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CEEMEA Weekly Summary - 12 March 2014

Core Content

This document provides an economic outlook for the CEEMEA region, focusing on key developments in Russia, Ukraine, Hungary, South Africa, and Turkey. It includes analyses of current account balances, inflation trends, central bank policies, and political implications for economic performance.

Main Themes and Key Points

Russia-Ukraine Tensions

• Crimean Referendum: Expected to show majority support for joining Russia, likely to be welcomed by Moscow but contested by Ukraine and the West.
• Economic Impact: The crisis is expected to negatively affect both Russian and Ukrainian GDP growth trajectories in 2014.
• Sanctions Risk: Mutual economic sanctions remain a possibility, and the EU may reduce energy imports from Russia in the long term.

Hungary: Nearing the End of the Easing Cycle

• Policy Rate Cuts: The Hungarian National Bank (NBH) is expected to deliver its final rate cuts of the cycle in March and April, bringing the main policy rate down to 2.50% from 2.70%.
• GDP Growth: New economic projections suggest a slightly better GDP growth outlook for 2014 and 2015, but inflation projections are unlikely to change significantly.
• Inflation and CPI: February CPI inflation was lower than expected, and the NBH may not raise rates in 2014 due to weak inflation pressures.
• Market Expectations: Despite the NBH's easing cycle, the market is already pricing in rate hikes for later in 2014, with the possibility of tightening policy once CPI inflation reaches the 3% target in 2015.

South Africa: Brief Respite for the Current Account

• Current Account Deficit: Narrowed to 5.1% of GDP in Q4 2013 from 6.4% in Q3, mainly due to a smaller trade deficit.
• Structural Deficit: The current account deficit is expected to remain structurally high in the medium term.
• Capital Flows: Net portfolio investment fell sharply in Q4, with a net outflow of ZAR 24.5bn, but 'unrecorded transactions' and 'other investment' inflows helped offset the decline.
• Electricity and Labour Issues: Power outages and labor disputes pose significant risks to export receipts and could worsen the current account deficit.
• ZAR Outlook: The ZAR is expected to remain structurally weak in 2014, averaging around 11.00 per USD.

South African Politics: The Electric ANC Acid Test

• ANC Support Concerns: Claims of a collapse in ANC support in Gauteng raise concerns about President Zuma's influence in urban areas.
• Election Manifestos: Agang, Cope, and Freedom Front Plus launched their manifestos, focusing on local governance and resource management.
• ANC Performance: The ANC is expected to lose support in Gauteng, while the EFF is gaining traction in poorer areas.
• Rwanda-South Africa Tensions: Diplomatic clashes intensified after Rwanda expelled six South African diplomats, citing support for M23 rebels in the DRC.
• Load Shedding: Eskom's power cuts are attributed to government policy delays rather than internal issues.

Turkey: Growth Showing Resilience

• Economic Resilience: Despite financial turmoil since mid-December, real-sector indicators and hard data suggest Turkish growth remains robust.
• Interest Rates: The Central Bank of the Republic of Turkey (CBRT) is expected to keep rates unchanged and maintain a tight funding policy.
• Currency and Inflation: The TRY is considered undervalued, and monetary conditions are tight, slowing credit growth.
• Growth Drivers: Fiscal spending and net exports are expected to support growth in the coming quarters.
• Consumer Confidence: Declined materially, and credit growth has slowed due to rate hikes and political instability.
• PMI and Industrial Output: Manufacturing PMI rose to 53.4 in February, and industrial production grew by 7.3% y/y in January, indicating resilience in the real sector.

Summary Table

Conclusion

The region faces a mix of economic and political challenges. While some countries like Hungary and Turkey show signs of economic resilience, others such as South Africa and Ukraine remain vulnerable to external shocks and internal instability. The potential for policy shifts and external tensions will continue to shape the economic outlook in the coming months.