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CEEMEAnomics Summary - 16 April 2014

Core Content

This report provides an economic outlook for several CEEMEA (Central and Eastern Europe, Middle East, and Eastern Africa) countries, focusing on Russia, South Africa, and Poland, while also touching on Turkey and the broader implications of the Ukrainian crisis.

Main Themes

1. Ukraine Conflict and Its Implications

• Tensions in eastern Ukraine have escalated, with pro-Russian separatists occupying public buildings and installations.
• There are concerns that the conflict could lead to the annexation of eastern Ukraine, similar to Crimea, but analysts do not believe Russia intends to expand further.
• The Russian government seeks a neutral, bloc-less Ukraine with autonomous regions, which would allow pro-Russian politicians to influence national politics.
• Talks between Ukraine, Russia, the US, and the EU on 17 April are expected to address the crisis, but a comprehensive solution is unlikely before Ukraine's presidential election on 25 May.
• The EU is dependent on Russian gas imports, with some countries (e.g., Baltic states, Bulgaria) relying on 100% of their gas from Russia.
• The Ukrainian crisis is likely to lead to a reassessment of EU-Russia relations, with Europe seeking to diversify gas imports and reduce dependence on Russia.
• Russia's economy is unlikely to support a new arms race due to slowing growth and high military spending.

2. South Africa: Revised Growth Forecasts

• The South African GDP growth forecast has been revised downward to 2.1% in 2014 and 2.9% in 2015, from previous estimates of 2.6% and 3.4%, respectively.
• The revised forecast is based on weak total factor productivity (TFP), employment, and other idiosyncratic factors like strikes and power outages.
• Despite the weak growth outlook, the SARB is expected to raise interest rates by 50-75bp in 2014 to combat inflation, although the negative output gap complicates monetary policy.
• TFP and employment have been key drag factors on growth, with TFP showing erratic performance and employment growth remaining sluggish.
• The negative output gap is estimated at -1.1% in 2013 and -0.9% in 2014, with a potential closure in late 2015.
• The report uses a production-function approach to estimate potential output, taking into account capital, labour, and TFP growth.

3. Poland: Growth and Inflation Outlook

• The report maintains that Polish GDP growth will average more than 3% in 2014 and 2015, driven by domestic demand.
• Weaker demand from Russia and Ukraine will be offset by stronger growth in the eurozone.
• Inflation is expected to remain below 2% y/y in 2014, but will gradually rise to 2-2.5% y/y in 2015, as demand pressures increase and energy prices rise.
• The Polish central bank is expected to keep interest rates unchanged in 2014 and tighten policy in 2015, with a forecast of 100bp rate hikes.
• The ECB's monetary easing may delay the tightening cycle or reduce its scope.
• The report forecasts 8-10% y/y growth in Polish exports, with a minimal impact on overall growth due to the relatively small share of exports to Russia and Ukraine (less than 8%).

Key Information

Ukraine

• Conflict in eastern Ukraine is escalating, with pro-Russian separatists and Ukrainian forces in confrontation.
• Russia's goal is a neutral, bloc-less Ukraine, not full annexation.
• The EU and US are likely to impose more sanctions on Russia if no political resolution is reached.
• The gas pipelines through Ukraine are crucial for Russia's exports to Europe, and their control is a strategic interest.

South Africa

• GDP growth forecast cut to 2.1% (2014) and 2.9% (2015).
• TFP and employment remain weak, with strikes and power cuts exacerbating the situation.
• The negative output gap is persistent, explaining the SARB's cautious monetary policy.
• The report highlights structural issues in the economy, including labour unrest, electricity supply constraints, and infrastructure bottlenecks.
• Production-function approach is used to estimate potential output and growth components.

Poland

• GDP growth is expected to average over 3% in 2014 and 2015.
• Domestic demand is a growing driver of economic expansion.
• EU funding and rising real incomes are expected to boost public investment and consumption.
• Inflation will rise gradually, with CPI inflation expected to reach 2-2.5% y/y in 2015.
• Monetary policy is expected to remain accommodative in 2014, with tightening likely in 2015.

Turkey

• Moody's lowered its rating outlook to negative from stable, citing external financing pressures and a slowing growth outlook.
• The Turkish central bank eased TRY liquidity as the lira appreciated, but is unlikely to cut key rates at the next MPC meeting due to inflationary pressures.

Conclusion

The report outlines the economic challenges and geopolitical tensions affecting the CEEMEA region. While the Ukrainian crisis poses risks to Russia and Europe, it is expected to lead to a re-evaluation of economic ties and a shift towards diversification in energy imports. In South Africa, structural issues and political instability are limiting growth potential, prompting a revised GDP forecast and cautious monetary policy. Poland, on the other hand, is expected to continue its growth trajectory, supported by domestic demand and EU funding, despite external headwinds.