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1Q2017
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
“
Your Leading Banking Partner in
Central and Eastern Europe
UniCredit Research
”
page 2
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Contents
4
CEE in 2017: ups and down and growing divergence
14
CEE Strategy: Adapting to higher rates and inflation
27
CEEMEA FX: Not all “Tantrums” need be the same
78
Acronyms and abbreviations used in the CEE Quarterly
EU canditates
and other countries
Countries
32
Bulgaria
60
Bosnia and Herzegovina
36
Croatia
62
Russia
40
Czech Republic
66
Serbia
44
Hungary
70
Turkey
48
Poland
74
Ukraine
52
Romania
56
Slovakia
58
Slovenia
Erik F. Nielsen, Group Chief Economist (UniCredit Bank London)
+44 207 826-1765, [email protected]
Lubomir Mitov, Chief CEE Economist (UniCredit Bank London)
+44 207 826-1772, [email protected]
Artem Arkhipov, Head of Macroeconomic Analysis and Research Russia (UniCredit Russia)
+7 495 258-7258 ext. -7558, [email protected]
Anca Maria Aron, Senior Economist (UniCredit Bank Romania)
+40 21 200-1377, [email protected]
Published on 9 January 2017
Erik F. Nielsen
Group Chief Economist
(UniCredit Bank London)
120 London Wall
London
EC2Y 5ET
Dan Bucşa, Lead CEE Economist (UniCredit Bank London)
+44 207 826-7954, [email protected]
Hrvoje Dolenec, Chief Economist (Zagrebačka banka)
+385 1 6006-678, [email protected]
Dr. Ágnes Halász, Chief Economist, Head of Economics and Strategic Analysis Hungary (UniCredit Hungary)
+36 1 301-1907, [email protected]
Ľubomír Koršňák, Chief Economist (UniCredit Bank Czech Republic and Slovakia)
+42 12 4950-2427, [email protected]
Kiran Kowshik, EM FX Strategist (UniCredit Bank London)
+44 207 826-6080, [email protected]
Imprint:
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UniCredit Research
Arabellastrasse 12
D-81925 Munich
Kristofor Pavlov, Chief Economist (UniCredit Bulbank)
+359 2 9269-390, [email protected]
Supplier identification:
www.research.unicredit.eu
Javier Sánchez, CEE Fixed Income Strategist (UniCredit Bank London)
+44 207 826-6077, [email protected]
Marcin Mrowiec, Chief Economist (Bank Pekao)
+48 22 524-5914, [email protected]
Pavel Sobisek, Chief Economist (UniCredit Bank Czech Republic and Slovakia)
+420 955 960-716, [email protected]
Dumitru Vicol, Economist (UniCredit Bank London)
+44 207 826-6081, [email protected]
UniCredit Research
page 3
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
CEE in 2017: ups and down and growing divergence
Lubomir Mitov,
Chief CEE Economist
(UniCredit Bank London)
+44 207 826-1772
[email protected]
1
■
Political shocks, financial markets’ volatility and sharp reversals in risk appetite turned
2016 into a rollercoaster ride. The benign global environment that had prevailed since the
Brexit vote reversed sharply following Mr. Trump’s victory in the U.S. presidential election,
triggering major capital outflows from EMs amid rising core yields and higher risk premia.
■
Against this background, the divergence within the CEE has deepened. Solid fundamentals
have enabled the CEE-EU 1 to weather the post-U.S. election storm relatively unscathed.
Russia has been resilient, too, thanks to sound policies and rising oil prices, while Turkey,
with its large imbalances, misplaced polices and dysfunctional politics, has been hit hard.
■
Economic performance has diverged, too. In CEE-EU, growth slowed in 2016 to a still solid 3%,
as a temporary drop in EU transfers cut public investment. Growth picked up in Croatia and
Serbia thanks to strengthened confidence and improved policies, but still lagged CEE-EU.
■
Further east, growth remained elusive. Russia posted another year of contraction – the first
back-to-back recessions since 1994, as Ukraine continues to crawl along the bottom. While in
Russia prudent policies have boosted confidence, in Ukraine they have continued to languish.
■
For Turkey, 2016 was a year to forget. A series of political shocks, growing security concerns,
and misguided policies have taken a heavy toll. The economy slipped into recession in 2H16,
for the first time since 2009, as macroeconomic imbalances widened further. Financial markets
have been battered, with the TRY and Turkish bonds among the worst performers globally.
■
In 2017-18, the external environment should be supportive for CEE. The outlook for the EA
and the UK has improved as Brexit fears subside. Growth will be stronger also in the U.S
due to a prospective fiscal stimulus, and in EM as commodity prices and trade recover. At
the same time, rising oil prices and gradual reflation will constrain consumption, while
global risk appetite will remain muted as markets adjust to higher U.S interest rates.
■
We expect growth to firm in most of CEE next year. In CEE-EU, it will top 3%, supported by
a pickup in EU transfers, and remain only a tad slower in Croatia and Serbia, partly due to
the need for further fiscal adjustment. Buoyed by a tenuous recovery in tourism, growth in
Turkey will approach 3% this year as well. Growth will return also to Russia and Ukraine,
but will remain anemic at 1-2%, constrained by ongoing structural rigidities.
■
Inflation developments will diverge. While in CEE-EU we expect gradual reflation as oil
prices rise and with economies at or above potential, inflation will remain below targets
through most of the year. In Russia, by contrast, tight monetary policies are likely to reduce
inflation close to the 4% target, while in Turkey inflation is likely to accelerate into double
digits as a result of a weak TRY and expansionary policies.
■
Scope for growth-supportive policies will be much more limited this year. There is no room
for monetary accommodation anywhere in CEE, and fiscal space is absent outside CEEEU, as well as in Poland and Romania. Turkey will continue pursuing expansionary policies
even though it should not, given rising macroeconomic imbalances.
■
With concerns about Brexit easing, external risks have abated. The expected changes in
US economic policy look unlikely to affect CEE directly, but the indirect impact could be
significant. While the rise in core yields will lead to a re-pricing of CEE bonds, for most the
risks seem well contained, except for Turkey. At current policies, Turkish markets will
remain volatile, limiting foreign interest, with risks for a disorderly adjustment rising.
■
Conversely, domestic political risks have increased. These are most pronounced in Turkey,
where political tensions will weigh on confidence well into 2017. Elsewhere, dissatisfaction
with political elites risks has brought to power populist and nationalist governments.
CEE-EU include the EU members that joined in 2004-07 and have not adopted the euro (Bulgaria, Czech Republic, Hungary, Poland and Romania)
UniCredit Research
page 4
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
2016: a rollercoaster ride
2016 was a year of political
upsets and market volatility…
…with the relative post-Brexit
calm abruptly reversing after
the U.S. election…
…causing a major selloff in EM,
depreciations and a surge in
risk premia
Despite this environment ,
most of CEE has done well…
…with CEE-EU outperforming
once again…
…and Turkey hit the hardest
among EMs
Growth in CEE-EU slowed in
2016 due to a transient drop in
EU transfers…
2016 was a year of surprises, stunning political upsets, and repeated bouts of financial
markets’ volatility. Despite these shocks and after a dismal start, financial markets
demonstrated a remarkable resilience until recently, essentially shrugging off concerns about
the impact of the Brexit vote and resulting in a long run of risk-on sentiment that pushed
portfolio flows to EM to a record high during the summer and early fall.
However, this period of relative calm and buoyant risk appetite came to an abrupt halt with the
victory of Mr. Trump in the November U.S. presidential election. This victory, which we cited
as a potential risk in our previous quarterly report, has completely changed the mood in global
financial markets. While little is still known about the exact intentions of the incoming U.S.
administration, markets have already moved sharply in response to the anticipated fiscal
easing and more protectionists stance on trade. The USD has surged, as have US bond
yields, and the heavy portfolio inflows from the summer have been replaced by equally heavy
outflows at a pace exceeding that during the 2013 taper tantrum. EM currencies have
plummeted as a result and risk premia have widened.
Despite this challenging environment, most of the CEE region has done relatively well.
However,, the divergence within the region has widened yet again, with the core, comprising
the CEE-EU, clearly outperforming both the rest of CEE and EM as a whole. Not only have
these countries weathered the market storm that followed Mr. Trump’s victory relatively
unscathed, but they have also demonstrated remarkable resilience, with growth still solid at
near 3% in 2016 despite growing headwinds. Croatia and Serbia have done well, too, while
further to the east growth remains elusive in Ukraine and Russia. However, the biggest outlier
in CEE was Turkey which, due to a combination of major political shocks, geopolitical
tensions and dysfunctional policies, suffered both a major blow to growth as well as one of the
sharpest financial market deteriorations among the EM universe.
This said, growth in CEE-EU in 2016 is likely to have slowed to around 3% from 3.9% in 2015.
(taking into account the leap year effect, the slowdown was even stronger, some 1.1-1.2pp).
However, we see this slowdown as largely temporary because it was caused by a drop in EU
funds’ absorption. This drop, which was largely technical and was due to the shift to a new
programming period, appears to have shaved off as much as 1.5pp from growth in 2016. The
impact was particularly strong in the countries with the best EU funds absorption, such as
Hungary and Poland, which have seen the sharpest slowdowns.
CEE OUTLOOK HAS IMPROVED THANKS TO FINANCIAL MARKET RESILIENCE, STRONGER EA GROWTH
Financial markets have remained broadly resilient post-Trump…
1000 JPM EMBIG Index
900
800
700
…whit a more subdued Brexit fallout boosting growth prospects
Africa
EM Asia
EM Europe
Latam
Middle East
8.0
6.0
Real GDP, % change
2015
2016 old
2016 new
2017 old
2017 new
2018F
4.0
600
2.0
500
400
0.0
300
200
-2.0
100
-4.0
0
-6.0
EA
HR
SRB
RU
TK
CEE5
Source: Bloomberg, IIF, UniCredit Research
UniCredit Research
page 5
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
…even though the underlying
economic performance
was strong
Apart from EU-funded investment, the economic performance has remained strong, with all
other expenditure components posting solid growth. Consumption, in particular, has become
the main engine of growth in CEE-EU, bolstered by a further drop in unemployment,
accelerating wage growth and absent inflation. EU funds absorption will pick up in 2017,
adding back 1pp to growth, but the sharp slowdown in 2016 still underscores the high
dependence of CEE-EU on EU transfers for growth and investment.
Croatia and Serbia did better
than expected…
Outside CEE-EU, both Croatia and Serbia did better than expected in 2016, with growth
picking up nicely – even though still lagging that in CEE-EU. Solid demand in the euro area
(EA) has played a major role by boosting exports, but perhaps more important was the
rebound in private consumption and investment on the back of firming confidence. An
improved perception among foreign investors has helped, too, with both countries having
made significant progress in fiscal adjustment and emerging from parliamentary elections with
stronger pro-reform majorities. So far, financial market pressures have been manageable,
although both are at higher risk than CEE-EU to a further deterioration in global sentiment.
…thanks to improving confidence
and firmer foreign demand
Further east CEE’s most
populous economies have
struggled…
…with Russia yet to emerge
from recession…
Further east, the region’s three most populous economies continued to struggle, further
diverging from the core. However, the trends among them differed as well. While Russia will
record another year of output contraction – albeit much shallower than in 2015 -- with the
long-awaited recovery still not in sight, confidence and market perceptions have improved
significantly. Fiscal restraint and prudent monetary policies have helped tame inflation and
inflation expectations, and greatly reduced the economy’s vulnerability to the fluctuation in oil
prices. Buoyed in part by the recovery in the latter, foreign capital has started flowing back,
cushioning the adverse impact of the post-Trump selloff.
…and Ukraine’s economy
crawling along the bottom
In Ukraine, the economy continued to crawl along the bottom. Some growth has returned, but
remains feeble and uneven, and is subject to numerous political and policy risks, with reforms
lagging and the political elite showing little resolve to tackle deeply-embedded corruption and
nepotism. The country, alone in CEE, remains shut off from foreign financial markets and is
fully dependent on official foreign funding, which is set to decline sharply already in 2017
For Turkey, 2016 was a year
to forget…
For Turkey, 2016 will be a year to forget. Hit by political shocks, such as the failed coup in
July, the Russian export and travel bans (the latter partially lifted only in September), growing
security concerns, and Moody’s downgrade to sub-investment grade in October, the economy
slipped into recession after mid-year, for the first time since 2009. However, unlike 2009, the
2H16 recession in Turkey is domestically-bred and not driven by a global crisis. For FY16,
growth is likely to come in at just 1.5%, again the worst print since the global financial crisis.
…with the economy in
recession in 2H16 and financial
markets under duress
Turkish markets have consistently
underperformed their peers…
Turkey’s financial markets have been also among the biggest losers globally. USD-TRY
slumped as much as 17% against the dollar since mid-October, and yields on TURKGBs
soared by more than 200bp. During most of the year, Turkish assets have underperformed
their peers, both in times of upside (when they barely gained) as well as in selloffs, when they
were among the hardest hit..
…which reflected in part deeply
rooted structural problems and
misguided policies
This underperformance reflected the further deepening of Turkey’s longstanding structural
weaknesses. These have been made worse by misguided policies, which focused on
boosting growth via major fiscal and monetary easing, rather than addressing the underlying
structural deficiencies. This policy stance has done little for growth, but has boosted the
already very sizable imbalances. Despite the economic slowdown, the C/A deficit has
continued deteriorating (both in volume and USD terms) and price pressures have intensified,
leaving Turkey among the most exposed EM in the wake of the Trump selloff.
UniCredit Research
page 6
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
2017: a better year in sight
On balance, 2017 and 2018
ought to be good years for CEE
Looking forward, 2017 and 2018 ought to be, on balance, good years for CEE. On the positive
side, global demand looks likely to pick up markedly. Most important for the region is the
significantly improved outlook for the EU. With the fallout from Brexit likely to take longer and
be back-loaded closer to the date of actual exit (presumably by 2019), we have revised up our
2017 growth projections for EA from 1.0% to 1.4%, and for the UK from nil to 0.6%. The
outlook for EU exports (which are of key importance for CEE-EU) has been upgraded as well,
with U.S. growth revised up thanks to the fiscal stimulus which the incoming US
administration has promised, and stronger EM demand amid recovering commodity prices, a
gradual revival in global trade, and a stabilization of activity in China.
…with global growth picking up…
… and growth in EA, the U.S.
and EM revised upwards…
…while higher oil prices and
tightening financial conditions
act as a brake on growth
On the negative side, higher oil prices and a tightening of global financial conditions will act as
a brake on growth in CEE – albeit to varying degrees and via different channels in different
countries. Rising oil prices and gradual reflation are likely to dampen private consumption in
oil importers and cause some deterioration in C/A balances. The expected faster pace of Fed
tightening, and the further rise in U.S. bond yields and continued re-orientation of capital flows
away from the EM associated with it, will have an impact on the availability of capital,
borrowing costs and financial conditions, especially where foreign borrowing needs are large.
GROWTH PROSPECTS WILL IMPROVE IN 2017
For the first time since 2007 all CEE countries will register growth …
8.0
EA
TR
RU
CEE5
HR
… helpedininCEE-EU
…helped
CEE-EUby
byimproved
improvedEU
EUfund
fundabsorption
absorption
UA
2015
2016F
2017F
5.0
6.0
4.5
4.0
4.0
3.5
2.0
3.0
0.0
2.5
-2.0
2.0
1.5
-4.0
1.0
-6.0
0.5
-8.0
-10.0
2014
% of GDP
…whi
0.0
2012
2013
2014
2015
2016F
2017F
Slovakia
Poland
Bulgaria
Romania
Czech Rep
Hungary
2018F
Source: Bloomberg, national statistical offices, UniCredit Research
We expect somewhat stronger
growth in CEE in 2017-18…
…with CEE-EU growing at
slightly above 3% in both years
The upside to growth in CEEEU will be constrained by the
more limited policy room…
…with monetary policy on
hold through 2017
UniCredit Research
Against this background, we expect growth to be somewhat stronger in CEE both in 2017 and
2018. The only exception will be Romania, where growth is likely to slow from an especially
brisk pace as the massive pre-election fiscal stimulus that has pushed growth to 4.5% in 2016
withers due to limited fiscal space. In CEE-EU, a pickup in EU-funded public investment will
support growth both years as well. All in all, we expect growth in CEE-EU to top 3% in both
years and to be slightly stronger in 2017, adjusted for the leap year effect.
The upside to growth in CEE-EU will be constrained by the more limited scope for policy
accommodation – even though macroeconomic imbalances will remain all but absent. With
policy rates at record lows, global financial conditions tightening, and the trough in inflation
behind us, scope for further monetary easing is all but non-existent. We do not expect
tightening within the next twelve months either, with inflation unlikely to hit central bank
targets until late 2017. Even so, with real interest rates easing as inflation rises, and exchange
rates tending to be a tad weaker amid heightened global risk aversion, monetary conditions
could still ease somewhat. Prospects beyond that will depend on the course of ECB policy.
page 7
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Scope for fiscal policy is
somewhat larger in some
countries…
Scope for fiscal accommodation in CEE-EU is somewhat larger, at least in part of the region.
Hungary, the Czech Republic and Bulgaria have plenty of fiscal room to support growth.
Nevertheless, we do not expect major fiscal relaxation in the former two. In Bulgaria, fiscal
policy will almost certainly be eased in 2017, after a massive 4.4% of GDP tightening
(although partly unintended) left the general government in a sizable surplus in 2016. At the
same time, Poland and especially Romania have no fiscal room to maneuver. Moreover, both
countries may well need to tighten in 2017 to avoid breaching agreements on deficit reduction
reached with the EC.
…but absent in Poland and
Romania
Growth in Croatia and Serbia
will remain solid near 20116
levels…
Growth in Croatia and Serbia will remain solid as well, close to its 2016 level of near 3%. This
will be still somewhat slower than in CEE-EU, partly due to the lack of policy space. Both
countries need to continue with their deficit reduction efforts, building on the strong progress
achieved in 2016, and in both scope for monetary policy accommodation is nonexistent. This
said, fiscal risks seem somewhat larger in Croatia where the government bets on a strong
rebound in revenue to avoid further spending cuts.
...constrained by the need for
further fiscal retrenchment
SCOPE FOR FISCAL ACCOMMODATION TO DIMINISH IN 2017
Fiscal deficits likely to mostly widen next year…
Fiscal balance (% of GDP)
1.0
CEE5
TR
RU
…but government debt will still stabilize
HR
Public Debt (% of GDP)
100.0
SRB
0.0
90.0
-1.0
80.0
TK
RU
HR
SRB
70.0
-2.0
60.0
-3.0
50.0
-4.0
40.0
-5.0
30.0
-6.0
20.0
-7.0
10.0
-8.0
CEE5
2009
2010
2011
2012
2013
2014
2015
0.0
2016F 2017F 2018F
2009
2010
2011
2012
2013
2014
2015
2016F 2017F 2018F
Source: ministries of finance, Haver, UniCredit Research
In Russia, the economy will exit
recession, but just barely
Growth will be supported by
higher oil prices and improved
confidence
In the short run, growth will
be constrained by the tight
fiscal stance
The CBR is unlikely to cut
before March 2017, and then
only cautiously…
UniCredit Research
In Russia, we expect the economy to exit recession, but just barely, growing by only around
1% in both 2017 and 2018. Growth both years will be supported by the expected recovery in
oil prices to USD 60/bbl by the end of 2017 and USD 65/bbl a year later, and a gradual upturn
in domestic demand after more than two years of declines. Activity will also be supported by
the return of capital inflows to non-sanctioned entities. On the other hand, growth will be
constrained by the likely rebound in imports. Import substitution has not advanced much outside
agro processing, with imports already recovering in 2016 despite the ongoing recession.
In the short term, growth will be also constrained by the tight fiscal stance. If implemented as
passed, the 2017 budget envisages an underlying tightening of about 1% of GDP. We expect
higher oil prices than those assumed in the budget to provide some room for extra spending
ahead of the March 2018 presidential election, but fiscal policy will still remain a brake on
growth in 2017.
We do not expect the CBR to cut rates before March 2017 at the earliest and then only
cautiously, keeping the real policy rate at 3% or more, by far the highest in CEE. While this
tightness may have some limited adverse impact on activity in the short run, the confidence
this policy stance has instilled and the remarkable decline in inflation achieved are likely to
pay off over the longer term by facilitating investment.
page 8
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
…with inflation approaching
the 4% target by late 2017
We expect inflation to ease to just above the CBR 4% target by the end of 2017 and be
anchored around that level in 2018. In Ukraine, by contrast, where policies remain largely in
limbo, growth will remain sluggish at just under 2% in both years – a pace that appears
insufficient to dispel growing debt sustainability concerns once IMF disbursements cease and
debt repayments rise from 2018 on. Public finances remain under pressure – both due to
Parliament’s reluctance to push ahead with fiscal reforms and abolish numerous loopholes
that benefit powerful vested interests, as well as the unfinished bank restructuring, with the
takeover of Privatbank, the country’s largest bank, adding at least 3% of GDP to public debt -if not more.
By contrast, Ukraine policies
remain largely in limbo…
…constraining growth at under
2% in both years…
…a pace insufficient to dispel
debt sustainability concerns
After a dismal 2016, growth will
rebound in Turkey…
After a dismal 2016, we expect growth in Turkey to rebound towards 3% in 2017. This
rebound, however, will be driven largely by base effects: a partial recovery in tourism, a better
agricultural year, and the expected lifting of the Russian ban on Turkish agricultural exports.
Activity will also be supported by significant competitiveness gains, with the TRY now at its
lowest level in real effective terms since the 2001 crisis.
…driven by both base effects
and competitiveness gains.
Continued aggressive policy accommodation will also be a supportive factor for growth, but
will also contribute to the further increase in macroeconomic imbalances. Rising oil prices are
likely to push the C/A deficit close to 6% of GDP in 2018, and combine with currency
weakness to leave inflation in double-digits for most of 2017. Inflation will remain elevated and
the currency weak due in part to the CBRT’s reluctance to tighten monetary policy as much as
needed to stabilize the TRY. We expect the CBRT to hike by a total of 75bp during 2017, on a
par with the Fed, which is unlikely to be enough to lure back investors. Fiscal policy will also
contribute to price pressures, although low public debt ought to provide a safety cushion for
public finances, at least in 2017-18.
Continued aggressive
policy accommodation
will support growth…
…but at the expense of a wider
C.A deficit and higher
inflation…
…with the CBRT likely only to
follow Fed interest rate hikes
MACROECONOMIC INBALANCES MOSTLY UNDER CONTROL - BUT NOT EVERYWHERE
Inflation well anchored - except or Turkey
%
CEE5
18.0
TR
RU
C/A deficits mostly modest - but a growing concern in Turkey
HR
C/A balance (% GDP)
8.0
SRB
16.0
6.0
14.0
4.0
TR
UA
HR
SRB
RU
2.0
12.0
0.0
10.0
-2.0
8.0
-4.0
6.0
-6.0
4.0
-8.0
2.0
-10.0
0.0
-12.0
-2.0
CEE5
2009
2010
2011
2012
2013
2014
2015
-14.0
2016F 2017F
2009
2010
2011
2012
2013
2014
2015 2016F
Source: Haver, central banks, UniCredit Research
This will leave Turkey
highly vulnerable to shifts
in market sentiment…
…with Turkish assets under
pressure, at least until the
spring of 2017
UniCredit Research
These developments will leave Turkish financial markets highly vulnerable to even modest
shifts in market sentiment. Risks to external financing will remain elevated and financial
markets under pressure, at least until domestic politics are sorted out. We do not expect this
to happen before the likely referendum on granting the president executive powers,
presumably by April or May 2017. A temporary rebound could follow and extend through the
summer as tourism receipts rise; but with global financial conditions likely to continue
tightening into 2018, risks to external financing will grow. Another potential risk is the
significant deterioration of corporate balance sheets due to the TRY depreciation and the
spillover effect this may have on domestic banks, especially in the case of a Fitch downgrade.
page 9
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Diminished external, growing domestic risks
With immediate Brexit
concerns easing, external risks
to the CEE have subsided
With the immediate concerns about Brexit subsiding, downside risks for the CEE region as a
whole have abated significantly, at least for 2017-18. While we still expect Brexit to have a
significant adverse impact on both the UK and the EA, this impact will be more protracted and
become apparent by 2019 and beyond, close to the actual departure date. While a slowdown
in the EA remains as always the key potential risk for CEE, odds for such a slowdown appear
slim, at least in 2017.
The risks related to the Trump
victory do not pose major
direct risks for CEE…
On the other hand, other key global developments do not pose major risks for CEE at
present. The expected changes in economic policy by the new US administration will actually
benefit global growth, with those aspects that might be problematic such as increased
protectionism unlikely to affect the region directly given relatively limited trade links. However,
the indirect impact (via a slowdown in global growth and trade) could still be significant,
especially in the case of far reaching trade restrictions.
…although the indirect impact
could be significant
Fed tightening and the rise in
core yields will affect
everybody…
…CEE-EU seem well
ring-fenced…
…with Russia resilient as well
Turkey, on the other hand,
remains by far the
most vulnerable…
…with odds of a major financial
dislocation on the rise
Conversely, domestic political
risks have been on the rise…
…especially in Turkey
…extending the uncertainty
well into 2017
In CEE-EU, domestic political
tensions have spiked the most
in Poland…
…with electoral upsets in
Bulgaria and Romania raising
concerns about reforms…
…and a snap election in Serbia
posing a risk for the IMF program
UniCredit Research
While Fed tightening and the associated rise in core yields will lead to a re-pricing of CEE
bonds, for most of CEE the risks seem well contained. In CEE-EU, financing needs are low
thanks to large extended basic surpluses and modest fiscal deficits, leaving the region
resilient to the pressures that have plagued other EMs. Moreover, with the ECB to keep its
highly accommodative stance at least until December 2017, the core region ought to be
cushioned to a significant extent from global turbulence. A solid external position, along with
an attractive carry, are likely to support Russian assets, too, as will a growing expectation
(unfounded in our view) about a possible thaw in Russia-US relations under President Trump.
Turkey, on the other hand, is by far the most vulnerable in CEE and among the most exposed
EM to the rise in core yields. Given current policies, Turkish markets will remain volatile and
continue underperforming peers and limiting foreign interest despite attractive nominal
returns. While we do not expect a full-blown financial crisis under our baseline scenario, risks
for a “sudden stop” of capital inflows have greatly increased recently, and with them the odds
for a major financial upheaval that could trigger major TRY depreciation, a spike in interest
rates and result, eventually, in a recession.
Conversely, domestic political risks have been on the rise. These risks are most pronounced
in Turkey, where the intensification of the conflict with the Kurds both in southeast Turkey and
in northern Syria has rattled confidence and reinvigorated security concerns that might be
harmful to the anticipated revival of tourism. Furthermore, the increased interference of
politicians in the decision making by independent policy-making bodies such as the CBRT
have greatly increased the risks of a policy error. Last, but not least, the purge of many civil
service officials has undoubtedly affected the quality of government institutions – something
that will become apparent only in the future. Finally, the upcoming referendum on granting the
president executive powers will also weigh on confidence well into 2017. As a result, market
pressures will remain elevated for quite some time.
In CEE-EU, domestic political tensions have spiked the most in Poland, where efforts by the
PiS government to strengthen its grip on the judiciary and the media have sparked major
protests and caused a spat with the EC. Further south, in Bulgaria and Romania, voters have
ousted centrist well-performing governments in favor or populist and nationalists parties,
underscoring the disillusionment with the elite. While unlikely to have an immediate economic
impact, they may affect future reform prospects and policy making, especially in Romania.
Finally, in Serbia, the recently elected government has surprisingly decided to call early
elections in January – despite having won an overwhelming majority as recently as last April.
This could again cause a slowdown in reforms (similar to the previous pre-election period a
year ago), delaying IMF disbursements and affecting confidence of foreign investors.
page 10
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
OUR GLOBAL FORECAST
GDP
CPI
Policy interest rate
10Y bond yield
Exchange rate (LC/EUR)
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
1.6
1.5
1.4
0.2
1.5
1.4
0
0
0
-
-
-
1.05
1.10
1.16
1.8*
1.5*
1.6*
0.4
1.8
1.9
-
-
-
0.20
0.80
1.20
-
-
-
France
1.2
1.2
1.1
0.2
1.3
1.3
-
-
-
-
-
-
-
-
-
Italy
0.9
0.8
0.9
-0.1
1.1
1.1
-
-
-
-
-
-
-
-
-
UK
2.1
1.2
0.8
0.6
2.3
2.8
0.25
0.25
0.25
1.23
2.00
2.10
1.23
1.25
1.30
USA
1.6
2.4
2.7
1.3
2.5
2.6
0.75
1.25
2.0
2.44
3.00
3.00
-
-
-
Oil price, USD/bbl
57
60
60
Eurozone
Germany
*non-wda figures. Adjusted for working days: 1.7% (2016), 1.8% (2017) and 1.6% (2018)
Source: UniCredit Research
THE OUTLOOK AT A GLANCE
Real GDP
(% change)
CEE-EU
2015 2016E
2017F
2018F
CPI
(% change)
CEE-EU
2015
2016E
2017F
2018F
-0.5
-0.4
1.8
2.3
-0.1
-0.8
1.1
1.6
0.3
0.6
2.0
C/A balance
(% GDP)
2015
2016E
2017F
2018F
0.1
0.4
0.2
-0.4
Bulgaria
0.4
3.7
2.4
0.8
2.2
Czech Rep.
0.9
2.3
1.8
1.8
3.0
2.9
Hungary
3.4
4.4
4.3
4.2
-0.6
1.6
2.0
Poland
-0.6
-0.7
-0.7
-1.7
Romania
3.9
2.9
3.0
3.2
Bulgaria
3.6
3.4
3.6
3.4
Bulgaria
Czech Rep.
4.6
2.4
2.4
2.5
Czech Rep.
Hungary
3.1
2.2
3.0
3.1
Hungary
-0.1
0.5
Poland
3.9
2.7
3.0
3.4
Poland
-0.9
Romania
Romania
CEE-EU
3.8
4.5
3.4
3.3
-0.6
-1.5
1.6
2.7
-1.2
-2.2
-2.2
-2.4
Croatia
1.6
2.7
2.7
2.9
Croatia
-0.5
-1.1
1.3
1.5
Croatia
5.1
2.8
2.1
1.7
Russia
-3.7
-0.8
0.9
1.1
Russia
15.6
7.1
4.8
4.2
Russia
5.3
1.9
1.2
0.8
Serbia
0.8
2.7
3.0
3.0
Serbia
1.4
1.1
2.5
3.7
Serbia
0.7
1.2
1.0
1.5
Turkey
6.1
1.5
3.0
3.3
Turkey
7.7
7.8
10.6
7.6
Turkey
-3.7
-5.1
-5.6
-6.0
2015 2016E
2017F
2018F
External debt
(% GDP)
2015
2016E
2017F
2018F
2015
2016E
2017F
2018F
CEE-EU
72.1
72.2
69.3
64.8
-1.8
-1.8
-2.3
-2.3
Extended basic
balance (% GDP)
CEE-EU
General gov’t
balance (% GDP)
4.2
4.4
4.4
3.8
Bulgaria
6.8
8.0
7.0
5.6
Bulgaria
75.3
72.8
67.9
63.8
Bulgaria
-2.9
1.7
-1.7
-2.3
Czech Rep.
3.3
7.3
6.1
5.9
Czech Rep.
68.7
78.9
78.1
75.1
Czech Rep.
-0.6
0.3
-0.4
-0.5
Hungary
8.3
9.0
10.1
10.0
107.7
98.6
94.3
89.3
Hungary
-1.6
-2.0
-2.4
-2.0
Poland
3.8
2.3
3.0
2.1
Poland
70.3
70.8
67.6
62.4
Poland
-2.6
-2.6
-2.8
-2.8
Romania
3.0
3.2
2.1
2.0
Romania
56.4
51.9
48.9
45.1
Romania
-0.8
-2.8
-3.0
-3.0
Croatia
6.2
6.3
6.1
6.1
Croatia
103.8
96.8
94.4
91.9
Croatia
-3.3
-2.1
-2.0
-1.6
Russia
3.9
0.6
0.3
0.2
Russia
39.3
39.1
31.7
29.9
Russia
-2.4
-3.8
-3.6
-3.1
Serbia
0.7
1.2
1.0
1.5
Serbia
80.3
78.0
78.0
76.6
Serbia
-3.8
-2.0
-1.8
-2.0
Turkey
-2.4
-4.3
-4.7
-5.2
Turkey
46.0
46.9
48.3
54.1
Turkey
-1.7
-2.6
-2.8
-3.1
Gov’t debt
(% GDP)
2015 2016E
2017F
2018F
Policy rate
(%)
2015
2016E
2017F
2018F
REER
2000 = 100
2015
2016E
2017F
2018F
CEE-EU
48.3
49.4
50.1
49.6
1.2
1.1
1.2
1.7
CEE-EU
112.5
109.9
110.3
112.8
Bulgaria
25.6
28.7
25.2
25.3
Bulgaria
0.0
0.0
0.0
0.0
Bulgaria
136.9
136.0
135.4
136.1
Czech Rep.
40.3
38.6
37.9
36.8
Czech Rep.
0.1
0.1
0.1
0.5
Czech Rep.
