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4Q2016
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
“
Your Leading Banking Partner in
Central and Eastern Europe
UniCredit Research
”
page 2
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Contents
4
CEE in late 2016: beyond the cyclical peak?
15
CEE Strategy: Waiting for the Fed
22
CEEMEA FX: A liquidity driven rally
76
Acronyms and abbreviations used in the CEE Quarterly
EU candidates
and other countries
Countries
30
Bulgaria
58
Bosnia and Herzegovina
34
Croatia
60
Russia
38
Czech Republic
64
Serbia
42
Hungary
68
Turkey
46
Poland
72
Ukraine
50
Romania
53
Slovakia
56
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]
Dan Bucşa, Economist (UniCredit Bank London)
+44 207 826-7954, [email protected]
Published on 29 September 2016
Erik F. Nielsen
Group Chief Economist
(UniCredit Bank London)
120 London Wall
London
EC2Y 5ET
Imprint:
UniCredit Bank AG
UniCredit Research
Arabellastrasse 12
D-81925 Munich
Supplier identification:
www.research.unicredit.eu
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]
Marcin Mrowiec, Chief Economist (Bank Pekao)
+48 22 524-5914, [email protected]
Kristofor Pavlov, Chief Economist (UniCredit Bulbank)
+359 2 9269-390, [email protected]
Javier Sánchez, CFA, EM Fixed Income Strategist (UniCredit Bank London)
[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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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
CEE in late 2016: beyond the cyclical peak?
Lubomir Mitov,
Chief CEE Economist
(UniCredit Bank London)
+44 207 826-1772
[email protected]
■
Fed dovishness and continued monetary accommodation by major central banks have
provided welcome relief to financial markets in the aftermath of the Brexit vote. We expect
the relative calm to continue into 4Q, leaving the global environment for CEE favorable, at
least until December, when the next Fed hike looks likely to occur.
■
As during past rallies, the countries with highest risk perceptions such as Russia and
Turkey stand to benefit the most. The upside in CEE-EU 1 will be more muted given already
tight spreads and their resilience during selloffs. Domestic politics will be increasingly
important, reinforcing the global upside (Croatia, Serbia), or impeding it (Poland, Turkey).
■
Growth surprised mostly on the downside in 2Q. While one-off factors such as a temporary
drop in EU transfers and weaker demand in the euro area (EA) played a role, it seems that
CEE-EU economies are now behind their cyclical peaks. In Turkey, the 2Q slowdown was
mostly politically driven, while in Russia and Ukraine the long-awaited recoveries remained
elusive with growth crawling along the bottom.
■
Preliminary data about 3Q point to diverging trends. All in all, we expect 3Q growth near
the 2Q level before easing somewhat in 4Q as EA growth slows in response to Brexit. In
CEE-EU, we have upgraded our growth projection for Hungary and Bulgaria on expected
fiscal accommodation and kept the rest little changed. Growth ought to accelerate also in
Croatia and Serbia thanks to improved policy implementation.
■
We upgraded also Russia’s outlook for both this and next year, taking into account the
economy’s increased resilience and the expected recovery in oil prices, and downgraded
the outlook for Ukraine due to lagging reforms. We have also downgraded our projection
for Turkey due to the fallout of the failed July coup and an unprecedented drop in tourism.
■
This year’s growth will be supported by policy accommodation. Monetary policy will remain
loose, with inflation mostly subdued and global liquidity ample. In CEE-EU, we expect
central banks to remain on hold, with inflation approaching targets only in late 2017. Russia
will be on hold until 2Q17 due to high inflation expectations, with modest cuts likely
thereafter. Serbia could cut, but may forego easing if capital inflows remain weak. Turkey,
in contrast, has no scope for easing given rising inflation and market volatility following
Moody’s downgrade but will do so nonetheless, partly due to intensified political pressure.
■
Scope for fiscal accommodation is ample this year, except for Croatia and Serbia, which
are in the midst of major fiscal adjustments, and in Russia, where the drop in oil revenues
has hit revenues hard. Next year, fiscal space will be mostly exhausted, especially in
Poland and Romania, which may need to tighten. By contrast, good fiscal outcomes this
year leave scope for fiscal stimulus in Bulgaria, Czech Republic, Hungary, and Slovakia.
■
Less policy accommodation and a Brexit-related slowdown will moderate growth in CEE-EU
and in the Balkans next year. Growth ought to pick up marginally in Turkey as tourism
recovers, and Russia and Ukraine will emerge from recessions, but only barely as reforms
continue to lag. Macroeconomic imbalances ought to remain under control, but risks will
remain elevated in Serbia, Ukraine and especially in Turkey, all of which run significant
current account deficits and are heavily dependent on foreign funding.
■
With Fed hikes delayed until December and no decision on initiating Brexit likely until 2017,
the outcome of the U.S. presidential election in November has become the key risk. A
Trump victory is likely to spur a global selloff that would hit EMs hard. In CEE, Turkey and
Serbia are most at risk to shifts in market sentiment. The standoff in Syria poses risks as
well, especially in respect to Russia once the new U.S. administration takes over. Domestic
political risks have abated recently, but could re-emerge, especially in Poland and Turkey.
1
This group includes some of the countries that joined the EU in 2004 and 2007, namely Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia.
Croatia is addressed separately.
UniCredit Research
page 4
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
So far so good
Financial markets have
recovered quickly post-Brexit,
thanks to dovish central banks
We expect the favorable
environment to extend into 4Q…
After the initial shock following the UK’s decision to leave the EU, market sentiment has
recovered quickly, buoyed by renewed Fed dovishness and stepped-up monetary
accommodation by other major central banks. Capital flows to EM have recovered as risk
appetite has rebounded, and borrowing costs for most EM have eased. With Fed hikes now out
of the way at least until December, and assuming Hillary Clinton wins the presidential race in the
U.S. in November, we expect the relative calm to extend well into 4Q.
…providing welcome support
to CEE
This favorable environment will remain supportive for CEE, although to a varying extent. The
countries with highest risk perceptions such as Serbia and Turkey, and, to a lesser extent, Russia
stand to gain the most from the benign global environment.. At the same time, in CEE-EU the
upside will remain limited due to already tight spreads that have barely bulged during the selloff.
While CEE markets will continue
to be driven by global trends…
While CEE markets will continue to be driven by global trends, domestic factors have played a
role, too. In Poland, concerns about the standoff with the EU over the constitutional court statute
have weighed on markets, while in Bulgaria the successful completion of the banking system’s
asset quality review triggered a major rally. Domestic politics have been also supportive in Croatia
and Serbia, where parliamentary elections returned pro-reform governments to power.
…the role of domestic factors
has increased
BREXIT’S IMMEDIATE IMPACT WAS NEGLIGIBLE, BUT THE MEDIUM-TERM CONSEQQUENCES WILL BE SIGNIFIFCANT
Financial market have recovered quickly after the Brexit vote…
… but the impact on the EA will be significant next year
Cumulative performance of Bloomberg local bond indices (FX adjusted)
30%
25%
20%
Romania
Turkey
Serbia
Poland
Russia
Bulgaria
Euro Area GDP (% qoq, rounded)
Hungary
Croatia
0.35
0.30
10%
0.25
5%
0.20
0%
0.15
-5%
-15%
New
0.40
15%
-10%
Previous
0.45
0.10
23 Jun - Brexit
-20%
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Jul-16
0.05
0.00
Aug-16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
Source: Bloomberg, IIF, UniCredit Research
Despite the benign global
environment, growth has
surprised on the downside
In CEE-EU, a drop in EU
transfers was a major factor for
the slowdown…
...but exports have been
generally weak, too
UniCredit Research
Despite the generally favorable external environment for most of the year, growth performance in
the region has surprised on the downside. In CEE-EU, 2Q growth was only slightly up from the
relatively weak 1Q, and, except for Bulgaria and Romania, well below last year’s pace. Growth
also slowed in 2Q in Turkey and Serbia, but from a relatively brisk pace in 1Q. Meanwhile,
Russia’s exit from recession remains elusive, while Ukraine’s economy continued crawling along
the bottom. Only Croatia recorded a marked pickup in 2Q, thanks mostly to a rebound in
domestic demand amid strengthened confidence and rapidly improving labor markets.
In CEE-EU, a key factor for the lackluster 2Q performance was the drop in EU funds absorption
at the start of the 2014-20 programming period after peaking last year with the expiration of the
deadline for the 2007-13 program. Investment plummeted across CEE-EU as a result, but the
drop was the steepest in Poland and Hungary, countries with the best EU funds absorption.
However, export growth has also slowed from 2015, reflecting somewhat softer demand in the
EA. Except for Bulgaria, the contribution of net exports has turned negative across CEE-EU. At
the same time, private consumption remained buoyant, supported by rapidly improving labor
markets, faster wage growth and, in several countries, a recovery in bank lending. That said, the
page 5
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Macroeconomic stability
remains well entrenched in
CEE-EU…
…with price pressures absent
and external positions strong
The absence of imbalances has
enabled CEE-EU to pursue progrowth policies
Looking forward, the region
seems to have passed its
cyclical peak...
…with growth in 3Q likely to be
little changed from 2Q…
…and slow moderately in 4Q
on Brexit concerns
strong expansion in domestic spending has not led to the buildup of macroeconomic
imbalances in CEE-EU. Core inflation has remained well below central bank targets, with
headline inflation in negative territory due to lower oil and food prices. External positions have
remained generally strong, with current accounts in surplus or modest deficits, and extended
basic balances 2 in sizable surpluses, limiting external financing needs.
The absence of macroeconomic imbalances has enabled CEE-EU authorities to pursue
growth-supporting policies without putting financial stability at risk. The rebound in domestic
demand gave an important cyclical boost to revenues, enabling governments to increase
spending without jeopardizing deficit targets. On the other hand, the solid external positions
enabled CEE-EU to benefit to the fullest from ultra-low global interest rates, keeping monetary
stances accommodative with interest rates at record lows and currencies broadly stable.
Looking forward, the region seems to have passed its cyclical peak, with growth set to retreat
towards long-term potential (estimated within the 2.5-3.5% range). For the remainder of the
year, the outlook is mixed. On the one hand, the drop-off in EU funds is likely to reverse, with
signs of a pickup already evident across CEE-EU. A bumper harvest ought also to support
exports and growth. On the other hand, the broader export outlook remains uncertain amid
fears about Brexit. All in all, we expect 3Q growth in CEE-EU to remain near its 2Q level and
slip somewhat in 4Q. For the year as a whole, we upgraded our 2016 growth projections for
Bulgaria and Hungary on expectations of increased fiscal accommodation, but have left the
forecast little changed for the rest of CEE-EU from our July review.
GROWTH SEEMS TO HAVE IS PAST THE CYCLICAL PEAK IN CEE
Growth set to moderate, but will still exceed that in EA…
6.0
EA
TR
RU
CEE5
HR
…with lower EU fund absorption a major constraint in CEE-EU
UA
5.0
2015
2016F
2017F
4.5
4.0
4.0
2.0
3.5
0.0
3.0
-2.0
2.5
-4.0
2.0
1.5
-6.0
1.0
-8.0
-10.0
2014
% of GDP
0.5
2012
2013
2014
2015
2016f
0.0
2017f
Slovakia
Poland
Bulgaria
Romania
Czech Rep
Hungary
Source: Central banks, statistical offices, Haver, UniCredit Research
Elsewhere, scope for policy
accommodation is more limited
Growth in Croatia and Serbia
will firm this year…
…as solid fiscal consolidation
reduced imbalances
2
Elsewhere, policy scope is more limited. While recovering domestic demand and buoyant
exports have boosted growth in Croatia and Serbia, it still lags that in CEE-EU. Some of this
underperformance was probably due to their well-known structural rigidities, but the inability to
pursue growth-supportive policies played perhaps a larger role. On the one hand, the
pervasive euroization in both countries severely limits scope for independent monetary policy.
On the other hand, the need for further fiscal retrenchment has remained a drag on growth, as
both tried to reduce excessive deficits and public debt.
The sum of the current account balance, net FDI inflows and EU transfers
UniCredit Research
page 6
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Growth slowed in 2Q in Turkey
as well…
and was heavily skewed
towards consumption…
…driven by a major fiscal
expansion…
…and stepped-up monetary
accommodation despite
mounting price pressures
Policy easing is insufficient to
offset the impact of the failed
coup and the drop in tourism…
...leading to a major downward
revision of our growth forecast
At the same time, imbalances
have continued building up…
…with inflation trending higher...
…and the C/A deficit widening
The Moody’s downgrade will
have a relatively modest impact
on Turkish financial markets
Inflation remains an issue in
Russia and Ukraine
Both will exit recession, but
just barely…
...with Russia performing better
3
We expect a growth path similar to that in CEE-EU, with 3Q activity supported by record-high
tourism receipts in Croatia and a bumper harvest in Serbia before easing in both in 4Q on
weakening foreign demand. In both countries, macroeconomic imbalances are likely to ease
thanks to significant fiscal adjustment to date. Growth in Turkey also slowed sharply in 2Q
towards 3.0% yoy, and, like elsewhere in the region, was also driven by domestic demand.
However, unlike CEE-EU, the expansion in domestic demand was led by public and private
consumption, with investment stagnating for a fourth year in a row. Moreover, private
consumption was driven by rapidly rising real wages and stepped-up policy accommodation
rather than labor market improvements (unemployment has risen).
Fiscal policy has been lax for years in Turkey, but this year the pace of accommodation has
picked up sharply. The underlying fiscal stance widened by about 2.5% of GDP in January-July
from a year before, even though one-off revenues, cyclically-high tax receipts, and lower
interest payments helped keep the headline deficit little changed. Similarly, monetary policy
has remained expansionary, despite the renewed acceleration in inflation and growing
evidence that it is mostly demand driven. Even though this would argue for tighter monetary
policy, the CBRT, partly due to political pressures, has continued cutting interest rates.
Even though accommodative polices have provided support to growth, their effectiveness has
diminished as of late and came at a price. We expect activity to bottom out in 3Q, when a
collapse in tourism and the disruptions caused by the failed coup in July are likely to bring growth
to a halt. In 4Q, we expect a slight pickup on the back of continued monetary and fiscal easing,
bringing full-year growth to 2.8%, a major downgrade from our pre-coup forecast of 3.6%.
At the same time, macroeconomic imbalances look set to continue building up, with inflation
trending higher at above 8%, despite lower oil prices and imported disinflation, and the C/A is
set to deteriorate. While lower oil prices enabled the headline C/A deficit to narrow further
during January-July, the underlying deficit 3 widened by 1.5% of GDP yoy. With the base effect
of lower oil prices lapsing after August, we expect the full-year C/A deficit to widen to 5.2% of
GDP, up from 4.5% in 2015. These growing imbalances will further augment Turkey’s already
high vulnerability to shifts in market sentiment. At the same time, the recent downgrade by
Moody’s to sub-investment grade, after the initial jolt, is likely to have a relatively modest
impact on markets given the favorable global environment, pushing up TURKGB yields by 2550bp and leaving the TRY roughly 2% weaker than what was likely before.
Further east, inflation also remains a concern – as does the poor growth outlook. In both Russia
and Ukraine, the recoveries remain elusive, with the former still in a shallow recession, and the
latter struggling to rise from the bottom. We expect growth to resume in 2H in both countries, but
at a very slow pace. That said, a shallower-than-initially expected contraction in 1H has led us to
revise our full-year GDP projection for Russia to - 0.8% vs. - 1.7% before. In Ukraine, by contrast,
we have downgraded our growth projection from 1.7% to 1.2% due to lagging reforms.
Adjusted for changes in prices, exchange rate movements and net gold trade
UniCredit Research
page 7
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
MACROECONOMIC BALANCES MOSTLY LIMITED, BUT NOT EVERYWHERE
Inflation under control or subsiding, except or Turkey
yoy (%)
TR
CEE5
RU
HR
C/A deficits modest, but a growing worry in Turkey
SRB
TR
UA
HR
SRB
6.0
14.0
4.0
12.0
2.0
10.0
0.0
8.0
-2.0
6.0
-4.0
4.0
-6.0
2.0
-8.0
0.0
-10.0
-2.0
-12.0
-4.0
CEE5
8.0
16.0
2009
2010
2011
2012
2013
2014
2015
2016F
-14.0
2017F
2009
2010
2011
2012
2013
2014
2015
2016F
Source: Ministries of finance, Eurostat, UniCredit Research
Both countries have brought
inflation down…
…with the decline in Russia
more sustainable
A widening C/A deficit in
Ukraine remains an issue
At the same time, both countries have succeeded in bringing inflation down, thanks to weak
domestic demand and tight monetary policies. The slowdown appears more sustainable in
Russia, where the central bank is not only fully committed to disinflation, but also has more policy
room. In Ukraine, price pressures remain elevated due to long-standing structural rigidities and
recurrent exchange rate weakness. C/A balances look set to deteriorate in both countries, but
while in Russia the oil-driven shrinkage of the C/A surplus is likely to be offset by a similar drop in
capital outflows, in Ukraine the C/A deficit remains an issue given very limited financing.
A more challenging outlook for 2017
The outlook for 2017 is more
challenging…
…due to the fallout of Brexit…
…higher oil prices…
… and prospective Fed hikes
Brexit is likely to shave off 0.5pp
from CEE growth next year
The impact will be stronger on
small open economies…
…with Russia least affected
In CEE-EU, a pickup in EU
transfers will help growth…
…but scope for policy
accommodation will be limited
Monetary policy will remain
loose, with little scope for more
cuts except by Russia
UniCredit Research
The outlook for 2017ar looks more challenging, with global conditions likely to be less
favorable. The Brexit fallout is expected to shave 0.7pp off EA growth next year, with real
GDP expanding just 1%, compared with 1.6% likely this year. Exports will be affected even
more, slowing by as much as 1.5pp this year. The expected recovery in oil prices towards
USD 60/bbl by late 2017 from less than USD 50bbl at present will represent another
constraint on growth. Significant uncertainty also remains about the path of U.S. rate hikes
and the response of other major central banks. In our baseline scenario, we assume that the
Fed will hike twice next year and that the ECB may extend its QE through late 2017 and we
do not expect major financial disturbances.
As detailed in our previous edition of the Quarterly Report, the Brexit impact is likely to cut
real GDP growth by about 0.5pp for the region as a whole, with small open economies in
Central Europe likely to be affected the most. The Brexit impact is likely to be smaller for
countries with larger domestic markets such as Poland, Romania and Turkey, and negligible
in Russia given its reliance on oil and commodity exports. In addition, the projected rise in oil
prices, while benefitting Russia, is likely to have a dampening impact on domestic demand,
especially on consumption, everywhere else in the region.
In CEE-EU, the expected pickup in EU funds utilization ought to provide a welcome reprieve.
More important, however, would be the ability and willingness of CEE authorities to conduct anticyclical policies. Scope for such actions will be much smaller next year than this year. With
interest rates at record lows, we do not see much scope for further monetary easing, except
perhaps in Poland and Hungary, and then only if ECB actions or market developments (such as
currency appreciations) warrant this. Outside CEE-EU, Russia alone ought to be able to cut
interest rates in 1H 2017. Despite the political pressure, we do not see scope for more cuts in
Turkey next year, given the likely Fed hike in December and the expected tightening in global
liquidity conditions. Therefore, the brunt of policy adjustment would rest on fiscal policy.
page 8
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Space for fiscal stimuli varies
across the region…
…with Russia, Croatia and
Serbia set to tighten further…
…and Poland and Romania
under pressure, too
Bulgaria, Czech Republic,
Hungary and Slovakia have
scope for fiscal easing…
…which will help limit the Brexit
impact to 0.5-0.6% of GDP
Concerns about growth are
likely to prompt further fiscal
easing in Turkey…
…but risks to financial stability
will be limited in the near term
We expect slightly slower
growth in CEE-EU next year…
…but an uptick in Turkey and
Russia due to external
developments
Inflation will move into positive
territory in CEE-EU next year,
but will remain below targets
Inflation will slow in Russia but
not enough to hit the target
And is set to pick up in Turkey
C/A balances will weaken next
year, but will pose no issues in
CEE-EU and Croatia…
The C/A deficit will remain an
issue in Serbia…
…and especially in Turkey,
where it will remain a source of
vulnerability and volatility
UniCredit Research
Consequently, scope for fiscal stimuli varies widely across the region. At the one extreme are
Russia, Croatia and Serbia, where fiscal pressures remain high and scope for fiscal
accommodation is all but nonexistent. In fact in Russia, fiscal policy is slated to be restrictive
again next year because of limited availability of financing and despite the approach of the
2018 presidential elections. In CEE-EU, Poland and Romania will also have next to no scope
for fiscal accommodation given significant easing this year that will push them dangerously
close to the 3% of GDP threshold next year, necessitating some fiscal adjustment next year.
On the other hand, Bulgaria, Czech Republic, Hungary and Slovakia will all have plenty of scope
for fiscal accommodation, on the order of 0.6 to 0.8% of GDP. This will reflect much better than
projected outturns this year, which would leave room for a significant ramp-up in spending next
year without jeopardizing fiscal targets. This ought to limit the Brexit impact to around 0.5-0.6%
of GDP in these countries, broadly similar to that in larger economies in the region.
Concerns about flagging growth are likely to prompt the Turkish government to continue with
aggressive fiscal policy as well, even though the opposite would rather be needed to restrain
inflation. We expect the fiscal deficit to widen to more than 3% of GDP next year, but risks to
financial stability should be well contained, as long as foreign funding is forthcoming and given
relatively low government debt.
All in all, we expect growth next year to be some 0.6pp lower in 2017 than this year in CEE-EU
and in the Balkans. In Turkey, the likely recovery in tourism after this year’s collapse and the
absence of disturbances similar to those caused by the failed coup attempt would help push
growth up to 3% next year, still below potential. In Russia, higher oil prices have led us to revise
our growth projection up from 1.2% to 1.4% next year, but downgrade that for Ukraine to 1.5%.
With growth centered on domestic demand and oil prices trending higher, inflation is likely to
return into positive territory. However, in CEE-EU imported disinflation is likely to keep inflation
well below central bank targets through 2017 if not for longer. Price pressures are likely to
ease also in Russia, with domestic demand remaining weak and the central bank determined
to reach its 4% target by the end of 2017. In Turkey alone, we expect inflation to accelerate
markedly, towards double digits, driven by accommodative policies, a weaker currency and
the pickup in oil prices.
While the increased reliance on domestic demand for growth will boost imports and lead to
some deterioration in current accounts, we expect most of them to remain in surplus or only
minor deficits. The only exceptions are Serbia and Turkey. While in the former the C/A deficit
is likely to remain moderate, in the former the shortfall will widen to close to 6% of GDP from
5.2% likely this year and 4.5% in 2015. The large C/A deficit, along with somewhat tighter
liquidity conditions, will leave Turkey increasingly vulnerable to market tensions. This
vulnerability would result in heightened financial market volatility, but barring a major global
shock (which we see as unlikely for 2017 under our baseline scenario) or a major policy error,
a full-blown financial crisis looks unlikely.
page 9
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
SCOPE FOR POLICY ACCOMMODATION SET TO DIMINISH IN 2017
Fiscal deficits likely to widen next year…
1.0
% of GDP
CEE5
…but government debt likely to stabilize
TR
RU
HR
SRB
100.0
0.0
90.0
-1.0
80.0
CEE5
TR
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
% of GDP
2010
2011
2012
2013
2014
2015
2016F
0.0
2017F
2009
2010
2011
2012
2013
2014
2015
2016F
2017F
Source: Central banks,. Haver, UniCredit Research
In Russia, the recovery will be
slow and tenuous…
…but faster than initially
anticipated with oil prices higher
Scope for rate cuts is
constrained by limited
economic slack
Fiscal policy has become the
main challenge…
…and the key risk to the
inflation outlook…
…with financing options limited
by the EU/U.S. sanctions
In Ukraine, growth will remain
bumpy…
…constrained by dysfunctional
politics and slow reforms
The subpar growth will keep
financial risks elevated,
especially after 2017…
.., when official funding ceases
and repayments to the IMF and
private creditors commence
UniCredit Research
In Russia, we expect the recovery will be slow and tenuous, at about 1-1.5% in annualized
terms, constrained by sanctions, still low by historical standards oil prices, and the need to
sustain fiscal adjustment given restricted access to financing. Stronger growth would require
major structural and institutional reforms and a return of capital inflows, neither of which looks
likely under current political circumstances. With potential output much weaker than previously
thought, economic slack is limited, leaving less scope for rate cuts than previously thought.
We expect the CBR to resume rate cuts only in 2Q17, and then at a very cautious pace. This
would enable inflation to slow markedly to just under 5% by the end of next year – still above
the 4% central bank target, mostly due to the fallout of fiscal policy.
Fiscal policy, indeed, will become the main challenge in 2017. With the fiscal deficit remaining
above 3% of GDP, the government would need to start drawing on the Wellbeing Fund once
the oil reserve fund is depleted early next year, and at the same time step up sharply
domestic borrowing. The resulting increase in liquidity is likely to exert upward pressure on
prices, preventing the CBRT from reaching its target next year. Other challenges for monetary
policy would be the uneven distribution of liquidity that would require the CBR to
simultaneously conduct sterilization and refinancing operations, and the need to prevent
excessive RUB appreciation as oil prices rise in order to keep oil revenues sufficient in RUB
terms to meet budget targets.
In Ukraine, we expect real GDP growth to continue to bump along at less than 2% - way too
low after a cumulative decrease of 20% since 2013. Growth will continue to be constrained by
dysfunctional financial markets, lingering tensions in the east and restricted access to foreign
funding. However, the main impediment to a strong recovery remains the lack of progress in
institutional and structural reforms, which have also prevented the faster normalization of
financial markets.
The root cause of the lack of progress on reforms remains the dysfunctional and oligarchcontrolled political system. Until this model is dismantled, Ukraine will continue
underperforming and financial risks will remain substantial. The latter are likely to increase
markedly after 2017, when the inflow of official financing will diminish to a trickle, repayments
to the IMF begin and payments commence on the private debt restructured last year. For next
year, however, still significant official financing should secure a measure of financial stability,
provided the IMF program does not veer completely off track.
page 10
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Limited near-term risks
Near-term downside risks have
abated…
With Fed hikes now off the table until December, major central banks reiterating their
commitment to sustained monetary accommodation and the initial impact of Brexit more
limited than initially feared, near–term external risks have diminished. Therefore, we expect a
relatively calm 4Q.
…with the main event to
watch being the U.S.
presidential election
The main event that could trigger a selloff and a reversal in risk appetite could be the U.S.
election. If Mr. Trump wins, a global selloff is likely, with EM hit particularly hard after his
protectionist rhetoric. After the initial jolt, markets will remain edgy well into 2017, until after
the new president takes over and new policies take shape. While at present it appears more
likely that Mrs. Clinton will be the winner, a Trump victory cannot be excluded and remains a
distinct risk that will extend well beyond the near term. As in past selloffs, we expect CEE-EU
to remain resilient, given limited financing needs and diminishing exposure to the U.S.
However, countries with higher borrowing needs and risk perceptions, such as Serbia and
especially Turkey, will be hit hard. In the latter, a major drop in capital inflows would push the
TRY sharply weaker, forcing the CBRT to hike rates, which could well trigger a recession.
A Trump victory could lead to
sustained market volatility
CEE-EU should be less affected…
…but the fallout on Turkey will
be significant and could trigger
a recession
In the EU, the outcome of the
constitutional referendum in
Italy is worth watching…
…as a defeat could prompt the
ECB to step up monetary
accommodation
The policies of the new U.S.
administration remain
unknown…
…with a more hawkish stance
vs. Russia…
…with a tightening of
sanctions possible if the
Syria conflict escalates
Beyond 2016, Brexit discussions
and the future of monetary
policy are the main unknowns
…with Turkey among the most
vulnerable among EMs in case
of faster rate hikes
UniCredit Research
In Europe, the outcome of the Italian constitutional referendum in early December is worth
watching. A defeat of the proposed changes would most likely trigger a resignation of Mr.
Renzi’s government and new elections with an uncertain outcome at a time that Italy is
grappling with numerous economic challenges. In such a case, we expect the ECB to act to
prevent a major rise in periphery bond yields. The CEE-EU, which already decoupled from the
periphery, are likely to weather the storm well, and may actually benefit from the expected
additional monetary accommodation by the ECB. Policies of the new U.S. administration
(even with a Clinton win) remain a major unknown for Russia. With any new administration
likely to be more hawkish than the outgoing one on foreign policy, odds for a further tightening
of economic sanctions will increase. In this respect, the recent intensification of fighting in
Syria and the direct clash between Russia and the U.S. do not bode well for future U.S.Russia relations. Unless a political solution is found in the remaining term of President
Obama, tensions will almost certainly escalate under the new administration and may well lead
to additional economic and financial sanctions, with a potentially major adverse impact on
Russia’s access to foreign funding and access to technology.
Beyond 2016, the evolving of Brexit discussions once the process starts, presumably in early
2017, and the future evolvement of monetary policy by major central banks will be the key
uncertainties. We do not expect much of an impact on CEE through the forecast horizon from
Brexit other than the already incorporated slowdown in growth, but its timing may shift.
Despite growing doubts about the appropriateness of current monetary policy
accommodation, we expect the ECB to continue (and potentially expand) its current QE
program well into 2017, providing support to CEE assets. Uncertainty related to the Fed is
higher, especially if the pace of rate hikes proves faster than currently projected. In such a
case, re-pricing of risk will mostly hurt Turkey, but will also impact Russia and Serbia, with the
rest of the region more resilient.
page 11
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
OUR GLOBAL FORECAST
GDP
CPI
Policy interest rate
10Y bond yield
Exchange rate (LC/EUR)
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
1.9
1.6
1.0
0.0
0.2
1.3
0.0
0.0
0.0
-
-
-
-
-
-
1.7*
1.7*
0.9*
0.2
0.4
1.7
-
-
-
0.21
0.25
0.80
-
-
-
France
1.2
1.4
0.9
0.0
0.2
1.3
-
-
-
-
-
-
-
-
-
Italy
0.6
0.9
0.6
0.1
0.0
1.1
-
-
-
-
-
-
-
-
-
2.2
1.7
0.0
0.0
0.7
2.5
0.5
0.1
0.1
1.43
1.20
1.90
0.78
0.93
0.90
2.6
1.5
2.0
0.1
1.2
2.4
0.5
0.75
1.25
1.87
1.70
2.30
1.13
1.12
1.15
54.5
50
56.5
Eurozone
Germany
UK
USA
Oil price, USD/bbl
Source: UniCredit Research
* non-wda figures. Adjusted for working days: 1.4% (2015), 1.6% (2016) and 1.1% (2017).
