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CEEMEA Weekly Summary - 9 April 2014

Core Content Overview

This document provides an economic and political analysis of key developments in Central and Eastern Europe, the Middle East, and Africa, focusing on Hungary, Turkey, and South Africa. It outlines the current economic conditions, central bank policies, and political dynamics that influence market performance and currency trends in these regions.

Main Themes and Key Insights

Central and Eastern Europe

• Hungary: The ruling Fidesz party won parliamentary elections, securing a two-thirds majority. The new government faces the challenge of maintaining economic growth while keeping the budget deficit under 3% of GDP. Political stability is expected to accompany improving economic prospects.
• Poland: March headline inflation is expected to be well below 1% y/y, with core inflation remaining contained. Low wage and money growth are cited as reasons for this.
• Czech Republic: CPI prints barely exceed zero, indicating low inflationary pressures. The document anticipates a gradual increase in inflation due to a weaker currency and rising demand pressures.
• Russia: Economic growth is slowing towards zero, and inflation has risen to nearly 7% y/y. Weak real wage and retail sales data suggest a slowdown in economic activity, which is affecting the labor market and household consumption.

Turkey

• TRY Performance: Turkish assets have performed strongly due to the return of global risk appetite and reduced domestic political risks. However, risk-adjusted yields are not particularly high, as they reflect high inflation and risk premiums.
• CBRT Policy: The Central Bank of the Republic of Turkey (CBRT) eased lira liquidity by increasing funding at the policy rate of 10%, leading to a decline in interbank overnight rates. A premature rate cut is seen as a risk to TRY assets, as it would make them more vulnerable than peers.
• Current Account: The current account deficit is expected to narrow to 6.2% of GDP in 2014 from 7.9% in 2013. This is partly due to net gold exports. However, the document warns that a reversal in global risk appetite could still negatively impact TRY assets.
• Political Outlook: Political developments will take center stage as the presidential election approaches in August 2014. The CBRT is under pressure to ease monetary policy, but the timing will depend on the Monetary Policy Committee (MPC).

South Africa

• Trade Account: South Africa's trade account moved into surplus in February due to improved exports. However, the effects of prolonged strikes in the platinum sector are expected to continue affecting production and exports.
• Mining Sector Impact: The strikes have entered their eleventh week, and major producers have declared force majeure. This suggests that PGM inventories built up in anticipation of strikes are depleting. Mining production growth is expected to contract by 0.5% in February.
• ZAR Weakness: Despite recent strength, the rand is likely to remain weak due to persistent trade and current account deficits. The document forecasts the rand to average around 11.00/USD in 2014.
• Portfolio Flows: Foreign portfolio inflows have turned positive but remain vulnerable to changes in global risk appetite. The document estimates that cumulative foreign flows into SA markets are just under ZAR 9.0bn year-to-date.
• HIV Infection Rates: HIV infection rates have increased from 10.6% in 2008 to 12.2% in 2012, with 6.4 million infected individuals. This is considered a more serious issue than Nigeria's GDP rebase.
• Political Tensions: COSATU is facing internal tensions, with Zwelinzima Vavi's suspension being set aside by the court. The split within COSATU between pro-ANC and anti-ANC factions is a significant political development.
• Nigeria's GDP Rebase: Nigeria's GDP rebase caused a stir in South African media, but the document argues that it does not reflect a significant threat to South Africa's economic position. South Africa still remains the largest economy in Africa, though its status may be challenged by other emerging economies.

Key Data and Forecasts

Risk Adjusted Bond Yields (Table 1)

Conclusion

The document highlights that while Central and Eastern Europe is experiencing improved economic prospects and political stability, Turkey and South Africa face significant challenges. Turkey's TRY is supported by global risk appetite but remains vulnerable to political and economic shifts. South Africa's trade surplus is expected to be short-lived due to ongoing strikes and weak fundamentals, with the rand likely to remain weak. Political tensions within South Africa, particularly in COSATU, are set to intensify as the presidential election approaches, and the country's HIV/AIDS crisis is a more pressing issue than the recent GDP rebase in Nigeria.