105.3
106.4
108.7
110.8
Hungary
CEE-EU
CEE-EU
Hungary
74.7
73.2
72.7
70.2
Hungary
1.4
0.9
0.9
0.9
Hungary
126.6
127.5
127.8
129.6
Poland
51.1
53.8
55.8
55.8
Poland
1.5
1.5
1.5
2.3
Poland
110.3
105.9
105.9
108.7
Romania
Romania
Romania
108.7
37.9
38.7
39.0
38.9
1.8
1.8
2.0
2.5
110.3
105.9
105.9
Croatia
86.7
85.2
83.6
81.5
Croatia
0.0
0.0
0.0
0.0
Croatia
95.1
97.2
97.2
97.3
Russia
10.3
11.0
10.4
11.2
Russia
11.0
10.0
8.0
6.5
Russia
178.0
179.2
205.9
206.7
Serbia
75.9
74.6
72.4
69.6
Serbia
4.5
4.0
4.0
4.0
Serbia
Turkey
30.6
33.2
33.2
33.5
Turkey
7.5
7.8
8.5
8.0
Turkey
109.0
107.7
100.8
97.4
Source: National statistical agencies, central banks, UniCredit Research
UniCredit Research
page 11
See last pages for disclaimer.
January 2017
Economics & FI/FX Research
CEE Quarterly
EM VULNERABILITY HEATMAP
BG
CZ
HR
HU
PL
RO
RS
RU
SK
TR
UA
MX
BR
CL
SA
ID
IN
CN
Current account (% of GDP)
3.1
1.9
3.2
4.4
-0.5
-2.0
-4.2
2.4
-0.1
-3.8
-0.6
-2.9
-1.4
-2.0
-4.3
-2.1
-0.8
2.3
Extended Basic Balance (% of GDP)
7.8
5.6
7.4
9.7
2.6
2.9
1.3
1.7
6.9
-3.4
3.2
-2.3
2.5
0.8
-2.2
-0.6
1.3
0.0
FX Reserves coverage (months of imports)
9.3
5.1
7.1
3.4
5.3
5.4
6.9
14.5
-
5.5
2.8
5.1
21.2
6.7
4.0
8.9
8.4
20.4
External Debt (excl.ICL, % of GDP)
46.5
73.2
81.9
70.0
74.2
41.2
72.9
38.8
70.8
48.6
118.7
29.6
27.4
67.8
43.2
32.5
23.4
10.3
Short-term debt (% of GDP)
16.4
34.5
7.6
11.6
10.2
7.4
1.4
3.9
24.3
12.2
17.6
3.7
3.8
4.8
29.9
4.7
4.0
0.0
REER (Index, 2010=100)*
96.4
89.6
93.4
89.1
86.8
95.2
115.9
86.1
122.2
78.4
73.9
75.8
78.4
92.8
66.4
90.3
105.8
123.3
Corporate debt (% of GDP)
58.6
54.0
71.6
60.3
47.0
40.1
44.1
67.7
52.5
75.5
48.6
73.7
40.0
35.0
38.0
22.0
49.0
160.0
Household Debt (% of GDP)
20.3
33.6
39.9
23.7
37.2
-
19.9
13.0
39.6
21.0
7.8
15.2
20.0
23.6
-
9.9
10.7
36.2
1.3
30.6
59.4
27.6
32.8
18.4
-
26.8
40.4
16.9
-
33.7
14.4
-
35.3
37.0
-
-
External Liquidity
Domestic Finances
Nonresident holdings of gov.debt (% total)
Banking System
Credit Impulse (% of GDP)
-0.6
0.2
-4.4
0.2
-0.5
0.2
2.8
1.6
0.1
5.8
-6.2
1.4
-0.3
7.9
4.9
2.6
5.6
19.7
Loans/deposit ratio (%)
75.1
78.7
90.0
79.1
99.9
82.7
103.4
108.3
93.1
126.0
127.1
93.5
132.5
105.1
98.7
114.2
114.2
65.1
NPL (% of total loans)
14.1
4.8
14.7
10.0
7.3
10.0
19.5
9.7
4.8
3.2
31.0
2.3
3.8
1.9
3.2
3.0
7.6
1.7
Domestic Banks CAR (%)
22.8
16.0
21.9
16.8
17.1
18.8
21.2
12.4
17.3
15.5
14.2
14.7
16.5
12.9
15.2
21.2
13.0
13.5
Domestic Banks RoE (%)
13.1
17.4
10.3
19.2
8.7
12.3
6.9
2.0
14.8
15.5
-10.8
16.2
13.3
13.8
21.3
15.4
4.4
15.0
*Increase means appreciation
Source: Haver, Bloomberg, UniCredit Research
Legend
Not vulnerable
Somewhat vulnerable
Moderately vulnerable
Highly vulnerable
UniCredit Research
page 12
See last pages for disclaimer.
January 2017
Economics & FI/FX Research
CEE Quarterly
EM VULNERABILITY HEATMAP (CONTINUED)
BG
CZ
HR
HU
PL
RO
RS
RU
SK
TR
UA
MX
BR
CL
SA
ID
IN
CN
Policy
Policy Rate, nominal (%)
-
0.1
-
0.9
1.5
1.8
4.0
10.0
-
8.0
14.0
5.8
13.8
3.5
7.0
6.5
6.5
4.6
Real policy rate (%)
-
-0.4
3.9
0.3
0.7
2.3
2.5
4.0
-
-0.5
6.6
1.7
5.3
0.4
0.8
2.9
0.7
2.4
-0.2
1.5
-0.8
0.9
1.1
2.3
4.5
0.2
1.3
9.7
2.1
4.9
0.9
1.2
3.7
1.3
1.0
1.9
Real Money market rate (%)
Headline inflation (% yoy)
-0.5
0.5
-0.9
1.1
0.8
-0.6
1.5
5.7
-0.5
8.5
7.9
3.0
8.5
3.1
6.1
3.5
5.8
Core Inflation (% yoy)
-0.3
1.1
-0.1
1.5
-0.1
0.5
1.9
6.7
0.1
8.7
6.3
3.3
7.1
3.4
5.6
3.5
4.5
1.6
1.0
-0.2
-1.2
-2.0
-1.8
-0.5
-2.5
-3.4
-2.4
-0.8
-1.4
-1.4
-7.6
-2.5
-3.4
-2.8
-5.5
-2.7
GG Fiscal balance (% of GDP)
GG Primary balance (% of GDP)
2.3
0.8
3.2
1.4
0.2
0.6
0.8
-2.9
0.0
1.2
2.0
-0.1
-3.1
-1.7
0.6
-1.1
-1.5
-1.2
28.3
39.8
84.6
75.6
53.5
36.8
71.3
10.2
53.3
29.4
67.4
35.7
#N/A
32.3
55.9
30.9
61.4
57.2
Local Debt Spread (10Y, bp)**
196.7
47.5
253.3
60.7
82.0
181.7
214.6
136.9
31.7
336.1
580.9
179.0
268.7
86.6
287.8
215.6
-
104.7
Local Currency Curve (5Y, %)
0.7
-0.3
1.6
1.8
3.0
2.4
5.3
8.3
-0.2
11.0
-
7.3
11.4
3.9
8.3
7.3
7.4
2.7
Local currency bond spread (2s10s)
168.7
133.0
185.0
246.0
159.1
240.2
182.5
12.5
126.5
114.5
-704.4
72.0
45.9
61.0
133.0
39.3
41.4
30.4
CDS (5Y, bp)
133.0
43.5
203.3
108.5
69.5
105.7
-
172.5
44.2
272.5
-
162.7
258.2
79.8
206.5
156.5
119.3
114.0
-
2.8
4.0
5.8
6.8
4.3
-
15.6
-
15.7
-
16.1
16.2
10.7
20.2
10.7
6.7
5.5
IBRD Doing Business***
39.0
27.0
43.0
41.0
24.0
36.0
47.0
51.0
33.0
69.0
80.0
47.0
123.0
57.0
74.0
91.0
130.0
78.0
WEF Competitiveness Ranking*
50.0
31.0
74.0
63.0
36.0
62.0
94.0
45.0
67.0
51.0
79.0
57.0
75.0
35.0
47.0
41.0
39.0
28.0
7.0
4.0
13.8
4.9
8.2
5.9
14.4
5.2
9.5
11.3
9.1
4.1
7.4
6.9
26.6
25.0
8.4
4.1
Government Debt (% of GDP)
Markets
FX 3m implied volatility (%)
Structural
Unemployment (%)
**External Debt CZ, HU, SR (USD), SK for 5Y; ***IBRD and WEF indicators as of 2015
Source: Haver, Bloomberg, UniCredit Research
Legend
Not vulnerable
Somewhat vulnerable
Moderately vulnerable
Highly vulnerable
UniCredit Research
page 13
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
CEE Strategy: Adapting to higher rates and inflation
Javier Sánchez,
CEE Fixed Income Strategist
(UniCredit Bank London)
+44 207 826-6077
■
2017 will see higher volatility in fixed-income markets, as global yields may be on the rise.
We remain cautious about adding duration, particularly in EUR-denominated bonds as the
gap between Bunds and US Treasury bond yields may narrow from the current historically
elevated levels. We look at the sensitivities of emerging market bond spreads and the USD
across emerging market bonds and conclude that so far the impact has been limited.
■
We expect headline inflation to accelerate in CEE and other emerging markets, increasing
the risk of higher rates in local currency bonds. We do not expect central banks to change
their stance in 2017 for most markets, with the exception of Russia where we expect
additional cuts and in Turkey where we expect higher rates.
■
Flows to emerging markets were poor in 2016, but allocations by investment funds were at
record highs. We look at the increasing role of ETFs in this trend and conclude that, as
markets become deeper and allocations increase, their role will become more important.
We also look at the differences in investor patterns between ETFs and other investment
funds and find some differences in the initial reaction to stress events in the markets.
■
We discuss how 2016 marked a confirmation of the trend by US investors towards higher portfolio
investment in CE and we look in some detail at foreign participation in the region’s markets.
■
Finally, we look at the performance of USD and EUR spreads and the yields of local
currency bonds and make some recommendations for each currency group
[email protected]
1. Outlook for 2017 and review of 2016
In 2017, we expect global rates to be on the rise and potentially steeper EUR curves,
particularly at the long end. The increase in rates may be driven by less accommodative
monetary policies on both sides of the Atlantic and the rise in inflation expectations, which in
the US initially moved upward after the US elections. Our G10 strategists target 3% for the US
10-year and 0.8% for 10-year Bunds by the end of 2017, which is a rise of 40bp and 90bp
from current levels. This increase in rates will result in lower returns in EM fixed income with
higher volatility than over the past years of monetary accommodation.
We therefore remain cautious about EM fixed income in general and about increasing
duration in particular. EUR-denominated bonds are potentially at a higher risk of selloff should
the current differential between Bunds and US Treasuries narrow from current levels which
are at historic highs. For the same reason, local currency bonds will encounter headwinds in 2017.
Headline inflation is on the rise across the CEE region, much of which is due to base effects,
with an average increase over the last six months of 130bp (excluding Russia and Turkey).
Core inflation fared better across the region and recent trends show significant variation
across countries. Russia and Turkey ended the year with lower inflation rates and Russia’s
will get close to target by the end of 2018. On the other hand, despite lower recent headline
readings, Turkey saw in Q4 one of the sharpest depreciations in its recent history and we
expect headline and core inflation to be on the rise as the currency depreciation is passed
through to consumer prices. We expect, on average, that inflation will pick up by 175bp by the
end of 2017 and continue increasing in 2018, albeit at a slower pace.
Despite the return of headline inflation, we expect central European central banks to remain
on hold for most of 2017 as inflation will remain below target in 2017 and for much of 2018 for
most countries. Growth rates at a regional level are expected to increase in 2017 for most
countries and flatten in 2018. With global rates on the rise, headline inflation picking up and
no deceleration in sight, the outlook for CEE-EU local currency in CEE is not as favorable as
in the beginning of 2016 and local curves may steepen during the year.
UniCredit Research
page 14
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
2016 was a below-average year in terms of EM fixed-income returns, with USD bond returns
annualized volatility of 6%p.a. compared to 7% p.a. in the period 2000-2015. Most of the
shortfall in performance was due to a poor 4Q16, with the CEE region’s selloff overdone. In
CEE, this gap was even more pronounced, with the volatility in 2016 half to one-third of that
observed to 2015. With possibly both USD and EUR core rates on the rise and a return of
headline inflation in the region, it is safe to expect that volatility will increase in the year ahead.
ASSET CLASS RETURNS AND FI COUNTRY RETURNS
Asset class returns and volatility in 2016
USD and local performance of EM sovereign debt
20%
US HY
LATAM Bonds
20%
25%
Turkey
Poland
Lithuania
Latvia
Romania
Europe Stocks
15%
Philippines
10%
Serbia
US Tsy 10y
-10.0%
Hungary
-5%
5%
0.0%
Mexico
4%
0%
10.0%
0%
Bunds 10y
2%
20.0%
5%
Croatia
6%
30.0%
Russia
EM Europe
Bonds
8%
EM Sovereign
CRB
EM Stocks
Indonesia
10%
40.0%
10%
US Stocks
EM Corporate
50.0%
15%
EM Local
12%
70.0%
60.0%
SA
14%
Local (rs)
20%
16%
Brazil
18%
0%
USD
25%
-20.0%
Source: Bloomberg, UniCredit Research
Following the US elections, higher global rates and a stronger USD have been flagged as
major risks to EM fixed income. In Central Europe, we estimate that the sensitivity of long-term
rates to changes in US Treasury yields is relatively low compared to other countries. For
bonds in local currency, US Treasury betas are low and in most cases explain little of the
variability in the local rate. Turkish and Mexican local and USD yields have the highest
sensitivity to US rates of all large EM countries (and in both cases the US rate explains in
excess of 2/3 of the countries’ rates variability). In Turkey, the sensitivity was amplified by
domestic concerns. CEE local yields’ sensitivity to Bunds was higher in the last year than in 2015
(and highest in Russia and Turkey), but it also explained little of the total variability in local rates.
Looking at the US Treasury yield widening after the US election on November 8 as a way to
gauge US rates’ sensitivities, we reach a similar conclusion: the highest sensitivities in local
yields are in Mexico and Turkey, with the group of CEE countries overall less sensitive than
other EM countries. In the case of USD spreads, much of the initial widening has been
corrected after the peak on 14 November.
UniCredit Research
page 15
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
BETAS TO 10Y RATES AND RATES MOVES AFTER US ELECTIONS
Betas of USD and LC debt to 10Y US Treasury and Bunds
USD vs UST
3.5
LC vs UST
USD spread and LC yield widening from US election to end of the year
LC vs Bunds
3.0
LT
TU
MX
RO
BR
HU
PL
ID
SB
SA
HR
PH
RU
2.5
2.0
1.5
1.0
0.5
0.0
Bulgaria
Czech
Croatia
Hungary
Russia
Serbia
Poland*
Indonesia
Philippines
Romania*
Mexico*
Brazil
SA
-1.0
Turkey*
-0.5
USD spreads
Initial
Net
Widening*
43
27
56
24
71
22
65
21
50
20
46
19
25
17
55
11
55
7
74
5
51
4
31
-1
4
-40
MX
TU
PH
ID
SA
RO
PL
HR
LT
BR
SR
HU
RU
LC
Initial
Net
Widening*
113
134
107
91
75
61
94
60
51
31
28
26
35
25
12
17
18
15
107
14
6
3
29
-15
27
-18
Coefficient on UST10Y or Bund 10Y of a regression between the USD or local-currency country yields against UST or Bund 10Y for 2016.
* For USD bonds, the initial widening was up to 14 November 2016 and for LC bonds most widening took place before November 28
Source: Bloomberg and UniCredit Research.
Historically, USD strength has been a negative factor for emerging markets. USD strength
was one of the factors leading to the wave of defaults and restructurings in Latin America in
the 80s 2 and of the Asian defaults at the end of the 90s. In both cases, the accumulation of
debt in foreign currency was one of the major causes leading to defaults.
The US dollar has appreciated 20% in REER terms since 2014 (trade-weighted), leading to a
prolonged decline in EM local currency bond returns but without a significant increase in
defaults of either sovereign or corporate issuers. The USD REER is about 1 standard
deviation above its average since 1972 and probably overvalued based on fundamentals. We
therefore don’t expect a significant increase in the USD and do not consider this as a major
risk affecting our markets in 2017, barring an intentional policy to promote a stronger USD.
We study the effect of the USD on the USD yields of a panel of EM countries including seven
in the CEE region and control for other factors such as domestic inflation, external debt, the
VIX index and US Treasury 10 year yields 3. We find that the average sensitivity to the USD is
small compared to other factors such as inflation and we observe that the yields of the USD
bonds of CE countries have lower sensitivity than that in other EM countries.
1.
Flows into EM fixed income markets
We expect flows to EM in 2017 to remain challenging given the global backdrop as a
continuation of the trend we have observed over the last few years. Non-resident flows to EM
countries were poor in 2016, ending the year at about USD 40bn, the lowest portfolio inflows
observed in recent years. According to IIF estimates, fixed-income portfolio flows would have
ended 2016 with at least USD 23bn in outflows, with the trend accelerating after the US elections.
In contrast to net portfolio inflows into EM countries, 2016 was the third best year in the last
decade in terms of inflows to EM fixed-income dedicated funds with net inflows of USD 23bn.
Only the years of 2012 with USD 38bn and 2010 with USD 35bn exceeded this amount.
2
Which led to the US-sponsored debt restructurings via the Brady plan and the birth of emerging market bonds.
We run a estimate a panel two-stage-least-square (2SLS) model using as instruments the one period lag in EM USD bonds yield, Brent prices and the ratio of FX
reserves to short-term external debt.
3
UniCredit Research
page 16
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
According to EPFR data, investment fund net assets allocated to EM fixed-income at USD 311bn
increased by 27% in 2016 and have doubled since 2011.
The year saw a return of ETFs after three years of lackluster inflows into the asset class. ETF
flows of USD11.2bn accounted for half of total fund inflows and with net assets of USD 39bn, or
13% of the total, their importance in the market markedly increasing compared to the last few years.
EM FI FUND ASSETS
Net assets of EM FI funds by asset class
Total
Sovereign
Net assets of ETF FI funds (in % of total)
Corporate
Mixed sov+corp
14
350,000
12
300,000
10
250,000
8
200,000
6
150,000
4
100,000
2016
2016
2015
2015
2014
2013
2013
2012
2012
2011
2011
2010
2009
2009
2008
2008
2007
2006
2006
2005
2005
2004
2004
0
2007
2008
2008
2008
2009
2009
2009
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
2
50,000
0
ETF FI funds
16
400,000
Source: EPFR and UniCredit Research
2.1 The increased importance of ETFs
We expect the role of ETFs in the market to continue increasing over the following years as
EM products offer liquidity to investors and the fees are generally lower than for comparable
passive funds. We believe that, as EM allocations become more mainstream and the assets
more widely traded, ETFs will become more important as the liquidity gap narrows between
the ETF product and that of its underlying constituents.
The landscape of EM fixed-income ETFs is very concentrated with the top 3 accounting for
about ½ of total assets, the top 6 for 75% and the top 10 for 90%. In terms of the target asset
class, about 90% is invested in sovereign bonds and 7% in corporate bonds, with the rest
invested in mixed strategies. Most of the ETFs invest in foreign-currency bonds and just about
¼ target local-currency or mixed-currency strategies.
FLOWS TO EM FUNDS
YTD flows to all EM FI funds
2012
USD mn
YTD flows to EM FI ETF
2013
2014
2015
2016
2013
2014
2015
2016
18,000
40,000
16,000
30,000
14,000
12,000
20,000
10,000
10,000
8,000
0
6,000
4,000
-10,000
2,000
-20,000
0
-30,000
-40,000
2012
USD mn
50,000
-2,000
-4,000
Jan
Mar
Apr
May
Jun
Jul
Aug
Sep
Nov
Dec
Jan
Mar
Apr
May
Jun
Jul
Aug
Sep
Nov
Dec
Source: EPFR and UniCredit Research
UniCredit Research
page 17
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Most EM fixed-income ETFs were launched after 2008 and net asset build-up only took place
in size from 2011, so the product remains relatively untested during times of crisis. We look at
two metrics for assessing the risks so far: the evolution of net assets during periods of net
asset loss greater than 10% and the price to NAV ratio.
The period after 2011 has seen at least three episodes of cumulative net asset drawdowns of
10% or more:
(1) In 2013 during the “taper tantrum”: aggregate fund net assets began declining in mid-May
and only recovered prior AUM levels by August 2014. ETFs sold off first and lost as much as
¼ of total assets by the end of June but sharply recovered thereafter. In contrast, the
drawdowns from other fund products were smaller initially and investors weathered the initial
selloff relatively more calmly;
(2) The period from mid-July 2015 until the beginning of 2016 saw net asset losses unrelated
to EM performance. During this period, ETFs also sold off more aggressively initially but also
recovered faster than the rest of EM FI funds, eventually losing proportionally less assets than
other investment funds.
(3) The period after US elections saw a drop in ETF net assets of about 15%, while that for
other investment funds was about half of that.
It seems that a similar pattern was followed during the three periods highlighted where the
selloff is originally sharper for ETFs but also the subsequent recovery, with ETFs eventually
recovering AUM faster. The fixed-income environment for 2017 is a challenging one, but we
may see a similar pattern of recovery in AUM in 2017.
ETF BEHAVIOR DURING CRISES
Net asset drawdowns (% change)
0
iShares EM Bonds ETF premium to NAV
iShares USD Emerging Market Bonds
EM FI funds net asset drawdown (% change)
15
Price/NAV discount or premium
-0.05
10
-0.1
5
-0.15
0
-5
-0.2
Total ex-ETF
ETF
EMBIG
-0.25
-0.3
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
-10
Dec-16
-15
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Source: Bloomberg and UniCredit Research
The other risk indicator we monitor is the ETF’s premium to NAV, which in the period after 2008
has behaved pretty well for the largest ETF funds. The iShares Emerging Market Bond ETF is
the longest existing ETF, the largest in terms of AUM and therefore representative of the EM
ETF asset class. We observe that from 2010 the premium/discount to NAV was never larger
than 2.5% and averaged a premium of 41bp. During the “taper tantrum” with increased selling
pressure, the maximum discount to NAV was 2%, and in the days after the US elections the
discount exceeded 1.5% for only two days and returned to a premium in the days thereafter.
Since 11 November 2016, the discount to NAV for other ETF funds in the top 10 also never
exceeded 2% for more than a couple of days, in the face of a 15% loss in total assets,
suggesting an orderly liquidation.
UniCredit Research
page 18
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
In conclusion, there is no evidence so far that ETFs have been disruptive to the liquidity of the
asset class and we see the ETF funds share increasing. This highlights the need for alpha
generation on the part of active portfolio managers in order to face the additional competition.
2.2 Foreign participation in fixed-income markets
According to the IMF’s CPIS Survey and the US Treasury’s TIC data, US domiciled investors
own about ¼ of the bond portfolio investment in EM and about 1/5 of the bonds in the CEE
region (with Germany and Luxembourg-domiciled investors owning about 14% each). In 2017,
foreign participation may remain at current or lower levels as global and domestic rates inch higher.
The information up to September 2016 shows that bond investments in the top 30 countries
(which represent about 90% of the EMBIG index weight) portfolio investment increased by
13% YTD, with 50% of the increase in investment going to LatAm. By country, the largest
increases in holdings were in Argentina (+60%), South Africa (+35%) and Indonesia (+26%),
and after 19 months of net reductions in CEE bonds’ holdings, US investors began increasing
positions once again. However, excluding Russia and Turkey, bond portfolio investment in the
CEE region actually declined slightly compared to the end of 2015.
In CEE, the largest position increases by US investors were in Russian and Romanian bonds,
with holdings increasing by 37% and 13% during the year. Although investors began
accumulating Turkish bonds at the beginning of 2016, the data up to September show that
they reduced positions after the coup in July, and CBRT data suggest that they also reduced
positions during 4Q16.
Eurozone-based investors’ position in CEE was flat in the first half of the year, with the largest
position reduction in Hungary and Poland (down by EUR 1.6bn and EUR 0.9bn, respectively),
but offset by position increases in Romania and Bulgaria. EZ investors also accumulated
positions in Russia, but the portfolio investment stock is still about 20% below the presanctions’ peak in 2Q14. Further foreign investor participation may be limited unless
sanctions are removed.
FOREIGN PARTICIPATION IN EM FIXED INCOME
Foreigners’ holdings of local government debt (12-month range, in %)
50
One-year range
%
US investors’ bond portfolio investment changes in 2016 (USD bn)
8,000
Current level
7,000
45
6,000
40
5,000
35
4,000
30
3,000
25
2,000
20
1,000
15
0
10
Peru
Indonesia
South Africa
Malaysia
Poland
Mexico
Hungary
Czech
Russia
Colombia
Romania
Turkey
Thailand
Brazil
Hungary
Serbia
Lithuania
Croatia
Romania
Turkey
Poland
Russia
South Africa
Colombia
Brazil
-2,000
Indonesia
0
Mexico
-1,000
Argentina
5
Source: National sources, TIC and UniCredit Research
UniCredit Research
page 19
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
2.
Redemptions and issuance for 2017
2.1 Redemptions
We estimate that the sovereign bond-related debt service (including principal and interest) will
amount to USD 140bn in 2017, of which USD 32bn is in foreign currency. International bond
redemptions will be concentrated in the periods between February to April and September to
November. Turkey will see the largest bond debt service requirements accounting for ¼ of
total international redemptions at USD 7.1bn, followed by Russia and Poland with
redemptions in excess of USD 5bn each. Local currency bond redemptions will amount to
USD 108bn, with Turkey also representing ¼ of total regional redemptions.
REDEMPTIONS IN 2017
Redemptions of international bonds (in USD mn equivalent)
Redemptions of local currency debt (in USD mn equivalent)
CZ+HR+LT+LV+RO
SB
HU
PL
RU
TU
6,000
5,000
16,000
14,000
12,000
4,000
10,000
3,000
8,000
6,000
2,000
4,000
1,000
Dec-17
Nov-17
Oct-17
Sep-17
Aug-17
Jul-17
Jun-17
May-17
Apr-17
Mar-17
Feb-17
Dec-17
Nov-17
Oct-17
Sep-17
Aug-17
Jul-17
Jun-17
May-17
Apr-17
Mar-17
Feb-17
0
Jan-17
2,000
Jan-17
0
CZ+HR+LT+LV+RO
SB
HU
PL
RU
TU
Source: Bloomberg and UniCredit Research. Serbian local currency redemptions include Central Bank bills.
2.2 Issuance for 2017
We expect net bond issuance of EUR 57.9bn in 2017 (gross issuance of EUR 125bn and
redemptions of EUR 67bn) in the major countries in our region, with Poland and Turkey the
most active in the Eurobond market with approximately EUR 6bn each.
Bond
Gross Bond Issuance
Net
Redemptions
Total
o/w: Intl Bonds
Issuance
Poland
18.5
37.7
6.3
19.2
Turkey
18.8
35.3
5.7
16.5
Russia
7.7
23.6
2.8
15.9
Romania
3.6
7.9
2.0
4.3
Hungary
3.4
5.5
1.0
2.1
Ukraine
2.2
4.1
0.0
1.9
Croatia
1.3
1.9
1.5
0.6
Bulgaria
0.4
0.3
0.0
-0.1
Serbia
2.6
2.2
1.0
-0.4
Czech
8.5
6.4
0.0
-2.1
67.0 124.9
20.3
57.9
Total
Source: ministries of finance, UniCredit Research
UniCredit Research
page 20
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
3.
Rating outlooks for 2017
Emerging markets’ foreign currency (FC) ratings drifted lower in 2016, with the unweighted
average rating in the BB area. FC ratings in the CEE-EU region were relatively unchanged,
but with some notable rating actions during the year, such as Hungary and Serbia on the plus
side and Turkey on the verge of losing investment grade by the three major agencies.
In 2017, we expect Bulgaria to be upgraded by S&P to investment grade after the downgrade
below investment grade in December 2014. Serbia may be upgraded by Moody’s and S&P by
one notch and Fitch may assign it a positive outlook. We also think that the Czech outlook
will be changed to positive by Moody’s and Fitch.
Russia’s and Croatia’s outlook may be improved, with the outlook changed to stable by
Moody’s. We expect no changes to Romanian and Slovakian foreign currency ratings and we
think that Turkey may be downgraded by Fitch as early as the end of January.
RATINGS AND SPREADS
Z-spreads per rating and duration buckets. Averages and 1st and 3rd
quartiles
Rating average per region
B150
140
B+
Duration 2-6
A
BBB
BB
B
130
BB120
BB
110
BB+
100
BBB90
BBB
Duration >6
A
BBB
BB
B
80
BBB+
A-70
EM
LATAM
A 60
A+50
2007
2008
2009
CEE (EU)
Asia
2010
2011
2012
CEE (Non-EU)
Africa
2013
2014
USD Z-spreads
Average
1Q
3Q
94
131
246
475
63
76
205
387
118
174
301
580
138
224
388
491
165
313
463
280
452
523
EUR Z-Spreads
Average
1Q
3Q
5
160
232
391
-3
128
17
189
39
245
245
22
194
60
282
2015
Spreads per rating and duration buckets are calculated using a sample of 381 actively traded bonds issued by countries typically classified as emerging markets.
Source: Bloomberg, rating agencies, UniCredit Research
UniCredit Research
page 21
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
4.
USD Bonds’ performance
4.1 The year in review
EM sovereign bonds denominated in USD returned 10% in 2016. This was by all accounts a
very good performance as it topped the 8.9% compounded return of the index between 1998
and 2015 and was the highest annual return since 2012. The year’s performance was divided
into two, with the first three quarters returning solid positive returns and the last quarter being
negative for almost all EM countries with the exception of the higher yielding ones such as
Ukraine, Ghana and Nigeria.
Returns were higher among the lowest-rated sovereign credits, with the BB and B-rated
countries providing returns in excess of 10% p.a. and the higher-rated countries showing
gross returns below 5% p.a. From a geographical point of view, the best performance was
shown by the very high-yielders Venezuela and Ghana, which began the year with spreads in
excess of 1000bp, with total returns in excess of 50% and 33%, respectively. The lowest
performing USD sovereign bonds were to be found in Turkey with a total return of -1% for the year.
In 2016, the CEE region’s USD bond returns were overall the lowest in EM at about 6% p.a.,
while on average exceeding 14% p.a. for Latin American and African sovereign issuers.
However, European credits, on aggregate, provided the best longer-term risk-adjusted returns
with an average Sharpe ratio of 0.7x over the last five years. This is higher than the riskadjusted returns for the EM composite index and it is double that of the LatAm region. Since
2012, the improved macroeconomic picture in the region has led to lower volatility of returns
and higher risk-adjusted returns than other EM debt.
The longer-term performance within the regions is however far from homogeneous. Turkey is
at the bottom of the list with negative returns and higher volatility than the EM composite,
while Russia and Croatia delivered returns in excess of 8% p.a. with lower volatility than
regional peers.
USD denominated bonds YTD Total Return (in %)
Maturity
BG
RO
18
HU
HR
LV
LT
2%
19
3%
5%
20
3%
6%
2%
3%
7%
2%
21
22
2%
23
2%
4%
8%
24
3%
4%
9%
RU
SB
TU
2%
5%
2%
3%
1%
5%
2%
6%
2%
2%
4%
RO
HU
HR
2%
1.2
2.8
0.7
2.2
0.1
0.7
2.0
0.3
1%
2%
2%
0.1
7%
0%
1%
0.2
0.5
1.7
0%
1%
0.2
0.5
1.8
0%
LV
LT
0.4
1%
RU
SB
TU
0.8
1.9
0.5
0.9
-0.2
0.9
-0.1
0.9
0.1
1.8
0.2
0.2
4%
28
1%
30
1%
34
-3%
15%
43
17%
45
0.0
0.0
1.2
-0.3
-0.4
-0.3
-0.3
-7.1
-0.4
-2%
1.1
-0.6
-0.8
0.3
-1%
-1.4
-0.8
-0.6
-3%
42
0.2
-0.1
-1%
7%
0.4
PL
1.2
0%
26
0.8
-0.6
1.5
-3%
1.5
-5%
-0.4
-0.6
In gray bonds which issued in 2016
UniCredit Research
BG
6%
25
41
3%
YTD Sharpe ratio (w/ 10y Bunds)
PL
Source: UniCredit Research
page 22
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
4.2 What we like in USD
On a relative valuation basis, Turkey appears mispriced against its rating peers, as the USD
Z-spreads are at the higher end of the spreads observed for BB-rated sovereigns.
In CEE-EU, Romania and Hungary trade at similar levels across the curve, but we prefer
Hungary based on a continuation of the improvement in its fiscal and external metrics.
Hungary has lower budget balances and a declining public debt to GDP ratio and also shows
the largest current account surplus of all major emerging markets. The net IIP position has
stabilized at about -60% of GDP and it is worth noting that it was twice this level in 2009. In
the Baltics, Lithuania trades at spreads not commensurate with its rating in the context of a
declining public debt and one of the highest primary balances in the region. It also hasn’t
retraced much of the spread widening after the US elections, perhaps due to geopolitical
considerations, which we believe are overstated.