THE OUTLOOK AT A GLANCE
Real GDP
(% change)
CPI
(% change)
2014
2015
2016F
2017F
3.1
3.7
3.1
3.0
Bulgaria
1.5
3.0
3.2
3.0
Bulgaria
Czech Rep.
2.0
4.6
2.3
2.1
Czech Rep.
Hungary
3.7
2.9
2.3
2.9
Hungary
Poland
3.5
3.6
3.1
3.3
Poland
CEE-EU
Romania
CEE-EU
2015
2016F
2017F
0.2
-0.5
-0.5
1.6
-1.4
-0.1
-0.6
1.1
0.4
0.3
0.6
-0.2
-0.1
0.0
-0.9
C/A balance
(% GDP)
2014
2015
2016F
2017F
-0.8
0.2
0.5
-0.2
Bulgaria
1.2
0.4
3.6
1.9
1.9
Czech Rep.
0.2
0.9
1.7
1.6
0.5
2.3
Hungary
1.8
3.1
4.2
2.7
-0.7
1.3
Poland
-2.0
-0.3
-0.1
-1.0
Romania
CEE-EU
3.0
3.8
4.4
3.4
1.1
-0.6
-1.4
1.9
-0.5
-1.1
-2.5
-2.4
Croatia
-0.4
1.6
2.2
1.5
Croatia
-0.2
-0.5
-1.2
1.0
Croatia
0.8
5.2
2.4
1.8
Russia
0.6
-3.7
-0.8
1.4
Russia
7.8
15.6
7.2
5.2
Russia
3.3
5.3
1.9
1.3
Serbia
-1.8
0.7
2.6
2.4
Serbia
2.1
1.4
1.3
3.0
Serbia
-6.0
-4.0
-4.4
-4.9
Turkey
2.9
4.0
2.8
3.0
Turkey
8.9
7.7
7.9
9.3
Turkey
-5.4
-4.5
-5.2
-5.9
2014
2015
2016F
2017F
External debt
(% GDP)
2014
2015
2016F
2017F
2014
2015
2016F
2017F
2.3
1.8
2.1
2.1
CEE-EU
75.8
73.0
72.2
69.1
-2.6
-1.9
-2.2
-2.4
Bulgaria
5.4
6.9
8.1
6.6
Bulgaria
92.1
77.2
74.3
70.7
Bulgaria
-3.6
-2.9
-1.4
-1.7
Czech Rep.
2.1
0.3
3.0
3.0
Czech Rep.
67.0
68.7
67.9
67.3
Czech Rep.
-1.9
-0.4
0.0
-1.0
Hungary
8.2
8.1
7.6
7.3
Hungary
116.8
108.6
103.5
98.6
Hungary
-2.5
-2.0
-1.8
-2.6
Poland
0.0
0.0
0.0
0.0
Poland
72.4
71.8
73.3
69.8
Poland
-3.3
-2.6
-2.9
-2.8
Romania
3.9
2.9
1.9
2.0
Romania
63.1
56.1
52.9
49.6
Romania
-1.4
-1.1
-3.0
-3.0
Croatia
3.9
5.6
4.2
3.5
Croatia
108.4
103.7
99.4
98.2
Croatia
-5.7
-3.2
-2.5
-2.9
Russia
1.3
3.9
0.6
0.3
Russia
29.6
39.1
38.7
32.7
Russia
-0.5
-2.4
-3.8
-3.5
Serbia
-2.3
1.5
1.3
0.5
Serbia
77.8
80.4
78.9
78.3
Serbia
-6.5
-3.8
-2.6
-2.4
Turkey
-4.5
-2.9
-4.1
-5.1
Turkey
51.7
53.8
56.1
57.8
Turkey
-1.4
-2.1
-2.9
-3.2
Gov’t debt
(% GDP)
2014
2015
2016F
2017F
Policy rate
(%)
2014
2015
2016F
2017F
CEE-EU
49.0
48.7
49.6
50.4
1.7
1.2
1.1
1.1
Bulgaria
26.4
26.4
29.7
28.6
Bulgaria
0.0
0.0
0.0
0.0
Czech Rep.
42.7
41.1
39.2
39.0
Czech Rep.
0.1
0.1
0.1
Hungary
76.2
75.3
73.6
73.4
Hungary
2.1
1.4
Poland
50.4
51.3
53.8
55.3
Poland
2.0
1.5
Romania
Extended basic
balance (% GDP)
CEE-EU
Romania
2014
CEE-EU
Romania
General gov’t
balance (% GDP)
CEE-EU
REER
2000 = 100
2014
2015
2016F
2017F
CEE-EU
114.4
109.8
106.9
106.5
Bulgaria
144.6
151.0
150.2
148.4
0.1
Czech Rep.
102.1
106.1
106.5
106.0
0.9
0.9
Hungary
124.2
122.0
121.2
119.4
1.5
1.5
Poland
109.5
106.0
101.0
101.9
99.4
39.8
38.4
38.9
39.5
2.8
1.8
1.8
1.8
125.5
105.0
102.2
Croatia
85.1
86.7
86.6
86.9
Croatia
0.0
0.0
0.0
0.0
Croatia
Romania
104.1
99.7
101.7
99.9
Russia
12.4
15.0
15.9
15.1
Russia
17.0
11.0
10.0
8.0
Russia
197.5
149.2
149.3
171.6
Serbia
72.4
77.3
76.4
74.7
Serbia
8.0
4.5
4.0
4.0
Serbia
Turkey
36.2
36.0
36.3
36.3
Turkey
8.3
7.5
7.5
8.0
Turkey
108.5
-
-
-
91.5
91.4
86.1
Source: National statistical agencies, central banks, UniCredit Research
UniCredit Research
page 12
See last pages for disclaimer.
September 2016
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)
3.4
1.9
4.4
4.5
-0.4
-2.1
-4.3
3.1
-1.5
-4.2
-0.6
-2.9
-1.8
-2.2
-5.4
-2.1
-0.8
2.3
Extended Basic Balance (% of GDP)
9.8
3.7
5.9
8.6
2.8
2.4
1.2
2.2
5.3
-3.5
3.2
-2.3
2.5
1.0
-5.6
-3.4
-2.2
0
FX Reserves coverage (months of imports)
10.0
4.9
7.4
3.7
5.2
5.3
7.1
13.8
-
5.5
2.9
5.1
14.0
6.5
4.0
7.8
8.4
18.6
External Debt (excl.ICL, % of GDP)*
53.5
71.9
87.0
72.5
52.9
40.9
86.3
40.2
66.2
60.9
118.1
28.7
29.3
68.6
43.2
32.5
23.4
5.2
Short-term debt (% of GDP)
18.4
32.9
7.7
12.8
8.8
7.4
1.1
3.5
20.1
15.2
18.0
3.5
3.9
4.6
29.9
4.7
4.0
4.2
REER (Index, 2010=100)*
96.0
90.0
93.4
88.5
87.4
96.0
115.9
77.5
122.2
83.1
74.4
80.5
71.0
88.7
66.4
90.3
103.8
123.3
Corporate debt (% of GDP)
61.0
53.4
75.0
66.1
45.9
40.2
44.5
69.4
50.3
88.8
49.1
72.0
40.0
35.0
38.0
22.0
49.0
160.0
Household Debt (% of GDP)
20.5
33.6
39.9
23.1
37.1
-
19.8
12.9
38.4
21.0
8.1
15.2
20.0
23.5
-
9.9
10.7
36.2
Nonresident holdings of gov.debt (% total)
36.5
25.8
39.2
28.8
35.2
17.1
-
25.4
40.4
19.5
-
32.6
16.4
-
35.3
38.9
-
-
External Liquidity
Domestic Finances
Banking System
Credit Impulse (% of GDP)
-0.8
1.5
-3.6
-2.1
2.0
0.4
2.6
2.3
0.1
5.7
-8.4
1.4
2.5
8.1
5.8
2.5
5.6
19.7
Loans/deposit ratio (%)
75.5
78.1
64.4
75.8
103.8
83.7
102.9
110.1
90.5
125.3
126.0
92.1
133.4
102.6
98.7
114.2
114.2
65.1
NPL (% of total loans)
14.5
5.2
15.9
10.6
4.4
11.3
20.2
9.2
4.8
3.2
30.4
2.4
3.8
1.9
3.2
3.0
7.6
8.0
Domestic Banks CAR (%)
22.7
16.5
21.9
16.8
17.1
19.1
21.6
12.4
17.3
15.5
13.0
14.8
16.5
12.9
15.2
21.2
13.0
13.5
Domestic Banks RoE (%)
14.8
13.8
3.3
3.4
8.7
12.3
6.5
2.0
14.8
15.5
-20.0
16.5
13.3
13.8
21.3
15.4
4.4
15.0
*External debt incl. ICL for CZ, RS, TR, MX, CL and SA; **Increase means appreciation
Source: Haver, Bloomberg, UniCredit Research
Legend
Not vulnerable
Somewhat vulnerable
Moderately vulnerable
Highly vulnerable
UniCredit Research
page 13
See last pages for disclaimer.
September 2016
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 (%)
Real policy rate (%)
Real Money market rate (%)
Headline inflation (% yoy)
Core Inflation (% yoy)
GG Fiscal balance (% of GDP)
0
0.1
-
0.9
1.5
1.8
4.0
10.0
-
7.5
14.0
4.3
14.3
3.5
7.0
6.5
6.5
4.6
-0.2
-0.5
-
1.0
2.3
2.0
2.8
2.9
-
-0.5
6.1
1.5
4.8
0.1
1.0
3.6
1.4
3.0
0.3
-0.3
2.1
1.0
2.4
0.7
2.3
3.4
0.6
0.7
9.2
2.0
4.4
0.6
1.4
4.2
1.8
1.5
-0.2
0.6
-1.5
-0.1
-0.8
-0.2
1.2
6.9
-0.9
8.1
8.4
2.7
9.0
3.4
5.9
2.8
5.1
1.3
0.1
1.1
-0.7
1.2
-0.4
0.5
2.0
7.0
-0.2
9.4
7.4
3.0
7.7
3.9
5.7
3.3
4.7
1.6
-1.0
-0.2
-2.2
-1.1
-2.2
-1.6
-3.3
-3.2
-2.8
-1.3
-3.1
-1.7
-8.1
-1.8
-4.0
-2.5
-7.2
-3.1
GG Primary balance (% of GDP)
-0.1
0.9
1.4
2.4
-0.4
0.1
0.1
-2.7
-1.0
1.1
1.1
-0.4
-2.5
-1.1
-0.7
-1.2
-2.6
-2.4
Government Debt (% of GDP)
29.8
40.4
85.8
77.2
52.0
37.6
72.9
15.0
52.2
35.3
67.3
35.6
65.5
30.6
50.1
27.3
67.2
53.8
212.0
45.6
280.2
71.9
72.0
177.3
238.6
168.0
19.2
293.0
698.4
147.0
283.7
83.2
287.8
215.6
-
104.7
0.5
-0.2
1.9
1.8
2.3
2.1
5.3
8.5
-0.4
9.0
-
5.8
11.7
3.9
8.3
7.3
7.4
2.7
Local currency bond spread (2s10s)
186.2
83.8
190.3
160.5
111.0
203.1
189.0
-46.5
62.9
112.5
-423.2
57.1
5.1
61.0
133.0
39.3
41.4
30.4
CDS (5Y, bp)
103.4
43.5
253.4
114.3
70.5
109.0
-
217.4
44.2
264.0
661.0
264.0
273.3
84.5
281.0
185.2
153.5
122.2
-
2.4
4.0
5.6
6.3
3.5
-
14.1
-
11.2
-
13.5
16.4
11.3
20.2
10.7
6.7
5.5
IBRD Doing Business***
38.0
36.0
40.0
42.0
25.0
37.0
59.0
51.0
29.0
55.0
83.0
38.0
116.0
48.0
73.0
109.0
130.0
84.0
WEF Competitiveness Ranking***
50.0
31.0
74.0
69.0
36.0
62.0
90.0
43.0
65.0
55.0
85.0
51.0
81.0
35.0
47.0
41.0
39.0
28.0
8.8
4.0
12.8
5.1
6.2
6.1
15.9
5.6
9.6
10.4
9.1
3.9
7.4
6.7
26.6
25.0
7.1
4.1
Markets
External Debt Spread (10Y, bp)
Local Currency Curve (5Y, %)
FX 3m implied volatility (%)
Structural
Unemployment (%)
*IBRD for 2016 and WEF indicators for 2017
Source: Haver, Bloomberg, UniCredit Research
Legend
Not vulnerable
Somewhat vulnerable
Moderately vulnerable
Highly vulnerable
UniCredit Research
page 14
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
CEE Strategy: Waiting for the Fed
Javier Sánchez, CFA
EM Fixed Income Strategist
(UniCredit Bank London)
■
We expect CPI inflation in Central Europe to remain close to or below target and GDP
growth in the region and its partners to slow. As a result, central banks in the region will, in
our opinion, maintain policy rates unchanged, providing support for domestic yield curves
and curve flatteners.
■
As we expected, Moody’s downgraded Turkey below investment grade. We believe that
foreign currency bonds already partially priced in the rating action and positioning was
light. Relative valuations appear attractive at this stage, but we suggest waiting until the
effects of portfolio rebalancing from investors with restricted mandates are cleared. On the
domestic front, CPI inflation will continue to overshoot the target, but the CBRT will
maintain an easing bias in November. We think that the lira will continue to weaken and
domestic rates will increase and we would wait for better levels before initiating a position.
■
In Russia, we expect policy rates to remain unchanged in 4Q16, providing support to OFZ
valuations and keeping interbank rates anchored. We prefer the 1 to 3 year range of IRS
where we would initiate receivers to OFZs, as heavy domestic issuance requirements may
put upward pressure on yields.
■
The most important external events in the quarter ahead will be the US presidential
election on 8 November and a very likely hike in the Fed funds rate on 14 December. We
expect that the effect of both on fixed-income markets in Central Europe will be transitory
and we would add positions if there was a selloff.
■
Closer to our region, we expect the ECB to extend QE to October 2017 at its meeting
on 8 December as both inflation and growth remain below desired levels.
[email protected]
1. Markets in 3Q16
In 3Q16, emerging markets (EM) were softer compared to the first half of the year across
asset classes, with local currency faring worse than corporate and sovereign USD EM bonds.
YTD local markets (in USD equivalent) are outperforming both EM USD bonds and stocks
thanks to the stellar performance of local currency investments in 1Q16. With the exception of
TRY, CEE currencies performed relatively well against the EUR, and the quarter was
characterized by range-bound trading vs. USD.
This solid performance by EM fixed income and currencies was supported by the
accommodative monetary policy of the ECB and the Fed, which we expect to continue into
4Q16. In line with the consensus, we expect the Fed to raise rates by 25bp at its December
meeting, with two more rate increases coming in 2017. During 3Q16, consensus US growth
expectations for 2017 were revised downwards, core inflation remained trendless, with
headline inflation well below target. We think therefore that the case for accelerated Fed rate
hikes appears weak and hence the pace of rate increases will be slow. For these reasons, the
effect of the Fed rate hike on our markets could be transitory for both external and domestic
bonds, even considering the high non-resident ownership of local currency instruments.
In the eurozone, we expect the ECB to remain accommodative despite recent musings
suggesting a change of tone. The growth outlook in the eurozone points to a deceleration
over the next twelve months on the back of weaker exports and confidence shock if the UK
triggers article 50 in 2017. UniCredit economists expect the ECB to extend QE to October 2017
and recalibrate its institutional constraints in order to prevent tighter financial conditions.
Therefore, we think that the ECB’s monetary policy will remain supportive for our region
during 4Q16.
UniCredit Research
page 15
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
In the USD bond universe, Croatia, Romania and Hungary were the best performers during
3Q16, outperforming the index. Croatia reversed some of the relative loss of performance in
2Q16 and has overall outperformed the benchmark largely as a result of an improved macro
picture and better fiscal performance. Hungary performed in line with the index during the
quarter up to the unexpected rating upgrade to investment grade by S&P on 16 September,
which led to a subsequent rally and outperformance for the period.
3Q16 PERFORMANCE OF EM DEBT
3Q16 local currency debt returns in USD
3Q16 returns of EM USD debt
6.0%
15.0%
5.0%
10.0%
4.0%
3.0%
5.0%
2.0%
0.0%
1.0%
0.0%
-5.0%
Croatia
Romania
Indonesia
Argentina
Uruguay
Kazakhstan
Hungary
South Africa
Brazil
Georgia
Serbia
Malaysia
Colombia
Poland
Ukraine
Chile
Lebanon
China
Russia
Philippines
Turkey
Mexico
South Africa
Brazil
Hungary
Indonesia
Romania
Colombia
Poland
Russia
Chile
Philippines
Turkey
-2.0%
Mexico
-10.0%
-1.0%
Source: Bloomberg, UniCredit Research
Local yield curves in Romania, Hungary and Poland continue to be the steepest among major
emerging markets. Curves flattened in 3Q16 and we expect this trend to continue, driven by
downward revisions to monetary policy expectations on the back of lower inflation and real
GDP growth. Given this growth and inflation background in CE, the only rate moves during
3Q16 could be rate cuts in Turkey (after the CBR announced that it will not cut again this year).
REAL RATES AND GOVERNMENT YIELD CURVE 2-10Y SLOPE
10Y and Policy real yield rates (deflated with 2016F CPI yoy)
10Y real interest rate
Local currency 2Y-10Y government bond yield slope*
June 30
CB real rate
Sept 27
300
6.00
250
5.00
200
4.00
150
3.00
100
2.00
*For Hungary, the 3Y HGB maturity is used in the calculation.
UniCredit Research
Romania
Hungary
Turkey
Poland
South Africa
Czech
USA
Thailand
Germany
Colombia
Mexico
Indonesia
Japan
Brazil
Romania
Poland
Mexico
Brazil
Indonesia
Hungary
South Africa
Thailand
Turkey
Russia
-150
USA
-2.00
Japan
-100
Czech
-1.00
Colombia
-50
Germany
0
0.00
Russia
50
1.00
Source: Bloomberg, UniCredit Research
page 16
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
2. Recommendations by country
2.1 Russia
■
Local currency: receive swaps in the 1-3Y
The CBR cut the policy rate to 10% at its September meeting and suggested that it would remain
on hold for the rest of the year. We expect additional cuts next year, which could bring the policy
rate to 8% by the end of 2017. Besides monetary policy easing, a further reduction in rates could
be supported by the highest real interest rates in EM and an expected increase in the oil price,
which would support the RUB (our expectation is for Brent at USD 65/bbl by end-2017).
Bank liquidity will turn more supportive for domestic rates, with the banking system moving
gradually to a net creditor position with the CBR, even though liquidity is unevenly spread
across the banking system. We believe therefore that at current levels the domestic yield
curve is too high, despite a significant compression over the last six months. We prefer to
express our positive view through IRS rather than OFZ as these have rallied more and
issuance is expected to increase significantly in 4Q16. The short end of the IRS remains
elevated and we expect that it will flatten, particularly in the 1-3 year segment where we would
receive rates. Longer duration maturities are less interesting, given the CBR’s relative
hawkishness and limited potential for tightening.
■
Foreign currency: valuations stretched
Valuations in USD bonds appear stretched across the curve compared to rated peers such as
Turkey. Russia also trades more expensive than higher-rated countries in the short end (e.g.,
South Africa) and in the long end (e.g., Colombia). Fitch will review Russia’s rating by 14
October and we expect it to keep the investment grade.
RUSSIA
Russia’s USD bonds Z-spreads against peers
Russian Federation
Croatia
400
Colombia
Log. (Croatia)
IRS curve and UniCredit MOSPRIME forecast for 2016F and 2017F
South Africa
10
350
9.5
300
9
250
8.5
200
8
150
7.5
100
7
50
6.5
0
IRS of 26-Sep
IRS of 29-Jun
3m MOSPRIME target by 2016F
3m MOSPRIME target by 2017F
11
10.5
6
0
5
10
15
20
1y
2y
3y
4y
5y
6y
7y
8y
9y
10y
Source: Bloomberg, UniCredit Research
UniCredit Research
page 17
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
2.2 Turkey
■
Local currency: curve to remain steep
The CBRT will remain dovish despite inflation overshooting its target, with the O/N lending
rate on a path towards 8%. We believe that the monetary policy stance may be too
accommodative considering the near-term balance of risks and portfolio outflows related to its
rating below investment grade on the FX rate and its pass-through to inflation. We think
therefore that the steepening of the TURKGB curve in 3Q16 is justified and we would be
cautious about initiating positions in longer duration bonds at this stage.
■
Foreign currency: good value compared to peers
Turkish USD bonds were one of the worst performing in 3Q16 due to the failed coup attempt,
worsening macro data and the downgrades by S&P and Moody’s. Spread levels are above
pre-coup levels and may remain higher despite favorable headwinds for EM fixed income until
the effects of the downgrade on flows are priced in and if there are additional downward rating
revisions. On a relative valuation basis, the curve appears attractive, particularly when
compared to Russia and Brazil in the belly of the curve.
TURGKB yield curve to remain steep
As of Sept 27, '16
USD spread at similar levels to Brazil
As of Jun 30, '16
As of Mar 30, '16
Russian Federation
10.5
Turkey
Brazil
Croatia
Georgia
450
400
10
350
300
9.5
250
200
9
150
100
8.5
8
50
0
0
1
2
3
4
5
6
7
0
2
4
6
8
10
12
14
16
Source: Bloomberg, UniCredit Research
2.3 Hungary
■
Local currency: enter long HGB positions in the 3-5Y segment
We believe that the recent decision by the NBH to ease policy via a cap on 3M deposits will
boost HGB demand in 4Q16 when the cap will need to be met and HUF 200-400bn will need
to be placed in alternative instruments. In our opinion, HGBs could receive much of this
liquidity and we like 3-5Y HGBs as they have positive asset-swap spreads, a significant
rolldown to the short end and are less prone to a negative reaction from Fed tightening than the
long end of the HGB curve. In any case, investors should consider hedging the HUF exposure to
mitigate the negative effect of excess liquidity on the FX rate towards the end of the year.
■
Foreign currency: fairly priced
REPHUN bonds have had a good rally in 3Q16 after range trading in the previous quarter.
Further to the upgrade to investment grade by Moody’s, the rally has continued but we believe
that the USD curve is priced fairly to ROMANI USD bonds and expensive to higher-rated
sovereigns such as Mexico (2 notches higher) in the long end. Similar for EUR-denominated
bonds, we find these fairly priced to Romania and Bulgaria bonds, which we prefer.
UniCredit Research
page 18
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
HGBs offer better value than IRS in medium maturities
IRS
HGB
3.5
USD bonds are fairly priced against peers
Hungary
Mexico
400
3.0
350
2.5
300
2.0
250
1.5
200
150
1.0
100
0.5
0.0
Romania
450
50
0
0
2
4
6
8
10
12
0
5
10
15
20
Source: Bloomberg, UniCredit Research
2.4 Poland
■
Local currency: value in the medium-long end
The POLGB curve traded range bound during 3Q16 and we find its current valuation
attractive, particularly the medium to long end. Although inflation forecasts for 2016 and 2017
were revised downwards during the quarter, the medium to long end of the curve did not
tighten accordingly, offering value at these levels. We like POLGBs in the 2021-25 maturities
which could re-test levels of mid-August.
■
Foreign currency: fairly valued
USD bonds remain fairly valued compared to peers in the A-rated range and thus we believe
that there are other more compelling opportunities in foreign currency.
The POLGB curve remains too steep…
As of Sept 27, '16
… and yields traded range bound in 3Q16
As of Jun 30, '16
POLGB Jul25
As of Mar 30, '16
3.2
3.5
3.1
3
3
2.5
0
2
4
6
8
10
12
Sep-16
0
Aug-16
2.5
Jul-16
0.5
Jun-16
2.6
May-16
1
Apr-16
2.7
Mar-16
1.5
Feb-16
2.8
Jan-16
2.9
2
Source: Bloomberg, UniCredit Research
UniCredit Research
page 19
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
2.5 Romania
■
Local currency: curve to flatten in long end
We believe that the ROMGB curve is too steep, considering that expectations of rate
increases and fears of the economy overheating are overblown. GDP growth could slow down
and CPI inflation is expected to remain inside the target range at least until early 2018. The
flattening of the curve accelerated in 3Q16 and, in our opinion, this will continue, with local
investors targeting the belly, and foreigners more active in the long end. We expect the EUR-RON
to remain stable and thus we are comfortable with increasing positions in the longer end of
the curve in ROMGB 25s.
■
Foreign currency: fairly priced
The EUR curve is fairly priced against peers and thus we prefer ROMGBs to foreign currency
bonds. Romania is expected to issue in EUR during 4Q16 and we would recommend to add
to positions if issued at a premium against bonds with similar duration.
We expect ROMGB curve to flatten further…
As of Sept 27, '16
Poly. (As of Mar 30, '16)
… and we prefer longer duration bonds
As of Mar 30, '16
4.5
Spread in bp (rs)
ROMGB Feb25 (ls)
ROMGB Jun21 (ls)
120
4
3.5
100
4
3
80
3.5
2.5
60
2
3
40
1.5
1
2.5
20
0.5
0
0
2
4
6
8
10
2
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
0
Source: Bloomberg, UniCredit Research
2.6 Serbia and Croatia
■
Foreign currency: not cheap after the rally
Croatian and Serbian USD bonds rallied strongly in 3Q16 and we believe that they are
currently trading at fair value in respect to each other. Serbian USD spreads already discount
at least a one-notch upgrade. Moody’s has the lowest rating of the three agencies at B2(+)
and may review its positive outlook by mid-November. If upgraded, this would put it in line
with the ratings of the other two agencies.
UniCredit Research
page 20
See last pages for disclaimer.
September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Croatia and Serbia have rallied very strongly…
Croatia Mar'21
380
…but at current levels USD bonds do not look cheap
Serbia Sep'21
Croatia
Russian Federation
Serbia
Turkey
400
360
350
340
300
320
250
300
200
280
150
260
100
240
50
Sep-16
Aug-16
Jul-16
Jun-16
Apr-16
May-16
Mar-16
Jan-16
Feb-16
Dec-15
Oct-15
Nov-15
Sep-15
Aug-15
-50
Jul-15
0
200
Jun-15
220
-100
0
1
2
3
4
5
6
7
8
9
Source: Bloomberg, UniCredit Research
2.7 Bulgaria
In the investment grade universe, we like Bulgarian EUR bonds, as the likelihood of new
issuance is low in 2016 and 2017 and bank liquidity is plentiful. Local banks are increasing
holdings of EUR-denominated bonds following the positive results of the Asset Quality Review
in August. Bonds are a more liquid alternative to lev-denominated BULGGB bonds and hence
will continue to be well bid by local banks during the next quarter. Although EUR-denominated
bonds rallied significantly in 3Q16, making them tight to comparable bonds issued by
Romania and Hungary, we think Bulgarian bonds offer better value.
Valuation of Bulgarian bonds is tight…
Bulgaria
… but we prefer them to peers
Hungary
Romania
Bulgaria '22
300
250
Romania '24
Hungary '20
250
200
200
150
150
100
0
2
4
6
8
10
12
14
Jul-16
Sep-16
May-16
Jan-16
Mar-16
Nov-15
Jul-15
Sep-15
May-15
Jan-15
Mar-15
Nov-14
-50
Jul-14
0
Sep-14
0
Mar-14
50
May-14
50
Jan-14
100
16
Source: Bloomberg, UniCredit Research
UniCredit Research
page 21
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
CEEMEA FX: A liquidity driven rally
Kiran Kowshik,
EM FX Strategist
(UniCredit Bank London)
+44 207 826-6080
[email protected]
Main points
3. Liquidity has taken over as a driver for the EMFX rally, urging caution.
4. This could present opportunities to consider long PLN-HUF and long RUB-ZAR before
November.
5. Fundamental reasons for TRY remaining the EM laggard remain. With the rating
downgrade out of the way, position for a range-bound USD-TRY followed by a rise in 2017.
6. We like RUB on any weakness but fiscal policy risks need to be monitored carefully.
EM currencies: Liquidity has now taken over as the driver
1H16 EMFX rally linked to
China, commodities and
dovish central banks
We abandoned our long held bearish view on emerging market currencies in February by
turning constructive on commodity currencies like RUB and ZAR (See FX Flash EM
Commodity FX: the rally has legs from 22 February 2016). We followed that up with a more
concrete positive view from April onwards (see FX Perspectives “EM FX: why the rally has
further to run”, 7 April). The main reasons behind that view were threefold: 1. A cyclical
rebound in China, especially in construction, which boosted commodities (and several
correlated EM currencies), 2. More dovish central banks, especially the Fed and 3. Very
supportive flow backdrop and positioning.
Commodities no longer
providing the support they
have in the longer term…
Chart 1 compares the annual appreciation trend in a commodity index set against that for our
constructed EMFX-USD index. The latter was constructed using the weights of the JP Morgan
global diversified EM bond index. The close historical link suggests that EM currencies tend
to appreciate when supported by commodities, which likely reflects the global growth
picture. While the support was there in 1H, a gap has opened up in 2H, specifically after Brexit.
…and China not supporting
commodities like it did in 1H
We also find that Chinese investment, especially in the construction sector (which explained
commodity trends), has slowed down, or at least stabilized and this suggests that
commodity prices may be too high (chart 2). Hence, not only are current EMFX levels
looking stretched relative to the traditional driver of commodities, but the tailwind that China
provided to commodities is not as convincing as was the case in 1H16.
EMFX HISTORICALLY DRIVEN BY COMMODITIES BUT CHINA NOW LESS OF TAILWIND FOR THE LATTER
Chart 1: Commodities supported EMFX rally until 1H16
70.0
50.0
EMFX-USD index (EMBIG weights, rs)
Both series
yoy
GSCI commodity index
30.0
80.0
20.0
10.0
30.0
0.0
10.0
-10.0
-10.0
-30.0
R^2 = 74% since 2005
83% since 2010
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
-50.0
-70.0
Chart 2: But China no longer supporting commodities
China completed real estate investment (rs)
Both series
YoY
42.5
37.5
60.0
32.5
40.0
27.5
20.0
22.5
17.5
0.0
-20.0
-20.0
-30.0
-40.0
-40.0
-60.0
12.5
R^2 = 48% since 2005
62% since 2010
7.5
2.5
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
90.0
GSCI commodity index
-2.5
Source: Bloomberg, UniCredit Research
UniCredit Research
page 22
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Instead, low rates for even
longer CB mindset
has taken over
We think that the driver that has taken over in supporting EM currencies is very low yields in
the developed world and (relatedly) ample liquidity. The UK vote to leave the EU in June
promoted a “low for even longer” view for the G4 central banks (US, Europe, UK and Japan).
