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CEEMEA Weekly Summary - 19 February 2014

Core Content

This report provides an overview of economic developments and central bank policies in Central and Eastern Europe (CEEMEA) and South Africa for the week of 19 February 2014. It highlights growth trends, inflationary pressures, and political dynamics impacting the region.

Main Themes

Central Europe: An Oasis of Growth

• Czech Republic: Q4 GDP growth reached 1.6% q/q, the strongest in seven quarters, with the annual growth rate at 0.8% y/y. Growth was driven by investment, not exports, indicating a positive shift in the economy.
• Hungary: Q4 GDP growth was 0.6% q/q, with an annual growth rate of 2.7% y/y. Growth was supported by investment and net exports. The NBH is expected to continue easing rates until mid-2014, with a possible conclusion to the easing cycle by June, taking the main policy rate to 2.5%. Inflation is expected to rise sharply in 2015.
• Romania: Q4 GDP growth was 5.2% y/y, the fastest in five years. Growth remains driven by net exports, with domestic demand expected to pick up in 2014.
• Poland: Q4 GDP growth was 0.5% q/q, with an annual growth rate of 2.7% y/y. The economy showed a broad-based recovery, though slightly below expectations. Growth is expected to continue in early 2014.

South Africa: Prickly Prices

• Inflation: South African CPI inflation rose to 5.8% y/y in January from 5.4% y/y in December. We expect CPI inflation to average 6.0% in 2014, 0.3pp below the SARB's January estimate.
• Core Inflation: Core inflation remained 5.3% y/y for five consecutive months, indicating persistent demand-driven pressures.
• ZAR Weakness: The weaker ZAR is a key driver of inflation, with the currency expected to weaken by 5% over the course of 2014. This will likely push inflation above the 6% target band from Q2.
• SARB Policy: The SARB is expected to continue hiking interest rates in 2014, likely in 25bp increments, to curb inflation while being mindful of the economic climate. The SARB is also likely to maintain a tight monetary policy stance.

Central Bank of Turkey: On Hold

• The CBRT kept its interbank overnight rates at 11.5%, with the one-week repo rate at 10% and the rest of the market at 12%.
• The central bank stated it would maintain a tight policy stance until the TRY appreciates further, and expects an improvement in the current account deficit in 2014.
• The CBRT has not provided excess funding to the market, leading to high interbank rates and forcing banks to rely on the overnight lending facility.

Market Developments in Turkey

• The Turkish Treasury auctioned five-, 10- and a new two-year benchmark bonds, along with a five-year CPI linker and seven-year FRN, to roll over TRY 14bn of maturing debt.

Key Information

• CEEMEA Growth Outlook: The region is expected to perform well in 2014, with no substantial inflationary pressure in the short term and a healthy economic outlook.
• Hungary: The NBH is likely to conclude its easing cycle by mid-2014, with inflation expected to rise sharply in 2015.
• South Africa: The SARB is expected to hike rates in 25bp increments in 2014, with inflation likely to breach the 6% target from Q2.
• Turkey: The CBRT is likely to keep rates on hold for the remainder of 2014, but may reduce them in 2015 if the TRY appreciates further.

Central Bank Actions

• Hungary: NBH cut rates by 15bp, bringing the main policy rate to 2.70%. Future decisions will depend on the March Inflation Report.
• Russia: CBR kept rates on hold at 5.50%, citing weak economic performance and potential inflation risks due to the RUB's weakening.
• South Africa: SARB raised rates by 50bp in January, and is likely to continue hiking in smaller increments.
• Turkey: CBRT left rates unchanged, with the overnight lending rate at 11.5% and the one-week repo rate at 10%.

Political Developments in South Africa

• Zuma's Address: Highlighted Cyril Ramaphosa's rising influence and signaled a hard line against unions, particularly non-ANC ones.
• Amplats vs. AMCU: Amplats plans to sue the AMCU for ZAR 591mn in damages, part of a coordinated strategy to reset the balance of power with unions.
• Labour Relations: The government is likely to support companies in taking a hard line with unions, especially the AMCU, which has been a key opponent of the ANC.
• Leadership Transition: There is speculation that Tito Mboweni may take over from Nhlanhla Gordoan at the Ministry of Finance. Also, Baleka Mbete may be promoted to a senior government role.

Economic Outlook

• CEEMEA: The region is expected to be among the top emerging-market performers in 2014, with balanced and broad-based growth.
• South Africa: Despite a weak ZAR and high inflation, the SARB is expected to continue tightening monetary policy. However, the pace and magnitude of hikes remain uncertain.
• Inflation Risks: Inflationary pressures are a key concern for the Czech Republic and Hungary, particularly due to the weaker CZK and higher food prices.

Summary

The CEEMEA region showed signs of economic recovery in Q4 2013, with Central Europe leading the way. Hungary and Poland are expected to continue their growth trajectories, while the Czech Republic's recovery is seen as dependent on external demand. Inflationary pressures are a growing concern, especially in the Czech Republic and Hungary, where the impact of utility price cuts may be temporary.

In South Africa, inflation is expected to rise, driven by the weaker ZAR and higher fuel and food prices. The SARB is likely to continue hiking rates, but in smaller increments, to manage inflation without overly disrupting growth. Political developments, including the rise of Cyril Ramaphosa and the legal actions against unions, suggest a shift in the balance of power in the mining sector.

Turkey is expected to maintain its current monetary policy, with the CBRT keeping rates on hold until the TRY appreciates further. The central bank is also looking to improve the current account deficit and reduce domestic consumption.

Overall, the report highlights the mixed economic and political landscape in CEEMEA, with growth and inflationary pressures being the central themes.