USD BOND CHARTS
Investment grade rated issuers
Issuers rated below investment grade
250 A s of December 28, 2016.
440 As of December 28, 2016.
400
360
150
USD Z-spread (in bp)
USD Z-spread (in bp)
200
100
50
0
-50
320
280
240
45
200
160
120
80
0
2
4
6
8
10
12
14
40
Modified Duration
Hungary (Baa3/BBB-/BBB- | 100)
Rom ania (Baa3*+/BBB-/BBB- | 98)
Lithuania (A3/A-/A- | 70)
0
2
4
6
8
10
12
14
Modified Duration
Poland (A2*-/A-/BBB+ | 72)
Latvia (A3/A-/A- | 70)
Turkey (Ba1/BBB-*-/BBu | 112)
Serbia (B1*+/BB-/BB-*+ | 130)
Rus s ian Federation (Ba1*-/BBB-/BB+ | 108)
Croatia (Ba2*-/BB*-/BB | 123)
Source: Bloomberg, UniCredit Research
UniCredit Research
page 23
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
5.
EUR Bonds
5.1 The year in review
Within the CEE wider region, EUR-denominated bonds performed comparatively better than
USD-denominated bonds, with Bulgaria delivering returns in excess of 8% across the curve
and about 13% in the long end. Croatian bonds and Russian 20 bonds returned double digits.
EUR bonds yielded better risk-adjusted returns than USD bonds with similar maturities. In riskadjusted terms, the Sharpe ratios (vs. Bunds) several times exceeded that for USD bonds.
We believe that the performance of EUR-denominated bonds will encounter headwinds if the
current historically wide spread between Bunds and US Treasury bonds narrows, whether this
is a result of a reallocation of sovereign investment away from Bunds or because of a less
accommodative monetary policy by the ECB. We think that EUR spreads may have room to
narrow in countries such as Bulgaria and Croatia.
EUR-denominated bonds YTD Total Return (in %)
Maturity
BG
18
RO
HU
HR
LV
LT
1%
1%
4%
1%
0%
3%
3%
19
RU
2%
21
11%
2%
22
6%
23
8%
24
8%
25
TU
2%
1%
2%
1%
2%
5%
26
27
8%
28
10%
6%
35
13%
7%
36
13%
BG
RO
HU
HR
LV
LT
2.0
3.3
5.1
0.8
0.2
3.3
1.3
1%
3.7
3%
4.0
3.0
3%
3%
5%
4%
2%
-4%
4%
6%
7%
0%
TU
0.4
0.6
0.5
0.7
1.0
0.4
2.0
1.6
2.5
-4%
3.4
1.9
-1%
2.0
1.1
3.1
PL
1.0
3.4
4%
9%
SB
0.3
2.1
1.2
3%
RU
2.9
3.3
3%
10%
5%
YTD Sharpe ratio (w/ 10y Bunds)
PL
0%
2%
20
SB
1.3
1.6
1.8
0.9
1.7
1.6
0.9
-3.9
1.4
1.5
0.8
-3.2
1.6
0.0
-0.2
1.7
46
-5%
-1.9
55
-3%
-0.3
In gray bonds which issued in 2016
Source: UniCredit Research
5.2 What we like in EUR
The belly of the curve, in the 4-7 duration range, offers the best roll-down in Z-spread terms.
EUR curves of lower-rated credits Romania and Bulgaria are very steep compared to higher
rated ones, but we would hesitate to recommend longer duration positions until we have more
clarity in respect to the yield differential between US Treasury bonds and Bunds.
On credit metrics and scarcity value, Bulgaria offers a good pick versus higher-rated credits
such as Poland, with a Z-spread twice as high as the latter in the belly but with low liquidity. In
Croatia we like both the EUR and USD spreads supported by fiscal consolidation and
improvement in the foreign currency rating outlook.
UniCredit Research
page 24
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
EUR BOND Z-SPREADS
Mid-IG issuers
100
Low-IG issuers
As of December 28, 2016.
250 As of December 28, 2016.
80
200
EUR Z-spread (in bp)
EUR Z-spread (in bp)
60
40
20
0
-20
150
100
50
0
-40
0
2
4
6
8
10
12
-50
14
0
2
4
6
Modified Duration
Lithuania (A3/A-/A- | 70)
Poland (A2*-/A-/BBB+ | 72)
10
12
14
Modified Duration
Latvia (A3/A-/A- | 70)
Slovenia (Baa3*+/A-/A*+ | 73)
Romania (Baa3*+/BBB-/BBB- | 98)
Hungary (Baa3/BBB-/BBB- | 100)
The score in parenthesis is an average rating score computed using ratings and outlooks.
6.
8
Bulgaria (Baa2/BBB-/BB+ | 100)
Source: Bloomberg, UniCredit Research
Local-currency bonds
7.1 The year in review
The GBI-EM, an aggregate EM local currency index, posted a USD-equivalent return of
11.5% p.a. in 2016, well above the average annual return of the index since 2001 of 7% p.a.
In USD-equivalent, Russia, Brazil and Colombia provided the best returns, with Turkish,
Mexican and Nigerian the worst performing ones.
In the CEE region, the EUR-equivalent performance of local currency bonds was better than
that of international bonds denominated in EUR, albeit with slightly higher volatility. Russia
was the star performer, delivering a 40%+ total return in EUR equivalent, followed by Croatia
which performed well in the 10-year maturity area with a 13%+ return p.a., and HGBs which
returned between 7-10% p.a. in EUR equivalent.
Local currency bonds YTD Total Return (in %) (EUR equivalent)
Maturity
BG
RO
HU
HR
18
1%
7%
6%
19
2%
6%
20
4%
6%
7%
21
2%
10%
3%
22
2%
9%
43%
23
4%
8%
45%
24
25
4%
RU
SB
TU
PL
39%
3%
-6%
41%
4%
3%
6%
41%
7%
18%
13%
15%
5%
28
31
LT
9%
26
27
LV
RO
HU
HR
-1%
0.6
1.7
3.6
-6%
-1%
0.7
1.4
-9%
-1%
-5%
-1%
-9%
-2%
-9%
-2%
-9%
LT
RU
SB
TU
PL
2.3
1.1
-0.6
-0.2
2.3
3.9
0.8
1.9
3.7
0.7
1.7
2.3
1.0
1.5
2.3
2.3
1.3
-3%
-2%
9%
44%
-5%
5%
45%
-6%
-2%
0.9
1.0
-0.6
-0.2
-0.8
-0.2
1.9
-0.5
-0.1
-0.7
-0.3
-0.7
-0.3
2.3
4.5
5.4
1.3
1.4
1.0
-0.7
-0.6
2.8
-0.6
-0.4
-0.3
1.1
2.2
-1.8
0.8
2.2
-0.8
-1.1
-9%
In gray bonds which issued in 2016
UniCredit Research
LV
1.4
-9%
18%
37
YTD Sharpe ratio (w/ 10y Bunds)
BG
-1.2
Source: UniCredit Research
page 25
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
7.2 What we like in local currency
Most currencies in the region are at multi-year lows in terms of realized volatility and appear
relatively fairly valued in terms of a CPI-based REER index compared to its 10-year average.
By this last metric, Croatia, Poland and Russia are between 5-8% below average and Turkey
is below by about 15%, suggesting undervaluation. This pattern is also apparent in other
emerging markets, partly due to the strength of the USD, which in REER terms is above 1
standard deviation away from its average since 1972.
Turkey appears therefore as the only potential currency which remains substantially
undervalued. Since the economic crisis in 2001, TRY has rarely been at this level of
undervaluation on a trade weighted and CPI-adjusted basis. A combination of tighter
monetary policy with the current historically high real and nominal interest rates would make
TURKGBs a compelling trade for 2017, as yields get closer to 12% p.a. However, entering
into such a trade will remain highly speculative until the policy response becomes firmer.
Despite economic stagnation, Russia benefitted in 2016 from solid monetary policy, high real
rates and the RUB rising in tandem with oil prices. However, we still like Russian local debt on
the basis of our forecast for a higher oil price in 2017 of USD 60 per bbl, our expectation for
CPI inflation close to target by 2018 and continuation of the disinflationary process throughout 2017,
which makes current OFZ rates relatively high in real terms. The current wider levels in OFZs
compared to the beginning of 4Q make a good re-entry point. The RUB appreciated by 32%
in REER terms and is currently just below its 10-year average; therefore we expect lower
returns in 2017 compared to 2016 as the currency may be close to fair value; there is an
increased risk of domestic issuance and foreign positioning is heavy.
In CEE, Hungary and Romania have the steepest curves in the region, but we prefer HGBs in
the longer end based on our outlook for inflation in 2017, and in the belly as the MNB
continues to provide excess liquidity to the banking system. Of these two, we prefer HGBs in
the belly of the curve.
LOCAL CURRENCY CHARTS
Nominal rates and expected disinflation in 2017
10Y-1/2 Y rate differential in bp
350.0
10y LC Real
300.0
12.0
bra
tur
250.0
10.0
200.0
zaf
8.0
rus
idn
150.0
mex
100.0
6.0
4.0
0.0
pol
hrv
2.0
rom
hun
-50.0
Brazil
Russia
Indonesia
Mexico
SA
Philippines
400
Czech
300
Turkey
200
Change in CPI to 2017
Bulgaria
100
Serbia
0
Poland
-100
Croatia
cze
-200
Romania
-100.0
bgr
Hungary
0.0
-300
50.0
srb
phl
Source: Bloomberg, UniCredit Research
UniCredit Research
page 26
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
CEEMEA FX: Not all “Tantrums” need be the same
Kiran Kowshik,
EM FX Strategist
(UniCredit Bank London)
+44 207 826-6080
[email protected]
Main points
1. The “Trump Tantrum” will have a more differentiated impact on EM currencies
compared to the “Taper Tantrum”. Commodities and external balances are on a
better footing.
2. We prefer commodity exporters like ZAR and RUB over importers like TRY.
3. PLN will rally on renewed inflows in the absence of reserve accumulation. HUF
would require a strong recovery in financial flows to see a sustainable rally.
4. Following an initial selloff, EUR-CZK should grind higher once the floor is removed
in mid-2017.
5. We stay bearish on TRY even at oversold technical levels but would change our
view if the CBRT were to tighten policy significantly.
Nuanced on the EMFX view: Not all “tantrums” need be the same
For EM currencies, higher
commodity prices will partially
offset higher core yields
In our last quarterly update, we made the point that after 2Q16 ample global liquidity had
taken over as the driver of several EM currencies rather than the positive demand impulse
coming from China (see “CEEMEA FX: A liquidity driven rally” in September’s
4Q16 CEE Quarterly [pages 22-28]). The election of Donald Trump has seen markets price in
a strong fiscal policy response, better growth outcomes down the line and, as a result, sharply
higher nominal US yields. As per our prior 4Q quarterly diagnosis, this constitutes a global
liquidity tightening and should be, across-the-board, negative for EM currencies, especially
those countries with weak external balances and a high proportion of financing in US dollars.
Two reasons why we should
view the “Trump tantrum”
differently compared to the
“Taper tantrum”
However, the situation is now more nuanced in our view; while US yields are moving higher,
there are increasing signs of improvement in EM growth, particularly in China. In recent
months, we have seen firmer data on industrial activity (especially for “old” commodityintensive industries like construction), credit as well as commodity import volumes. This has
coincided with a strong bid under industrial metal prices, seen even before the outcome of the
US election. Our analysis suggests that modest rises in US real yields alongside signs of
reflation may be consistent with a positive view on a number of currencies, especially those of
commodity producers (see FX Perspectives: EM FX & the "Trump Tantrum" - why this time
could be different, 17 November).
EMFX: BETTER EXTERNAL BALANCES AND HIGHER COMMODITY PRICES COMPARED TO 2012-13
Chart 1:
Industrial metals provide a positive EMFX signal
EMFX index
Chart 2: The average EM C/A position has improved
since the 2013 taper tantrum
CRB raw industrials index (rs)
1,750
600
1,700
2.0
-1.0
-2.0
Jun-17
Dec-15
Sep-16
Jun-14
Mar-15
Dec-12
Sep-13
Jun-11
Mar-12
Dec-09
Sep-10
Jun-08
Mar-09
Dec-06
Sep-07
Jun-05
Mar-06
Nov-16
Aug-16
Feb-16
May-16
Nov-15
Aug-15
Feb-15
May-15
Nov-14
Aug-14
Feb-14
May-14
Nov-13
Aug-13
Feb-13
May-13
Nov-12
Aug-12
Feb-12
May-12
Nov-11
350
* average reading of 16 liquid EMs that have released 3Q data
Dec-03
-3.0
But right now, commodities are rallying
Sep-04
1,400
Jun-02
400
Mar-03
1,450
1,350
0.0
450
Sep-01
2013 "taper tantrum" saw EM currencies fall
sharply, and in line with commodities which
had been falling for several months
1.0
Mar-00
1,500
500
Dec-00
1,600
1,550
3.0
550
1,650
EM average* current account (% of GDP)
4.0
Source: Bloomberg, MSCI, UniCredit Research
UniCredit Research
page 27
See last pages for disclaimer.
<date>
January 2017
Economics & FI/FX Research
CEE Quarterly
Here, we quickly point out two reasons why we should not view the “Trump Tantrum” as
having the same impact on EMFX as the “Taper Tantrum”. First, EM (and China) growth
prospects appear stronger now, as reflected in the surge in industrial raw material prices.
Back in mid-2013, EM currencies were trading far too high relative to the latter, which had
already been falling for several months (likely reflecting weakening EM growth prospects).
Instead, now we have a bullish divergence for EM currencies (chart 1). Second, the average
EM current account balance has improved substantially compared to 2013 (chart 2).
Our working assumptions for 1Q
Looking forward, there is a high degree of uncertainty over how things pan out, especially on
the future path of US policies. These relate to fiscal policy, trade policy as well as how US
monetary policy shifts. For our base-case scenario, we assume the following: 1. US 10Y
yields grind up to 3.00% by end-2017, 2. No punitive trade tariffs are implemented and China
does not retaliate via step-wise devaluations, and 3. Chinese authorities continue to push the
pedal on fiscal expansion to ensure growth continues “at any cost” ahead of the crucial
19th National Congress of the Communist Party of China to be held sometime in 2H17
(with the date still to be determined). Overall, under such assumptions, we maintain our
preference for the commodity exporters (RUB and ZAR) relative to the importers (TRY).
What about the risks?
We can think of a few risks which could hinder the cited backdrop. We list three here, all of
which pertain to the evolution of US policies.
Hopes of a fiscal stimulus
are dashed
First, Trump significantly dashes expectations of a fiscal stimulus focusing on “infrastructure
build”. This would place commodities under some pressure and weigh on RUB and ZAR. At
the same time, lower US yields may result in some respite for the currencies of commodity
importers dependent on fixed income inflows. In such a scenario, commodity exporter
currencies could suffer relative to commodity importers (including PLN, HUF and TRY).
A more protectionist turn in US
policies will initially hurt
commodity exporters
Second, Trump moves to highly protectionist trade policies. Apart from CNY and MXN, this
seems underpriced in other currencies; TWD and KRW – two potential casualties given their
status as serial currency manipulators and having very open economies – have held up quite
well so far. We would be less worried about the US labeling China a “currency manipulator”. A
much bigger concern would be the US slapping tariffs on Chinese imports, as this would
surely weaken China’s trade balance (one of the few strong components of the country’s
balance of payments at present) significantly. Note that that China’s trade balance with the
US contributed to over 30% of China’s total trade balance.
In such a scenario, initially we would expect: 1. A sharper weakening in CNY, 2. Selloff in
Asian currencies (like TWD and KRW- heavily linked to China via supply chains), and
3. Some weakness for EM commodity producer currencies as markets price in the outcome
as a negative Chinese growth shock. That said, while numbers 1 and 2 seem like reasonable
longer-term market responses, we see number 3 as temporary. This is because we believe
that authorities could well respond to weaker external demand with even more fiscal stimulus
targeted even at “old” and commodity-intensive industries to shore up growth (as they have
recently). Eventually, this should allow EM commodity currencies to recover.
De-regulation of the US energy
sector would weigh on RUB
UniCredit Research
Third, a further de-regulation of the US energy sector could place energy prices under more
pressure and provide headwinds for the Russian ruble and could help oil importers like the
Turkish lira (our least favored CEEMEA currency) as well as the Hungarian forint. However,
our base-case scenario remains for energy prices to grind higher.
page 28
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
PLN appreciation pressure
may increase…
A recovery in portfolio flows has seen Poland’s broad basic balance of payments (BBoP)
recover and signal appreciation pressures. We assume that the appreciation pressure builds
up further next year as EU fund inflows recover strongly. That said, this year such pressures
have not been adequately reflected in the currency, and appear to have been absorbed by
rising currency reserves. Indeed, as a proportion of GDP, reserve accumulation is running at
an exceptionally high pace, last seen when PLN was at much stronger levels (at or below 4.00
on EUR-PLN – chart 3). Authorities seem to favor a weaker currency, but we assume
constraints, such as a negative cost of sterilizing such reserves, will see policymakers foster a
faster pace of appreciation next year should inflows improve. But the trend in reserves will be
a key one to watch, in our view.
…which could see a stronger PLN
if reserve accumulation is curbed
NBH liquidity policy may have a
diminishing impact on
depressing HUF in 1Q
The forint came under pressure in 4Q, in part on account of the NBH’s policies aimed at
increasing the banking sector liquidity surplus. We think such policies could have a
diminishing impact over 1Q17, with yields having already turned negative. However, we do
not think that EUR-HUF will break familiar ranges (300-320) anytime soon. The last time
EUR-HUF traded well below 300 on a sustainable basis was over 2012 and 2013. There are
two important factors which support the forint at this time.
Besides a strong C/A surplus, a
revival of portfolio inflows
would be a prerequisite for
EUR-HUF to sustainably break
below the 300-320 range
First, rates were much higher in Hungary over 2012-13; the 3M bill yielded some 300-600bp
over the comparable 3M bill in the euro area. That same spread currently is only minus 46bp.
The NBH seems quite comfortable in remaining dovish and will likely continue to hold such a
stance even as inflation rebounds. Secondly, just a few years ago (from 1Q12 to 4Q13), the
current account surplus was still quite strong, averaging 2.4% of GDP. But in addition,
financial inflows (portfolio plus FDI) were also solid at +3.2% of GDP. In contrast, over the
past two years (3Q14 to 3Q16), while it is true the C/A has firmed even further (averaging
3.5% of GDP), financial outflows (at -4.2% of GDP) have more than overwhelmed the C/A
surplus (chart 4). After July, foreign investor demand for local bonds increased sharply, but
recently enthusiasm appears to have waned. A strong improvement in financial flows may be
a prerequisite for a sustained break in EUR-HUF below 300.
Barring an initial dip, EUR-CZK
to be well supported after
removal of floor
Elsewhere, the EUR-CZK floor will likely be removed around June 2017 in line with the CNB’s
guidance. Barring an initial 3-4% decline (perhaps to 26.00), the cross should grind back
higher because of: 1. Somewhat higher global yields allowing the country to recycle the still
modest C/A surplus abroad, and 2. CNB will likely continue to maintain its intervention policy
even after the floor is removed. The nature of the financial inflows being seen going forward
will be crucial in determining how sustainable any EUR-CZK drop will be; the more
speculative, the greater the odds of a reversal higher in EUR-CZK, but if the inflows are stickier
flows (like FDI), EUR-CZK could stay under pressure requiring persistent CNB intervention.
PLN & HUF: INTERVENTION AND FINANCIAL FLOW PRESSURES IN FOCUS
Chart 3: Poland accumulating FX reserves at fast pace
even at weaker PLN levels
Official reserve assets (3M sum, % of GDP)
12
Chart 4:
HUF: Financial outflows have been fully re-cycling the C/A surplus
EUR-PLN (rs)
5
35
4.8
7
4.6
FDI plus Port inv. net inflow
C/A
4.2
330
310
25
290
2012-13: strong C/A and
financial inflows
4.4
2
EUR-HUF (rs)
both series in % of GDP,
3Q moving average
270
15
250
4
-3
3.8
5
230
3.6
Jun-17
Apr-16
Nov-16
Sep-15
Jul-14
Feb-15
Dec-13
Oct-12
May-13
Mar-12
Jan-11
Aug-11
Jun-10
Apr-09
Nov-09
Sep-08
Jul-07
Feb-08
Dec-06
Oct-05
3
May-06
Jun-17
Apr-16
Nov-16
-15
190
Financial outflows more than fully
re-cycling C/A surplus after 2015
3.2
Sep-15
Jul-14
Feb-15
Dec-13
Oct-12
May-13
Mar-12
Jan-11
Aug-11
Jun-10
Apr-09
Nov-09
Sep-08
Jul-07
Feb-08
Dec-06
Oct-05
May-06
Mar-05
Jan-04
Aug-04
-13
210
-5
3.4
As of October-end
Mar-05
-8
170
Source: Bloomberg, UniCredit Research
UniCredit Research
page 29
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
In the three most recent instances of strong intervention (4Q13, 3Q15 and now 3Q16), the
flows appeared to be of the more speculative variety, described under “other investments” in
the financial account. Net inflows here run in excess of 10% of GDP in all above instances.
We assume such flows are more prone to a reversal after an initial CZK strengthening as
positions are reversed. At the margin, we point out that higher global yields would place less
strengthening pressure on CZK, as seen in the reduced intervention pressure seen over November.
Despite three years of losses, most of the reasons for our bearish TRY view
(see FX Perspectives Turkish Lira - the fragile one) remain intact. The current account is likely
to remain under widening pressure as energy prices rise in the months ahead. Medium-term
momentum indicators on USD-TRY are at levels that preceded strong TRY relief rallies.
However, in all those instances, the real CBRT funding rate (deflated by inflation expectations)
was well north of 100bp (chart 5). Hence, we stay bearish on TRY even at current levels. A
sharp tightening from the CBRT (over 200bp) would make us more constructive on TRY;
however, such a prospect appears unlikely. A referendum on a move to a presidential system
(likely around April) will keep foreign investors wary of committing to anything but tactical positions.
Still no reason to for turn
positive on TRY
Strong CBRT response would
change our view
While there will be bouts of volatility, we continue to hold a constructive stance towards the
two commodity producers (RUB and ZAR). For South Africa, we think the year 2017 will be of
two halves; a better performance in 1H on strong terms of trade support and diminished
political and rating risk, followed by weakness from 2H on for exactly the opposite reasons.
The outperformance in the currency has come hand in hand with the outperformance of the
materials sector in equity markets (chart 6). The latter still flags some further gains ahead. For
Russia, higher energy prices should see the currency strengthen. The oil price (in RUB terms)
is now close to RUB 3400/bbl, the highest level in over a year and some 20% above the
government’s current budget assumption of RUB 2720/bbl. Hence, there is plenty of scope for the
RUB to catch up to rising terms of trade without sparking verbal intervention from the government.
ZAR will perform well in 1H
but 2H brings risks
We like RUB on higher
energy prices
TRY WILL CONTINUE TO UNDERPERFORM BOTH ZAR & RUB
Chart 5: Low real yields suggest USD-TRY unlikely to sell-off
despite overbought medium term technical conditions
14-week RSI on USD-TRY
90
Real CBRT average funding rate (rs)
USD-TRY overstretched on momentum ...
80
70
60
Chart 6: Outperformance of EM materials sector has come
hand in hand with a stronger ZAR
MSCI EM materials/broader index
850
110.00
0.62
650
0.57
550
0.52
90.00
0.47
80.00
450
50
ZAR NEER (rs)
750
350
100.00
0.42
40
250
30
150
20
50
0.32
-50
0.27
50.00
-150
0.22
40.00
Oct-16
Dec-15
May-16
Feb-15
Jul-15
Sep-14
Nov-13
Apr-14
Jan-13
Jun-13
Aug-12
Oct-11
Mar-12
Dec-10
May-11
Feb-10
Jul-10
Sep-09
Jun-08
Nov-08
Apr-09
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
0
USD-TRY to sell-off
60.00
Jan-08
But much higher real rates required to allow
10
70.00
0.37
Source: Bloomberg, UniCredit Research
UniCredit Research
page 30
See last pages for disclaimer.
<date>
January 2017
Economics & FI/FX Research
CEE Quarterly
Countries
UniCredit Research
page 31
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Bulgaria (Baa2 stable/BB+ stable/BBB- stable)*
Outlook – Given the country’s very strong position – with a solid growth momentum, twin
surpluses and abundant fiscal and FX reserves – the immediate impact of the GERB’s
government resignation on growth and policy making more generally would be rather small.
Growth is likely to remain strong in early 2017, and if the general elections don’t produce a
pronounced shift toward more dysfunctional policies, the economy is likely to reach its cyclical
peak in end of 2017 or in early 2018 – roughly two years after the rest of CEE-EU. Downside
risks have risen, in the meantime, as odds for a populist-nationalist coalition winning the
general elections have increased. If such a scenario materializes, the hard-won stabilization
of the energy sector would be most at risk, in our view.
Author: Kristofor Pavlov, Chief Economist (UniCredit Bulbank)
MACROECONOMIC DATA AND FORECASTS
2014
2015
2016F
2017F
2018F
GDP (EUR bn)
42.8
45.3
46.5
48.6
51.1
Population (mn)
7.2
7.2
7.1
7.1
7.0
5,937
6,330
6,528
6,871
7,252
GDP
1.3
3.6
3.4
3.6
3.4
Private Consumption
2.5
3.9
3.4
3.2
3.3
Fixed Investment
3.4
2.7
0.2
3.5
4.5
-0.8
2.9
-2.1
2.5
4.0
Exports
3.1
5.7
5.4
4.8
4.9
Imports
5.2
5.4
3.8
4.2
5.2
Monthly wage, nominal (EUR)
420
458
493
533
577
Real wage, change (%)
7.4
9.0
8.6
6.9
6.7
Unemployment rate (%)
11.4
9.1
7.7
6.8
6.0
Budget balance
-3.6
-2.9
1.7
-1.7
-2.3
Primary balance
-3.0
-2.0
2.5
-0.9
-1.5
Public debt
26.4
25.6
28.7
25.2
25.3
Current account balance (EUR bn)
0.0
0.2
1.7
1.2
0.4
Current account balance/GDP (%)
0.1
0.4
3.7
2.4
0.8
Extended basic balance/GDP (%)
4.4
6.8
8.0
7.0
5.6
Net FDI (% of GDP)
2.1
3.5
3.0
3.3
3.5
Gross foreign debt (% of GDP)
92.0
75.3
72.8
67.9
63.8
FX reserves (EUR bn)
16.5
20.3
22.7
24.3
26.2
6.5
8.0
9.2
9.2
9.2
CPI (pavg)
-1.4
-0.1
-0.8
1.1
1.6
CPI (eop)
-0.9
-0.4
-0.2
1.8
1.9
Central bank reference rate (eop)
0.02
0.01
0
0
0
USD/BGN (eop)
1.79
1.76
1.77
1.81
1.71
EUR/BGN (eop)
1.96
1.96
1.96
1.96
1.96
USD/BGN (pavg)
1.47
1.76
1.83
1.78
1.69
EUR/BGN (pavg)
1.96
1.96
1.96
1.96
1.96
139.8
136.9
136.0
135.4
136.1
-1.1
-2.1
-0.6
-0.5
0.6
KEY DATES/EVENTS
■ Mid-Feb: GDP flash estimates for 4Q16
■ Mid-Feb: Labor force survey data for 4Q16
■ End-Mar/early Apr: General government elections
GDP per capita (EUR)
Real economy, yoy change (%)
GDP GROWTH TO STABILIZE AT ROBUST LEVELS
Fixed Investments
Private consumption
Net Export
Public consumption
GDP, real growth
yoy (%)
5.0
3.6
4.0
Public Consumption
3.4
3.6
3.4
3.0
1.3
2.0
1.0
Fiscal accounts (% of GDP)
0.0
-1.0
-2.0
-3.0
2014
2015
2016F
2017F
2018F
CPI INFLATION WILL CONTINUE TO ACCELERATE
yoy (%)
3.0
2.0
Months of imports, goods & services
1.0
Inflation/Monetary/FX
0.0
-1.0
-2.0
-3.0
Dec-14
External accounts
Dec-15
Dec-16
Dec-17
Dec-18
Source: NSI, UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
Source: Eurostat, NSI, BNB, MoF, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 32
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Outlook remains favorable, but downside risks are rising
The sizeable fiscal boost,
which the public sector was set
to provide in the remainder of
the year, failed to materialize
Survey results point to
continued solid growth
momentum in 4Q16
Meanwhile, business and consumer sentiment proved very resilient in the period between the
first and the second round of the presidential election, which suggests that, apart from the
shift to growth-negative fiscal policy in 2H16, the short-term outlook for the economy is likely
to remain little changed. Indeed, the headline business sentiment indicator in November rose
to its highest level in seven years (see lhs chart), with the employment expectation
component being particularly buoyant across the board. Consequently, we decided to revise
our full-year GDP growth projection for 2016 downward to 3.4% yoy from 3.7%.
Consumption-driven growth will
remain strong in 2017 and 2018…
…but will slow down thereafter,
in the absence of growthenhancing reforms
…but will keep long-term
arrangements in relations
between UK and EU uncertain
for a protracted period of time
The upward revision of GDP
growth in 2017 also reflects
stronger investment
We expect a slight acceleration in growth in 2017 to 3.6% – just a notch higher vis-à-vis our
previous forecast. As before, domestic demand and individual consumption in particular will
be in the driver’s seat. The latter will mostly draw support from the solid rise in wages, while
the pace of job creation is forecasted to shift to a lower gear, as labor shortages constrain the
pace of economic expansion in some sectors. At the same time, there are indications of a
somewhat stronger global recovery. This is mostly attributable to the upward revision of our
GDP growth projection for the EA (to 1.5% from 1%), which reflects a shift in our perception of
the impact of Brexit, which we now see as an unfolding event with only a limited negative
impact in the short run, while keeping uncertainty elevated over the longer term. With the
trade shock from Brexit now less than feared, we expect real export volumes to rise close to
5% in 2017, much stronger than our previous projection in September for a 3.5% rise.
Meanwhile, the gap between EU funds absorption on a contractual and cash basis rose to a
whopping 27% (see the rhs chart), pointing to a large volume of infrastructure projects which
are about to enter the construction phase. Thus, after a slow start of EU projects from the new
planning period in 2016, public investments are likely to receive a significant boost in 2017
and thereafter.
Sentiment recovery to new post-crisis highs continues
ESI - total (rs)
Construction
Industry
Households
EU funds absorption is set to shift into higher gear
Services
60
150
40
100
20
50
0
0
-20
-50
-40
-100
-60
-150
Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16
35
% of total Programme budget
So far, the negative impact
from Brexit proved smaller
than expected…
The acceleration in GDP growth in 2H16 (pushing full-year GDP growth to 3.7% from 3.5% in 1H16),
which we anticipated in September, failed to materialize. Real GDP increased by 3.4% yoy in
3Q16, somewhat weaker than both the 3.6% 2Q16 outturn and our 3.7% forecast. While we
were right to expect that the record-breaking increase in tourist arrivals and wheat harvest
would boost output in 3Q16 and further in 4Q16, it was the jump in fiscal spending that we
foresaw three months ago where our forecast missed the mark. We were expecting that the
drag from investment was about to ease, as the budget balance was set to shift from a 3.7%
of GDP surplus in July to a 1.6% deficit in December, but the unexpected loss of the
presidential election forced the GERB government to resign and altered its fiscal plan for the
remainder of the year. We now expect a 1.7% of GDP budget surplus in December which, if
correct, would produce considerable fiscal tightening equivalent to 4.6% of GDP in 2016.
Gap between Contracted and Paid (2014-2020)
Programme period 2014-2022 - CONTRACTED
Programme period 2014-2022 - PAID
30
25
20
15
10
5
0
12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Months since start of Programme period
Source: Eurostat, EU funds-single information web portal, UniCredit Research
UniCredit Research
page 33
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
FDI stabilizing close to 3% of
GDP, as stronger EU inflows
and higher lending, all point to
more investment…
…boosting further both
productivity and exports
Solid corporate profits and improving productivity, coupled with signs that production capacity
is falling short to meet expected demand in a number of sectors, also bode well for
investment. Lending conditions are likewise improving, helped by a favorable combination of
abundant liquidity, the falling cost of borrowing and stronger provisions of credit from
multinational institutions such as the EIB, which have focused on the SME segment where
local players have been less eager to expand. With households more confident about the
stability of their income and job and banks willing to lend more, the outlook for the residential
construction sector has also improved (see lhs chart), which points to both more construction
activity and moderately higher house prices in both 2017 and 2018.
The number of employed in 3Q16 posted a decline yoy (-1%) for the first time since 4Q14, but
the big picture looks reassuring. This reflects a drop in the number of self-employed in
agriculture, which has been under way for years since jobs are migrating to sectors with
higher productivity, as well as job losses in construction, due to the slow start of EU projects
under the new planning period. As these trends are not entirely new, the drop seems also
driven by weaker job creation in the rest of the economy, including a limited number of sectors
facing labor shortages. We are not particularly worried, however, because job losses in
construction should be over soon, as more EU projects are started, and especially because
the fall comes against the backdrop of two consecutive quarters of an outstandingly strong
pace of job creation (1.2% on average in 1H16 yoy vis-à-vis 0.4% in both 2014 and 2015),
which makes the 3Q16 result look like a technical correction. Wage growth has been strong,
at the same time, while risks for price competitiveness appear well contained, given a recordbreaking C/A surplus which is estimated to come close to 3.7% of GDP at the end of 2016.