As a consequence, yield curves flattened sharply and a hunt for liquid EM assets emerged
(See FX Perspectives “Brexit impact on EM currencies: gone with the wind” 14 July). The
dynamic has taken on a life of its own, and now the rally in EM currencies appears to be
almost entirely driven by the hunt for liquid EM assets. Several EM currency returns are,
since June, extremely negatively correlated with G4 bond market returns – so when yields
decline, EM currencies rally.
Unusually, EMFX returns are
now strongly linked to lower
core bond yields
Chart 3 plots the 6M rolling correlation between weekly EM currency returns and weekly
changes in average G4 10Y nominal government bond yields. A negative correlation
signifies that EM currencies are rallying when bond yields are declining (a liquidity-driven phase)
and vice versa. Even after 2010, a period characterized by unconventional G4 central bank
policy, EMFX returns and bond yields shared a positive relationship. The recent switch to a
negative correlation has been quite sudden. Assuming central banks keep monetary policy
accommodative, DM yield curves can stay flatter. It is likely that this will continue to support
an almost indiscriminate hunt for liquid EM assets in the weeks ahead. That being said,
there is only so far a liquidity-driven rally can go. There was always some catalyst to disturb
such a situation. In 2013, it was the taper tantrum, in mid-2014 it was a hawkish re-pricing of
the Fed outlook, while in 3Q15 it was the CNY devaluation.
This may continue some
time longer
But there is so much a
liquidity driven rally can go
Hard to see what can burst this
liquidity-driven EMFX rally…
It is impossible to see where the next catalyst for a correction comes from. We suspect that
signs that authorities are more open to using fiscal stimulus (as opposed to monetary stimulus)
could be a catalyst. The recent weakness in EMFX coincided with steepening of yield curves
and was driven by concerns the Bank of Japan’s existing easy monetary policies are
reaching their limits given negative side effects (weighing on bank profitability). With
monetary policy seen as reaching its limits, fiscal policy may have a greater role to play;
fiscal expansion (if not accompanied by more monetary easing) could see very low bond
yields re-price. The consensus view is that the prospect of such a change in policy seems
far off. But this will be something to monitor. In this regard, the views on fiscal policy of the
next President of the United States will need to be monitored; both candidates have pledged
to increase spending, but especially Donald Trump. Similarly, the UK budget Autumn
Statement will be important with the Chancellor having suggested cutting corporate taxes.
Japan’s Abe government will also need to be monitored for any signs of a change in fiscal policy.
But keep an eye on government
rhetoric on fiscal policy
EMFX RALLY SINCE JULY MORE LIQUIDITY DRIVEN AND HENCE PRONE TO REVERSAL ON A RATES RE-PRICING
Chart 3: EMFX-G4 bond link hints of a liquidity driven rally
Chart 4: EMFX: Varying sensitivity to post-Brexit DM bond rally
6M rolling correlation of EMFX returns and average G4 yield change (weekly)
50
40
Good EM years
30
Jun to Sep 2016
COP
TWD
CNH
RUB
PLN
HUF
INR
TRY
MYR
MXN
THB
CLP
EMFX index
KRW
ZAR
BRL
IDR
Strong Fed
QE phase
20
10
0
-10
-20
-30
China deval
Jun-16
Jun-15
Dec-15
Jun-14
hawkish
Fed
re-pricing
Dec-14
Jun-13
Jun-12
Jun-11
Dec-11
Jun-10
Dec-10
Jun-09
Dec-09
Jun-08
Dec-08
Jun-07
Dec-07
Jun-06
Dec-06
Jun-05
-60
Dec-05
-50
Dec-12
"taper
tantrum"
Dec-13
-40
since 2010
Less vulnerable
to back up in G4
yields
More vulnerable
-60
-40
-20
0
20
40
60
Source: Bloomberg, UniCredit Research
UniCredit Research
page 23
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Currencies like RUB and PLN
less reliant on the post Brexit
bond rally…
However, it is useful to keep in mind which currencies have been increasingly reliant on a
liquidity-driven rally versus those that are not. Chart 4 compares the correlation between
different EMFX-USD pairs and changes in G4 10Y bond yields (both in weekly returns) for
two periods: 1. Since 2010 and 2. After June 2016. We see that RUB, PLN an HUF FX
returns are less correlated with declining G4 bond yields. On the other hand, ZAR, BRL and
COP appear far more linked. TRY stands somewhere in the middle in this regard. If the
global yield curve-flattening theme re-emerges (as it has done recently), then currencies at
the bottom of chart 4 can outperform those near the top. Hence, RUB-ZAR could stay
heavier as well as PLN-HUF lower still.
…while ZAR and HUF are more
exposed to a reversal in mood
The liquidity-driven rally will
allow better entry levels for…
But this could present opportunities for long positions in line with our fundamental views as
we enter November. Specifically, we expect the HUF to weaken temporarily heading into
November when a significant liquidity surplus will open up. Around the same time, the
passage of the October 27 EC deadline for the Polish government could allow a relief rally in
PLN. Similarly, we think that markets could push ZAR lower as political rhetoric against
Finance Minister Gordhan increases ahead of the medium-term budget statement (MTBS),
usually in the third week of October. RUB is past the seasonally weak period (August and
September) and could perform better from hereon.
…long PLN-HUF and
long RUB-ZAR
Polish Zloty
View
We think EUR-PLN should broadly remain in a 4.25-4.40 range and we recommend buying
and selling towards the bottom and top of the range respectively. We expect the cross to
remain under pressure until mid-October, but ongoing headline risk from the dispute
between the government and the EC could see the cross hold in higher ranges. Any signs of
resolution should allow for a bigger selloff in EUR-PLN heading into 2017.
Two sources of headline risk
In 1H16, PLN was the major EM underperformer on account of heightened uncertainty over
government policies, concerns of a downgrade by other agencies (following S&P) triggering
debt portfolio outflows. The two major local factors which hurt were: 1. Issue of forced
conversion of CHF mortgages, and 2. Ongoing dispute of the government with the EC over
the functioning and composition of the Constitutional Tribunal. The first has gone away for
now, or at least been postponed. President Duda has asked banks to consider a voluntary
conversion with a deadline of around July 2017. This could be a cause of concern next year,
but is unlikely to be a hindrance now.
PLN: HIGH REAL YIELDS COULD PROVIDE SUPPORT IF FISCAL RISKS DECLINE
Chart 5:
Poland offers high real yields
2016
PLN
MXN
BRL
IDR
HUF
ZAR
INR
MYR
TRY
RUB
CNH
KRW
TWD
CZK
CLP
COP
Chart 6: Broad basic balance of payments point
to appreciation pressures
2017
18
BBoP 12m sum EUR bn (2M lead)
PLN NEER YoY (rs)
20
15
13
-5
-7
-10
0
2
4
6
8
-15
correlation = 75% since Jan 2009
-20
-25
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Mar-16
Aug-16
-22
-2
0
-2
-17
-4
5
3
-12
-6
10
8
Real 10Y yield
(current 10Y yield
deflated by consensus
CPI estimates)
-30
Source: Bloomberg ECFC, UniCredit Research
UniCredit Research
page 24
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
PLN could perform better
after the event risks in the
third week of October
The second still remains with the European Commission having provided a deadline of 27 October
to resolve the dispute and review other laws which were deemed unconstitutional. Markets
will re-focus on this issue ahead of this date, which could see the PLN weaker. Note that
around this time, there is also a very large POLGB maturity (PLN 22.4bn) on 25 October.
Our working assumption is that the government is unlikely to comply, with a resolution
probably appearing more likely in 2017 after the CT President is replaced. Still, both event
risks could create headwinds for the PLN and provide opportunities to buy the currency,
perhaps against HUF tactically with the latter weakening on increased liquidity in November.
Better activity and budget data
needed to help portfolio flows
Beyond the next six months, two factors will be important from a flows perspective to make
us more bullish on the PLN. First, with short-term rates relatively high and the NBP sounding
more hawkish, carry trade related flows could provide support. Second, given the high real
yields (chart 5), bond flows could rise, though this would probably require stronger
confidence that Polish authorities maintain the budget deficit under 3% in 2017 and the
country does not return to the excessive deficit procedure (EDP). So far, growth outcomes
have been weaker and authorities projected tax collections are on the optimistic side. The
monthly budget data as well as activity data will be important in this regard, and stronger
outcomes should help the currency as markets price out fiscal risks. Third, an improvement
in FDI flows would make us more bullish, given that FDI flows have historically been
important for the currency, over and above portfolio flows or the current account (chart 6). A
reduction in uncertainty over government policies would be needed for this to occur. This is
something to monitor going forward.
Improving FDI flows would
make us more positive on PLN
Hungarian Forint
View
We expect EUR-HUF to gradually move higher towards 315 by year-end with a short-lived
spike to 320 possible. The move should gain traction towards the end of October when a
substantial HUF liquidity surplus will likely open up. However, a stronger broad basic balance,
low global yields and renewed foreign interest in local debt will make it difficult to re-cycle its
strong current account surplus. EUR-HUF could edge lower once again heading into 2017.
Tighter liquidity to weigh on
EUR-HUF for now
In the next 1-2 months, the central bank’s liquidity operations, in particular the NBH decision
to cap the use of the 3M deposit facility (the main sterilization instrument), will be important.
We think excess HUF liquidity may only increase after mid-October at the earliest, with
much depending on the 3M deposit tender on 19 October (see EEMEA Macro Flash “The
National Bank of Hungary strengthens its commitment to low interest rates”).
Rising liquidity to push cross
higher in November
HUF: HIGHER LIQUIDITY WILL WEAKEN THE CURRENCY, BUT FLOWS WORKING IN OPPOSITE DIRECTION
Chart 7: Lower yields to weaken HUF in November
Chart 8: Fixed income flows point to stronger HUF
change on month (bp, rs)
HUF 1M implied yield (%)
4
80
3.8
3.2
-3
-2
-1
0
20
0
-2
3
0
-20
-60
Jul-16
Dec
Sep-16
Nov
Mar-16
Oct
May-16
Sep
Jan-16
Aug
Nov-15
Jul
Jul-15
Jun
Sep-15
May
May-15
Apr
Jan-15
Mar
4
Mar-15
Feb
-8
Nov-14
Jan
-40
Sep-14
average 2011-15
2.2
3
-6
Jul-14
2.4
2
May-14
2.6
1
-4
Mar-14
2.8
2
-4
2
40
3.4
-5
4
60
3.6
Treasury Notes Held By Foreign Investors (22D change, 5DMA)
EUR-HUF (22D change, 5DMA, inverse scale, rs)
6
5
Source: UniCredit Research
UniCredit Research
page 25
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
However, until then, HUF liquidity could remain tighter, keeping money market yields higher
and EUR-HUF heavier in a 305 to 310 range. But a move to a much higher HUF liquidity
surplus after November (which tends to happen anyway- see chart) should take EUR-HUF up
to the 310-315 range.
But strong external balances
and renewed bond inflows…
…should see HUF strengthen
again in 2017
That being said, very strong external balances will make it difficult for such liquidity measures
to sustainably take EUR-HUF above 320. The current account has moved from a deficit of
near -7% of GDP before 2009 to close to a 5% surplus of GDP recently. Together with FDI
and EU funds, the extended basis balance stands at near 8%. At the same time, after having
declined for over a year, foreign investor flows into the bond market have increased after
August. This is important given that we find that bond inflows were the one component having
a higher correlation with the currency over longer periods of time. We expect such flows to
keep the HUF frustratingly strong. After an initial rally towards year-end, EUR-HUF should
decline heading into 2017.
Turkish Lira – Still very much the EM laggard
With Moody’s having downgraded the sovereign below investment grade, USD-TRY will likely
rally up to 3.02-3.05. However, the continued rally in G4 bonds and resultant push towards
liquid EM assets could see USD-TRY move back down to a 2.90-2.95 range. Nevertheless,
we have not altered our long-held bearish medium-term TRY view. With implied volatility still
high and the rating risk now out of the way, 6M USD call options with barriers placed for the
next two months could make sense.
View
TRY has been an EM laggard
Removal of downgrade
uncertainty could see TRY rally
initially after the shock
TRY has underperformed each and every CEEMEA currency over the past three months.
Indeed, most EM currencies have outperformed the TRY quarter to date (QTD), barring the
MXN. We think the underperformance is due to the macro economic imbalances which are
worse than most liquid EM currencies. However, we are skeptical that the move to junk status
will take TRY much weaker. Foreign investors have also not participated as much in Turkish
assets as they have in other emerging markets, like South Africa for instance- suggesting
some underlying caution already. At the same time, implied volatility remains high at the 3M
point. The 1M-3M part of the USD-TRY implied volatility curve, now at 2 vols, is elevated. On
the other hand, the 3M-6M part of the curve is still off prior highs. USD-TRY could stay in
lower ranges for a while longer, if the liquidity-driven EMFX rally continues.
But beyond the next 1-2 months, the case for a weaker TRY in the medium term remains
clear to us (see FX Perspectives Turkish Lira - the fragile one from 19 May).
TRY: STILL CHALLENGING LONG-TERM FUNDAMENTALS
Chart 9: TRY: Most overvalued major EM currency
Chart 10: Net FX reserves dangerously low
Implied* REER gap (Aug 2016)
USD bn
Gross FX reserves
FX reserves less bank FX
120.0
MYR
RUB
100.0
Undervalued
ZAR
MXN
80.0
KRW
BRL
60.0
PLN
40.0
THB
Overvalued
Jan-16
Jan-15
Jan-14
Jan-13
20
Jan-12
10
Jan-11
0
Jan-10
-10
Jan-09
-20
Jan-08
-30
0.0
Jan-07
INR
TRY
Jan-06
20.0
* use IMF EBA REER valuation for
2015 and adjusts for REER move
to August
Jan-05
CNY
Jan-04
IDR
Source: Bloomberg, IMF External Balance Assessment, CBRT, UniCredit Research
UniCredit Research
page 26
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
But TRY will remain a laggard
for good reasons
Using the IMF’s most recently released external balance assessment estimates on REER
valuation, TRY still appears overvalued (chart 9). The C/A deficit is wide (2010-15 average of
6.5% of GDP) and dependent on foreign portfolio inflows and short-term borrowing, both
prone to shifts in sentiment. Turkey has a massive net international investment liability
position of 50% of GDP. Along with the trade deficit, the interest and dividends to be paid on
such large liabilities result in a large income deficit (with a lot of the liabilities short term),
taking annual external financing requirements over 25% of GDP. This compares with a much
smaller 17%, 9% and 8% projected for South Africa, Indonesia and Brazil. So Turkey needs
that much more inflow just to keep the currency stable. This is why even a resumption of
portfolio inflows is unlikely to result in any meaningful TRY strength.
External financing remains
challenging
If one assumes that the sizeable external financing requirement is not plugged by either
borrowing or private investment, then the outflows will be accommodated by either a further
drawdown in FX reserves and/or further depreciation in the lira. But FX reserves are already
painfully low (chart 10). Authorities have already drawn down reserves (some USD 10.3bn
between December 2014 to February 2016), but there is little alternative other than for
authorities to allow the currency to adjust, with higher interest rates looking unviable. The
narrower rate corridor suggests that there is no scope to squeeze implied rates higher and
hence one less major tool to protect the currency against speculators.
Limited FX reserves means
TRY will still face the brunt of
outflow pressure
Russian Ruble – Buy into weakness, but wary of fiscal policy risks
View
Barring near-term volatility, we think a combination of: 1. A projected rise in energy prices,
2. High real rates, and 3. Lower sensitivity to the post-Brexit G4 bond rally should allow USD-RUB
to hold in a 62.00 to 65.00 range. USD-RUB remains a sell on rallies towards the top of this range.
Better seasonals and lower
sensitivity to G4 bonds make
RUB attractive
In the near term, there are two factors which suggest that RUB will be an attractive long. First,
we have now passed the usually seasonally weak period of August and September which
tends to see the currency weaker (See Why the odds favour RUB weakness in 3Q). Second,
as mentioned in the introductory section, unlike many other EM currencies, RUB seems more
immune to the risk scenario of a global re-pricing of core government bond yields.
RUBLE: WE LIKE IT, BUT FISCAL RISKS TO PLAY AN INCREASING ROLE
Chart 11:
Foreign investor flows to OFZs
Chart 12: With very weak government revenues, authorities may
need to inflate oil and gas revenues (RUB terms)
35
20
1
-1
Dec-16
Jun-16
Sep-16
Mar-16
Dec-15
Jun-15
Sep-15
Mar-15
Dec-14
Jun-14
Sep-14
Mar-14
Dec-13
Jun-13
Sep-13
Mar-13
Dec-12
Jun-12
Sep-12
Mar-12
Dec-11
45
40
-10
35
-20
30
-30
5
Foreign investors bought OFZs up to May
50
0
10
-3
30
20
10
15
25
-40
-50
0
60
55
40
25
3
Government revenue (yoy)
Oil and gas (% proportion of total budget revenue, rs)
50
30
5
-5
60
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Foreign holdings (monthly change, USD bn)
% foreign holdings in total (rs)
7
20
Source: Bloomberg, UniCredit Research
UniCredit Research
page 27
See last pages for disclaimer.
<date>
September 2016
Economics & FI/FX Research
CEE Quarterly
But a flow-driven RUB
appreciation without a rise
in energy prices…
…will see government verbal
intervention increase
But while an increase in capital flows (given the high carry on bonds) will see RUB
appreciate, if this occurs without a corresponding increase in energy prices, government
authorities will likely verbally intervene as they did over June and July considering the
challenging fiscal situation. In recent months, oil and gas revenues made up only 35% of
total revenues compared with 50% historically (for the federal budget). Overall government
revenue has been contracting close to 30% yoy. In such a backdrop and given the
presidential elections, government authorities will likely verbally intervene against a RUB
appreciation if unaccompanied by a rise in energy prices. Such intervention occurred in July
when energy prices (RUB terms) went below RUB 2900 per barrel (we are now closer to
such a threshold). If the RUB appreciation continues, then at some point the CBR could restart their FX reserve-building program, though this still seems some way off given the
CBR’s strict focus on getting inflation lower.
Higher energy prices should
see USD-RUB in a 58-60
range next year
Longer term, our house view is for energy prices to increase to USD 56.50bbl in 2017
compared to USD 45.00bbl in 2016. Based on 12M rolling regressions of USD-RUB on
energy prices, this would translate into USD-RUB moving from 67.00 in 2016 to 59.80 in
2017. The IMF’s valuation measures suggest the RUB is very undervalued (chart 9).
However, there are two factors that could work to limit gains.
But weaker current account…
First, our forecast for a rebound in growth – led by consumption – should result in higher
imports and a narrower trade surplus. Indeed, we forecast the current account surplus
narrowing to 1.3% of GDP, from 1.9% and 5.3% in 2016 and 2015, respectively. Second,
with the reserve fund likely to be depleted (current USD 32bn vs. USD 70bn 12 months
earlier) and other options to plug the deficit (like draining the wellbeing fund or cutting
spending appearing difficult), increased OFZ issuance to plug a likely wider budget deficit
(3.5% of GDP for 2017 vs. MoF projection of 3.2%) could reduce foreign appetite for OFZs
and hold RUB back.
…and rising fiscal risks could
dent the rally
UniCredit Research
page 28
See last pages for disclaimer.
<date>
September 2016
Economics & FI/FX Research
CEE Quarterly
Countries
UniCredit Research
page 29
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Bulgaria (Baa2 stable/BB+ stable/BBB- stable)*
Outlook – A jump in fiscal spending in 2H16, along with a record high wheat harvest and a
surge in tourist arrivals, will help GDP growth to accelerate to 3.2% this year. Next year’s
growth is set to slow marginally, with Brexit likely to produce a net trade shock equivalent to
1% of GDP, while tailwind from lower oil prices starts to fade. Robust labor market recovery
will be the main growth driver next year, while at the same time the solid fiscal position will
help the government to mitigate most of Brexit’s impact on growth. In addition, investment is
also expected to contribute positively to growth next year, as more shovel-ready infrastructure
projects enter the pipeline. The solid growth will be accompanied by a record-high C/A
surplus, which not only points to improving competitiveness, but will also help push external
debt to more manageable levels.
Author: Kristofor Pavlov, Chief Economist (UniCredit Bulbank)
MACROECONOMIC DATA AND FORECASTS
2013
2014
2015
2016F
2017F
GDP (EUR bn)
41.9
42.8
44.2
45.3
47.2
Population (mn)
7.2
7.2
7.2
7.1
7.1
5,784
5,936
6,173
6,366
6,661
KEY DATES/EVENTS
■ 30 Oct: Budget Act 2017 introduced in Parliament
■ 6 Nov: Presidential elections
■ 15 Nov: Flash GDP estimates for 3Q16
GDP per capita (EUR)
Real economy, yoy change (%)
GDP
GDP GROWTH STABLE AT 3%
yoy (%)
Private consumption
Public consumption
Net Export
GDP, real growth
Fixed Investments
5.0
3.2
4.0
3.0
3.0
3.0
2.0
1.3
1.3
1.5
3.0
3.2
3.0
-1.1
2.5
0.7
3.1
2.7
Fixed Investment
0.3
3.4
2.5
-2.3
1.9
Public Consumption
3.1
-0.8
0.4
0.5
0.4
Exports
9.2
-0.1
7.6
4.6
3.5
Imports
4.9
1.5
4.4
2.3
2.5
Monthly wage, nominal (EUR)
396
420
458
492
529
Private Consumption
1.5
Real wage, change (%)
5.1
7.4
9.0
8.1
6.4
Unemployment rate (%)
12.9
11.4
9.1
7.9
6.8
-2.0
1.0
Fiscal accounts (% of GDP)
0.0
Budget balance
-1.8
-3.6
-2.9
-1.6
-1.0
Primary balance
-0.9
-3.0
-2.1
-0.8
-1.2
Public debt
17.6
26.4
26.4
29.7
28.8
Current account balance (EUR bn)
0.5
0.4
0.6
1.8
1.5
Current account balance/GDP (%)
1.3
0.9
1.4
4.0
3.2
Extended basic balance/GDP (%)
5.5
5.2
7.7
8.3
7.6
Net FDI (% of GDP)
3.0
2.1
3.4
3.0
3.1
-2.0
-3.0
2013
2014
2015
2016F
2017F
INFLATION TO RETURN TO POSITIVE TERITORRY
yoy (%)
External accounts
3.0
Gross foreign debt (% of GDP)
88.1
92.1
77.2
74.7
70.9
2.0
FX reserves (EUR bn)
14.4
16.5
20.3
23.8
26.8
5.9
6.6
7.8
9.0
9.9
CPI (pavg)
0.9
-1.4
-0.1
-0.6
1.1
CPI (eop)
-1.6
-0.9
-0.4
0.3
1.3
Central bank reference rate (eop)
0.07
0.02
0.01
0
0
USD/BGN (eop)
1.42
1.79
1.76
1.76
1.72
EUR/BGN (eop)
1.96
1.96
1.96
1.96
1.96
USD/BGN (pavg)
1.47
1.47
1.76
1.75
1.70
EUR/BGN (pavg)
1.96
1.96
1.96
1.96
1.96
153.9
152.6
151.0
150.2
148.4
0.3
-0.8
-1.0
-0.5
-1.2
Months of imports, goods & services
1.0
Inflation/Monetary/FX
0.0
-1.0
-2.0
-3.0
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Source: BNB, NSI, MoF, UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
Source: Eurostat, NSI, UniCredit Research
*
Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch, respectively
UniCredit Research
page 30
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Growth to remain resilient next year
We keep our 2016-17 GDP
growth projections unchanged
Brexit has materially altered the outlook for next year. Given its high dependence on foreign
trade and deep integration in production chains of major EA exporters, Bulgaria faces a net
trade shock on the order of 1% of GDP. But with domestic demand robust thanks mainly to
the strongly improving labor market and with the government in a position to provide a
sizeable fiscal impulse, we were not particularly worried in June and penciled in only a small
downward revision to our above-consensus GDP growth projection for this and next year.
Our GDP growth forecasts of
3.2% in 2016 and 3.0% in 2017
are both above consensus
(2.5% and 2.7%, respectively)
Developments over the last three months have broadly reconfirmed these views. In 2Q16,
GDP growth expanded at an annualized rate of 3%, the same as in the past five quarters.
Private consumption remains the main driver, as households have become more confident
about their income and job prospects and, to a lesser extent, exports, which offset a fall in
fixed investment, with EU fund absorption slowing as forecasted. We expect the recovery to
accelerate in 2H16, pushing full-year GDP growth to 3.2%. On the expenditure side, the drag
from investment is likely to ease, as the public sector is set to produce a significant fiscal
boost in the remainder of the year (when the budget balance is expected to shift from a 3.7%
of GDP surplus in July to a 1.6% deficit by December) after the asset quality review showed
that the banking sector didn’t need financial support from the state budget. On the production
side, GDP growth in 2H 2016 will be fueled by a favorable combination of a record-high surge
in revenues from seaside tourism and a record-breaking rise in the wheat harvest.
On top of a strengthening labor
market recovery, growth in
2H16 will draw support from a
solid rise in fiscal spending
Individual consumption is set
to remain strong…
…while investment is about to
recover…
… but some of the tailwinds
which have propelled growth
this year are starting to fade
The fallout from Brexit will be
felt in full next year
GDP growth is set to slow marginally to 3% next year. Private consumption will remain the
key growth driver. With the unemployment rate at 8.1% in 2Q16, the economy seems far from
full employment. At the same time, a C/A surplus at above 2% of GDP suggests that costs are
well contained and that there is room for wage increases in the best-performing exportoriented sectors without risk to competitiveness. Although to a smaller extent, fixed
investments are also expected to contribute positively to the domestic demand expansion in
2017. Solid profits and improving productivity, coupled with signs that companies have little
spare production capacity to meet a further increase in demand (see lhs chart) bode well for
investment. The outlook in the residential sector also looks more promising. Housing sales
rose to the highest level since 2008, while slowly increasing construction permits and
mortgage lending (see rhs chart) point to both more construction activity and moderately
higher house prices. On the other hand, the external environment will become less supportive
next year, as on top of the negative impact that Brexit will have on the pace of export
expansion, tailwinds from lower energy prices and a weaker euro are also likely to fade.
Headline inflation (-0.3% yoy in August 2016) has been rapidly exiting negative territory, after
bottoming out in April (-2.2%) this year.
The prolonged period of
abnormally low inflation is
coming to an end
Existing capacity seems short to meet expected demand
Capacity to meet expected demand
25
Falling interest rates are slowly pushing mortgage lending higher
10Y Long-term average
10
20
8
15
6
10
4
5
2
Mortgage loans, outstanding, yoy growth
Interest rates on newly extended mortgage loans
0
0
-2
-5
-10
%
-4
Jul.11
3Q06
3Q08
3Q10
3Q12
3Q14
Jul.12
Jul.13
Jul.14
Jul.15
Jul.16
3Q16
Source: Eurostat, BNB, UniCredit Research
UniCredit Research
page 31
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Job growth in the private
sector continues at a decent
clip…
…with most of new hiring in
well-paid jobs from business
services…
…where outsourcing has been
most pronounced
Widening C/A surplus suggests
that competitiveness is improving
Looking ahead, the C/A surplus is
set to continue breaking records
The presidential elections will
produce no major shift in the
balance of power…
…but no major impact on
reforms either
This was mostly attributable to a much more pronounced seasonal adjustment in
unprocessed food and a large part of leisure services prices. We expect headline inflation to
increase at a moderate pace in the coming months (to 0.3% in December 2016) before
accelerating next year (to 1.3% in December 2017).
Labor market data have been mixed recently, but the overall trend remains positive. The
2Q16 jobs report failed to impress on the positive side, as lower-than-expected 22K jobs were
created (on a par with 25K jobs in 1Q16, but less than the 50K on average in 2015). A deeper
look reveals that these two weak quarterly prints were almost entirely attributable to one-off
employment drops in the public sector, while in the more vibrant private sector the pace of job
creation was little changed from 2015. Other labor market indicators were more positive. The
unemployment rate fell to 8.1% in 2Q16, down from 8.6% in 1Q16 and 9.9% in 2Q15, while
the balance between hiring and firing intentions of business managers in different sectors of
the economy continued trending higher (see lhs chart). Also positively, average wages rose
6.9% yoy in 2Q16, underpinning individual consumption and aggregate demand more
generally. On balance, the labor market recovery seems to have progressed at a decent pace
in 2Q16, but with more than 266K unemployed the economy looks far from full employment.
We expect a record-high C/A surplus this year. Stepped-up export expansion gave a
pronounced boost to the C/A balance already last year, which also benefitted from lower oil
prices and a jump in EU transfers. All these helped the C/A to post a small 0.4% of GDP
surplus in 2015 (see rhs chart), despite marked terms of trade deterioration, with export prices
dropping 2.5% yoy vs. a 1.4% decline in import prices. But terms of trade improved and the
C/A surplus swelled to 2.4% on a 12-month basis in July, in spite of weaker EU transfers. It
was particularly encouraging to see the 12-month deficit in merchandise trade shrinking to
4.6% of GDP (from 5.9% in 2015), in spite of higher domesic demand. Looking ahead, the
C/A surplus is expected to peak at 3.6% in 2016, before softening marginally to 1.9% in 2017,
when consumption and investment push imports up. The record-high C/A surplus this year will
also draw support from an all-time high wheat harvest, which will help to fully offset the
negative impact from falling grain prices, and the surge in tourism revenues, as geopolitical
tensions redirected tourist flows to Bulgaria from some traditional destinations like Turkey.
Right-wing, pro-European GERB party is ahead in the opinion polls for the next presidential
elections, scheduled for 6 November. As things stands today, these elections are unlikely to
produce any major shift in the balance of political power, which is also our baseline scenario.
