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CEEMEA Weekly Summary - 13 August 2014

Core Content Overview

This report provides an analysis of economic developments and political events in Central and Eastern Europe (CEE) and South Africa, with a focus on GDP growth, fiscal policy, and geopolitical risks. It also touches on political dynamics in Turkey and South Africa, particularly regarding leadership transitions and institutional integrity concerns.

Main Themes and Key Points

1. EU-Russian Tensions Impact European Growth

• The ongoing conflict in Ukraine and resulting sanctions between the EU and Russia are creating uncertainty for European economic growth.
• The EU's potential ban on Russian oil and gas transit could impact 15% of EU gas consumption and 2% of oil.
• These sanctions are expected to negatively affect growth in Central and Eastern Europe, including Poland, by slowing exports and increasing inflationary pressures.

2. Poland's Economic Outlook

• Poland is set to release its Q2 GDP data on 14 August, with an expected growth of 0.5% q/q and 3.3% y/y.
• A weaker-than-expected GDP growth could lead to a rate cut in September.
• Mixed signals from activity and tax data suggest a potential slowdown in growth, but strong indirect tax revenues indicate robust domestic demand.
• Leading indicators still suggest a growth rate of around 3.5% y/y, supported by stable consumer confidence and capacity utilisation.
• Geopolitical risks, especially from a deeper Russian economic contraction, could reduce Polish exports and weaken growth prospects.

3. South Africa's Economic and Fiscal Challenges

• South Africa's economic environment has deteriorated, with revised GDP growth forecasts of 1.5% for 2014 and 2.7% for 2015, significantly below initial expectations.
• The National Treasury is expected to revise its 2014/15 main budget deficit upward to over 5.0% of GDP (from 4.7%), and then narrow to around 3.7% by 2016/17.
• Fiscal consolidation is likely to slow due to reduced government revenues and the need to address socio-economic challenges.
• The government's expenditure ceilings are under scrutiny, especially the "compensation of employees" line, which accounts for over 35% of government spending.
• The Treasury may introduce tax policy changes in October 2014, with implementation likely in February 2015, to broaden the tax base and support infrastructure and economic development.

4. Political Developments in South Africa

• The ruling ANC and its allies are divided over potential reforms, including the breakup and privatisation of Eskom.
• COSATU opposes Eskom privatisation, citing its negative impact on economic growth and job creation.
• The new finance minister, Nhlanhla Nene, faces significant pressure to maintain fiscal discipline in the October medium-term budget review.
• The National Prosecuting Authority (NPA) is in crisis, with concerns over political interference and institutional integrity.
• The Marikana Commission is examining Cyril Ramaphosa's involvement in the 2012 mining massacre, which could affect his political standing in the ANC succession race.
• Nkosazana Dlamini-Zuma, Zuma's ex-wife, is a potential candidate for the ANC leadership, though she is seen as more of an insider than Ramaphosa.

Key Information Highlights

• Poland's Q2 GDP: Expected to grow 0.5% q/q and 3.3% y/y, with a possible rate cut in September if growth is weaker.
• South Africa's Fiscal Outlook: Deficit is projected to rise to over 5.0% of GDP in 2014/15, with slower fiscal consolidation due to economic weakness.
• Turkish Politics: Recep Tayyip Erdogan wins the presidential election with 51.8% of the vote, but his low participation rate and the search for a new prime minister will shape the country's future economic direction.
• Eskom Privatisation: Politically unfeasible despite potential economic benefits, due to strong opposition from COSATU and the ANC's historical stance against neoliberal reforms.
• South African Institutions: The NPA, SARS, and intelligence services are under scrutiny for political interference, undermining legal and regulatory certainty.

Critical Risks and Outlook

• Poland: Geopolitical tensions with Russia and weak Q2 GDP data could lead to monetary easing.
• South Africa: Fiscal consolidation is expected to slow, with a likely increase in the budget deficit. Political instability and institutional corruption pose significant risks to economic and investment confidence.
• Turkey: Political uncertainty around the next prime minister and the impact of geopolitical events could affect economic stability.
• Global Implications: The EU-Russia conflict and its ripple effects on CEE economies, especially Poland, remain a major concern for growth and inflation.