Download 2013Q2 – 06 – CEE - ABN AMRO Insights

6
Emerging Markets Outlook – April 2013
Arjen van Dijkhuizen, tel +31 20 628 8052
Emerging Europe: Southern and Western headwinds have not yet subsided
On the back of protracted eurozone weakness, emerging
Europe’s slowdown intensified and expanded throughout
2012. We lowered some of our forecasts, but expect
regional growth to mildly accelerate this year gaining
further momentum in 2014. We also see more room for
monetary easing in several countries. The Cyprus saga
caused some regional stress, but we continue to think that
Cyprus is a very special case.
Slowdown broadened and intensified in 2012
The slowdown in emerging Europe that started in mid-2011
intensified in late 2012 and has become more broad-based.
But growth patterns remain strongly divergent, with the severity
of contagion from the eurozone dependent on factors such as
trade and financial linkages, fiscal, external or banking sector
soundness and the scope countries have to implement
accommodative monetary and/or fiscal policies. In the course
of 2012, the protracted weakness of the eurozone economy
started to affect growth in several countries that had been
relatively immune in the earlier part of the latest slowdown. In
Russia, Poland and the Ukraine, growth cooled significantly in
the second half of last year. Still, these countries were able to
prevent a contraction (at least on an annual basis). By
contrast, several countries in central Europe (Czech Republic,
Hungary) and the western Balkans (Slovenia, Croatia, Serbia)
have remained in recession, with the pace of contraction
actually intensifying during 2012. The latter sub-regions have
particularly strong trade and financial ties with the eurozone.
Economic growth
% yoy
2012
2013
Czech Republic
-1.1
-1.5
-1.7
-1.3
0
1.5
Hungary
-1.7
-1.7
-2.7
-1.7
0
1.5
Poland
2.3
1.4
1.1
2
1.5
2.5
Romania
1.9
-0.5
1.1
0.7
1.5
2.5
Russia
4.3
3.0
2.1
3.4
3.5
4
Turkey
2.9
1.6
1.4
2.2
4
4.5
Ukraine
3.0
-1.3
-2.5
0.2
1.5
3
2.1
2.6
3.4
Regional average
Q2-12 Q3-12 Q4-12
2014
although much of the corporate sector has ample liquidity.
Public investment created some stimulus in a few countries.
But most EU member states have limited fiscal space as they
are required to reduce budget deficits and keep public debts in
check under the Excessive Deficit Procedure. Non EUmembers Russia and Turkey have more room to manoeuvre,
as they have relatively sound public finances. The Baltics
underwent a period of strong fiscal consolidation during the
global credit crisis and now have more leeway to let the
automatic stabilisers work.
The forward-looking manufacturing PMIs started 2013 on a
positive note. The average PMI results for Q1 2013 were better
than in Q4 2012 for Turkey, Poland and the Czech Republic
(although they stayed below the neutral 50 mark in the latter
two countries). The Russian average for Q1 2013 was almost
unchanged over the previous quarter. But in March, the index
fell for all four countries suggesting that business confidence
took a hit at the end of Q1.
Some acceleration in 2013, gaining momentum in 2014
The eurozone economy contracted by 0.5% in 2012. We
expect another contraction of 0.5% this year, with some
improvement towards year-end. Given the strong correlation
between emerging European and eurozone growth rates,
regional headwinds from Southern and Western Europe have
not yet subsided. Against this background and given the recent
growth dynamics, we have lowered our 2013 forecasts for the
Czech Republic, Hungary, Poland and Ukraine by 0.5 ppts
(compared to our previous EMO published last January). For
2014, we have lowered our forecasts for Poland and Turkey by
0.5 ppts. Despite these reductions, we still expect a modest
acceleration in emerging European growth in 2013 to 2.6%
(compared with 2.1% in 2012), partly based on the assumption
that the eurozone economy will stabilise in the course of this
year. We expect Turkey, Russia and the Baltics (whose
exports are less concentrated on the eurozone) to be the
regional outperformers in 2013. We believe the recovery will
gain further momentum in 2014, but at an average of 3.4%
regional growth will remain clearly below pre-crisis levels.
Sources: ABN AMRO Group Economics, EIU, Thomson Reuters
The regional slowdown is driven by weakening exports (in
particularly to the eurozone) and a further cooling of domestic
demand. Private consumption has long been a key growth
driver in Russia, Turkey and Poland, but lost steam due to a
tightening of credit, falling confidence levels and/or a rise in
unemployment. In Central Europe and the Balkans, private
consumption has been weak for a long time, due to
deleveraging from elevated debt levels (with high FX risks),
rising unemployment and stagnant wages. Private investment
slowed further on the back of uncertain economic prospects,
Still room for monetary easing in some countries
With demand pressures weak and cost-push factors fading,
inflation has followed a declining trend in most countries. In
early 2013, CPI hit seven-year lows in Hungary and Poland
and an 18-month low in the Czech Republic. By contrast,
inflation in Turkey and Russia recently re-emerged due to
seasonal factors (food prices, tax hikes) and hovers at much
higher levels (around 7%). Still, we expect inflation in both
countries to continue falling in the course of 2013. All in all, we
forecast that average inflation in emerging Europe will fall from
around 6.4% in 2012 to around 6% in 2013 and 5.5% in 2014.