So far, the focus has been on the candidates’ nomination, but as GERB had not yet
nominated its presidential candidate, the time for any meaningful debates on future policy is
likely to be shortened to less than a month. This raises concerns that the election campaign
will be limited to the exchange of personal accusations and repetition of outworn slogans and
dogmas, which risk to further frustrate already disenchanted voters, instead of building a
stronger consensus for pressing ahead with the implementation of the key missing reforms.
Employment expectations are trending higher
75
Industry
Services
Retail trade
Construction
CA surplus is breaking records
% of GDP
Household
20.0
75
50
50
25
25
15.0
Trade balance
Services balance
Primary income balance
Secondary income balance
Current Account
10.0
0
5.0
0
-25
-25
-50
-50
0.0
0.3
-0.9
1.3
0.9
1.4
2013
2014
2015
4.0
3.2
2016F
2017F
-5.0
-10.0
-15.0
-75
-75
Aug.07 Aug.08 Aug.09 Aug.10 Aug.11 Aug.12 Aug.13 Aug.14 Aug.15 Aug.16
2011
2012
Source: Eurostat, BNB, NSI, UniCredit Research
UniCredit Research
page 32
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: Bulgarian assets have upward potential left
Bulgarian EUR-denominated asset prices still offer upward potential despite the fact that the
GB yield curve has moved to a substantially lower level in line with the tide in CEE during the
summer months. Increased buying over 3Q has further flattened the curve, but yields remain
attractive compared to those of regional rating peers and against the prospects of more
downward pressure going forward.
Funding needs will
tighten significantly
The combination of lower sovereign funding needs and abundant liquidity in the banking
sector will be the main drivers, going forward. Weak credit growth against the background of
robust deposit expansion has pushed the loan-to-deposit ratio further down (forecast at 73%
in eop 2016), pressuring banks and other local institutional investros to search for yield in the
GB market. At the same time, budget execution has received significant support from cyclical
factors, as well as tax compliance improvement, which will continue to benefit the revenue
side in the short to medium run.
We don’t see new external debt
supply before 2019
That said, we have revised our estimates for sovereign issuance further down as downside
risk associated with AQR and stress tests in the banking sector failed to materialize. Already
accumulated buffers will be used for debt redemption in 2017 – the only year with a relatively
elevated debt repayment profile up to 2022. Even in a scenario of deficits which are
significantly larger than those forecast by the MinFin we don’t see the issuer returning to the
external market before 2019, raising the scarcity value of Bulgarian EUR-denominated assets.
As a result, domestic debt supply will increase only slightly, but will still be in line with longterm averages and will be easily absorbed by the market.
BGRIA EUR 2023s and BGRIA
EUR 2028s look cheap
This should push the entire curve of Bulgarian EUR-denominated assets further down,
providing opportunities for maturity extension as BGRIA EUR 2028 looks particularly attractive
compared to similar paper of rating peer Romania. At the shorter end, BGRIA EUR 2023
looks cheap against the rest of the curve and compared to domestic market alternatives.
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
2015
2016F
2017F
4.9
1.3
3.6
1.0
0.1
1.0
0
2.6
2.4
0.2
4.9
0.7
0.6
0.1
0
3.3
3.2
0.1
0
1.5
0.7
0.7
0.5
0.5
0
0
0.2
0
0.2
1.5
0.3
0.3
0
0
2.1
2.0
0.1
0
2.5
0.9
1.6
0.4
0.4
0
0
1.1
1.0
0.2
2.5
1.5
1.5
0
0
0.1
0
0.1
0
1.0
-1.0
0.9
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
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
2015
16.4
-0.6
7.0
2.6
0.6
3.8
10.0
16.4
1.5
0.6
4.0
3.3
0.5
0.2
7.9
1.9
4.3
3.8
2016F
10.0
-1.8
3.9
0.2
0.5
3.2
7.9
10.0
1.4
0.9
5.5
2.1
0.6
2.8
7.1
1.0
-1.9
3.9
2017F
10.5
-1.4
4.7
1.1
0.5
3.1
7.1
10.5
1.5
-0.5
3.7
0.1
0.5
3.1
6.8
1.2
0.7
2.9
0
2.2
0
2.0
0
-1.0
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 33
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Croatia (Ba2 negative/BB negative/BB negative)*
Outlook – The victory of the center-right HDZ in the September snap election has removed a
major uncertainty and increased the likelihood of a return of the pro-reform HDZ-MOST
coalition to power, Despite this uncertainty and the anxiety created by the UK’s decision to
leave the EU, the economy has shown remarkable resilience. Strong first-half expansion,
driven by resurgent private consumption and investment, led us to revise our full-year growth
projection to 2.2% for 2016. The Brexit-related slowdown in the euro area will trim growth next
year, but only slightly, with a much-improved fiscal position leaving some scope for countercyclical easing. While public finances have improved significantly this year thanks to a cyclical
rebound in revenues and lower public spending, challenges remain, especially in tackling the
still outsized public debt.
Author: Hrvoje Dolenec, Chief Economist (Zagrebačka banka)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
EUR bn
2013
2014
2015
2016F
2017F
■ 21 October: EDP notification
■ 30 November: 3Q GDP flash estimate
■ November: 2017-2019 Government Budget Proposal
GDP (EUR bn)
43.5
43.0
43.9
45.4
46.6
Population (mn)
4.3
4.2
4.2
4.2
4.2
10,225
10,156
10,430
10,836
11,176
GDP
-1.1
-0.4
1.6
2.2
1.5
Private Consumption
-1.9
-0.7
1.2
2.3
1.8
Fixed Investment
1.4
-3.6
1.6
4.0
3.5
Public Consumption
0.3
-1.9
0.6
0.9
0.4
Exports
3.1
7.3
9.1
5.0
3.0
Imports
3.1
4.3
8.6
5.6
3.8
4
Monthly wage, nominal (EUR)
990
985
1,000
1,032
1,057
2
Real wage, change (%)
-1.4
0.4
1.8
3.6
1.3
-2
Unemployment rate (%)
17.2
17.3
16.3
15.1
14.5
-4
Fiscal accounts (% of GDP)
-6
-2.9
GDP per capita (EUR)
Real economy, change (%)
DOMESTIC CONTRIBUTION TO GDP RISES
Household Consumption
Investments
Net Exports
8
Government Consumption
Inventories
GDP
6
0
Budget balance
-5.3
-5.5
-3.2
-2.5
-10
Primary balance
-1.8
-2.0
0.4
1.1
0.8
-12
Public debt
82.2
86.5
86.7
86.6
86.9
Current account balance (EUR bn)
0.4
0.4
2.3
1.1
0.8
Current account balance/GDP (%)
1.0
0.9
5.2
2.4
1.8
Extended basic balance/GDP (%)
2.9
3.9
5.6
4.2
3.5
Net FDI (% of GDP)
1.9
3.1
0.3
1.8
1.7
105.6
108.4
103.7
99.4
98.2
-8
-14
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
INFLATION TO RETURN GRADUALLY IN 2017
10
External accounts
Gross foreign debt (% of GDP)
8
FX reserves (EUR bn)
12.9
12.7
13.7
14.0
14.8
6
Months of imports, goods & services
10.0
9.4
9.5
9.3
9.3
4
Inflation/Monetary/FX
CPI (pavg)
2.2
-0.2
-0.5
-1.2
1.0
CPI (eop)
0.3
-0.5
-0.6
-0.2
1.2
3M money market rate (Dec avg)
0.95
1.08
1.24
0.9
0.9
USD/FX (eop)
5.55
6.30
6.99
6.79
6.61
EUR/FX (eop)
7.64
7.66
7.64
7.60
7.60
USD/FX (pavg)
5.71
5.75
6.86
6.80
6.61
EUR/FX (pavg)
7.57
7.63
7.61
7.55
7.54
109.3
103.5
99.7
101.7
99.9
1.6
-5.3
-3.7
2.0
-1.8
2
0
-2
-4
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
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 34
Source: Eurostat, NSI, UniCredit Research
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Remarkable resilience despite uncertainties
The early general elections
heightened uncertainty during
the summer…
…but with the HDZ-MOST
coalition likely to return to power
-- now on a sounder basis…
…this can be seen as the mostmarket-friendly outcome
Despite the uncertainties, the
recovery has continued…
…with the external demand
contribution replaced by
domestic demand …
…facilitating an impressive
fiscal consolidation
The main issue for Croatia in the third quarter was the outcome of the snap elections held in
early September after the previous HDZ-MOST coalition fell apart in June, mostly due to
disputes among party leaders. The center right HDZ won a plurality with 61 seats out of a total
of 151), with a solid margin over the center-left SDP-led coalition with 54 seats. However, this
was still insufficient for HDZ to form a government on its own, making a coalition unavoidable.
The most likely partner will again be MOST, another center party which won 13 seats. A HDZMOST coalition will most likely be joined by some or all of the 8 national minorities MPs, who
usually stand by the winner, as well as by some of the few other smaller parties with 1-3 MPs,
which should give a HDZ-MOST-minorities coalition more than the 76 seats needed for a
majority. Consultations have just started, and most likely the National Reform Program (NRP)
prepared by the outgoing HDZ-MOST government and endorsed by the European
Commission) back in May would form the basis for the new coalition. This would be the most
market-friendly approach with the program addressing such key issues as the reform of public
administration, fiscal consolidation, revamping the tax system and public asset management,
advancing privatization, and simplifying business regulations. Judiciary and education will
likely be high on the agenda, too.
Despite the uncertainties caused by the snap election, the lack of a coherent response by the
EU to the migrant crisis and, more recently Brexit, growth proved resilient in the first half of
the year. Even though confidence did weaken, the rebound in external demand recorded in
the preceding six to eight quarters was sufficient to prompt the private sector to continue
expanding investment and consumption. As a result, the recovery in both gross fixed capital
formation and private consumption accelerated. GDP growth in 1H quickened to 2.7% yoy
(2.1% yoy when seasonally adjusted). It is encouraging that the growth was broad-based,
with merchandise exports expanding at a robust pace, while, surprisingly, public consumption
also contributed to growth in 2Q.
The recovery in activity led to a marked improvement in government revenues. Combined
with consolidation efforts on the expenditure side, the recovery in revenues resulted in a
significant improvement in the fiscal deficit and public debt dynamics. The January-June
central government deficit on a cash basis fell to a historic low of just 0.7% of GDP, which,
combined with surpluses in local governments and some public companies, resulted in an
even lower general government deficit of 0.2% of GDP. This follows a major improvement in the
general government deficit last year when it was cut to 3.2% of GDP from 5.5% in 2014. Helped
by a favorable redemption profile, public debt actually declined in nominal terms in 1H.
POLITICAL ENVIRONMENT WEAKENS SENTIMENT…
130
Economic sentiment
Consumer sentiment (r.a.)
…WHILE DOMESTIC DEMAND IS NOW DRIVING GROWTH
Net external demand
8
0
Domestic demand
6
120
-10
110
-20
100
-30
90
-40
80
-50
4
2
0
70
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
-60
-2
-4
-6
-8
-10
Mar-08
Sep-09
Mar-11
Sep-12
Mar-14
Sep-15
Source: Crostat, European Commission, UniCredit Research
UniCredit Research
page 35
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
A strong tourism season and
increased propensity to spend
will support activity in 2H …
The rebound in domestic demand, especially in personal consumption, driven in part by rising
disposable income and a falling savings rate after years of elevated precautionary savings,
ought to support robust activity in 2H. Another strong tourism season will help as well, with the
sector already benefitting from investment in new capacity from the last couple of years..
Strong domestic demand and buoyant tourism should keep seasonally adjusted growth above
2% yoy in 3Q, to be replaced in 4Q by stronger industrial production and construction.
However, part of the projected rebound in domestic demand is likely to be met by imports,
both of consumption goods and capital goods (investments), shifting the net contribution of
exports negative.
…improving also the 2017
outlook despite the drop in
external demand due to Brexit
The much-improved fiscal
position leaves some room for
fiscal response to a potential
Brexit-related slowdown…
Stronger domestic demand, now with a bigger carryover effect, should alleviate the expected
weakening of external demand next year as Brexit cuts into euro area growth. Activity ought
to be supported also by the emergence of some scope for countercyclical fiscal policy, thanks
to the combination of stronger revenue collection and lower government spending (both
intended and automatic under the auspices of the technical government) that cut the deficit by
more than planned. As communicated during the election campaign, this fiscal stimulus might
take the form of gradual cuts in both personal and corporate income taxes, while leaving VAT
unchanged to preserve the main base.
…leaving growth next year only
slightly below this year’s level
Taking these factors into account, and despite a quite strong Brexit-related trade effect, real
GDP growth should expand stronger than initially envisaged, at least at 1.5%.(without the
Brexit effect, growth could be around or slightly above 2% yoy). These projections do not
assume major advances in structural reforms, the agenda for which remains unclear until the
economic policy of the new government is presented.
Risks to the forecast
are multiple…
Consequently, there are some risks to our projections. First, even though we assumed a quite
significant Brexit impact, its magnitude and timing remain highly uncertain. The projected
significant rise in oil prices would also have a dampening effect on growth. Next year’s tourism
performance, which was boosted this year by heightened geopolitical risks in key destinations,
could suffer next year if tensions recede. Finally, a faster-than-currently assumed speed of the
Fed’s hiking cycle could affect growth via less favorable funding conditions.
…with the economic policy of
the new government required
to focus on the issues defined
in the National Reform Program
More fundamentally, sustaining robust growth in the medium term will be difficult without
advancing key structural reforms. These include, among others, reforming further the pension
system and labor markets, education, social protection policy, public administration and public
sector, public companies management, privatization and public assets management,
regulatory and para-fiscal burden, judiciary and non-performing assets resolution. The
previous government submitted NRP to the EU as an answer to its in-depth review where
such challenges were clearly identified and communicated – this also complemented Specific
Country Recommendation Commission released just afterwards
RECOVERY MOTIVATES HOUSEHOLDS TO CONSUME MORE…
…BUT WILL SAVINGS RATE READJUST TO IT?
Private consumption
10
14
Gross savings rate
12
8
10
6
8
4
6
2
4
0
2
-2
0
-4
-2
-6
-4
-8
-10
Mar-07
Real disposable income
-6
Sep-08
Mar-10
Sep-11
Mar-13
Sep-14
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Mar-16
Source: Crostat, European Commission, UniCredit Research
UniCredit Research
page 36
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Risk premium declining following EM developments
Redemption profile for 2017 is
already more demanding than in
2016, but fiscal consolidation
developments and risk premium
trends are encouraging.
Fiscal consolidation in 2016 was very much supported by the strong performance in revenue
collection and lower spending under the temporary budget environment. With technical
spending in most of 2H, we may see a lower deficit than envisaged in full 2016; as the strong
tourism season means higher revenues, we now foresee a deficit of around 2.5% of GDP in
2016 – if spending remains contained for the next couple of months with prospects to be even
lower. This should also result in lower relative public debt already in this year. However,
uncertainty remains in regard to funding this year, recognizing buffers created through
contained expenditures. The budget plan envisaged Eurobond issuance of about EUR 1bn in
2016 (issuance in June canceled due to increased risk premium). Recently, favorable risk
appetite in emerging markets combined with the encouraging economic performance of the
domestic economy and public finances created an environment with significantly lower
premiums (CDS declined to 200bp – 50bp lower against June, spread to Bund below 300bp
for 10Y yield – 90bp lower against June). This is encouraging for 2017 funding requirements
which significantly increases and weakens the redemption profile versus 2016.
RISK PREMIUM FOR CROATIA IS IMPROVING JUST AS…
5Y CDS
425
…DEBT REDEMPTION REQUIREMENTS INCREASE
10Y spread to Bund
T-Bills
3.0
Domestic Loans
Foreign Loans
Local bonds
Eurobonds
2.5
375
2.0
325
1.5
275
1.0
0.5
225
175
Apr 15
0.0
Jun 15
Aug 15
Oct 15
Dec 15
Feb 16
Apr 16
Jun 16
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Aug 16
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
2015F
2016F
2017F
1.4
8.1
6.4
1.1
3.9
1.4
1.7
1.4
0.3
1.1
7.0
6.1
0.5
3.7
1.9
0.9
0.8
0.1
1.3
9.1
6.8
1.3
3.8
1.7
2.3
2.2
0.1
7.5
1.6
3.7
2.2
1.6
1.5
0.1
0.4
6.3
1.3
3.8
1.2
1.6
1.5
0.1
0.2
8.1
1.3
3.8
3.0
1.7
1.5
0.2
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
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: BNB, MoF, UniCredit Research
UniCredit Research
page 37
2015F
2016F
2017F
-2.3
9.1
1.6
3.6
3.8
7.4
4.8
1.9
0.6
14.1
0.2
0.1
11.1
3.5
3.7
3.9
4.6
0.7
-1.8
-0.7
-1.1
7.6
1.3
1.2
5.1
5.9
3.4
1.8
0.6
12.3
0.8
0.2
10.9
2.8
2.0
6.1
0
0.7
0
-0.3
-0.8
7.0
2.5
1.9
2.6
2.4
0
1.8
0.6
8.6
0.8
0.5
8.4
1.7
3.0
3.7
0
1.0
-1.3
-0.8
n.a.
0.8
n.a.
1.5
n.a.
0.2
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Czech Republic (A1 stable/AA- stable/A+ stable) *
Outlook – GDP growth is expected to bottom out in 3Q16, before accelerating in 4Q16 and
beyond. On the demand side, private consumption is set to remain the key component of
growth, with net exports also contributing amid the ongoing contraction in fixed capital
formation. Poor investment appetite in the public sector may lead to a balanced budget in
2016. The CNB will maintain its narrative of terminating the FX intervention policy around mid2017. The floor could be maintained for longer if reflation and economic growth disappoint. At
the same time, the CNB could remove the floor before mid-2017 if inflation returns to the 2%
target, growth recovers in the eurozone and the risk of rapid CZK appreciation subsides.
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: 3 Nov, 22 Dec
■ GDP: 30 Sept (2Q16 final), 15 Nov, 2 Dec (3Q16 flash, structure)
■ Regional elections 7-8 Oct
EUR bn
2013
2014
2015
2016F
2017F
GDP (EUR bn)
157.7
156.6
167.0
172.9
180.3
Population (mn)
10.5
10.5
10.5
10.5
10.6
15,007
14,882
15,845
16,394
17,087
-0.5
2.7
4.6
2.3
2.1
0.5
1.8
3.1
2.6
2.4
-2.5
3.9
9.1
-1.5
1.5
Public Consumption
2.5
1.1
2.0
2.3
2.0
Exports
0.2
8.7
7.9
4.3
3.4
Imports
0.1
10.1
8.4
3.1
3.6
Monthly wage, nominal (EUR)
964
936
970
1,018
1,075
Real wage, change (%)
-1.5
2.5
2.4
3.6
2.6
Unemployment rate (%)
7.7
7.7
6.5
5.6
5.5
Budget balance
-1.3
-2.0
-0.4
0
-1.0
Primary balance
0.1
-0.6
0.7
1.0
0
45.1
42.7
41.1
39.2
39.0
Current account balance (EUR bn)
-0.8
0.3
1.5
3.0
2.9
Current account balance/GDP (%)
-0.5
0.2
0.9
1.7
1.6
Extended basic balance/GDP (%)
1.2
4.0
3.3
5.8
5.7
Net FDI (% of GDP)
-0.2
1.9
-0.6
1.3
1.3
Gross foreign debt (% of GDP)
66.7
68.3
68.7
75.0
76.0
FX reserves (EUR bn)
40.8
44.9
59.2
74.5
77.0
4.4
4.5
5.5
6.9
6.7
CPI (pavg)
1.4
0.4
0.3
0.6
1.9
CPI (eop)
1.4
0.1
0.1
1.4
2.4
Central bank target
2.0
2.0
2.0
2.0
2.0
0.05
0.05
0.05
0.05
0.05
GDP per capita (EUR)
Real economy, change (%)
GDP
Private Consumption
Fixed Investment
GDP GROWTH: FIXED CAPITAL FORMATION
BECOMES A DRAG
pp of real GDP
6.0
Net exports
Gross capital
Consumption
GDP yoy
4.0
Fiscal accounts (% of GDP)
2.0
0.0
Public debt
-2.0
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
A BASE EFFECT IS SEEN MOVING BOTH PPI AND
CPI A TAD HIGHER BY LATE 2016
CPI
PPI
Months of imports, goods & services
5.0
Corecast
Inflation/Monetary/FX
2.5
0.0
Central bank reference rate (eop)
-2.5
-5.0
Jan-14
External accounts
3M money market rate (Dec avg)
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Source: UniCredit Research
0.38
0.34
0.29
0.30
0.35
USD/FX (eop)
19.89
22.83
24.82
24.11
23.04
EUR/FX (eop)
27.25
27.73
27.03
27.00
26.50
USD/FX (pavg)
19.57
20.75
24.60
24.41
23.51
EUR/FX (pavg)
26.02
27.53
27.28
27.10
26.80
Real effective exchange rate, 2000=100
106.5
106.1
106.1
106.5
106.0
-0.1
-0.4
-0.0
0.4
-0.4
3.0
3.0
5.0
3.3
3.3
Change (%)
EU funds (EUR bn)
Source: Eurostat, NSI, UniCredit Research
*
Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch respectively
UniCredit Research
page 38
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
A rebound expected after the summer lull
Following a poor 2Q16, we expect economic growth to bottom out in 3Q16 and accelerate
thereafter. That said, the rebound in 4Q16 may be slow due to a low carry-over. Industrial
production weakened significantly over the summer and could require several months to
return to its long-term trend. This is true especially if the expected slowdown in the eurozone
and the UK materializes. On a positive note, demand for new car models manufactured in the
Czech Republic could remain robust. On the domestic market, construction output has been
low since the start of 2016. However, the start of infrastructure projects blocked so far due to
environmental audit issues is expected to boost output.
On the demand side, private consumption is set to remain the key growth driver, with net
exports also contributing amid the ongoing contraction in fixed capital formation. The public
sector’s poor investment appetite may lead to a balanced budget in 2016. Fixed capital
formation is expected to bottom out in 3Q16 after falling by 4.4% yoy in 2Q16. That said, new
construction projects will take time to start and cannot offset the 11% yoy decline in output
during 7M16. Meanwhile, productive investment will rise slower due to a base effect, mostly
from past investment in transport equipment and other machinery. The latter’s three-year-long
boom is expected to come to an end either this year or in 2017.
The drop in fixed capital
formation from 2Q16 will be
reversed from 4Q16 the earliest
Residential construction is the likeliest fixed capital component to expand in 2016 and 2017.
However, the trend may not be smooth there either, as housing starts have tumbled for
administrative reasons in Prague. The capital accounts for 20% of the country’s construction
activity. Thus, bureaucratic blockages may slow the growth in residential fixed investment in
2017, despite strong demand.
Wage pressure is mounting
The rise in household disposable income is set to accelerate in 2H16 amid growing pressure
for wage increases. This is a lagged reaction to the worsening labor shortage, with the
unemployment rate hitting a seven-year low of 5.3% in August. The unemployment rate may
fall throughout 2017 or even longer, since it remains more than 1pp above its 2008 low. In
addition, the government’s pre-election generosity means that the bill for public wages may
increase by 8.2% yoy in 2017 (according to the central government budget draft) and will add
to the overall pressure on wage growth.
Obviously, corporate profits will suffer from the wage rise amid stagnating or even declining
output prices. The wage bill has been growing faster than the gross operating surplus for
three quarters already and we expect the wedge to widen in 2H16. This may be another
factor limiting capital expenditure in the coming quarters.
GROWTH DRIVERS HAVE BEEN WEAKENING OVER THE SUMMER
A slow recovery expected for industrial production after the July fall
Industrial output (MA3 yoy)
Waning investment appetite is pushing net exports higher
3.0
Manufacturing PMI - RS
58
6
54
0
50
-6
1H16
Net exports (pp of GDP)
12
2.0
0.0
-1.0
2013
2014
46
-2.0
-4.0
-12
Jul-12
2015
1.0
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
42
-2.0
0.0
2.0
4.0
Gross capital formation (pp of GDP)
Source: Markit, CZSO, UniCredit Research
UniCredit Research
page 39
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Inflation is set to depart from ultra-low levels in November – December 2016, helped by a
base effect in fuel and food prices. Motor fuels are expected to push headline inflation above
1% yoy in late 2016. The inflationary effect of food prices may be less intense, but last well
into 2017. A rebound in meat and dairy prices could offset the disinflationary impact of the
good harvest in Europe. In 2H17, headline inflation could rise above the 2% target if oil prices
rise to USD 65/bbl (our baseline scenario) and rapid wage increases continue.
Households are cautious in
regard to consumer expenditures,
as they invest in housing
Private consumption growth has been trailing real wage growth since mid-2015 and we
expect this difference to last. We attribute it to households preferring real estate purchases
and related purchases of durable goods (up 8.9% yoy in 2Q16) to other consumption
spending. This is supported by a rapid increase in mortgage lending, as the average interest
rate on new loans is a mere 1.88%. We expect households’ preference for real estate to
continue throughout 2016 and 2017. Nevertheless, consumer lending may pick up in 2017 as
well on the back of increased demand for home appliances and construction materials.
The CNB may stay on alert due
to house prices accelerating
Meanwhile, strong demand is expected to further lift prices of residential real estate. In 1Q16,
transaction prices for existing homes were up by roughly 15% from their cyclical low, although
they remained below their pre-crisis peak from 2008. We expect home prices to add at least 7%
over the next 12 months, forcing the CNB to remain on alert. Central bankers have already
issued some recommendations to mortgage providers aimed at preventing a potential house
price bubble. The CNB prefers to address potential imbalances with financial stability tools,
such as using countercyclical capital buffers and discouraging banks from accepting too-high
loan-to-value ratios for mortgages. Thus, we do not expect the housing market to affect the
timing of the CNB’s exit from its FX intervention policy.
State budget may avoid a
deficit in 2016, unlike
government’s plan
Fiscal policy risks becoming a drag on growth. In stark contrast to a planned deficit of CZK 70bn
for 2016, the state budget posted a CZK 81bn surplus at the end of August. This leads us to
believe that the general government budget may end 2016 in balance for the first time ever.
However, the lower deficit and the underlying fiscal contraction are undesired, largely
stemming from all tiers of the government’s inefficiency in running investment projects. For
2017, we foresee optimistically that the bottleneck in public infrastructure spending will ease
somewhat. Alongside an expected underperformance in tax collection (caused by optimistic
official projections being based on strong revenue growth in 2016), higher capital spending
may bring public finance back to a deficit of 1.0% of GDP.
The upcoming local elections to be held in October are set to be a litmus test of cohesion in
the government coalition. The Social Democrats need to defend their dominance in regional
governments and are likely to lose some positions of regional governors to the ANO
movement of Finance Minister Andrej Babiš. Despite growing frictions between the two
coalition partners, we expect the coalition to remain in place until 2017’s general elections.
Households are spending less than justified by their income growth
Bank lending is on the rise but dynamics past their peak
Private consumption yoy current prices
Wages and salaries yoy current prices
yoy (%)
8.0
yoy (%)
Retail
12%
Corporate
10%
6.0
8%
4.0
6%
2.0
4%
2%
0.0
-2.0
0%
Jan-14
1Q11
4Q11
3Q12
2Q13
1Q14
4Q14
3Q15
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
2Q16
Source: UniCredit Research
UniCredit Research
page 40
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: Abandoning the EUR/CZK 27.0 floor may not mean
the end of CNB interventions
Currency speculation is
picking up…
…as the EUR-CZK floor is likely
to be abandoned in 2017
After an early-summer lull, market speculation on the CNB exiting the intervention regime and
subsequent CZK appreciation has picked up again. We estimate that the volume of FX interventions
reached almost EUR 2bn in August, the highest monthly figure since January. As more evidence of
CZK positions being built, EUR-CZK forward rates plummeted in the first days of September and
CZGBs were constantly on the bid from abroad, despite their yields hitting historic lows. The CNB
may maintain its narrative of abandoning the current intervention policy around mid-2017. The exit
could happen earlier in 2017 if inflation exceeds 2% yoy (we expect the level to be reached in July),
if growth recovers in the eurozone and the CZK is not under strong appreciation pressure. While
poor data could compel the CNB to extend forward guidance, we believe the CNB prefers
abandoning the EUR-CZK floor in 2017, since it stretched the central bank’s mandate. That said,
getting rid of the floor may not mean the end of interventions. Under the managed-float regime,
intervention will aim to prevent EUR-CZK from falling back to pre-intervention levels.
Foreign investors eased bidding CZK in early summer only temporarily
Banks keep selling CZGB, non-residents on the buy side
CZ bonds held by CZ banks
CZGB net purchases by non-residents (CZK bn)
CNB FX purchases (CZK bn)
120
48%
90
60
(% of total)
CZ bonds held by nonresidents (rs)
28%
44%
24%
40%
20%
36%
16%
30
0
-30
32%
Jul-13
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
12%
Jul-16
Jan-16
Jul-16
Source: UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
GROSS EXTERNAL FINANCING REQUIREMENTS
EUR bn
2015
2016F
2017F
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
11.5
0.7
10.8
10.5
5.7
4.6
0.2
0.3
0.2
0.1
11.5
9.9
6.6
3.2
0.1
0.1
0
0.1
1.5
10.7
2.0
8.7
8.5
5.1
3.2
0.2
0.2
0.1
0.1
10.7
9.4
6.4
2.9
0.1
0.1
0
0.1
1.2
12.3
2.7
9.6
9.0
6.0
3.0
0
0.6
0.5
0.1
12.3
11.7
8.6
3.0
0.1
0.1
0
0.1
0.5
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: BNB, MoF, UniCredit Research
UniCredit Research
page 41
2015
38.9
-1.5
8.7
5.3
1.0
2.4
31.7
2.0
11.0
18.7
38.9
-1.0
6.0
8.9
9.9
-3.0
2.0
36.0
5.0
-3.0
-13.0
2016F
44.7
-2.3
11.0
6.2
1.0
3.8
36.0
2.0
13.5
20.5
44.7
2.2
3.0
8.9
9.4
-2.0
1.5
37.0
3.6
0
-10.0
2017F
44.6
-2.6
11.7
7.7
1.0
3.0
35.5
2.0
12.5
21.0
44.6
2.3
-2.0
9.5
9.4
0
2.0
35.8
3.5
0
-4.5
4.0
0
3.0
0
0
0
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Hungary (Ba1 positive/BBB- stable/BBB- stable)*
Outlook – Hungary’s return to investment grade was warranted by improving flow and stock
metrics. Economic growth will slow this year due to weak EU fund inflows, but is expected to
pick up next year amid larger EU disbursements and expanding car factories. Fiscal policy
and rapid wage growth will support growth in 2016 and 2017. By capping liquidity sterilization,
the NBH intends to lower short-term rates and prevent HUF appreciation. The referendum on
migrant settlement will not impact Hungary’s EU membership.
