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CEEMEA Weekly Summary - 6 November 2013

Core Content Overview

This week's CEEMEA Weekly report focuses on the economic and political developments in Central and Eastern Europe (CEE), South Africa, and Turkey. The report highlights the fragile recovery in CEE driven by net exports, the widening trade deficit in South Africa, and the inflationary pressures in Turkey. It also touches on the political landscape in South Africa and the implications of recent events on the investment climate.

Main Themes and Key Points

Central and Eastern Europe: From the Outside In

• Net Exports as a Growth Driver: Net exports have been the primary contributor to GDP growth in CEE over the last few quarters. This is due to the region's reliance on external demand, especially from the eurozone.
• Eurozone Influence: The CEE economies are closely tied to the eurozone, particularly Germany, which is their main trading partner. The recovery in CEE depends heavily on the eurozone's economic performance.
• Currency Impact: The Czech Republic's economy is most affected by the depreciation of the Czech koruna (CZK), which has supported export growth. In contrast, the Hungarian forint (HUF) has remained stable, limiting the benefit of exports.
• Poland's Resilience: Poland's economy is relatively less exposed to the German cycle due to its lower dependence on external demand. Unit labour costs have been managed effectively, contributing to export competitiveness.
• FX Volatility and Recovery: The CEE region's recovery is vulnerable to FX volatility, as a stronger currency could reverse the gains from depreciation. The Czech National Bank (CNB) is unlikely to intervene directly in the short term.

South Africa: Trade Deficit Balloons Even More in Q3

• Record Trade Deficit: South Africa's trade deficit reached a new high in Q3, surpassing the full-year deficit of 2012. This is likely to result in a significant current-account shortfall.
• Impact on ZAR: The weak ZAR continues to underperform against other emerging-market currencies, though portfolio flows into fixed-income markets have helped alleviate some pressure.
• Industrial Action: Strikes in the platinum sector, particularly by the National Union of Mineworkers (NUM), are a major concern. These strikes have contributed to the trade deficit and could disrupt mining exports.
• Export Performance: South African exports to key trading partners (Europe and Asia) have remained weak, partly due to industrial action and the lack of competitiveness despite the weaker rand.
• Election Dynamics: The Democratic Alliance (DA) is launching its 2014 election campaign, but it's unlikely to significantly challenge the ANC. The ANC's support is expected to remain strong, especially in rural areas.
• Political Uncertainty: Concerns are growing over the Promotion of Investment and Protection Bill, which could increase uncertainty for foreign investors. The bill replaces bilateral investment treaties, which were previously seen as a positive factor for investment.

Turkey: An Uphill Battle Against Inflation

• Inflation Surprises: October inflation in Turkey exceeded expectations, reaching 1.8% month-on-month. Headline inflation declined slightly to 7.7%, but core inflation rose to 7.5%.
• CBRT Policy Stance: The Central Bank of the Republic of Turkey (CBRT) has ruled out rate cuts until inflation approaches the 5% target. The inflation outlook remains challenging.
• Currency Depreciation: The Turkish lira (TRY) is under depreciation pressure, which the CBRT is struggling to counteract. The TRY's performance is heavily influenced by global risk sentiment rather than domestic policy.
• Economic Resilience: Despite inflationary pressures, Turkish economic activity remains relatively resilient, as indicated by the 53.3 PMI reading in October.

Key Information Summary

CEE Economic Recovery

• Growth Drivers: Net exports, especially from the Czech Republic and Poland, are key to the region's recovery.
• Inflation Trends: CEE inflation remains low due to negative output gaps and falling food prices.
• FX Volatility: The depreciation of the CZK has helped boost exports, but the CNB is hesitant to intervene.
• Dependence on Germany: CEE economies are closely linked to Germany's economic cycle, with the Czech Republic being the most dependent.

South Africa's Trade and Political Challenges

• Trade Deficit: Q3 trade deficit hit a record high, with cumulative figures surpassing 2012's full-year deficit.
• Current Account Deficit: Expected to remain at 6.5-6.7% of GDP in Q3, which will keep the ZAR weak.
• Industrial Action: Strikes in the platinum sector and vehicle manufacturing continue to weigh on exports.
• Election Outlook: The ANC is expected to retain its dominance, with the DA and EFF posing challenges but not significant threats.

Turkey's Inflation and Currency Outlook

• Inflationary Pressures: Turkey is unlikely to meet its end-of-year inflation target due to persistent core inflation.
• CBRT Policy: The CBRT is tightening its stance but is not expected to curb inflation effectively.
• TRY Depreciation: The TRY is under depreciation pressure, and its performance is more influenced by global sentiment than domestic policy.
• Economic Resilience: Despite inflation, economic activity in Turkey remains relatively strong.

Conclusion

The report outlines a mixed economic outlook for the CEEMEA region, with CEE showing a fragile recovery supported by net exports and a weak ZAR in South Africa. However, challenges remain, including inflationary pressures in Turkey, industrial action in South Africa, and political uncertainty that could impact investment. The CEE region's growth is closely tied to the eurozone, and the recovery remains vulnerable to external shocks.