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CEEMEA Weekly Summary - 13 November 2013

Core Content

The CEEMEAnomics report for 13 November 2013 outlines key economic developments across Central Europe, Russia, and South Africa, alongside insights on Saudi Arabia's energy consumption and investment plans. It also includes a detailed economic calendar and central bank policy outlook.

Central Europe: Disinflation and FX Interventions

• Czech Republic: The Czech National Bank (CNB) intervened directly in the FX market to weaken the CZK against the EUR, targeting a rate of 27.0. This move aims to eliminate deflationary risks and push inflation towards the 2% target by early 2015. However, it may delay a broader economic recovery and prompt faster interest rate hikes.
• Disinflationary Trends: Disinflation continues to be a dominant theme in Central Europe. Weak demand pressure and low output gaps, combined with falling food and fuel prices, are keeping inflation in check. Lower CPI inflation is expected to boost real disposable income and consumption.
• Economic Recovery: Preliminary GDP data for Q3 is expected to confirm a fragile but ongoing recovery in the region.

Russia: Inflation Targeting Challenges

• Inflation Targeting Difficulties: The Central Bank of Russia (CBR) faces challenges in achieving sustainable disinflation by 2016 due to structural factors.
• Short-term Outlook: Inflation is expected to decline in the short term, with the CBR likely to meet its 2014 CPI target of 5%. The bank is expected to cut interest rates by 50bp by the end of Q1 2014, though the timing may shift due to higher-than-expected October CPI data.
• Structural Factors:
  • High Food Prices: Food accounts for over 35% of the CPI basket, and its volatility has historically contributed to inflation.
  • Low Potential Growth: Russia's potential growth rate has dropped to below 2.5%, limiting the scope for output gap closure.
  • High Inflation Expectations: These are influenced by tight labor markets and past inflation volatility.
• Core Inflation: Expected to trend down from late 2014, likely below 5% y/y, as economic growth slows and labor market pressures ease.
• CBR Reaction Function: The bank's policy is likely to be guided by a combination of the lagged output gap and core inflation, with a stable policy rate of 5.00% through the end of 2015.

South Africa: Political Campaigning and Economic Challenges

• Election Fever: Political parties have begun campaigning ahead of the 2014 elections, with some notable events such as Winnie Mandela's visit to Bekkersdal and the EFF's provocative actions.
• Economic Data:
  • Retail Sales: Further slowdown in Q3 domestic consumption growth, consistent with weak unsecured lending and high consumer debt.
  • GDP Growth: Expected to slow further, with manufacturing being a significant drag on Q3 GDP growth.
• Political Tensions:
  • PIC and Adcock Ingram: The Public Investment Corporation (PIC), representing the Government Employees Pension Fund (GEPF), has opposed a proposed foreign takeover of Adcock Ingram, highlighting political and financial tensions.
  • DA and Racial Engineering: The Democratic Alliance faces criticism for its support of the Employment Equity Amendment Bill, which is seen as politically motivated.

Saudi Arabia: Rising Energy Consumption and Diversification Plans

• Energy Consumption: Saudi Arabia's primary energy consumption per capita is 4.1 times the world average, and energy intensity is increasing. Domestic oil consumption is rising due to population growth and fuel subsidies.
• Energy Sustainability: The country has launched ambitious plans to diversify energy sources, including renewable and nuclear energy, to ensure long-term sustainability.
• Investment Plans:
  • Renewable Energy: Aiming to increase electricity production capacity from 55GW to 120GW by 2020, with 50% from renewable sources by 2032.
  • Solar and Nuclear: Planning to invest USD 109bn in solar energy and USD 230bn in solar and nuclear energy projects, which could boost GDP growth by around 1pp annually during construction.
• Oil Export Concerns: Domestic oil demand is expected to rise, potentially reducing oil exports and affecting fiscal and current account balances. However, the risk of a major decline is unlikely in the short term.

Economic Calendar (14–22 November 2013)

• Hungary: GDP (preliminary) data for Q3, expected to show growth of 0.7% q/q and 1.3% y/y.
• Czech Republic: GDP (preliminary) data for Q3, expected to show growth of 0.5% q/q and -0.1% y/y.
• Poland: GDP (preliminary) data for Q3, expected to show growth of 0.6% q/q and 1.4% y/y; Core inflation data for October, expected at 1.1% y/y.
• Russia: Industrial production data for October, expected at 0.2% y/y; Real wages and retail sales data, expected at 5.8% and 2.2% y/y, respectively.
• Turkey: CBRT policy rate and O/N lending rates are expected to remain unchanged, though tightening measures may increase.

Key Information

• The Czech FX intervention is a major event, aiming to counter deflationary risks and support inflation towards the target.
• Russia's inflation targeting is complicated by high food prices, low potential growth, and unanchored inflation expectations.
• South Africa is experiencing political unrest and economic slowdown, with the PIC's stance on foreign takeovers reflecting broader political tensions.
• Saudi Arabia is facing rising domestic energy consumption, which could threaten oil exports, but has ambitious plans to diversify energy sources and ensure sustainability.

Disclaimer

• The views in this report are based on the personal opinion of the author, who is an independent political analyst.
• The analysis is produced by BNP Paribas Cadiz Securities and reviewed by BNP Paribas, which holds an indirect 60% stake in the firm.
• This document does not contain investment research recommendations.