Strategy – HGB yields should be well supported by the cap on 3M deposits due to limited net
issuance and few alternative opportunities available for banks.
Authors: Dan Bucșa, Lead CEE Economist (UniCredit Bank London)
Ágnes Halász, Head of Economics & Strategic Analysis (UniCredit Bank Hungary)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ 25 Oct, 22 Nov, 20 Dec: NBH monetary policy meetings
■ 19 Oct, 23 Nov, 21 Dec: 3M deposit tenders
■ 15 Nov, 6 Dec: 3Q16 GDP (flash, structure)
■ 2 Oct: Referendum on migrant resettlement in Hungary
■ 4 Nov: Moody’s rating update
GDP GROWTH
5.0
yoy (%)
Net exports
Fixed investment
Private consumption
Change in inventories*
Public consumption
GDP
EUR bn
2013
2014
2015
2016F
2017F
GDP (EUR bn)
101.2
104.3
108.8
111.4
117.0
9.9
9.9
9.9
9.8
9.8
10,192
10,521
11,014
11,315
11,926
GDP
1.9
3.7
2.9
2.3
2.9
Private Consumption
0.3
1.8
3.0
5.8
4.9
Fixed Investment
7.3
11.2
1.9
-9.3
7.1
Public Consumption
2.5
2.9
0.5
3.2
2.9
Exports
6.4
7.6
8.4
6.7
5.5
Imports
6.3
8.5
7.8
7.0
6.2
Monthly wage, nominal (EUR)
776
770
800
860
910
Real wage, change (%)
1.7
3.3
4.4
8.1
3.6
Unemployment rate (%)
10.2
7.7
6.8
5.4
5.1
-2.6
Population (mn)
GDP per capita (EUR)
Real economy, change (%)
Fiscal accounts (% of GDP)
4.0
3.0
Budget balance
-2.6
-2.3
-2.0
-1.8
2.0
Primary balance
1.9
1.7
1.6
1.4
0.6
1.0
Public debt
76.8
76.2
75.3
73.6
73.4
0.0
External accounts
-1.0
Current account balance (EUR bn)
4.0
2.2
3.7
4.7
4.6
-2.0
Current account balance/GDP (%)
4.0
1.7
3.1
4.2
3.9
-3.0
Extended basic balance/GDP (%)
8.7
8.2
8.1
7.6
8.5
Net FDI (% of GDP)
1.1
2.7
0.4
0.8
1.1
118.5
117.5
108.6
102.5
98.6
32.6
33.7
30.0
28.4
32.5
4.8
4.7
4.0
3.6
3.9
2013
2015
2014
2016F
2017F
Gross foreign debt (% of GDP)
INFLATION FORECAST
yoy (%)
FX reserves (EUR bn)
Annual inflation rate
Base rate
Inflation target
Target range
Months of imports, goods & services
Inflation/Monetary/FX
CPI (pavg)
1.6
-0.2
-0.1
0.5
2.3
5
CPI (eop)
0.4
-0.9
0.9
1.7
2.4
4
Central bank target
3.0
3.0
3.0
3.0
3.0
3.00
2.10
1.35
0.90
0.90
6
3
Central bank reference rate (eop)
2
3M money market rate (Dec avg)
3.11
2.10
1.35
0.79
0.65
0
USD/FX (eop)
218.8
246.8
285.6
283.0
275.5
-1
EUR/FX (eop)
296.9
314.9
313.1
317.0
320.0
USD/FX (pavg)
223.7
232.6
279.3
281.0
276.6
EUR/FX (pavg)
297.0
308.7
309.9
313.1
313.5
Real effective exchange rate, 2000=100
127.4
122.6
122.0
121.2
119.4
-2.5
-3.8
-0.5
-0.6
-1.5
3.6
3.8
4.6
2.6
3.5
1
-2
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
Source: UniCredit Research
Change (%)
EU funds (% of GDP)
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch respectively
UniCredit Research
page 42
Source: Eurostat, NSI, UniCredit Research
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Public policies as a strong growth driver
Hungary returned to
investment grade in 2016
The adjustment in flow and stock imbalances was rewarded with a second investment grade
rating (from S&P) that bodes well for Hungarian asset prices. Meanwhile, the economy is
going through a soft patch brought about by low investment. However, growth is likely to pick
up in 2017, owing to a mix of fiscal and monetary stimulus, and larger FDI and EU fund
inflows. While external risks remain significant, the government has sufficient ammunition to
accelerate GDP growth ahead of general elections expected in spring 2018. That said, the
issue of sustaining growth close to 3% in the medium term remains unresolved.
2016 growth reduced by small
EU fund inflows…
Low EU fund inflows in 2016 reduced economic growth close to 2%, offsetting the positive
impact of robust consumption growth and very resilient exports. While disbursements from the
2014-20 EU budget are expected to start before year-end, they will fall short of last year's
inflows at a time when private investment is weak as well. In addition, slower growth in the
eurozone and the UK could affect Hungarian exports, especially at the turn of the year.
… but helped by fiscal policy
In case growth fails to recover in 2H16, the government can spend more without increasing
macroeconomic imbalances owing to three reasons: 1. A prudent budget execution in 8M16,
with the deficit at 0.8% of GDP vs. an annual target of 2%. Budget expenditure fell by 0.9% of
GDP yoy as the lack of EU fund inflows reduced public co-financing. Usually, revenues are
much bigger in 2H than in 1H of every year, so the fiscal impulse could be much larger than in
1H16. 2. Government cash reserves at 3.7% of GDP at the end of August, of which 2.8% of
GDP in HUF. 3. HUF 270bn (0.7% of GDP) available for debt buybacks before year-end,
ensuring that the debt-to-GDP ratio will fall this year even if spending increases above plan.
Economic growth will
accelerate next year…
Economic growth is expected to accelerate next year. Rapid wage increases, more social
security spending and housing subsidies will boost household consumption and investment.
Hungarian house prices are the fastest growing in CEE, rising 18.5% between December 2014
and March 2016. As a result, housing construction projects could accelerate next year. A
price bubble may become a threat if prices rise at the same speed for another year and the
increase in new mortgage loans accelerates.
…owing to better EU fund inflows
and expanding car factories
Two additional sources of fresh investment in 2017 will be EU funds and factory expansions
at Audi and Mercedes. The former will remove a shift while increasing capacity. As a result,
car output will rise significantly only from 2018 onwards. Even if imports grow faster than
exports due to strong consumption and larger investment, the trade surplus will remain the
largest in Central Europe, with the extended basic balance exceeding 6% of GDP in 2017.
LARGER FISCAL AND CREDIT IMPULSES EXPECTED IN 2H16 AND 2017
The cash budget execution is much tighter this year than before
% of GDP
2013
2014
2015
Mortgage lending (% yoy)*
2016
1.10
25.0
-0.5
20.0
-1.0
15.0
-1.5
10.0
1.05
1.00
0.95
5.0
-2.0
0.0
*
UniCredit Research
0.90
Mar-16
Sep-16
Mar-15
Sep-15
Mar-14
Sep-14
Sep-13
Mar-13
Mar-12
Sep-12
Mar-11
Sep-11
Mar-10
Sep-10
0.85
Sep-09
Dec
Nov
Oct
Sep
Aug
Jul
Jun
-15.0
May
-3.5
Apr
-10.0
Mar
-3.0
Feb
-5.0
Jan
-2.5
-4.0
House prices (2009 = 1, rs)
30.0
0.0
Mar-09
0.5
Mortgage lending stabilised, but is lagging home price dynamics
0.80
Source: NBH, Eurostat, UniCredit Research
page 43
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
HUF appreciation remains a risk
Besides balance-of-payments support for the currency, two more factors could push EURHUF lower: potential carry trades and foreign bond purchases after Hungary’s upgrade to
investment grade. We expect European investors to gradually replace US investors as the
largest holders of HGBs, with ECB QE pushing bond yields and EUR-HUF lower.
As a result, the central bank’s dovish bias is expected to remain in place beyond the end of
2017. The most important reason for keeping rates on hold is inflation staying safely inside
the 2-4% target range. We expect inflation to rebound from September onwards, exceeding
2% in 1Q17, but remaining below the central target until the end of next year, even if the price
of Brent oil rises to USD 65/bbl. Moreover, potential cuts to energy and utility prices may push
inflation below the target range by the end of 2017. With non-energy imported inflation
remaining very low, a combination of higher core inflation, rising prices in the eurozone and
more expensive oil would be needed to push inflation above 4%.
Monetary easing continues
with partial liquidity absorption
The NBH will cap 3M deposits at HUF 900bn by the end of the year. As a result, BUBOR
rates could trade in the 0.6-0.9% range. The excess liquidity left in the market could be close
to HUF 400bn, but it will take a while to reach that level (for details, please see the EEMEA
Macro Flash – “The National Bank of Hungary strengthens its commitment to low interest
rates” from 20 September). The central bank is pushing banks to increase transactions on the
interbank market to smooth the transmission of excess liquidity to short-term interest rates.
Falling BUBOR rates will lower lending costs. As argued before, demand, rather than supply,
prevents lending from recovering more due to the structure of the economy. This is evident in
banks' healthy appetite to lend and also in the recent recovery in mortgage lending, prompted
by a positive wealth effect. Corporate lending will continue to be supported mainly by the
Funding for Growth Scheme, with exporters and larger companies unlikely to increase their
reliance on local funding.
The migrant referendum has no
impact on EU membership
The referendum on migrant resettlement, held on 2 October, is expected to result in a clear
vote against accepting migrants without the approval of the National Assembly. That said, the
referendum may be invalidated by low turnout. Even if the vote is valid, its impact will be very
limited, since it will not trigger a vote to leave the EU. Hungarian authorities made it clear that
the country will remain an EU member, since it relies heavily on EU funds and exports to the
EU. The referendum can be seen as a test for the government’s popularity and a return to the
nationalist theme. The far-right Jobbik remains the second most popular party in the country
and the governing Fidesz will try again to poach voters from its major competitor. Hungary’s
view on immigration is shared by the Czech Republic, Poland and Slovakia, all opposed to
receiving refugees, but willing to support their settlement in other countries.
BANKS MAY HAVE TO EXTEND BOND DURATION AFTER LIQUIDITY CAP
Foreign investors are still reducing their HGB holdings
HUF tn,
yoy
HUF tn
2.5
Stock of 3M deposits
Maturing 3M deposits
Stock of 3M deposits
2.0
1.5
1.0
0.5
0.0
Apr-16
Jun-16
Feb-16
Oct-15
Dec-15
Aug-15
Apr-15
Jun-15
Feb-15
Oct-14
Dec-14
Aug-14
Apr-14
Jun-14
Feb-14
Oct-13
Dec-13
Aug-13
Apr-13
Jun-13
Feb-13
-1.0
04-May
11-May
18-May
25-May
01-Jun
08-Jun
15-Jun
22-Jun
29-Jun
06-Jul
13-Jul
20-Jul
27-Jul
03-Aug
10-Aug
17-Aug
24-Aug
31-Aug
07-Sep
14-Sep
21-Sep
28-Sep
05-Oct
12-Oct
19-Oct
26-Oct
02-Nov
09-Nov
16-Nov
23-Nov
30-Nov
07-Dec
14-Dec
21-Dec
28-Dec
-0.5
Dec-12
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Excess liquidity could be significantly higher from November on
Other investors
Insurance, pension and investment funds
Foreign investors
Households
Banks
NBH
Source: AKK, NBH, UniCredit Research
UniCredit Research
page 44
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: More curve flattening in the belly
A liquidity surplus will appear
gradually in the market…
The NBH’s decision to cap sterilization at HUF 900bn will take time to feed into liquidity
conditions. We expect a significant liquidity surplus to arise from 23 November onwards if the
3M tender on 19 October is a large one.
…pushing HGB yields lower
in the 3-5Y segment
Excess liquidity could push yields lower as banks will try to minimize the amount of liquidity kept
in overnight deposits at the NBH at a rate of -0.05%. The Debt Management Agency (AKK) is
planning to issue net HUF 77.5bn in T-bills and HUF 120bn in T-bonds in 4Q16, but may reduce
issuance due to large sales of retail T-bills and a smaller-than-planned budget deficit. As a
result, yields up to 1Y could fall towards 0.6%, with the curve flattening in the 3-5Y segment as
banks try to find bonds. A rally in the 5-10Y segment of the HGB curve would need support from
foreign investors. Crossover and index-linked accounts could increase their purchases following
the upgrade to investment grade.
Hungary could still sell a EUR bond before year-end to extend the average duration of
marketable debt. This would not prevent the FX share of public debt from falling below 25%.
A EUR bond is not a priority
Short-term liquidity tightening tied to large 3M deposit tenders
EUR issuance would not prevent the gradual decline in FX debt
Repos (inverse sign)
Excess reserves
Overnight deposits
2W deposits (- limit)
Net liquidity (- = liquidity shortage)
1W HUFONIA - base rate (%, rs, inverted)
HUF bn
200
% of GDP
-200
-400
-600
-800
-1000
21-Sep
07-Sep
24-Aug
27-Jul
10-Aug
13-Jul
29-Jun
15-Jun
01-Jun
18-May
20-Apr
04-May
06-Apr
23-Mar
09-Mar
24-Feb
27-Jan
10-Feb
13-Jan
30-Dec
-1200
16-Dec
FX public debt
80
0
-1400
HUF public debt
90
70
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
60
50
40
30
20
10
0
2009
2010
2011
2012
2013
2014
2015
2016F
2017F
Source: 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
2015F
2016F
2017F
20.8
2.2
18.6
15.6
4.6
5.3
5.7
3.0
0.9
2.1
20.8
19.4
7.4
3.1
8.9
0
0
0
1.4
20.0
2.0
18.0
13.8
3.8
2.8
7.1
4.2
1.6
2.6
20.0
19.5
6.5
3.4
9.6
1.0
1.0
0
-0.5
17.9
3.0
14.9
13.5
2.3
3.4
7.8
1.4
0.6
0.8
17.9
16.9
5.9
2.5
8.5
1.0
1.0
0
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)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 45
2015F
17.8
-3.7
5.2
2.1
0.8
2.3
16.3
3.4
8.2
4.7
17.8
0.4
-0.6
-0.2
-3.4
1.5
1.7
8.3
5.0
0
4.9
2016F
16.8
-4.7
7.2
3.6
1.8
1.8
14.3
3.0
6.2
5.1
16.8
0.8
-0.3
3.1
0.6
0.5
1.9
8.7
2.9
0
1.6
2017F
12.4
-4.6
8.3
2.8
3.7
1.8
8.7
2.4
1.2
5.1
12.4
1.1
-0.3
4.0
1.0
1.1
1.9
7.6
4.1
0
-4.1
-3.4
-0.9
-0.4
-0.6
0
0.4
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Poland (A2 negative/BBB+ negative/A- stable)*
Outlook – Economic growth is expected to slow temporarily this year, as weak investment
offsets the rise in private consumption. Larger EU fund inflows in 2017 should help boost
growth. Consumption will remain the main driver, with tight labor market conditions ensuring a
fast rise in real wages. The government can keep the budget deficit below 3% of GDP next
year, although the assumptions for GDP growth and tax collection are too optimistic. Reflation
will be slow, with the target met only in 2018. This would allow the NBP to remain on hold
throughout 2017, despite recent hawkish comments.
Strategy - We expect EUR-PLN to trade range-bound this year and to fall towards 4.15 in 2017.
The POLGB curve could flatten further in the absence of fiscal and headline risks.
Author: Marcin Mrowiec, Chief Economist (Bank Pekao)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ 4-5 Oct, 8-9 Nov, 6-7 Dec: MPC decision-making meetings
■ 8-9 Nov: Inflation Projection (key figures), full document
released on 10 or 14 November
■ 15 Nov, 30 Nov: 3Q16 GDP (flash, structure)
EUR bn
2013
2014
2015
2016F
2017F
GDP (EUR bn)
394.6
410.8
427.8
426.4
470.7
Population (mn)
38.5
38.5
38.5
38.5
38.5
10,241
10,669
11,111
11,079
12,235
GDP
1.3
3.3
3.6
3.1
3.3
Private Consumption
0.2
2.6
3.1
3.7
3.6
-1.1
10.0
5.9
-1.2
5.5
Public Consumption
2.2
4.7
3.3
3.3
3.3
Exports
6.1
6.4
6.8
8.3
4.9
Imports
1.7
10.0
6.3
8.3
6.0
910.9
947.9
979.1
982.7
1,079.4
GDP per capita (EUR)
Real economy, change (%)
Fixed Investment
pp (contribution to GDP growth)
GDP COMPONENTS
6
Household consumption
Public consumption
Fixed investments
Inventories
Net exports
GDP
Monthly wage, nominal (EUR)
5.0
4
3.7
3.6
3.3
3.1
3.3
3.5
1.6
3.8
4.5
5.3
3.9
Unemployment rate (%)
13.5
12.3
10.5
9.1
8.7
Budget balance
-4.0
-3.3
-2.6
-2.9
-2.8
Primary balance
-1.5
-1.4
-0.8
-1.2
-1.2
Public debt
56.0
50.5
51.3
53.8
55.3
Current account balance (EUR bn)
-5.0
-8.3
-1.1
-0.3
-4.7
Current account balance/GDP (%)
-1.3
-2.0
-0.3
-0.1
-1.0
Extended basic balance/GDP (%)
1.3
3.7
2.9
3.1
2.6
Net FDI (% of GDP)
0.2
3.1
1.5
2.0
1.9
Gross foreign debt (% of GDP)
70.7
71.1
70.5
70.6
64.0
FX reserves (EUR bn)
77.1
82.6
86.9
97.2
95.3
5.3
5.2
5.2
5.6
5.0
1.3
Fiscal accounts (% of GDP)
1.3
1.6
Real wage, change (%)
2
0
External accounts
-2
2010
2011
2012
2013
2014
2015
2016F
2017F
2018F
HEADLINE INFLATION VS. TARGET
CPI (%, yoy)
Target range
6
Months of imports, goods & services
5
Inflation/Monetary/FX
4
3
2
1
0
-1
-2
2010
2011
2012
2013
2014
2015
2016
2017
Source: UniCredit Research
CPI (pavg)
0.9
0
-0.9
-0.7
CPI (eop)
0.7
-1.0
-0.5
-0.2
2.0
Central bank target
2.50
2.50
2.50
2.50
2.50
Central bank reference rate (eop)
2.50
2.00
1.50
1.50
1.50
3M money market rate (Dec avg)
2.67
2.06
1.73
1.70
1.80
USD/FX (eop)
3.01
3.51
3.90
3.84
3.61
EUR/FX (eop)
4.15
4.26
4.26
4.30
4.15
USD/FX (pavg)
3.16
3.16
3.77
3.92
3.68
EUR/FX (pavg)
4.20
4.19
4.18
4.36
4.18
105.0
106.9
106.0
101.0
101.9
-0.8
1.8
-0.8
-4.8
1.0
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 46
Source: Eurostat, NSI, UniCredit Research
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Economic outlook shaped by fiscal policy
Private consumption will help
GDP grow by 3.1% in 2016
and 3.3% in 2017
Economic growth could slow to 3.1% in 2016 as the contribution of private consumption is
partly offset by weak investment. Larger EU fund inflows in 2017 could boost GDP growth to
3.3%. Fiscal risks remain significant in 2017: the budget draft that expects a deficit below 3%
of GDP assumes optimistically nominal GDP growth at 4.9% and improved tax collection.
Asset prices should benefit if headline risks subside and fiscal discipline is maintained.
Tight labor market conditions support private consumption growth, which will remain the main
growth driver both this year and next. A cyclical improvement in labor demand adds to a
structural decline in the labor force due to an ageing population, increasing the pressure on
wage growth as the unemployment rate falls below NAWRU. This cyclical improvement in
employment is set to continue next year, albeit at a slower pace. As a result, aggregate
wages across the economy are expected to increase by 5.2% yoy in real terms next year,
after adding 8.3% yoy in 2016.
Poor investment performance
in 2016 prompted GDP
downward revision
Meanwhile, investment will continue to perform poorly this year. The weakness is broad
based: public infrastructure projects lack EU fund inflows. These are expected to start
recovering before year-end, but will remain below last year’s levels. Meanwhile, private sector
investment is postponed amid regulatory uncertainty. The government’s intention to improve
tax compliance, increase punishment for tax avoidance (although details are –lacking) and
overhaul the personal income tax and social security contributions (the latter in 2018) is
keeping companies from increasing capex despite many conditions for new investment being
met: 1. A high level of capacity utilization; 2. Low levels of investment in past years;
3. Significant profits accumulated in previous years; 4. Good current margins and favorable
PLN exchange rate; 5. High level of amortization of existing productive capital in the
economy; 6. Low borrowing costs; 7. The need for quantitative and qualitative improvements
in fixed capital to offset the dearth of available workers.
Investments are likely to
rebound in 2017; in an optimistic
scenario they could push GDP
stronger than the currently
assumed 3.3%
Faster economic growth in 2017 needs a rebound in investment. EU fund inflows are
expected to increase vs. 2016 as reimbursements for projects from the 2014–20 budgeting
period accelerate. This will help increase public investment from 3.9% GDP in 2016 to 4.3%
GDP in 2017. A clearer roadmap for tax changes is needed for the private sector to increase
capex significantly. While the government’s intentions to simplify the tax system are
commendable, limited fiscal flexibility increases the risk of postponing measures or relying on
sectoral taxes (such as a revamped bank tax or the retail tax) to cover all financing needs. If
fiscal uncertainty persists, low capex will affect potential growth.
Gross fixed capital formation surprised on the downside in 2016
EU capital transfers (yoy %)
Strong wages’ growth propels strong consumption
Real wage bill the corporate sector (yoy %)
Gross fixed capital formation (yoy %, rs)
150
12
100
8
50
4
Private consumption (yoy %)
9.0
6.0
3.0
0
0
0.0
-50
-100
-4
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
-8
-3.0
4Q09
4Q11
4Q13
4Q15
4Q17
Source: UniCredit Research
UniCredit Research
page 47
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
2017 state budget assumes
sub-3% deficit, but as it is
based on relatively optimistic
assumptions, there could be
some slippage
The 2017 state budget draft assumes a deficit below 3% of GDP. However, the deficit
projection is based on a relatively optimistic macroeconomic scenario assuming 2017 GDP
nominal growth of 4.9%, divided into 3.6% real growth (vs. our forecast at 3.3%) and 1.3%
growth in prices (in line with our forecast). Moreover, the budget draft forecasts a substantial
improvement in tax collections. VAT revenues are expected to rise by a robust PLN 14.1bn
(up by 10.9% yoy) and corporate income tax receipts are seen increasing by PLN 2.5bn
(+9.6% yoy). Both forecasts may prove overly optimistic, since they rely on a significant
improvement in tax collection due to new legislative and control measures.
2017 net borrowing needs at
PLN 17.9bn will be 22% higher
than in 2016.
The 2017 net borrowing needs are estimated at PLN 79.0bn (EUR 18.9bn), a 22.1% rise vs.
2016. Gross borrowing needs are forecasted at PLN 178.5bn in 2017 vs. PLN 174.3bn this
year, falling 0.3% of GDP to 9.1% in 2017. The government intends to finance net borrowing
needs predominantly on the domestic market by issuing fixed-rate T-bonds. Investors,
especially foreign ones, will need a prudent budget execution and low headline risk to cover
the increase in PLN T-bond and T-bill supply of EUR 2.7bn (equivalent).
Gross borrowing needs will fall
0.3% of GDP to 9.1% in 2017
The standoff between Polish
and EU authorities may extend
till December, when the
mandate of current CT
president expires
The standoff between Polish and EU authorities on the functioning and composition of the
Constitutional Tribunal (CT) continues to be the main source of headline risk for Polish asset
prices. The European Parliament gave Polish authorities time until October to solve five
contention points regarding the CT. With the government unlikely to comply, the standoff is
likely to continue. The mandate of CT President Andrzej Rzepliński ends in early December
and his replacement may offer another opportunity to bridge the differences between judges
appointed by the current and the former governments. Asset prices could rally if headline risks
subside, especially since the inflation outlook remains benign.
CPI inflation expected at -0.2%
in end-2016, 1.0% in mid-2017
and 2.0% in end-2017
CPI inflation is expected at -0.2% yoy in December 2016, rebounding to 2% by the end of
2017. Annual inflation may to turn positive in January 2017, reaching the lower end of the
target range (1.5-3.5%) in 3Q17. Reflation will be supported by base effects from oil and food
prices, strong private consumption, and enterprises passing higher costs onto retail prices as
the output gap turns positive.
Markets price in unchanged
NBP rates in the coming months;
NBP president indicated that the
next step in monetary policy will
likely be a hike, possibly
as soon as end-2017
NBP President Adam Glapiński suggested that the next step in monetary policy will likely be a
rate hike, and it could come as soon as end-2017. With domestic demand growing strongly
and labor market conditions tightening, the MPC considers that further rate cuts would do little
to boost investment, but would harm savers. While hikes are likelier in 2018 than in 2017, in
our opinion, there are downside risks to the NBP’s stance. Weakening demand from Europe
and persistent supply-side shocks may keep inflation below target for longer, even if oil prices
rebound. At the same time, a sharp appreciation of the PLN would tighten real monetary
conditions. If carry trades take EUR-PLN below 4.20 over a short period of time and economic
growth fails to recover, the NBP may have to turn more dovish.
The budget deficit is expected to remain below 3% of GDP in 2017
The forecast for next year’s VAT collection is rather optimistic
Change in VAT collections
(% of GDP)
State budget balance, cash basis (% of GDP)
0.0
1.0
0.8
-1.0
0.6
-1.5
0.4
-1.6
-1.7
-1.7
0.2
-1.9
0.0
-2.3
-2.5
-0.4
-3.1
2009
2010
-0.2
-2.4
-2.5
-3.0
-3.5
UniCredit Pekao forecast
1.2
-0.5
-2.0
MinFin forecast
-0.6
-3.0
2011
2012
2013
2014
2015
2016F
2007
2008
2009
2010
2011
2012
2013
2014
2015 2016F 2017F
2017F
Source: UniCredit Research
UniCredit Research
page 48
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: Range-bound PLN, POLGBs under pressure
EUR-PLN is set to trade range-bound, most likely in the 4.30-4.40 range until year-end. Solid
economic growth and trade surpluses with goods and services will support the zloty, whereas
shifts in global risk appetite and headline risk could keep it from strengthening significantly. In
2017, we look for gradual appreciation towards EUR-PLN 4.15 amid a rise in the carry trade,
and we would use any rise over EUR-PLN 4.40 as an opportunity to go short EUR-PLN.
While a Fed hike in December could affect POLGBs due to a significant share of US
investors, an extension of the ECB’s QE to October 2017 should help the POLGB curve
flatten again next year. With the market not pricing in any rate hikes in 2017, long-end
POLGBs could outperform as long as the budget deficit remains in check and country-specific
risks subside. If yields widen following an expected Fed hike in December 2016, we would
look to add to long POLGB positions.
Foreign investors stabilized their holdings of POLGBs
40%
Banks
Insurance funds
Investment funds
Markets price in stable NBP rates in the coming months
Foreign investors
Pension funds
NBP reference rate
WIBOR 3M
07/14
07/15
FRA 6x9
3.0
30%
2.5
20%
2.0
10%
1.5
0%
1.0
01/14
01/15
01/16
07/16
Source: UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
GROSS EXTERNAL FINANCING REQUIREMENTS
EUR bn
2015
2016F
2017F
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
41.7
15.6
26.1
20.4
19.1
0
1.4
5.7
5.7
0
41.7
28.3
28.0
0
0.3
6.5
6.5
0
6.9
42.2
16.7
25.5
21.9
19.1
1.5
1.3
3.6
3.6
0
42.2
38.2
36.4
1.5
0.3
5.3
5.3
0
-1.2
47.6
22.8
24.8
21.0
18.5
2.4
0.2
3.8
3.8
0
47.6
40.5
37.7
2.8
0
6.3
6.3
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)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 49
2015
95.6
1.1
46.4
5.7
5.2
35.5
48.1
0
14.5
33.6
95.6
4.0
-5.2
46.9
9.1
5.9
31.9
45.0
7.3
-1.4
0.9
2016F
88.7
0.3
43.4
3.6
5.4
34.5
44.9
0
13.1
31.9
88.7
6.5
0.5
40.4
1.8
5.8
32.7
43.0
5.0
-6.0
0.7
2017F
91.5
4.7
42.8
3.8
5.3
33.8
44.0
0
12.8
31.2
91.5
7.0
1.0
41.2
3.3
5.7
32.2
42.3
8.0
-7.3
0.7
2.6
-0.4
-3.5
1.9
-3.0
1.6
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Romania (Baa3 positive/BBB- stable/BBB- stable) *
Outlook – The Social Democratic Party is expected to win parliamentary elections held on
11 December and head the next coalition government. Regardless of the next government’s
composition, fiscal policy may have to be tightened in 2H17 to keep the budget deficit below
3% of GDP. We expect investment to be crowded out again. As a result, the main risk of past
fiscal easing is weaker economic growth over the next few years. Inflation may stay close to
target in 2017 and the NBR could remain on hold to prevent currency appreciation.
Strategy – ROMGBs remain well supported ahead of the potential Fed hike in December and
the curve could flatten more in 2017.
