Paribas Fortis SA/NV is authorized and supervised by European Central Bank (ECB) and by the National Bank of Belgium, boulevard de Berlaimont 14, 1000 Brussels, and is also under the supervision on investor and consumer protection of the Financial Services and Markets Authority (FSMA), rue du congrès 12-14, 1000 Brussels and is authorized as insurance agent under FSMA number 25789 A Ireland: This report is being distributed in Ireland by BNP Paribas S.A., Dublin Branch. BNP Paribas is incorporated in France as a Société Anonyme and regulated in France by the European Central Bank and by the Autorité de Contrôle Prudentiel et de Résolution. Italy: This report is being distributed by BNP Paribas Italian Branch (Succursale Italia) which is authorised and lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution and regulated by the Autorité des Marchés Financiers, and this authorisation has been notified to the Bank of Italy. BNP Paribas Succursale Italia is the Italian branch of a company incorporated under the laws of France having its registered office at 16, Boulevard des Italiens, 75009, Paris, whose offices are located in Piazza Lina Bo Bardi 3, Milan, tax code and registration number at the Companies Registry of Milan No. 04449690157, is enrolled in the register of the banks held by Bank of Italy under No. 5482, duly authorised to provide in Italy banking and investment services according the principle of the mutual recognition. The branch is subject to limited regulation by the Bank of Italy and the CONSOB respectively. Netherlands: This report is being distributed in the Netherlands by BNP Paribas Fortis SA/NV, Netherlands Branch, a branch of BNP Paribas SA/NV whose head office is in Brussels, Belgium. BNP Paribas Fortis SA/NV, Netherlands Branch, Herengracht 595, 1017 CE Amsterdam, is authorised and supervised by the European Central Bank (ECB) and the National Bank of Belgium and is also supervised by the Belgian Financial Services and Markets Authority (FSMA) and it is subject to limited regulation by the Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (De Nederlandsche Bank). Portugal: BNP Paribas – Sucursal em Portugal Avenida 5 de Outubro, 206, 1050-065 Lisboa, Portugal. www.bnpparibas.com. Incorporated in France with Limited Liability. Registered Office: 16 boulevard des Italiens, 75009 Paris, France. 662 042 449 RCS Paris. BNP Paribas – Sucursal em Portugal is lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR). BNP Paribas - Sucursal em Portugal is authorized by the ECB, the ACPR and Resolution and it is authorized and subject to limited regulation by Banco de Portugal and Comissão do Mercado de Valores Mobiliários. BNP Paribas - Sucursal em Portugal is registered in C.R.C. of Lisbon under no. NIPC 980000416. VAT Number PT 980 000 416.” Spain: This report is being distributed in Spain by BNP Paribas S.A., S.E., a branch of BNP Paribas S.A. whose head office is in Paris, France (Registered Office: 16 boulevard des Italiens, 75009 Paris, France). BNP Paribas S.A., S.E., C/Ribera de Loira 28, Madrid 28042 is authorised and supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and subject to limited regulation by the Bank of Spain. Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities traders, fund management companies and asset managers of collective investment schemes, regulated insurance institutions as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Financial Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CHE-102.922.193. BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2, place de Hollande, 1204 Geneva, Switzerland. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. United States: This report may be distributed (i) by BNP Paribas Securities Corp. to U.S. persons who qualify as an institutional investor under FINRA Rule 2210(a) (4), or (ii) by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer only to U.S. persons who are considered “major U.S. institutional investors” (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended). U.S. persons who wish to effect transactions in securities discussed herein must contact a BNP Paribas Securities Corp. representative unless otherwise authorized by law to contact a non-US affiliate of BNP Paribas. BNP Paribas Securities Corp. is a broker dealer registered with the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) and member of FINRA, SIPC, NFA, NYSE and other principal exchanges. Brazil: This report was prepared by Banco BNP Paribas Brasil S.A. or by its subsidiaries, affiliates and controlled companies, together referred to as "BNP Paribas", for information purposes only and do not represent an offer or request for investment or divestment of assets. Banco BNP Paribas Brasil S.A. is a financial institution duly incorporated in Brazil and duly authorized by the Central Bank of Brazil and by the Brazilian Securities Commission to manage investment funds. Notwithstanding the caution to obtain and manage the information herein presented, BNP Paribas shall not be responsible for the accidental publication of incorrect information, nor for investment decisions taken based on the information contained herein, which can be modified without prior notice. Banco BNP Paribas Brasil S.A. shall not be responsible to update or revise any information contained herein. Banco BNP Paribas Brasil S.A. shall not be responsible for any loss caused by the use of any information contained herein. 32

Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr).. Notice Published in accordance with ‘‘Communiqué Regarding the Principles on Investment Consultancy Activities and the Investment Consultancy Institutions’’ Series: V, No: 55 issued by the Capital Markets Board. The investment related information, commentary and recommendations contained herein do not constitute investment consultancy services. Investment consultancy services are provided in accordance with investment consultancy agreements executed between investors and brokerage companies or portfolio management companies or non-deposit accepting banks. The commentary and recommendations contained herein are based on the personal views of the persons who have made such commentary and recommendations. These views may not conform to your financial standing or to your risk and return preferences. Therefore, investment decisions based solely on the information provided herein may fail to produce results in accordance with your expectations. Israel: BNP Paribas does not hold a licence under the Investment Advice and Marketing Law of Israel, to offer investment advice of any type, including, but not limited to, investment advice relating to any financial products. Bahrain: This document is being distributed in Bahrain by BNP Paribas Wholesale Bank Bahrain, a branch of BNP Paribas S.A. whose head office is in Paris, France (Registered Office: 16 boulevard des Italiens, 75009 Paris, France). BNP Paribas Wholesale Bank Bahrain is licensed and regulated as a Registered Institution by the Central Bank of Bahrain – CBB. This document does not, nor is it intended to, constitute an offer to issue, sell or acquire, or solicit an offer to sell or acquire any securities or to enter into any transaction. South Africa: BNP Paribas Securities South Africa (Pty) Ltd (Registration number 1996/009716/07) is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Provider (FSP 29451) in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002. Any view or opinion expressed in this report does not constitute advice and the recipient should obtain their own advice prior to making any decision or taking any action whatsoever based hereon. China: This document is being distributed in the People’s Republic of China (“PRC”), excluding the Hong Kong or Macau Special Administrative Regions or Taiwan) by BNP Paribas (China) Limited (“BNPP China”), a subsidiary of BNP Paribas. BNPP China is a commercial bank licensed by the China Banking Regulatory Commission to carry on banking business in the PRC. India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. ("BNPPSIPL"), having its registered office at 5th floor, BNP Paribas House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 (Tel. no. +91 22 3370 4000 / 6196 4000 / Fax no. +91 22 3370 4363). BNPPSIPL is registered with the Securities and Exchange Board of India (“SEBI”) as a stockbroker in the Equities and the Futures & Options segments of National Stock Exchange of India Ltd. and Bombay Stock Exchange Ltd. (SEBI Regn. Nos.: INB/INF231474835, INB/INF011474831; CIN: U74920MH2008FTC182807; Website: www.bnpparibas.co.in). Indonesia: This report is being distributed by PT BNP Paribas Securities Indonesia and is delivered by licensed employee(s) to its clients. PT BNP Paribas Securities Indonesia, having its registered office at Menara BCA, 35th Floor, Grand Indonesia, Jl. M.H.Thamrin No.1, Jakarta, 10310, Indonesia, is a fully subsidiaries company of BNP Paribas SA and is licensed under Capital Market Law No. 8 of 1995 and the holder of broker-dealer and underwriter licenses issued by the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK). PT BNP Paribas Securities Indonesia is also a member of Indonesia Stock Exchange. Neither this research publication nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This research publication is not an offer of securities in Indonesia. Some of the securities referred to in this research publication have not been registered with the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstance which constitute an offer within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. Philippines: This report is being distributed in the Philippines by BNP Paribas Manila Branch, an Offshore Banking Unit (OBU) of BNP Paribas whose head office is in Paris, France. BNP Paribas Manila OBU is registered as an offshore banking unit under Presidential Decree No. 1034 (PD 1034), and regulated by the Bangko Sentral ng Pilipinas. This report is being distributed in the Philippines to qualified clients of OBUs as allowed under PD 1034, and is qualified in its entirety to the products and services allowed under PD 1034. