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CEEMEAnomics Summary - 28 October 2015

Core Content

This document provides an analysis of economic developments and policy outlooks in Central and Eastern Europe (CEE), focusing on Poland, Hungary, and South Africa, as well as a mention of Russia and Turkey. It outlines key economic indicators, central bank decisions, and political developments that could influence future economic performance and monetary policy in these regions.

Main Themes and Key Points

Poland: Easy Go, Easier Come

• The Law and Justice Party (PiS) won a significant majority in the parliamentary elections, allowing it to form a single-party government and control economic policy.
• The party plans to scale back pre-election promises to stay within the EU's 3% GDP deficit limit and avoid losing access to cohesion funds.
• Fiscal measures include increased social spending and reduced personal income tax, funded by new taxes on banks and large retail chains.
• Monetary policy is expected to become more accommodative, with the National Bank of Poland (NBP) likely to cut interest rates by 50bp by the end of Q1 2016.
• The NBP is expected to appoint pro-rate-cutting officials to its monetary policy council, and further quantitative easing measures could follow in H2 2016.
• However, as inflation rises due to higher food and fuel prices, the NBP may need to tighten policy in 2017 to prevent inflation expectations from rising.

Hungary: Tooling Up

• The National Bank of Hungary (NBH) is set to announce new measures on 3 November to boost corporate lending and investment.
• These measures are expected to include adjustments to the reserve requirement ratio (RRR), reducing it to 2% from 2-5%, giving banks more liquidity to invest in government bonds.
• The NBH also plans to cut the overnight deposit rate to 0.1% in September, which was aimed at securing demand for treasury bills.
• The Funding for Growth (FGS) scheme has been effective in boosting SME lending, but credit demand remains weak, especially among small and medium-sized enterprises (SMEs).
• The NBH may consider unconventional tools like quantitative easing (QE) if regulatory issues are resolved, but we believe the efficacy of these new measures will be limited due to weak demand.

South Africa: Less Growth Now, Rate Hikes Later

• South African GDP growth forecasts have been cut to 1.4% in 2016 and 1.9% in 2017, reflecting the weakening domestic and emerging market outlook.
• The South African Reserve Bank (SARB) is expected to delay rate hikes to Q1 and Q4 2016, instead of November 2015, due to the need to support growth.
• The SARB is under pressure to manage inflation while maintaining a "due concern for growth" stance.
• Political tensions, including student protests and the closure of universities, have added to the economic uncertainty.
• The Economic Freedom Fighters (EFF) are gaining traction, challenging the ruling ANC's policies and potentially increasing political instability.

Russia: Central Bank to Cut Rates

• The Central Bank of Russia (CBR) is expected to cut its policy rate by 50bp to 10.50% on Friday, 29 October 2015.
• The decision is influenced by lower-than-expected inflation, a stronger RUB, and tight fiscal policy.
• The Russian government has submitted its 2016 budget, projecting a 3.7% increase in revenues and a 4.4% increase in expenditures, though inflation is expected to exceed 6% in 2016.
• The budget deficit is forecast to be around 3% of GDP in 2016, slightly above the 2015 level, and will likely be financed from the Reserve Fund.
• The CBR is unlikely to issue external debt in 2016 due to market conditions and concerns about crowding out private investment.

Turkey: Election Re-run and Inflation Outlook

• Turkey will hold a re-run of its general election on 1 November 2015, with the AKP expected to gain more support.
• The Turkish Central Bank (CBRT) has raised its inflation forecasts for 2015 and 2016 to 7.9% and 6.5%, respectively.
• The CBRT is likely to maintain a tight monetary policy stance until the Fed's rate hike in 2016, with interbank rates expected to stay at 10.75%.
• The CBRT may consider a single policy rate that aligns with the current cost of funding, which is around 8.75%, but rate hikes are not expected immediately.

Key Economic Data and Outlook

• Poland: CPI inflation is expected to rise in early 2016 due to higher food and fuel prices, potentially leading to rate hikes in 2017.
• Hungary: Corporate credit growth is weak due to low demand, not tight lending conditions. The NBH is focusing on boosting domestic bond holdings and reducing external funding needs.
• South Africa: GDP growth is slowing, with a larger output gap expected. The SARB may delay rate hikes until 2016.
• Russia: Inflation is expected to decline to 15.5% in October 2015, and the CBR may resume rate cuts in the near term. The budget deficit is projected to be around 3% of GDP in 2016.
• Turkey: The CBRT is maintaining a tight policy stance, with inflation expected to rise, but rate hikes are likely to be postponed until 2016.

Conclusion

The document highlights the diverging paths of monetary and fiscal policies across CEE and emerging markets, with a focus on how political developments and economic conditions are shaping future outlooks. While Poland and Hungary are expected to implement more accommodative monetary policies, South Africa and Russia face challenges with weak growth and inflation management. Turkey's political and economic situation remains uncertain, with a re-run election and inflationary pressures likely to persist.