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GEMs Daily - London Edition

EEMEA FX: a whiff of stagflation

Preview Major currencies recovered vs the USD intraday but there continues to be latent support for the USD from quarter end fixes. Risk on and constructive tone for Asian assets persisted ahead of US payrolls data. Follow through gains in Southeast Asian equity markets (PSI +0.8%, JKSE +0.4%, KLCI, SET 0.3%) helped, to a certain extent, to sustain the wider spreads in USD bonds in Indonesiaand the Philippines. Spreads for Indonesia 5-30s and Phili 2-10s remained wide at 253.7bp and 286.3bp respectively. In FX, the THB, SGD and INR were about 0.1-0.2% stronger while TWD and KRW nearly 0.1% weaker vs the USD.

EEMEA FX in Focus: a whiff of stagflation Four months after we published our COMPASS update, we take a fresh look at FX valuations in EEMEA, based on three different approaches. On the whole, they suggest ILS is clearly undervalued, and ZAR is clearly overvalued. Evidence on TRY is mixed. The CE-3 and RUB are relatively close to fair value. (D. Hauner; page 2)

News and Views In Hungary, producer price inflation came in modestly lower than expected at 6.3% yoy in Feb, vs consensus at 6.4% yoy and down from 7% yoy in Jan. Central Bank of Turkey (CBT) says weaker TRY and higher commodity prices pass through to inflation, and core will continue accelerating. In Brazil, the March IGP-M released on Wednesday by the FGV gained 0.62% mom, down sharply from 1.0% mom in the previous month. Producer prices gained 0.65% mom, down significantly from 1.2% mom in Jan. In Chile, industrial production disappointed, with a 1.1% mom seasonally adjusted decline last month, and a below-consensus increase of 1.9% yoy. China’s 10-year government bonds declined on speculation that the PBoC will raise interest rates in April to counter inflation. (page 4)

Asia and LatAm in Focus In Asia, Hong Kong labor market conditions have improved markedly since Q3 2010 on the back of solid economic growth. In LatAm, the auto industry in Mexico has become the second most important industry, behind only oil. (Page 9 & 11)

Today’s Market Movers The highlight will be Turkey’s GDP data for Q410. Turkish trade balance for February and Q410 current account data for Hungary. In Romania, the NBR is likely to keep rates on hold while South Africa’s PPI is likely to accelerate further on the back of higher commodity prices. Data releases, key events EST Country Data/Event For BofAMLe Cons. Previous 02:30 Hungary Current account (€) Q4 400mn 124mn 477mn 03:00 Turkey GDP (yoy) Q4 7.2% 7.4% 5.5% 03:00 Turkey Trade balance (US$) Feb -7.0bn -6.8bn -7.3bn 05:30 South Africa PPI (yoy) Feb 6.2% 6.1% 5.5%.

- Romania NBR rates decision - 6.25% 6.25% 6.25% Source: BofA Merrill Lynch Global Research, Bloomberg

Emerging Markets

GEMs | Fixed Income Strategy & Economics | Global 31 March 2011 corrected

David Hauner, CFA +44 20 7996 1241 EEMEA FI Strategist MLI (UK) David Beker +1 646 855 9512 LatAm FI Strategist MLPF&S TJ Bond +852 2161 7152 Emerging Asia Economist Merrill Lynch (Hong Kong) Claudio Piron +65 6591 0401 Emerging Asia FI Strategist Merrill Lynch (Singapore) Alberto Ades +1 646 855 4044 GEM FI Strategist & Economist MLPF&S Daniel Tenengauzer +1 646 855 5337 GEM Fixed Income Strategist MLPF&S GEMs FI Strategy & Economics MLPF&S

See Team Page for Full List of Contributors

GEMs Daily – Asia Edition Hong Kong: job market prospects

GEMs Daily – US Edition Mexico: auto sector’s key role

GEMs Monthly Inflation rocks GEMs Analytics Sovereign external debt Corporate bonds

GEMs Da i ly - London Ed i t ion 31 March 2011

2

In Focus

EEMEA: a whiff of stagflation A month ago, we flagged that the MENA shock to oil and risk appetite, if sustained, may bring about a whiff of stagflation (“Trading stagflation”, Feb 24). This trend is materializing, as reflected in our forecast revisions in today’s GEMs Monthly: growth is down, while inflation is up. We also revise our FX forecasts.

Global disappointments We think the oil shock is here to stay. MENA will not settle down any time soon, in our view. Thus, the oil price risk premium will remain elevated, coalescing with already very tight markets: oil is up 20% versus copper since mid February when the Libya conflict broke out (Chart 1), indicative of the supply concerns in oil and the demand concerns stemming from the disaster in Japan. Our commodity strategists have increased their Brent forecast significantly, now expecting an average 2011 price of $108 per barrel (vs. $88 previously).

The global data has begun to be affected by the shock to confidence and purchasing power. In the US, the data has evolved from strong to mixed, and our US team has downgraded their Q1 GDP forecast to 2.5% from 3.3%. In the Euro zone, manufacturing remains stellar, but overall GDP growth is probably capped below 2% this year as the oil shock hits still weak consumer confidence and makes the already painful fiscal adjustment even harder.

Leverage x oil x hikes = toxic While we need to be careful not to overstretch comparisons with previous oil shocks, some aspects of the current situation are actually worse. Looking at a combined measure of slack and inflation (our version of the “misery index”) for the OECD shows we are far from the levels reached during the 1970s and 80s (Chart 2). This is partly due to the share of oil consumption in GDP being lower. But another key reason is worrisome: inflation is constrained by still significant leverage compared to the level in the 1980s, including in the government sector. Oil could impede the deleveraging process, especially in the EU Periphery that remains a key risk factor for EEMEA.

G-10 central banks will struggle to prevent rising inflation expectations but risk making things worse by hiking while the economy is aching under the oil shock. The ECB is likely to hike first in April, and Fed QE2 looks set to end in June.

David Hauner +44 20 7996 1241

Chart 1: Oil is up 20% versus copper since mid-February

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Source: Bloomberg, BofA Merrill Lynch Global Research

Chart 2: Stagflation-meter uptick: OECD output gap + inflation z-scores

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GEMs Da i ly - London Ed i t ion 31 March 2011

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Shocking the forecast Our recent forecast revisions in EEMEA reflect the stagflationary shock. We have cut GDP growth in most oil importers (Table 1). The forecast for Turkey remained unchanged, as the still very strong data offsets the negative impact of oil. However, upgrades in the oil exporters offset a large part of the impact on the regional level, thus bringing down EEMEA GDP growth by only 0.3ppt. Meanwhile, inflation forecasts are creeping higher. Our forecasts for the 2011 average recently increased by 0.5-1ppt in the CE-4, S Africa and Turkey.

However, we maintain what has been one of our core views: central banks will bark more than bite. Stuck between higher headline inflation on one hand, and lower growth, fiscal tightening and still high leverage on the other, they will only hike it they must. Thus far, the tightening cycle has played out exactly like this: the only central bank ahead of the curve was the NBH, as it cannot take any risk on the currency. The BoI and the CBT have fallen deliberately behind the curve and recently had to change course sharply as the bond market pressure became high. The CBR and the NBP should probably already have tightened more, but the balance of risk – globally and domestically – always argued against it.

Looking for the lesser evil Considering a stagflationary backdrop, Russia and Kazakhstan are the places to be. However, in contrast to consensus, we think FX and fixed income are not undervalued any more, but they can likely still overshoot on high oil prices and global liquidity. We already took profit on a long RUB trade we opened on Dec 1.

Turkey is now cheap in our baseline scenario, and we went long TRY on the back of the CBT’s RRR hike as we think it is still oversold (Table 1). However, Turkey remains the EEMEA market most at risk from a major macro hiccup in 2011.

S Africa continues to grow at a below-potential rate even while it has record terms of trade. This is an optimal combo for ZAR, and we thus think it can only weaken over the mid-term. The SARB is unlikely to hike before September, in our view.

Table 1: Key macro forecasts Real GDP growth (% yoy) FX 2011F 2012F 2011F 2012F

2010E BofAML Chg. Consensus Economics BofAML Chg.

Consensus Economics Spot BofAML Chg.

Bloomberg Consensus BofAML Chg.