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is registered as a Licensed Bank under the Banking Ordinance and regulated by the Hong Kong Monetary Authority. BNP Paribas Hong Kong Branch is also a Registered Institution regulated by the Securities and Futures Commission for the conduct of Regulated Activity Types 1, 4 and 6 under the Securities and Futures Ordinance. Singapore: BNP Paribas Singapore Branch is regulated in Singapore by the Monetary Authority of Singapore under the Banking Act, the Securities and Futures Act and the Financial Advisers Act. This report may not be circulated or distributed, whether directly or indirectly, to any person in Singapore other than (i) to an institutional investor pursuant to Section 274 of the Securities and Futures Act, Chapter 289 of Singapore ("SFA"), (ii) to an accredited investor or other relevant person, or any person under Section 275(1A) of the SFA, pursuant to and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provisions of the SFA. South Korea: Branch: BNP Paribas Seoul Branch is regulated by the Financial Services Commission and Financial Supervisory Service for the conduct of its financial investment business in the Republic of Korea. This report does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. 33

Securities: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This report does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Taiwan: BNP Paribas Taipei Branch is registered as a licensed bank under the Banking Act and regulated by the Financial Supervisory Commission, R.O.C. This report is directed only at Taiwanese counterparties who are licensed or who have the capacities to purchase or transact in such products. This report does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in Taiwan. Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS (“BNPP”) and Finansia Syrus Securities Public Company Limited (“FSS”). FSS International Investment Advisory Securities Co Ltd (“FSSIA”) prepares and distributes research under the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name “FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Australia: This material, and any information in related marketing presentations (the Material), is being distributed in Australia by BNP Paribas ABN 23 000 000 117, a branch of BNP Paribas 662 042 449 R.C.S., a licensed bank whose head office is in Paris, France. BNP Paribas is licensed in Australia as a Foreign Approved Deposit-taking Institution by the Australian Prudential Regulation Authority (APRA) and delivers financial services to Wholesale clients under its Australian Financial Services Licence (AFSL) No. 238043 which is regulated by the Australian Securities & Investments Commission (ASIC).The Material is directed to Wholesale clients only and is not intended for Retail clients (as both terms are defined by the Corporations Act 2001, sections 761G and 761GA). The Material is subject to change without notice and BNP Paribas is under no obligation to update the information or correct any inaccuracy that may appear at a later date. Some or all of the information contained in this document may already have been published on https://globalmarkets.bnpparibas.com © BNP Paribas (2017). All rights reserved. IMPORTANT DISCLOSURES by producers and disseminators of investment recommendations for the purposes of the Market Abuse Regulation: Although the disclosures provided herein have been prepared on the basis of information we believe to be accurate, we do not guarantee the accuracy, completeness or reasonableness of any such disclosures. The disclosures provided herein have been prepared in good faith and are based on internal calculations, which may include, without limitation, rounding and approximations. The date and time of the first dissemination of this investment recommendation by BNP Paribas or an affiliate is addressed above. BNP Paribas and/or its affiliates may be a market maker or liquidity provider in financial instruments of the issuer mentioned in the recommendation. BNP Paribas and/or its affiliates may provide such services as described in Sections A and B of Annex I of MiFID II (Directive 2014/65/EU), to the Issuer to which this investment recommendation relates. However, BNP Paribas is unable to disclose specific relationships/agreements due to client confidentiality obligations. Section A and B services include A. Investment services and activities: (1) Reception and transmission of orders in relation to one or more financial instruments; (2) Execution of orders on behalf of clients; (3) Dealing on own account; (4) Portfolio management; (5) Investment advice; (6) Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; (7) Placing of financial instruments without a firm commitment basis; (8) Operation of an MTF; and (9) Operation of an OTF. B. Ancillary services: (1) Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management and excluding maintaining securities accounts at the top tier level; (2) Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction; (3) Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings; (4) Foreign exchange services where these are connected to the provision of investment