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CEEMEA Weekly Summary - 10 July 2013

Core Content Overview

This report provides an analysis of the economic and monetary developments in the CEEMEA (Central and Eastern Europe, the Middle East, and Africa) region, focusing on Russia, Poland, South Africa, and Turkey. It highlights central bank actions, economic stimulus measures, and challenges facing key sectors.

Key Themes and Developments

Russia: Monetary Policy and Regulatory Changes

• New Central Bank Governor: Elvira Nabiullina took over as the new CBR Governor, with her first policy-setting meeting on 12 July 2013.
• Expected Rate Cut: Despite market consensus expecting a rate cut in August or September, the report forecasts a 25bp cut in July, with a cumulative 75bp reduction in H2 2013, bringing the refi rate to 7.5% by year-end.
• Mega-Regulator Status: The CBR is set to become a mega-regulator of the financial sector and markets, effective 1 September 2013. This includes supervision of banks, insurance, credit cooperatives, and exchanges, as well as control over pension contributions and securities issuance.
• Board Expansion: The CBR board will be expanded to 15 members, with a new quorum of 8 directors required for decisions. The transition period is expected to last 2-4 months, and new members from the former FFMS are likely to support monetary easing.
• Inflation Targeting: The CBR's mandate is shifting to include economic growth as a condition for maintaining low inflation. The target for inflation in 2013 is 5-6% y/y, and the recent slowdown in CPI inflation to 6.9% y/y in June may prompt the CBR to prioritize growth.

Poland: Policy Shift and Economic Outlook

• Easing Cycle Completed: The Polish MPC cut the main policy rate to 2.50% in July, stating that the easing cycle was over.
• Base-Case Scenario: Unchanged interest rates are the base-case for the near future, although monetary easing before year-end cannot be ruled out.
• Key Factors for Further Cuts: The MPC will monitor growth and growth outlook, exchange rate, and November's Inflation Report for potential rate cuts.
• Disinflation Trends: Inflation is expected to continue slowing in Poland and Hungary, with the CPI likely to remain below the 2.5% target in late 2015.
• Exchange Rate Watch: The MPC will also focus on the zloty exchange rate, which could be affected by global yield stability and the ECB's monetary policy.

South Africa: Persistent Challenges

• Production Sectors Struggling: Manufacturing and mining output data are expected to reflect weak performance, aligning with poor business confidence figures.
• Economic Constraints: The main challenges include weak demand, severe electricity shortages, falling commodity prices, and labour unrest.
• Eskom's Medupi Power Station Delay: Eskom announced it would miss the December 2013 completion deadline, pushing it to the second half of 2014. This delay exacerbates the country's electricity supply issues.
• Impact on Industry: Electricity shortages have already led to temporary shutdowns of some large aluminium smelters, highlighting the severity of the problem.
• GDP and Sector Performance: The production-side GDP performance of the manufacturing and mining sectors is still below pre-recession levels, reinforcing the need for stimulus.

Turkey: Central Bank's Constraints

• Avoiding Rate Hikes: The CBRT is trying to contain depreciation pressures on the TRY through FX sales and raising overnight rates to the ceiling of the interest-rate corridor.
• Limited Room for Maneuver: High and sticky inflation, external financing needs, and low FX reserves restrict the CBRT's ability to raise rates.
• Recovery Uncertain: While the recovery may have continued in Q2, its durability in H2 remains questionable.

Summary of Key Data and Forecasts

Conclusion

The CEEMEA region faces a mix of economic challenges and policy shifts. Russia is expected to take a more active monetary stance, with the CBR likely to cut rates and expand its regulatory role. Poland has completed its easing cycle, but may still adjust rates if economic data and growth outlook warrant it. South Africa continues to struggle with production-led sectors, particularly due to electricity shortages and weak demand. Turkey's CBRT is under pressure to maintain currency stability, with limited room for rate hikes. Overall, the report suggests a cautious approach to monetary policy, with a focus on short-term stimulus and economic recovery.