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CEEMEA Weekly Summary: 29 January 2014

Core Content Overview

This report provides a detailed analysis of the economic and political developments in Central and Eastern Europe (CEE), South Africa, Turkey, and the Gulf Cooperation Council (GCC) countries during the week of 29 January 2014. It highlights central bank actions, inflation trends, economic fundamentals, and political shifts, especially in South Africa and Turkey.

Main Themes

1. Central Bank Responses to EM Stress

• Turkey: The Central Bank of Turkey (CBRT) significantly raised key interest rates by 425-550bp at an interim MPC meeting, moving to an orthodox policy framework. This was a surprise move, as it exceeded market expectations of a 225bp increase. The repo rate was raised to 10%, with the corridor set between 8% and 12%. The CBRT emphasized its commitment to curbing inflation and stabilizing the Turkish Lira (TRY), signaling a shift to a more rigid monetary policy. It also raised its 2014 inflation forecast by 1.3pp to 6.6%, though the author believes these forecasts are likely optimistic unless the TRY appreciates further.

• South Africa: The South African Reserve Bank (SARB) surprised the market by raising the policy rate by 50bp to 5.50%. The move was aimed at combating inflation, not at supporting the currency. The SARB revised its inflation forecasts upward to 6.3% for 2014 and 6.0% for 2015, citing the weakness of the South African Rand (ZAR). The bank also cut its GDP growth forecasts slightly, to 2.8% and 3.3% for 2014 and 2015 respectively. If the ZAR remains weak, the SARB may be forced to raise rates again, though it indicated a preference for smaller hikes starting from March.

2. Central Europe: Resilience in EM Stress

• Central European markets have shown resilience to the ongoing emerging-market sell-off due to stronger economic fundamentals, including manageable borrowing needs and better positioning to benefit from global growth.
• The region's currencies and bonds have experienced minor weakening, but not as severe as in Turkey, South Africa, or Russia.
• The Ifo index suggests continued improvement in the German economy, which is a key trading partner for Central Europe, thereby supporting regional exports.
• The author believes that Central Europe is well-positioned to outperform other emerging markets in 2014, with a focus on both external growth and internal demand recovery.
• Central banks in Poland and the Czech Republic are expected to maintain current policies, though Poland may see a debate on tightening monetary policy in the coming months.

3. GCC: Inflation in Check, Rental Prices as a Key Driver

• Inflation in the Gulf Cooperation Council (GCC) countries (UAE, Saudi Arabia, Qatar) remained relatively low in 2013, driven by moderate food inflation, lower transport prices, and steady housing price increases.
• Qatar: Rental inflation was a major factor, rising to 5.8% y/y in 2013, and is expected to push inflation to 3.5% in 2014. The new CPI basket base year (2007) has led to lower inflation rates compared to the previous series.
• Saudi Arabia: Inflation ended 2013 at 3.0% y/y, slightly below expectations. Rental inflation was a key factor, with transport prices declining significantly. The author expects inflation to remain in the 3-4% range until 2015, though a decline in migrant workers could increase construction costs.
• UAE: Inflation was at 1.4% y/y in 2013, below forecasts. Rental and utility costs have been in positive territory since June 2013, with food inflation declining slightly.

Key Information

Central Bank Actions

• Turkey: CBRT raised rates by 425-550bp, with the repo rate at 10% and corridor rates at 8% and 12%. The move was intended to signal a zero-tolerance stance against currency weakness and inflation expectations.
• South Africa: SARB raised rates by 50bp to 5.50%, emphasizing that it was not to support the ZAR but to combat inflation. The decision was not unanimous among MPC members.
• Poland and Czech Republic: Central banks are expected to maintain current policies, with no major surprises anticipated.

Economic Outlook

• Central Europe: Expected to perform better than other emerging markets due to stronger fundamentals and less reliance on credit. The author notes that the region is well-positioned to benefit from global growth.
• South Africa: Faces challenges with weak economic growth and currency depreciation. The SARB may need to continue tightening policy if the ZAR remains weak.
• GCC: Rental prices are expected to drive inflation in 2014. Food inflation remains moderate, while transport and utility prices have declined.

Political Developments

• South Africa: Mamphela Ramphele, a former World Bank executive and anti-apartheid activist, joined the Democratic Alliance (DA) and will run for president in the 2014 general election. This move is seen as an attempt to broaden the DA's appeal among black voters, but the author believes it is an opportunity missed, as AgangSA had not yet gained significant traction.
• Ramphele's Impact: Her entry into the DA is expected to provide credibility, but the devalued political capital she brings may not significantly shift the DA's image in the short term.

Data and Forecasts

• Dates and Data: Includes a one-week calendar, key data preview, and contacts.
• Key Economic Forecasts: Central Europe's GDP growth is expected to improve, while South Africa's growth forecasts have been slightly cut.
• Inflation Forecasts: The CBRT expects inflation to reach 6.6% by end 2014 and 5% by mid-2015. The SARB expects inflation to peak at 6.4% in Q4 2014.
• Upcoming Data: Manufacturing PMI and CPI data for Turkey, as well as retail sales data for Hungary and the Czech Republic, are expected to provide further insight into economic recovery in Central Europe.

Disclaimer

• The analysis is produced by BNP Paribas Cadiz Securities (Pty) Ltd and reviewed by BNP Paribas.
• The views expressed are personal and not investment research recommendations.
• The Central Bank of Turkey (CBRT) analysis is produced by Turk Ekonomi Bank A.S. ("TEB") and reviewed by BNP Paribas.
• No part of the compensation is directly or indirectly linked to the views or recommendations in the document.