The drop in the number of
employed in 3Q16 looks like
a technical correction…
. ..as it comes against the
backdrop of exceptionally
solid job growth in the
preceding two quarters
The outcome of early
parliamentary elections is
highly uncertain…
…with odds for the emergence
of a populist-nationalist
coalition being significant
A potential shift towards
populist policies (similar to the
ones in 2013 – 14) could have a
far-reaching adverse impact
Hard-won stabilization of the
energy sector may prove only
short-lived if populists return
to power
Deceleration of growth-enhancing reforms following snap elections is the key downside risk to
our benign baseline scenario. This will amount to a major setback, given that the long-term
outlook is already dark as a result of sharply deteriorating demographics. Efforts to cut
corruption and overhaul sclerotic prosecution remain the key concerns, while there has been
only limited progress thus far in identifying the policy changes needed to make growth not only
stronger but also more inclusive. Given the country’s very strong position – with solid growth
momentum, twin surpluses and abundant fiscal and FX reserves – the risk for a sharp
immediate deceleration of growth is small. We think that any incoming government will keep
the budget deficit below the 3% threshold to avoid a standoff with European Commission that
may put access to EU funding at risk. If the past has any clue to offer, budget implementation
risks are likely to increase if socialists win, given their poor track record in boosting tax
collection. Previous socialist-led governments have also favored social spending over
investment, reducing infrastructure spending and co-financing for EU funds. In case of an
excessive reversal of regulations enacted by the outgoing administration, risks for the stability
of the energy sector may resurface. The past proclivity of socialist-led governments to
committing to large-scale energy infrastructure projects with huge corruption potential, which
at the same time make little sense on purely economic grounds, is also a risk worth watching.
Housing demand is on an upward trend
Drop in 3Q16’s hours worked seems driven by technical factors
Number of mortgages, yoy growth, 12m MA
Housing price index, yoy growth, 12m MA
%
%
50
40
2.0
30
1.5
20
1.0
10
Industry, contribution to growth
BPO, contribution to growth
Total, yoy growth
0.5
0
0.0
-10
-20
-0.5
-30
-1.0
-40
-1.5
-50
-2.0
-60
-70
Agriculture, contribution to growth
Construction, contribution to growth
Other services, contribution to growth
3Q07
3Q08
3Q09
3Q10
3Q11
3Q12
3Q13
3Q14
3Q15
-2.5
3Q16
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
Source: NSI, Registry agency, UniCredit Research
UniCredit Research
page 34
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: Value in scarcity
Javier Sánchez,
CEE Fixed Income Strategist
(UniCredit Bank London)
+44 207 826-6077
[email protected]
Bulgarian bonds will continue to have scarcity value in 2017 with a light redemption calendar,
the budget balance turning to a large surplus in 2016 and little additional issuance until 2019.
Local banks continue to be awash with liquidity and will continue to be strong bid.
In 2015 and 2016, the Sovereign tapped the 7, 12 and 20-years’ maturity in international
markets on several occasions, issuing EUR 3.1bn in 2015 and EUR 2bn in 2016. The
redemption calendar for 2017 is very light with EUR 1bn maturing in July, which was
prefunded in early 2016, and the following scheduled maturity is for 2022. Hence, the USD
curve will remain empty going forward, and the EUR curve relatively light.
Bulgarian EUR bonds have issue sizes slightly below other bonds in the region and the lack
of USD-assets will continue to limit international portfolio investment, particularly from the US.
US investors own approximately 8% of all the stock of foreign investment, which is about 1/3 of
the ownership in Hungary and Slovenia or half of the ownership in Romanian bonds. Eurobond
issues are mostly owned by local banks which are currently awash with liquidity; they hold the
largest positions in short-term maturities, while owning relatively less of longer-term bonds.
Bond scarcity has created value and rewarded foreign investors with a better performance in 2016
compared to rated peers Hungary and Romania, with the 2023 and 2028 bonds issued in 1Q16
performing particularly well. We continue to like BGARIA bonds for their scarcity value and
fiscal metrics and we prefer the belly of the curve, which currently has a lower ownership rate
by local banks.
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans
External borrowing
Bonds
IMF/EU/Other IFIs
Privatization/Other
Fiscal reserves change (- =increase)
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
-0.1
-0.8
0.7
0.5
0.5
0
0
0.2
0
0.2
-0.1
0.3
0.3
0
0
2.1
2.0
0.1
0
2.4
0.8
1.5
0.4
0.4
0
0
1.1
1.0
0.2
2.4
0.3
0.3
0
0
0.1
0
0.1
0
2.0
1.2
0.8
0.6
0.6
0
0
0.2
0
0.2
2.0
1.3
1.3
0
0
0.1
0
0.1
0
-2.4
1.9
0.6
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
EU structural and cohesion funds
Other
Change in FX reserves (-= increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
2016F
10.1
-1.7
3.9
0.2
0.5
3.2
7.9
10.1
1.4
0.9
5.4
2.1
0.3
3.0
7.7
1.4
-4.3
2.4
2017F
11.1
-1.2
4.7
1.1
0.4
3.1
7.7
11.1
1.6
-0.7
3.3
0.1
0.4
2.7
7.4
1.5
-0.4
1.6
2018F
10.7
-0.4
3.7
0.2
0.4
3.0
7.4
10.7
1.8
-0.2
2.8
0.1
0.5
2.2
7.2
1.6
-0.6
1.9
0
2.0
0
-1.0
0
0.0
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 35
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Croatia (Ba2 negative/BB stable/BB negative)*
Outlook – With GDP growth accelerating further in 3Q, boosted by a strong tourism season,
we revised our 2016 growth forecast to 2.7% from 2.2%. The momentum should continue
during 2017 based on private consumption growth boosted by envisaged tax reform, and
stepped-up investment growth driven by continuously improving EU funds’ absorption and
progress in easing obstacles to business. The fiscal position should improve further, but
challenges abound as the government is facing so far the most demanding year in terms of
public debt redemptions while global financial markets remain unsettled. We therefore find the
country’s strong extended basic balance position and prospects of credit rating improvements
in the medium term encouraging.
Author: Hrvoje Dolenec, Chief Economist (Zagrebačka banka)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
EUR bn
2014
2015
2016E
2017F
2018F
■ 28 Feb: 4Q GDP and FY 2016 flash estimate
■ 7 Mar: 4Q GDP and FY 2016 detailed release
■ 31 Mar: FY 2016 Balance of Payments
■ 20 Apr: EDP notification
GDP (EUR bn)
43.0
43.9
45.5
47.4
49.5
Population (mn)
4.2
4.2
4.2
4.2
4.1
10,146
10,419
10,875
11,375
11,950
GDP
-0.4
1.6
2.7
2.7
2.9
Private Consumption
-1.6
1.2
3.2
3.1
2.6
Fixed Investment
-2.8
1.6
4.2
6.0
6.7
Public Consumption
-0.8
-0.3
1.4
1.0
1.0
Exports
7.6
10.0
5.3
4.5
4.8
Imports
4.5
9.4
5.9
5.8
5.5
Monthly gross wage, nominal (EUR)
985
1,000
1,035
1,066
1,105
GDP per capita (EUR)
Real economy, change (%)
DOMESTIC DEMAND ACCELERATES
Household Consumption
Investments
Net Exports
6
Government Consumption
Inventories
GDP
4
Real wage, change (%)
0.4
1.8
3.5
1.4
2.0
2
Unemployment rate (%)
17.3
16.3
13.7
12.0
10.9
0
Fiscal accounts (% of GDP)
-1.6
-2
-4
Budget balance
-5.4
-3.3
-2.1
-2.0
-6
Primary balance
-1.9
0.3
1.3
1.3
1.6
-8
Public debt
86.6
86.7
85.2
83.6
81.5
Current account balance (EUR bn)
0.9
2.2
1.3
1.0
0.8
Current account balance/GDP (%)
2.1
5.1
2.8
2.1
1.7
Extended basic balance/GDP (%)
4.1
6.2
6.3
6.1
6.1
Net FDI (% of GDP)
1.9
0.4
2.2
1.9
2.2
108.4
103.8
96.8
94.4
91.9
12.7
13.7
14.0
14.8
15.8
8.0
7.9
7.8
7.7
7.6
-10
External accounts
-12
-14
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
HEADLINE INFLATION TO REBOUND
Gross foreign debt (% of GDP)
10
FX reserves (EUR bn)
8
Months of imports, goods & services
6
Inflation/Monetary/FX
4
CPI (pavg)
-0.2
-0.5
-1.1
1.3
1.5
CPI (eop)
-0.5
-0.6
0.0
1.7
2.0
3M money market rate (Dec avg)
1.08
1.24
0.90
0.90
1.00
USD/FX (eop)
6.30
6.99
7.08
6.88
6.49
EUR/FX (eop)
7.66
7.64
7.58
7.57
7.53
USD/FX (pavg)
5.75
6.86
6.79
6.98
6.62
EUR/FX (pavg)
7.63
7.61
7.53
7.51
7.49
104.1
100.4
104.9
106.9
107.9
-5.3
-3.6
4.5
1.9
0.9
2
Central bank target
0
Central bank reference rate (eop)
Jan-18
Jan-17
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
-4
Jan-07
-2
Source: UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 36
Source: Eurostat, NSI, UniCredit Research
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Domestic demand recovery encouraged by tax reform
With political uncertainty
behind us, the policy support
to the ongoing economic
recovery is back in focus…
…with tax reform and work
on removing obstacles to
business added to the fiscal
consolidation efforts
The recovery of the economy
is continuing…
…with private consumption
accelerating thanks to rising
employment, higher real
wages, debt write-offs and
income tax cuts…
…as investment, now led
by state-owned companies,
should be boosted by rising
EU fund absorption and easing
of obstacles to business
The recovery of the Croatian economy gained momentum through 2016 despite political
uncertainty that dominated most of the year, thanks to both expanding domestic demand and
the benefits of a strong tourism season. Fortunately, this uncertainty was replaced by a more
stable environment after snap elections. Following the formation of the new government again
around a coalition of two center-right parties, the largest one, HDZ, and the newest one,
MOST, economic sentiment recovered,, reflecting the benefits of broad-based economic
growth. The good news was that the new government continued to work on the reforms
announced in the spring by the old government: tax reform and improvements in the business
environment, while insisting on a fiscal policy that should result in a lower government deficit
and public debt.
During 2016, GDP growth accelerated to 2.9% yoy in 3Q, enjoying the benefits of larger
investment in private tourist accommodation capacity in previous years as well as
weaknesses in some of the major Mediterranean competitors hit by conflicts and migration.
The strong 2016 tourism season provided a tailwind for further investment in capacity as the
sector starts preparing for the 2017 season. However, growth in the tourism sector was
accompanied by an across-the-board expansion in all sectors and expenditure components.
Private consumption in 2016 has been supported by rising employment (1.8% yoy ytd), real
wages (2.7% yoy ytd) and declining household indebtedness, especially after the write-offs of
the principal of some housing loans as a result of the CHF loan conversion. These factors
boosted private consumption growth to 3%+ yoy in 2016. Improved economic sentiment,
combined with a decline in interest rates on savings, might trigger a decline in households’
gross saving rate, which reached more than 14% of disposable income in Croatia, well above
the average for CEE and even above the levels in some old EU members. Implementation of
tax reform during 2017 means cuts in personal income tax both through lower tax rates and
widened tax brackets where a lower tax rate is implemented, giving an additional boost to
private consumption and keeping the growth rate at the same levels as in 2016.
Domestic demand should also be buoyed by the envisaged reduction in the corporate tax rate
(from 20% to 18%, for SMEs to 12%). Investment already accelerated in 2016 following
capital spending in state-owned companies and improved EU funds’ absorption. Ongoing
progress on removing obstacles to business has also supported investment activity (and the
government just announced improvements in public procurement, introducing more flexibility).
The absorption of EU funding is an area where we already see progress and we expect
further acceleration in the short term, as Croatia is still missing sustainable momentum in
private investment, apart from that related to tourism.
LABOR MARKET DEVELOPMENTS IMPROVE…
Employment
Labour force
Unemployment rate (rs)
…BOOSTING DOMESTIC DEMAND GROWTH.
Real net wages
20
5
4
18
4
3
16
2
14
1
12
0
10
5
-1
8
-2
6
-3
4
-4
2
-5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Real disposable income
3
2
1
0
-1
-2
-3
-4
-5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Crostat, European Commission, UniCredit Research
UniCredit Research
page 37
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Tax reform found solid
ground on the basis of rising
public revenues and both
intentional and unintentional
spending control
The determination to advance tax reform has been underpinned by recent favorable fiscal
developments. A significant decline in the government deficit was achieved already in 2015,
when the former government was faced with challenging Excessive Deficit Procedure targets.
More recently, budget revenues started benefiting from the upside in the economic cycle as
revenue growth accelerated to 6% in 2016, in line with stronger GDP growth. At the same
time, the government imposed tighter spending controls, albeit some of the spending restraint
was unintentional and reflected budget rules during periods when caretaker governments
were in charge. These developments should bring the cash government deficit in 2016 well
below 2% of GDP. However, with government arrears on the rise (predominantly in the health
sector), the deficit, based on ESA 2010 standard, is likely to surpass 2% of GDP.
Budget proposal for 2017 sets
ambitious target for revenue
performance despite cut in
income and corporate taxes…
The 2017 budget is based on the same presumptions of strong growth of central government
revenues (4.5%, including EU fund disbursements and based on the assumption of 3.2% real
GDP growth). The government expects growth to accelerate thanks to strengthened private
consumption and EU-funded investment growth. Faster growth is supposed to compensate
for lower corporate and income tax rates. This approach should allow the government to plan
bigger central government expenditures, rejecting the strategy of attaining fiscal consolidation
through lower expenditure shares in GDP. The 2017 budget projects surpluses of extrabudgetary funds and of local government, enabling the general government deficit to still be
lower than in 2016. The budget also targets a primary surplus, which ought to allow public
debt to decline relative to GDP.
…to allow deficit shrinkage
and public debt ratio decline
despite spending acceleration
Such a plan is facing
several risks…
…as the government is facing
demanding financing needs in
2017 but…
…it can be met by more
favorable Croatian risk
premium after the recent
improvements in the fiscal
position, GDP growth, political
outlook and rating outlook
A number of risks are linked to such projections. First, we expect real GDP growth to be
weaker in 2017 at 2.7% rather than the 3.2% assumed by the government, based on slower
growth of private consumption, with tax reform likely to have a bigger impact on the income of
the population with a higher propensity to save, and of investment as we still miss evidence of
accelerated private investment. Real GDP growth will also be susceptible to uncertainty linked
to the global trade outlook. Second, rising arrears might result from expanded expenditures
(in terms of cash outlays) like on a few occasions in the past. Third, the government has
envisaged moderate growth in employees’ compensation, while in the meantime reaching an
agreement with trade unions for gradually phasing in a 6% increase in public sector salaries.
Buoyant revenues in 2016 and the cash buffer, which the government created from 2015,
allowed public debt to be financed without tapping international debt markets in 2016.
We should not forget, however, that the redemption profile for 2016 was very light. However,
funding needs for 2017 will be very challenging. The budget-funding plan for 2017 envisages
large bond issuance on both the domestic market (equivalent to about EUR 1.9bn) and on
international markets (EUR 1.5bn), along with stepped-up support from international financial
institutions such as the World Bank. However, the implementation of this plan will be
challenging given the potential rise in US interest rates and global long-term yields.
BUDGET PROPOSAL EASED ON EXPENDITURES…
41
central government expenditures*
…BUT STILL TARGETING LOWER DEFICITS.
central government revenues*
10
39
general government deficit (ESA2010)
primary balance
8
37
6
35
33
4
31
2
29
0
27
25
-2
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
* Excluding the operations of the Croatian Health Insurance Fund in 2015
UniCredit Research
Source: Crostat, European Commission, UniCredit Research
page 38
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy
Javier Sánchez,
CEE Fixed Income Strategist
(UniCredit Bank London)
+44 207 826-6077
The ongoing fiscal in improvement should provide support for the bonds. The budget deficit
will remain below 3% of GDP allowing the debt to GDP ratio to fall gradually.
The redemption calendar for 2017 has the USD1.5 bn CROATI 17 maturing in April for which
the MinFin is planning its financing via issuance of Eurobonds according to the budget plan
depending on market conditions. Croatia hasn’t issued any USD Eurobonds since April 2013
and the international markets and current spread levels should be acceptable to the
government for considering new issuance.
[email protected]
Croatia offers the highest EUR and USD spreads of any EU countries and we expect that the
rating agencies will improve the foreign currency rating outlook during the year which will
provide further support for the bonds.
CROATIA AND OTHER SUB-IG CREDITS Z-SPREADS
Croatia 2024
Russia 2023
DEBT SERVICE (IN USD MN EQUIVALENT)
Turkey 2024
USD mn
Eurobonds
Government bonds
T-bills
3000
400
2500
350
2000
300
Dec-17
Nov-17
Oct-17
Sep-17
Aug-17
Jul-17
Jun-17
May-17
Dec-16
Dec-16
Oct-16
Nov-16
Sep-16
Sep-16
Jul-16
Aug-16
Jul-16
Jun-16
May-16
Apr-16
May-16
Mar-16
Mar-16
Jan-16
Feb-16
0
Jan-16
150
Apr-17
500
Mar-17
200
Feb-17
1000
Jan-17
1500
250
Source: Bloomberg, central bank, MoF, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans
External borrowing
Bonds
IMF/EU/Other IFIs
Privatization/Other
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
8.4
1.0
7.4
6.5
0.5
3.7
2.3
0.9
0.8
0.1
8.4
7.4
1.3
3.8
2.2
0.2
0.0
0.2
0.8
10.2
0.9
9.2
6.9
1.3
3.9
1.8
2.3
2.2
0.1
10.2
7.2
1.9
3.9
1.5
1.9
1.5
0.4
1.0
8.5
0.8
7.7
6.4
0.8
3.9
1.7
1.3
1.2
0.1
8.5
6.9
1.6
3.9
1.5
1.3
1.0
0.2
0.4
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Government/central bank
Banks
Corporates/Other
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
EU structural and cohesion funds
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
2016F
14.4
-1.3
6.7
0.9
0.7
5.1
9.0
4.6
3.9
0.5
14.4
1.0
0.2
6.2
0.2
2.0
4.0
5.1
0.6
1.6
-0.3
2017F
10.7
-1.0
6.3
2.3
1.2
2.8
5.4
3.0
2.0
0.4
10.7
0.9
0.5
6.6
1.9
1.0
3.7
2.4
1.0
0.0
-0.8
2018F
8.1
-0.8
3.8
1.3
1.0
1.5
5.1
3.7
1.0
0.4
8.1
1.1
0.5
6.0
1.3
1.0
3.7
0.5
1.1
0.0
-1.0
n.a.
0.0
n.a.
0.2
n.a.
0.3
Source: CNB, Crostat, MoF, UniCredit Research
UniCredit Research
page 39
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Czech Republic (A1 stable/AA- stable/A+ stable)*
Outlook – The Czech economy is heading for policy shifts in 2017 on several fronts, the end
of the CNB’s EUR-CZK floor of 27.0 being the most important one. With headline inflation set
to reach 2% yoy before mid-2017, we expect the CNB to exit its policy in 2Q17. Moderate
tightening in monetary conditions may be offset by slight fiscal easing, leaving the GDP
growth momentum broadly unchanged.
Strategy – The end of interventions is set to terminate the recent outperformance of CZK bonds
versus German Bunds, putting upside pressure on CZK bond yields for short-term tenors.
Authors: Pavel Sobisek, Chief Economist (UniCredit Bank Czech Republic and Slovakia)
Patrik Rozumbersky, Economist (UniCredit Bank Czech Republic and Slovakia)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ CNB policy meetings: 2 Feb, 30 Mar
■ 4Q16 GDP: 14 Feb (flash), 3 Mar (structure), 31 Mar (accounts)
■ FX intervention exit: expected sometime in 2Q17
GDP GROWTH:
STABLE DYNAMIC WITH A CHANGING STRUCTURE
Contribution to GDP (pp)
5.0
Consumption
Gross capital
Export
GDP (yoy %)
2.5
2015
2016F
2017F
2018F
156.6
167.0
174.1
183.6
193.0
Population (mn)
10.5
10.5
10.6
10.6
10.6
14,882
15,842
16,477
17,350
18,224
GDP
2.7
4.6
2.4
2.4
2.5
Private Consumption
1.8
3.1
2.7
3.0
2.2
Fixed Investment
3.9
9.1
-0.8
2.0
3.0
Public Consumption
1.1
2.0
2.4
2.3
1.5
Exports
8.7
7.9
3.8
2.7
4.0
Imports
10.1
8.4
3.0
2.9
4.0
Monthly wage, nominal (EUR)
936
970
1,020
1,092
1,144
Real wage, change (%)
2.5
2.4
3.8
2.7
1.8
Unemployment rate (%)
7.7
6.5
5.5
5.2
5.1
Budget balance
-1.9
-0.6
0.3
-0.4
-0.5
Primary balance
-0.6
0.4
1.1
0.4
0.4
Public debt
42.2
40.3
38.6
37.9
36.8
Current account balance (EUR bn)
0.3
1.5
4.0
3.2
3.5
Current account balance/GDP (%)
0.2
0.9
2.3
1.8
1.8
Extended basic balance/GDP (%)
4.0
3.3
7.3
6.1
5.9
Net FDI (% of GDP)
1.9
-0.6
2.9
2.3
2.2
Gross foreign debt (% of GDP)
68.3
68.7
78.9
78.1
75.1
FX reserves (EUR bn)
44.9
59.2
82.0
87.0
88.0
4.5
5.5
8.9
8.9
8.6
CPI (pavg)
0.4
0.3
0.6
2.0
2.2
CPI (eop)
0.1
0.1
1.6
2.2
2.2
Central bank target
2.0
2.0
2.0
2.0
2.0
0.05
0.05
0.05
0.05
0.50
GDP per capita (EUR)
Real economy, change (%)
External accounts
2013
2014
2015
2016F
2017F
BOTH CPI AND PPI ARE HEADING TO 2% YOY
BY MID-2017
CPI
5.0
PPI
Corecast
Months of imports, goods & services
Inflation/Monetary/FX
2.5
0.0
Central bank reference rate (eop)
-2.5
-5.0
Jan-14
2014
GDP (EUR bn)
Fiscal accounts (% of GDP)
0.0
-2.5
EUR bn
3M money market rate (Dec avg)
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Source: Eurostat, UniCredit Research
0.34
0.29
0.29
0.30
0.80
USD/FX (eop)
22.83
24.82
24.15
23.04
22.03
EUR/FX (eop)
27.73
27.03
27.05
26.50
26.00
USD/FX (pavg)
20.75
24.60
24.41
23.25
22.29
EUR/FX (pavg)
27.53
27.28
27.10
26.50
26.30
Real effective exchange rate, 2000=100
105.2
105.3
106.4
108.7
110.8
-0.3
0.1
1.0
2.2
1.9
Change (%)
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 40
Source: Eurostat, CNB, UniCredit Research
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Heading for policy shifts
Shifts in economic policies
expected in 2017
After several years of relative stability in economic policies, the Czech economy is heading
for policy shifts in 2017 on several fronts. With the unemployment rate sinking below 5%
(4.9% for November 2016), the mounting labor shortage is pushing up wages and may boost
corporate investment, leading, in turn, to productivity gains. Inflation is seen moving up as a
result of not only wage pressure but also a cyclical upturn in prices of food and fuels. The on-line
reporting system for restaurants and retail sales - the key policy measure introduced to fight
tax avoidance - may contribute a bit to higher inflation as well. The inflation uptick will fulfill the
CNB’s key condition to exit its FX intervention policy. The underlying tightening of monetary
conditions will be offset by fiscal easing, as public-funded investment is set to recover from a
low level in 2016. In addition, the Social Democrats are expected to push for generous social
policies in the run-up to general elections to be held in autumn 2017, which may ease fiscal
policy in 2018.
Nominal wage growth at close to 5% yoy is believed to be sufficient for private consumption to
avoid a slowdown despite higher inflation in 2017. Thus, private consumption growth (+3% yoy)
could remain the key contributor on the demand side to a GDP expansion of 2.4%. Fixed
capital formation is projected to resume growing in 2017, although the pace is uncertain. On
the one hand, manufacturers are optimistic about their investment in modernization and costsaving measures (albeit less so in extending their production base) and some infrastructure
projects are also expected to proceed. On the other hand, investment in transport equipment
may slow after two solid years, and so will housing projects (where both demand and supply
constraints could emerge). In 2018, domestic demand is seen expanding at a pace broadly
unchanged from 2017.
Private consumption and fixed
capital formation are expected
to support GDP growth
Slow growth for exports…
Exports will contribute less to GDP growth in 2017 and in 2018, despite receiving support
from the expected rebound in global trade. Demand for new cars in Europe provided a big
boost to Czech exports in recent years. With that demand getting close to saturation after
more than three years of uninterrupted growth in the number of car registrations in Europe,
we believe that Czech exports may only grow marginally above the pace of global trade. The
situation reminds us a bit of 2013, when Czech exports stagnated. Our export growth forecast
of 2.7% for 2017 means net exports will cease to contribute to GDP growth
…and industrial output
On the production side, industrial output growth could slow down further to 2.5% in 2017
before picking up slightly to 3% in 2018. GDP growth will rely more than in 2016 on
construction, trade (probably helped by potential currency appreciation) as well as business
services (ICT in particular should continue expanding).
Czech manufacturing PMI has sunk below German PMI
Germany
58
Outperformance of Czech over global export yoy dynamics is over
Jan 2013=100
Czech
CZ exports, MA(3)
World exports
125
120
115
54
110
105
50
100
46
Jan-13
Aug-13
Mar-14
Oct-14
May-15
Dec-15
95
Jan-13
Jul-16
Aug-13
Mar-14
Oct-14
May-15
Dec-15
Jul-16
Source: Markit, CPB World Trade Monitor, Eurostat, UniCredit Research
UniCredit Research
page 41
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
The EUR-CZK floor could be
abandoned in 2Q17
The end of the CNB’s EUR-CZK floor of 27.0 is set to be the key policy event of the year.
Of the two potential obstacles to the CNB’s exit, i.e. low inflation and the ECB’s QE, the
former is probably almost gone. We expect headline inflation to reach 2% yoy before mid-2017,
with higher core inflation adding to food and fuel price inflation. As to the ECB, the issue is
how its QE extension will be interpreted by the CNB’s MPC. Comments made ahead of the
extension nevertheless tended to play down the ECB as a factor for CNB policy. This makes
us believe that the exit from interventions is more likely to come in 2Q17 than in 3Q17. More
specifically, our preferred scenario is that of an early April exit, which would minimize the spell
of uncertainty after expiration of the CNB hard commitment at the end of 1Q16. The decision
would be based on the inflation outlook to be released in early February, with inflation data for
January and February expected to support the decision.
The CNB may resume
interventions should EUR-CZK
drop below 25.0
If EUR-CZK appreciates, we expect verbal interventions below EUR-CZK 25.50 and actual
interventions if EUR-CZK drops to 25.00. In the logic of the CNB model, the EUR-CZK at
25.00 would correspond to five 25bp repo rate hikes, which appears to be significant
tightening. The CNB may prefer not to intervene during the initial market reaction and wait for
a significant portion of investors to take profits before correcting a potential excessive
appreciation of the CZK. Moreover, fine-tuning real monetary conditions using a managed
float may prove a difficult task. Once investors start taking profits on their positions, we expect
EUR-CZK to return towards 26.5, given the shallow local market and the lack of euros. After
that, EUR-CZK could appreciate gradually towards 26.00 in 2018, a move equivalent to
approximately 60bp in interest rate increases. This would leave monetary conditions laxer
than at the time when the EUR-CZK floor was introduced.
The CNB may hike a couple of
months later than its current
forecast suggests
We do not expect any rate hike in 2017 if the CZK appreciates by more than 5%. The current
CNB model assumes 3M Pribor a full percentage point above its current level by end-2017 on
the condition that there would be no CZK appreciation. In reality, our envisaged EUR-CZK
path would be consistent with a couple of 25bp repo rate hikes by the end of 2017. However,
the CNB may delay the start of rate increases by several months, taking into account both the
ECB’s easing and the risk of CZK firming later.
Taxes and social security are
set to be the key general
election topics
As a policy issue unrelated to the CNB, tax and social security issues appear to be the main
topics in the run-up to next autumn’s general elections. With exact campaign agendas yet to
be formulated, the Social Democrats (CSSD) have started to speak out about progressive tax
rates being implemented for individuals as well as companies. In contrast, the ANO
movement promises to reduce social contributions paid by low-earners, thereby boosting their
disposable income. ANO has lately taken a 10pp lead over CSSD in opinion polls, with no
other party strong enough to challenge the two. So far, euro adoption has been completely
ignored as a campaign topic. Unless this changes unexpectedly in the next couple of months,
a decision on the euro is not to be expected before 2021.
Productivity gains are poor both per employee and per hour,…
yoy
Productivity/employee
…while unemployment hit a long-term low and vacancies soar
Productivity/hour
Unemployed local
5.0%
2.5%
Vacancies - rs
650
persons in '000
20.0
590
46.0
530
72.0
470
98.0
410
124.0
0.0%
-2.5%
-5.0%
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
350
Jan-13
3Q16
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
150.0
Source: Eurostat, UniCredit Research
UniCredit Research
page 42
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
CNB reserves set to exceed 50% of GDP
FX hedging activity will drive
CNB reserves further up in
early 2017
Over the four months ending in November 2016, the CNB added EUR 9.2 billion to its FX
reserves via interventions. While part of the pressure on CZK came from exporters’ hedging,
foreign purchases are believed to be the main culprit. In a similar vein, the share of CZK
government bonds held by non-residents jumped to 30.6% in November. The level of CNB
reserves amounted to 46% of annual GDP at the end of November despite signs of purchases
easing. With the assumed end of CNB interventions coming closer, we expect FX hedging activity
to intensify in the first months of 2017. CNB reserves will likely exceed an equivalent of 50% of
GDP by the time the intervention policy will be discontinued. The end of interventions is set to
terminate the recent outperformance of CZK bonds versus German Bunds, putting upside
pressure on CZK bond yields for short-term tenors in 2017. More upside pressure, spread over
the whole curve, may come in 2018 when refinancing needs are set to rise.
The third wave of CNB interventions was the highest
Accommodative monetary conditions will continue until late 2018
CZGB net purchases by non-residents (CZK bn)
Real monetary condition index
CNB FX purchases (CZK bn)
120
CNB repo rate (%, rs)
3.0
1.0
Restrictive
2.0
0.5
90
1.0
60
0.0
30
-1.0
0
-2.0
0.0
-0.5
-30
Accommodative
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
-3.0
Dec-12
Oct-16
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
-1.0
Dec-18
Source: CNB, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans
External borrowing
Bonds
IMF/EU/Other IFIs
Privatization/Other
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
13.0
-0.3
13.3
12.7
9.5
3.2
0.1
0.6
0.5
0.1
13.0
12.4
9.1
3.3
0
0.6
0.5
0.1
0
11.2
0.9
10.3
10.2
8.2
1.9
0.1
0.1
0
0.1
11.2
11.0
8.1
2.9
0
0.2
0.0
0.2
0
15.2
1.5
13.7
11.6
9.5
1.9
0.2
2.1
2.0
0.1
15.2
14.6
10.8
3.8
0
0.6
0.5
0.1
0
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Government/central bank
Banks
Corporates/Other
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
EU structural and cohesion funds
Other
Change in FX reserves (- = increase)
Source: CNB, MoF, UniCredit Research
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
UniCredit Research
page 43
2016F
57.3
-3.0
7.7
0.5
4.5
2.7
52.6
0.1
29.8
22.7
57.3
5.0
2.5
14.2
4.3
3.9
6.0
53.8
3.7
0
-21.9
2017F
58.4
-2.9
7.9
0
5.1
2.8
53.4
0.1
30.3
23.0
58.4
4.1
1.5
11.7
0
5.4
6.3
42.3
3.7
0
-5.0
2018F
61.1
-2.7
10.0
2.0
5.0
3.0
53.8
0.1
30.5
23.2
61.1
4.2
0.5
9.5
0.5
4.0
6.9
45.2
3.8
0
-2.0
3.8
0
-1.5
0
0
0
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Hungary (Baa3 stable/BBB- stable/BBB- stable)*
Outlook – Growth should accelerate to 3% in 2017 and 3.1% in 2018, helped by EU funds,
strong consumption and a positive fiscal impulse. The budget deficit will widen temporarily in
pre-election year 2017, but public debt will continue to fall as a percent of GDP. The NBH is
expected to remain on hold in 2017-18, despite inflation returning to target. Risks stem from
US economic and monetary policies, volatile appetite for EM assets, and EU politics.
Strategy – EUR-HUF could trade range-bound in 2017-18. Hungary is expected to sell a EUR
bond this year, with a maturity of at least 10Y. HGB belly will remain supported by monetary policy.