Bloomberg Consensus

EEMEA 4.4 4.2 -0.3 - 4.6 - - Czech Rep. 2.3 1.8 (0.5) 2.2 3.0 - 2.9 24.52† 23.75 - 24.00† 23.65 (0.9) 23.55† Egypt* 5.1 1.0 (4.2) - 5.6 - - 5.95 6.30 0.45 6.00 7.00 1.00 - GCC 3.7 4.7 0.2 - 5.0 - - - - - - - - - Hungary 1.2 2.5 (0.3) 2.5 3.0 - 3.2 268† 270 - 268† 270 (10.0) 270† Israel 4.0 3.9 - 3.8 4.5 - 3.8 3.52 3.50 - 3.50 3.50 (0.2) 3.58 Kazakhstan 5.5 5.0 - 6.3 5.0 - 6.5 146 140 - 132 132 (3.0) 134 Lebanon 8.0 6.0 - - 5.5 - - 1508 1508 - - 1508 - - Poland 3.8 3.0 (1.2) 4.1 3.7 (0.1) 4.2 3.99† 4.00 0.25 3.75† 3.95 - 3.73† Romania -1.3 1.5 - 1.6 2.5 - 3.6 4.12† 4.05 (0.32) 4.12† 4.49 - 4.08† Russia 4.0 4.8 0.3 4.4 4.1 - 4.4 28.41 29.25 (1.3) 28.80 32.50 - 29.85 South Africa 2.8 3.3 (0.2) 3.5 3.9 (0.3) 4.0 6.87 8.00 - 7.34 8.20 - 7.80 Turkey 8.4 5.3 - 4.8 5.5 - 4.6 1.56 1.50 - 1.52 1.55 - 1.54 Ukraine 4.3 4.2 - 4.5 4.2 - 5.1 7.97 7.90 0.1 7.79 7.90 0.4 7.50

† Exchange rates vs EUR. *Egypt 2011 and 2012 GDP growth forecasts under revision. Source: BofA Merrill Lynch Global Research, Consensus Economics (March 2011)

GEMs Da i ly - London Ed i t ion 31 March 2011

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News and Views

EEMEA Hungary: producer price inflation eases Producer price inflation came in modestly lower than expected at 6.3% yoy in February, vs consensus at 6.4% yoy and down from 7% yoy in January. The moderation in the yoy change is primarily due to favorable base effects. Food, textile and rubber material prices slowed mom, but those for chemicals, transport and fuels stayed brisk.

Neutral: The moderation in producer price inflation is likely to be welcomed by the MPC, but the breakdown does not suggest any significant change in the inflation risks. We expect the MPC to keep the policy rate unchanged in coming quarters.

Hungary: NBH expects weaker growth, better CA surplus The NBH decreased the 2011 GDP outlook modestly, but shaved off 1pp from the 2012 projections on the expected negative impact from fiscal consolidation and a less favorable global backdrop. Our 2011 GDP forecast remains lower than that of the NBH, while the 2012 outlook is the same. Higher oil prices have not led to higher expected inflation due to a slower domestic demand recovery and some beneficial impact from the government’s decision to cap energy price tariff adjustments. Core inflation was revised down significantly.

On hold: The tone of the NBH report is consistent with market expectation of flat rates this year. Limited external vulnerability allows the NBH to remain on the sidelines despite the ECB's tightening.

Iraq: Kuwait and Iraq hold bilateral talks The Kuwaiti Deputy Prime Minister and Foreign Minister met with the Iraqi Foreign Minister in Kuwait City in the first meeting of the joint ministerial committee set up to solve outstanding bilateral issues. Further follow-up meetings are planned in Baghdad.

Positive: Iraq reaffirmed its commitment to its international obligations toward Kuwait, including the maintenance of the border marks and UN war reparations. (Note that the UNCC ascribed final war reparations of US$52.3bn in 2005 and that the UNSC Resolution 1483 in May 2003 brought down the deduction from Iraqi oil export revenues to 5%). We believe war reparations would be fully paid back in 2016. The issue of the cUS$22bn non-Paris Club debt owed to Kuwait has been left for further negotiation. This debt is not being serviced and could de jure eventually receive debt relief on the same or better terms compared to Paris Club countries debt. However, the Kuwaiti Parliament has so far staunchly resisted such a move.

Poland: MT budget plans confirm small 2012 consolidation According to the local news provider PAP, the government's medium-term budget plans see a cut of the State deficit to PLN37bn, from PLN40bn this year. The deficit will narrow further to PLN30bn in 2013 and PLN28bn in 20104. Net borrowing needs are expected at PLN49bn in 2011, rising to PLN51.9bn in 2012, hovering thereafter around PLN35bn. GDP growth expected at 4% this year and the next, easing modestly later.

Raffaella Tenconi +44 20 995 9173

Raffaella Tenconi +44 20 995 9173

Jean-Michel Saliba +44 20 7995 8568

Raffaella Tenconi +44 20 995 9173

GEMs Da i ly - London Ed i t ion 31 March 2011

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Neutral. The 2012 state deficit is in line with what the government suggested previously. The state shortfall is relatively small (2.3% of GDP), but significant uncertainty remains on the speed of consolidation of the general government overall, which we expect at 5.4% of GDP. The GDP growth assumptions are optimistic given the unfavorable backdrop, in our view.

Turkey: no imminent rate hikes Central Bank of Turkey (CBT) announced the minutes of last week’s MPC meeting. CBT says weaker TRY and higher commodity prices pass through to inflation, and core will continue accelerating. CBT believes domestic demand has remained strong in Q111; therefore, no marked slowdown in economic activity. CBT hopes that lagged impact of the monetary policy measures it has taken will become effective from Q211 onward. CBT still underlined that additional tightening was necessary and RRRs would be more effective than hiking policy rates. Finally, the CBT believes RRR hikes are enough to limit secondary impact of higher commodity prices on inflation and some additional macro-prudential measures to tame credit supply might follow.

Cautious: Our read is that the CBT sounds less comfortable on the inflation outlook due to higher imported prices. But for now, it signals that it is done with the RRR hikes in the near term, unless we have further increase in commodity prices. The minutes mentioned that the bank acts on the risk scenario mentioned in January inflation report, which was based on a permanent increase in commodity prices. The monetary policy response in that scenario was further tightening vs. the base case, though the composition (RRR or rate hike) of that tightening would depend on capital flows, foreign demand and credit growth. Given that Turkey still receives capital inflows, foreign demand for exports only gradually recovers and credit growth is slowing down, a policy rate hike doesn't seem imminent, for now.

Latin America Argentina: government relaxes barriers to capital inflows The Government relaxed constraints applied to inflows of capital to encourage investment in building power generation, according to two resolutions published on 30 March in the Official Gazette. Both laws provide an exception to the 30% non-remunerated reserve requirement (implemented 2005) to foreign capital inflows for this type of investment.

Positive: This will allow the construction of two power generators, with an estimated cost of US$1 bn.

Brazil: dovish inflation report The Q1 inflation report (IR) released on Wednesday brought no news from previous meetings and statements, as the bank continues to sound very dovish. There was no further discussion on macro-prudential measures. Notably, inflation forecasts should have deteriorated by at least 20bp since the cut date for the report (11 March), as the forecast for March IPCA was at 0.50% month over month then and is now close to 0.70% mom.

Dovish: In our view, the report reinforces steepening of the yield curve and we continue to like Jan-14-Jan-17. The likelihood of the government allowing FX appreciation to help curb inflation is also increasing, in our view. In

Turker Hamzaoglu +44 20 7996 2417

Marcos Buscaglia +1 646 855 2582

David Beker +1 646 855 9512

GEMs Da i ly - London Ed i t ion 31 March 2011

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addition, the bank noted that the cost to accelerate the inflation convergence on GDP would be too high, which supports the view that the bank will end the tightening cycle soon. We continue to expect one last 50bp hike in April.

Brazil: IGP-M decelerates sharply in March The March IGP-M released on Wednesday by the FGV gained 0.62% mom, down sharply from 1.0% mom in the previous month. Producer prices gained 0.65% mom, down significantly from 1.2% mom in January. Wholesale agricultural prices gained 1.37% mom, down over 1% from the last IGP-10. Consumer prices decelerated slightly and gained 0.65% mom, down from 0.67% mom in January, as seasonal pressures continued to ease at the margin. Construction prices gained 0.44% mom, slightly up from 0.39% mom in January.

Dovish: The March result was below market consensus at 0.69% mom. While seasonal pressures should have lower impact on inflation in the coming months, wholesale agricultural inflation has eased significantly at the margin. According to the Brazilian Central Bank's weekly survey of market expectations released on Monday, consensus for the 2011 IGP-M stood at 6.99% yoy.

Chile: disappointing IP in February Industrial production disappointed, with a 1.1% mom seasonally adjusted decline last month, and a below-consensus increase of 1.9% yoy. Mining declined 4%, affected by a 6.6% decline in copper production. While electricity generation increased 2.1% yoy, the production of electricity with hydro electrical sources dropped 19.9% yoy. Indicators from the construction sector are positive, but show some "stagnation", according to the INE's report. On the positive side, retail sales continue to grow strongly at 16.8%yoy, while supermarket sales were at 10.7%yoy, both in inflation-adjusted terms.

Negative: With these figures, we expect the economic activity index (IMACEC) to grow 6.0% yoy in February, below January’s print of 6.8% yoy. In any case, it does not change our view that BCCh will hike rates 50bp on 12 April.

Mexico: closely monitoring corn prices Officials from Grupo Maseca (Gruma), a top global tortilla and corn flour producer, anticipated that although grain price volatility will continue in the coming years, the company will not be affected because it has set up corn hedges for 2011 and 2012.

