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CEEMEAnomics Summary - 14 October 2015

Core Themes of the Week

• Poland and Turkey: Political dynamics dominate market attention, with elections approaching and potential coalition formations influencing economic policy.
• Central Europe: Czech Republic and Hungary show signs of disinflation due to falling oil prices, but inflation is expected to rise gradually due to food costs and strong consumer demand.
• Russia: The economy continues to face challenges with declining non-oil exports and shifting capital flows. The current account surplus is expected to remain robust at over 5% of GDP.
• South Africa: The Treasury is likely to revise down GDP growth forecasts, and fiscal pressures are mounting due to lower corporate tax revenues and the need for fiscal consolidation.

Key Developments

Poland

• Election Campaign: The general election is on 25 October, with Law and Justice (PiS) leading opinion polls at around 35%.
• Kukiz'15 Party: A new political party, Kukiz'15, has proposed a radical tax overhaul, which could significantly impact government revenues.
  • Personal Income Tax: The tax-free allowance is set to increase from PLN 3,091 to PLN 10,000, potentially reducing tax receipts by PLN 12bn annually.
  • Corporate Tax Reform: Proposes a 1% revenue tax instead of the current 19% profit tax, which could boost fiscal revenue by around PLN 11bn annually but may harm low-margin industries.
  • VAT Changes: A 5% VAT rate on necessities could have a limited fiscal impact.
• Economic Outlook: CPI inflation is expected to rise due to food costs and strong internal demand. The central bank may start raising interest rates in late 2016.

Hungary and Czech Republic

• Inflation Trends: Both countries are experiencing disinflation due to falling oil prices, but inflation is expected to rise gradually.
• Monetary Policy: The National Bank of Hungary may tighten policy next year due to rising inflation, while the Czech koruna cap is likely to remain in place in 2015 and 2016.
• Industrial Output: Strong manufacturing output supports a positive outlook for both economies.

Russia

• Current Account Surplus: Q3 surplus was USD5.4bn, lower than expected, due to a sharp decline in non-oil exports. The full-year forecast has been revised down to USD71bn.
• Capital Flows: A net private-sector capital inflow of USD5bn was recorded in Q3, but this is largely due to the "errors and omissions" component and seasonality.
• Capital Outflows: Net private-sector capital outflows are expected to reach USD70-75bn for 2015, still high relative to the current account surplus.
• Economic Downturn: Non-oil exports have contracted for three consecutive years, and the economy is still struggling with weak domestic demand and a weak RUB.

South Africa

• MTBPS Preview: The medium-term budget policy statement (MTBPS) will be closely watched for changes in fiscal and growth forecasts.
• GDP Growth Forecasts: The Treasury is expected to cut its 2015 GDP growth forecast, likely by 0.5pp, with revised projections of 1.5%, 1.9%, and 2.7% for 2015, 2016, and 2017 respectively.
• Revenue Trends:
  • Personal Income Tax and VAT: Remain robust, with growth of +14.5% and +8.6% respectively.
  • Corporate Tax: Has been under pressure, with a 1.5% y/y decline in August.
• Fiscal Challenges:
  • The Treasury has used up its contingency reserves due to above-inflation wage increases.
  • The postponement of UIF cuts will help FY2015/16 revenue projections.
• Government Spending: Likely to be constrained, with potential delays in infrastructure spending due to fiscal pressures.

Political and Economic Implications

• Hungary and Czech Republic: Political stability and economic resilience are expected to hold, with limited exposure to Asia reducing the risk of external shocks.
• Poland: Kukiz'15, though small, may influence coalition politics and could have a negative impact on economic activity through its tax proposals.
• Turkey: The central bank is likely to keep rates unchanged, waiting for the Fed's rate decision. A potential hung parliament could lead to political uncertainty.
• South Africa: Fiscal discipline remains a priority, but the government may have to delay infrastructure spending to maintain deficit control.

Outlook and Policy Signals

• Monetary Policy: No changes are expected in Central Europe for the remainder of 2015, with focus on 2016.
• Fiscal Policy: South Africa's Treasury is expected to maintain its fiscal consolidation path, though with some delays in infrastructure spending.
• Russia: The economy is still in a downturn, with the current account surplus remaining robust despite challenges in non-oil exports and capital outflows.
• Turkey: The political climate remains volatile, with potential impacts on public finances and economic stability.

Key Figures

• Poland's CPI Inflation: Expected to rise gradually due to food costs and strong internal demand.
• Russia's Current Account Surplus: Revised to USD71bn for 2015, with a forecast of USD85bn for 2016 if oil prices rise slightly.
• South Africa's GDP Growth: Likely to be revised down to 1.5% for 2015, with fiscal deficit expected to slip by 0.2-0.3pp.
• Kukiz'15 Tax Impact: Estimated to reduce government tax receipts by PLN 12bn annually and may negatively affect low-margin industries.

Conclusion

The week highlights the political and economic challenges in CEEMEA countries, with Poland and Turkey at the forefront. Central Europe shows a more stable outlook, while Russia and South Africa face significant fiscal and economic pressures. The upcoming MTBPS in South Africa and the election dynamics in Poland and Turkey will be key focal points for markets and policymakers.