Authors: Dan Bucșa, Lead CEE Economist (UniCredit Bank London)
Ágnes Halász, Chief Economist, Head of Economics & Strategic Analysis (UniCredit Bank Hungary)
MACROECONOMIC DATA AND FORECASTS
EUR bn
2014
2015
2016F
2017F
2018F
GDP (EUR bn)
105.0
109.7
112.8
118.9
126.0
9.9
9.9
9.8
9.8
9.8
10,593
11,108
11,454
12,113
12,879
GDP
4.0
3.1
2.2
3.0
3.1
Private Consumption
2.5
3.4
5.1
4.5
3.7
Fixed Investment
9.9
1.9
-9.8
6.2
4.6
Public Consumption
4.4
0.9
2.0
2.4
1.7
Exports
9.8
7.7
6.2
5.7
6.3
Imports
10.9
6.1
7.0
6.2
6.6
4.0
Monthly wage, nominal (EUR)
770
800
861
912
966
3.0
Real wage, change (%)
3.3
4.4
7.8
2.9
3.1
2.0
Unemployment rate (%)
7.9
6.9
5.3
4.7
4.6
1.0
Fiscal accounts (% of GDP)
-2.0
KEY DATES/EVENTS
■ 24 Jan, 28 Feb, 28 Mar: NBH monetary policy meetings
■ 14 Feb, 7 Mar: 4Q16 GDP (flash, structure)
■ 25 Jan, 1 Mar, 29 Mar: 3M deposit tenders
Population (mn)
GDP per capita (EUR)
Real economy, change (%)
GDP GROWTH FORECAST
5.0
yoy (%)
Net exports
Fixed investment
Private consumption
Change in inventories*
Public consumption
GDP
0.0
Budget balance
-2.1
-1.6
-2.0
-2.4
-1.0
Primary balance
1.9
2.0
1.2
0.8
1.2
-2.0
Public debt
75.7
74.7
73.2
72.7
70.2
Current account balance (EUR bn)
2.2
3.7
5.0
5.1
5.3
Current account balance/GDP (%)
2.1
3.4
4.4
4.3
4.2
Extended basic balance/GDP (%)
8.5
8.3
9.0
10.1
10.0
-3.0
2014
2015
2016E
2018F
2017F
INFLATION FORECAST
yoy (%)
Annual inflation rate
Base rate
Inflation target
Target range
External accounts
Net FDI (% of GDP)
Gross foreign debt (% of GDP)
2.7
0.4
2.1
2.3
2.2
116.7
107.7
98.6
94.3
89.3
33.7
30.0
26.0
30.1
34.7
4.7
4.0
3.4
3.7
4.0
5
FX reserves (EUR bn)
4
Months of imports, goods & services
3
Inflation/Monetary/FX
2
CPI (pavg)
-0.2
-0.1
0.5
3.0
2.9
1
CPI (eop)
-0.9
0.9
1.7
3.0
2.6
0
Central bank target
3.0
3.0
3.0
3.0
3.0
2.10
1.35
0.90
0.90
0.90
Central bank reference rate (eop)
-1
-2
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Source: CSO, UniCredit Research
3M money market rate (Dec avg)
2.10
1.35
0.41
0.45
0.45
USD/FX (eop)
259.1
286.6
293.7
284.5
271.6
EUR/FX (eop)
314.9
313.1
311.0
313.0
315.0
USD/FX (pavg)
232.6
279.3
281.5
290.6
275.4
EUR/FX (pavg)
308.7
309.9
311.8
312.1
312.5
Real effective exchange rate, 2000=100
126.9
126.6
127.5
127.8
129.6
-3.8
-0.3
0.7
0.2
1.4
Change (%)
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 44
Source: EcMin, NBH, CSO, UniCredit Research
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Better growth ahead
Hungary enters 2017 as an investment-grade country after a six-year hiatus. The impressive
adjustment in stock imbalances is expected to continue as budget deficits are reined in and
the extended basic balance (EBB) remains in surplus. Moreover, 2017 should mark a rebound
in GDP growth triggered by larger EU fund inflows. Risks stem from US economic and
monetary policies, swings in appetite for EM assets, and EU politics.
Economic growth to accelerate
to 3% in 2017…
GDP growth should rebound to 3.0% in 2017 as EU fund inflows recover, leading to the
fastest growth in fixed investment across CEE. Besides EU-funded projects, large investment
at car companies will add to capex growth. The downside is the expected loss of a shift at the
Audi plant, which will affect industrial production and exports for most of 2017. That said,
export growth is expected to rebound after a weak 2H16, in line with robust demand from the
eurozone, especially Germany. Strong sales abroad should offset larger imports, keeping the
trade balance above 10% of GDP.
…helped by investment and
public spending…
The government will play a major role in boosting growth, with the budget deficit expected to
widen to 2.4% of GDP (3.1% on cash basis) in pre-election year 2017. Most of 2016’s budget
deficit was incurred in the second half of December, impacting growth in 2017. Households
will benefit the most from larger social security transfers and support for the housing market,
with private consumption growing by an average of 4% per year in 2017-18. At the same time,
companies will get a boost in 2017 (estimated by the government at HUF 145bn or 0.4% of
GDP) from a cut in the corporate tax rate to 9%, the lowest level in the EU.
Next year, growth could accelerate slightly to 3.1%. EU funds, real revenue growth, lax real
monetary conditions and the second-round effects of 2017’s fiscal easing will boost domestic
demand. Meanwhile, the trade surplus could increase again owing to new production
capacities for car manufacturers, as long as European demand remains robust. Two
consecutive years of above-potential growth (which we estimate at around 2.5%) should open
up a positive output gap that will accelerate the rise in core inflation.
…with EU fund inflows
increasing this year and next
Reflation could accelerate in 2017 amid base effects from oil prices and a weaker EUR, as
well as higher core inflation. As a result, annual inflation may temporarily exceed the 3%
target in 1Q17 and remain close to this level throughout this year and next. Imported inflation
from the eurozone could continue to mitigate part of demand-side pressure on prices. That
said, headline inflation may test the upper limit of the 2-4% target range if the EU removes
sanctions on Russia, triggering a faster rise in food prices throughout central Europe.
Inflation will remain inside
the target range
ECONOMIC GROWTH IS EXPECTED TO ACCELERATE THIS YEAR
The 2017 fiscal impulse* will be the largest since 2011
% of GDP
4
Fiscal impulse
Industry and construction will drive the growth rebound in 2017
% yoy,
pp of GDP
Output gap
5
3
Net taxes
Real estate services
Market services
Industry
GDP
Other services
Financial services
Construction
Agriculture
4
2
3
1
2
0
1
-1
0
-2
-1
2014
2015
2016
2017
2018
*We assume that most spending incurred in December 2016 will impact growth in 2017.
UniCredit Research
page 45
2014
2015
2016F
2017F
2018F
Source: CSO, EcMin, UniCredit Research
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
The NBH could ease further by
increasing the liquidity surplus
The NBH is unlikely to increase the base rate in 2017 and 2018, unless inflation exceeds the
target range. Moreover, the central bank may loosen liquidity conditions further by capping
3M deposits at HUF 750bn (at most) in 1Q17. The gradual increase in the structural liquidity
surplus pushed interbank interest rates below the policy rate. This wedge is expected to
widen further, at least in 1H17, lowering borrowing costs in HUF. The main beneficiaries are
likely to be households, the real estate sector and SMEs, while larger companies may
continue to rely mostly on their own liquidity or on funding from parent companies.
A large, positive EBB will
facilitate external deleveraging
After falling temporarily in 2016, the EBB is expected to rise to 10% of GDP this year amid a
recovery in EU fund inflows and FDI. A large EBB doubled by slow releveraging may push
external debt to below 90% of GDP in 2018.
A temporary increase in the
budget deficit in 2017…
Public-sector deleveraging will be slower, but will continue despite a larger budget deficit in 2017.
Moreover, most one-off budget revenues may be used to reduce public debt further.
We expect fiscal policy to tighten again after next year's parliamentary elections. This can be
achieved even if Hungary increases EU-fund cofinancing in an attempt to draw down most
available European funding before the end of next year. The focus on covering public
financing needs on the local market will be maintained. Demand for retail bonds is expected
to grow further as banks slash deposit rates. Reflation may increase the attractiveness of
inflation-linked bonds, such as the PEMAKs, after poor demand in 2016.
…will still allow for a reduction
in the debt to GDP ratio
Nationalism and euro-skepticism
will be prominent before elections
In the run-up to general elections, the ruling Fidesz is likely to intensify its nationalist rhetoric
as it tries to poach voters from the second-largest party in the country, the far-right Jobbik.
The eurosceptic, nationalist stance of Fidesz contrasts with Hungary’s reliance on funding and
demand from the EU, which will remain the main growth drivers in 2017 and 2018. Fidesz is
likely to win another outright majority, even though a constitutional majority would need
temporary support from Jobbik. Meanwhile, the political left remains divided. Even an alliance
of most left-wing parties may struggle to get 25% of the vote, according to opinion polls.
External risks stem from
US policies, …
Faster growth in the US amid laxer fiscal policy from the Trump administration could benefit
European (including Hungarian) exports, as long as trade barriers are not considered. At the
same time, rate increases by the Fed may lead to outflows from EM assets, slowing the
flattening of the HGB curve. 2017 will be a busy election year in the eurozone, with France,
Germany and the Netherlands going to the polls. While we believe that threats to EU
cohesion are not significant at this stage, the advancement of populism and the reversal of
globalization threaten growth in open economies such as Hungary’s.
...European elections…
…and the reversal of
globalization
THE EXTERNAL DELEVERAGING IS SUPPORTED BY LARGE EBB AND RETAIL BOND ISSUANCE
The extended basic balance will dwarf bank deleveraging
Investment funds
Foreign investors
Banks
% of GDP,
4Q MA
12
Households hold as much in bonds as foreign investors
Insurance & pension funds
Households
% of GDP
55
9
Public sector
Insurance & pension funds
Households
NBH
50
45
6
40
35
3
30
25
0
20
-3
15
-6
5
-9
Others
Investment funds
Foreign investors
Banks
10
0
Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
3Q16
2Q17
1Q18
4Q18
Source: AKK, NBH, UniCredit Research
UniCredit Research
page 46
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
More curve flattening in the belly
EUR-HUF could trade rangebound in 2017 and 2018
With external deleveraging continuing, we expect appreciation pressure on the HUF to re-emerge
periodically. The NBH is fighting this by loosening real monetary conditions, but low interest
rates may not be sufficient to depreciate the HUF. As a result, we expect EUR-HUF to trade in
a 305-320 range for most of 2017 and 2018. Spikes may be caused by temporary swelling of
liquidity surpluses if the central bank chooses not to sterilize them.
Hungary is expected to return to EUR bond markets this year and we expect good demand
and a maturity of at least 10Y. The short end and the belly of the HGB curve should remain
well supported by lax monetary policy and demand from local banks, even if inflation
rebounds toward the target. The longer end remains a play on risk appetite for EM assets.
A new EUR bond is in the pipeline
The HGB 21/B offer a pickup over the HGB 19/C offer a pickup of about 80 bp which we think
is interesting and both bonds are included in major indices. The gap between the two may
narrow between 20-30bp as domestic banks extend duration.
The structural liquidity surplus is rising in the money market
HGB yield curve to compress more in the belly
Repos (inverse sign)
Excess reserves
O/N deposits
Net liquidity balance (HUF bn, - = deficit)
1W HUFONIA - base rate (%, inverted, rs)
800
5
600
-0.8
400
-0.6
200
-0.4
0
-0.2
28-Dec
14-Dec
30-Nov
16-Nov
19-Oct
02-Nov
05-Oct
21-Sep
07-Sep
24-Aug
27-Jul
10-Aug
13-Jul
29-Jun
15-Jun
01-Jun
18-May
0.4
20-Apr
-600
04-May
0.2
06-Apr
-400
23-Mar
0.0
09-Mar
-200
As
As of
of Jan
Jan 3,
3, '17
'17
As
As of
of Sep
Sep 30,
30, '16
'16
As
As of
of Jun
Jun 30,
30, '16
'16
4
-1.0
HUF YTM (in %)
HUF bn
3
2
1
0
-1
0
0
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
Modified
Modified Duration
Duration
Source: NBH, MinFin, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans & retail securities
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans & retail securities
External borrowing
Bonds
IMF/EU/Other IFIs
Change in fiscal reserves (- = increase)
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
20.7
2.7
18.0
13.8
3.8
2.8
7.1
4.2
1.6
2.6
20.7
20.0
6.1
3.1
10.8
1.2
1.0
0.2
-0.3
25.3
3.7
21.6
19.4
4.5
2.9
12.0
2.3
0.6
1.6
25.3
25.2
7.1
3.4
14.7
1.0
1.0
0
-0.9
26.4
2.5
23.9
21.6
4.7
3.4
13.5
2.2
0.3
1.9
26.4
25.1
7.6
2.5
15.0
1.3
1.0
0.3
0.3
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Government/central bank
Banks
Corporates/Other
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
EU structural and cohesion funds
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
Source: NBH, EcMin, UniCredit Research
UniCredit Research
page 47
2016F
16.5
-5.0
7.2
3.6
1.8
1.8
14.3
3.0
6.2
5.1
16.5
2.1
-1.3
2.1
-0.2
0.5
1.8
6.8
2.8
0
4.0
2017F
10.8
-5.1
8.1
2.6
3.7
1.8
7.8
1.9
1.9
4.1
10.8
2.3
-0.3
3.3
1.0
0.4
1.9
5.6
4.1
0
-4.1
2018F
10.5
-5.3
9.3
4.4
3.8
1.1
6.6
1.5
0.9
4.1
10.5
2.2
0
3.1
1.6
0.4
1.2
4.9
4.8
1.0
-4.5
-1.4
-0.6
0
0.4
0.3
0.7
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Poland (A2 negative/BBB+ stable/A- stable)*
Outlook – Economic growth is expected to rebound this year on the back of larger EU fund
inflows and the start of large FDI projects. Private consumption will grow strongly this year
before moderating in 2018 due to base effects. Fiscal risks may lead to an uncertain tax
outlook that, in turn, may weigh on private-sector investment. Inflation is likely to rise to 2%
this year, remaining below the 2.5% target in 2018. We expect three rate increases in 2018 in
the absence of large negative growth shocks and sharp PLN appreciation.
Strategy - We expect EUR-PLN to fall towards 4.25 in 2017 as growth rebounds in 2H17 and
FX flows increase on the back of FDI and EU funds. Tighter monetary conditions in the US
and large financing needs at home may prevent a flattening of the POLGB curve.
Author: Marcin Mrowiec, Chief Economist (Bank Pekao)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ 10-11 Jan, 7-8 Feb, 7-8 Mar: MPC decision-making meetings
■ 8 Mar: Inflation Projection (key figures), full document
released on 10 or 13 March
■ 26-31 Jan: 2017 GDP release (whole year flash), 15 Feb:
4Q16 GDP flash, 28 Feb: Full GDP data for 2016
Public consumption
Inventories
GDP
pp (contribution to GDP growth)
6
4
3.3
5.0
3.7
1.6
3.9
2.7
1.4
3.0
3.4
2
2010
2011
2012
2013
2014
2015
2016F
2017F
2018F
HEADLINE INFLATION VS. TARGET
CPI (%, yoy)
Target range
6
2016F
2017F
2018F
429.8
425.9
448.5
489.1
Population (mn)
38.5
38.5
38.5
38.5
GDP per capita (EUR)
10,672
11,164
11,066
11,657
38.5
12,719
Real economy, change (%)
GDP
3.3
3.9
2.7
3.0
3.4
Private Consumption
2.7
3.2
3.6
3.7
3.0
10.0
6.1
-5.2
-0.8
8.0
Public Consumption
3.7
2.3
3.5
3.5
2.5
Exports
6.7
7.7
7.7
5.3
6.0
Imports
10.0
6.6
7.7
5.0
7.0
Monthly wage, nominal (EUR)
948
979
978
1041
1122
Real wage, change (%)
3.8
4.4
4.7
3.5
3.4
Unemployment rate (%)
12.3
10.5
9.0
8.3
8.1
Budget balance
-3.4
-2.6
-2.6
-2.8
-2.8
Primary balance
-1.4
-0.8
-0.9
-1.2
-1.3
Public debt
50.2
51.1
53.8
55.8
55.8
Current account balance (EUR bn)
-8.5
-2.6
-2.9
-3.3
-8.5
Current account balance/GDP (%)
-2.1
-0.6
-0.7
-0.7
-1.7
Extended basic balance/GDP (%)
2.7
3.8
2.3
3.0
2.1
Net FDI (% of GDP)
2.4
2.1
1.9
2.0
2.0
Gross foreign debt (% of GDP)
71.4
70.3
70.8
67.6
62.4
FX reserves (EUR bn)
82.6
86.9
102.9
95.4
93.8
5.2
5.2
6.0
5.2
4.7
CPI (pavg)
0.0
-0.9
-0.6
1.6
2.0
CPI (eop)
-1.0
-0.5
0.2
2.1
1.7
Central bank target
2.50
2.50
2.50
2.50
2.50
Central bank reference rate (eop)
2.00
1.50
1.50
1.50
2.25
3M money market rate (Dec avg)
2.06
1.73
1.73
1.86
2.55
USD/FX (eop)
3.51
3.90
4.18
3.70
3.57
EUR/FX (eop)
4.26
4.26
4.42
4.25
4.20
USD/FX (pavg)
3.16
3.77
3.94
3.79
3.59
EUR/FX (pavg)
4.19
4.18
4.36
4.31
4.22
110.9
110.3
105.9
105.9
108.7
2.0
-0.6
-4.0
-0.0
2.6
Fiscal accounts (% of GDP)
Months of imports, goods & services
Inflation/Monetary/FX
5
4
3
2
1
0
-1
-2
2010
2015
410.9
External accounts
0
-2
2014
GDP (EUR bn)
Fixed Investment
GDP COMPONENTS
Household consumption
Fixed investments
Net exports
EUR bn
2011
2012
2013
2014
2015
2016
2017
Source: CSOP, NBP, UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
Source: CSOP, NBP, MinFin, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 48
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
In need of larger investment
Economic growth is expected to accelerate to 3.0% in 2017, after dipping to approximately
2.7% in 2016. Last year, growth had to rely overwhelmingly on robust private consumption
growth amid fast revenue growth and larger fiscal transfers (of which the “Family 500+” child
subsidy program is the most important). At the same time, low EU fund inflows weighed on
investment growth far more than expected. 2018 and 2019 will see a significant acceleration
in EU co-financed investment that may push GDP growth to 3.4% if private investment
rebounds as well. Beyond 2019, a sharp drop in EU fund inflows will require a coordinated
strategy to spur domestic and foreign investment in order to offset the negative impact on
potential growth. Absent such measures, economic growth is likely to decelerate towards
2.5% (or lower) at the end of the decade.
A rebound in EU fund inflows…
… may offset slower
consumption growth…
… but an uncertain regulatory
outlook could weigh on privatesector investment
Tight labor market conditions will continue to support private consumption growth, which will
remain the main growth driver in 2017. A cyclical improvement in labor demand adds to a
structural decline in available labor supply due to an ageing population, pushing the
unemployment rate to 8.1% by the end of 2017 and 8.0% at end-2018, still above NAWRU
(estimated by the NBP at 6.4% in 2017 and 6.1% in 2018), and increasing the pressure on
wage growth. In 2017, the pace of growth of employment in the corporate sector may slow
down to 2.1% (from 2.9% in 2016), but there will be increasing pressure on wages, pushing
their growth up to 5.2%, from 4.1% yoy in 2016. As inflation picks up, the real wage bill
growth in the corporate sector will slow from 7.8% yoy in 2016 to 5.7% in 2017. In 2018,
wages are expected to increase by 5.5%, also because the pool of available workers will be
shrinking. Hence, we anticipate employment growth to slow down to just 0.5% yoy.
Private consumption growth is likely to decelerate to 3.0% in 2018, after 3.6% and 3.7% in
2016 and 2017, respectively, as the impact of the 500+ program disappears.
Private investment is expected to stay relatively flat in 2017 - although we expect annual
growth rates to turn slightly positive in 2H17. High capacity utilization could push more
companies to increase capital expenditure. In addition, investment could be boosted by some
recently-announced big-ticket FDI projects from Daimler-Chrysler, Fiat, Toyota and Rolls
Royce (aviation). The key reason for weak private investment is the high level of regulatory
uncertainty. The government decided in December 2016 not to unify the personal income tax
with health and social security contributions in 2018, after pondering such a move for most of
last year. A clearer tax outlook should help private investment accelerate gradually. Any
further delay in private-sector investment threatens growth in the coming years as the
economy runs out of unused production capacity.
Aggregate wage growth in the economy propels consumption growth
Increasing demand boosts rising corporate sector employment
real retail sales (%, yoy, 3-month average)
real wage bill (%, yoy, 3-month average)
12
Non-subsidized job offers (k, yoy)
Employment in the corporate sector (%, yoy, rs)
40
10
8
30
6
8
20
4
6
10
2
4
0
0
2
0
-2
-4
2009
-10
-2
-20
-4
-30
-6
-40
2002
2010
2011
2012
2013
2014
2015
2004
2006
2008
2010
2012
2014
2016
-8
2016
Source: CSOP, UniCredit Research
UniCredit Research
page 49
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
There is a strong political commitment to keeping the budget deficit below 3% and avoiding a
return to the excessive deficit procedure. That said, the 2017 budget is based on optimistic
assumptions regarding economic growth and budget revenues. At the same time, mitigating
measures in case of negative surprises are small. The most important may be solid NBP profit
in 2016 that could boost government revenues this year. If the government’s assumptions
prove too optimistic, the risk of an uncertain tax environment will remain elevated.
2017 net borrowing needs are set
to increase by ca. 20% vs. 2016
We expect total net borrowing needs for 2017 at PLN 69.4bn (EUR 16.0bn), almost flat vs.
PLN 67.7bn in 2016. Gross borrowing needs are forecasted at PLN 165.3bn this year vs.
PLN 181.5bn in 2016, falling by 1.2pp to 8.6% of GDP in 2017. The government intends to
finance net borrowing needs predominantly on the domestic market by issuing fixed-rate
T-bonds. A better-than-expected budget execution in 2016 allowed the government to cover
some of spending initially planned for 2017.
Inflation is likely to approach
the 2.5% target by end-2018
Headline inflation is expected to rise to 2.1% by end-2017 from 0.2% in December 2016,
approaching the 2.5% target by end-2018. Our forecast for average inflation is 0.3pp and 0.5pp
higher than the NBP’s for 2017 and 2018, respectively, due to rising inflationary pressure as
past supply-side shocks are reversed. Higher commodity and energy prices pushed the PMI
sub-index for input prices to the highest level since 1H12 and should translate into both output
and consumer prices. PPI inflation turned positive in September 2016 and is expected at
1.7% yoy by the end of 2017. In addition, higher oil prices lead to higher global food prices (as
seen, e.g., via the FAO index) and should accelerate food price reflation in Poland. Core
inflation is also likely to rebound in 2017 as wage growth accelerates further.
NBP President Adam Glapiński has stated repeatedly that interest rate increases will probably be
discussed in late 2017. This would be in line with inflation re-entering the target range (1.5-3.5%)
in mid-2017. We expect three rate increases in 2018, but the decision to tighten will have to
take into account ECB policies (low rates and a potential extension of QE to 2018), as well as
broader real monetary conditions. In 2016, the hawkish tone of the MPC was supported by
currency undervaluation. Adjusted with unit labor costs, the real effective exchange rate of the
PLN is at its weakest level since the financial crisis. In central Europe, only the CZK has
weakened more since 2010.
We expect rate increases
only in 2018
If economic growth disappoints in early 2017 (when we expect it below 3% yoy) and the PLN
firms from current levels, the MPC may have to moderate its hawkish tone. That said, outright
rate cuts are excluded in our baseline scenario, since they would do little to boost investment,
while affecting savings. Only sharp PLN appreciation could push the MPC to lower rates.
INFLATIONARY PRESSURE WILL RISE IN 2017
Commodity and energy price increases are pushing input prices up
80
PMI, output prices
pts
Food prices (almost 25% of CPI basket) will likely push CPI up
PMI, input prices
FAO index (yoy, USD-PLN adjusted)
75
70
CPI food (%, yoy, rs)
40
10
30
8
6
20
65
4
10
60
2
55
0
50
-10
-2
-20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-4
45
40
2010
2011
2012
2013
2014
2015
0
2016
Source: Markit, FAO, CSOP, UniCredit Research
UniCredit Research
page 50
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Range-bound PLN, POLGBs likely to stay under pressure
We expect gradual PLN
appreciation in 2017
EUR-PLN is expected to trade in the 4.35-4.50 range during 1H17 as growth and inflation
remain low. Accelerating growth later in 2017 could support the PLN and we look for gradual
appreciation towards EUR-PLN 4.25 by end-2017. We maintain the view that EUR-PLN levels
above 4.40 are an opportunity to go short EUR-PLN.
We see room for a steeper POLGBs curve in the coming months. Short-term T-bonds should
be stable within the range of 1.90-2.10% in 1H17. Expectations of a long period of flat NBP
rates should support this scenario. However, if the Ministry of Finance focuses on this sector
on the primary market, yields could increase even at the short end and the belly. We expect
more volatility at the long end, mainly due to the Fed’s normalization of interest rates. Risk-off
episodes and a lower level of pre-financing than in previous years may also push yields
higher. Thus, 10Y yields could rise to 3.80-4.00% by mid-2017. Higher levels are possible if
risk appetite for EM bonds is low.
Tighter monetary conditions
in the US and large financing
needs at home may weigh
on POLGBs
PLN vs. FX financing of net borrowing needs of the state budget
non-PLN financing
Change of POLGB holdings of various types of investors
PLN instruments financing
80
70
70
60
60
50
2014
2015
Jan-Nov 2016
40
50
30
40
20
30
10
20
0
10
0
PLN bn
-10
2010
2011
2012
2013
2014
2015
2016
Banks
Foreign investors
Insurance
Investment funds
2017
Source: MinFin, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans/Other
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans/Other
External borrowing
Bonds and loans
IMF/EU/Other IFIs
Privatization/Other
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
41.7
17.0
24.7
21.5
18.6
1.5
1.3
3.2
3.2
0
41.7
36.8
35.0
1.5
0.3
6.7
6.7
0
-1.8
42.4
18.0
24.4
20.7
18.2
2.3
0.2
3.7
3.7
0
42.4
37.7
35.9
1.8
0
6.2
6.2
0
-1.5
44.1
18.2
25.9
21.0
18.7
2.3
0
4.9
4.9
0
44.1
36.8
33.3
3.1
0.4
6.6
6.6
0
0.7
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Government/central bank
Banks
Corporates/Other
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
EU structural and cohesion funds
Other
Change in FX reserves (- = increase)
Source: BNB, MoF, UniCredit Research
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
UniCredit Research
page 51
2016F
94.9
2.9
44.9
3.2
5.6
36.1
47.1
0
13.7
33.4
2017F
89.1
3.3
42.3
3.7
5.2
33.4
43.5
0
12.7
30.8
2018F
95.2
8.5
44.2
4.9
5.3
34.0
42.5
0
12.5
30.0
94.9
8.0
1.7
43.6
3.2
6.1
34.3
45.1
5.0
6.5
-15.0
89.1
9.0
1.2
40.7
3.2
5.7
31.8
41.8
8.0
-12.3
0.7
95.2
10.0
1.5
42.1
6.6
5.5
30.0
40.8
9.0
-7.2
-1.0
-4.0
3.8
-1.8
1.6
0
0
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Romania (Baa3 positive/BBB- stable/BBB- stable)*
Outlook – Economic growth is expected to slow gradually in 2017 and 2018 to 3.5% and 3.3%,
respectively. Lower EU fund inflows and a slowdown in real wage growth could lead to a
deceleration in domestic demand growth. Exports are unlikely to rebound strongly in the
absence of large FDI projects. Inflation is expected to return close to target in late 2017. The
NBR may postpone rate increases to November 2017 or later.
Strategy – Reflation and local political risks may prevent a return of ROMGB yields to 2016 lows.
The roll-down of DBN056 (Dec 22) makes it an interesting switch from DBN032 (June 21).
Authors: Dan Bucșa, Lead CEE Economist (UniCredit Bank London)
Anca Aron, Senior Economist (UniCredit Bank Romania)
MACROECONOMIC DATA AND FORECASTS
2014
2015
2016F
2017F
2018F
GDP (EUR bn)
150.2
160.4
168.6
179.9
190.8
Population (mn)
20.0
19.9
19.8
19.7
19.6
7,528
8,071
8,534
9,130
9,717
GDP
3.0
3.8
4.5
3.4
3.3
Private Consumption
3.8
6.1
8.1
7.4
5.7
Fixed Investment
2.5
8.8
3.3
0.6
2.1
Public Consumption
0.3
1.6
2.1
2.2
1.6
Exports
8.6
5.5
6.2
4.6
4.7
Imports
8.9
9.1
8.7
7.2
7.0
Monthly wage, nominal (EUR)
531
576
643
693
729
Real wage, change (%)
4.2
9.1
14.5
5.9
2.8
Unemployment rate (%)
6.8
6.8
6.1
5.8
5.5
-3.0
KEY DATES/EVENTS
■ 6 Jan, 7 Feb: NBR monetary policy meetings
■ 9 Feb: Inflation report
GDP per capita (EUR)
■ 1 Feb, 1 Apr: new fiscal easing measures
■ 14 Feb, 7 Mar: 4Q16 GDP (flash, structure)
■ 1Q17: attempts to water down judicial reforms
Real economy, change (%)
GDP GROWTH FORECAST
Private consumption
Public consumption
Net Export
yoy (%, pp)
7.0
Fixed Investment
Change in inventories
GDP
6.0
5.0
Fiscal accounts (% of GDP)
4.0
Budget balance
-0.8
-0.8
-2.8
-3.0
3.0
Primary balance
0.7
0.5
-1.4
-1.5
-1.5
39.4
37.9
38.7
39.0
38.9
Current account balance (EUR bn)
-1.0
-1.9
-3.7
-4.0
-4.5
Current account balance/GDP (%)
-0.7
-1.2
-2.2
-2.2
-2.4
Extended basic balance/GDP (%)
3.7
3.0
3.2
2.1
2.0
Net FDI (% of GDP)
1.8
1.8
2.4
2.2
2.1
Gross foreign debt (% of GDP)
63.1
56.4
51.9
48.9
45.1
FX reserves (EUR bn)
32.2
32.2
34.2
35.4
35.4
6.2
5.8
5.8
5.6
5.3
2.7
2.0
1.0
Public debt
0.0
External accounts
-1.0
-2.0
-3.0
2014
2015
2016F
2017F
2018F
INFLATION AND INTEREST RATE FORECASTS
yoy (%)
4.5
Consumer price inflation
Inflation target
Target range
Monetary policy rate
Months of imports, goods & services
Inflation/Monetary/FX
3.5
CPI (pavg)
1.1
-0.6
-1.5
1.6
2.5
CPI (eop)
0.8
-0.9
0.0
1.9
2.5
1.5
Central bank target
2.50
2.50
2.50
2.50
2.50
0.5
Central bank reference rate (eop)
2.75
1.75
1.75
2.00
2.50
3M money market rate (Dec avg)
1.69
1.03
0.80
1.23
1.85
USDRON (eop)
3.69
4.15
4.30
4.09
3.88
EURRON (eop)
4.48
4.52
4.54
4.50
4.50
USDRON (pavg)
3.35
4.01
4.06
4.18
3.96
EURRON (pavg)
4.44
4.44
4.49
4.49
4.50
126.1
124.2
121.7
121.2
122.7
0.9
-1.5
-2.1
-0.4
1.2
-0.5
-1.5
-2.5
-3.5
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-
Source: NIS, UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
Source: NBR, NIS, MinFin, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 52
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Post-election splurge
Romania enters a new election cycle with economic growth slowing down and public finances
overstretched. The new government led by the Social Democrats (PSD) adopted several fiscal
easing measures that add to the ones voted by the previous parliament. While these measures
bode well for consumption, they are likely to weigh on growth from 2H17 onwards.
Economic growth is expected
to slow down this year and next
Economic growth is expected to slow to 3.5% this year and 3.3% in 2018 as some of the past
growth factors weaken. First, a rebound in inflation and slower nominal wage increases will
reduce real revenue growth. Second, the credit impulse may turn negative due to lower real
wage growth and smaller state guarantees for mortgage lending. Third, EU fund inflows are
likely to fall markedly vs. 2017 because Romania lags the region in implementing projects
under the 2014-20 EU budget. Fourth, the fiscal impulse, which will remain positive in 1H17,
could turn negative in 4Q17 if the government wants to keep the budget deficit below 3% of
GDP. Fifth, the bumper harvest in 2016 is expected to lead to a negative base effect this year.
The budget deficit is likely to
be on the cusp of 3% of GDP…
The government will struggle to keep the budget deficit below 3% of GDP in 2017 and 2018.
Cuts in the main VAT rate (1pp) and excise duties for fuels (USD 0.07) implemented on 1 January,
4
as well as new measures adopted in early January could push the budget deficit above 4%
of GDP this year. As a result, planned infrastructure investment and co-financing for EU funds
may be cut this year by a quarter (more than 1% of GDP) to meet the deficit target. Fiscal
easing at the peak of the business cycle may weigh on policies beyond 2017: the scope for
increasing investment in 2018 and later will remain small unless taxes increase.
…at the cost of lower investment
Net exports could remain a
drag on GDP growth in
2017 and 2018
Fast private consumption growth will further widen the trade deficit with goods. Exports are
unlikely to help in the absence of large FDI projects. We expect annual growth rates to fall
below 5% in 2017 and 2018, even if global trade rebounds. Demand from Europe will remain
paramount: in 2016, it accounted for almost 90% of export growth, out of which 2/3 was
German demand. With car production peaking in 2015, electronics and lower-value added
exports such as furniture and food will have to perform strongly. At the same time, light
manufacturing is hit by falling margins due to rising labor costs.