To watch: Tortilla prices have been increasing in a number of different cities, among small retailers in particular. The national average tortilla prices in small retailers has moved from MXN10 to MXN10.7 year-to-date. In large retail stores (Wal-mart, Soriana, etc) prices increased from MXN7.16 to MXN7.32 during the same period. It will be worth monitoring further volatility in corn prices since it could be reflected in the merchandise core.

Uruguay: CB President wanted to send strong signal According to a Bloomberg report, Central Bank President Mario Bergara and Economy Minister Fernando Lorenzo increased rates by 100bp as a way to assure markets that inflation is the top concern for policy-makers. In addition, Bergara stated that he was “concerned that private consumption accelerated faster than economic growth last year.” Similarly, Lorenzo affirmed that the government will lend a hand toward fighting inflation by controlling spending. The

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GEMs Da i ly - London Ed i t ion 31 March 2011

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government will now postpone a planned VAT reduction for next year. Separately, Bergara said that the bank is not planning to issue bonds and will more likely continue to change Uruguay’s debt profile. The CB President expects Uruguay to be one of the next countries in the region to receive the coveted investment grade.

Positive: As we have previously stated we view BCU’s surprising –by its magnitude-rate increase as a positive given inflation remains outside the policy target. We expect inflation to finish the year at 7.0%, down from 7.7% currently.

Asia

China: bonds, yuan and stocks moved on inflation concerns China’s 10-year government bonds declined on speculation that the PBoC will raise interest rates in April to counter inflation. The yield on the 3.83% note due March 2021 gained 2bp to 3.90% on Tuesday. China’s yuan strengthened to nearly a 17-year high, while property and financial stocks in Hong Kong declined on similar concerns.

Mixed: Market attention will shift from earnings to macro data this week. Concerns about rising inflation will rule the markets, from stocks to rates, until mid April. We expect headline yoy CPI inflation to peak in March at 5.5% (to be released on 15 April; see forecast here), moderate afterward, peak again at 5.5-6.0% in June and then trend down to about 4.0% at year-end. Market sentiment on policy tightening could be amplified by the volatile inflation readings and diverging calls from the sell side. Also, check out our March and 3Q macro forecasts here.

China: Nissan’s April output expected to fall 10% below target Nissan Motor’s expects April output at its China unit to fall 10% below target due to supply chain disruptions. Dongfeng Nissan Passenger Vehicle Co, Nissan’s joint venture with Dongfeng Motor, will slash production by idling plants on weekends until mid April. Overtime will continue on weekdays and the firm has not set a production schedule for beyond mid-April.

Neutral: The number of supply chain disruptions has increased, in our view. However, we believe the negative impact from these disruptions could be largely offset by a boost in China’s exports to Japan from staples in the near term to construction materials in the medium term. On the other hand, the overcapacity in China auto sector means the quake-led disruption may not significantly affect China’s annual auto (and parts) output. See our latest research on Asian supply chain disruptions here.

China: property price targets should consider public opinion After most cities said they would limit home price increases to within 10% this year, the Ministry of Housing issued a memo urging local governments to receive public support before setting price control targets. Those cities that have announced targets should adjust according to public opinions. So far, Beijing City is the only city that will cap home prices at the same level as, or slightly lower than, last year.

Negative: As we commented yesterday, the 10% cap is not what the central government wants. Ten percent is well above the deposit rates (1y

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GEMs Da i ly - London Ed i t ion 31 March 2011

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benchmark is at 3%), and well above the 4% CPI inflation target. A more reasonable home price cap might be set at around just 4%. That said, regulating home prices could never be effective and efficient, as evidenced many times throughout economic history. The central government, while sensible in guiding expectations on asset price inflation, might need to focus on some other measures (such as adding land supply and cutting fees) to stabilize home prices.

GEMs Da i ly - London Ed i t ion 31 March 2011

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Asia in Focus

Hong Kong: job market prospects The labor market is a key driver of domestic demand, inflation and property prices in Hong Kong. Labor market conditions have improved markedly since Q3 2010 on the back of solid economic growth – job creation has been strong and the unemployment rate has fallen to its lowest level since November 2009. Labor cost pressures have been subdued thus far in 2011; however, pressures are likely to be more visible going forward.

Labor market conditions Employment reached a record high of 3.58 million in January, but dropped slightly in February. We view the latest datapoint with a grain of salt, as it was distorted by reduced business activities and labor demand following the Lunar New Year holidays.

The outlook for the labor market remains favorable given the impressive improvement since June 2010. In general, employers continue to adopt a positive attitude toward staff hiring. The latest quarterly report on business tendency survey indicated that all surveyed sectors – particularly the financing and insurance, retail, and information and communications sectors – expect their employment to increase in Q1 2011. This is the third consecutive quarter where respondents are optimistic about the labor market and are willing to hire more people.

Mirroring the pace of job creation, the headline unemployment rate has been declining steadily; it reached 3.6% in February, the lowest level since November 2009, and not far above the pre-crisis levels of 3.2%.

Upon closer inspection, however, we notice that the latest dip was caused by withdrawals from the labor force rather than employment gains. Compared to the previous three months, the labor force declined by 13,600 in February while total employment, after accelerating for eight straight months, actually slowed and dropped by 6,600. As the reduction in total employment was smaller than that in the labor force, the number of unemployed persons fell further to 123,300, bringing the unemployment rate to 3.6%.

Marcella Chow +852 2161 7236 This piece was originally published in the latest GEMs Daily – Asia Edition.

Chart 3: Improving labor market helps consumer spending

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Chart 4: Falling jobless rate coupled with increasing price level

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GEMs Da i ly - London Ed i t ion 31 March 2011

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The unemployment rate in lower-skilled segment of the labor market has far exceeded the unemployment rate in the higher-skilled segment over the past few years. However, there have been significant improvements in recent months. In particular, the unemployment rate for workers in the lower-skilled segment fell to 3.7% in February, a remarkable recovery from 5.6% in May 2010.

Employment in the higher-skilled sectors also picked up, with the unemployment rate falling to 2.0% recently. The implementation of the statutory minimum wage may, to some extent, dampen job creation in the lower-skilled segment. But we expect the broad based recovery to continue, driven by robust domestic demand. The strong demand from China for Hong Kong’s service exports, particularly the offshore financial services, should remain a key positive for the job market.

Labor costs The growth in overall labor earnings has largely been in line with recent pick-up in economic activity. In nominal terms, yoy growth in payroll per person remained positive at 0.8% and 3.1% in Q3 and Q4 2010, respectively. In real terms, however, payroll per person declined 1.4% yoy in Q3, as growth in nominal payroll was outpaced by inflation.

Given the robust growth in labor productivity, the positive yoy growth of nominal payroll per person in both Q3 and Q4 did not pose significant labor cost pressures on the overall price level, creating inflation.

Though labor cost pressures have been subdued thus far, they are likely to be come more visible going forward. Solid economic growth coupled with improving labor market conditions and rising inflationary pressures have led to more intense calls for higher pay rises in the economy. This could further increase labor earnings. We will continue to monitor the effect of the implementation of the statutory minimum wage on both the job market and the overall economy.

Chart 5: Unemployment rates in the higher and lower-skilled segments

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Chart 6: Nominal vs. Real payroll index

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Source: CEIC, BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 31 March 2011

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LatAm in Focus

Mexico: auto sector’s key role The auto industry among top economic activities in Mexico The auto industry has become a strategic sector for Mexico’s economy. It is now the second most important industry, behind only oil. While the manufacturing industry represents around 18% of total GDP, the auto industry accounts for nearly 3% of GDP. According to INEGI, auto industry’s production value increased from MXN499bn in 2005 to MXN778bn in 2010. Total sales value rose as well, from MXN484bn to MXN761bn in the same period.

The auto industry also represents an important source of employment. Although the economic crisis led to several technical stops in Mexican assembly plants, reducing the number of positions from 218,000 in 2008 to 125,000 in 2009, employment was up to 145,000 jobs by year-end 2010YE.

Mexico's IP momentum at the beginning of 2011 (up 6.6% yoy; 1.43% mom sa) has been mainly driven by a robust performance of its manufacturing sector, supported by still-firm vehicle sales abroad. In fact, breaking down export growth (20%) during the first two months of 2011, car exports to the US, Canada and Latin America—which together accounted for 90.1% of total exports—grew 13.8%, 11.1% and 112.3% yoy, respectively, while those sent to Europe declined 15.9% and those directed to Asia grew 17.8% yoy.

Mexico’s auto exports diversifying gradually Mexico’s auto sector is still largely reliant on US and Canada. In 2007 auto exports to the US represented the largest share of Mexico’s total auto exports by far (86% of total). Exports to Europe and Latin America remained a distant second and third, with 9.1% and 4.8% of total exports, respectively; exports to other world regions were practically null.

