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CEEMEA Weekly Summary - 11 September 2013

Core Content Overview

This report provides an analysis of economic developments and political uncertainties in Central and Eastern Europe (CEE) and the Middle East, focusing on Poland, South Africa, and Turkey. The key themes include subdued inflation, political instability, and mixed economic performance. The report also outlines key data releases and central bank actions for the coming week and month.

Main Points

Poland

• Political Uncertainty: The ruling coalition's majority in parliament is declining, and the Civic Platform (PO) is losing public support. Early elections are a possible scenario, though not the base case.
• Economic Outlook: Despite a slowdown in industrial production (expected to drop from 6.3% y/y in July to 2.5% y/y in August), the calendar-adjusted data suggest a stronger rebound in production. The government may attempt to "muddle through" with support from smaller parties or by increasing fiscal spending in 2014-15.
• Risk of Early Elections: There is a 40% probability of early elections, as the ruling party may fear losing further ground in opinion polls. If early elections occur, the political landscape could shift, with the Law and Justice (PiS) party possibly emerging as the largest force.
• Fiscal Impact: Muddling through could lead to increased current (social & welfare) spending, which may strain fiscal space and lead to higher public debt and inflation.

South Africa

• Current Account Deficit: The deficit widened to 6.5% of GDP in Q2, driven by a larger trade deficit and reduced dividend receipts. This highlights the country's vulnerability to capital outflows.
• GDP Growth: Q2 GDP growth was slightly better than expected at 3.0% q/q saar, but the report suggests a slowdown in 2013 to around 2.0% due to weak consumer confidence, high consumer debt, and poor implementation of public sector capital expenditure (capex).
• Investment Trends: Fixed investment growth improved slightly to 2.7% q/q, but remains weak due to low business confidence and delays in public sector projects. The report forecasts slower GFCF growth for 2013, below the 2012 average of 5.7%.
• Capital Account Pressure: Foreign bond purchases declined in Q2, but there was some improved appetite for South African equities, which helped mitigate the impact of capital outflows.

Turkey

• GDP Growth: Q2 GDP growth reached 4.4% y/y, exceeding both market consensus (3.5%) and BNP Paribas' initial forecast (3.0%). The growth was driven by household consumption and government spending.
• Economic Indicators: July industrial production and August PMI data indicate continued expansion in Q3, though the report warns of potential slowdowns in H2 due to financial market volatility and rising interest rates.
• Interest Rates: The CBRT is expected to maintain rates unchanged in September, with the possibility of rate hikes later in the year to counter the lira's depreciation. The report maintains its 2013 growth forecast at 3.5%, with upside risks.

Key Data Preview

Central Bank Watch

Key Risks and Outlook

• Poland: Political instability could lead to early elections, which may have short-term economic volatility but could prevent further erosion of the ruling party's support.
• South Africa: Continued capital outflows and weak public sector implementation pose risks to the current account and economic growth.
• Turkey: Financial market volatility and rising interest rates may slow growth in the second half of 2013, despite strong Q2 performance.

Overall, the report suggests a cautious outlook for the region, with inflation remaining subdued, political uncertainty rising, and economic growth facing headwinds in the coming months.