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CEEMEA Weekly Summary – 5 March 2014

Core Content Overview

The CEEMEAnomics report for 5 March 2014 analyzes the regional economic and political developments in Central and Eastern Europe (CEE), South Africa, and Turkey. It outlines the effects of the Crimean crisis on financial markets, the political shifts in South Africa, and the inflationary pressures in Turkey.

Key Themes and Insights

1. Russian-Ukrainian Crisis and CEE Markets

• Tensions and Market Impact: The Russian troop movement into Crimea intensified regional tensions and had knock-on effects on financial markets, particularly the Russian stock market and currency. However, the impact on CEE markets has been limited so far.
• Political Resolution: A political resolution is expected to stabilize markets. The report assumes that the conflict will not escalate to the point of economic sanctions, which would have a more significant impact.
• Export Impact: CEE exports to Russia and Ukraine are expected to decline due to the weakened RUB and UAH. However, the share of these exports in total CEE GDP is relatively small, so the overall impact on GDP growth is likely to be minimal.
• Growth Projections: Despite the export decline, the ongoing economic recovery in CEE countries is expected to persist. The report maintains its GDP growth forecasts for Poland, Hungary, and the Czech Republic at 3%, 2.5%, and 2%, respectively.
• Poland's Vulnerability: Poland is the most exposed to the crisis, with exports to Russia and Ukraine accounting for 8% of total exports. However, even a 30% drop in exports would only reduce CEE GDP growth by 1pp.
• Currency and Bond Yields: CEE currencies (HUF, PLN) have only slightly weakened against the EUR, and bond yields have remained flat, indicating limited market instability.

2. South African Politics

• NUMSA's Political Shift: The National Union of Metalworkers of South Africa (NUMSA) is at risk of being expelled from the ANC-aligned Congress of South African Trade Unions (COSATU). It is forming its own socialist political party, called the United Front and Movement for Socialism.
• ANC's Response: The ANC is attempting to curb union dissent, particularly from NUMSA, to maintain political control and support for its National Development Plan (NDP). This is seen as a move to counter the influence of the Economic Freedom Fighters (EFF).
• Economic Policy and Mining: There is growing resistance from the mining industry to the government's Black Economic Empowerment (BEE) policies, especially the requirement for 26% black ownership. Some companies, like Sibanye Gold, are threatening to take legal action.
• Electoral Concerns: Allegations of potential vote rigging by the Independent Electoral Commission (IEC) have been raised, indicating concerns over the legitimacy of the electoral process and long-term political stability.
• ANC's Strategy: The ANC is likely to strengthen transformation obligations on the private sector while aligning with it against militant unions. This strategy is expected to be more pronounced as the year progresses.

3. Turkey's Economic Outlook

• Inflation Trends: Turkish headline CPI inflation rose 0.1pp to 7.9% y/y in February, as expected. Core inflation, however, surged 0.8pp to 8.4% y/y, reaching its highest level since May 2007.
• Inflation Drivers: The sharp increase in core inflation is attributed to a 6.2% m/m rise in car prices, which was partly offset by low food inflation (0.1% m/m). The report forecasts CPI inflation to reach 9% y/y by mid-2014 due to base effects and TRY depreciation.
• Monetary Policy: The Central Bank of the Republic of Turkey (CBRT) is expected to maintain a tight funding strategy and keep interbank overnight rates close to 12%.
• Current Account Deficit: The current account deficit is expected to narrow to 5.8% of GDP in Q4 2013 from 6.8% in Q3, driven by a 2.0% trade deficit improvement and the end of strikes.
• Bond Yields and Funding: Turkey's bond yields have remained under pressure due to the high Treasury auctions and rising core inflation. The current account deficit remains a significant financing challenge.

Economic Calendar and Data Highlights

Summary of Key Economic Indicators

• Russia: Raised interest rates by 150bp to 7.00% to counter RUB depreciation and inflation, but this move is likely temporary.
• Turkey: Core inflation reached 8.4% y/y, with CPI inflation expected to rise to 9% y/y by mid-2014. The CBRT is likely to keep rates near 12%.
• Poland, Hungary, Czech Republic: CPI inflation is expected to remain low, with the report maintaining its forecasts at 1.5% y/y for CEE countries.

Conclusion

The report highlights that while the Crimean crisis has caused some volatility, its impact on CEE markets and growth is expected to be limited. In South Africa, political tensions are increasing, with the formation of a new socialist party and continued resistance to BEE policies. In Turkey, inflationary pressures are rising, particularly in core inflation, and the current account deficit is expected to narrow, but the overall economic outlook remains challenging. The economic calendar for the week includes several key data releases that will provide further insight into the region's performance.