Four years later, although still largely reliant on the North American market, Mexican auto exports to the US and Canada have decreased slightly to 76.2% as a share of total exports, while those directed to LatAm have increased to 13.6%. As of February 2011, auto exports to Europe represented 6.6%, while those to Asia and other regions totaled 3.5% of total exports.

Edgar Camargo + 52 55 5201 3350 This piece was originally published in the latest GEMs Daily – US Edition.

Chart 7: Auto production and sales evolution (%yoy)

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Chart 8: Auto Exports by main destination

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9.1

6.6

4.813.6

86.0

1.50.12.00.0

0

10

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30

40

50

60

70

80

90

100

Feb-07 Feb-11

North America Europe Latin America Asia Other

Source: AMIA, BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 31 March 2011

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Strategically positioned in the global auto market Mexico’s geographic location has played an important role in the development of its auto industry. The country’s access to both the Pacific and Atlantic Oceans constitutes a key advantage for those auto companies looking to target the European and Asian markets. Also, Mexico’s location relative to the US and Latin America as a whole allows it to reach the biggest buyers in the auto sector. As a result, Mexico stands among the top 10 manufacturers of cars, trucks and auto parts, where eight out of the top 10 auto car makers already have at least one assembly plant in the country.

Auto sector showing signs of stabilizing at a healthy pace In its latest report, the Mexican Association of the Auto Industry (AMIA) showed auto production increased 18.2% yoy during January-February, as exports and domestic sales grew 20% and 9.9% in the same period, respectively. While exports continued to show momentum, results were slightly less dynamic than those in H2 2010. This reaffirms our view that manufacturing and the auto industry performance will moderate somewhat as we move further into 2011, but only to follow a more sustainable pace in auto production and exports.

Domestic demand holds a substantial potential Despite encouraging signs of recovery in 2010, domestic auto sales have not reached pre-crisis levels. While slightly more than 1 million vehicles were sold in Mexico in 2008, last year’s figure barely reached 820,000 units. Nevertheless, with domestic demand gradually catching up, the car sales outlook might improve.

Following the recent recovery in consumer credit conditions, auto sales financing has been improving. May 2010 auto credit did drop 7.9% yoy, but CNBV figures showed car loans growing 14.1% yoy in January 2011. Likewise, non-performing loans as a share of total credit in the auto sector have shown a continuous reduction. All in, as long as credit conditions continue to improve, domestic car sales might benefit.

Finally, Mexico’s skilled labor productivity in the auto industry coupled with a weaker currency following the crisis has led to significant costs reductions underpinning the country’s attractiveness as an important receiver of investments (several of these announced recently) in the sector. For all the above, the auto industry has been and will continue to be a critical driving force for the Mexican economy.

Chart 9: gradually picking up

-10

-5

0

5

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-10

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0

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11

20000

35000

50000

65000

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95000

110000Auto credit (y oy )Domestic sales (rhs)NPL (% of total auto loans)

Source: CNBV, BofA Merrill Lynch Global Research

Chart 10: Most recent investment plans by auto makers US$mn Announced Concept

Chrysler 570 October 2010 Opening of a new plant in Coahuila, where a new enginemodel will be developed.

Ford Motor 3000 2008 Remodeling of plant in Cuautitlán, State of Mexico. Theplant was reopened in May 2010.

1300 February 2011 Plant expansion in Hermosillo, Sonora.

GM 500 August 2010 Facility's expansion in engine and assembly plants inRamos Arizpe, Coahuila.

540 January 2011 Production of two low-emission engine models in Toluca,State of Mexico.

Mazda - - Plans to open a plant by 2013.

Nissan 1050 March 2011 Production of two new car models. The investment isconsidered in its multiyear plan 2009-2013

11.2 March 2011 Opening of four car dealerships in Jalisco.

Toyota - - Plans to open a second plant, tentatively in Guanajuato.

Volkswagen 560 January 2011 Start of the construction of a new high-tech engine plantto be opened by 2013.

Announced investments

Source: AMIA, local media, auto dealerships, BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 31 March 2011

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Data Preview Wednesday-Friday, 30 March to 01 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

– Russia GDP (yoy) Q4 5.0% 4.8% 2.7% We forecast a 5.0% yoy 2010Q4 growth and, correspondingly, 4.0% 2010 annual GDP growth.

– Russia GDP (yoy) 2010 4.0% n.a. 4.0% Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

Thursday, 31 March NYT Country Data/Event For BofAMLe Cons.† Previous Comments

2:30 Hungary Current account (€) Q4 400mn 124mn 477mn A wider trade surplus in Q4 will likely be offset by the deterioration in the income account, in our view.

3:00 Turkey GDP (yoy) Q4 7.2% 7.4% 5.5% GDP growth is likely to have accelerated further into Q111. 3:00 Turkey Trade balance (US$) Feb -7.0bn -6.8bn -7.3bn Trade deficit is likely to have continued deteriorating at full pace

with higher oil prices weighing on imports. 3:30 Thailand Current account balance (US$) Feb 2500mn 2875mn 1090mn We expect to see large current account surplus in Feb from strong

exports and tourism income. 4:00 Taiwan CBC rate decision 1.75% 1.75% 1.63% We are sticking with our call for the CBC to raise interest rates this

month by another 12.5bp. However, as the economy most affected by Japan, there is some risks that the CBC will pause to assess the momentum of domestic investment and the impact of supply chain disruptions.

4:00 Hong Kong Retail sales value (yoy) Feb n.a. 18.5% 28.2% 5:00 Hong Kong M3 money supply (HK$, yoy) Feb n.a. n.a. 9.5% 5:30 South Africa PPI (yoy) Feb 6.2% 6.1% 5.5% Producer price inflation is likely to accelerate further on the back of

higher commodity prices. However, the recent strength of the Rand will help cushion the impact of higher oil prices.

6:00 Malaysia M3 money supply (yoy) Feb n.a. n.a. 8.8% 7:30 India Current account balance (US$) 4Q n.a. -9.2bn -15.8bn 8:00 South Africa Trade balance (ZAR) Feb -5.2bn -1.5bn -4.9bn Exports slumped -17.0% mom in January while imports surged

+14.0% mom on the back of a sharp rise in demand for machinery and equipment. While monthly numbers can be very volatile, we still expect import growth to outpace export growth as firms look to rebuild inventories.

8:00 Chile Unemployment Rate Feb n.a. 7.4% 7.3% 9:30 Brazil Primary Budget Balance Feb n.a. 6.9B 17.7B 12:00 Colombia Urban Unemployment Rate Feb n.a. 12.9% 14.7%

– Egypt GDP (qoq) Q4 -1.4% n.a. 2.5% Despite seasonal qoq weakness, GDP would have expanded by a robust 5.8% yoy in Q4 before the sudden stop due to the civil uprising in mid-January

– Romania NBR rates decision – 6.25% 6.25% 6.25% The NBR will likely leave rates unchanged as it tries to balance the upward pressures from commodity prices and continued recession in domestic demand.

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

Friday, 01 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

0:00 Indonesia Inflation (yoy) Mar 7.2% 7.0% 6.8% We expect headline CPI inflation to climb higher to +7.2%, largely because of a low base last year. Month-on-month increase probably remained small, forecasted at +0.2%, given signs of easing food prices. Core inflation however likely continued to inch higher to about +4.5% from +4.4% in Feb.

0:00 Indonesia Exports (yoy) Feb 22.9% 26.8% 24.7% Exports probably continued expanding at a robust pace of +22.9% in Feb, down slightly from +24.7% in Jan. Interest will also be on the trade balance, as the trade surplus fell noticeably to US$1.9 bn in Jan from US$3.7bn in Dec. We expect the trade surplus to fall further to about US$1.1bn in Feb, given strong domestic demand and an appreciating currency.

GEMs Da i ly - London Ed i t ion 31 March 2011

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Friday, 01 April NYT Country Data/Event For BofAMLe Cons.† Previous Comments

1:30 India Exports (yoy) Feb n.a. n.a. 32.4% 3:00 Thailand CPI (yoy) Mar 3.0% 3.1% 2.9% We expect inflation to be 3% in Mar slightly higher than Feb.

inflation is expected to accelerate in 2Q onward as producers are passing through higher cost of production to consumers.

5:00 South Africa PMI Mar 54.5 54.8 54.8 The Kagiso PMI is signaling a healthy pick up in activity during Q1 which has yet to be reflected in underlying data. We expect the headline PMI to move sideways in March.

7:30 Chile Central Bank Meeting Minutes

– – – Attention will be on hints that may help discern whether the shift toward a 50bp hikes pace will be persistent or not. The discussion in the minutes will reflect the new set of forecasts from the staff, an information yet to be unveiled to the market as the release of March's MPR has been delayed.

8:00 Brazil Industrial Production sa (mom) Feb 1.1% 0.9% 0.2% Following several months of relative stagnation, we expect industrial production to have gained some momentum in February, as autos production recovers from a significant decline in January.

