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CEEMEA Weekly Summary - 3 September 2014

Core Content

The CEEMEA markets were heavily influenced by developments in Ukraine, which remained a central theme. The potential for a "ceasefire process" in eastern Ukraine sparked discussions about the likelihood of further EU sanctions on Russia. Meanwhile, political changes in Poland and economic challenges in South Africa and the GCC region were also highlighted.

Key Themes and Developments

Ukraine and Russia: Ceasefire and Sanctions

• Ukraine Conflict: Ongoing developments in Ukraine, particularly the potential for a "ceasefire process" in eastern Ukraine, continue to drive market sentiment.
• EU Sanctions: The EU is set to decide on Friday whether to impose further sanctions on Russia. If a ceasefire is achieved, the probability of new sanctions would decrease, but they remain a potential risk.
• Proposed Sanctions: Possible measures include a ban on new purchases of Russian sovereign bonds and private-sector instruments, as well as restrictions on Russian access to European capital markets.
• Russian Response: Russia may retaliate with measures such as a ban on European car exports, which could significantly impact the EU's automotive industry.
• Economic Impact: Financial restrictions on Russia could deepen the recession, increase the risk premium on Russian assets, and lead to capital outflows. The Central Bank of Russia (CBR) is expected to raise interest rates by another 50bp to $8.50% in September.

Poland: Political Transition and Economic Outlook

• Donald Tusk's Move: Donald Tusk, the Polish Prime Minister, will become the new European Council President in December 2014 and will resign from his position by late November.
• New Prime Minister: A new Polish government is expected by year-end, and the ruling Civic Platform (PO) faces significant challenges, including a decline in opinion poll support.
• Election Outlook: The PO is currently trailing the opposition Law and Justice party (PiS) by about 6 percentage points. The political transition could affect Poland's economic policies and financial markets.
• Monetary Policy: The National Bank of Poland (NBP) kept interest rates unchanged, but is expected to cut them by 25bp in October and November, bringing the main policy rate down to $2.00%.

South Africa: Political and Economic Challenges

• Zuma's Visit to Russia: President Jacob Zuma's six-day visit to Russia was seen as a personal trip, with speculation about its purpose. It may have included intelligence and security discussions.
• Lesotho Coup Attempt: South African special forces reportedly aided Lesotho's Prime Minister Thomas Thabane in fleeing during a military-backed coup attempt, which had a Gupta connection.
• Current Account Deficit: South Africa's current account deficit is expected to widen to $5.8% of GDP in Q2 due to a trade gap and weak terms of trade.
• SARB Quarterly Bulletin: The release of the South African Reserve Bank's (SARB) Q2 bulletin will be a key focus, highlighting the balance of payments and potential economic slowdown.
• ZAR Pressure: The ZAR may face pressure from investors due to concerns over the US Federal Reserve's potential monetary tightening in mid-2015.

GCC Inflation: Regional Variations

• Food Prices: Soft global food prices have helped keep inflation in check in the GCC, but home rental costs are a major driver of inflation.
• Qatar: Rental inflation is particularly strong in Qatar and is expected to push overall inflation to $4.3% by year-end, up from the previous forecast of $3.5%.
• UAE: Housing inflation varies across emirates, with Dubai showing signs of overheating. Overall UAE inflation is expected to remain at $2.7% for the year.
• Saudi Arabia: Inflation is relatively benign, with subdued housing inflation and a revised CPI forecast of $2.5% for 2014.
• Interbank Rates: Rising US interest rates in 2015 may lead to higher interbank rates in the GCC, cooling real-estate sector overheating.

Summary of Main Points

• Ukraine Conflict: A potential ceasefire may reduce the likelihood of further EU sanctions on Russia, but the situation remains uncertain.
• Russia's Economic Strain: Additional financial sanctions could worsen Russia's recession, increase inflation, and reduce international reserves.
• Poland's Political Transition: The departure of Donald Tusk could lead to internal party conflicts and a shift in political power by 2015.
• South Africa's Economic and Political Challenges: The country faces a widening current account deficit and internal political turmoil, with Zuma's potential retirement being speculated.
• GCC Inflation Dynamics: Rental prices are a key factor in inflation across the GCC, with Qatar showing the highest rental inflation and the UAE having a mixed outlook.

Key Figures and Forecasts

• Russia: Expected to raise interest rates by 50bp to $8.50% in September. Current account deficit is at $35% of GDP.
• Poland: NBP may cut rates by 25bp in October and November, bringing the main rate to $2.00%.
• South Africa: Current account deficit forecast to widen to $5.8% of GDP in Q2. ZAR may face pressure from US Fed policy.
• Qatar: Inflation forecast raised to $4.3% for 2014, driven by rental price increases.
• UAE: Overall inflation expected to be $2.7% for 2014, with Dubai showing overheating signs.
• Saudi Arabia: CPI inflation forecast cut to $2.5% for 2014, due to subdued housing inflation.

Conclusion

The CEEMEA markets remain volatile due to geopolitical tensions, political transitions, and economic challenges. Ukraine and Russia continue to be central to market sentiment, with the potential for a ceasefire influencing EU sanctions decisions. In Poland, the departure of Donald Tusk may lead to significant political and economic shifts. South Africa faces internal political and economic pressures, while the GCC experiences varied inflation trends driven by food and rental prices.