Stable capital flows could
fall in 2017
The wider trade deficit will shrink the EBB to 2.2% and 2.3% of GDP in 2017 and 2018,
respectively. Besides lower EU fund inflows, FDI will continue to hover at 2% of GDP.
Romania is unable to compete with its neighbors for large investment projects in
manufacturing due to poor infrastructure and a lack of expertise at the government level.
DOMESTIC DEMAND GROWTH COULD SLOW IN 2017
Retail sales could slow due to falling real wage growth
Real wage growth
yoy (%)
Net stable capital flows will decline in the coming years
Bank deleveraging
FDI
Net stable capital flows
% of GDP
Retail sales growth
15.0
6.0
EU funds
Current account
5.0
12.0
4.0
3.0
9.0
2.0
1.0
0.0
6.0
-1.0
-2.0
3.0
-3.0
-4.0
0.0
2013
2014
2015
2016F
2017F
2015
2016E
2017F
2018F
2018F
Source: NIS, NBR, MFE, UniCredit Research
4
Among them, new VAT exemptions, lower taxes for pensioners and self-employed, and pension and wage increases.
UniCredit Research
page 53
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
EUR-RON stuck in a tight range
The loss of competitiveness should drive EUR-RON higher, but the NBR is still holding onto
the EUR-RON 4.40-4.50 range, with the RON trading closer to the upper limit of the range.
FX loans are expected to represent more than 30% of the total by the end of 2018, limiting the
NBR’s incentive to let the currency depreciate. A smaller EBB than in other central European
countries will continue to cover bank deleveraging, but will leave little support for the RON
from stable capital flows. That said, the RON may be cushioned from swings in risk appetite
by the low foreign ownership of ROMGBs, dominated by eurozone investors. The central
bank offset real currency appreciation by maintaining lax liquidity conditions. The structural
excess liquidity is unlikely to be sterilized because of costs. However, the central bank will
have to consider tightening liquidity conditions due to rapid reflation.
Reflation will pick up in 2017…
Inflation returned inside the 1.5-3.5% target range at the beginning of 2017, but could remain
below the 2.5% target this year after the VAT and excise duty cuts. Excluding tax cuts, the
rebound in prices is broad-based, with volatile fuel prices leading the way. Next year, inflation
could exceed temporarily the target as core inflation and fuel prices rebound further. Even so,
end-2018 inflation could be close to 2.5% or even below, if the main VAT rate is cut again by 1pp
to fulfill PSD’s pre-election promise. The central bank may want to align the policy interest
rate to the new inflation level, but the timing of tightening is uncertain. The NBR could choose
to look through the initial reflation episode in 1H17 and start raising rates only when inflation
approaches the 2.5% target. We believe this could happen in late 2017. As a result, we
expect three interest rate increases to 2.5% starting in November 2017.
…but rate increases may be
delayed to November 2017
An earlier tightening of monetary conditions by narrowing the interest rate corridor may be
unwarranted, unless the NBR re-widens the corridor when increasing the key rate. If it keeps
a narrow corridor, the central bank would face a high marginal deposit rate and, thus, higher
costs. At the same time, it would increase the carry and narrow the scope of using liquidity
conditions to stabilize the currency, leading to more FX volatility. A higher EUR-RON could
keep the topic of an administrative FX loan conversion in the limelight. We expect the
Constitutional Court to let lower courts decide whether conditions are met for a conversion at
lower exchange rates 5. A large-scale conversion of FX loans into RON represents the biggest
risk for the banking sector in the coming years.
The main internal risks are
a conversion of FX loans
into RON…
… and a potential reversal of
judicial reforms
Local political developments pose a risk to asset prices as the new government prepares to
repeal some of the judicial reforms implemented in the past. This could trigger a stand-off with
the European Commission and could keep more risk-averse European bond investors away
from Romanian bonds. While Romanian authorities usually try to avoid major confrontations
with European institutions, watering down judicial reforms is too important an objective for the
PSD leadership.
THE NBR MAY POSTPONE TIGHTENING REAL MONETARY CONDITIONS TO THE END OF 2017
The RON has appreciated in real terms vs. peers since 2012
ULC-based REER, 1 = 2009
1.15
CZK
HUF
PLN
The NBR may delay tightening due to the uncertain inflation path
Inflation forecast - baseline scenario
RON
yoy (%)
Inflation with a 1pp VAT cut in 2018
Inflation target
1.10
Target range
4.0
1.05
2.0
1.00
0.0
0.95
-2.0
0.90
0.85
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
-4.0
Jan-15
Mar-16
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Source: central banks, Eurostat, NIS, UniCredit Research
5
For details, please see the “EEMEA Macro Flash - Trip notes: Romania – post-electoral cool-down” from 31 October 2016.
UniCredit Research
page 54
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Uncertain path for ROMGBs
Reflation may prevent a return
of ROMGB yields to 2016 lows
Uncertainty will remain high after a seesaw year for ROMGBs. Several factors may prevent a
flattening of the yield curve going forward: 1. Reflation and a potentially more hawkish tone
from the NBR; 2. A gradual deleveraging of US investors from the region, especially if the
USD continues to strengthen against the EUR; 3. Local political risks and a potential
confrontation with the EU if Romanian authorities try to reverse some of the judicial reforms.
At the same time, factors supporting ROMGBs are still in place: 1. Large MinFin reserves and
manageable funding needs; 2. Large amounts of cash at local fund and pension managers;
3. Attractive valuation; 4. The persistence of a large liquidity surplus on the local interbank
market that will keep short-term rates below the policy rate.
Although there are headwinds to a flattening of the curve, the DBN056 (Dec 22) has the
highest roll-down on the ROMGB curve and is interesting as a switch from the DBN032 (June 21).
Local interest will increase in the DBN056 as its remaining maturity falls to 5 years.
ROMGB yield curve
5
DBN056 vs DBN032 yield differential
ROMGB Dec 22 spread pickup to Jun 21
70
As of Jan 5, '17
As of Sep 30, '16
As of Jun 30, '16
4
60
3
50
2
1
40
0
30
-1
0
1
2
3
4
5
6
7
8
9
10
20
IV
I
II
IV
III
Source: Bloomberg, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans
External borrowing
Bonds
IMF/EU/Other IFIs
Privatization/Other
Fiscal reserve change (- = stock increase)
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
14.0
3.8
10.2
8.6
6.3
2.0
0.3
1.6
1.5
0.1
14.0
11.1
8.9
2.1
0.1
4.0
3.2
0.8
0
-1.1
12.5
5.4
7.2
6.0
3.6
2.1
0.3
1.2
0
1.2
12.5
9.8
7.9
1.8
0.1
2.7
2.0
0.7
0
0
14.3
5.7
8.6
5.7
3.6
1.8
0.3
2.9
1.5
1.4
14.3
10.1
8.0
2.0
0.1
2.7
2.0
0.7
0
1.5
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Government/central bank
Banks
Corporates/Other
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
EU structural and cohesion funds
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
Source: NIS, NBR, MinFin, UniCredit Research
UniCredit Research
page 55
2016F
31.5
3.7
14.3
3.6
4.8
5.8
13.5
0.0
4.9
8.6
31.5
4.0
0.1
11.8
5.0
1.9
4.8
10.8
5.1
0
-0.3
2017F
27.7
4.0
12.5
2.8
3.9
5.8
11.2
0.3
3.5
7.4
27.7
4.0
0.1
10.5
3.8
1.9
4.8
10.5
3.8
0
-1.2
2018F
28.8
4.5
13.4
4.5
2.9
6.0
10.9
0.2
3.1
7.6
28.8
4.0
0.1
10.2
3.9
1.5
4.9
10.2
4.3
0
0
1.3
1.7
1.2
2.0
1.2
0.5
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Slovakia (A2 stable/A+ stable/A+ stable)*
Outlook – Economic growth is expected to accelerate to 3.2% in 2017 and 3.7% in 2018,
driven this year by rebounding investment. Labor market conditions will continue to tighten,
supporting household spending. Inflation is expected to bottom out amid higher energy prices
and rising consumption. In 2017, the structure of EU growth will be less favorable for Slovak
exports, which are dominated by durable consumer goods. Lower car production could be at
least partially offset by a pickup in global trade. Fiscal goals are less ambitious than in the past,
relying mostly on strong growth in 2017. A balanced budget is expected to be reached in 2019.
Author: Ľubomír Koršňák, Chief Economist (UniCredit Bank Czech Republic and Slovakia)
MACROECONOMIC DATA AND FORECASTS
EUR bn
KEY DATES/EVENTS
■ 11 Jan, 10 Feb, 13 Mar – Industrial production
■ 13 Jan, 15 Feb, 15 Mar – CPI
2017F
2018F
75.9
2014
78.7
80.8
83.5
87.0
Population (mn)
5.4
5.4
5.4
5.4
5.4
14,016
14,507
14,890
15,390
16,031
GDP
2.6
3.8
3.2
3.2
3.7
Private Consumption
1.4
2.2
2.7
2.7
2.7
Fixed Investment
1.2
16.9
-6.5
6.5
2.3
Public Consumption
5.3
5.4
2.5
2.1
1.5
Exports
3.7
7.0
3.4
3.7
4.4
Imports
4.4
8.1
1.5
4.4
2.2
Monthly wage, nominal (EUR)
858
884
912
942
974
GDP per capita (EUR)
■ 10 Feb – flash 4Q16 GDP
■ 8 Mar – 3Q16 GDP structure
2015
Real economy, change (%)
INFLATION REBOUNDING FROM HISTORICAL LOW
2.5
2016F
GDP (EUR bn)
% yoy
2.0
1.5
Real wage, change (%)
4.2
3.3
3.7
2.3
1.9
1.0
Unemployment rate (%)
13.2
11.5
9.7
9.0
8.4
0.5
Fiscal accounts (% of GDP)
-0.8
0.2
0.0
-1.1
-0.8
1.2
0.2
0.0
-1.3
-0.9
Extended basic balance/GDP (%)
2.7
3.8
2.4
3.7
4.3
Net FDI (% of GDP)
0.6
0.0
0.7
3.3
3.5
Gross foreign debt (% of GDP)
89.2
85.4
86.9
86.9
86.7
FX reserves (EUR bn)
EUR
EUR
EUR
EUR
EUR
-
-
-
-
-
CPI (pavg)
-0.1
-0.3
-0.5
1.0
1.6
CPI (eop)
-0.1
-0.5
0.0
1.5
1.7
Central bank target
EUR
EUR
EUR
EUR
EUR
Central bank reference rate (eop)
EUR
EUR
EUR
EUR
EUR
3M money market rate (Dec avg)
EUR
EUR
EUR
EUR
EUR
USD/FX (eop)
EUR
EUR
EUR
EUR
EUR
EUR/FX (eop)
EUR
EUR
EUR
EUR
EUR
USD/FX (pavg)
EUR
EUR
EUR
EUR
EUR
EUR/FX (pavg)
EUR
EUR
EUR
EUR
EUR
Real effective exchange rate, 2000=100
175.9
173.1
171.7
171.4
170.9
0.2
-1.6
-0.8
-0.2
-0.3
Sep-18
0.9
Current account balance/GDP (%)
Jan-18
Current account balance (EUR bn)
May-18
External accounts
Sep-17
-1.5
Jan-17
51.7
May-17
52.8
Sep-16
53.6
Jan-16
52.5
May-16
53.6
Sep-15
Public debt
Jan-15
0.7
-1.0
May-15
-0.1
Sep-14
-1.5
-0.5
Jan-14
-2.1
-1.0
May-14
-2.7
-0.8
Sep-13
-2.7
Primary balance
Jan-13
Budget balance
May-13
0.0
-0.5
GDP GROWTH TO BE DRIVEN BY INVESTMENT
IN 2017 AND EXPORTS IN 2018
5.0
Domestic demand
yoy (%; pp)
Net export
GDP
Inflation/Monetary/FX
4.0
3.0
2.0
1.0
0.0
-1.0
Months of imports, goods & services
2013
2014
2015
2016F
2017F
2018F
Source: SO SR, UniCredit Research
Change (%)
Source: SO SR, NBS, Eurostat, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 56
See last pages for disclaimer.
<date>
January 2017
Economics & FI/FX Research
CEE Quarterly
2017: the year of investment
GDP growth is expected to recover gradually in 2017 to 3.2% and 3.7% in 2018 from 2.8% in
2H16, driven by stronger investment activity. Economic growth could accelerate towards 4%
in 2018-19, boosted by larger investment and production in the automotive industry. The main
growth driver will shift from net exports to domestic demand in 2017. The C/A will turn
temporarily to a deficit due to recovering foreign direct investment triggering larger imports.
The C/A deficit will start to narrow again from 2018 onwards, when new car production
capacities will add to exports, which will be again the main GDP growth engine. At the same time,
strong base effects in private investment will weigh on domestic demand dynamics in 2018.
Economic growth to be driven
by new investment in
automotive industry
Investment growth will be supported by both public and private projects in 2017. Public
investment will benefit from a restart in highway construction financed by new EU funds and
by PPP. These projects were postponed from 2016 to early 2017 due to obstacles in
procurement. The automotive sector will dominate corporate investment, led by the new
Jaguar Land-Rover car plant. However, construction permits suggest a strong recovery also
in non-residential building (offices, retail, storage). The residential market is expected to peak
in 1H17 as a new central bank regulation implemented in March 2017 may slow mortgage
credit growth below 10% yoy.
Household spending to support
economic growth…
Household spending will also contribute to domestic demand growth, supported by tight labor
market conditions and consumer confidence at post-crisis highs. Unemployment could test alltime lows below 9% by the end of 2017. A further reduction may be prevented by structural
issues, such as regional disparities, low internal mobility and the high share of long-term,
unskilled unemployed. All these factors add to rising wage pressure. At the same time, a
gradual rebound in inflation is expected to slow down real income growth. Inflation bottomed
out with low oil prices and should turn positive in January 2017, ending a three-year fall in
prices. Nevertheless, price increases will remain subdued in 2017, rising above 1% only
gradually due to cuts in regulated electricity and heating prices. Inflation may stay below 2%
throughout 2017 and 2018, in line with eurozone inflation.
…despite rebounding inflation
European car market growth to
slow down…
…partially offset by pick-up in
global trade
Fiscal drag to continue, budget
to be balanced in 2019
Coalition government
remains stable
UniCredit Research
The main risk to the economic outlook comes from external demand. The cyclical growth in
European demand is expected to peak as the support from lower FX and oil prices wanes.
The European growth structure will be less favorable for Slovak exports, which are dominated
by durable consumer goods. Rebounding inflation is expected to gradually slow down real
income growth in the EU, affecting sales of durable goods, including cars. New car sales are
close to long-term potential and are approaching 2008 levels at the EU level, leaving room for
further growth only in southern European countries, while Scandinavia and Czech Republic
are close to a cyclical peak in car demand. Thus, further growth in Slovak car production will
not depend on model production cycles. On the positive side, weaker European demand
could be at least partially offset by a pickup in global trade in 2017.
The fiscal stance is expected to tighten from 2018 onwards. The 2017 budget law forecasts a
fall in the deficit from an expected 2.0% of GDP in 2016 to 1.3% of GDP in 2017. However,
the 2017 fiscal goal cannot be considered ambitious: the improvement will be driven
exclusively by economic growth, with constant expenditures leading to a deficit of 0.9% of GDP.
The fiscal drag should accelerate in 2018 and afterwards. The government still aims to
balance the budget in 2019, with the primary balance turning positive in 2018. Public debt
should decline towards 50% of GDP by 2019, remaining close to the debt-brake level, which
will start to decline by 1 pp every year after 2018 from the current level of 50% of GDP.
The left-right coalition remains stable and so far handled well several potential crises.
However, support for the strongest coalition party – the Social Democrats of Prime Minister
Robert Fico - is falling amid several corruption scandals. This could prevent potential
discussions about early elections. Local government elections are scheduled for autumn 2017
having limited informative value as the turnout is usually only 10-20%.
page 57
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Slovenia (Baa3 positive/A positive/A- stable)*
Outlook – Stronger-than-expected consumer spending and buoyant foreign demand led us to
upgrade Slovenia’s GDP growth projection for 2016 to 2.4%. We expect growth to accelerate
further to 2.6% in 2017 on recoveries in EU funds absorption and private investment, while
domestic demand will be supported by improving labor markets. Inflation, meanwhile, is
expected to gradually accelerate to 0.9% yoy by the end of 2017 as base effects fade, oil
prices rise, and the output gap closes. The major near-term risks are related to fiscal policy:
we see downside risks for the government’s budget deficit targets for 2017 (1.6% of GDP)
and 2018 (0.7% of GDP) as they assume above-consensus growth..
Author: Dumitru Vicol, Economist (UniCredit Bank London)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
2014
2015
2016F
2017F
37.3
38.6
40.1
41.6
2018F
43.3
■ 6 Feb, 28 Feb, 31 Mar – Consumer Price Index
GDP (EUR bn)
Population (mn)
2,061.8
2,063.3
2,066.2
2,069.1
2,071.2
■ 31 Jan, 28 Feb, 31 Mar – Retail Sales
GDP per capita (EUR)
18,107
18,693
19,395
20,123
20,887
■ 10 Jan, 10 Feb, 21 Mar – Industrial Production
GDP
3.1
2.3
2.4
2.6
2.3
Private Consumption
1.9
0.5
2.4
2.1
1.9
Fixed Investment
1.4
1.0
-4.0
5.8
4.8
-1.2
2.4
2.0
1.2
0.6
5.7
5.6
5.8
5.4
4.9
Real economy, change (%)
■ 9 Jan, 9 Feb, 10 Mar – Trade balance
■ 28 Feb – 4Q16 GDP
Public Consumption
PRIVATE CONSUMPTION TO SUPPORT GDP GROWTH
Imports
8.0
Exports
Household Consumption
Investments
Net Exports
yoy (%)
Government Consumption
Inventories
GDP Growth
4.6
5.3
5.9
5.3
1555.7
1585.3
1620.1
1634.7
Real wage, change (%)
1.1
1.4
2.1
0.9
-0.3
Unemployment rate (%)
9.7
9.0
8.0
7.7
7.4
Budget balance
-5.0
-2.7
-2.3
-2.0
-1.6
Primary balance
-1.9
0.3
0.4
0.8
0.9
Public debt
80.7
83.2
80.2
78.2
76.5
Fiscal accounts (% of GDP)
6.0
4.0
2.0
0.0
External accounts
-2.0
-4.0
-6.0
-8.0
4.2
1545.4
Monthly wage, nominal (EUR)
2011
2012
2013
2014
2015F
2016F
2017F
2018F
Current account balance (EUR bn)
2.3
2.0
2.7
2.3
2.3
Current account balance/GDP (%)
6.2
5.2
6.7
5.6
5.3
Extended basic balance/GDP (%)
7.8
8.4
8.8
7.6
7.2
Net FDI (% of GDP)
1.6
3.2
2.1
2.0
1.9
124.6
116.6
114.7
112.8
110.8
0.8
0.8
1.4
2.1
2.8
CPI (pavg)
0.4
-0.8
-0.2
1.3
1.2
CPI (eop)
-0.1
-0.6
0.6
0.9
1.2
EUR
EUR
EUR
EUR
EUR
Gross foreign debt (% of GDP)
FX reserves (EUR bn)
INFLATION TO REMAIN LOW IN 2017
8.0
Inflation/Monetary/FX
yoy (%)
7.0
Central bank target
6.0
5.0
Central bank reference rate (eop)
EUR
EUR
EUR
EUR
EUR
4.0
3M money market rate (Dec avg)
EUR
EUR
EUR
EUR
EUR
3.0
USD/FX (eop)
EUR
EUR
EUR
EUR
EUR
2.0
EUR/FX (eop)
EUR
EUR
EUR
EUR
EUR
1.0
USD/FX (pavg)
EUR
EUR
EUR
EUR
EUR
0.0
EUR/FX (pavg)
EUR
EUR
EUR
EUR
EUR
-1.0
-2.0
Jan-07
Source: NBS, MinFin, UniCredit Research
Jul-08
Jan-10
Jul-11
Jan-13
Jul-14
Jan-16
Jul-17
Source: NBS, MinFin, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 58
See last pages for disclaimer.
<date>
January 2017
Economics & FI/FX Research
CEE Quarterly
Finding the path back to growth
Domestic demand is poised
to become the main GDP
growth driver
Stronger-than-expected consumer spending buoyed by an improving labor market and low
inflation, combined with a strong tourist season, firmer euro area (EA) demand, led us to
upgrade our FY16 GDP growth projection to 2.4% from 1.9% previously. Growth should
accelerate further to 2.6% yoy in 2017, driven by a recovery in investment, both public and
private. Pubic investment will be boosted by the expected recovery of EU fund absorption,
while private investment is likely to gain momentum on supportive financial conditions and
strong corporate balance sheets.
Improving financial conditions as banks’ deleveraging moderates, and stronger wage growth,
should also support private consumption despite the slight rise in inflation and in oil prices. At
the same time, the contribution of net exports to growth is poised to shrink as import growth
picks up on strengthening domestic demand. The impact of falling oil prices has faded and
inflation is expected to accelerate on base-effects and a recovery in commodity prices, with
average inflation in 2017 reaching 1.3%. Strengthening of domestic demand and the closing
output gap, or even turning positive, in 2017-18 are likely to fuel the upward trend.
Excessively optimistic
assumptions for economic
growth might mean the
government misses budget
deficit targets
The increased global uncertainty related to the impact of Brexit, to the Trump victory in the
U.S. election and to the pace of Fed tightening, has translated into considerable uncertainty
as regards growth, with estimates ranging from 1.8% to 2.6%. At the same time, the
government has assumed real GDP growth of 2.9%. This apparently optimistic assumption
seems to stem from escalating political pressure to boost spending, forcing the government to
assume higher growth in 2017-18 in order to accommodate these demands. The budget bills
for 2017 and 2018 6 have been adopted with deficit targets of 1.6% and 0.7% of GDP,
respectively. These targets, however, seem too optimistic both to us and to the European
Commission, which has already warned about the risk of non-compliance with the Stability
and Growth Pact.
Even so, the political process is not yet finished. The upper chamber of parliament, the
National Council, vetoed the budget bills on alleged inadequate funding for municipalities.
However, the three-party coalition has a majority of 52 out of 90 MPs, which should allow it to
overturn the veto, especially after having recently reaching an agreement with trade unions on
public sector wages. Initially, the trade unions demanded the abolishment of all austerity
measures 7 that would cost around EUR 215mn (0.5% of 2016 GDP). The final agreement
envisages a package of additional wage and benefit increases worth EUR 70mn, out of which
EUR 58mn will be included in the 2017 budget. These expenses are likely to be implemented
to the detriment of public investment, since the government insisted that the financial
framework remain unchanged.
The privatization of NLB
was again postponed to 2017
In regard to structural reforms, progress has been made in bank consolidation as Nova KBM
(the second biggest bank) and KBS Banka officially completed their merger. At the same time,
the privatization of NLB has been postponed again for 2017, when the deadline imposed by
the EC expires, due to unfavorable conditions. While there were some rumors that Slovenia
might ask permission from the EC for a three-year delay, Slovenian Sovereign Holding
appears to be committed to proceed with the privatization in 2017, most probably via an IPO.
The downside risks for 2017 seem to have eased, with slower EA growth remaining the most
significant factor. Additionally, faster wage growth in Slovenia resulting from the trade union
agreement, and improving labor markets (from an already elevated level relative to peers),
could harm the country’s competiveness, adding to risks, especially if external demand proves
weaker than anticipated.
6
The budget bills for 2017 and 2018 are designed in line with the fiscal rule law adopted in 2015, which set upper limits for expenditures for several years in
advance and have strict parameters on how austerity measures can be lifted. Hence, social transfers, allowances, wages and other items can be raised only by a
limited amount over a certain period of time.
7
Pensioners got the first regular increase since 2008 of only 1.15%, while all the other allowances and unemployment benefits were capped for another two years.
UniCredit Research
page 59
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Bosnia and Herzegovina (B3 stable/B stable/not rated)*
Outlook – Weaker growth continued in 2H16, so the full year GDP growth is now seen being
lower (2.5% yoy from 2.8% before). Domestic private consumption remains the main driver of
growth due to a rise in households’ real disposable income, while exports and, especially,
investment activity are still subdued. Acceleration of growth towards 3% in 2017 is expected,
supported by a recovery in investment and export demand. The fiscal position has stabilized
as tax collection has strengthened substantially, while spending remains under control (the
EFF program conditions approved in September ought to be met, albeit with delays).
However, the progress in advancing crucial reforms and the growth outlook remain dependent
on the fragile and unconvincing decision-making process.
Author: Hrvoje Dolenec, Chief Economist (Zagrebačka banka),
Nenad Golac, Senior Economist (Zagrebačka banka)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
EUR bn
2014
2015
2016E
2017F
2018F
GDP (EUR bn)
13.96
14.65
14.87
15.55
16.41
3.8
3.8
3.8
3.8
3.8
3648
3844
3916
4110
4359
GDP
1.1
3.1
2.5
3.0
3.5
Monthly wage, nominal (EUR)
659
659
663
678
699
Real wage, change (%)
0.7
1.0
1.6
0.7
1.1
Unemployment rate (%)
43.9
43.2
41.9
40.2
38.5
Budget balance
-2.9
-0.1
-0.8
-0.8
-0.6
Primary balance
-2.1
0.7
0.1
0.2
0.4
Public debt
44.0
44.0
44.2
43.2
42.3
Current account balance (EUR bn)
-1.0
-0.8
-0.9
-1.2
-1.4
Current account balance/GDP (%)
-7.4
-5.7
-6.1
-7.7
-8.6
-2.0
Extended basic balance/GDP (%)
-4.6
-4.2
-4.7
-5.3
-5.6
-3.0
Net FDI (% of GDP)
2.8
1.5
1.5
2.5
3.0
■ 20 Jan: CPI FY 2016
■ 20 Jan: Foreign trade FY 2016
■ 20 Jan: Industrial Production FY 2016
■ 24 Mar: Balance of payments FY 2016
■ 24 Mar GDP 4Q 2016
ANNUAL INFLATION
Population (mn)
GDP per capita (EUR)
Real economy, change (%)
Fiscal accounts (% of GDP)
CPI (%, yoy)
4.0
3.0
2.0
External accounts
1.0
0.0
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
-1.0
63.7
62.7
63.4
62.4
61.1
FX reserves (EUR bn)
4.0
4.4
4.9
5.0
5.2
Months of imports, goods & services
6.1
6.8
7.4
7.0
6.7
CPI (pavg)
-0.9
-1.0
-1.0
1.5
2.0
CPI (eop)
-0.4
-1.3
0.1
2.0
2.1
25
1M money market rate (Dec avg)
0.02
-0.21
-0.35
-0.35
-0.35
20
USD/FX (eop)
1.61
1.79
1.83
1.78
1.69
EUR/FX (eop)
1.96
1.96
1.96
1.96
1.96
USD/FX (pavg)
1.47
1.76
1.76
1.81
1.71
EUR/FX (pavg)
1.96
1.96
1.96
1.96
1.96
INDUSTRIAL PRODUCTION AND EXPORTS
35
ytd (% yoy)
30
Industrial production, growth rate
Merchandise exports, growth rate
Merchandise imports, growth rate
15
10
5
0
-5
Gross foreign debt (% of GDP)
Inflation/Monetary/FX
-10
-15
Source: Eurostat, National statistical office, UniCredit Research
2010 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16
Source: National Statistical office, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 60
See last pages for disclaimer.
<date>
January 2017
Economics & FI/FX Research
CEE Quarterly
Growth should regain momentum in 2017
The main growth driver is
growing personal consumption
while exports and investment
are still subdued.
Therefore, we lowered our 2016
growth estimate to 2.5%
The period of weaker growth extended into 2H 2016, so we have lowered our 2016 GDP
forecast from 2.8% to 2.5%. Growth in 2016 has been driven primarily by private
consumption due to the strong increase in households’ real disposable income. The latter
reflect rising employment (by 1.9% yoy on average in the nine months of 2016), slightly
increased nominal wages (by 0.7%) and pensions, and still strong CPI deflation (-1.3%). At
the same time, investment activity and export performance remained subdued. Merchandise
export growth slowed down to 2.6% yoy during January-October, while the lack of investment
activity is visible from a decline in the construction .sector. They are 0.3% yoy lower during
the first three quarters of 2016, of which civil engineering works declined as much as 3.2%.
An important reason for this decline in investment (primarily public works)y, appears to have
been difficulties and delays in securing international funding, i.e., from the IMF and the World
Bank as both were waiting for a new EFF to be agreed on. FDI is also underperforming – net
inflows in 1H16 were one-third lower compared to 1H15.
Acceleration of growth seems
plausible, provided the current
pace of reform implementation
keeps momentum to support the
delayed investment recovery
On a positive note, prospects for 2017 and following years seem more favorable –
growth should accelerate to 3.0% and perhaps more in 2018. In 2017, we expect the
acceleration of growth to be driven by strong personal consumption, on the back of rising
employment and households’ real disposable income, but now accompanied again by
improved external and investment demand. Some encouraging signs for the latter were
already visible in 2H16 in the area of residential construction. Apart from that, there are a
number of infrastructure and other large investments in the pipeline put on hold in 2016 due
to procedural problems in project preparation and gaps in ensuring funding (especially for
sections of the corridor Vc motorway, which are expected to be predominantly financed by
international financial institutions). World Bank and other financing could reach some EUR
750mn, if political parties in the government make progress to meet their obligations under
the Letter of Intent under the EFF arrangement with the IMF. Provided IMF funding is
restored soon (only the first tranche in the amount of EUR 79mn of the two that had been
expected was disbursed in 2016 as the authorities have not increased excise duties
according to the plan) can help government capital outlays to return to levels above 5% of
GDP, encouraging private investment to rise as well.
The C/A deficit has widened on
subdued merchandise exports
and lower remittances..
The C/A deficit is slightly widening despite the low energy prices, suffering from
subdued merchandise export volumes and the lower-than-expected inflow from
remittances. The estimated CA deficit in 2016 is somewhat higher than in 2015 (6.1% vs. 5.7%
of GDP), resulting from stagnant exports of goods and services and slightly faster growth in
services’ imports. Despite historically low imported energy prices, merchandise imports have
not decreased, while slightly lower remittances also contributed to the widening of the C/A
deficit. We see much higher external imbalances in 2017 and 2018 (7.7% and 8.6% of GDP,
respectively) due to the forecasted robust investment growth and given the strong
dependence of the economy on imported investment goods’. As energy and other primary
material prices are expected to increase, the four-year-long period of deflationary trends
should be ended. In 2017, we expect consumer price growth of close to 2% yoy.
… and looks set to widen
further as investment picks up
in 2017 and 2018
Fiscal stability improved via
higher tax collection and
controlled public spending
supported now by the EFF
UniCredit Research
Fiscal sustainability should be reinforced by the EUR 554mn EFF arrangement agreed
with the IMF in September. The initial results of the implementation of the Reform Agenda
and the measures agreed on under the EFF resulted in an improved fiscal position, with the
expected general government deficit below 1% of GDP and a primary surplus in 2016. These
were achieved through improved tax collection (4% yoy rise in indirect tax receipts during
January-November in a deflationary environment) and restrained public spending – partly as
a response to delays in the second EFF tranche disbursement. However, we expect that the
issues causing delays will be resolved very soon and would not pose a risk to future fiscal
stability, with the EFF now providing roughly EUR 250mn in 2017, and governments at all
levels ensuring the continuation of the public sector reforms needed to ensure a sustainable
fiscal stabilization path. The key risk, therefore, remains the complex decision making process.
page 61
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Russia (Ba1 negative/BB+ stable/BBB- stable)*
Outlook – Despite the improving external environment, the recovery remains elusive as the
weakness of internal drivers continues to be a drag on growth. We expect consumption to
start recovering in the months ahead, although its overall contribution to GDP will be
restrained by a pickup in imports. We therefore maintain our forecast of a contraction of 0.8%
in 2016, followed by a modest recovery in 2017-18 at a pace of roughly 1% per year. The
current and prospective slowdown in inflation should permit the CBR to resume rate cuts in 2017,
albeit at a moderate pace, given still significant risks to the inflation outlook. Fiscal risks
remain the key issue, especially in regard to deficit financing. The future growth outlook
crucially depends on the supply response, institutional reforms and structural changes.