10:00 Brazil Trade Balance (FOB) - Monthly Mar $900M $1200M $1199M 11:00 Mexico Remittances (USD) Feb n.a. 1619.0M 1401.8M

– Korea CPI (yoy) Mar 4.9% 4.8% 4.5% On the back of higher global oil prices, we expect inflation to further edge up to 4.9% yoy from its 27-month high of 4.5% yoy in Feb. Markets could prove sensitive to a number above 5% (inflation last stood above 5% in September 2008); however, we expect inflation to remain below this level in Mar.

– China PMI Mar 54.5 54.0 52.2 We expect PMI to rebound to 54.5 in March from 52.2 in February. Domestic demand has stayed robust, while export orders should pick up after CNY holiday ended in February.

– Korea Exports (yoy) Mar 26.8% 20.1% 16.9% We expect export growth to pick up to 26.8% yoy from 16.9% yoy (revised) in February. This will be the first month of clean data after the CNY holidays, and will provide important information on the underlying trend.

– Czech Rep. Central Bank's minutes – – – – The minutes will shed more light on the CNB's voting and assessment of the inflation/economic outlook.

– Colombia Monetary Policy Meeting Minutes Feb – – – We expect the central bank minutes to continue to reemphasize that the current monetary stimulus is not necessary. We also look whether Banrep considered pausing given lower than expected inflation.

– Venezuela Venezuela Crude Oil Basket 1-Apr – – $100.15 – Peru Consumer Price Index (mom) Mar 0.50% 0.47% 0.38% Lagged impact of global commodity price increases continues to

impact headline inflation. We expect the 12m rate to rise to 2.5%. – Peru Wholesale Prices (mom) Mar n.a. n.a. 0.64%

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

GEMs Da i ly - London Ed i t ion 31 March 2011

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Data Review Thursday, 31 March NYT Country Data/Event For Actual BofAMLe Cons.† Previous Comments

– Korea Industrial production (yoy) Feb 9.1% 9.7% 9.6% 13.7% – Singapore Bank credit (yoy) Feb 17.4% n.a. n.a. 16.1% – Singapore M2 money supply (yoy) Feb 8.7% n.a. n.a. 8.5%

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

Wednesday, 30 March NYT Country Data/Event For Actual BofAMLe Cons.† Previous Comments

1:00 South Africa Private sector credit (yoy) Feb 5.4% 5.6% 5.2% 5.0% Credit growth continues to improve, albeit slowly 1:00 South Africa M3 money supply (yoy) Feb 7.6% 8.4% 8.6% 8.2% 7:00 Brazil FGV Inflation IGP-M (mom) Mar 0.62% 0.65% 0.69% 1.00% lower impact on consumer prices. 7:30 Brazil Central Bank Quarterly Inflation Report There was no further discussion on macro-prudential

measures. Notably, inflation forecasts should have deteriorated at least by 20bp since the cut date for the report (11 March), as the forecast for March IPCA was at 0.50% month over month back then and is should be close to 0.70% month over month now.

8:00 Chile Industrial Production (yoy) Feb 1.9% n/a 4.5% 4.0% Industrial production disappointed, with a 1.1% mom seasonally adjusted decline last month. Mining posted a 4% decline. While electricity generation increased 2.1% yoy, the production of electricity with hydroelectrical sources dropped 19.9%yoy, which will likely negatively affect the value-added of the sector. Indicators from the construction sector are positive.

– Korea Real GDP (F, yoy) 4Q10 4.7% n.a. n.a. 4.8% – Brazil Central Govt Budget Feb 2.6B n.a. 3.4B 14.3B

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

Tuesday, 29 March NYT Country Data/Event For Actual BofAMLe Cons.† Previous Comments

– China Leading index Feb 101.05 n.a. n.a. 100.8 – Korea Current account balance (US$) Feb 1178.0mn n.a. n.a. 229.0mn

Notes: †Bloomberg consensus; = level of importance; A = advanced; F = final; P = preliminary; sa = seasonally adjusted; saar = seasonally adjusted annualized rate; nsa = not seasonally adjusted; wda = working-day adjusted; n.a. = not available; mom = month-on-month; qoq = quarter-on-quarter; yoy = year-on-year. Source: BofA Merrill Lynch Global Research, Bloomberg, Central banks * denotes previous month

GEMs Da i ly - London Ed i t ion 31 March 2011

16

Portfolios Update Trade

Expiry date

Entry date Entry price Target Stop

Equity (US$ mn)

Notional (US$ mn) Leverage

Current level

FX discretionary portfolio Long 6m USD-call CZK-put at 20 29-May-11 29-Nov-10 2.73% 0.137 5.00 Long worst of 6M INR put, IDR put vs USD call 29-May-11 29-Nov-10 0.92% 0.092 10.00 Long 3m EUR put TRY call at 2.02/1.96 4-Jul-11 4-Jan-11 0.26% 0.086 33.25 Long 6m USD call INR put at 46.56 with 3m UAO window at 47.20

11-Jul-11 11-Jan-11 0.83% 0.083 10.00

Long EUR put ILS call spread at 4.75/4.65 24-Jul-11 24-Jan-11 0.31% 0.031 10.00 Buy 2M JPY put, KRW call at 13.00 11-Apr-11 11-Feb-11 0.89% 0.089 10.00 Long 3m USD call TWD put spread 22-Jun-11 22-Mar-11 0.54% 0.054 10.00 Long 6m SGD vs JET 29-May-11 29-Nov-10 100.00 106.00 99.10 3.00 15.00 5.0 99.52 Short 6m USD-ARS NDFs 29-May-11 29-Nov-10 4.14 3.98 4.23 3.00 7.00 2.3 4.10 COMPASS Basket: Long IDR, ILS, ARS; Short INR, ZAR, COP vs USD

28-Feb-11 29-Nov-10 100.00 120.00 90.00 5.00 52.90 10.6 101.61

Long 3m PHP-IDR NDFs 18-Apr-11 18-Jan-11 203.3 221.8 197.0 3.00 25.50 8.5 200.82 Short 3m MYR NDFs vs Long 3m THB Fwds 27-Apr-11 27-Jan-11 10.10 9.68 10.30 4.00 10.00 2.5 10.03 Short 9m USD–KZT NDFs 10-Nov-11 10-Feb-11 146.40 140.00 148.00 2.00 8.00 4.0 145.70 Short 3m BRL-MXN 13-May-11 15-Feb-11 7.15 6.50 7.48 1.25 6.75 5.4 7.27 Short PLN-HUF Spot 14-Dec-11 14-Mar-11 67.60 64.20 69.30 2.00 4.60 2.3 66.61 Short 12m USD-PHP NDFs 22-Dec-11 22-Mar-11 43.34 42.00 43.80 3.00 12.00 4.0 43.42 Short 1m USD-COP 22-Dec-11 22-Mar-11 1865 1770 1920 1.00 4.80 4.8 1879 Short 3m SGD-IDR NDFs 23-Dec-11 23-Mar-11 6896 6600 7000 2.34 8.64 3.7 6907 Long TRY-CZK Spot 24-Dec-11 24-Mar-11 11.10 11.75 10.80 1.50 9.00 6.0 11.19 LDM discretionary portfolio Brazil: receive Jan-14 DI (pay DI), pay Jan-17 DI (receive CDI)

2-Jan-14 29-Nov-10 -17 50.00 -35.00 2.00 16.0 x 10.0 8.00 -14

Buy S. Africa 2023s Linker, FX hedged 7-Dec-23 29-Nov-10 2.62% 2.20% 2.80% 2.60 10.0 3.80 2.66% Buy Argentina BOCAN '15s 10-Sep-15 29-Nov-10 $26.00 $33.00 $21.00 4.00 10.0 2.50 $27.53 Receive South Africa 5y5y Fwd 19-Jan-16 19-Jan-11 9.25% 8.40% 9.90% 2.50 4.06 1.62 9.35% Buy Mexico MUDI '40s 24-Jan-11 4.16% 3.40% 4.45% 2.00 10.00 5.00 4.26% Buy 2m2y ATM (5.90%) TIIE Swaption Receiver (5-April-2011)

