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CEEMEA Weekly Summary - 21 May 2014

Core Content

This report provides an analysis of economic and political developments in the CEEMEA region (Central and Eastern Europe, the Middle East, and Eastern Europe), focusing on key events and central bank decisions.

Main Events and Trends

Ukraine Presidential Election

• Event: The presidential election in Ukraine is scheduled for 25 May 2014.
• Expectation: Businessman and politician Petro Poroshenko is expected to win the election.
• Impact: His victory is anticipated to help ease tensions in the eastern regions of the country.
• Context: Mr. Poroshenko has experience in foreign affairs and trade and previously led the Ukrainian central bank council from 2007 to 2012.

Russia

• RUB Slump: The Russian ruble's depreciation is causing income and spending declines in April.
• Inflation Impact: The slump in RUB is accelerating inflation, which is eroding household purchasing power.

Central Bank Analysis

Hungary (NBH)

• Rate Cut Expected: The National Bank of Hungary (NBH) is expected to cut the main policy rate by 10bp to 2.40% on 27 May 2014.
• Reasons: Falling energy prices, fading utility price base effects, rising food prices, and increasing demand pressure as the output gap closes.
• Future Outlook:
  • If no sudden rise in risk aversion, the NBH could cut the policy rate to 2% by autumn 2014.
  • Inflation is expected to rise from 2015, driven by the closure of the negative output gap and the end of energy price cuts.
  • The NBH may need to tighten monetary policy by early 2015, with the policy rate expected to reach 3.5%.

South Africa (SARB)

• Rate Decision: The South African Reserve Bank (SARB) is expected to hold rates steady on 22 May 2014.
• Inflation Situation: CPI inflation reached 6.1% y/y in April, breaching the 6% target band.
• Uncertainty: A 25bp hike cannot be ruled out, especially considering the negative real policy rates and the SARB's sensitivity to macroeconomic context.
• Market Expectations: The FRA curve suggests a 50% chance of a 25bp hike and a cumulative 100bp hike over the next year.

Turkey (CBRT)

• Rate Cut Expected: The Central Bank of the Republic of Turkey (CBRT) is expected to cut key interest rates by 50bp to 9.50% at its 22 May MPC meeting.
• Reasons: This is contrary to the consensus and based on CBRT officials' comments, not macroeconomic drivers.
• Inflation Outlook: Inflation is above the 5% target, and there is a likelihood of hitting double digits in May.
• Future Outlook: The CBRT is unlikely to cut rates again due to the challenging inflation outlook, which could disappoint bond markets.

Political Developments

South African Politics

• Platinum Strike: The platinum strike continues with no clear resolution and no winners.
• DA and Helen Zille: DA leader Helen Zille faces media backlash for alleged comments about "making" outgoing parliamentary leader Lindiwe Mazibuko.
• Agang SA: Leader Mamphela Ramphele has declined to take up her parliamentary seat, leading to internal party instability and implosion.
• ANC Preparation: The ANC is preparing for cabinet and provincial premier announcements, with the new government likely to be in place by Sunday.
• Legislation Watch: The investment bill and private security bill are key legislative developments to monitor.

Key Economic Indicators

South Africa

• CPI Inflation: Rose to 6.1% y/y in April, up from 5.9% in March.
• Core CPI: Remained stable at 5.5% y/y, but on a m/m basis, it continued to rise.
• Food Price Inflation: Increased to 8.2% y/y, contributing 1.2pp to headline CPI.
• ZAR Performance: The rand appreciated by 3.0% against the USD and 2.0% on a real effective basis since the March MPC meeting.
• Economic Deterioration: Several real economy indicators have weakened, including manufacturing and mining production, PMI, and retail and vehicle sales.
• GDP Growth Projections: The IMF has revised South African GDP growth to 2.3% in 2014 and 2.7% in 2015, down from 2.8% and 3.3% respectively.

Charts and Data Highlights

• Chart 1: Deflation is expected to spur more Hungarian rate cuts.
• Chart 2: Strong external balances support soft monetary policy in Hungary.
• Chart 3: Energy price cuts are a key driver of Hungarian disinflation.
• Chart 4: The impact of energy price cuts will fade in 2015, leading to moderate inflation.
• Chart 5: Market pricing indicates a 50% chance of a 25bp rate hike in South Africa.
• Chart 6: The SARB is likely to consider South Africa's low real rates relative to EM peers.

Summary of Key Views

• Hungary: The NBH is expected to cut rates further, but inflation will rise by 2015.
• South Africa: The SARB is likely to hold rates steady, but a 25bp hike remains a possibility.
• Turkey: The CBRT is expected to cut rates by 50bp, contrary to the consensus, but rate cuts may slow due to inflation concerns.
• Ukraine: The presidential election is a key event that could ease tensions in the east.

Disclaimer

This analysis is produced by BNP Paribas Cadiz Securities (Pty) Ltd and has been reviewed, but not amended, by BNP Paribas. The analysis does not contain investment research recommendations.