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CEEMEA Weekly Summary - 28 August 2013

Core Content

This report provides an overview of economic developments and market outlooks for Central and Eastern Europe (CEEE), Russia, and South Africa during the week of 28 August 2013. It highlights the impact of global monetary policy, particularly the Federal Reserve's tapering, on emerging markets and evaluates the performance and future prospects of key economies in the region.

Main Themes and Key Insights

Central Europe: Summer Progress, Autumn Uncertainty

• Poland:

  • The Monetary Policy Council (MPC) has completed its easing cycle, with the main policy rate at 2.50%.
  • GDP growth improved to 0.4% q/q and 0.8% y/y in Q2, with further acceleration expected in Q3.
  • The government's fiscal adjustments, including a PLN 16bn increase in the deficit and a PLN 8bn spending cut, could slow the recovery in Q4 and H1 2014.
  • Political uncertainty is rising due to the ruling Civic Platform (PO) losing popularity and potential cabinet reshuffles in the coming months.

• Hungary:

  • The National Bank of Hungary (NBH) cut the main policy rate by 20bp to 3.80%, indicating a continued easing cycle.
  • The economy showed a slower recovery in Q2 (0.1% q/q), but leading indicators suggest improvement in Q3.
  • The NBH is expected to lower rates further, potentially to 3.00-3.50%, which could lead to inflationary pressures and risk price stability.
  • The government plans to phase out FX mortgages, which may reduce external debt and improve fiscal health.

• Czech Republic:

  • Early elections are expected in October, likely favoring left-wing parties with softer fiscal policies.
  • The central bank (CNB) is less likely to intervene in the foreign exchange market due to the improving economic outlook.
  • The economy showed stronger-than-expected growth in Q2 (0.7% q/q), reducing the likelihood of deflation and easing the need for monetary intervention.
  • The CNB is expected to maintain a verbal intervention strategy, keeping interest rates near zero for the foreseeable future.

Russia: Resisting the Pressure

• The rouble has shown resilience against the broader emerging market sell-off, despite a slowdown in the economy and potential central bank policy shifts.
• Inflation is expected to decline to 6.1% y/y in August, supporting the possibility of monetary easing as early as September.
• The government has revised its growth target down to 1.7% for 2013 and 3.2% for 2014, reflecting concerns about economic stagnation.
• A USD 7bn Eurobond placement may be postponed due to unfavorable market conditions.
• The current account surplus remains strong at 2.7-3% of GDP, providing support to the currency and economy.
• The central bank (CBR) is likely to increase monetary easing, which may lead to greater rouble volatility in the coming months.
• The rouble's depreciation is not seen as a devaluation, but rather a natural fluctuation, with the CBR indicating a shift towards a free-floating regime.

South Africa: Growth Rebounds, Downside Risks Remain

• GDP growth rose to 3.0% q/q in Q2, but this was largely due to base effects after a weak Q1 performance.
• The manufacturing sector's strong Q2 performance was a technical rebound, not a sustained recovery.
• The finance, real estate, and trade sectors contributed to the growth, with the trade sector showing a modest improvement.
• The output gap remains large, and we expect 2013 GDP growth to be around 2.1%, below the 2012 average of 2.5%.
• Downside risks include industrial action in key sectors, such as mining and manufacturing, and a weak labor market with a 25.6% unemployment rate.
• Consumer confidence improved, but high consumer debt and inflation expectations may limit consumption growth in H2 2013.

Key Data and Trends

• Poland: GDP growth at 0.4% q/q, inflation at 1.1% y/y.
• Hungary: GDP growth at 0.1% q/q, inflation at 3.0% y/y.
• Czech Republic: GDP growth at 0.7% q/q, inflation at 1.2% y/y.
• Russia: Inflation expected to decline to 6.1% y/y in August, current account surplus at 2.7-3% of GDP.
• South Africa: GDP growth at 3.0% q/q, but year-on-year growth at 2.0%, with manufacturing contributing 11.5% q/q to GVA.

Outlook and Risks

• Poland: Political uncertainty and fiscal tightening could slow the recovery in late 2013 and early 2014.
• Hungary: Continued monetary easing may lead to inflationary pressures, and the phasing out of FX mortgages is expected to reduce external debt.
• Czech Republic: Softer fiscal policy in 2014 could support faster growth and reduce the need for FX intervention.
• Russia: Rouble volatility is expected to increase, with the potential for further depreciation and monetary easing.
• South Africa: Downside risks remain due to industrial action and a weak labor market, despite a rebound in GDP growth.

Conclusion

The CEEMEA region is navigating a mix of economic recovery, political uncertainty, and external pressures. While some economies like Poland and the Czech Republic show signs of improvement, others like Hungary and South Africa face challenges that could slow growth. Russia remains resilient due to its strong current account surplus and high oil prices, but the risk of monetary easing and rouble depreciation persists. The overall outlook suggests a transition from a strong summer to a potentially more volatile autumn.