5-Apr-11 8-Feb-11 5.90% 0.098 40.00

Receive Poland 6m2y Fwd IRS 17-Feb-12 17-Feb-11 5.26 5.00 5.65 2.00 15.00 7.50 5.19 Malaysia 2s10s Steepener 22-Jun-11 22-Mar-11 115.00 150.00 100.00 2.00 25.94 x 6.10 12.97 114.00 China 1s5s Steepener 22-Jun-11 22-Mar-11 70.00 95.00 58.00 2.00 50.83 x 10.84 25.42 76.00 Korea 2s10s Steepener 22-Jun-11 22-Mar-11 49.00 70.00 36.00 2.00 25.99 x 6.12 12.99 51.00 EXD discretionary portfolio Colombia 5s10s CDS steepener 29-Nov-10 27 50 32 4.00 50.0 x 29.08 12.5 41 Sell Qatar vs Buy Abu Dhabi 5y CDS 29-Nov-10 10.00 70.00 (20.00) 2.00 10.0 x 10.03 5.0 0.00 Buy CDS basket in Poland, Mexico, Indonesia 29-Nov-10 134.00 180.00 100.00 5.00 10.0 x 10.00 6.0 130.94 Buy Malaysia Sukuk '15s 29-Nov-10 104.63 110.00 101.00 2.50 10.00 4.3 103.97 Buy Brazil '18s vs Sell Brazil '40s 20-Jan-11 5.00 (15.00) 25.00 1.55 20.0 x 15.16 11.9 8.25 Buy Venz '22s vs Sell Arg '17s 2-Mar-11 715 635 765 1.00 5.0 x 4.56 5.0 696 Buy Hungary ‘20s vs Sell Poland ‘19s 15-Mar-11 121 60 165 1.27 10.0 x 9.48 7.87 138 Buy Indon '14Ns vs 3y CDS 22-Mar-11 (62) (20) (90) 1.50 10.0 x 11.71 8.4 (58) LDM long-only portfolio Overweight Korea, Malaysia, Philippines, Poland, South Africa Market Weight Brazil, Hungary, Indonesia, Mexico, Turkey Underweight Thailand EXD long-only portfolio Overweight Argentina, Qatar, Russia, South Africa, Venezuela Market Weight Brazil, Colombia, Hungary, Indonesia, Mexico, Panama, Peru, Philippines, Turkey, Ukraine, Uruguay Underweight Lebanon Note: The equity allocation is set such that a 6-sigma movement in the trade against our recommendation (ie, six times the standard deviation of the total returns of the trade) would not wipe out more than 20% of the equity. The correlation between our trades is assumed to collapse to zero under stress condition. This assumption makes the value-at-risk (VAR) of the portfolio more conservative. The total VAR amounts to 20% of the equity allocated to trade recommendations. The leverage is calculated by the ratio between notional and equity. All quotes in the Asian time zone are at close on the open day, for the other time zones the quotes are at 11am NY Time (4pm London). For portfolio methodology and details of the calculations refer to EXD discretionary portfolio: year two report, 01 April 2010, "LDM portfolio is four", EM Spotlight, 02 November 2009, EM FX discretionary portfolio returns 12.9% in first year, 01 October 2010 and Introducing BAML LDM long-only portfolio, 28 April 2010. A complete EXD portfolio and LDM portfolio performance record is available upon request. The performance does not reflect tax withholdings and investors should note that their costs may vary. Past performance does not guarantee future returns. Source: Bloomberg, BofA Merrill Lynch Global Research

GEMs Da i ly - London Ed i t ion 31 March 2011

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Selected Market Indicators EM DEBT (TRR) 1D% 1W% MTD% 1M% YTD% 1Y% EM 0.0 0.1 1.0 1.2 0.8 8.8 LATAM 0.0 0.3 1.1 1.3 1.4 10.0 Argentina 0.0 2.1 4.2 3.3 -2.2 29.4 Brazil -0.1 -0.3 0.6 0.9 1.0 8.6 Colombia -0.2 0.1 0.6 0.8 1.7 9.8 Mexico 0.0 0.0 0.5 1.1 1.7 8.3 Panama 0.0 0.4 0.9 1.3 1.5 11.0 Peru 0.3 -0.2 -1.1 -0.1 0.2 8.4 Venezuela 0.3 2.0 3.6 3.5 3.7 9.3 EMEA 0.0 0.1 1.4 1.6 0.5 7.2 Lebanon 0.0 0.1 0.4 0.5 -0.7 5.4 Russia 0.0 0.2 1.1 1.3 2.4 7.2 South Africa -0.2 0.6 1.2 1.1 0.8 8.2 Turkey -0.1 -0.4 2.2 2.4 -1.2 8.7 Ukraine 0.1 0.6 2.8 2.9 3.1 13.1 ASIA -0.1 -0.4 0.0 0.0 -0.5 8.6 Indonesia -0.2 -0.3 0.2 0.2 -0.7 8.0 Philippines 0.0 -0.5 -0.3 -0.4 -0.5 9.8 EM DEBT (IGOV Sprds) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y EM 254 -5 -16 -21 -23 9 33 LATAM 288 -6 -19 -19 -22 -12 18 Argentina 544 -5 -37 -50 -39 132 12 Brazil 107 -3 -11 -15 -18 -20 -15 Colombia 146 -2 -17 -17 -17 -32 -25 Mexico 111 -5 -17 -13 -21 -24 -5 Panama 134 -6 -17 -17 -20 -27 -28 Peru 152 -8 -13 4 -4 -7 13 Venezuela 1051 -14 -51 -73 -70 -51 147 EMEA 238 -4 -15 -28 -30 -10 38 Lebanon 334 -3 -16 -18 -19 36 64 Russia 156 -5 -19 -22 -25 -39 17 South Africa 125 1 -22 -27 -26 -17 -17 Turkey 193 -3 -10 -36 -40 17 -1 Ukraine 386 -5 -27 -65 -67 -60 -130 ASIA 193 -3 -11 -7 -6 7 -3 Indonesia 181 -2 -12 -12 -12 10 2 Philippines 152 -4 -10 -1 0 2 -20 EM 5y CDS (Sprd) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y CDX.EM 208 0 -5 -11 -11 7 -21 Argentina 606 2 -6 -52 -52 4 -292 Brazil 113 -2 -2 -5 -5 2 -17 Mexico 106 -2 -3 -8 -8 -7 -9 Venezuela 1,015 -21 -67 -107 -107 -1 77 Russia 129 2 -4 -10 -10 -16 -13 Turkey 163 3 2 -11 -11 22 -9 Philippines 136 1 0 -5 -5 8 -32 Indonesia 146 0 -1 -2 -2 17 -12 EM Debt by Rating (Sprd) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y EM BBB 139 -4 -16 -16 -20 -25 6 EM BB 203 -4 -11 -17 -18 10 17 EM B 633 -8 -31 -45 -43 -21 2 EM vs HY Sprd Diff. Last 1D 1W MTD 1M YTD 1Y EM BBB - US Corps BBB -50 -46 -39 -39 -35 -47 -75 EM BB - US Corps BB -147 -146 -154 -140 -140 -215 -232 EM B - US Corps B 161 166 176 207 202 109 67 US Corps (TRR) 1D% 1W% MTD% 1M% YTD% 1Y% US High Yield (H0A0 TRR) 0.0 0.1 0.2 0.3 3.8 14.1 US High Grade (C0A0 TRR) -0.3 -0.7 -0.2 -0.2 0.7 7.7 US Treasury Master (G0Q0) -0.2 -0.8 -0.3 -0.2 4.6 4.6 US Corps (Sprd) Last 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y US High Yield (H0A0 Sprd) 473 -3 -18 -3 -5 -68 -106 US High Grade (C0A0 Sprd) 149 -1 -4 -3 -2 -17 -14 Commodities Last 1D% 1W% MTD% 1M% YTD% 1Y% Crude Oil ($/Bbl) 104.2 -0.5 -0.9 7.5 7.5 14.1 26.5 Copper 426.1 -1.8 -3.6 -4.9 -4.9 -4.0 19.8 UST Yields Last 1D 1W MTD 1M YTD 1Y 10Y 3.45 3.49 3.35 3.43 3.43 3.29 3.86 2Y 0.80 0.81 0.66 0.68 0.68 0.59 1.06 10Y - 2Y 2.65 2.67 2.69 2.75 2.75 2.70 2.80 Global Yields Last 1D 1W MTD 1M YTD 1Y Japan Global '10 1.25 1.24 1.23 1.26 1.26 1.13 1.40 Germany Bund '10 3.34 3.33 3.24 3.17 3.17 2.96 3.11 Risk Aversion (Levels) Last 1D 1W MTD 1M YTD 1Y Risk Aversion S&P (VIX) 17.59 18.16 19.17 18.35 18.35 17.75 17.13 Source: BofA Merrill Lynch Global Research

