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CEEMEA Weekly Summary - 30 April 2014

Core Content Overview

This document provides a detailed analysis of economic and political developments in Central and Eastern Europe and Africa, focusing on key countries such as Russia, Turkey, Hungary, and South Africa. It outlines the implications of these developments on monetary policy, inflation, and economic growth, as well as political tensions and their impact on the economy.

Key Themes and Developments

Ukraine Crisis Impact on Russia

• Economic Effects: Russia is experiencing the consequences of its involvement in Ukraine, including rising interest rates, a ratings downgrade by S&P to BBB- with a negative outlook, and new sanctions from the US and EU.
• Interest Rates: The Central Bank of Russia (CBR) unexpectedly raised rates by 50bp to 7.50%, in response to the downgrades and currency depreciation.
• Inflation Outlook: The document forecasts that Russian CPI inflation will rise to 7.2% y/y in April and could peak at around 10% y/y in May before declining to 8.2% y/y by year-end.
• IMF Funding Risk: The ongoing crisis could jeopardize Ukraine's access to IMF funding.

Hungary: End of the Easing Cycle

• Rate Cut: The National Bank of Hungary (NBH) cut rates by 10bp, bringing the main policy rate to 2.50%, but did not explicitly state the end of the easing cycle.
• Minutes to Watch: The minutes from the 29 April meeting, to be published on 14 May, will be crucial in determining whether further rate cuts are on the horizon.
• Inflation Target: The economic outlook suggests that inflation will reach the 3% target in 2015, possibly exceeding it, which may lead to rate hikes.
• Fiscal Impact: The NBH's shift from two-week bills to a deposit facility could increase forint liquidity, potentially weakening the currency and increasing inflationary pressures in H2 2014.

Turkey: Interest Rate Policy and Fiscal Risks

• Rate Cut Expectations: The CBRT is expected to cut rates by 50bp in May, following a dovish statement from Governor Erdem Başı.
• Inflation Forecast: The CBRT raised its 2014 inflation forecast to 7.6%, with CPI inflation likely to rise to 9.1% in April and peak at around 10% y/y in May.
• Treasury Guarantees: New regulations limit annual financing guarantees for public-private BOT projects to USD 3bn, but existing mega-projects may still pose fiscal risks.
• Fiscal Stimulus Concerns: These guarantees could act as indirect fiscal stimulus, increasing contingent liabilities for the Treasury and undermining recent fiscal strength.

South Africa: Political and Economic Developments

• Freedom Day Celebrations: South Africa celebrated 20 years of democracy, with a report highlighting the country's progress, but also the ongoing challenges.
• ANC and Nkandla Scandal: The ANC has blocked a parliamentary committee investigating the Nkandla scandal, drawing criticism from opposition parties and raising concerns about accountability.
• Economic Indicators:
  • Private Credit Growth: An uptick in private-sector credit growth (8.8% y/y) in March was largely driven by the corporate sector and unlikely to prompt the SARB to tighten policy.
  • Consumer Pressures: Household credit growth remains weak (4.8% y/y), reflecting continued inflationary concerns and potential rate hikes.
  • Trade Deficit: South Africa's trade account returned to deficit in March, with a gap of ZAR 11.4bn, following a brief surplus. This could worsen due to ongoing platinum strikes.
• Platinum Strike: The strike has entered a tense phase, with employers bypassing the AMCU to approach workers directly, risking further economic disruption.
• Education Scandal: SADTU is accused of being involved in a jobs-for-cash racket, including alleged threats to school principals, highlighting systemic issues in the education sector.

Additional Notes

• Political Dynamics: The ANC faces internal and external criticism, including from Archbishop Desmond Tutu, for its handling of the Nkandla scandal and perceived lack of accountability.
• Election Campaigns: The political climate is marked by intense campaigning, with opposition parties highlighting the ANC's failures.
• Investment Concerns: The ANC's investment arm, Chancellor House, is acquiring a major Eskom supplier, raising concerns about the use of public funds for political purposes.
• Fiscal and Legal Issues: NECSA's funding of ANC events has sparked controversy, especially as it is set to oversee the country's largest public-sector contract.

Summary of Key Points

• Russia: Rising rates, downgrades, and sanctions are part of the fallout from the Ukraine crisis, with inflation expected to climb.
• Hungary: The easing cycle may have ended, with rate hikes anticipated in 2015 due to inflationary pressures.
• Turkey: Rate cuts are likely, but fiscal risks from new BOT guarantees remain.
• South Africa: Political tensions and strikes are affecting economic performance, while the ANC faces scrutiny over its governance and financial practices.

Important Disclaimer

• The views in this document are based on the author's personal analysis and are not investment research recommendations.
• BNP Paribas is an indirect shareholder of BNP Paribas Cadiz Securities (Pty) Ltd, with a 60% stake.