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CEEMEA Weekly Summary - 27 August 2014

Core Content

This report provides an overview of key economic developments and political events in the CEEMEA (Central and Eastern Europe, Middle East, and Africa) region, focusing on Turkey, Poland, and South Africa. It outlines central bank actions, inflation trends, economic growth, and political challenges impacting these countries.

Main Themes and Key Points

Turkey: Central Bank Surprises with Policy Shift

• CBRT cuts ceiling rate: The Central Bank of the Republic of Turkey (CBRT) unexpectedly reduced the ceiling rate of its interest-rate corridor by 75bp to 11.25% (10.75% for primary dealers), while keeping the policy rate at 8.25% unchanged.
• Market expectations: The market had anticipated no change or a 25bp cut in the policy rate, and no change in the ceiling rate.
• Implication for future: The CBRT indicated more ceiling rate cuts are likely, suggesting a shift toward more symmetric interest rate policy.

Political Transition in Turkey

• Erdogan takes office: Turkish President-elect Tayyip Erdogan is set to take office, with his new cabinet expected to be announced on Friday.
• Deputy Prime Minister's role: Ali Babacan, Deputy Prime Minister, is expected to remain in the cabinet, as he has strong market credibility.
• AKP leadership: Ahmet Davutoglu is the sole candidate for AKP party leadership and will replace Erdogan as prime minister.

Inflation Outlook in Turkey

• CPI expected to decline: The August CPI is projected to fall by 0.2% month-on-month on 3 September, bringing the year-on-year rate down to 9.2% from 9.3% in July.
• Base effects and food prices: Despite positive base effects, inflation has not dropped significantly since May, with food inflation still above historical averages.

Poland: Monetary Easing and Economic Challenges

Monetary Policy Outlook

• NBP expected to cut rates: The National Bank of Poland (NBP) is expected to cut interest rates by 50bp in two steps in October and November, reducing the main policy rate to 2.00%.
• MPC reaction function: The current Monetary Policy Council (MPC) is expected to be slow in reacting, with earlier cuts in September and/or one-off 50bp cuts less likely.

Economic Impact of Russia-West Tensions

• Growth slowdown: Poland's economic growth has slowed to below 3% year-on-year in early Q3, partly due to the economic impact of the Russia-West standoff.
• Export decline: The closure of Russia as a key export market and EU sanctions have affected Polish growth and CPI inflation.
• Monetary pass-through: NBP's models suggest that 100bp rate cuts could boost GDP by 0.55pp and CPI inflation by 0.4pp after a year, and weaken the PLN by about 2%. However, the impact may be limited due to geopolitical risks and weak trade dynamics.

Exchange Rate and Lending Constraints

• Weaker PLN less helpful: A weaker PLN may not significantly help net trade due to the economic impact of the Russia-West standoff on key trading partners.
• Lending and investment: Softer monetary policy may have a smaller impact on domestic demand and inflation due to geopolitical uncertainty and tighter lending standards.
• Bank funding risks: Overly aggressive rate cuts could reduce the attractiveness of banking-sector deposits, especially as they have been a key source of funding for banks since 2011.

South Africa: Economic and Political Challenges

Economic Performance

• Q2 growth avoids technical recession: South Africa managed to avoid a technical recession in Q2, but growth was only 0.6% quarter-on-quarter (1.0% year-on-year), below expectations.
• Weak production sectors: Mining and manufacturing sectors contracted again in Q2, with mining down 9.4% q/q and manufacturing down 2.1% q/q.
• Consumer pressures: The trade sector contracted for the first time since the 2009 financial crisis, indicating weak consumer demand and rising inflationary pressures.

SARB's Policy Dilemma

• Inflation and growth conflict: The SARB faces a dilemma between weak economic growth and high inflation, with CPI inflation likely to remain above target.
• Future rate hikes: The SARB is expected to raise interest rates by 25bp in November, but this could be postponed if economic conditions do not improve in H2.

Political Scandal: Nkandla and EFF

• Nkandla scandal: The Economic Freedom Fighters (EFF) have been causing parliamentary unrest over the Nkandla scandal, demanding President Jacob Zuma pay back the costs of his home upgrades.
• Legal dispute: Public Prosecutor Thuli Madonsela challenged Zuma's attempt to set aside her findings, asserting that he lacks the constitutional right to do so.
• Julius Malema's financial scrutiny: The South African Revenue Service (SARS) is investigating Julius Malema's funding sources for his tax debt, raising questions about his financial transparency.

Structural Challenges in South Africa

• Divergence in economic sectors: Production-led sectors (mining, manufacturing) have underperformed compared to consumer and service sectors since the 2008-09 crisis.
• Need for structural reform: The economy is in need of structural overhaul to address high unemployment and persistent underperformance in key sectors.
• Land reform and unintended consequences: Land reform efforts have led to unintended negative impacts, including job losses in agriculture and increased rural poverty.

Key Economic Data and Calendar

• Hungary: PPI y/y (Jul) forecast at 0.0%, with previous at -0.6%.
• South Africa: Private-sector credit y/y (Jul) forecast at 8.5%, previous at 8.7%.
• Poland: Manufacturing PMI (Aug) forecast at 49.0, with previous at 49.4.
• Turkey: CPI m/m (Aug) forecast at -0.2%, previous at 0.5%.
• Important events: The NBP's MPC meeting on 3 September, with expected rate decisions.

Conclusion

The region is marked by mixed economic signals, with Turkey and Poland facing inflationary and growth challenges due to geopolitical tensions, while South Africa grapples with weak economic performance and political instability. Central banks are under pressure to adjust monetary policy in response to these dynamics, but the effectiveness of such measures is constrained by structural and external factors. Political events, particularly in South Africa, continue to cast a shadow over economic stability and public trust.