EM FX Last 1D% 1W% MTD% 1M% YTD% 1Y% EUR ($) 1.413 0.1 0.3 2.4 2.4 5.6 5.4 Japanese Yen USDJPY 82.90 -0.5 -2.4 -1.4 -1.4 -2.2 10.6 Argentinean Peso USDARS 4.042 0.1 0.0 -0.3 -0.3 -1.6 -4.3 Brazilian Real USDBRL 1.627 1.2 2.0 2.2 2.2 2.0 9.1 Chilean Peso USDCLP 482 0.0 0.0 -1.3 -1.3 -3.0 8.3 China Renminbi USDCNY 6.556 0.1 0.1 0.2 0.2 0.8 4.0 Colombian Peso USDCOP 1,876 0.5 -0.5 1.7 1.7 1.7 2.8 Czech Koruna EURCZK 24.56 -0.1 -0.7 -0.8 -0.8 1.8 3.5 Egyptian Pound USDEGP 5.965 -0.3 -0.2 -1.3 -1.3 -2.8 -8.4 Hungarian Forint EURHUF 266 0.7 1.1 1.8 1.8 4.5 0.2 Indian Rupee USDINR 44.76 0.1 0.2 1.1 1.1 -0.1 0.7 Indonesian Rupiah USDIDR 8,720 -0.1 0.0 1.1 1.1 3.1 4.1 Korean Won USDKRW 1,104 0.6 1.8 2.2 2.2 1.9 2.3 Mexican Peso USDMXN 11.92 0.3 0.8 1.5 1.5 3.4 3.6 Polish Zloty EURPLN 4.015 -0.5 0.4 -1.5 -1.5 -1.3 -3.7 Russian Ruble USDRUB 28.48 -0.4 -0.4 1.3 1.3 6.7 3.5 S. African Rand USDZAR 6.818 0.5 1.8 2.2 2.2 -2.8 7.5 Taiwanese Dollar USDTWD 29.49 -0.1 0.3 0.8 0.8 -0.7 7.2 Thai Baht USDTHB 30.32 0.0 -0.2 0.9 0.9 -0.9 6.2 Turkish Lira USDTRY 1.552 0.3 0.4 2.9 2.9 -0.5 -1.4 EM 2y Rates (∆ in bp) Last% 1D∆ 1W∆ MTD∆ 1M∆ YTD∆ 1Y∆ Brazil (DI Futures) 12.81 -5 -1 10 10 55 105 Chile 5.84 6 9 47 47 112 316 China (onshore) 3.60 4 5 -26 -26 24 83 Czech 2.25 1 -1 2 2 22 31 Hong Kong 0.88 3 13 6 6 14 -13 Hungary 6.44 -6 -5 3 3 -14 91 India (onshore) 7.50 1 -7 -12 -12 29 185 Israel 4.22 2 23 37 37 114 128 Korea (onshore0 3.90 2 6 7 7 38 22 Malaysia (onshore) 3.60 0 6 16 16 22 46 Mexico (TIIE) 5.93 0 1 18 18 46 -6 Poland 5.20 5 6 0 0 33 57 Russia 5.76 -2 -10 -27 -27 -45 19 Singapore 0.52 4 9 9 9 -8 -37 South Africa 6.76 7 4 18 18 86 -24 Taiwan (onshore) 1.00 1 2 -4 -4 1 -11 Turkey 7.95 3 14 59 59 172 -54 EM EQUITY (USD) P/E 1D% 1W% MTD% 1M% YTD% 1Y% EM 13.5 0.4 2.1 3.1 3.1 -0.8 13.2 LATAM 13.0 0.3 0.7 0.0 0.0 -2.8 8.5 Argentina 11.4 -0.2 0.2 -3.9 -3.9 -12.7 39.3 Brazil 11.2 0.6 0.3 -0.3 -0.3 -1.8 3.6 Chile 18.2 -1.2 1.2 1.9 1.9 -10.1 28.0 Mexico 20.2 0.0 2.5 0.4 0.4 -1.7 15.3 EMEA 9.6 -1.3 1.4 4.0 4.0 10.2 19.9 Russia 8.8 -1.4 1.9 5.0 5.0 16.1 28.3 South Africa 16.5 1.4 3.5 1.1 1.1 -5.7 19.5 Turkey NA -1.6 -2.1 5.4 5.4 -7.3 6.3 ASIA 14.5 0.6 2.6 4.6 4.6 -1.0 13.8 China NA 0.3 1.0 4.5 4.5 2.1 5.6 India 16.8 1.0 6.1 9.6 9.6 -6.4 6.9 Korea 11.9 1.1 4.1 10.2 10.2 5.1 27.4 Taiwan NA 0.5 1.4 0.8 0.8 -5.1 16.2 Thailand 13.5 0.2 1.1 8.0 8.0 3.9 40.1 EM EQUITY (Sectors) P/E 1D% 1W% MTD% 1M% YTD% 1Y% Energy 9.7 0.1 1.3 4.1 4.1 9.2 18.8 Material 14.1 0.9 2.6 2.9 2.9 0.6 15.5 Industrials 15.9 0.7 1.7 4.0 4.0 -5.7 14.9 Consumer Discretionary 17.8 0.7 2.9 6.1 6.1 -0.8 26.7 Consumer Staples 20.7 -0.1 1.5 3.4 3.4 -4.4 18.7 Health Care 13.3 1.0 2.2 3.5 3.5 -7.6 3.5 Financials 13.7 0.1 1.7 3.5 3.5 -3.0 9.1 Information Technology 13.3 0.2 2.6 -0.5 -0.5 -3.8 9.3 Telecom Services 12.9 0.7 3.0 2.4 2.4 -0.7 8.2 Utilities 14.6 0.2 2.0 4.4 4.4 -0.6 3.2 Global Equities Last 1D% 1W% MTD% 1M% YTD% 1Y% Dow Jones (INDU) 12,349 0.7 2.2 1.1 1.1 6.8 13.4 Nasdaq (CCMP) 2,777 1.0 2.7 -0.1 -0.1 4.7 15.3 S&P 500 (SPX) 1,328 0.7 2.0 0.2 0.2 5.7 13.3 Small Cap (RTY) 840 1.0 2.6 2.1 2.1 7.3 22.9 DJ Stoxx € 50 (SX5P) 2,615 0.0 1.8 -3.9 -3.9 1.3 2.7 Nikkei 225 (NKY) 9,709 2.6 3.6 -7.9 -7.9 -4.2 -10.9 Deutsche Borse AG (DAX) 7,057 -0.1 2.3 -4.6 -4.6 0.3 12.6

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Recent Research Date Publication Headline Authors 30-Mar-11 GEMs Trade Note Exit short BRL-MXN and short USD-ARS GEMs FI Strategy & Economics; Ades, Alberto; Beker, David; Boquin, Alberto 30-Mar-11 GEMs Daily - US Edition Mexico: auto sector’s key role GEMs FI Strategy & Economics 30-Mar-11 GEMs Weekly FX Monitor EURBRL risk reversals on the rise Bastani, Ali; Ades, Alberto; GEMs FI Strategy & Economics 30-Mar-11 GEMs Daily - London Edition Belarus: devaluation not enough GEMs FI Strategy & Economics 30-Mar-11 GEMs Daily - Asia Edition China macro data in March: when inflation rules again GEMs FI Strategy & Economics 29-Mar-11 GEMs Daily - US Edition LatAm: black swans, what black swans? GEMs FI Strategy & Economics 29-Mar-11 GEMs Daily - London Edition BoP blues: Poland vs Romania GEMs FI Strategy & Economics 29-Mar-11 GEMs Daily - Asia Edition Strategy: rich-cheap analysis in Asian NDFs GEMs FI Strategy & Economics 28-Mar-11 GEMs Daily - US Edition BRL: an instrument to fight inflation? GEMs FI Strategy & Economics 28-Mar-11 GEMs Weekly CDS Monitor Basis opportunities in Hungary Bastani, Ali; Tenengauzer, Daniel; GEMs FI Strategy & Economics; Ades, Alberto 28-Mar-11 GEMs Daily - London Edition MENA: Which way forward? GEMs FI Strategy & Economics 28-Mar-11 GEMs Daily - Asia Edition India: BoP — risks overdone GEMs FI Strategy & Economics 25-Mar-11 Asia Macro Weekly Asia: supply chain disruptions Asia FI Strategy & Economics; Bond, TJ; Chow, Marcella; Chua, Hak Bin; Lu, Ting; Sen Gupta,

Indranil; Zhi, Xiaojia; Piron, Claudio; Bhundia, Ashok; Tan, Christy 25-Mar-11 GEMs Weekly Bond Monitor Sticky EM bond prices and UST moves Bastani, Ali; Tenengauzer, Daniel; GEMs FI Strategy & Economics; Ades, Alberto 25-Mar-11 LatAm Macro Weekly LatAm ratings upside in 2011 LatAm FI Strategy & Economics; Beker, David; Boquin, Alberto; Buscaglia, Marcos; Camargo,

Edgar; Munoz, Oscar; Rivera, Alejandro; Tenengauzer, Daniel; GEMs FI Strategy & Economics 25-Mar-11 China Macro Chartbook Inflation: A view of two peaks Lu, Ting; Zhi, Xiaojia; Bond, TJ 25-Mar-11 EEMEA Macro Weekly Russia: Not that income unequal EEMEA FI Strategy & Economics; Hauner, David; Doan, Mai; Hamzaoglu, Turker; Saliba, Jean-

Michel; Sen, Arko; Sharratt, Matthew; Tchakarov, Ivan; Tenconi, Raffaella; Tenengauzer, Daniel; GEMs FI Strategy & Economics