Authors: Dan Bucșa, Lead CEE Economist (UniCredit Bank London)
Anca Aron, Senior Economist (UniCredit Bank Romania)
MACROECONOMIC DATA AND FORECASTS
2013
2014
2015
2016F
2017F
GDP (EUR bn)
144.3
150.2
160.4
168.7
179.8
Population (mn)
20.0
19.9
19.9
19.8
19.8
7,205
7,530
8,071
8,514
9,103
GDP
3.5
3.0
3.8
4.4
3.4
Private Consumption
0.7
3.8
6.1
8.6
5.4
Fixed Investment
-5.4
2.5
8.8
5.9
2.7
Public Consumption
-4.6
0.3
1.6
2.1
0.6
Exports
19.7
8.6
5.5
3.9
2.9
Imports
8.8
8.9
9.1
8.7
5.3
Monthly wage, nominal (EUR)
507
531
576
640
689
Real wage, change (%)
1.0
4.2
9.1
13.7
5.6
Unemployment rate (%)
7.1
6.8
6.8
6.2
6.0
-3.0
KEY DATES/EVENTS
■ 30 Sept, 4 Nov: NBR monetary policy meetings
■ 15 Nov, 6 Dec: 3Q16 GDP (flash, structure)
■ 11 December: parliamentary elections
GDP per capita (EUR)
Real economy, change (%)
GDP GROWTH: FIXED CAPITAL FORMATION
BECOMES A DRAG
Private consumption
Public consumption
Net Export
yoy (%, pp)
8.0
Fixed Investment
Change in inventories
GDP
6.0
4.0
Fiscal accounts (% of GDP)
2.0
Budget balance
-2.2
-1.4
-1.1
-3.0
0.0
Primary balance
-0.5
0.1
0.3
-1.6
-1.5
Public debt
38.0
39.8
38.4
38.9
39.5
Current account balance (EUR bn)
-1.5
-1.0
-1.8
-4.1
-4.3
Current account balance/GDP (%)
-1.1
-0.7
-1.1
-2.5
-2.4
Extended basic balance/GDP (%)
3.0
3.7
2.9
1.9
2.0
Net FDI (% of GDP)
2.0
1.8
1.7
2.1
2.0
Gross foreign debt (% of GDP)
67.8
63.1
56.1
52.9
49.6
FX reserves (EUR bn)
32.5
32.2
32.2
32.6
33.5
6.7
6.2
5.8
5.6
5.5
1.9
-2.0
-4.0
External accounts
2013
2014
2015
2016F
2017F
A BASE EFFECT IS SEEN MOVING BOTH PPI AND
CPI A TAD HIGHER BY LATE 2016
Consumer price inflation
yoy (%)
Inflation target
Target range
4.5
Months of imports, goods & services
3.5
Inflation/Monetary/FX
2.5
CPI (pavg)
4.0
1.1
-0.6
-1.4
1.5
CPI (eop)
1.6
0.8
-0.9
-0.2
2.0
0.5
Central bank target
2.50
2.50
2.50
2.50
2.50
-0.5
Central bank reference rate (eop)
4.00
2.75
1.75
1.75
1.75
-1.5
3M money market rate (Dec avg)
2.58
1.69
1.03
0.75
0.75
USD/FX (eop)
3.26
3.69
4.15
4.02
3.91
EUR/FX (eop)
4.48
4.48
4.52
4.50
4.50
USD/FX (pavg)
3.33
3.35
4.01
4.03
3.96
EUR/FX (pavg)
4.42
4.44
4.44
4.49
4.49
105.8
106.9
105.0
102.2
99.4
4.7
1.0
-1.8
-2.7
-2.7
-2.5
-3.5
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Source: UniCredit Research
Real effective exchange rate, 2000=100
Change (%)
Source: Eurostat, NSI, UniCredit Research
*Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch respectively
UniCredit Research
page 50
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
The first signs the economy is cooling off
The Social Democrats are
favoured to lead the
next government
The Social Democrat Party (PSD) is expected to win the parliamentary elections scheduled
for 11 December, with the National Liberal Party (PNL) coming in second. Several smaller
parties are polling close to the 5% threshold, with the Hungarian minority party, UDMR, the
populist ALDE and maybe the Popular Movement (PMP) of former president Traian Băsescu
having the best chances of entering parliament. The likeliest outcome is a PSD - ALDE
government that may include PMP and/or UDMR. A grand coalition between PSD and PNL
has a lower probability and would require the two parties to get a similar vote tally and several
smaller parties to enter parliament. The least likely outcome at the moment is a government
led by PNL, which currently trails PSD in opinion polls by 5-10pp.
Fiscal policy will have to be
tightened in 2H17
Regardless of which coalition will lead Romania from December onwards, large fiscal
commitments made in previous years will constrain policies. With economic growth slowing
and discretionary public expenditure reduced by significant tax cuts and wage increases, the
new government will have to tighten fiscal policy before the end of 2017 to keep the budget
deficit below 3% of GDP. This threshold should not be breached: most of the budget deficit is
incurred in the last quarter of every year, so the government will know exactly how much it
can spend. That said, some of the past promises could be postponed (such as increasing a
wide range of wages and cutting the VAT rate by 1pp to 19% in January 2017).
The likely victim of the inevitable fiscal tightening will be public investment. The current
government finalised the absorption framework for EU funds until 2020, but this is no
guarantee for future performance. State co-financing for EU funds and infrastructure spending
could be crowded out by other types of public spending, as it was in 2012–15. Thus, the big
fiscal risk is not a rapidly-widening budget deficit, but slower economic growth.
GDP growth could reach a post-financial crisis high of 4.4% this year. However, excluding
agriculture, growth already peaked last year (4.2% vs. 4.1% in 2016). Strong private
consumption growth could translate into higher imports than anywhere else in central Europe
(CE), as local producers fail to benefit from the retail spending boom. Moreover, exports will
also grow slower than in the rest of CE due to a lack of large investment projects in past
years. On a positive note, fixed investment is rising much faster than in CE for three main
reasons: 1. Late EU fund disbursements from the 2007-13 EU budget reached EUR 2.9bn in
8M16; 2. The government is spending more on public investment and, especially, on EU fund
co-financing than last year; and 3. Residential construction is rebounding.
Economic growth will peak
this year
DOMESTIC DEMAND GROWTH COULD SLOW IN 2017
Public investment recovered in 2016, but could fall again in 2017
Consumption growth spills over to higher imports
EU structural and cohesion funds
Co-financing for investment projects
Capital expenditure - budget
% of GDP, 12M MA
8.0
6
5
7.0
4
6.0
5.0
3
4.0
2
3.0
1
2.0
0
1.0
0.0
Jan-12
Consumption growth
Change in trade balance (+ = larger deficit)
in % of previous
year's GDP
-1
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
2013
2014
2015
2016F
2017F
Jul-16
Source: Markit, CZSO, UniCredit Research
UniCredit Research
page 51
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
The omens of slower growth
are already present
We expect growth to fall to 3.4% next year, the first signs of a slowdown being visible in this
year’s data. First, agriculture will contribute less (if at all) to growth after this year’s bumper
harvest. Second, new RON lending has peaked this summer and is likely to slow down further
in 2017. In 2016, the government allocated RON 2.7bn (0.4% of GDP) in guarantees for the
First Home program (the main driver of mortgage loans). Going forward, authorities could
reduce both the amount of pledged guarantees and the access of better-off borrowers. Third,
real wage growth may slow next year due to smaller revenue increases and higher inflation.
Pre-election promises for wage rises will be difficult to fulfill in 2017 as long as the budget
deficit remains below 3% of GDP.
Inflation could stay close
to target…
Annual inflation is expected to rise above 1% in 1Q17 from close to zero at the end of 2016, touching
2% in 2Q17. However, we do not expect inflation to exceed the 2.5% target even when factoring in a
rise in the Brent oil price to USD 65/bbl by the end of next year. The main reasons are: low food
prices, cheap imports from the eurozone and a small contribution of administered prices to inflation.
… keeping the NBR on hold
If our benign inflation scenario is confirmed, the NBR is likely to remain on hold throughout
2017. Moreover, the central bank may postpone narrowing the interest corridor as well for two
main reasons: 1. A higher deposit rate would increase the carry for eurozone investors and
2. A narrower interest corridor could result in higher EUR-RON volatility, something the NBR is
trying to avoid.
EUR-RON remains stronger in real effective terms than its regional peers. With the stock of
FX loans still at 45% of the total, strong depreciation remains off the table. Thus, EUR-RON is
expected to trade closer to the top of the 4.40-4.50 range for most of 2017. Any monetary
tightening could push the pair lower. If the refinancing of FX loans into RON continues, the
EUR-RON range may be gradually widened on the upside. A wider C/A deficit and ongoing
bank deleveraging are still covered by FDI and EU fund inflows, but the cushion is smaller
than in other CE countries, leaving EUR-RON more sensitive to volatile capital flows.
The economy is not overheating
Fears of a credit-driven overheating of the economy are overblown for at least three reasons.
First, the fast rise in RON lending is linked to a gradual refinancing of FX loans into RON.
While the share of FX loans has been falling by approx. 6pp per year in the past two years,
the stock of FX loans will remain above regional averages in the medium term without an
administrative conversion. Second, housing loans remain dependent on the First Home
program. The government supplemented it recently for a second time this year, but the
amount of available guarantees is much smaller than in 1H16. Moreover, the First Home
program caps the value of purchased homes at EUR 70,000, preventing a recovery in house
prices. Third, monthly new RON consumer lending slowed over the summer. The strong
correlation with wage growth means that the slowdown could continue.
FEARS OF A CREDIT-INDUCED OVERHEATING ARE OVERBLOWN
New RON lending is slowing, as is wage growth
RON bn,
12M cum
25.0
Consumer loans (SA, deflated with net wage growth)
Mortgage loans (SA, deflated with net wage growth)
Net wage growth (% yoy, rs)
yoy (%)
35.0
25.0
20.0
15.0
10.0
5.0
2015
2016
6
4
2
15.0
0
10.0
-2
5.0
-4
0.0
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
2014
8
30.0
20.0
0.0
In FX-adjusted terms, outstanding loans are growing slower
-5.0
-6
-8
CZ
HU*
PL
RO
Source: UniCredit Research
UniCredit Research
page 52
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: The ROMGB curve is still too steep
Support for ROMGB yields
ahead of expected Fed hike…
Even if the Fed hikes in December, ROMGBs could remain well supported in 4Q16 for several
reasons: 1. Huge MinFin cash balances: FX deposits at the NBR were EUR 8.3bn or 4.9% of
GDP at the end of July. Adding to these, deposits at commercial banks and RON deposits at
the central bank amounted to 3% of GDP. 2. Low RON gross issuance until the end of the
year. Local issuance of RON 4.0bn per month (1.6% of GDP in 4Q16) would be more than
enough to cover financing needs, assuming a cash deficit of 2.6% of GDP between August
and December 2016, RON redemptions of 0.3% of GDP, the ROMANI EUR 2028 retap
adding EUR 1bn (0.6% of GDP) to reserves and a reduction in the MinFin’s cash reserves.
3. Low foreign holdings of ROMGBs (19% in June 2016 on the more liquid ISINs), more than
80% in the eurozone. 4. Part of the low-yielding cash balances at local pension funds (0.5%
of GDP at the end of July) and new money (more than 0.8% of GDP per year) could be
invested in bonds due to the lack of alternative investment opportunities. If inflation remains
close to target in 2017 and the NBR stays on hold to prevent the emergence of carry trades,
the ROMGB curve should flatten further.
Local pension funds hold large amounts of low-yielding cash
7
6
5
50
4
40
3
2
30
Oct-12
Jul-13
Apr-14
Jan-15
Oct-15
Dec-17
Oct-17
Nov-17
Sep-17
Jul-17
Aug-17
Jun-17
Apr-17
May-17
Mar-17
Jan-17
Feb-17
Dec-16
0
Jul-16
Oct-16
0
10
Nov-16
20
0
Sep-16
1
Jul-16
1
Aug-16
2
Jun-16
3
T-bonds
8
60
4
T-bills
9
80
70
5
-1
Jan-12
RON bn
10
Apr-16
Bank deposits (% of AuM, rs)
May-16
Sovereign bonds (yoy, RON bn)
Sovereign bonds (% of AuM, rs)
Mar-16
Bank deposits (yoy, RON bn)
Jan-16
6
T-bond and T-bill redemptions are very low until May 2017
Feb-16
… and potential curve
flattening next year
Source: UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
GROSS EXTERNAL FINANCING REQUIREMENTS
EUR bn
2015
2016F
2017F
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 decline/- stock increase)
13.2
2.3
10.9
6.9
4.2
2.4
0.3
4.0
1.0
3.0
13.2
7.8
5.5
2.0
0.3
2.8
2.0
0.8
0
14.7
4.5
10.2
8.6
6.3
2.0
0.3
1.6
1.5
0.1
14.7
11.1
8.9
2.1
0.1
4.0
3.2
0.8
0
12.5
5.3
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
2.6
-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
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 53
2015
32.5
1.8
19.7
6.2
6.4
7.1
11.0
0.4
3.5
7.1
32.5
2.8
0.1
14.8
3.8
4.5
6.5
11.8
3.7
0
-0.7
2016F
30.8
4.1
14.5
3.5
5.0
6.0
12.2
0.1
4.9
7.2
30.8
3.6
0.1
12.1
5.1
2.0
5.0
11.7
3.8
0
-0.4
2017F
29.3
4.3
12.9
3.0
4.0
5.9
12.1
0.2
4.5
7.4
29.3
3.6
0.1
10.7
3.8
2.0
4.9
11.4
4.3
0
-0.8
-2.2
1.0
1.3
1.7
1.2
2.0
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Slovakia (A2 stable/A+ stable/A+ stable) *
Outlook – Economic growth is expected to slow down due to lower EU fund absorption and
weaker European demand after the Brexit vote. These will be only partially offset by new
investment in car manufacturing, infrastructure and real estate. European car sales will be key
for GDP growth in the medium term. Labor market conditions continue to tighten, supporting
household spending. Inflation is expected to bottom out amid higher energy prices and rising
consumption. Fiscal goals are less ambitious than in the past, postponing the balancing of the
budget from 2018 to 2020, and reducing room for additional fiscal spending if economic
growth weakens.
Author: Ľubomír Koršňák, Chief Economist (UniCredit Bank Czech Republic and Slovakia)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
EUR bn
2013
2014
2015
2016F
2017F
■ 11 Oct, 11 Nov, 9 Dec – Industrial production
GDP (EUR bn)
73.8
75.6
78.1
80.3
82.7
Population (mn)
5.4
5.4
5.4
5.4
5.4
13,639
13,945
14,394
14,791
15,226
■ 13 Oct, 14 Nov, 14 Dec – CPI
■ 15 Nov – flash 3Q16 GDP
■ 6 Dec – 3Q16 GDP structure
GDP per capita (EUR)
Real economy, change (%)
GDP
INFLATION TO REBOUND FROM HISTORICAL LOW
2.5
yoy (%)
1.4
2.5
3.6
3.3
2.7
Private Consumption
-0.8
2.4
2.4
2.7
2.5
Fixed Investment
-1.1
3.5
14.0
-1.5
4.5
Public Consumption
2.2
5.9
3.4
1.7
2.7
Exports
6.2
3.6
7.0
3.2
2.3
Imports
5.1
4.3
8.2
1.9
2.9
Monthly wage, nominal (EUR)
824
858
884
908
937
2.0
Real wage, change (%)
1.0
4.2
3.3
3.2
1.9
1.5
Unemployment rate (%)
14.2
13.2
11.5
9.8
8.9
1.0
Fiscal accounts (% of GDP)
Budget balance
-2.7
-2.8
-3.0
-2.3
-2.7
Primary balance
-0.7
-0.9
-1.5
-1.1
-1.6
Public debt
55.0
53.9
52.9
53.1
53.7
Current account balance (EUR bn)
1.4
0.1
-1.0
-1.3
-2.0
Current account balance/GDP (%)
2.0
0.1
-1.3
-1.7
-2.5
Extended basic balance/GDP (%)
3.1
1.3
3.4
1.7
2.3
Net FDI (% of GDP)
-0.3
0.2
1.1
2.1
3.5
Gross foreign debt (% of GDP)
81.9
89.7
86.1
86.2
86.6
FX reserves (EUR bn)
EUR
EUR
EUR
EUR
EUR
-
-
-
-
1.2
0.5
0.0
-0.5
-1.0
Sep-17
Jan-17
May-17
Sep-16
Jan-16
May-16
Sep-15
Jan-15
May-15
Sep-14
Jan-14
May-14
Sep-13
Jan-13
External accounts
May-13
-1.5
GDP GROWTH TO BE DRIVEN BY DOMESTIC
DEMAND IN 2017
8.0
Domestic demand
yoy (%; pp)
Net export
GDP
Months of imports, goods & services
Inflation/Monetary/FX
6.0
CPI (pavg)
1.4
-0.1
-0.3
-0.5
4.0
CPI (eop)
0.4
-0.1
-0.5
0.2
1.7
2.0
Central bank target
EUR
EUR
EUR
EUR
EUR
0.0
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
172.6
173.1
171.3
170.8
171.0
0.7
0.3
-1.0
-0.3
0.1
-2.0
-4.0
-6.0
2012
2013
2014
2015
2016F
2017F
Source: SO SR, UniCredit Research
Real effective exchange rate, 2000=100
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 54
See last pages for disclaimer.
<date>
Error! Reference
Economics & FI/FX Research
CEE Quarterly
Cars and what else?
Economic growth to slow down
New investment to offset
slowing European demand
European car sales to be key
for Slovak economic growth
Economic growth is expected to slow down in the remainder of 2016 due to low EU fund
inflows weighing on public investment. We expect the slowdown to continue in 2017, when
slower growth in European demand could offset the rebound in investment. The structure of
growth is expected to be balanced in 2H16, while turning gradually towards domestic demand
in 2017. Household consumption could remain strong amid tight labor-market conditions.
Meanwhile, investment will benefit from the restart of highway construction at the end of this
year, financed by new EU funds (at least in the amount of 1.0% GDP) and by PPP (Bratislava
ring road – 1.3% GDP). The automotive sector will dominate corporate investment: the
construction of the new Jaguar Land-Rover plant (1.8% GDP) started in summer, while PSA
and VW are extending their current capacities too. The recovering real estate market will
support investment and construction as well. The strong rebound in real estate prices is
supported by rapid loan and wage growth. However, authorities may have to take
administrative measures to slow mortgage credit growth below 10% yoy if the rally persists.
The main threat to the economic outlook is coming from external demand in the aftermath of
the Brexit vote. Current growth is driven once again by the automotive sector benefiting from
the strong rebound in new car sales in Europe. Car production is poised to break last year’s
record. However, weaker consumer sentiment in the eurozone and high exposure to British
demand (the second most important destination for Slovak car exports, with the share
exceeding 10%) could weigh temporarily on car production growth in 2017. Vehicle
production from ongoing investment will be launched mostly in 2018-19, and the automotive
sector remains a key growth factor in the medium term. The change in model lines and
segment diversity may increase the resilience of Slovak car production.
With imported investment growing this year and next and a soft patch expected for exports in
2H16 and 1H17, the C/A deficit is expected to narrow only from 2018 onwards. Even so, the
net financing capacity will remain positive in the coming years.
Labor market shows signs of
overheating; demography
not helping
Medium-term growth could be restricted by adverse demographic trends. Unemployment fell
below 10% in 2Q16 only for the third time in Slovakia history. This highlights structural issues
like regional disparities and low internal mobility. The high share of long-term, unskilled
unemployed limits a further decline in the unemployment rate and creates rising wage
pressure. As a result, unit labor costs are likely to outpace productivity in the coming years. A
steady increase in job vacancies is boosting immigration, which accounts for 1.3% of total
Slovak employment. This is partly offsetting past worker emigration, with an estimated 10% of
Slovaks working abroad.
Inflation to bottom out but
remain subdued
Inflation is expected to turn positive only at the turn of the year, when 2015’s fall in oil prices
will exit the base. Headline inflation is likely to remain below 2% in 2017. Second-round
effects from lower energy prices will keep core inflation subdued at least in 2H16, despite the
recovery in consumption.
Less ambitious fiscal goals a
threat in a cyclical downturn
The 2016 budget remains on track to achieve the planned deficit of 2.0% of GDP. Postelection fiscal tightening should keep public debt below the painful debt-brake trigger (55% GDP).
That said, the new left-right government coalition postponed balancing the budget from 2018
to 2020. This limits room for fiscal stimulus in case economic growth weakens. As a result, the
government is preparing to introduce or change sectoral levies on insurance companies,
banks, regulated sectors and is mulling reintroducing a dividend tax. The additional budget
revenues may be used to increase public spending.
Government remains
relatively stable
UniCredit Research
The four-party coalition was reduced to a three-party one as the smallest member #Siet
disappeared. Since most #Siet MPs migrated to Most-Hid, the coalition retained almost all
MPs. The coalition handled well several potential crises so far and Slovakia’s EU presidency
could prevent or at least soften possible disagreements inside the coalition until year-end.
Afterwards, a government reshuffle may be in the cards, primarily in case of new political
scandals involving the ruling Social Democrats or if PM Robert Fico’s health issues persist.
page 55
See last pages for disclaimer.
Error! Reference
<date>
Economics & FI/FX Research
CEE Quarterly
Slovenia (Baa3 positive/A stable/A- stable) *
Outlook – Significant progress in fiscal consolidation led Fitch to upgrade Slovenia’s rating and
Moody’s to revise the outlook to positive. This year, lower interest payments are likely to cut the
fiscal deficit to 2.2%, paving the way for additional credit upgrades. However, despite being one
of the fastest-growing euro area countries, Slovenia’ structural deficit still remains high and the
key policy issue. Higher GDP growth will be needed than the 2% expected in the medium term to
reduce the structural deficit more sustainably. With net exports, which have been the traditional
growth driver, losing steam, and consumption momentum likely to ease in the medium term,
Slovenia would need to focus on measures to boost productivity and speed up privatization.
Author: Dumitru Vicol, Economist (UniCredit Bank London)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
2013
2014
2015
2016F
35.9
37.3
38.6
39.7
2017F
41.4
■ 28 Oct, 30 Nov, 29 Dec – Consumer Price Index
GDP (EUR bn)
Population (mn)
2,059.6
2,061.8
2,063.4
2,066.4
2,069.5
■ 28 Oct, 30 Nov, 30 Dec – Retail Sales
GDP per capita (EUR)
17,439
18,107
18,693
19,225
20,002
■ 10 Oct, 10 Nov, 9 Dec – Industrial Production
GDP
-1.1
3.1
2.3
1.9
2.1
Private Consumption
-4.1
1.9
0.5
2.2
2.0
3.2
1.4
1.0
-3.8
3.8
-2.1
-1.2
2.4
1.4
1.0
3.1
5.7
5.6
5.7
5.3
Real economy, change (%)
■ 10 Oct, 9 Nov, 9 Dec – Trade balance
Fixed Investment
■ 30 Nov – 3Q16 GDP
Public Consumption
PRIVATE CONSUMPTION TO SUPPORT GDP GROWTH
Imports
8.0
Exports
Household Consumption
Investments
Net Exports
yoy (%)
Government Consumption
Inventories
GDP Growth
4.0
2.0
4.2
4.6
5.3
5.9
1,545.4
1,555.7
1,582.2
1,613.8
Real wage, change (%)
-2.1
1.1
1.4
2.0
0.7
Unemployment rate (%)
10.1
9.7
9.0
8.2
7.5
Budget balance
-15.0
-5.0
-2.9
-2.4
-2.2
Primary balance
-12.5
-1.8
0
0.3
0.3
70.8
80.7
83.2
80.2
78.7
Public debt
0.0
External accounts
-2.0
-4.0
-6.0
2011
2012
2013
2014
2015F
2016F
2017F
Current account balance (EUR bn)
1.7
2.3
2.0
2.7
2.3
Current account balance/GDP (%)
4.8
6.2
5.2
6.8
5.6
Extended basic balance/GDP (%)
5.0
7.8
8.4
10.0
8.9
Net FDI (% of GDP)
0.1
1.6
3.2
3.2
3.2
116.6
124.6
116.6
115.7
113.4
0.7
0.8
0.8
0.8
0.8
0
0
0
0
0
1.3
Gross foreign debt (% of GDP)
INFLATION TO REMAIN LOW IN 2017
8.0
2.1
1,523.1
Fiscal accounts (% of GDP)
6.0
-8.0
Monthly wage, nominal (EUR)
FX reserves (EUR bn)
Months of imports, goods & services
Inflation/Monetary/FX
yoy (%)
CPI (pavg)
1.9
0.4
-0.8
0
CPI (eop)
1.1
-0.1
-0.6
0.9
1.1
5.0
Central bank target
EUR
EUR
EUR
EUR
EUR
4.0
Central bank reference rate (eop)
EUR
EUR
EUR
EUR
EUR
3.0
3M money market rate (Dec avg)
EUR
EUR
EUR
EUR
EUR
2.0
USD/FX (eop)
EUR
EUR
EUR
EUR
EUR
1.0
EUR/FX (eop)
EUR
EUR
EUR
EUR
EUR
0.0
USD/FX (pavg)
EUR
EUR
EUR
EUR
EUR
EUR/FX (pavg)
EUR
EUR
EUR
EUR
EUR
7.0
6.0
-1.0
-2.0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: UniCredit Research
Source: NBS, MinFin, UniCredit Research
*
Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch
UniCredit Research
page 56
See last pages for disclaimer.
<date>
September 2016
Economics & FI/FX Research
CEE Quarterly
Time to focus on long-term productivity
Lower interest rate payments
might lead to additional credit
upgrades
Improving budget deficit and debt metrics led Fitch to upgrade Slovenia’s rating to A- with
stable outlook on 23 September and Moody’s to revise the outlook to Baa3 Positive on
16 September. With expectations of low interest rates for longer, rising household
consumption, and a high absorption rate of EU funds, Slovenia’s fiscal deficit is likely to shrink
further to 2.4% in 2016 and 2.2% in 2017. Furthermore, lower interest rate outlays thanks to
savings resulting from an USD to EUR debt swap could provide additional scope for reducing the
fiscal deficit. With the government's fiscal consolidation measures bearing fruit and the primary
balance shifting to a surplus, the likelihood of further credit upgrades from Moody’s has risen.
Stronger-than-expected private consumption is likely to push GDP growth to 1.9% (+0.3pp) in
2016 and 2.1% (+0.4pp) in 2017. Improving consumer sentiment, a drop in unemployment to
its lowest level since 4Q10, and a pickup in wage growth were all reflected in the strength of
retail sales, which rose a healthy 3.5% yoy in July, the fastest pace since October 2014.
Hence, with wage growth likely to remain buoyant and an extraordinary pension hike in the
cards for the autumn, we believe that private consumption will increase above 2% in both
2016 and 2017. Although NPLs declined from 11.1% in H115 to 8% 4 in 1H16 thanks to the
transfer of part of the overdue loans to the Bank Asset Management Company (bad bank),
scope for a rebound in bank lending is limited, with deleveraging still ongoing. The output gap
is likely to close this year on solid consumption and net exports, which should cause some
inflationary pressure. Subdued wage growth and lower commodity prices were the main
drivers behind the weak inflation numbers thus far, but the fading base effect of energy prices,
the removal of some measures to freeze public wages, and the closure of the output gap are
likely to push inflation to 0.9% yoy by year-end and slightly above 1% in 2017.
Consumption, the main
economic growth driver in the
medium term …
… hence, Slovenia should
focus on faster privatization
aiming to boost productivity.
4
Despite the progress thus far, the new minister of finance, Mateja Vraničar Erman, will face
serious fiscal challenges in 2017 and 2018 given strong pressure for higher spending from the
junior coalition partners. More consolidation is needed to reduce the still high structural deficit
which would require more permanent measures such as broadening the tax base, introducing
a real estate tax (the previous proposal was rejected by the Constitutional Tribunal in 2014),
improving privatization, and tackling the expenditure growth related to population ageing. The
latest changes in tax legislation, approved on 8 September, aim at supporting labor
productivity, but do little to improve the budget deficit as the cut in the personal income tax
rate by 7pp will be only partly offset by the increase in the corporate income tax by 2pp to19%.
Looking forward, Slovenia needs new growth drivers, with the consumption momentum poised
to lose steam in the medium to long term. Alternative sources of growth are needed such as
productivity via stepped-up FDI and investment. Recent progress in privatization has boosted
FDI inflows, which, over time, ought to augment the country’s output potential. Recently, the
Slovenian Sovereign Holding (SSH), the country’s privatization agency, submitted a revamped
state asset strategy, proposing the elimination of restrictions on private investors holding a
higher share than the state in NLB (the largest bank), Petrol (energy), KRKA (drug producer).
If approved, these steps could attract potential strategic investors. The privatization of NLB via
an IPO, which is likely to be delayed until 2H17, will be the main test of both the government’s
intentions to decrease the share of SOEs and foreign interest in Slovenian assets. The EBRD
is expected to participate in the IPO, given that it used to hold a minority stake in 2003-08.
Another potential investor is Apollo, which aims to attain a market share of 25% in the banking
sector and owns NKBM and KBS Banka, the former Raiffeisen, that are planned to merge
after 2017. Finally, EU funds might provide an additional source for investment and
productivity. Assuming the same utilization ratio of 95% from the previous EU budget
framework, Slovenia might attract as much as EUR 3.25bn (8.43% of 2015 GDP) under the
new structural fund policy for 2014-20.
excluding Probanka and Faktor Banka
UniCredit Research
page 57
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Bosnia and Herzegovina (B3 stable/B stable/not rated)*
Outlook – A slowdown in 1H16 growth after the strong expansion in 2015, confirmed now at
3.2%, led us to revise down a bit our growth forecast for 2016 to 2.8%. Two sets of
uncertainties have hindered growth in 2016 – delays in approval of the IMF Extended Fund
Facility (EFF), whose recent approval and first tranche disbursements ought to ease funding
risks for the budget, and the ongoing political turmoil caused by the country’s complex
government setup. Political risks remain the main challenge to the near-term outlook but
these could be alleviated once final agreements are reached on the coordination mechanism
for EU accession negotiations and EU accession process finally advances.
