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CEEMEA Weekly Summary - 20 August 2014

Core Content Overview

This summary provides an economic outlook for the CEEMEA region, focusing on Russia, Poland, and South Africa, as well as the GCC. It highlights inflation trends, growth forecasts, and central bank policy expectations, while also touching on geopolitical and market developments influencing these factors.

Key Themes and Analysis

Russia: Inflation and Monetary Policy Challenges

• Inflation Outlook: Russian inflation is expected to hover around 8% y/y in the coming months, with a brief spike to nearly 9% y/y in early 2015, before moderating to 5.5–6.0% y/y by the end of 2015.
• Inflation Targets: The Central Bank of Russia (CBR) is likely to miss its 2014 inflation target of 5% and the 2015 target of 4.5%, necessitating additional monetary tightening of 50–100bp over the next six months.
• Policy Direction: The CBR's strategy is to keep the real, CPI-deflated repo rate in positive territory, which means further rate hikes are expected if inflation remains above target.
• Factors Affecting Inflation:
  • Domestic Demand: Slowing economic activity and a deepening recession are expected to reduce demand pressure.
  • Food Prices: The ban on EU and US food imports and global food price trends are pushing up inflation.
  • Tax Hikes: A planned increase in consumption taxes is expected to raise inflation in early 2015.
• Exchange Rate Impact: A weaker RUB and potential depreciation could exacerbate inflationary pressures.

Poland: Growth and Inflation Forecasts Revised Downward

• Growth Outlook: Poland's GDP growth is expected to slow to 3.0% y/y in 2014 and 2.5% y/y in 2015, down from previous estimates of 3.3%.
• Inflation Outlook: Inflation is expected to hover around zero in the near term, with a slight pickup to ~2% y/y in 2016.
• Monetary Policy: The National Bank of Poland (NBP) is expected to resume monetary easing, with a 50bp cut in the main policy rate to 2.00% this autumn.
• Reasons for Forecast Cuts:
  • Weaker Foreign Demand: Sanctions on Russia have reduced demand from key export markets (EU, Russia, Ukraine).
  • Export Slowdown: Weakness in exports is likely to feed into domestic economic activity, leading to lower investment and employment growth.
• Policy Timing: A rate cut in October is more likely than September, as the MPC tends to be data-dependent and cautious.

South Africa: Inflation Respite, but Risks Remain

• Inflation Trends: Headline CPI inflation eased to 6.3% y/y in July, down from a likely peak of 6.6% in June, but is still above the SARB's target band of 6%.
• Monetary Policy: The SARB is expected to raise rates by another 25bp before year-end, in line with global monetary tightening.
• Key Risks to Inflation:
  • Weaker ZAR: A depreciating currency is likely to increase inflationary pressures.
  • Electricity Price Increases: Potential hikes in electricity tariffs over the next year are a major upside risk to inflation.
• Outlook for 2015: Weaker ZAR and possible electricity price increases may prevent CPI from significantly dropping below the 6% target band.
• Economic Data: Q2 GDP data showed a modest 1.0% q/q growth (1.2% y/y), but negative growth in manufacturing and trade suggests underlying weakness.

GCC: Fiscal Dependency on Oil Prices

• Fiscal Challenges: GCC countries are increasingly dependent on oil for fiscal revenue and public spending.
• Breakeven Oil Prices: Rising fiscal breakeven oil prices pose a long-term challenge for fiscal sustainability.
• Subsidy Reductions: Authorities in Bahrain and Oman are urged to reduce subsidies and diversify their economies to mitigate oil price volatility.

Key Policy and Market Events

• Russia-Ukraine Summit: The meeting on 26 August is expected to calm tensions, though mutual sanctions will continue to hinder growth.
• Poland's NBP Policy Rate Decision: The MPC meeting on 3 September is expected to announce a rate cut of 50bp.
• Turkey's Political Transition: The new president, Ahmet Davutoğlu, is expected to be announced on 27 August, with domestic politics remaining a focus.
• CBRT Policy Outlook: The Central Bank of Turkey is expected to end its rate-cutting cycle on 27 August, potentially reducing the policy rate by 25bp to 8%.

Summary of Key Forecasts

Conclusion

The CEEMEA region faces mixed economic conditions, with Russia and Poland experiencing slower growth and inflationary pressures, while South Africa sees moderate inflation relief but persistent risks. Central banks are adjusting monetary policies in response to these trends, with Russia and Poland expected to tighten or ease rates, respectively, and South Africa to continue its tightening cycle. Geopolitical tensions and oil price dynamics remain key drivers of economic and monetary policy decisions in the region.