11 December 2017 Special Report: EMFX Outlook 2018: Growth-led Revaluation CU The Colombian peso faces a challenging domestic and external scenario. In addition to the already familiar twin deficits on the fiscal and current accounts, the Colombian economy faces a low- confidence environment as well as a challenging election ahead. Towards the end of 2017 growth has somewhat picked up and inflation has eased. In 2018 growth is likely to somewhat strengthen yet the peso's volatility is very sensitive to changes in the risk perception of the Colombian economy. Therefore, the election-related headlines especially if connected to Colombia's fiscal accounts could very likely trigger a bout of COP weakness followed by outflows due to Banrep's dovish stance and the increasingly challenging fiscal scenario up ahead. 3 Unlike the currencies mentioned above, ILS does not have any major fundamental pressure points, as growth is in reasonable shape and the current account is in surplus. However, valuation and positioning are major concerns, and drive our tactically bearish view on the currency at these levels. In trade-weighted terms, ILS is near its all-time strong levels, which has also pushed overvaluation to historical extremes (chart). On our DBeer and PPP metrics, ILS is around 10% overvalued, right at the top of the historical valuation range. There have been retracements from such stretched valuations in the past. Meanwhile, inflation remains low, which - combined with the strong currency - opens the door for Bol FX intervention to pick up. ILS is at historical extreme overvalued levels .6 Overvalued as Neer maeaennant• TM band OW -Z0 Cv.'4? 0..04 0.1410 0.143 Ca./d Ott.sa Ocsaa Sastv Onict.• Sant INN. The best of the tailwind - structurally positive policy measures (GST, bank recap), policy easing, ratings upgrade, carry/vol - are already in the price, and will be hard pressed to drive further outperformance in 2018