Author: Hrvoje Dolenec, Chief Economist (Zagrebačka banka)
Nenad Golac, Senior Economist (Zagrebačka banka)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
EUR bn
2013
2014
2015
2016F
2017F
■ 15 Dec: GDP 3Q 2016 preliminary
■ 20 Dec: CPI November 2016
■ 20 Dec: Foreign trade November 2016
■ 23 Dec: Industrial Production November 2016
■ 23 Dec: Balance of payments 3Q 2016
GDP (EUR bn)
13.67
13.96
14.42
14.69
15.35
3.8
3.8
3.8
3.8
3.8
3569
3648
3783
3870
4058
HEADLINE INFLATION TO RISE BY YEAR END
4
Population (mn)
GDP per capita (EUR)
Real economy, change (%)
GDP
2.4
1.1
3.2
2.8
3.0
Monthly wage, nominal (EUR)
661
659
659
663
678
Real wage, change (%)
0.3
0.7
1.0
1.5
0.9
Unemployment rate (%)
44.6
43.9
43.2
42.0
40.5
Budget balance
-1.9
-2.9
-0.1
-0.8
-0.8
Primary balance
-1.1
-2.1
0.7
0.1
0.2
Public debt
43.5
44.0
44.7
44.8
43.8
Fiscal accounts (% of GDP)
3
External accounts
2
Current account balance (EUR bn)
-0.751
-1.092
-0.812
-0.816
-0.917
1
Current account balance/GDP (%)
-5.5
-7.8
-5.6
-5.6
-6.0
Extended basic balance/GDP (%)
-4.1
-5.2
-4.2
-3.0
-3.0
1.4
2.6
1.4
2.5
2.9
61.7
63.7
63.7
65.7
66.0
0
Net FDI (% of GDP)
-1
Gross foreign debt (% of GDP)
-2
FX reserves (EUR bn)
3.6
4.0
4.4
4.6
4.7
-3
Months of imports, goods & services
5.9
6.1
6.8
6.8
6.6
CPI (pavg)
-0.1
-0.9
-1.0
-0.9
1.4
CPI (eop)
-1.2
-0.4
-1.3
0.2
2.0
3M money market rate (Dec avg)
0.22
0.02
-0.20
-0.35
-0.35
USD/FX (eop)
1.42
1.61
1.79
1.73
1.70
EUR/FX (eop)
1.96
1.96
1.96
1.96
1.96
25
USD/FX (pavg)
1.47
1.47
1.76
1.76
1.73
20
EUR/FX (pavg)
1.96
1.96
1.96
1.96
1.96
Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17
EXPORTS ARE LOSING MOMENTUM
yoy (%)
35
30
Industrial production, growth rate
Merchandise exports, growth rate
Merchandise imports, growth rate
Inflation/Monetary/FX
15
Source: Eurostat, NSI, UniCredit Research
10
5
0
-5
-10
-15
Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16
Source: 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>
September 2016
Economics & FI/FX Research
CEE Quarterly
Step forward for economic stability, can politics follow?
IMF approved EFF, praising
progress in implementing the
Reform Agenda…
IMF’s Executive Board on 7 September finally approved the long-delayed three-year
EUR 553mn EFF. This arrangement is crucial for the country’s financial and macroeconomic
stability and has become possible as a result of the significant progress made in reforms
defined by the government’s Reform Agenda. The approval was expected in July, but has
been delayed until all remaining prior actions have been implemented. Another positive
development was the agreement reached during the summer by the different levels of BH
authorities on the coordination mechanism for negotiations with the EU, and the long-delayed
approval of the adaptation of the Stabilization and Association Agreement (SAA) with the EU.
…and disbursed the first tranche
to support fiscal consolidation
The first EUR 79mn tranche was disbursed upon approval and will be used in support of
fiscal consolidation, which is currently on track. The EFF arrangement’s conditions are more
favorable than those in previous IMF stand-by arrangements, with a longer grace period of
four years and lower charges (1.05% pa). The EFF aims to address BH medium-term
balance of payments needs, create room for much needed infrastructure investment, and
support policies for boosting the private sector’s potential through structural reforms,
readjustments in the composition and quality of public spending, and gradual lowering of
public debt. Approval of the EFF is expected to finally unlock additional financing expected
from the EU and the World Bank, totaling some EUR 750mn over the medium term in support
of a number of projects in transportation and energy infrastructure.
IMF retains a positive outlook, but
stresses existing risks in labor
market and business environment
Growth slowed down in 1H with
industrial production and
construction decelerating…
…but 2H prospects are, with IFI
funding, now brighter
Our view is a bit more cautious…
…as, following a weaker 1H,
we revised down our FY16
growth forecast
Political risks remains
pronounced, threatening the
benign economic outlook.
UniCredit Research
The IMF assessed recent developments positively, praising the easing of external and
internal imbalances, and the acceleration of GDP growth above 3% in last year, despite a
stronger-than-planned fiscal consolidation brought about by a financing shortfall. The IMF
also stressed that the budget was close to balance in 2015, with the C/A deficit narrowing,
while inflation remained negative, largely due to the impact from the euro area through the
currency board arrangement. As major concerns, the IMF pointed to the high youth and longterm unemployment, which encourages emigration, as well as the much worse business
environment in comparison with regional peers.
High frequency data suggest that growth slowed during 1Q and did not fully recover until midyear. During 1H, growth was driven primarily by private consumption, while exports remained
subdued. Retail trade growth rates soared to 7% yoy in 1Q before easing to a still high 4% in 2Q.
At the same time, exports were weak in 1Q and rose by just 1.8% yoy during January-July.
Imports were lower, -1.5% yoy in 1Q and -0.8% ytd through July. Industrial production also
rose at a lower-than-expected pace during January-July 4% yoy), which is primarily the result
of the underperformance of electricity generation. At the same time, investment activity
remained subdued, with civil engineering construction falling 5.5% yoy in 1H. Residential
construction increased by just 0.8%, mitigating the overall decline in construction to 3.1% yoy.
However, civil engineering works are expected to recover in 2H, driven by intensified
motorway construction and the revival of other public infrastructure works as preparatory
procedures for new projects are accelerated in parallel with EFF negotiations.
We agree with the IMF’s view, but remain more cautious versus the near-term outlook. We
do not see real GDP growth reaching 3% this year and 3.2% next year. We noted clear signs
of a slowdown in exports and investment in the first half of this year, which are unlikely to be
fully compensated for by the pickup in private consumption. Therefore, we lowered our GDP
forecast from 3% to 2.8% yoy for 2016 and left it unchanged at 3% for 2017. However, in the
medium term, we now see more room for an acceleration of growth towards 4%, but only
provided that reforms envisaged are implemented in a timely fashion.
Political factors remain the main risks to the otherwise benign economic outlook. Although all
major political actors recently reached a compromise and accepted all essential documents
to implement Reform Agenda, accepted a new arrangement with the IMF and took a new
step forward towards EU candidate status, the general outlook is once again jeopardized by
the disputes over a referendum on the constitutional position of the Republic of Srpska entity.
page 59
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Russia (Ba1 negative/BB+ stable/BBB- negative) *
Outlook – The near-term outlook has improved in recent months, thanks to the recovery in oil
prices and an upward revision in projections going forward. We expect the economy to bottom
out in 3Q16 and growth to resume in 4Q, prompting us to upgrade our growth projections to -0.8%
this year and 1.4% next year. A faster recovery seems unlikely amid policy constraints and
uncertain growth drivers. A sharp slowdown in inflation should enable the CBR to resume rate
cuts, albeit at a moderate pace, given still significant risks to the inflation outlook. Fiscal risks
remain the key issue, especially in 2017, when the depletion of the Reserve Fund will make
deficit financing more challenging.
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
EUR bn
2013
2014
2015
2016F
■ 28 Oct, 16 Dec – MPC meeting
■ 1 Nov – 2017 budget submission to Duma
■ 18-23 of every month – short-term statistical overview
GDP (EUR bn)
1677
1527
1188
1143
1303
Population (mn)
143.3
146.1
146.3
146.3
146.3
11,706
10,457
8,121
7,816
8,908
GDP
1.3
0.7
-3.7
-0.8
1.4
Private Consumption
4.4
1.5
-9.6
-2.8
2.1
Fixed Investment
0.9
-2.6
-7.6
-4.5
1.2
Public Consumption
1.4
0.2
-1.8
-1.5
0.7
Exports
4.6
0.6
3.6
0.8
0.5
Imports
3.6
-7.6
-25.7
-5.7
4.8
Monthly wage, nominal (EUR)
704
637
500
468
513
Real wage, change (%)
4.8
1.2
-9.3
-0.5
1.3
Unemployment rate (%)
5.5
5.2
5.6
5.7
5.7
-3.5
GROWTH IS PICKING UP, ALBEIT SLOWLY
Personal Consumption
Fixed Capital Formation
Net export
yoy (%)
8
Public Consumption
Inventories
Gross Domestic Product
6
4
2
0
GDP per capita (EUR)
2017F
Real economy, change (%)
-2
Fiscal accounts (% of GDP)
-4
Budget balance
-0.5
-0.4
-2.4
-3.8
-6
Primary balance
0.1
0.1
-1.8
-3.1
-2.8
11.7
12.4
15.0
15.9
15.1
Current account balance (EUR bn)
25.2
43.9
62.7
22.0
17.2
Current account balance/GDP (%)
1.5
2.9
5.3
1.9
1.3
Extended basic balance/GDP (%)
0.8
1.3
3.9
0.6
0.3
-0.8
-2.0
-1.2
-0.7
-0.5
-8
-10
Public debt
2013
2014
2015
2016F
2017F
CHART TITLE
19%
Headline CPI
External accounts
Net FDI (% of GDP)
Key CBR rate
Gross foreign debt (% of GDP)
FX reserves (EUR bn)
Months of imports, goods & services
15%
32.7
29.6
39.1
38.7
32.7
341.2
279.2
293.2
294.6
287.0
15.9
14.4
20.2
21.9
20.2
Inflation/Monetary/FX
11%
7%
3%
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Source: UniCredit Research
CPI (pavg)
6.8
7.8
15.6
7.2
5.2
CPI (eop)
6.5
11.4
12.9
6.0
4.5
Central bank target
5-6
5
-
-
4.0
Central bank reference rate (eop)
5.50
17.00
11.00
10.0
8.0
USD/RUB (eop)
32.9
60.7
73.8
63.75
60.06
EUR/RUB (eop)
45.3
73.2
80.3
71.40
69.06
USD/RUB (pavg)
31.9
38.6
61.3
67.51
62.05
EUR/RUB (pavg)
42.3
51.0
68.0
75.14
70.35
192.7
175.7
149.2
149.3
171.6
0.9
-8.8
-15.0
0.1
14.9
Real effective exchange rate, 2000=100
Change (%)
Source: CBR, Rosstat, Haver, 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.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
A tenuous recovery in sight
We upgraded our growth
forecast to -0.8% in 2016
and +1.4% in 2017
Output contraction appears to have deepened somewhat in 2Q, with real GDP falling 0.3%
qoq, adjusted for seasonality and the number of working days, from 0.1% in 1Q. However,
this was much less than last year, helping cut the yoy decrease in half from 1Q to just 0.6%.
Third-quarter data are inconclusive, with a tentative recovery in business confidence
contrasting with a further decline in real disposable household income. We still expect the
economy to bottom out in 3Q and to return to growth in 4Q, albeit at a modest pace. Thus,
real GDP will still decline this year as a whole, but less than we previously expected, leading
us to upgrade our growth forecast to -0.8% for FY16. We have upgraded also our 2017 forecast,
to an expansion of 1.4%, largely as a result of our higher-than-consensus oil price forecast.
We expect the recovery to be
consumption-driven…
We expect the recovery to be consumption-driven. Even though real disposable income
remains deep in negative territory for now (-5.3% yoy in 7M16), the slowdown in inflation has
given a boost to real wages. We expect this trend to continue into 2017, given the strong
commitment of the CBR to disinflation, paving the ground for a gradual recovery in real
incomes. Fiscal policy will also contribute to consumer spending, with the government
planning to make a lump sum payment to pensioners in early 2017 to compensate for 2016
inflation, plus the resumption of regular pension indexation. Social spending is likely to be
raised as well ahead of the March 2018 presidential election.
…but its net contribution to
growth will be partly offset by
the recovery in imports…
This said, the net contribution of consumption to growth will be somewhat smaller, as at least
part of the extra demand will be met by imports. Dependence on imports remains high, given
the limited ability of domestic producers to meet demand due to a period of extended
underinvestment (fixed investment was down 4.3% yoy in 1H16) and insufficient
competitiveness, especially for high value-added products. In addition, the improved outlook
for the RUB is expected to increase the price competitiveness of imports. As a result, the
contribution of net exports to GDP growth will be much smaller in 2016, compared to 2015,
and would turn negative in 2017, subtracting 0.6 pp from growth.
…amid the effective easing of
sanctions even in the absence
of their official withdrawal
Another factor affecting the external sector will be the status of sanctions (and
countersanctions). We do not expect the U.S or the EU to lift the existing sanctions during the
forecast period. However, we do not anticipate any further tightening either. In fact, compared
with the current status, we expect some effective easing of the grip of sanctions. The travel
embargo to Turkey has been lifted and the ban on Turkish imports is due to be abolished
soon. There are some signs of a tentative ‘normalization’ with some key Western partners,
and cooperation with the U.S. in Syria ought to ease tensions as well. As a result, we expect
capital inflows to gradually pick up further in areas not affected directly by sanctions.
Consumption remains under pressure…
15
yoy (%)
Retail turnover
Real wage
…and sensitivity of imports to domestic demand is still high
Real disposable income
40%
Import
Internal demand (rhs)
20%
10
20%
10%
0%
0%
5
0
-5
-20%
-10%
-10
-15
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
-40%
-20%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Rosstat, UniCredit Research
UniCredit Research
page 61
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Looking forward, fiscal policy
remains the main source of risk
over the medium term
Looking forward, fiscal policy remains the main source of risk over the medium term. Thus far
this year, federal budget revenues have lagged projections, especially those related to oil and
natural gas. By the end of August, revenues equaled just 60% of the FY target. Assuming
expenditures are executed as budgeted, the FY fiscal deficit could reach 3.8% of GDP, rather
than the 3% as targeted or the revised ministry of finance projection of 3.2% of GDP.
We expect no significant
spending cuts ahead of the
presidential elections…
The higher deficit will likely be financed from the Reserve Fund, which, on current projections,
will be drained in early 2017. Next year’s budget has yet to be finalized, but the ministry of
finance expects a deficit of 3% of GDP, requiring a nominal spending freeze at RUB 15.8tn
(implying a real cut in noninterest outlays of 6-7% or 1.2% of GDP). While social and defense
and security spending (together accounting for two-thirds of the total) are likely to be
protected, and roughly 0.5% of GDP in extra outlays is to be allocated for pension indexation,
the rest should be subject to massive cuts, but we do not think this will be politically plausible
ahead of the presidential election. Our significantly higher oil price projection (USD 56.5.bbl
on average) ought to offset some of the additional spending, but we expect next year’s deficit
to amount to 3.5% of GDP, equivalent to an underlying fiscal easing of nearly 1% of GDP.
…raising concerns over
financing sources
In 2017 the government will face hard choices in terms of financing. It would either need to
boost domestic borrowing, push ahead with privatization, or draw down on the Wellbeing Fund.
(The latter has about 5.7% of GDP left, but not all of it is available, and using it for budget
financing would require a change in legislation as currently its use is restricted to supporting
the pension system and financing investment projects). We expect the government to use
some combination of all these sources. Boosting domestic borrowing would imply a jump in
issuance, with negative implications for OFZ prices, while tapping the Wellbeing Fund would
boost bank liquidity, complicating monetary policy.
Fiscal risks are likely to limit
the RUB appreciation potential
While our upgraded oil price forecast calls for a stronger RUB, the fiscal risks described
above are likely to limit the appreciation potential, with the oil price in RUB terms trailing
projections. We therefore expect USD-RUB to end this year slightly below 64, and appreciate
only 7% next year despite the projected 25% increase in the oil price.
Inflation is set to slow down
amid tight policy and lower
pass-through
The CBR has officially stated that it plans to maintain the current level of interest rates until
the end of 2016, thus reinforcing its commitment to achieving a 4% inflation rate at the end of 2017.
A lower pass-through, moderating inflation expectations, and likely RUB appreciation are
likely to contribute to disinflation, bringing it to 6% and 4.5% by the end of this year and next
year, respectively. Still, the implementation of monetary policy will be complicated by the
uneven distribution of liquidity among banks.
Russia is entering the political cycle, but it is not the Duma polls (no surprise there) but the
presidential election that matter. Beyond that, with no changes in sight, reforms will remain
absent, and growth will languish at 1-1.5% over the medium term.
Medium-term growth will
languish at 1-1.5% in the
absence of reforms
Budget deficit is widening
Inflationary expectations are cooling
2014
1%
2015
2016
Observed
30
Expected
25
0%
20
-1%
15
-2%
10
-3%
5
-4%
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Source: CBR, FOM, MinFin, UniCredit Research
UniCredit Research
page 62
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: beware OFZ supply
Government funding needs to
spike in 4Q16…
…which may put pressure
on OFZ yields…
Financial market developments will, to a large extent, be shaped by the fiscal outlook. With
privatization likely to be delayed, government borrowing needs will surge in the remainder of
this year and further into 2017. To limit drawdowns of the oil reserve and wellbeing funds, the
government has decided to more than triple its domestic borrowing program to RUB 1 trillion, or
1.2% of GDP. The jump in the supply of OFZs, along with the CBR’s determination to defer further
rate cuts until 2Q17, may have a significant impact on bond prices and affect the yield curve.
However, we continue to like RUB exposure on the back of our expectation of oil prices in the
USD mid-60s by end 2017. Therefore, even if we would wait for initiating positions in OFZs,
we think that IRS receivers in 1 to 3Y offer good value as an alternative to shorter-term OFZs,
which are asset-swap negative.
…but we like RUB exposure
and prefer IRS receivers
The OFZ yield curve has tightened significantly
As of Jun 30, '16
As of Sept 27, '16
And yields are at risk of increased supply
As of Mar 30, '16
Aug'21
11
10
Feb'27
10.5
9.8
9.6
10
9.4
9.5
9.2
9
9
8.8
8.5
8.6
8
8.4
8.2
8
7.5
Feb-16
0
2
4
6
8
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
10
Source: UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
GROSS EXTERNAL FINANCING REQUIREMENTS
EUR bn
2015
2016F
2017F
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
45.2
28.7
16.5
12.1
12.1
-
55.9
43.2
12.7
9.3
9.3
-
54.9
45.6
9.3
7.2
7.2
-
4.4
3.5
0.9
45.3
12.3
12.3
-
3.4
1.4
1.9
55.9
13.3
13.3
-
2.0
1.8
0.3
54.9
22.7
22.7
-
0.1
0
0.1
0.2
32.7
2.7
2.7
0
1.3
38.5
2.6
2.6
0
10.0
19.6
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
Other
Change in FX reserves (- = increase)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
2015F
88.9
-62.7
99.7
4.4
29.0
66.3
51.8
88.9
-14.4
-24.2
82.0
0.1
27.1
54.8
44.0
0
1.5
2016F
95.6
-22.0
73.6
3.4
23.0
47.3
44.0
95.6
-8.5
8.9
51.9
2.7
16.1
33.1
46.0
-1.2
-1.5
2017F
90.7
-17.2
61.9
2.0
17.2
42.6
46.0
90.7
-6.1
5
44.5
2.6
12.1
29.8
44.6
-5
7.7
2.9
-
3
1.7
3
-1.7
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 63
See last pages for disclaimer.
September
<date> 2016
Economics & FI/FX Research
CEE Quarterly
Serbia (B1 positive/BB- stable/BB- stable) *
Outlook – We expect economic growth to accelerate, helped by fixed investment. Net exports will
contribute in 2016, with the fiscal impulse turning positive next year. The budget deficit will fall faster than
expected, leading to a lower debt to GDP ratio for the first time since 2008. While the IMF agreement
remains on track, more needs to be done on SOE losses and NPL resolution, as well as on EU
recommendations. The NBS has room to cut rates by 25-50bp but will do so only if capital flows stabilise.
Strategy – A first EUR Eurobond could prove attractive, since Serbia might have to pay a premium
to reluctant eurozone investors. SERBGBs could benefit from reform momentum and good risk
appetite, with a Fed hike likely to have only a temporary impact on yields.
Author: Dan Bucșa, Lead CEE Economist (UniCredit Bank London)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
■ 13 Oct, 10 Nov, 8 Dec: NBS monetary policy meetings
■ 31 Oct, 30 Nov: 3Q16 GDP (flash, structure)
■ Sept, Dec: quarterly IMF reviews
■ 18 Nov, 16 Dec: Rating updates from Moody’s and Fitch
GDP GROWTH
yoy
(%; pp of GDP)
6.0
Inventories and discrepancy
Net exports
Gross fixed capital formation
Public consumption
Private consumption
GDP
5.0
4.0
EUR bn
2013
2014
2015
2016F
2017F
GDP (EUR bn)
34.3
33.1
32.8
33.4
34.7
Population (mn)
7.2
7.1
7.1
7.1
7.0
4,783
4,638
4,623
4,731
4,939
GDP per capita (EUR)
Real economy, change (%)
GDP
2.6
-1.8
0.7
2.6
2.4
-0.6
-1.3
-0.6
1.7
2.5
-12.0
-3.6
8.3
8.4
5.0
Public Consumption
-1.1
-0.6
-1.2
2.8
2.5
Exports
21.3
5.7
7.8
9.0
4.7
Imports
5.0
5.6
5.5
8.5
5.5
Monthly wage, nominal (EUR)
537
524
506
516
529
Private Consumption
Fixed Investment
Real wage, change (%)
-1.8
-0.9
-1.8
2.7
1.0
Unemployment rate (%)
21.0
17.6
18.3
17.2
17.0
-2.4
3.0
Fiscal accounts (% of GDP)
2.0
Budget balance
-5.5
-6.6
-3.8
-2.6
1.0
Primary balance
-3.0
-3.7
-0.5
0.7
1.0
-1.0
Public debt
61.0
71.8
77.3
76.4
74.7
-2.0
External accounts
Current account balance (EUR bn)
-2.1
-2.0
-1.3
-1.5
-1.7
Current account balance/GDP (%)
-6.1
-6.0
-4.0
-4.4
-4.9
Extended basic balance/GDP (%)
-2.3
-2.3
1.5
1.3
0.5
3.8
3.7
5.5
5.7
5.5
Gross foreign debt (% of GDP)
74.8
77.6
80.4
78.9
78.3
FX reserves (EUR bn)
12.3
11.1
11.5
11.3
11.3
8.3
7.4
7.3
6.6
6.2
CPI (pavg)
7.7
2.1
1.4
1.3
3.0
CPI (eop)
2.2
1.8
1.6
2.2
3.7
3.0
Central bank target
4.0
4.0
4.0
4.0
4.0
2.0
Central bank reference rate (eop)
9.50
8.00
4.50
4.00
4.00
1.0
3M money market rate (Dec avg)
9.11
8.59
3.86
3.50
3.97
USD/FX (eop)
83.1
99.5
111.2
110.7
110.4
EUR/FX (eop)
114.6
121.0
121.6
124.0
127.0
USD/FX (pavg)
85.2
88.4
108.8
110.7
110.4
EUR/FX (pavg)
113.1
117.2
120.8
123.2
125.2
0.0
-3.0
-4.0
2013
2014
2015
2016F
2017F
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
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Source: UniCredit Research
Source: Eurostat, NSI, UniCredit Research
*
Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch respectively
UniCredit Research
page 64
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Choosing the untrodden path
The IMF agreement remains
on track
The government returned to the roadmap agreed with the IMF and is expected to meet most
of the revised targets. The fiscal adjustment is impressive again, and a faster-than-expected
fall in public debt could further improve the rating outlook. Serbia is maintaining its goal of
joining the EU but not NATO, an unprecedented move among CEE countries that became EU
members. While EU commissioner Johannes Hahn considers Serbia the top candidate for EU
membership, the list of needed reforms remains long.
Economic growth is picking up…
The economy continues its recovery, although base effects and weaker demand from Europe
may slow growth in 2H16 vs. 1H16. Fixed investment will be the main growth driver this year
and next. Infrastructure projects include the road corridor 11 financed with a USD 223mn
(0.6% of GDP) Chinese loan and five railway projects financed by drawing at least USD 162mn
(0.4% of GDP) from the USD 800mn loan from Russia. These multi-annual projects will be
supplemented by planned investment in heavy industry (Hesteel Serbia Steel and Iron, the
former Zelezara), car parts (Yazaki, Mei Ta) and agriculture (Toennies).
…helped by investment
Investment and the bumper harvest are expected to boost net exports in 2016. That said, a
stronger rebound in consumption next year amid an increase in household revenues could
lead imports to outpace exports. Lacking new models, car exports are unlikely to grow. Fixed
investment could be boosted further if privatisations continue. The government could sell 25%
of pharma company Galenika to a Russian – British consortium, while other companies in
mining and metal production (e.g., RTB Bor and Resavica) are supposed to be privatized.
The fiscal impulse could
turn positive in 2017…
Finally, growth could be boosted by a positive fiscal impulse in 2017 as this year’s budget
deficit is expected to fall more than planned. According to PM Aleksandar Vucic, the central
government had a RSD 35bn (0.9% of GDP) surplus on 15 September. This 2.0% of GDP
improvement over August 2015 came on the back of better economic growth, which boosted
tax revenues. Thus, revenues from personal and corporate income taxes were up 10.3% yoy
in 7M16, while indirect taxes (VAT, excise and custom duties) grew by 15.4% yoy. The sale of
4Q licenses accounted for high non-tax revenues.
… if spending increases
However, larger receipts reduced the incentive to pursue more reforms, which were frozen
during the almost four months that took to form a government. On the expenditure side,
wages, subsidies are unemployment benefits fell vs. 2015, but capital expenditure, goods and
services, and interest on debt rose in percent of GDP. Moreover, minimum wage and pension
increases in 2017 would offset part of the fiscal gains made this year.
LARGER FISCAL AND CREDIT IMPULSES EXPECTED IN 2H16 AND 2017
Unprecedented fiscal adjustment in 2016…
2012
% of GDP
2013
… on the back of a strong rebound in tax revenues
2014
2015
2016
1
0
4
-1
3
-2
2
-3
-3.5
-4
0
-4
-1
-5
-2
-4.5
-5
-5.5
-6
-3
-6
-4
Jan-13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
-6.5
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
-7
Jul-16
Dec
*
UniCredit Research
-2
-2.5
1
-3
-7
Other expenditure (+ = reduction)
Interest expenditure (+ = reduction)
Non-tax revenue
Tax revenue
Budget balance (% of GDP, rs)
% of GDP, yoy
12M rolling
Source: MinFin, UniCredit Research
page 65
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Reforms restarting with lay-offs
in the public sector
The public debt to GDP ratio
will start falling this year
Room to cut interest rates…
…but the NBS minds
capital outflows…
…despite inflation remaining
below target
Serbia’s reform program is expected to restart with voluntary leaves at Serbia railways and
the energy company EPS (4,000 people out of a target of 6,000 for 2H16), with a combined
cost of more than RSD 5bn (0.1% of GDP). These departures add to approx. 19,500 lay-offs
(7.8% of public employment) from the state sector since 2014. In 2017, lay-offs will target
support and service employment in healthcare and education, but also large SOEs.
We expect the budget deficit at 2.6% of GDP in 2016, 0.1pp below the revised target agreed
with the IMF. This would reduce the public debt to GDP ratio to 76.7% of GDP this year
(82.6% of GDP when including restitutions), the first annual decline since 2008. The budget
deficit could fall to 2.4% of GDP and public debt to 75.1% (80.7%) of GDP in 2017. This would
increase the probability of rating upgrades, although investment grades remain years away.
The central bank has room to cut 25-50bp more due to below-target inflation and less pressure
on FX. NBS’s FX purchases since July allowed FX reserves to increase slightly after a rapid
decline since November 2015. Tight monetary conditions will slow RSD lending at a time when
banks face additional costs from managing NPLs. The NPL ratio could fall below 20% by the end
of this year, with banks increasing NPL sales, despite lacking a proper resolution framework.
With lending strongly euroised, the NBS will remain concerned with a potential weakening of
the RSD due to capital outflows. Foreign SERBGB investors reduced their holdings by 2% of
GDP in 1H16 and outflows could continue, especially if the Fed hikes before year-end. The
NBS’s worries could be appeased if the MinFin issues an FX bond abroad later this year. The
C/A deficit will exceed 4% of GDP this year and may widen in 2017 if consumer spending
accelerates. Even if FDI covers the C/A shortfall, we expect the RSD to depreciate gradually.
Meanwhile, inflation could return to the 2.5-5.5% target range net year amid increases in
administered prices (especially for energy and tobacco) and base effects from fuel prices.
Even so, inflation would exceed the central target of 4% in 2017 only if oil prices rise
substantially above our forecast (USD 65/bbl at the end of next year) and the government
pursues an aggressive schedule of administered price increases.
Serbia’s EU-accession talks continue at a slow pace. According to press leaks, European
authorities are concerned with the pace of reforms in the judicial system, Serbia’s refusal to
reach an agreement with Kosovo on energy provision, the lack of media freedom and the
country’s regional position. Besides a tense relationship with Croatia, European authorities
would probably prefer Serbia to apply for NATO membership. This is unlikely as long as
Russia remains the country’s largest individual creditor.
THE NBS REMAINS HAWKISH DUE TO CAPITAL OUTFLOWS
The NBS is not cutting due to larger capital outflows…
12M cumulated,
% of GDP
15.0
FX reserves (+ = decline)
Other investment
FDI
… with foreigners selling bonds and reducing financing to banks
Errors and ommissions
Portfolio investment
Current account
12M cumulated,
% of GDP
12.0
10.0
8.0
5.0
4.0
0.0
0.0
-4.0
-5.0
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
-12.0
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
-8.0
-10.0
-15.0
Basic balance (C/A + FDI)
Foreign financing lines to banks
Foreign investment in government debt
Source: NBS, UniCredit Research
UniCredit Research
page 66
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: A first EUR Eurobond would be very attractive
A EUR bond may be cheap
Serbia had to postpone issuing its first eurobond in EUR due to protracted negotiations to
form the government, stalling structural reforms over the summer and fluctuating risk appetite
abroad. With reforms resumed and the budget deficit adjustment larger than expected, we
expect Serbia to try to sell a first EUR bond in 4Q16. This may prove to be the most attractive
sovereign EUR bond issued in CEE this year, since Serbian authorities will have to pay a
premium in order to attract interest from risk-averse eurozone investors.
SERBGBs offer some of the
highest real yields in EM
SERBGBs remain attractive due to low inflation and scope for further rate cuts. Real yields
(computed with expected inflation) are among the highest in EM and bonds should perform
well as long as depreciation risks remain subdued. Good risk appetite following the Fed’s
September meeting may lead to inflows into SERBGBs, but a potential risk-off episode in the
run-up to the Fed’s December decision could push yields higher temporarily. We prefer the
new 7Y benchmark, which is likely to be retapped. This bond is Serbia’s best chance of being
included in local-currency indices in the coming years.