services; (5) Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments; (6) Services related to underwriting; and (7) Investment services and activities as well as ancillary services of the type included under Section A or B of Annex 1 related to the underlying of the derivatives included under points (5), (6), (7) and (10) of Section C (detailing the MiFID II Financial Instruments) where these are connected to the provision of investment or ancillary services. BNP Paribas and/or its affiliates do not, as a matter of policy, permit pre-arrangements with issuers to produce recommendations. BNP Paribas and/or its affiliates as a matter of policy do not permit issuers to review or see unpublished recommendations. BNP Paribas and/or its affiliates acknowledge the importance of conflicts of interest prevention and have established robust policies and procedures and maintain effective organisational structure to prevent and avoid conflicts of interest that could impair the objectivity of this recommendation including, but not limited to, information barriers, personal account dealing restrictions and management of inside information. BNP Paribas and/or its affiliates understand the importance of protecting confidential information and maintain a “need to know” approach when dealing with any confidential information. Information barriers are a key arrangement we have in place in this regard. Such arrangements, along with embedded policies and procedures, provide that information held in the course of carrying on one part of its business to be withheld from and not to be used in the course of carrying on another part of its business. It is a way of managing conflicts of interest whereby the business of the bank is separated by physical and non-physical information barriers. The Control Room manages this information flow between different areas of the bank where confidential information including inside information and proprietary information is safeguarded. There is also a conflict clearance process before getting involved in a deal or transaction. In addition, there is a mitigation measure to manage conflicts of interest for each transaction with controls put in place to restrict the information flow, involvement of personnel and handling of client relations between each transaction in such a way that the different interests are appropriately protected. Gifts and Entertainment policy is to monitor physical gifts, benefits and invitation to events that is in line with the firm policy and Anti-Bribery regulations. BNP Paribas maintains several policies with respect to conflicts of interest including our Personal Account Dealing and Outside Business Interests policies which sit alongside our general Conflicts of Interest Policy, along with several policies that the firm has in place to prevent and avoid conflicts of interest. The remuneration of the individual producer of the investment recommendation may be linked to trading or any other fees in relation to their global business line received by BNP Paribas and/or affiliates. 34

IMPORTANT DISCLOSURES by disseminators of investment recommendations for the purposes of the Market Abuse Regulation: The BNP Paribas disseminator of the investment recommendation is identified above including information regarding the relevant competent authorities which regulate the disseminator. The name of the individual producer within BNP Paribas or an affiliate and the legal entity the individual producer is associated with are identified above in this document. Where this investment recommendation is communicated by Bloomberg chat or by email by an individual within BNP Paribas or an affiliate, the date and time of the dissemination by the relevant individual is contained in the communication by that individual disseminator. The disseminator and producer of the investment recommendations are part of the same group, i.e. the BNP Paribas group. The relevant Market Abuse Regulation disclosures required to be made by producers and disseminators of investment recommendations are provided by the producer for and on behalf of the BNP Paribas Group legal entities disseminating those recommendations and the same disclosures also apply to the disseminator. If an investment recommendation is disseminated by an individual within BNP Paribas or an affiliate via Bloomberg chat or email, the disseminator’s job title is available in their Bloomberg profile or bio. If an investment recommendation is disseminated by an individual within BNP Paribas or an affiliate via email, the individual disseminator’s job title is available in their email signature. For further details on the basis of recommendation specific disclosures available at this link (e.g. valuations or methodologies, and the underlying assumptions, used to evaluate financial instruments or issuers, interests or conflicts that could impair objectivity recommendations or to 12 month history of recommendations history) are available at https://globalmarkets.bnpparibas.com/gmportal/private/globalTradeIdea. If you are unable to access the website please contact your BNP Paribas representative for a copy of this document.

35