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CEEMEAnomics Weekly Summary - 25 June 2014

Core Content

This week's CEEMEAnomics report highlights developments in the political and economic landscapes of Poland, South Africa, and Turkey. It also touches upon broader regional and global implications, particularly regarding inflation, interest rates, and labor unrest.

Main Points

Poland

• Political Stability: The political uproar caused by the bugging scandal has eased, with the government coalition ruling out an imminent change of government or snap election. However, if the probe into the scandal is not concluded by the end of summer, an early election may be necessary.
• Confidence Vote: Prime Minister Donald Tusk called a vote of confidence, which is expected to be successful. This move aims to reinforce his political standing and the government's stability.
• Central Bank Policy: The National Bank of Poland (NBP) is likely to keep interest rates unchanged despite a motion for a rate cut. The NBP's economic projections suggest that CPI inflation may turn negative in Q3 2014 but is expected to rebound towards the 2.5% target by late 2015 or 2016.
• Central Bank Law Reforms: The NBP's Monetary Policy Council is concerned about its independence and plans to draft its own proposals for central bank law reforms, which could slow the approval process of the government's changes.

South Africa

• Platinum Sector Strike: The five-month platinum sector strike has ended, with the Association of Mineworkers and Construction Union (AMCU) signing an agreement. This includes a ZAR 1,000-a-month increase over three years for the lowest-earning employees.
• Metal and Engineering Sector Strike: A new strike is anticipated in the metal and engineering sector, with unions demanding a 15-20% pay rise and employers offering 6.5-7.0%. This is a key risk to economic production in the second half of 2014.
• Zuma's Health Concerns: Rumors about President Jacob Zuma's health are not new and are unlikely to cause significant political disruption.
• EFF's Impact: The Economic Freedom Fighters (EFF) are challenging the ANC with a more radical agenda, particularly in land reform. This may lead to a shift in the political landscape.
• Land Expropriation Proposal: The government has proposed a land expropriation plan that could lead to significant anxiety in the farming sector. Commercial farmers are expected to give half their land to farm workers, with the government funding the transfer.
• IEC Chair Controversy: The Electoral Commission (IEC) chair, Pansy Tlakula, has been recommended for removal due to irregularities in tender procedures, which could affect the integrity of the electoral process.

Turkey

• Interest Rate Cuts: The Central Bank of the Republic of Turkey (CBRT) cut the one-week repo rate by 75bp to 8.75%, which was larger than expected. However, the interest-rate corridor remains unchanged, preserving the central bank's ability to defend the Turkish Lira (TRY).
• Future Rate Cuts: The CBRT is expected to cut rates again in July, likely by 25bp, bringing the total reduction since May 2014 to 150bp. However, the scope for further large rate cuts is limited due to high inflation and geopolitical risks.
• Inflation Outlook: June CPI inflation is forecast to be 0.1% m/m, leading to a year-on-year rate of 9.0% from 9.7% in May. Base effects are expected to persist, suggesting inflation may peak in May and decline from June onwards.
• Political Context: Prime Minister Recep Tayyip Erdoğan is likely to run for president in August, which may influence the central bank's monetary policy decisions.
• Currency Performance: The TRY has been underperforming relative to other emerging-market currencies since the capture of Mosul by ISIS. This could limit the central bank's ability to cut rates further.

Key Information

• Poland's Political Outlook: The ruling Civic Platform (PO) is losing popularity, while the opposition is gaining. An early election is still a possibility if the bugging scandal is not resolved by the end of summer.
• South Africa's Economic Risks: The end of the platinum strike brings mixed results, with significant financial losses for both the industry and workers. A new strike in the metal sector poses a threat to production and economic growth.
• Turkey's Monetary Policy: The CBRT is under pressure to cut rates due to political and economic factors, but the central bank is cautious due to high inflation and the need to maintain currency stability.

Summary of Events

• Poland: Political tensions are easing, but the bugging scandal remains a concern. The prime minister's confidence vote is expected to succeed, and the central bank is likely to maintain rates.
• South Africa: The platinum strike has ended, but the metal sector strike looms. Land reform proposals and the IEC chair controversy are also key political issues.
• Turkey: The CBRT has cut rates by 75bp, but the interest-rate corridor remains unchanged. Inflation is expected to decline, and the central bank may cut rates again in July.

Economic Outlook

• Poland: Inflation is expected to turn negative in Q3 2014, with a rebound towards the 2.5% target by late 2015 or 2016.
• South Africa: Inflation pressures remain, with PPI inflation at 8.8% y/y in May. The central bank may be forced to raise rates in H2 if inflation expectations worsen.
• Turkey: Despite the rate cut, the TRY's performance is weak, and further rate cuts may be limited. The central bank's actions will be closely monitored for any impact on the currency.