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Citi Research: CEEMEA Markets Analysis Summary (16 June 2025)

Key Insights and Market Outlook

Citi economists, after meetings in Asia, highlight sustained demand for local currency exposure from structural investors, affecting credit deals and spurring local currency credit demand. Despite global macro risks like the oil shock, the economic impact of geopolitical events may be transitory, with potential for negative developments like U.S. involvement in the Iran-Israel conflict.

Currency and FX Analysis

• Romania: Current account deficit widened to EUR10.1bn in Jan-Apr 2025, driven by goods imports and reduced FDI inflows. Unidentified capital inflows rose, worsening financing conditions if a stable government isn't formed. Currency outlook is challenging.
• Poland: Ministry of Finance (MinFin) converted EUR30.2bn in foreign exchange funds in 2024, 50% more than 2023, aimed at preventing złoty appreciation by steering transactions through the central bank rather than the spot market. This reflects EU fund inflows.
• Other Countries: Poland's złoty faces pressure from high FX activity; Czech and Hungarian koruna show mixed signals, with declines in certain swap spreads. Turkey's lira is volatile due to policy uncertainty.
• Risk Factors: Geopolitical tensions, policy uncertainty, and potential recessions from oil-related shocks add to currency risks.

Currency and Rate Views

• Markets demand local currency exposure, altering credit deals. Interest rate forecasts indicate policy divergence, late cuts in EM jurisdictions due to input price risks.
• Forward rates suggest rate hikes or cuts in emerging markets; spreads and roll-over costs fluctuate, with carry trades like short USD/ZAR noted.

EM Sovereign and Corporate Credit

• Corporate credit outlook tightens due to high geopolitical risks. Key trades include long positions in Kenya, Egypt, and Nigeria bonds, with risks from protests, inflation, and currency weakness.
• Sovereign risks involve ratings downgrades and EM policy caution. Examples include UAE and Saudi Arabia bond trades, with geopolitical tensions in the Middle East as a key restraining factor.

CEEMEA Currency Portfolio Views

• Local bonds and cash allocation strategies are adjusted for FX volatility. Data shows profit/loss variability in trades, driven by local economic conditions and global risks.

Conclusion

• Citi advises a risk-based approach amid geopolitical uncertainty. Policy divergence in EMs and potential slowdowns add complexity. Currency interventions and trade views reflect country-specific risks, with opportunities in high-carry trades but elevated volatility.

Disclaimer: This summary is based on Citi’s daily report and incorporates market data, but actual investments should consider further risks.