7
Emerging Markets Outlook – April 2013
The regional average is pushed up by relative high inflation in
Russia and Turkey, emerging Europe’s largest economies.
sentiment has turned repeatedly against Hungary. This means
that the MNB may be forced to reverse course should the forint
and credit risk premiums once again come under pressure.
Inflation
% yoy
16
12
8
4
0
-4
08
09
Russia
Czech Republic
10
Turkey
Hungary
11
12
Poland
13
Sources: Bloomberg, Thomson Reuters Datastream
The monetary easing cycle that started in mid-2012 has
continued. The central banks of Hungary (MNB) and Poland
(NBP) have cut the policy rate by 200 and 150 bps,
respectively, to 5% and 3.25%. Previously, the Czech central
bank (CNB) cut the base rate to a record low of 0.05%. The
Turkish central bank (CBRT) has narrowed its interest rate
corridor by slashing the upper target by 450 bps since August
2012 to 7%, while lowering the central policy rate by 75 bps to
5%. The Russian central bank (CBR) has left the main policy
rate on hold at 8.25% since September 2012, but cut its rates
for longer-term liquidity operations by 25 bps in April, pointing
to increased risks to growth.
Cyprus downgrades dominate the rating scene
External rating developments show that emerging Europe has
been hit harder by the euro crisis than other emerging regions.
Rating downgrades have clearly outnumbered upgrades from
2011 to 2013. But this picture is largely shaped by the fate of
Cyprus, which accounts for over 50% of all the downgrades
since 2011. Cyprus received a EUR 10 bn bailout in March, but
its fortunes are clouded by the conditions tied to it. Its regional
banking model is history; large scale deleveraging, capital
outflows and a deep contraction will be the result. Post-Cyprus
markets have turned their attention to Slovenia (again), which
also has a negative feedback loop between recession, the
banking system and public finance. However, Cyprus remains
a very special case in our view. Slovenia’s banking sector (1.5
times GDP) is much smaller than that of Cyprus (8-9 times
GDP) and its fundamentals are stronger (the country is still
rated investment grade). But the centre-left coalition that took
office in March must act swiftly on bank recapitalisation and
fiscal consolidation to prevent Slovenia from being the next
eurozone bailout case. In GDP terms, Malta’s financial sector
is similar in size to that of Cyprus. But the Maltese financial
sector is dominated by foreign banks, meaning that the
sovereign’s contingent liabilities to the banking sector are
much smaller.
Rating changes
# notches (Moody’s, S&P, Fitch), cumulative
40
With growth and inflation falling, we expect the easing cycle to
continue in the coming months. However, the room for easing
has declined in countries where policy rates have been
slashed. For 2013, we have pencilled in two rate cuts in Russia
(under the realm of the new CBR governor, Elvira Nabiullina).
The Czechs do not have room for further cuts as the CNB
does not want to ‘go negative’; they have hinted at the option
of weakening the koruna if needed. In Turkey, we expect the
CBRT to keep finetuning its monetary tools in an effort to keep
the current account deficit, inflation and credit growth in check
while preventing lira appreciation. With so many policy targets,
this makes Turkish monetary policy rather complex.
‘Goulash’ central banking
Hungary is a case in itself. The MNB seems to have become
even more dovish given recent political appointments, with
former Economics Minister Matolcsy – responsible for several
controversial policy measures – as new governor. Just after
Matolcsy took office, the MNB announced a Funding for
Growth scheme to improve conditions for SME financing.
Meanwhile, Deputy Governor Kiraly resigned in protest over
Matolcsy’s management. We expect another 100 bps or so of
rate cuts this year. But given its controversial policies, market
30
20
10
0
06
07
08
09
Upgrades
10
11
Downgrades
12
13
Source: Bloomberg, ABN AMRO Group Economics
To conclude, we think we have seen the worst of the
downgrade cycle. But of course creditworthiness will remain
dependent on country-specific fundamentals and banking
sector soundness as well as generic factors such as eurozone
performance and changes in market sentiment. Countries with
fiscal, external or banking sector vulnerabilities (e.g. Hungary,
Croatia, Serbia, Slovenia, Ukraine) are the most vulnerable to
bad weather scenarios. To end on a positive springtime note:
Latvia, Lithuania and Turkey were recently upgraded.