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CEEMEA Weekly Summary - 31 July 2013

Core Content

The CEEMEA Weekly Wrap from 31 July 2013 provides an overview of economic and monetary developments across Central and Eastern Europe, the Middle East, and North Africa (CEEMEA). It highlights the diverging trends in the region, with some countries maintaining accommodative monetary policies while others face inflationary pressures and capital outflows. The report also includes forecasts, policy decisions, and analysis of key economic indicators for the Czech Republic, Russia, South Africa, and Turkey.

Main Themes and Key Points

Czech Republic: CNB to Opt Against FX Intervention

• The Czech National Bank (CNB) is expected to avoid direct FX intervention at its meeting on 1 August, despite soft growth.
• The decision is likely to be a close call, similar to the previous meeting on 27 June.
• The CNB is unlikely to act due to the absence of sustained deflationary risks, which are a prerequisite for intervention.
• The current loose monetary policy will likely continue for some time, with interest rates expected to remain at zero until the end of 2014.
• The koruna is expected to weaken gradually against the euro, supported by verbal interventions when it strengthens.

Russia: Capital Outflows and External Imbalances

• Russian capital outflows remain excessively high, roughly matching the current-account surplus.
• The poor investment climate and weak government institutions are the main reasons for capital outflows.
• Despite a strong current-account surplus, the trend is expected to reverse, leading to a current-account deficit by 2015-2017.
• The rouble is projected to weaken in the long term, with a fair value expected to fall to 34-35 against the dollar.
• The rouble is likely to become more volatile in the second half of 2013, especially as capital outflows and inflationary pressures continue.
• The report highlights that the current-account surplus is expected to shrink due to slower export growth and higher import demand, particularly for food and machinery.

South Africa: Supportive Consumer Climate Amid Challenges

• Private-sector credit growth slowed in June, with weaker demand and supply constraints.
• Unsecured lending remains a key driver of household credit, though it has slowed.
• Mortgage lending growth remains weak despite rising house prices.
• The South African consumer is still considered a cornerstone of GDP growth, supported by loose financial and monetary conditions.
• The Financial and Monetary Conditions Index (FMCI) for South Africa shows relatively "loose" conditions, at a score of -1.6.
• Positive wealth effects from house price growth and equity gains are expected to support consumer spending despite headwinds in production sectors.
• The report forecasts 2013 GDP growth of around 2.0%, with household consumption growth expected to be about 2.5%.

Turkey: CBRT Does Little to Anchor Inflation Expectations

• The Central Bank of the Republic of Turkey (CBRT) raised its end-2013 inflation forecast by 0.9pp to 6.2%, exceeding the 5% target.
• The CBRT is expected to keep its policy rate on hold as long as major central banks do not increase theirs.
• The bank plans to use the interest-rate corridor and liquidity policy to manage FX volatility, rather than raising rates.
• Inflation expectations remain high, with the latest CBRT survey indicating a market consensus of 7.2% for end-2013 CPI, 1pp above the bank's forecast.
• The CBRT's inflation report is unlikely to anchor expectations, and further rate hikes are expected as inflation remains elevated.

Key Information

• Czech Republic: CNB is unlikely to intervene in the FX market, and interest rates are expected to stay at zero until 2014.
• Russia: Capital outflows are high and may lead to a current-account deficit by 2015-2017. Rouble depreciation is expected in the long term.
• South Africa: Consumer spending remains a key driver of GDP, supported by loose monetary conditions. Credit growth has slowed, but the consumer is still a cornerstone of growth.
• Turkey: Inflation expectations remain above the target, and the CBRT is unlikely to tighten policy in the short term. The rouble is expected to weaken and become more volatile.

Additional Notes

• The report includes charts and data from various sources such as Reuters Ecowin Pro, BNP Paribas, and local institutions like the South African Reserve Bank (SARB).
• The analysis highlights the importance of capital flows, inflation trends, and monetary policy responses in shaping economic outcomes.
• The FMCI is used to assess whether financial and monetary conditions are too loose or tight relative to historical averages.
• The Kuwaiti general elections in July 2013 are also mentioned, with political effects influencing capital flows in the region.

Conclusion

The CEEMEA region is experiencing divergent economic and monetary trends, with some countries maintaining easing policies and others facing inflationary and capital outflow challenges. The report emphasizes the fragile nature of the rouble and the supportive environment for South African consumers, while highlighting the ongoing issues in Russia's investment climate and the CBRT's cautious approach to inflation management. Overall, the region is expected to face a mix of challenges and opportunities in the coming months.