Author: Artem Arkhipov, Head of Macroeconomic Analysis and Research Russia(UniCredit Bank Russia)
Anna Bogdyukevich, CFA, Economist (UniCredit Bank Russia)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ 3 Feb, 24 Mar – MPC meeting
■ 10 Jan 7 Feb 7 Mar – Consumer price index
■ 3 Feb – National accounts FY16
■ 23 Jan 16 Feb 16 Mar – Industrial production index
■ 18-23 of every month – short-term statistical overview
MARGINAL GROWTH AHEAD
Personal Consumption
Fixed Capital Formation
Net export
yoy (%)
Public Consumption
Inventories
Gross Domestic Product
EUR bn
GDP (EUR bn)
2014
1,527
2015
1,188
2016F
1,150
2017F
1,376
2018F
1,404
146.3
146.5
146.9
147.1
147.3
10,441
8,110
7,833
9,353
9,526
GDP
0.7
-3.7
-0.8
0.9
1.1
Private Consumption
1.5
-9.6
-4.2
1.5
2.0
-2.6
-7.6
-6.1
1.1
1.2
0.2
-1.8
-1.0
-0.4
-0.3
0.5
Population (mn)
GDP per capita (EUR)
Real economy, change (%)
Fixed Investment
Public Consumption
Exports
0.6
3.6
-1.5
0.5
Imports
-7.6
-25.7
-6.2
3.0
3.5
Monthly wage, nominal (EUR)
637
500
474
556
569
Real wage, change (%)
1.2
-9.3
0.5
1.3
1.5
8
Unemployment rate (%)
5.2
5.6
5.6
5.7
5.6
6
Fiscal accounts (% of GDP)
Budget balance
-0.4
-2.4
-3.8
-3.6
-3.1
Primary balance
0.1
-1.8
-3.1
-2.9
-2.4
10.1
10.3
11.0
10.4
11.2
Current account balance (EUR bn)
43.9
62.7
22.0
17.2
11.9
Current account balance/GDP (%)
2.9
5.3
1.9
1.2
0.8
Extended basic balance/GDP (%)
1.1
4.0
1.3
0.8
0.8
Net FDI (% of GDP)
-1.7
1.3
-0.6
-0.4
0
Gross foreign debt (% of GDP)
29.6
39.3
39.1
31.7
29.9
279.2
293.2
294.6
295.7
300.0
10.3
13.9
16.6
13.5
12.1
CPI (pavg)
7.8
15.6
7.1
4.8
4.2
CPI (eop)
11.4
12.9
5.7
4.5
4.0
-
4.0
4.0
4.0
4.0
Central bank reference rate (eop)
17.0
11.0
10.0
8.0
6.5
USD/RUB (eop)
60.7
73.8
60.7
59.8
60.6
EUR/RUB (eop)
73.2
80.3
63.8
65.8
70.3
USD/RUB (pavg)
38.6
61.3
67.2
60.8
59.7
EUR/RUB (pavg)
Real effective exchange rate,
2000=100
Change (%)
51.0
68.0
74.4
65.3
67.8
208.0
178.0
179.2
205.9
206.7
-8.7
-14.4
0.7
14.9
0.4
4
2
0
-2
Public debt
-4
External accounts
-6
-8
-10
2014
2015
2016Е
2017F
2018F
INFLATION SLOWDOWN TO CONTINUE
19%
FX reserves (EUR bn)
Months of imports, goods & services
Key CBR rate
Headline CPI
Inflation/Monetary/FX
15%
Central bank target
11%
7%
3%
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Source: CBR, UniCredit Research
Source: CBR, Rosstat, Haver, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 62
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
No easy way out
We maintain our forecast of a
contraction of 0.8% in 2016,
followed by a slow recovery
in 2017-18…
The economic contraction appears to have come to an end, with 3Q16 GDP falling 0.1% qoq
adjusted for seasonality, or 0.4% yoy. The recovery, however, still remains elusive with
preliminary estimates suggesting no change in seasonally-adjusted GDP in October. Despite
the projected improvement in the external environment, the weakness of the internal drivers
will remain a drag on growth. In addition, the leap year effect will subtract some 0.2 pp from the
headline growth rate in 2017 after a similar addition in 2016. As a result, we maintain our FY 2016
GDP forecast at -0.8% and cut the FY 2017 outlook to just short of 1%. In the absence of
structural reforms, growth is unlikely to accelerate much in 2018 either, expanding at 1.1%.
…despite the improvement
in external conditions
External conditions for the Russian economy have improved since our September publication,
with growth in the EU and the U.S. now expected to be stronger and oil prices on the rise.
However, even the projected 25-30% increase in the average oil price is unlikely to benefit the
Russian economy much, as it will result in appreciation pressures, reversing much of the
positive impulse back to external markets via an increase in import volumes.
While Mr. Trump’s election as the next U.S. president has been largely acclaimed as
beneficial for Russia, we remain skeptical. While some thaw in relations could well occur, we
do not expect any imminent improvement, at least not in regard to sanctions. We therefore
maintain our assumption that financial sanctions will remain in place during the whole
forecasting period, implying that external debt is likely to diminish further in 2017-18, albeit at a
slower pace. At the same time, the current external debt rollover ratio is rather high (close to 80%),
indicating that companies are receiving adequate refinancing, even if a large part of this
comes from affiliated entities registered abroad. This said, deleveraging will contribute to
resident capital outflows, which are likely to rise again, in line with export earnings.
We assume that financial
sanctions will remain in
place in 2017-18
Domestically, consumption has yet to recover, with retail sales down by 4.4% yoy in October
(-5.3% YTD). We however expect consumption to start recovering in the months ahead due to
several reasons. First, falling inflation has already helped push real wage growth into positive
territory (albeit modestly) and we expect this trend to gain momentum. Second, the
population’s savings behavior is returning to normal after being in a ‘crisis mode’ for a long
time. This implies that any further increase in income levels is likely to be spent rather than
saved, especially given sizable deferred demand for durables. Finally, the 2017 budget,
despite a headline contraction in real spending, is skewed towards social outlays, especially
ahead of the presidential election scheduled for 2018, which will also boost consumption.
We expect consumption
to start recovering in the
months ahead
Under this base-case scenario, we believe the USD-RUB exchange rate is likely to be broadly
flat amid a shrinking current account surplus (with the increase in commodity prices offset by
higher import volumes). The stable ruble and a still sluggish consumption will help inflation to
decelerate, although reaching the 4% target by the end of 2017 remains challenging.
USD-RUB exchange rate is
likely to be broadly flat, helping
inflation to decelerate
External debt rollover is high despite the sanctions
Saving mode is returning back to normal
20
750
% of income saved
Rollover
rate 78%
Rollover
rate 48%
650
15
2009-10 average
2015 average
550
non-crisis average
10
2014 average
450
Oct-16
Rollover
Repaym.
FX effect
Oct-15
Rollover
Repaym.
FX effect
Oct-14
350
5
0
2008 average
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
Source: Rosstat, CBR, UniCredit Research
UniCredit Research
page 63
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Even if the deficit is kept at
3.2% of GDP, deficit-financing
options remain a concern
There are some risks to the current outlook, however, mostly related to the authorities’ likely
policy response. Even with our less conservative assumptions on the oil price path, the
budget deficit in 2017-18 is likely to exceed 3% of GDP, as in this case a stronger RUB will
constrain the value of the oil-and-gas component of revenues (40% of the total at present).
Tax revenues will also remain under pressure due to still weak economic activity, and due to
the renewed increase in the shadow economy and tax optimization schemes. Even if the
deficit is kept at 3.2% of GDP as targeted, deficit-financing options remain a concern.
The Reserve Fund is likely to be depleted in 2017. External refinancing options are limited
due to the implicit sanctions. This leaves the government with two choices: to borrow
domestically, or to draw on the National Wellbeing Fund (NWF). Domestic debt issuance
plans are rather extensive already (RUB 1.6tn gross in each of the next two years), and may
create a supply overhang on the OFZ market, especially with the share of foreign ownership
already at record highs. The second option would require changes to the NWF’s mandate,
which currently limits its use to maintaining the stability of the pension system. Finally, the
government might extend privatization plans after the successful disposal of stakes in Rosneft
and Bashneft, although there is little envisaged in the current budget.
Depletion of the Reserve Fund
leaves two options: domestic
borrowing or NWF
The CBR’s policy response, on the other hand, has been straightforward: assuming no
significant price shock, the regulator is likely to maintain 2.5-3.5% real interest rates, implying
policy rate cuts at a pace of roughly 50bp per quarter starting in the spring. However, if risks
to the inflation outlook materialize (e.g., from higher food prices or larger administered price
adjustments), the CBR may defer the cuts by 1-2 quarters, resulting in a 50-100bp higher key
rate at the end of 2017 than the base case. The potential adverse impact on growth is,
however, likely to be limited given the weak transmission mechanism. Similarly, faster policy
easing is unlikely to boost growth as Russian companies have already accumulated
significant amounts of deposits. Faster easing, in our view, would be possible only in case of
undesirable RUB appreciation (to 55 vs. the USD or below), in order to discourage carry
investors. In this case, the CBR may also begin FX purchases to replenish reserves.
The CBR is likely to cut the policy
rate at a pace of roughly 50bp per
quarter starting in spring
This said, the future growth outlook crucially depends on the supply response. Even though
output currently seems to be stuck well below potential, we believe that demand-side policies
are capable of providing only a short-term cure. An extended period of underinvestment (YTD
fixed investment declined by 2.3% yoy, following two years of contraction) has negatively
affected domestic production capacities, resulting in lower potential growth. Therefore,
institutional reforms and structural changes are crucial for medium and long-term growth.
Given that the agenda mostly depends on political willingness, we do not expect much
progress before the 2018 election. There have been some signs that the Russian political
elite has come to realize the need for reforms, but it is yet uncertain whether these shifts will
result in policy actions after the 2018 election.
Future growth outlook
crucially depends on the
supply response…
…institutional and structural
reforms are crucial for medium
and long-term growth
Potential GDP growth has declined…
2014
RUB trln, in const 2008 prices
45
2016
…and growth is unevenly distributed across industries
Actual GDP, saar
3Y CAGR
200%
150%
43
100%
41
50%
Average growth ≈ 0
39
0%
-50%
37
35
2007
-100%
2008
2009
2010
2011
2012
2013
2014
2015
Production, ranked by CAGR
2016
Source: Rosstat, UniCredit Research
UniCredit Research
page 64
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: disinflation to continue
Javier Sánchez,
CEE Fixed Income Strategist
(UniCredit Bank London)
+44 207 826-6077
Russian bonds were the best performers in 2016 largely due to the strength of the ruble
supported by several years of credible monetary policy. Local currency investments returned
in EUR equivalent 40% and foreign-currency bonds returned between 8-10%.
[email protected]
Investors piled into OFZs and other Russian assets. The OFZ curve has been floored at about
8% yield for the last 6 months despite headline inflation continuously decreasing. The ruble
appreciated by 30% in real terms and is about 5% below its 10 year average. We expect oil
prices to inch slightly higher from current levels towards 62 bbl and therefore see the ruble
slightly undervalued. Therefore, we do not expect the currency to deliver the same level of
returns in 2017. We expect disinflation to continue and find current real OFZ rates attractive
targeting 100-150 bp of yield compression which would still result in real rates in excess of 200bp.
Foreign participation in Russian OFZ bonds (% of total)
OFZ yields and target inflation
Russia OFZ yield (in %)
Foreign participation in OFZ bonds
12
25
10
20
8
RUB YTM (in %)
30
15
10
6
CPI yoy 2017e
4
Jul-16
Oct-16
Apr-16
Jan-16
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
0
Jul-12
0
Oct-12
2
Apr-12
5
Jan-12
As of Jan 3, '17
As of Sep 30, '16
As of Jun 30, '16
CPI yoy 2018e
0
1
2
3
4
5
6
7
8
9
10
Modified Duration
Source: Bllomberg, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans
External borrowing
Bonds
IMF/EU/Other IFIs
Privatization/Other
Sovereign Funds
2016F
56.3
43.5
12.8
9.4
9.4
--3.4
1.4
1.9
56.3
13.4
13.4
--2.7
2.7
0
15.0
25.2
2017F
59.4
49.5
9.8
7.7
7.7
--2.1
1.9
0.3
59.3
23.6
23.6
--2.8
2.8
0
7.2
25.7
GROSS EXTERNAL FINANCING REQUIREMENTS
2018F
54.2
43.5
10.7
7.6
7.6
--3.1
3.1
0
54.2
23.0
23.0
--2.6
2.6
0
7.3
21.2
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
2016F
96.0
-22.0
74.1
3.4
23.1
47.6
44.0
96.0
-9.0
5.0
57.0
2.7
16.2
38.1
44.5
-1.0
-0.5
2017F
102.3
-17.2
75.0
2.1
19.7
53.2
44.5
102.3
-6.1
4.2
61.1
2.8
15.7
42.6
49.3
-5.0
-1.2
2018F
118.0
-11.9
80.6
3.1
17.1
60.4
49.3
118.0
-0.6
4.8
64.6
2.6
13.7
48.3
53.5
0.0
-4.3
5.7
1.1
3.0
-0.3
3.0
-0.9
Source: CBR, MoF, UniCredit Research
UniCredit Research
page 65
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Serbia (B1 positive/BB- positive/BB- stable)*
Outlook – The economy is in its best shape since the financial crisis, with growth expected at
3% this year and next supported by investment in 2017 and consumption in 2018. Budget
deficits of around 2% of GDP will help reduce the debt and improve the rating outlook.
Pressure on the RSD from volatile capital flows and a lower inflation target will postpone
monetary easing. The main domestic risks are loan euroization and potential early
parliamentary elections in April.
Strategy – Serbia needs to issue a EUR bond to stabilize external financing and lower the
pressure on local issuance. SERBIA USD bond spreads could tighten vs CROATI if early
parliamentary elections are not called for April.
Author: Dan Bucșa, Lead CEE Economist (UniCredit Bank London)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ 12 Jan, 14 Feb, 14 Mar: NBS monetary policy meetings
■ 1-3 Feb, 27-28 Feb: 4Q16 GDP (flash, structure)
■ Mar: quarterly IMF review
■ 9 Apr: presidential (and potentially parliamentary) elections
Inventories and discrepancy
Net exports
Gross fixed capital formation
Public consumption
Private consumption
GDP
2014
2015
2016F
2017F
2018F
GDP (EUR bn)
33.1
32.8
33.4
34.8
36.6
Population (mn)
7.1
7.1
7.1
7.0
7.0
4,638
4,624
4,734
4,957
5,243
GDP
-1.8
0.8
2.7
3.0
3.0
Private Consumption
-1.3
0.5
0.9
2.8
3.2
Fixed Investment
-3.6
5.6
5.9
4.5
3.8
Public Consumption
-0.6
-1.5
2.3
2.5
2.5
Exports
5.7
10.2
10.2
5.5
5.3
Imports
5.6
9.3
7.1
5.5
5.2
Monthly wage, nominal (EUR)
524
506
515
526
543
GDP per capita (EUR)
Real economy, change (%)
GDP GROWTH
yoy (%),
pp of GDP
EUR bn
Real wage, change (%)
-0.9
-1.8
2.6
1.0
1.0
5.0
Unemployment rate (%)
19.9
18.2
16.4
15.3
14.9
4.0
Fiscal accounts (% of GDP)
-2.0
6.0
3.0
2.0
Budget balance
-6.6
-3.8
-2.0
-1.8
1.0
Primary balance
-3.7
-0.5
1.2
1.5
1.3
0.0
Public debt
71.8
75.9
74.6
72.4
69.6
Current account balance (EUR bn)
-2.0
-1.6
-1.3
-1.4
-1.5
Current account balance/GDP (%)
-6.0
-4.8
-3.9
-4.0
-4.1
Extended basic balance/GDP (%)
-2.3
0.7
1.2
1.0
1.5
3.7
5.5
5.1
5.0
4.6
Gross foreign debt (% of GDP)
77.6
80.3
78.0
78.0
76.6
FX reserves (EUR bn)
11.1
11.5
11.2
11.6
11.7
7.4
7.3
6.7
6.5
6.1
CPI (pavg)
2.1
1.4
1.1
2.5
3.7
CPI (eop)
1.8
1.6
1.4
3.8
3.6
3.0
Central bank target
4.0
4.0
4.0
3.0
3.0
2.0
Central bank reference rate (eop)
8.00
4.50
4.00
4.00
4.00
1.0
3M money market rate (Dec avg)
8.59
3.86
3.45
3.97
4.00
USD/FX (eop)
99.5
111.2
117.1
114.5
110.3
EUR/FX (eop)
121.0
121.6
123.5
126.0
128.0
USD/FX (pavg)
88.4
108.8
111.3
116.2
111.5
EUR/FX (pavg)
117.2
120.8
123.1
124.8
126.5
-1.0
External accounts
-2.0
-3.0
2014
2015
2016F
2017F
2018F
Net FDI (% of GDP)
INFLATION FORECAST
yoy (%)
Headline inflation
Inflation target
Target range
6.0
Months of imports, goods & services
5.0
Inflation/Monetary/FX
4.0
0.0
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Source: SSO, NBS, UniCredit Research
Source: SSO, NBS, MinFin, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 66
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Optimistic outlook clouded by domestic risks
The economy is in the best
shape since the financial crisis…
…with growth expected at 3%
this year and next…
…supported by investment
in 2017…
…and consumption in 2018
The Serbian economy enters 2017 in the best shape it has been in since the financial crisis:
above-potential growth, low budget deficit, stable stock imbalances and moderate inflation.
Rating agencies took note and improved Serbia's rating outlook. The IMF considers the
precautionary agreement broadly on track. However, the risk of stalling reforms is also
materially higher than in the past. SOEs remain loss making 8, a drag on the budget and
economic growth. Addressing these losses remains the main item on the IMF’s agenda.
Labor, judicial and institutional reforms are needed to improve the business environment,
increase private and foreign investment and accelerate growth on a sustainable basis.
Economic growth should reach 3% this year and next, although the composition may change.
Public infrastructure investment will remain the biggest growth driver, with projects in rail and
road infrastructure financed with Russian, Chinese and Azeri loans. A bumper harvest and
new foreign investment projects in siderurgy, car parts and agriculture could keep export
growth above 5%, offsetting falling output at Fiat, the country's largest exporter. Private
consumption is likely to rise faster than in 2016, but higher inflation and the possibility of
additional lay-offs in the public sector will slow real wage growth, despite higher operating
margins in the private sector. In 2018, we expect private consumption to play a more
prominent role in keeping GDP growth close to 3%. At the same time, public investment could
slow, unless the government reduces SOE losses or borrows more.
Despite good export growth, a rebound in consumption and in investment projects is likely to
boost imports as well. Thus, any additional adjustment in the C/A deficit may be only
marginal. Moreover, this assumes that remittances will offset higher interest expenditure as
public external debt rises further. FDI will continue to cover the external shortfall, but the RSD
will remain vulnerable to swings in external risk appetite.
Budget deficits of around 2%
of GDP…
... will help reduce debt and
improve the rating outlook
Serbia's budget deficit is expected to remain close to 2% of GDP in 2017 and 2018, with a
significant reduction below this threshold unlikely as long as SOEs continue to generate large
costs. Moreover, contingent liabilities remain high: the IMF highlighted that SOEs are running
large arrears with Srbijagas and EPS. Eventually, these will have to be covered by the
government or affect energy companies’ results. A stable budget deficit of around 2% of GDP
will lead to a reduction in public debt to GDP. The pace is likely to be slower than in 2016,
when the government reduced its fiscal reserves by 1.5% of GDP. Stable debt metrics may
lead first to an upgrade from Moody's in 2017, thus aligning the three ratings. While rating
upgrades will probably continue, the investment grade remains years away.
IMPROVING SITUATION IN THE PRIVATE AND THE PUBLIC SECTOR
Companies’ financial health is improving
yoy (%), SA, CPI-adjusted
Public debt started falling last year (in percent of GDP)
Operating income
Public debt (EUR bn)
Operating costs
Public debt (% GDP, rs)
20
27.0
80.0
15
25.0
75.0
23.0
70.0
21.0
65.0
19.0
60.0
17.0
55.0
10
5
0
-5
15.0
-10
1Q09
4Q09
3Q10
2Q11
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
2012
2013
2014
2015
2016E
2017F
2018F
50.0
3Q16
Source: SSO, MinFin, UniCredit Research
8
The IMF mentioned on1 November 2016 the copper mine RTB Bor, the Resavica mines, and the chemical producers Petrohemija, Azotara and MSK.
UniCredit Research
page 67
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
The RSD remains vulnerable
to volatile capital flows
In 9M16, foreigners reduced their holdings of Serbian bonds by EUR 683mn (2% of GDP).
While most outflows were accounted for by a single investor, US investors are less keen on
Serbian bonds since yields are three times lower than their peak in 2H12. Tapping European
debt markets would make sense at this stage and would alleviate the depreciation pressure
on the RSD. Otherwise, the NBS will have to keep tight monetary conditions, thus supporting
further euroization.
Inflation is expected inside the
target range in 2017 and 2018
The NBS decided to lower its inflation target from 4% to 3% starting in 2017. As a result,
additional rate cuts are unlikely this year and next due to expected reflation. Headline inflation
could exceed 3% in both 2017 and 2018. This year, a combination of higher oil prices and
core inflation, stronger USD and regulated price increases could push inflation temporarily
close to 4%, without threatening to exceed the target band of 1.5-4.5%. Interest rate
increases are unwarranted, since the output gap will remain negative.
Loan euroization remains
the biggest risk for the
banking system
The biggest local risks refer to loan euroization and to political stability. The IMF believes that
reducing the inflation target will help the dinarization of the economy, but the process is not
straight-forward. The current rise in private-sector borrowing is supported mostly by FX loans,
which remain significantly cheaper than RSD loans. High euroization compels the NBS to
defend the currency at the cost of keeping monetary conditions tighter than the economy
would require in this phase of the business cycle. This is likely to continue if the structure of
external financing does not change to more stable sources and the average duration of
government bonds does not increase. The failure to reverse euroization remains one of the
biggest macroeconomic risks for a country that attempts a quasi-currency peg while running a
current account deficit.
After a Novi Sad court granted a CHF borrower the termination of his loan agreement at a
total cost that covers 60% of the value of the principal at the current exchange rate,
approximately 18,500 CHF borrowers may seek a similar settlement. This would affect the
banking sector at a time when the NPL ratio remains high (19.5% in September 2016).
Early parliamentary elections
would be bad for reforms and
asset prices
The newest local risk is another round of early parliamentary elections. PM Aleksandar Vučić
will decide by the end of January whether to call early parliamentary elections at the same
time as the regular presidential elections, expected on 9 April. This would help the SNS
candidate (yet to be determined) for the largely-ceremonial president position fight off a
potential single candidate from the opposition (the early favorite is former Foreign Minister
Vuk Jeremić). If Mr. Vučić decides to call early elections, the risk of stalling reforms and
delays in public financing could reemerge, affecting Serbian bond yields and the RSD.
EUROIZATION IS THE BIGGEST PROBLEM OF THE BANKING SECTOR
RSD loans are more expensive than EUR ones
interest rate on
new loans (%)
25.0
Loans to households in RSD
Loans to households in EUR
FX loans dominate lending and continue to grow
Loans to companies in RSD
Loans to companies in EUR
RSD bn
Household loans in other FX
Household loans - FX indexed
Household loans in RSD
Household loans in CHF
Household loans in EUR
1200
20.0
1000
800
15.0
600
10.0
400
200
5.0
0.0
Sep-10
0
Jan-12
Jun-11
Mar-12
Dec-12
Sep-13
Jun-14
Mar-15
Dec-15
Oct-12
Jul-13
Apr-14
Jan-15
Oct-15
Jul-16
Sep-16
Source: NBS, UniCredit Research
UniCredit Research
page 68
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: Issuance in EUR would be welcome
Javier Sánchez,
CEE Fixed Income Strategist
(UniCredit Bank London)
+44 207 826-6077
With the Fed expected to increase rates further in 2017 and reflation reducing the scope for
monetary easing in Serbia, the government will have to focus on expanding the bond investor
base to Europe. A first EUR international bond would be a step in the right direction, even if
issued at a significant premium over regional peers.
[email protected]
The SERBGB market needs to develop further in order to attract eurozone investors. Making
SERBGBs euroclearable, choosing primary dealers who can provide liquidity in the secondary
market and continuing to focus on a limited number of benchmarks are steps that could
increase liquidity in the market and lead to inclusion in local currency bond benchmarks.
SERBIA USD 20 and 21 offer a pickup over CROATI USD of about 40bp, close to the highs
registered since 2014. Although Croatia has a better macro outlook, the spread may narrow if
the Serbian government does not call early parliamentary elections for April 2017.
SERBGBs offer one of the highest yields in the CEE region
6
6
Serbia and Croatia USD z-spreads differential
Z-spreads, bp
As
As of
of Jan
Jan 3,
3, '17
'17
As
As of
of Sep
Sep 30,
30, '16
'16
As
As of
of Jun
Jun 30,
30, '16
'16
5
5
spread SERBIA to CROATI 20
spread SERBIA to CROATI 21
100
RSD YTM (in %)
80
60
4
4
40
3
3
20
0
2
2
-20
-40
1
1
-60
0
0
0
0
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
-80
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16
10
10
Residual
Residual Maturity
Maturity
* 7Y bond for Serbia
Source: Bloomberg, MinFin, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
External borrowing
Bonds
IMF/EU/Other IFIs
Other
Fiscal reserves change (- =increase)
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
4.6
0.7
3.9
3.3
1.9
1.4
0.6
0.6
0.1
4.6
3.2
2.4
0.8
1.2
0.0
0.6
0.6
0.3
4.8
0.6
4.1
3.4
2.6
0.8
0.7
0.7
0
4.8
3.1
2.2
0.9
1.8
1.0
0.2
0.6
-0.1
4.4
0.7
3.7
2.8
1.9
0.9
0.9
0.9
0
4.4
2.8
2.0
0.8
1.6
1.0
0.2
0.4
0
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Government/central bank
Banks
Corporates/Other
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
EU structural and cohesion funds
Change in FX reserves (- = increase)
Source: NBS, MinFin, UniCredit Research
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
UniCredit Research
page 69
2016F
6.7
1.3
5.1
0.6
1.0
3.5
0.3
0
0.2
0.1
2017F
6.7
1.4
5.1
0.7
1.0
3.4
0.2
0
0.1
0.1
2018F
7.0
1.5
5.2
0.9
1.0
3.4
0.2
0
0.1
0.1
6.7
1.5
0
4.6
0.4
0.8
3.5
0.3
0
0.3
6.7
1.5
0
5.9
1.8
0.7
3.4
0.2
0
-0.9
7.0
1.5
0
5.8
1.7
0.7
3.4
0.2
0
-0.5
-0.8
-0.6
0.0
0.3
0.1
0.1
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Turkey (Ba1/BB+/BBB- negative)*
Outlook – Economic performance worsened sharply in 2H16 with political shocks, security
concerns, and rating downgrades pushing the economy into recession. Macroeconomic
imbalances have widened, with policies aiming at boosting demand rather than addressing
the underlying structural rigidities, and financial markets have been battered by the slump in
risk appetite after Trump’s victory. While growth should pick up in 2017 in the absence of
further shocks, political uncertainty will keep markets volatile at least through mid-2017. With
global financial conditions set to tighten further, and the CBRT unlikely to tighten as needed to
lure investors back, Turkish assets will remain under pressure. Odds of a major financial
dislocation will rise, with a potentially severe adverse impact on growth and incomes.
Author: Lubomir Mitov, Chief CEE Economist (Unicredit Bank London)
MACROECONOMIC DATA AND FORECASTS
EUR bn
2014
2015
2016F
2017F
2018F
GDP (EUR bn)
703.6
776.2
750.5
727.0
753.7
Population (mn)
77.3
78.2
79.0
79.8
80.6
9,100
9,931
9,504
9,114
9,351
GDP
5.2
6.1
1.5
3.0
3.3
Private Consumption
3.0
5.5
1.5
3.3
3.8
Fixed Investment
5.1
9.2
3.1
0.5
3.5
Public Consumption
3.1
4.1
17.5
10.0
6.0
Exports
10.8
6.6
-0.6
4.0
4.6
Imports
1.7
3.8
4.5
3.9
4.1
Monthly wage, nominal (EUR)
968
1,029
1,072
1,036
1,071
14.0
Real wage, change (%)
1.0
2.3
7.6
0.4
2.9
12.0
Unemployment rate (%)
9.9
10.3
10.8
10.7
10.5
-3.1
KEY DATES/EVENTS
■ 11 Jan 14 Feb 13 Mar – Current account balance
■ 24 Jan – MPC meeting
GDP per capita (EUR)
■ 3 Feb 3 Mar – Consumer price index
■ 16 Mar – National accounts 4Q16
Real economy, change (%)
GROWTH HAS DECELATED SHARPLY…
16.0
yoy (%)
Personal consumption
Public consumption
Gross fixed capital
Net exports
Inventories
GDP
10.0
8.0
Fiscal accounts (% of GDP)
6.0
Budget balance
-1.9
-1.7
-2.6
-2.8
2.0
Primary balance
0.8
0.8
0.1
-0.1
-0.2
0.0
Public debt
31.0
30.6
33.2
33.2
33.5
Current account balance (EUR bn)
-32.8
-29.0
-37.8
-39.8
-43.6
Current account balance/GDP (%)
-4.7
-3.7
-5.1
-5.6
-6.0
Extended basic balance/GDP (%)
-3.9
-2.4
-4.3
-4.7
-5.2
0.8
1.3
0.8
0.9
0.8
Gross foreign debt (% of GDP)
44.6
46.0
46.9
48.3
54.1
FX reserves (EUR bn)
87.1
101.4
91.1
85.7
83.3
4.7
5.4
4.8
4.5
4.2
4.0
-2.0
External accounts
-4.0
-6.0
2010
2011
2012
2013
2014
2015E
2016F
2017F
2018F
…WITH INFLATION SET TO ACCELERATE
CPI
yoy (%)
Inflation target
TRY basket (rs)
14.0
35.0
12.0
30.0
Months of imports, goods & services
25.0
Inflation/Monetary/FX
20.0
10.0
8.0
6.0
15.0
CPI (pavg)
8.9
7.7
7.8
10.6
7.6
10.0
CPI (eop)
8.2
8.9
8.6
9.2
7.7
5.0
Central bank target
5.0
5.0
5.0
5.0
5.0
-5.0
Central bank reference rate (eop)
8.3
7.5
7.8
8.5
8.0
-10.0
3M money market rate (Dec avg)
9.6
9.3
8.5
9.8
8.3
USD/TRY (eop)
2.30
2.92
3.52
3.70
3.90
EUR/TRY (eop)
2.83
3.18
3.71
4.07
4.52
USD/TRY (pavg)
2.19
2.72
3.04
3.58
3.74
EUR/TRY (pavg)
2.91
3.01
3.35
3.85
4.13
108.6
109.0
107.7
100.8
97.4
-4.3
0.3
-1.2
-6.4
-3.4
0.0
4.0
2.0
0.0
Jan-07
Net FDI (% of GDP)
-15.0
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
-20.0
Source: Turkstat, CBRT, UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
Source: Turkstat, CBRT, Haver, Bllomberg,UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 70
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
A year to forget
2016 was the worst year since
the global financial crisis…
For Turkey, 2016 was the worst year since the global financial crisis. Hit by a series of political
shocks, such as the failed coup in July, a collapse in tourism caused by the Russian travel
ban (lifted only in September) and growing security concerns, as well as Moody’s downgrade
to sub-investment grade in October, the economy slipped into recession after midyear, for the
first time since 2009. However, unlike then, this time the recession is domestically-bred.
…with the economy in
recession after midyear
The slump in activity was particularly steep in 3Q16. Private consumption slipped, dragged
down by weak confidence in the wake of the coup attempt and the government’s response
that followed. Investment fell again and export growth softened. However, the major culprit
was tourism, with arrivals falling more than 30%, the largest drop on record. While most of the
exceptional factors that pulled down growth in 3Q have lapsed, activity remained subdued
also in 4Q, setting the stage for a second consecutive quarterly yoy decrease in real GDP.
For FY16, growth is likely to have come in at just 1.5%, again the worst outcome since 2009.
The slump in activity was
particularly deep in 3Q16…
…with real GDP likely to have
contracted yoy in 4Q16 as well…
…as financial markets have
come under intense pressure
following Trump’s victory…
To add injury to insult, financial markets have come under intense pressure towards the end
of the year, when Trump’s victory triggered a major global selloff. Turkey again was among
the biggest losers: the TRY has slumped as much as 17% against the USD since midOctober, and yields on TURKGBs soared by more than 200bp. In general, in 2016 Turkish
assets have consistently underperformed other EM, both in times of upside, gaining the least
among peers, as well as in selloffs, when they were among the most affected.
…and Turkish assets among
the worst performers globally
This underperformance cannot be explained just by one-off shocks but was rather rooted in
Turkey’s longstanding structural weaknesses. These have been reinforced by misguided
policies which focused on boosting growth via major policy easing rather than addressing
underlying structural deficiencies. The fiscal stance eased by more than 2% of GDP, with
government spending surging 15-20% in real terms. Monetary policy has remained lax, with
the CBRT reluctant to hike rates despite the drop in the TRY, opting to boost liquidity instead.
This underperformance is
mostly rooted in major
structural deficiencies…
…reinforced by strongly
expansionary policies…
This policy stance has done little for growth, boosting the already sizable macroeconomic
imbalances instead. Despite the slowdown in economic activity, the C/A deficit has widened to
5% of GDP from 3.7% in 2015. While about 1pp of this deterioration was due to the collapse
in tourism, the underlying trade balance (adjusted for terms of trade changes) has
deteriorated markedly again. Inflation has remained elevated at just under 8%, despite a
sharp slowdown in food price increases and lower oil prices. With both set to reverse this year
and the TRY sharply weaker, price pressures will intensify again in 2017.