24-Mar-11 GEMs Daily - US Edition Argentina: Bogar ‘18s the most attractive GEMs FI Strategy & Economics 24-Mar-11 GEMs Daily - London Edition EEMEA FX: back to baseline? GEMs FI Strategy & Economics 24-Mar-11 GEMs Daily - Asia Edition China: Normalization of Shibor rates GEMs FI Strategy & Economics 23-Mar-11 GEMs Trade Note Trading carry and policy differentiation: short SGD-IDR Tan, Christy; Piron, Claudio; GEMs FI Strategy & Economics 23-Mar-11 GEMs Daily - US Edition Brazil: waiting for macro-prudential measures GEMs FI Strategy & Economics 23-Mar-11 GEMs Daily - London Edition Turkey: MPC preview – rates on hold GEMs FI Strategy & Economics 23-Mar-11 GEMs Daily - Asia Edition Singapore: oil shocks and recessions GEMs FI Strategy & Economics 22-Mar-11 GEMs Weekly FX Monitor HUF lead EMFX stronger on improved policy, risk appetite Bastani, Ali; Tenengauzer, Daniel; GEMs FI Strategy & Economics 22-Mar-11 GEMs Trade Note Asia Alpha: Top trades in FX, rates and external debt Piron, Claudio; Bhundia, Ashok; Tan, Christy; Global EM Research Team; Bastani, Ali 22-Mar-11 GEMs Trade Note Short USD-COP Boquin, Alberto; Beker, David; Rivera, Alejandro; GEMs FI Strategy & Economics 22-Mar-11 GEMs Daily - US Edition Peru: uneasiness down electoral home stretch GEMs FI Strategy & Economics 22-Mar-11 GEMs Daily - London Edition SARB: on the sidelines but eyeing inflation risks GEMs FI Strategy & Economics 22-Mar-11 GEMs Daily - Asia Edition Asia strategy: looking to re-initiate long PHP trade GEMs FI Strategy & Economics 21-Mar-11 GEMs Weekly CDS Monitor Indonesia short end bonds are cheap to CDS Bastani, Ali; GEMs FI Strategy & Economics 21-Mar-11 GEMs Daily - US Edition Uruguay: inflation paves way for stronger peso GEMs FI Strategy & Economics 21-Mar-11 GEMs Daily - London Edition EEMEA FX: Strangely calm GEMs FI Strategy & Economics 21-Mar-11 GEMs Daily - Asia Edition Hong Kong: raising our growth projections GEMs FI Strategy & Economics 18-Mar-11 GEMs Strategy Viewpoint Sovereign debt restructurings, Part 2: post-Brady experience Brauer, Jane; Preusser, Ralf; GEMs FI Strategy & Economics 18-Mar-11 LatAm Macro Weekly Brazil: skepticism among locals intact LatAm FI Strategy & Economics; Beker, David; Boquin, Alberto; Buscaglia, Marcos; Camargo,

Edgar; Castro Cunha, Virgilio; Munoz, Oscar; Rivera, Alejandro; GEMs FI Strategy & Economics 18-Mar-11 EEMEA Macro Weekly Turkey: trip notes – the waiting game EEMEA FI Strategy & Economics; Hauner, David; Doan, Mai; Hamzaoglu, Turker; Saliba, Jean-

Michel; Sen, Arko; Sharratt, Matthew; Tchakarov, Ivan; Tenconi, Raffaella; GEMs FI Strategy & Economics

18-Mar-11 Asia Macro Weekly Emerging Asia: a long-run view Bond, TJ; Chow, Marcella; Chua, Hak Bin; Lu, Ting; Sen Gupta, Indranil; Whelan, Sharmila; Zhi, Xiaojia; Piron, Claudio; Bhundia, Ashok; Tan, Christy

17-Mar-11 GEMs Weekly Bond Monitor Adding volatility to selection criteria Bastani, Ali; Brauer, Jane; GEMs FI Strategy & Economics 17-Mar-11 GEMs Trade Note Close short 12m USD-PHP NDFs Tenengauzer, Daniel; Tan, Christy; GEMs FI Strategy & Economics 17-Mar-11 GEMs Daily - US Edition Mexico: employment, key driver for growth GEMs FI Strategy & Economics 17-Mar-11 GEMs Daily - London Edition Baltics: the worst is over, but bumps ahead GEMs FI Strategy & Economics 17-Mar-11 GEMs Daily – Asia Edition India: RBI – three burning questions GEMs FI Strategy & Economics 16-Mar-11 GEMs Daily - US Edition Peru: PEN adds to Soberano upside GEMs FI Strategy & Economics 16-Mar-11 GEMs Daily - London Edition ZAR: the respite is over GEMs FI Strategy & Economics 16-Mar-11 GEMs Daily - Asia Edition Japan’s tragedy: impact on emerging Asia GEMs FI Strategy & Economics 15-Mar-11 GEMs Weekly FX Monitor Commodity currencies lead EMFX weaker vs USD Bastani, Ali; GEMs FI Strategy & Economics 15-Mar-11 GEMs Trade Note Close Korea 6x9 FRA Receiver, China 2y3y NDIRS Payer Tenengauzer, Daniel; Bhundia, Ashok; GEMs FI Strategy & Economics 15-Mar-11 GEMs Trade Note Russia: Close long RUB Tenengauzer, Daniel; Sen, Arko; Hauner, David; GEMs FI Strategy & Economics 15-Mar-11 GEMs Trade Note CEE: Buy Hun $20 vs Pol $19s Sen, Arko; GEMs FI Strategy & Economics 15-Mar-11 EEMEA Strategy Viewpoint Sub-Saharan African credits: haven against beta risks Sen, Arko; Sharratt, Matthew; Doan, Mai; GEMs FI Strategy & Economics

GEMs Da i ly - London Ed i t ion 31 March 2011

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Link to Definitions Macro Click here for definitions of commonly used terms.

Analyst Certification We, Alberto Ades and David Hauner, CFA, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

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GEMs Da i ly - London Ed i t ion 31 March 2011

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Team Page Global Emerging Markets Fixed Income Strategy and Economics Alberto Ades +1 646 855 4044 GEM FI Strategist & Economist MLPF&S Daniel Tenengauzer +1 646 855 5337 GEM Fixed Income Strategist MLPF&S Ali Bastani +1 646 855 7158 Quantitative FI Strategist MLPF&S Jane Brauer +1 646 855 9388 Quantitative FI Strategist MLPF&S Rudy Loo-Kung +1 646 855 3386 GEM Economist MLPF&S Isidore Smart +1 646 855 8083 GEM Economist MLPF&S Emerging Asia FX and Rates Strategy Claudio Piron +65 6591 0401 Emerging Asia FI Strategist Merrill Lynch (Singapore) Christy Tan +65 6591 0427 Emerging Asia FX Strategist Merrill Lynch (Singapore) Ashok Bhundia +852 2536 3965 Emerging Asia Rates Strategist Merrill Lynch (Hong Kong) Asia Economics Regional, China, Korea TJ Bond +852 2161 7152 Emerging Asia Economist Merrill Lynch (Hong Kong) Marcella Chow +852 2161 7236 Emerging Asia Economist Merrill Lynch (Hong Kong) Indonesia, Malaysia, Singapore Hak Bin Chua +65 6591 0409 Emerging Asia Economist Merrill Lynch (Singapore) China Ting Lu +852 2536 3718 Emerging Asia Economist Merrill Lynch (Hong Kong) Xiaojia Zhi +852 2161 7815 Emerging Asia Economist Merrill Lynch (Hong Kong) India Indranil Sen Gupta +91 22 6632 8653 Emerging Asia Economist DSP Merrill Lynch (India) . EEMEA Fixed Income Strategy and Economics EEMEA FI Strategy & Economics David Hauner, CFA +44 20 7996 1241 EEMEA FI Strategist MLI (UK)

Arko Sen +44 20 7995 1576 EEMEA FI Strategist MLI (UK) CEE Mai Doan +44 20 7995 9597 EEMEA Economist MLI (UK) Turkey, Israel, MENA Turker Hamzaoglu +44 20 7996 2417 EEMEA Economist MLI (UK) Jean-Michel Saliba +44 20 7995 8568 EEMEA Economist MLI (UK) South Africa, Nigeria Matthew Sharratt +27 21 683 4089 EEMEA Economist Merrill Lynch (South Africa) Russia, Kazakhstan, Ukraine Ivan Tchakarov +7 495 662 6225 EEMEA Economist Merrill Lynch (Russia) CEE, EEMEA Raffaella Tenconi +44 20 7995 9173 EEMEA Economist MLI (UK) Latin America Fixed Income Strategy and Economics LatAm FI Strategy & Economics, Brazil David Beker +1 646 855 9512 LatAm FI Strategist MLPF&S Alberto Boquin +1 646 855 5062 LatAm FI Strategist MLPF&S Latin America, Argentina, Chile, Uruguay Marcos Buscaglia +1 646 855 2582 LatAm Economist MLPF&S Oscar Munoz +1 646 855 2308 LatAm Economist MLPF&S Mexico Edgar Camargo +52 55 5201 3350 LatAm Economist Merrill Lynch (Mexico) Colombia, Peru, Venezuela Alejandro Rivera +1 646 855 9496 LatAm Economist MLPF&S