SERBGBs offer some of the highest real yields in EM
%
8
A EUR bond would cover most of the remaining financing needs
Real 10Y yield (w. BBG forecast for 2017 inflation forecast)
Real 10Y yield one year ago (w. BBG forecast for 2016 inflation forecast)
USD bn
3
Net issuance
Redemptions
2.5
6
2
4
1.5
2
1
0
0.5
-2
0
Until 23 Sept
23 Sept - 31 Dec
Potential EUR bond
DE CZ US KR TH RO HU IL MY PH PL TR IN ID RU SA MX RS* BR
*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
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
Privatization/Other
Change in cash reserves
GROSS EXTERNAL FINANCING REQUIREMENTS
2015F
2016F
2017F
4.7
1.2
3.5
2.9
1.7
1.2
0
0.6
0.5
0.1
4.7
4.3
2.5
1.8
0
0.4
0
0.3
0.1
0
4.8
0.9
3.9
3.3
1.9
1.4
0
0.6
0.6
0.1
4.8
3.0
2.2
0.8
0
1.5
1.0
0.2
0.3
0.4
4.9
0.8
4.1
3.4
2.6
0.8
0
0.7
0.7
0
4.9
3.1
2.2
0.9
0
1.8
1.0
0.2
0.6
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)
Memoranda:
Nonresident purchases of LC govt bonds
International bond issuance, net
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 67
2015F
6.8
1.3
5.4
0.6
1.3
3.6
0.1
0
0.1
0
6.8
1.8
0
5.0
0.4
1.0
3.6
0.1
0
0
0
2016F
6.9
1.5
5.1
0.6
1.0
3.5
0.3
0
0.2
0.1
6.9
1.5
0
4.9
0.6
0.8
3.5
0.3
0
0
0.2
2017F
7.1
1.7
5.1
0.7
1.0
3.4
0.2
0
0.1
0.1
7.1
1.5
0
5.4
1.1
0.8
3.4
0.2
0
0
0
0.4
-0.5
-0.4
0.5
0.1
0.3
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Turkey (Ba1 stable/BB+ negative/BBB- negative) *
Outlook – The near-term outlook has deteriorated, hit by the fallout from the failed coup
attempt, the collapse in tourism, and the recent downgrade to sub-investment grade. Even so,
Turkish assets have held up well and are likely to remain resilient as long as risk appetite
stays strong. This should enable the CBRT to continue easing in the next couple of months
despite stubbornly high inflation. Activity should recover later this year and in 2017, but Brexitrelated headwinds, rising oil prices and ongoing political tensions will limit growth to 3%, less
than potential. Even so, with growth centered in consumption, inflation will stay elevated as
the C/A deficit widens again. The odds of a major correction will rise as the timing of the next
Fed hike approaches, with its size likely to be magnified by the authorities’ expansionary bias.
Author: Lubomir Mitov, Chief CEE Economist, Unicredit Bank London)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
EUR bn
2013
2014
2015
2016F
2017F
■ 3 Oct, 3 Nov, 5 Dec – CPI
GDP (EUR bn)
616.8
602.2
648.7
671.8
681.1
Population (mn)
76.5
77.3
78.2
79.0
79.8
8,065
7,788
8,300
8,508
8,538
GDP
4.2
2.9
4.0
10.2
3.0
Private Consumption
4.6
1.5
4.5
5.5
4.8
Fixed Investment
4.3
-1.2
3.6
-1.3
-2.0
Public Consumption
5.9
5.6
6.7
7.8
5.0
Exports
0.1
5.9
-0.8
-2.0
4.4
■ 20 Oct, 24 Nov – MPC meeting
■ 12 Oct, 11 Nov – Balance of payments
■ 12 Dec – 3Q GDP
GDP per capita (EUR)
Real economy, change (%)
DECELERATING GROWTH
yoy (%)
Personal consumption
Public consumption
Imports
8.5
-1.2
0.3
4.7
4.9
Gross fixed capital
Net exports
Inventories
GDP
Monthly wage, nominal (EUR)
961
968
1,029
1,094
1,100
Real wage, change (%)
4.6
1.0
2.3
7.6
1.7
12.0
Unemployment rate (%)
9.7
9.9
9.8
10.1
10.0
10.0
Fiscal accounts (% of GDP)
16.0
14.0
8.0
6.0
4.0
2.0
2010
2011
2012
2013
2014
2015E
2016F
2017F
INFLATION TRENDING HIGHER
-2.1
-2.9
-3.2
0.47
0.43
-0.34
-0.47
36.3
36.2
36.6
35.9
36.1
Current account balance (EUR bn)
-49.0
-32.8
-29.0
-35.2
-39.3
Current account balance/GDP (%)
-7.9
-5.5
-4.5
-5.2
-5.8
Extended basic balance/GDP (%)
-6.8
-4.5
-2.9
-4.1
-5.0
1.1
0.9
1.6
1.1
0.8
Gross foreign debt (% of GDP)
48.4
51.7
53.8
56.1
57.8
yoy (%)
CPI (lhs)
Inflation target (lhs)
FX reserves (EUR bn)
79.5
87.1
82.8
81.6
77.2
4.7
4.7
4.4
4.6
4.1
Net FDI (% of GDP)
TRY basket (rhs)
12.0
30.0
Months of imports, goods & services
25.0
Inflation/Monetary/FX
CPI (pavg)
7.1
8.9
7.7
7.8
8.6
10.0
CPI (eop)
7.4
8.2
8.9
7.7
9.2
5.0
Central bank target
5.0
5.0
5.0
5.0
5.0
Central bank reference rate (eop)
4.5
8.3
7.5
7.5
8.0
-10.0
3M money market rate (Dec avg)
8.4
9.6
9.3
8.5
9.0
-15.0
USD/TRY (eop)
2.07
2.30
2.92
3.05
3.25
EUR/TRY (eop)
2.83
2.83
3.18
3.42
3.77
USD/TRY (pavg)
1.91
2.19
2.72
2.95
3.16
EUR/TRY (pavg)
2.53
2.91
3.01
3.29
3.61
Real effective exchange rate, 2000=100
94.9
90.0
91.5
91.4
86.1
Change (%)
-2.5
-5.1
1.6
-0.1
-5.8
15.0
8.0
6.0
0.0
4.0
-5.0
2.0
0.0
Jan-07
35.0
20.0
10.0
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
-20.0
Source: UniCredit Research
*
-2.2
1.5
External accounts
-4.0
14.0
-1.7
Primary balance
Public debt
0.0
-2.0
-6.0
Budget balance
Source: Eurostat, NSI, UniCredit Research
Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch respectively
UniCredit Research
page 68
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Stronger headwinds
Economic performance has
deteriorated recently…
Turkey’s economic performance has deteriorated markedly recently, with growth slowing,
inflation up again, and the underlying C/A deficit widening. Confidence has taken a hit after
the failed coup attempt in July, while the purges of civil servants believed to be affiliated with
the Hizmet network run by exiled cleric Fettulah Gulen are feared to affect adversely the
quality of government institutions.
Real GDP growth slowed
markedly in 2Q16…
Real GDP growth slipped to 1.2% saar (work-day adjusted) in 2Q from 2.9% in 1Q (and 4-5%
during the preceding five quarters), the weakest reading since 3Q14. In yoy terms, growth
slowed to 3.0% from 4.5% in both 1Q and 4Q15. What is more worrisome, activity became
even more skewed towards consumption, with private consumption expanding 5.7% yoy
(slightly less than in 1Q), and government consumption surging 16% (a marked acceleration
from 1Q). At the same time, private investment fell again, as did export volumes (both in sa
terms and yoy), while import growth remained buoyant at near 8% yoy.
…with activity again centered
in consumption
Growth appears to have stalled
in 3Q16…
Moreover, high-frequency indicators point to further deterioration in 3Q. Industrial production
and exports contracted in sa terms in July, and tourism arrivals dropped 38% yoy, with the
outlook for August not any better amid heightened security concerns and the fallout of the
coup attempt. While one-off factors such as the shift of Ramadan to July from August last
year and the disruption triggered by the coup attempt have had an impact, leading indicators
point to sustained weakness, with August PMI and business confidence down to their lowest
levels since 2009. All this suggests that growth may have stalled or even reversed in 3Q.
…as confidence weakened and
tourism slumped
Barring a major deterioration in global sentiment, activity ought to gain momentum later in the
year and into 2017, supported by strongly expansionary policies and the lifting of travel and
trade sanctions by Russia. This year, however, their impact will be limited, leaving full-year
growth at 2.8%. Next year, the upside should be stronger, with growth peaking at 4% saar by
the summer as tourism recovers. On the other hand, a Brexit-related drop in demand in
Europe and a projected rebound in oil prices would have a significant dampening impact on
activity, leaving full-year growth at around 3.0% next year, slightly below potential.
Unless global sentiment
worsens, activity ought to pick
up in late 2016 and in 2017…
…but the fallout of Brexit and
higher oil prices will keep
growth near 3% both years
Even so, macroeconomic
imbalances will grow…
Despite below-potential growth, the emphasis on consumption will continue feeding into
macroeconomic imbalances. Inflation, after a temporary dip in the spring, has accelerated
again towards 8% by the summer, partly due to a lower seasonal decline in produce prices,
partly due to continued sticky core inflation at just under 9%. Going forward, the modest
acceleration in growth, along with the recovery in oil prices and with food prices trending
higher (as the Russian export ban is lifted), is likely to push inflation higher, peaking at just
above 10% in the spring before easing to 9.6% by December 2017.
…with inflation set to trend
higher next year
BUSINESS SENTIMENT HAS WEAKENED POST-COUP…
Business confidence
…AS THE UNDERLYING C/A HAS DETERIORATED
Consumer confidence
130.0
4.0
120.0
2.0
110.0
0.0
100.0
-2.0
90.0
ToT gains
CA balance adj
-4.0
80.0
-6.0
70.0
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
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
-10.0
Mar-14
-8.0
60.0
50.0
Trade balance adj
Source: Turkstat, CBRT, UniCredit Research
UniCredit Research
page 69
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
The underlying C/A has
continued deteriorating…
At the same time, the underlying C/A position continued worsening, with growth in exports
lagging that in imports, and with tourism receipts sharply lower. Adjusted for terms of trade,
the C/A deficit rose to 6.5% of GDP in the 12 months through July even though the headline
deficit narrowed, to 5.7% of GDP from 8% a year before, thanks to 35% lower oil prices. The
improvement in the headline C/A number will reverse after August, however, due to both the
drop in tourism and rising oil prices. For the full year, we expect a deficit of 5.2% of GDP, up
5.9% in 2017, up from 4.5% in 2015. Next year’s increase would mostly reflect the assumed
25% rise in oil prices, but will be tempered by the recovery in tourism and trade with Russia.
…and next year the headline
C/A will follow suit
Despite the deteriorating
outlook and numerous political
shocks, Turkish assets will
hold up well in the short term…
Despite the deteriorating outlook, Brexit impact, and repeated political shocks, TRY and
TURKGB prices have held up well. This was due to the extraordinarily favorable external
environment, with ongoing monetary accommodation by major central banks and ample
global liquidity boosting risk appetite. With the Fed unlikely to hike until December, we expect
this trend to continue over the next couple of months.
…enabling the CBRT to
continuing easing….
This ought to enable the CBRT to continue cutting interest rates despite stubbornly high
inflation. We expect the central bank to cut its overnight lending rate one more time in October
before pausing in November, as markets brace for the expected Fed hike. This would bring
the overnight lending rate to 8%, broadly achieving the “simplification” goal with a much
narrower and more symmetric interest rate corridor. Rate cuts will be accompanied by
stepped-up liquidity provision as the CBRT seeks to lower domestic banks’ funding costs in
order to achieve the reduction in lending rates demanded by President Erdogan.
…along with measures to boost
bank liquidity
The major near-term risk is a
potential Trump win in the U.S.
election…
The major near-term risk is the uncertainty related to the outcome of the U.S. presidential
election. A potential Trump win could trigger a major selloff followed by a protracted period of
heightened volatility until the new administration takes over and clarified its policies. EM
assets will be hit particularly hard given Mr. Trump’s protectionist bias, with Turkey, given ist
well-known vulnerability, among the most exposed.
…triggering a major and
sustained global selloff
Beyond November, prospects will hinge on the global outlook. Turkey’s high structural C/A
deficit (5-6% of GDP) and its reliance on foreign funding, especially portfolio and short-term
capital, leave the country highly vulnerable to shifts in market sentiment, making an eventual
adjustment unavoidable. Assuming the Fed proceeds only gradually and other major central
banks keep their monetary accommodation, we expect these adjustments to be gradual, with
both TRY and TURKGB prices trending lower, but not enough to cause disruptions. In any
case, the CBRT will eventually have to hike rates in line with the Fed. However, the odds are
growing of an abrupt adjustment in case global conditions deteriorate more than currently
envisaged or a delayed policy response. The resulting sharper than currently envisaged
tightening could then push the economy into recession and hurt financial markets.
Beyond November, prospects
will hinge on the global outlook
Odds for a sharp adjustment
will rise, especially if the Fed
tightens faster and by more
than markets currently expect
The structural fiscal deficit has widened…
Interest
6.0
Cyclical effect
…providing a sizable fiscal boost to growth
Primary structural
Headline
4.0
8.0
2.0
6.0
0.0
4.0
-2.0
2.0
-4.0
0.0
-6.0
Real GDP growth
-2.0
-8.0
-4.0
-10.0
-12.0
Fiscal Impulse
10.0
-6.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2008
2009
2010
2011
2012
2013
2014
2015
2016
2016
Source: UniCredit Research
UniCredit Research
page 70
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Strategy: life below investment grade
Although bonds rallied just days before the rating decision on the back of comments by Moody’s
officials suggesting that the rating downgrade was not a done deal, the market reaction to the
final downgrade was relatively subdued and partially priced in since mid-July. We believe that
USD bonds in Turkey offer good value compared to peers and that they are trading at similar
levels as credits with lower ratings. Nevertheless, the impact of losing investment grade will be
gradual and adjustments will take place over several months and hence the risk of further
widening remains. The historical experience in the aftermath of a loss of investment grade is
mixed for USD spreads. Brazil is the closest example in time but of limited comparability, in our
view, as the deterioration in the macroeconomic and institutional environment was deeper than
our expectation for Turkey going forward. In the case of Croatia in 2012, a significant spread
widening had already taken place several months before the IG loss, and in the case of Hungary
the downgrade momentum accompanied a greater deterioration of the institutional and larger
macroeconomic imbalances than those in Turkey currently.
There has been a subdued
reaction to Turkey downgrade
below investment grade…
… and historical experiences
offer mixed guidance.
Spread changes compared to EMBIG around loss of IG dates
150
Rating history for countries recently losing IG
Brazil (Oct'15)
Croatia (Dec'12)
Hungary (Aug'11)
Turkey (Sep'16)
Brazil
150
Croatia
Hungary
Turkey
140
130
100
120
110
50
100
0
90
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
w16
w14
w12
w10
w8
w6
w4
w2
w
w-2
w-4
w-6
w-8
w-10
w-12
-100
70
May-10
80
-50
Source: UniCredit Research
GOVERNMENT GROSS FINANCING REQUIREMENTS
GROSS EXTERNAL FINANCING REQUIREMENTS
EUR bn
2015
2016F
2017F
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
40.3
13.4
26.8
22.4
22.4
--4.5
4.2
0.3
40.2
31.3
31.3
--2.7
2.7
0
6.2
42.4
19.8
22.6
17.8
17.8
--4.8
2.5
2.3
42.4
31.5
31.5
--7.5
4.5
3.0
3.4
46.9
21.6
25.4
18.6
18.8
--6.8
3.5
3.3
46.9
35.3
35.3
--8.7
5.7
3.0
2.9
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
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 71
2015
185.7
29.0
43.8
6.8
20.8
16.3
10.4
-2.4
63.6
2.7
32.3
28.6
95.1
0
8.3
10.7
2016F
182.3
35.2
57.8
5.0
37.0
15.7
89.3
182.3
7.3
1.1
72.5
10.3
38.9
23.4
92.0
0
11.6
-2.2
2017F
170.7
39.3
39.4
6.9
20.8
11.6
92.0
170.7
5.4
0.5
61.2
8.7
29.8
22.8
87.5
0
13.5
2.5
-6.9
-4.5
4.9
1.8
2.0
2.2
112.9
185.7
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
Ukraine (Caa3 stable/B stable/CCC) *
Outlook – Growth has resumed, but only barely, and remains fragile and uneven. The recovery has
been centered on private consumption and investment, supported by sharp fiscal easing and a
marked acceleration in wage growth. This, however, has resulted in a renewed deterioration in the
current account and the fiscal position, deferring IMF disbursements for more than a year. IMF lending
resumed in September, but the outlook remains uncertain amid signs of flagging political support for
fiscal adjustment and reforms. With the dysfunctional political system unreformed and corruption
largely untackled, the outlook remains highly uncertain. At current policies, the recovery will remain
anemic at 1-2% a year, financial stabilization fragile, and prospects for a negotiated solution of the
conflict in the East remote. Risks remain heavily skewed to the downside, both economic and political.
Author: Lubomir Mitov, Chief CEE Economist (Unicredit Bank London)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS
EUR bn
2013
2014
2015
2016F
2017F
■ 7 Oct, 8 Nov, 8 Dec – CPI
■ 27 Oct, 12 Dec – Key rate decision
■ 24 Oct – 3Q Balance of payments
■ 11 Nov – 3Q GDP
GDP (EUR bn)
134.2
98.2
83.0
84.9
83.9
Population (mn)
45.4
42.9
42.8
42.3
41.9
2,957
2,289
1,942
2,008
2,001
GDP per capita (EUR)
Real economy, change (%)
GDP
THE RECOVERY REMAINS SLUGGISH
20.0
Private consumption
Public consumption
Gross fixed capital formation
Net exports
Inventories
yoy (%)
15.0
0
-6.8
-9.9
1.2
1.7
7.9
-9.0
-20.2
3.8
3.6
Fixed Investment
-6.7
-22.4
-9.3
7.0
5.0
Public Consumption
-2.7
0.4
1.0
-1.0
-0.8
Exports
-8.5
-14.1
-16.9
-4.8
2.2
Imports
-5.4
-21.3
-22.0
1.7
5.2
Monthly wage, nominal (EUR)
302
218
173
188
186
Real wage, change (%)
8.3
-5.2
-18.7
9.2
3.7
Unemployment rate (%)
7.2
9.3
9.6
9.7
9.6
-4.0
Private Consumption
10.0
5.0
Fiscal accounts (% of GDP)
0.0
Budget balance
-4.6
-4.5
-3.9
-5.1
-5.0
Primary balance
-1.3
0.9
1.6
0.3
1.3
Public debt
40.2
71.2
92.6
92.7
92.1
Current account balance (EUR bn)
-12.0
-4.2
-0.2
-1.7
-2.3
Current account balance/GDP (%)
-9.2
-3.9
-0.2
-2.1
-2.8
Extended basic balance/GDP (%)
-7.3
-3.7
3.7
1.1
0.5
1.9
0.2
3.9
3.2
3.3
144.3
164.8
225.2
247.0
252.4
14.6
5.0
12.0
13.8
14.3
2.2
0.9
2.8
3.4
3.4
-10.0
-15.0
-20.0
External accounts
2010
2011
2012
2013
2014
2015F
2016F
2017F
INFLATION STUCK IN THE LOW DOUBLE DIGITS
Net FDI (% of GDP)
Gross foreign debt (% of GDP)
yoy (%)
70.0
CPI
NEER
60.0
50.0
40.0
180
Months of imports, goods & services
140
Inflation/Monetary/FX
120
CPI (pavg)
-0.3
12.1
48.7
13.5
11.9
100
CPI (eop)
0.5
24.9
43.3
12.1
8.9
--
--
--
--
--
40
Central bank reference rate (eop)
6.5
14.0
22.0
14.0
12.0
20
3M money market rate (Dec avg)
12.0
21.0
19.0
15.0
13.0
0
USD/UAH (eop)
8.24
15.67
23.44
26.85
29.60
EUR/UAH (eop)
11.21
14.54
23.03
28.82
33.62
USD/UAH (pavg)
8.16
12.02
21.93
25.73
28.49
EUR/UAH (pavg)
10.84
15.96
24.26
27.79
32.54
Real effective exchange rate, 2000=100
100.8
79.8
80.3
88.2
101.9
-3.8
-20.8
0.6
9.9
15.5
80
30.0
60
20.0
10.0
0.0
-10.0
Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17
FX reserves (EUR bn)
160
-20
Source: Ukrstat, NBU, UniCredit Research
Central bank target
Change (%)
Source: Eurostat, NSI, UniCredit Research
,
*
Long-term foreign currency credit rating provided by Moody’s, S&P and Fitch respectively
UniCredit Research
page 72
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
One step forward, two backwards
The economy seems to have
found a bottom…
…but growth remains slow
and uneven…
…prompting us to downgrade
our growth outlook for
this year and next
The composition of growth has
added to macroeconomic
imbalances…
…with resurging domestic
demand leading to a marked
widening of the C/A deficit
The rebound in demand has
been mostly policy-driven…
Growth appears to have
stalled in 3Q16…
…resulting in a sharp widening
of the fiscal deficit…
…as government revenues fell
in real terms while spending
jumped
This fiscal slippage was the key
reason for the suspension of
IMF lending
The government has promised
measures to trim the deficit…
After eight quarters of contraction totaling roughly 20%, the economy appears to have found a
bottom. Growth has returned – albeit at an anemic pace, with real GDP up 1% yoy in 1H16.
(In seasonally adjusted terms, growth was somewhat stronger in 2Q16 at 2.4% saar).
Available data for the third quarter point to diverging trends: while a bumper harvest ought to
boost agricultural output and exports, flagging demand in Asia for steel (one of Ukraine’s
major exports) and growing disruptions in trade with Russia look set to keep growth subdued
at perhaps 1-2% saar in 3Q. With the difficult geopolitical situation and ongoing significant FX
market restrictions constraining a stronger recovery, we have downgraded our growth
forecast for this year from 1.7% to 1.2% and that for 2017 form 2.3% to 1.7%.
What is more concerning, the composition of growth has added to macroeconomic
imbalances rather than easing them, with growth centered on private consumption and
investment. While a rebound in both ought to be expected after two years of steep declines, it
has failed thus far to generate a significant supply-side response, resulting in a marked
increase in import volumes. Export volumes, by contrast, have plummeted, resulting in a
sharp widening in the C/A deficit, to 1.5% of GDP during January-July from 0.2% a year
earlier. The deficit widened despite a slight further real UAH depreciation, pointing to the
structural roots of Ukraine’s external finances.
What is perhaps more worrisome, the recovery in domestic demand has been mostly policy
driven. The January-July fiscal deficit (which is seasonally very low at that time) surged to
2.4% of GDP from a roughly similar surplus a year ago. This deterioration was built-in already
in the 2016 budget that, while formally complying with the 3.7% of GDP IMF target, lacked
mechanisms to achieve it. Furthermore, legislative changes (some of them repealed recently
under pressure from Ukraine’s official creditors) provided a number of loopholes that eroded
the tax base.
Not surprisingly, central government revenue dropped 7% yoy in January-July, with the
weakness centered in corporate income tax receipts and nontax revenues. Non-interest
spending, by contrast, rose 3% in real terms yoy, especially labor compensation (+4%) and
social welfare (+32%), with both providing key support to household spending – but widening
sharply the deficit. This fiscal slippage and the government’s reluctance to correct it promptly
was the key reason for the prolonged suspension of IMF lending.
Even though the government has undertaken to roll back some of the measures that have
hurt the budget and to rein in spending as a condition for the resumption of IMF support,
developments to date suggest that the deficit will be much higher than targeted this year, at
around 5% of GDP.
THE RECOVERY IN ACTIVITY HAS STALLED…
20.0
yoy (%)
Retail trade
…AS EXPORTS HAVE TRENDED LOWER AGAIN
Industrial production
Exports
Index (2010=100)
Imports
180.0
160.0
10.0
140.0
0.0
120.0
-10.0
100.0
-20.0
80.0
60.0
-30.0
-40.0
40.0
2012
2013
2014
2015
2016
2013
2014
2015
2016
Source: Ukrstat, NBU, UniCredit Research
UniCredit Research
page 73
See last pages for disclaimer.
September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
…the fiscal deficit will be much
higher than originally targeted
both this year and next
Including the losses of state-owned enterprises and off-balance sheet items, the broader
public sector deficit would increase to 6% of GDP or more. Assuming the government sticks
to the IMF program, we expect the fiscal deficit to ease back to 4% of GDP or so, remaining
1.5% of GDP above the original IMF target.
Under these circumstances, the anchor of macroeconomic policies shifted to monetary policy.
The latter has remained broadly tight, with cuts in the policy rate only gradual and tracking
the decline in inflation. However, the suspension of IMF lending (and most other official
support as a result) has led the NBU to extend the FX market restrictions, which has limited
the impact of monetary policy on the economy.
Under these circumstances,
monetary policy has become
the key policy anchor…
…albeit with limited effect
Nevertheless, inflation has continued to ease, falling to 8.4% yoy in August from 43% at the
end of last year. Most of this deceleration reflected the base effect of sharp price hikes in
early 2015 as well as the impact of a bumper harvest on food prices. At the same time,
monthly inflation averaged 0.6% thus far this year vs. 0.4% during June-December 2015 (after
the completion of the administered price hikes). We expect 12-month inflation to pick up
slightly to 12% by the end of this year, pushed up by firming oil prices and a somewhat
weaker UAH. Next year, inflation looks likely to remain in low double digits, fed by further
administered price hikes and tax measures, before easing to 9% by December 2017.
Inflation has eased, but
remains elevated….
…likely to remain in low double
digits this year and most of
next year
The key challenge going forward is to finally undertake long-delayed structural and
institutional reforms. Progress has been painstakingly slow and uneven, frustrating both the
general public and foreign creditors alike. The continued political discord, the omnipresent
dominance of powerful vested interests and the lack of political resolve to deal with corruption
are likely to continue to restrain reforms and weigh on the economy. Progress on privatization
has been all but absent and most measures related to SOEs have been largely designed to
benefit vested interests rather than reform the sector.
Advancing long-delayed
structural and institutional
reforms is the key challenge
Progress has been frustratingly
slow thus far
Under the current political setup, odds for a decisive breakthrough on reforms are slim.
Similarly, the absence of political coherence is likely to make a political solution on the conflict
in the East unlikely. Under these circumstances, we expect growth to remain slow and bumpy,
on the order of 2% to 3%, with inflation elevated in double digits and the C/A deficit at 2-3% of
GDP. This should be sustainable next year as long as official financing continues and
repayments to private creditors are minimal, but the situation will become much more
challenging from 2018 onwards, when official financing ebbs and repayments to private
creditors pick up. Ukraine’s foreign borrowing requirements will surge to USD 5-6bn. a year in
net terms, which will be very difficult under current policies and with the macroeconomic
scenario laid out above and with global liquidity likely to be less readily available.
Under the existing setup, odds
for a breakthrough are slim…
…leaving growth range-bound
at 2-3%...
…which is insufficient to
ensure a sustainable external
position after 2017-2018
THE C/A DEFICIT HAS WIDENED AGAIN…
30.0
USD bn
25.0
…WITH FOREIGN FINANCING NEEDS REMAINING LARGE
Official Financing
Equity
Resident Capital
Foreign borrowing
C/A
Change in FX reserves
MLT financing needs
USD bn
Official
Debt Restructuring
Other Private
25
20.0
20
15.0
15
10.0
5.0
10
0.0
-5.0
5
-10.0
-15.0
-20.0
0
2010
2011
2012
2013
2014
2015
2016
2016
2017
2018
2019
2020
2017
Source: NBU, IMF, UniCredit Research
UniCredit Research
page 74
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September 2016
<date>
Economics & FI/FX Research
CEE Quarterly
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
2015F
2016F
2017F
14.1
3.3
10.8
4.6
3.8
0.8
0
6.2
4.2
2.0
14.1
5.8
3.8
2.0
0
4.2
1.8
2.4
4.1
9.6
4.3
5.3
4.5
2.5
2.0
0
0.7
0
0.7
9.6
5.8
4.0
1.8
0
3.6
1.9
1.7
0.2
8.3
3.4
4.9
3.9
2.1
1.8
0
1.0
0
1.0
8.3
5.3
4.3
1.0
0
2.1
0
2.1
0.9
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
2015
25.2
0.2
16.3
6.2
2.5
7.5
8.8
25.2
3.2
-0.1
18.9
11.6
0.8
6.5
5.0
4.2
-6.1
2016F
18.3
1.7
11.6
0.7
2.6
8.2
5.0
18.3
2.7
0
15.4
6.6
1.9
6.9
3.8
-1.3
-2.3
2017F
17.8
2.3
11.7
1.0
2.5
8.3
3.8
17.8
2.7
0
13.8
5.1
1.8
6.8
3.5
-1.4
-0.9
0
-0.9
0
1.9
0
0
Source: BNB, MoF, UniCredit Research
UniCredit Research
page 75
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Acronyms and abbreviations used in
the CEE Quarterly
UniCredit Research
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
BNB – Bulgarian National Bank
■
■
■
■
SOE – state-owned enterprise
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
ECB – European Central Bank
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)
WB – World Bank
yoy – year on year
ytd – year to date
page 76
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September 2016
September 2016
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CEE Quarterly
Notes
UniCredit Research
page 77
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Notes
UniCredit Research
page 78
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
Notes
UniCredit Research
page 79
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September 2016
September 2016
Economics & FI/FX Research
CEE Quarterly
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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
UniCredit Bank
D. Galytrskogo Str. 14.,
UA-43016 Lutsk
Phone: +380 332 776210
E-mail: [email protected]
www.unicreditbank.com.ua
PJSC Ukrsotsbank
29 Kovpaka St.,
UA-03150 Kiev
Phone: +380 44 230 32 99
E-mail: [email protected]
www.unicredit.com.ua
UniCredit Research
page 82
September 2016
September 2016
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
September 2016
September 2016
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]
Dr. Tobias Rühl, Economist
+49 89 378-12560
[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]
Pavel Sobisek, Chief Economist, Czech Republic
+420 955 960-716
[email protected]
Dumitru Vicol, Economist
+44 207 826-6081
[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]
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.
EFI 35
UniCredit Research
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