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CEEMEAnomics Summary - 14 May 2014

Core Content Overview

The CEEMEAnomics report from 14 May 2014 provides an analysis of economic and political developments in South Africa, Turkey, and the broader CEEMEA region. It highlights key economic indicators, political outcomes, and potential risks and opportunities for financial markets.

Main Themes and Key Points

South African Politics: Chimes of Freedom

• ANC Wins Election: The African National Congress (ANC) won the national and eight out of nine provincial elections with 62.15% of the vote, a slight decline from 65.90% in 2009.
• Market Implications: The result is broadly positive for financial markets, giving the ANC a secure enough majority to pursue macroeconomic stability and fiscal consolidation.
• Urban Support Shifts: The ANC's support declined significantly in major urban areas, especially in Gauteng, the economic heartland, where it fell from 64.04% to 53.59%.
• Political Dynamics:
  • The ANC is likely to push for increased Black Economic Empowerment and affirmative action.
  • The Democratic Alliance (DA) gained 22 seats and is focused on good governance and anti-corruption.
  • The Economic Freedom Fighters (EFF), led by Julius Malema, gained 6.35% of the vote and is expected to push for radical populist policies, such as land seizures and mine nationalisation.
  • The ANC's leadership style, including controversial actions like the Nkandla home development and patriarchal legislation, has drawn criticism from urban voters.

South Africa: Power Trip

• Electricity Supply Concerns: Eskom, South Africa's state-owned utility, faces significant challenges in meeting electricity demand during the winter season. A shortfall of nearly 1000MWh per day is expected over the next three months.
• Risk of Load Shedding: There is a real risk of load shedding and/or restricted industrial usage, though not as severe as the 2008 rolling blackouts.
• Tariff Review: NERSA is set to reassess Eskom's 8% annual tariff increase, which may lead to further increases or a government capital injection.
• Mining Strikes Impact: The 16-week-long platinum sector strike has affected industrial activity, and if it continues, it could ease some electricity supply pressure but still hinder broader economic growth.

Turkey: Signs of Unexpected Resilience

• Strong Q1 Growth: Turkey's Q1 GDP growth was stronger than expected, with industrial production rising 4.2% y/y in March, surpassing market forecasts.
• Net Exports Recovery: The recovery in net exports, driven by increased EU demand and a weak TRY, contributed significantly to the growth.
• Fiscal Spending Boost: Government spending, particularly from local governments, has been a key driver of economic activity.
• Inflation and Interest Rates: Despite strong growth, inflation remains a concern. The Central Bank of the Republic of Turkey (CBRT) is expected to cut interest rates by 50bp, even with high inflation, due to dovish signals and low risk premiums.
• Current Account Deficit: Turkey's current account deficit narrowed to USD 60bn in February and is expected to shrink further to USD 45bn or 5.5% of GDP by year-end.

Key Economic Indicators

• CEEMEA Inflation: Low inflationary pressure in Central Europe, with Czech inflation at zero, Hungarian consumer prices falling in April, and Polish inflation well below 1% y/y.
• Russia Recession: Russia slipped into recession in Q1 2014 due to the RUB slump and ongoing Ukraine tensions, which could deepen the downturn.
• Turkey's Bond Issuance: The Turkish Treasury is set to issue two- and five-year benchmark bonds and a CPI-linker bond on 20 May to roll over TRY 14.5bn of maturing debt.
• Economic Outlook: The report suggests that Turkey's growth may slow in the coming months due to the lagged response to tightened monetary conditions, but the upside risks to the 2.2% GDP forecast have increased.

Political and Economic Outlook

• ANC's Future: The ANC will focus on the National Development Plan and may attempt to clean up its leadership behavior in response to declining support in urban areas.
• Cabinet Formation: President Jacob Zuma is expected to announce his new cabinet around 24 May, with attention on succession issues within the ANC.
• Turkish Economic Resilience: The resilience of Turkish growth, despite political and monetary challenges, is noted, but the report warns of potential slowdowns in the coming quarters.
• Market Risks: The report outlines the risks of power cuts, inflation, and the impact of political instability on economic growth, particularly in South Africa and Turkey.

Important Disclosures

• The analysis is produced by BNP Paribas Cadiz Securities (Pty) Ltd and reviewed by BNP Paribas.
• BNP Paribas holds an indirect stake in BNP Paribas Cadiz Securities.
• The report does not contain investment research recommendations.