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CEEMEA Weekly Summary - 2 October 2013

Core Content Overview

This report provides an economic analysis of Central and Eastern Europe (CEE), South Africa, Turkey, and Ukraine, focusing on key macroeconomic indicators, fiscal policies, and market outlooks. It highlights the contrasting economic conditions across the region, with CEE economies showing signs of recovery, while South Africa and Turkey face more challenging growth prospects.

Main Themes and Key Points

Central and Eastern Europe (CEE)

• PMIs remain strong, indicating a rebound in economic activity.
• Inflation pressures are absent, due to negative output gaps and decelerating food prices.
• Poland's 2014 budget is conservative, with a deficit of PLN 47.7bn (2.8% of GDP).
  • Realistic assumptions underpin the budget, with tax revenues potentially exceeding expectations and spending reductions due to the pension system overhaul.
  • The pension system overhaul is expected to reduce public debt by over PLN 120bn and cut debt servicing costs by more than PLN 6.5bn.
  • Direct tax revenues (PIT and CIT) are expected to be broadly achieved, while indirect taxes (VAT and excise) are projected to rise.
  • A lower budget deficit in 2014 (PLN 40-41bn) will allow for more fiscal stimulus in 2015, an election year.
  • The risk of overly loose fiscal policies beyond 2015 is noted due to slowing potential growth and a reduced need for fiscal consolidation.

Ukraine

• Current account deficit is at its highest since December 2012, reaching USD 1.5bn in August 2013.
• Current account deficit forecast for 2013 has been revised upward to 7.1% of GDP.
• FX reserves are expected to fall to USD 18bn by year-end, increasing the risk of a weaker UAH.
• High reliance on foreign inflows is problematic after Moody's downgrade to Caa1, leading to increased CDS spreads.
• Rebalancing in external trade is insufficient, with exports declining and imports supported by domestic demand and expectations of new taxes.
• Gas imports have surged, contributing to the current account deficit.
• Bilateral financial inflows are helping to cover the deficit, but may reverse if fundamentals worsen.

South Africa

• Consumer confidence hit a 10-year low in Q3, driven by financial concerns and a weak domestic economy.
• Credit extension to the private sector has softened, with household credit growth at 8.2% y/y in August.
• High consumer debt (around 76% of disposable income) and weak credit quality are limiting spending.
• Moderating credit growth and rising inflation are expected to keep consumption subdued in 2013.
• Monetary conditions remain supportive, allowing the SA Reserve Bank (SARB) to maintain an accommodative policy stance.
• Consumer credit health index shows further deterioration, with more households in arrears.
• Banks are adopting more cautious lending strategies, with credit standards slipping.
• We expect consumer spending growth to slow to 2.5% y/y in 2013, down from 3.5% in 2012.
• Monetary policy normalisation is expected to begin in late Q3 2014.

Turkey

• Recent market volatility highlights the need for a strategy to reduce external funding requirements.
• Manufacturing PMI reached its highest level in 2013, but consumer confidence saw its biggest contraction since 2008.
• Base effects are likely to dominate the inflation outlook, with monthly CPI inflation expected at 0.4%, lower than the market consensus of 0.65%.
• Annual inflation is projected to fall to 7.5% from 8.2% in August 2013.
• Core inflation remains upward trending due to the weak lira and sticky services inflation.
• CBRT has pledged to keep key rates on hold until year-end, which may hinder a sustained lira appreciation.
• Turkish Treasury will have a busy debt auction schedule, with TRY 12.7bn of debt maturing next week.
• FX reserves are strong at around TRY 25bn, but the external financing need remains high.
• Monetary policy tightening by the Fed is expected to continue, affecting global financial markets and investor sentiment towards Turkey.

Key Data and Forecasts

Conclusion

The report underscores the divergent economic paths across the CEEMEA region. CEE economies, particularly Poland, are showing signs of recovery, supported by fiscal discipline and stronger-than-expected tax revenues. In contrast, Ukraine faces a significant current account deficit and FX reserve depletion, while South Africa and Turkey struggle with weak consumer confidence, high debt levels, and inflationary pressures. The outlook for these economies remains cautious, with a focus on structural reforms and policy adjustments to ensure long-term stability.