…that have done little
for growth…
…but have widened
further the sizable
macroeconomic imbalances
Economic activity has remained subdued…
…as the C/A has deteriorated further
Business confidence
Consumer confidence
Industrial production (rs)
130.0
140.0
120.0
130.0
110.0
120.0
100.0
90.0
110.0
ToT gains
CA balance adj
2.0
0.0
-2.0
-4.0
-6.0
100.0
70.0
Jul-16
Sep-16
May-16
Jan-16
Mar-16
Nov-15
Jul-15
Sep-15
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Sep-16
Jan-16
May-16
Sep-15
Jan-15
May-15
Sep-14
Jan-14
May-14
Sep-13
Jan-13
May-13
Sep-12
Jan-12
May-12
Sep-11
Jan-11
May-11
Sep-10
Jan-10
May-10
-12.0
80.0
Jan-14
90.0
60.0
-8.0
-10.0
Mar-14
80.0
50.0
Trade balance adj
4.0
Source: Turkstat, CBRT, Haver, UniCredit Research
UniCredit Research
page 71
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
We expect growth to rebound
in 2017 and 2018…
After a dismal 2016, we expect growth in Turkey to rebound to slightly above 3% in 2017. This
rebound will partly benefit from the expected recovery in global growth, but will largely reflect
the weak base from 2016 and one-off factors such as a partial recovery in tourism and the
expected lifting of the Russian ban on agricultural exports from Turkey. Growth ought to be also
supported by competitiveness gains, with the TRY now at its weakest level in real effective
terms since 2001 – a weakness that has more than offset the surge in unit labor costs.
…thanks to firmer foreign
demand, one-off factors and
competitiveness gains
Continued aggressive policy accommodation would lend some support to growth as well, but
at the expense of a further increase in macroeconomic imbalances. The resulting boost to
demand, along with the projected rise in oil prices, is likely to push the C/A deficit close to 6%
of GDP in 2017. The same factors, together with a rebound in food prices and weak TRY, will
lift inflation into double-digits for most of 2017.
Aggressive policy
accommodation will support
growth on the margin…
…but will add to the large
C/A deficit…
Inflation will remain elevated and the TRY weak due in part to the CBRT’s reluctance to
tighten monetary policy as needed. We expect the CBRT, under heavy political pressure, to
limit rate hikes to 75bp in 2017, on a par with the Fed, which is unlikely to be enough to lure
back investors. Fiscal policy will remain strongly expansive, with the deficit near 3% of GDP in
2017. Even so, risks to financial stability will be modest given Turkey’s low government debt.
…and leave inflation elevated
Rate hikes will mirror the Fed…
…as the fiscal deficit
widens further
The heavy reliance on foreign financing, against the background of misguided policies, will
leave Turkish financial markets highly vulnerable to shifts in market sentiment. Risks to
external financing will remain elevated and asset prices under pressure, at least until political
tensions ease, presumably after the referendum on granting the president executive powers
expected by May. A rebound could follow through the summer as tourism receipts rise, but is
likely to ebb by the fall as global financial conditions continue tightening. Another risk is the
marked deterioration of corporate balance sheets due to TRY depreciation and the spillover
effect this may have on domestic banks.
Financial markets will be
volatile until late spring…
…with a brief rebound possible
in the summer…
…followed by more pressure…
The risks to our baseline scenario are tilted towards the downside. Turkey’s major challenge
is the adjustment to the expected tightening in global liquidity conditions and the rise in core
yields. Given current policies, Turkish assets will continue underperforming their peers,
limiting foreign interest despite attractive nominal returns. While we do not expect a full-blown
financial crisis under our baseline scenario, risks for a “sudden stop” of capital inflows are not
negligible. A “sudden stop” could unleash a major financial upheaval, with an abrupt TRY
depreciation triggering a spike in interest rates that could eventually result in a recession.
…and potential risks to
corporate balance sheets
The risks are tilted to the
downside…
…with the rise in core yields
the main challenge…
..and odds of a major financial
upheaval rising
Messy domestic politics are another risk factor to consider. Fighting with the Kurds and
Turkey’s involvement in northern Syria have reinvigorated security concerns that might be
harmful to the revival of tourism. Furthermore, the purge of numerous civil service officials has
undoubtedly affected the quality of government institutions – something that will become
apparent only in the future. Finally, the upcoming referendum on granting the president
executive powers will also weigh on confidence well into 2017 if not beyond. limiting any
potential upside to the TRY and government bonds.
Messy politics are another risk
factor to consider…
…with potential adverse impact
on tourism, the quality of
institutions and on confidence
Monetary policy has eased sharply….
…as external financing conditions have become more difficult
FDI
Banks
EOM
14
12
15.0
10
10.0
8
5.0
6
0.0
CBRT O/N
1w repo
Deposit O/N
weighted avg cost of funding
4
2
0
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Portfolio
Other private
Reserves
Official
Resident Lending
C/A balance
-5.0
-10.0
-15.0
Jan-17
2005 2006
2007 2008 2009
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
Source: Turkstat, CBRT, Bloomberg, UniCredit Research
UniCredit Research
page 72
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: not there yet
Javier Sánchez, CFA
EM Fixed Income Strategist
(UniCredit Bank London)
+44 207 826-6077
Turkish market dynamics have gone from bad to worse this year. Looking at the last decade’s
metrics, the currency and both local and foreign bonds appear at the tail of the valuation
levels which signaled in the past good entry levels. However, we believe that we still need
more clarity on policy and to see how the effects of the large and persistent depreciation in
the currency affect the inflation and external metrics in order to issue an entry
recommendation. We may be close to that point but much will depend on the policy response
and the evolution of domestic politics at a time when the external environment is not helpful.
[email protected]
We expect inflation to reach 9.2% by year-end, but only after peaking at levels that could be
as high as 11-12% in the first half of the year with significant volatility. We therefore think that
current TURKGB yield levels still have some downside, with Fitch’s downgrade looming and a
busy domestic political calendar, and therefore we target an entry level of 12%.
USD bonds are trading at the higher end of the BB group, but current spread levels still do not
offer a compelling entry level.
Real TURKGB yields
Turkey USD Z-spreads vs. BB and BBB group
10y
Source: Bloomberg abd UniCredit Research.
700
BBB average
BB average
Turkey '23
3
600
500
2
400
300
1
200
0
100
-1
2012
2013
2014
2015
I
2016
III
II
IV
I
II
III
IV
0
2016
2015
Source: Bloomberg, UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans
External borrowing
Bonds
IMF/EU/Other IFIs
Privatization/Other
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
42.0
19.4
22.6
17.8
17.8
--4.8
2.5
2.3
41.9
28.4
28.4
--6.1
5.0
1.1
7.4
44.6
20.2
24.4
18.6
18.6
--5.8
3.1
2.8
44.6
35.3
35.3
--6.6
4.1
2.5
2.7
47.7
23.0
24.5
18.8
18.8
--5.9
4.3
1.6
47.5
37.2
37.2
--7.7
5.7
2.0
2.8
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
2016F
191.3
37.8
58.4
5.1
37.4
15.9
95.1
191.3
6.0
1.1
73.3
10.4
39.3
23.6
90.0
10.0
11.0
2017F
171.6
39.8
41.8
7.3
22.1
12.3
90.0
171.6
6.3
4.2
59.1
6.6
30.0
22.5
87.6
11.5
2.9
2018F
171.9
43.6
40.8
7.2
21.6
12.0
87.6
171.9
6.3
4.0
61.3
7.7
28.1
25.5
90.6
10.1
-0.4
2.5
1.8
2.3
2.0
4.0
2.1
Source: CBRT, Treasury, Turkstat, UniCredit Research
UniCredit Research
page 73
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
Ukraine (Caa3 stable/ B- stable/ B- stable)*
Outlook – The worst of the crisis seems to be over, with inflation abating and growth
returning, even if barely. The recovery has been driven by strong wage growth and a sizable
fiscal easing, which has resulted in renewed widening of the C/A deficit amid weak exports.
While encouraging progress was made recently in bank restructuring, the overall pace of
reforms has disappointed. We expect the authorities to do just enough to secure the renewal
of IMF lending, but prospects after 2017 remain clouded. At current policies, growth is unlikely
to top 1-2% with financial stabilization remaining fragile. With IMF lending tapering off and
repayments to official and private creditors commencing in 2018, debt sustainability concerns
will return unless growth and reforms pick up much more than likely at present.
Author: Lubomir Mitov, Chief CEE Economist (Unicredit Bank London)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ 06 Jan 08 Feb - Consumer price index
■ 23 Jan 23 Feb- Industrial production index
■ 26 Jan - Key rate decision
■ 3 Feb – Current account balance, 4Q16 FY16
■ 18 Feb 21 Mar – GDP Q1417 FY17
15.0
2016F
2017F
2018F
81.6
82.6
86.9
89.9
Population (mn)
42.9
42.8
42.3
41.9
41.9
GDP per capita (EUR)
2289
1909
1953
2073
2145
GDP
-6.8
-9.7
1.3
2.0
1.7
Private Consumption
-9.0
-20.2
3.8
4.2
4.0
-22.4
-9.3
12.5
10.0
8.0
0.4
1.0
-1.0
-0.8
0.5
Exports
-14.1
-16.9
-3.2
3.2
0.9
Imports
-21.3
-22.0
4.8
5.7
5.0
Monthly wage, nominal (EUR)
218
173
185
195
209
Real wage, change (%)
-5.2
-18.7
8.9
4.6
8.2
Unemployment rate (%)
9.3
9.6
9.7
9.6
9.6
Budget balance
-4.5
-1.2
-3.8
-3.3
-3.0
Primary balance
-1.2
3.0
0.8
1.2
1.5
Public debt
71.2
91.3
93.3
95.9
95.2
Current account balance (EUR bn)
-4.2
-0.2
-2.6
-2.8
-3.9
Current account balance/GDP (%)
-3.9
-0.2
-3.0
-3.2
-4.4
Extended basic balance/GDP (%)
-3.7
3.7
0.6
0.0
-0.8
0.2
3.9
3.7
3.2
3.6
96.8
131.5
129.8
129.6
134.6
Public Consumption
10.0
Fiscal accounts (% of GDP)
5.0
0.0
-5.0
-10.0
External accounts
-15.0
-20.0
2015
98.2
Fixed Investment
Private consumption
Public consumption
Gross fixed capital formation
Net exports
yoy (%)
2014
GDP (EUR bn)
Real economy, change (%)
GROWTH REMAINS LACKLUSTER
20.0
EUR bn
2010
2011
2012
2013
2015
2016f
2017f
2018f
Net FDI (% of GDP)
INFLATION SLOWING BUT STILL ELEVATED
yoy (%)
70.0
CPI
NEER
60.0
50.0
Gross foreign debt (% of GDP)
FX reserves (EUR bn)
5.0
11.3
12.5
14.0
15.8
180
Months of imports, goods & services
0.9
2.5
2.9
3.2
3.5
160
Inflation/Monetary/FX
140
CPI (pavg)
12.1
48.7
13.9
10.9
7.2
CPI (eop)
24.9
43.3
12.0
8.3
6.4
--
--
--
--
--
14.0
22.0
14.0
11.0
9.0
120
40.0
100
30.0
20.0
10.0
0.0
80
Central bank target
60
Central bank reference rate (eop)
40
3M money market rate (Dec avg)
21.0
19.0
15.0
12.0
10.0
20
USD/UAH (eop)
15.67
23.44
26.25
28.00
30.00
EUR/UAH (eop)
14.54
23.03
27.46
30.73
34.22
USD/UAH (pavg)
12.02
21.93
25.55
27.19
29.00
EUR/UAH (pavg)
15.96
24.26
28.23
31.05
33.64
79.1
79.6
77.9
81.9
80.6
-20.6
0.6
-2.1
5.1
-1.7
0
-10.0
Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18
-20
Source: UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
*
Source: Ukrstat, NBU, Haver, UniCredit Research
Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch respectively
UniCredit Research
page 74
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
A tenuous recovery as risks loom large
The recovery which began
in late 2015 has continued
but at a very slow pace…
The recovery that began in late 2015 continued into 2016, but at a very slow and uneven
pace, with occasional reversals. Buoyed in part by a bumper crop and recoveries in industry
and construction as tensions in the East eased, FY16 real GDP expanded perhaps by 1.3%.
This was in line with our initial projection but lower than the IMF’s 1.5% program target.
The tenuous recovery has been driven by domestic demand. Private consumption jumped
nearly 4% and investment 15%, although from a very low level. Compared with the 2013
peak, both remain 20-25% lower. Fiscal policy was also supportive, adding some 2.8pp to
growth as the budget deficit widened to 3.8% from 1.5% in 2015. This nearly reversed a
largely unintended 3% tightening in 2015 afforded by lower interest payments in the wake of
the debt restructuring and a largely inflation-driven higher-than-projected rise in revenues.
The government used this fiscal room to partially compensate for the steep drop in real
pensions and government wages, with the latter rising roughly 10% in real terms in 2016.
…driven by a rebound in
consumption and investment…
…both of which were policy
driven, with the fiscal stance
easing sharply
In contrast, the external sector
has disappointed…
The external sector has disappointed, however. Hit by a combination of terms of trade shocks,
subdued demand for key exports, such as metals, and tighter trade restrictions by Russia,
export volumes fell again, some 3% in 2016 and more than 30% since 2013. Import volumes
have begun recovering, rising nearly 5% in 2016, but still 35% lower than before the crisis.
…with exports shrinking and
imports rising…
These developments not only pushed the C/A deficit to 3% of GDP in 2016 from near balance
in 2015, but also underscored Ukraine’s key structural weakness – a savings rate of only 14-15%
of GDP, which is insufficient to support a meaningful rebound in investment without a sizable
C/A deficit. The latter, however, is something the economy cannot afford, with virtually all
financing coming from official sources and no access to private markets.
…pushing the C/A deficit to 3%
of GDP from 0.2% in 2015…
…underscoring Ukraine’s
main structural issue –
a very low savings rate
The rebound in domestic
demand was policy-driven…
What is perhaps more worrisome, the recovery in domestic demand has been almost entirely
policy driven. The January-October fiscal deficit surged to 3.5% of GDP from just 0.5% a year
before. Monetary policy has been eased as well, albeit quite cautiously and in line with the
decline in inflation. The latter dropped to 12% in November from 43% at the end of 2015, but
the decline mostly reflected the high base in 2015 when inflation surged as a result of steep
adjustments in administered energy prices, especially natural gas. These adjustments were
much smaller in 2016, both because import prices dropped in line with the decline in global oil
prices (to which they are linked) and relative UAH stability. Room for a more active monetary
policy has remained constrained by the need to keep most FX restrictions in place, given the
lack of access to foreign markets as well as the continued difficulties in the banking system,
which remains fragile.
…with the fiscal deficit soaring
Monetary policy was
eased cautiously…
…as inflation fell to low
double digits…
…but remained constrained by
weak banks and FX shortage
Activity has stabilized at a low level…
yoy (%)
…as export volumes continued contracting
Retail trade
20.0
Industrial production
Index (2010=100)
Imports
160.0
10.0
140.0
0.0
120.0
-10.0
100.0
-20.0
80.0
Jul-16
Oct-16
Apr-16
Jan-16
Jul-15
Oct-15
Apr-15
Oct-14
Jan-15
Jul-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jul-16
Oct-16
Apr-16
Jan-16
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
40.0
Jan-13
60.0
-30.0
-40.0
Exports
180.0
Source: Ukrstat, NBU, UniCredit Research
UniCredit Research
page 75
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
The outlook for 2017-18 remains
highly uncertain, despite
stronger global growth…
The outlook for 2017 and 2018 remains highly uncertain. While the pickup in global growth
and recovering commodity prices should provide an upside to exports, higher oil prices will
boost the import bill and necessitate further sizable adjustments in domestic energy prices
that will add to inflation. Moreover, tighter global liquidity conditions as U.S. interest rates rise
will further complicate Ukraine’s return to capital markets. Finally, the uncertainty related to
the future course of U.S. foreign policy vis-a-vis Russia will also weigh on confidence.
…as higher oil prices, tighter
global liquidity and political
concerns weigh on confidence
However, dysfunctional policies
and politics are the main
impediments to recovery…
However, the by far most important factor constraining the recovery involves domestic policies
and politics. Despite the significant progress made in divesting the sizable macroeconomic
imbalances, the progress achieved has been uneven and subject to reversals. This fragility
reflects to a large extent the lack of tangible progress in structural reforms. The fight against
corruption remains in nascent stages and institutional capacity very weak. The reforms
needed to put public finances on a sustainable footing have yet to be designed, and the role
of the state in the economy remains pervasive.
…with progress on structural
reforms disappointing
All these shortcomings reflect to a great extent Ukraine’s dysfunctional politics. The country’s
political system has remained largely unreformed, with heavy influence of vested interests
that have opposed any move to limit tax loopholes or push ahead with the fight against
corruption. Instead, Parliament has repeatedly pushed strongly populist or self-serving ideas,
which would have been detrimental to stability if implemented. While MPs had eventually to
back off under pressure from the IMF, concerns have been on the rise about the future course
of policies when the IMF program expires in 2018.
Dysfunctional politics remain
the main culprit…
…with vested interests
blocking reforms and pushing
ahead with populist ideas…
…for now blocked by the IMF
Given current policies, growth
will remain sluggish as macroeconomic imbalances grow
Given current policies, we expect the supply side response to be limited, capping growth at
2% in the coming years. At the same time, macroeconomic imbalances will remain an issue.
We expect the C/A deficit to widen to 3.2% of GDP in 2017 and 4.4% in 2018, once Russian
natural gas transit via Ukraine falls as alternative pipelines come into operation. While inflation
should ease into single digits by 2018, it would remain among the highest in CEE.
External financing will become
a growing source of concern…
Under these circumstances, external financing will become a source of growing concern.
While in 2017 the availability of foreign official financing should provide a cushion, external
financing challenges will be much tougher in 2018, when IMF lending tapers off and
repayments commence to both official creditors and private bondholders. The IMF program
assumes Eurobond issues of USD 1bn already in 2017 and USD 2bn in 2018, assuming
growth strengthens to 3% by then, and a C/A deficit of 2% of GDP. With growth almost
certainly likely to be lower and the deficit more than twice as large, borrowing needs from the
financial markets are more likely to amount to USD 4-5bn. – something which will be very
difficult to achieve given current policies and given tightening global liquidity conditions.
Unless policies are changed and reforms implemented, debt sustainability concerns will
remerge by 2018.
…once official financing tapers
off and debt repayments
surge…
…boosting borrowing needs
from private markets in 2018
Unless policies are changed,
debt sustainability worries will
re-emerge
External financing remains dependent on official creditors…
30.0
Official Financing
Resident Capital
C/A
USD bn
25.0
…as borrowing needs from private creditors surge after 2018
Equity
Foreign borrowing
Change in FX reserves
Official
Debt Restructuring
Other Private
30
25
20.0
20
15.0
10.0
15
5.0
0.0
10
-5.0
5
-10.0
-15.0
-20.0
0
2010
2011
2012
2013
2014
2015
2016
2015
2016
2017
2018
2019
2020
2021
2022
2017
Source: NBU, IMF, UniCredit Research
UniCredit Research
page 76
See last pages for disclaimer.
January 2017
<date>
Economics & FI/FX Research
CEE Quarterly
GOVERNMENT GROSS FINANCING REQUIREMENTS
EUR bn
GROSS EXTERNAL FINANCING REQUIREMENTS
2016F
2017F
2018F
Gross financing requirement
Budget deficit
Amortization of public debt
Domestic
Bonds
Bills
Loans
External
Bonds and loans
IMF/EU/Other IFIs
Financing
Domestic borrowing
Bonds
Bills
Loans
External borrowing
Bonds
IMF/EU/Other IFIs
Privatization/Other
Memoranda:
9.5
3.1
6.4
3.8
2.6
1.2
0
2.6
1.9
0.7
9.5
3.6
2.8
0.8
0
3.8
0.9
2.9
2.1
10.1
2.9
7.2
3.0
2.2
0.8
0
4.2
2.9
1.3
10.1
6.7
5.5
1.2
0
3.0
0.0
3.0
0.4
11.1
2.7
8.4
3.3
2.1
1.2
0
5.1
2.8
2.3
11.1
7.6
6.5
1.1
0
3.1
0.0
3.1
0.4
Bank recapitalization
3.2
3.8
0
Naftogaz financing
0.7
1.2
0
EUR bn
Gross financing requirement
C/A deficit
Amortization of medium and long term debt
Government/central bank
Banks
Corporates/Other
Amortization of short-term debt
Financing
FDI (net)
Portfolio equity, net
Medium and long-term borrowing
Government/central bank
Banks
Corporates/Other
Short-term borrowing
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
2016F
28.6
2.6
13.1
2.6
2.4
8.1
12.8
28.6
3.0
0
23.1
7.5
8.4
7.2
12.9
-3.5
-1.6
2017F
24.9
2.8
9.2
4.2
0.6
4.4
12.9
24.9
2.9
0
12.9
6.6
1.9
4.4
12.7
-1.6
-2.0
2018F
27.9
3.9
11.2
5.1
1.0
5.1
12.7
28.1
3.3
0
12.0
4.8
1.8
5.3
12.5
2.5
-2.2
0
0.8
0
0
0
0.8
Source: NBU, MoF, IMF UniCredit Research
UniCredit Research
page 77
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Acronyms and abbreviations used in
the CEE Quarterly
UniCredit Research
■
■
■
■
■
■
■
■
■
■
BNB – Bulgarian National Bank
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
ECB – European Central Bank
C/A – current account
CBR – Central Bank of Russia
CBRT –Central Bank of the Republic of Turkey
CE – Central Europe
CEE – Central and Eastern Europe
CNB – Czech National Bank
DM – developed markets
EA – euro area
EC – European Commission
EDP – Excessive Deficit Procedure of the European Commission
EM – emerging markets
EMU – European Monetary Union
EU – European Union
FCL – Flexible Credit Line (from the IMF)
FDI – foreign direct investment
IFI – international financial institutions
IMF – International Monetary Fund
MoF – Ministry of finance
NBH – National Bank of Hungary
NBP – National Bank of Poland
NBR – National Bank of Romania
NBS – National Bank of Serbia
NBU – National Bank of Ukraine
PLL – Precautionary and Liquidity Line (from the IMF)
PM – prime minister
PPP – public – private partnership
qoq – quarter on quarter
sa – seasonally adjusted
SBA – Stand-by Arrangement (with the IMF)
SOE – state-owned enterprise
WB – World Bank
yoy – year on year
ytd – year to date
page 78
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Notes
UniCredit Research
page 79
See last pages for disclaimer.
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
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out of its businesses and financial transactions. UniCredit represents that: except for the potential conflicts of interest listed under the heading “Potential Conflicts of Interest”
above, UniCredit, its controlled companies, controlling companies or companies under common control (the “UniCredit Group”) are not in a condition that may impact on the
impartiality of this report or that may constitute a conflict of interest, including but not limited to the following: (i) the UniCredit Group does not hold material equity interests in the
companies that are the object of this report; (ii) the companies that are the object of this report do not hold material equity interests in the UniCredit Group; (iii) the UniCredit
Group does not have material financial or commercial interests in the companies or the securities that are the object of this report; (iv) the UniCredit Group is not involved in the
acquisition, sale and/or trading of the securities that are the object of this report; and (v) the UniCredit Group does not receive compensation for services rendered to the
companies that are the object of this report or to any related parties of such companies.
Notice to Canadian investors: This communication has been prepared by UniCredit Bank AG, which does not have a registered business presence in Canada. This
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solicitation to buy any securities.
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the law for the Provision of Investment Services, the Exercise of Investment Activities, the Operation of Regulated Markets and other Related Matters, Law 144(I)/2007 and
persons to whom it may otherwise lawfully be communicated who possess the experience, knowledge and expertise to make their own investment decisions and properly assess
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does not undertake banking business or provide financial services in Oman and no advice in relation to, or subscription for, any securities, products or financial services may or
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Notice to Serbian investors: This analysis is only for distribution to professional clients (profesionalni klijenti) as defined in article 172 of the Law on Capital Markets.
Notice to UK investors: This communication is directed only at clients of UniCredit Bank who (i) have professional experience in matters relating to investments or (ii) are
persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This
communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available
only to relevant persons and will be engaged in only with relevant persons.
ENP e 11
UniCredit Research
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January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Banking network
UniCredit Group CEE banking network – Headquarters
Azerbaijan
Hungary
Russia
Yapi Kredi Azerbaijan
Yasamal District, Jafar Jabbarlı Str., 32/12,
AZ 1065, Baku/Azerbaijan
Phone +994 12 497 77 95
E-mail: [email protected]
www.yapikredi.com.az/
UniCredit Bank
Szabadság square 5-6,
H-1054 Budapest,
Phone: +36 1 301 12 71
E-mail: [email protected]
www.unicreditbank.hu
UniCredit Bank
Prechistenskaya nab. 9,
RF-119034 Moscow
Phone: +7 495 258 7258
E-mail: [email protected]
www.unicreditbank.ru
Bosnia and Herzegovina
Macedonia
Serbia
UniCredit Bank d.d.
Kardinala Stepinca - bb,
BH-88000 Mostar
Phone: +387 36 312112
E-mail: [email protected]
www.unicreditbank.ba
UniCredit Bank Austria AG Rep.Office Macedonia
Ulica Makedonija br. 53/4
MK-1000 Skopje, Macedonia
Phone: +389 2 321 51 30
E-mail: [email protected]
UniCredit Bank
Rajiceva 27-29,
RS-11000 Belgrade
Phone: +381 11 3204 500
E-mail: [email protected]
www.unicreditbank.rs
UniCredit Bank Banja Luka
Marije Bursac 7,
BA-78000 Banja Luka
Phone: +387 80 051 051
E-mail: [email protected]
www.unicreditbank-bl.ba
Montenegro
Bulgaria
UniCredit Bulbank
Sveta Nedelya Sq. 7,
BG-1000 Sofia
Phone: +359 70 01 84 84
www.unicreditbulbank.bg
Croatia
Zagrebačka banka d.d.
Trg bana Josipa Jelačića 10
HR-10000 Zagreb
Phone: +385 1 6104 169
E-mail: [email protected]
www.zaba.hr
Czech Republic
Bank Austria Representative Office
Hercegovacka 13
ME-81000 Podgorica
Phone: +382 20 66 77 40
E-mail: [email protected]
Poland
Bank Pekao
ul. Grzybowska 53/57,
PL-00-950 Warsaw
Phone: +48 22 656-0000
www.pekao.com.pl
Romania
UniCredit Bank
1F, Blvd. Expozitiei
RO-012101 Bucharest 1
Phone: +40 21 200 2200
E-mail: [email protected]
www.unicredit.ro
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Želetavská 1525/1
CZ-140 92 - Prague 4
Phone: +420 955 911 111
E-mail: [email protected]
www.unicreditbank.cz
UniCredit Research
Slovakia
UniCredit Bank
Sǎncova 1/A,
SK-813 33 Bratislava
Phone: +421 2 4950 1111
www.unicreditbank.sk
Slovenia
UniCredit Bank
Šmartinska Cesta 140,
SI-1000 Ljubljana
Phone: +386 1 5876 600
E-mail: [email protected]
www.unicreditbank.si
Turkey
Yapı Kredi
Yapı Kredi Plaza D Blok, Levent,
TR-34330 Istanbul
Phone: +90 212 339 70 00
www.yapikredi.com.tr
Ukraine
PJSC Ukrsotsbank
29 Kovpaka St.,
UA-03150 Kiev
Phone: +380 44 230 32 99
E-mail: [email protected]
www.unicredit.com.ua
page 82
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
Contacts for entering into a business relationship with UniCredit’s corporate banking network
(UniCredit International Centers)
UniCredit International
Center Austria
Martin Zojer
Tel: +43 5 0505 42748
E-mail: [email protected]
E-mail: [email protected]
UniCredit International
Center Germany
Carmen Hummel
Phone: +49 89 378 29947
E-mail: [email protected]
UniCredit International
Center Italy
Luciano Cenedese
Tel: +39 02 8862 8122
E-mail: [email protected]
Azerbaijan
Montenegro
Orhan Gültekin
Phone: +994 12 49 77 795
E-mail: [email protected]
Milan Djordjevic
Phone: +389 70 267 034
E-mail: [email protected]
Bosnia and Herzegovina
Poland
UniCredit Bank d.d.
Ana Dujić – Divković
Phone: +387 33 491 617
E-mail: [email protected]
Irene Grzybowski
Phone: +48 22 524 6218
E-mail: [email protected]
UniCredit Bank a.d. Banja Luka
Aleksandar Bereta
Phone: +387 51 246 622
E-mail: [email protected]
Bulgaria
Aldo Andreoni
Phone: +359 2 923 3560
E-mail: [email protected]
Croatia
Paolo Garlanda
Phone: +385 1 630 5320
E-mail: [email protected]
Czech Republic
Fabio Bini
Phone: +420 955 961 524
E-mail: [email protected]
Hungary
E-mail: [email protected]
Macedonia
Milan Djordjevic
Phone: +389 70 267 034
E-mail: [email protected]
Romania
Raluca Popescu
Phone: +4 021 200 1616
E-mail: [email protected]
Russia
Pietro Pasqualucci
Phone: +7 495 723 7126
E-mail: [email protected]
Serbia
Niccolo Bonferroni
Phone: +381 11 3204 677
E-mail: [email protected]
Slovakia
Fabio Bini
Phone: +420 955 961 524
E-mail: [email protected]
Slovenia
Natasa Markov
Phone: +386 1 5876 874
E-mail: [email protected]
Turkey
Nicola Longo-Dente
Phone: +90 212 339 7988
E-mail: [email protected]
Ukraine
Roberto Poliak
Phone: +38 044 529 0583
E-mail: [email protected]
UniCredit Research
page 83
January 2017
January 2017
Economics & FI/FX Research
CEE Quarterly
UniCredit Research*
Erik F. Nielsen
Group Chief Economist
Global Head of CIB Research
+44 207 826-1765
[email protected]
Dr. Ingo Heimig
Head of Research Operations
+49 89 378-13952
[email protected]
Economics & FI/FX Research
Economics Research
EEMEA Economics & FI/FX Strategy
Global FI Strategy
European Economics
Lubomir Mitov, Chief CEE Economist
+44 207 826-1772
[email protected]
Michael Rottmann, Head, FI Strategy
+49 89 378-15121
[email protected]
Artem Arkhipov, Head, Macroeconomic Analysis
and Research, Russia
+7 495 258-7258
[email protected]
Dr. Luca Cazzulani, Deputy Head, FI Strategy
+39 02 8862-0640
[email protected]
Marco Valli, Chief Eurozone Economist
+39 02 8862-0537
[email protected]
Dr. Andreas Rees, Chief German Economist
+49 69 2717-2074
[email protected]
Stefan Bruckbauer, Chief Austrian Economist
+43 50505-41951
[email protected]
Tullia Bucco, Economist
+39 02 8862-0532
[email protected]
Edoardo Campanella, Economist
+39 02 8862-0522
[email protected]
Dr. Loredana Federico, Lead Italy Economist
+39 02 8862-0534
[email protected]
Chiara Silvestre, Economist
[email protected]
Dr. Thomas Strobel, Economist
+49 89 378-13013
[email protected]
Daniel Vernazza, Ph.D., Lead UK Economist
+44 207 826-7805
[email protected]
US Economics
Dr. Harm Bandholz, CFA, Chief US Economist
+1 212 672-5957
[email protected]
Anca Maria Aron, Senior Economist, Romania
+40 21 200-1377
[email protected]
Anna Bogdyukevich, CFA, Russia
+7 495 258-7258 ext. 11-7562
[email protected]
Dan Bucşa, Lead CEE Economist
+44 207 826-7954
[email protected]
Hrvoje Dolenec, Chief Economist, Croatia
+385 1 6006 678
[email protected]
Dr. Ágnes Halász, Chief Economist, Head, Economics and
Strategic Analysis, Hungary
+36 1 301-1907
[email protected]
Ľubomír Koršňák, Chief Economist, Slovakia
+421 2 4950 2427
[email protected]
Marcin Mrowiec, Chief Economist, Poland
+48 22 524-5914
[email protected]
Kristofor Pavlov, Chief Economist, Bulgaria
+359 2 9269-390
[email protected]
Javier Sánchez, CFA, CEE Fixed Income Strategist
+44 207 826-6077
[email protected]
Pavel Sobisek, Chief Economist, Czech Republic
+420 955 960-716
[email protected]
Chiara Cremonesi, FI Strategy
+44 207 826-1771
[email protected]
Alessandro Giongo, FI Strategy
+39 02 8862-0538
[email protected]
Elia Lattuga, FI Strategy
+44 207 826-1642
[email protected]
Kornelius Purps, FI Strategy
+49 89 378-12753
[email protected]
Herbert Stocker, Technical Analysis
+49 89 378-14305
[email protected]
Global FX Strategy
Dr. Vasileios Gkionakis, Global Head, FX Strategy
+44 207 826-7951
[email protected]
Kathrin Goretzki, CFA, FX Strategy
+44 207 826-6076
[email protected]
Kiran Kowshik, EM FX Strategy
+44 207 826-6080
[email protected]
Roberto Mialich, FX Strategy
+39 02 8862-0658
[email protected]
Dumitru Vicol, Economist
+44 207 826-6081
[email protected]
Publication Address
UniCredit Research
Corporate & Investment Banking
UniCredit Bank AG
Arabellastrasse 12
D-81925 Munich
[email protected]
Bloomberg
UCCR
Internet
www.research.unicredit.eu
*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan),
UniCredit Bank New York (UniCredit Bank NY), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and Slovakia, Bank Pekao, ZAO UniCredit Bank Russia (UniCredit Russia),
UniCredit Bank Romania.
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