Download CEE macro outlook: is Emerging Europe on the way to a

CEE macro outlook: is Emerging Europe on the way to
a healthy recovery?
EEMEA Economics and FX/FI Strategy
Gyula Toth, EEMEA Economics and FX/FI Strategy + 43 50505 82362
October 2009
Outlook summary
 Supportive external demand:
 External environment: huge inventory adjustment already behind us but fiscal stimulus played an important role
 This will support countries with a more open economies whilst these suffered the most in the slump
 As lack of demand is still the main reason for poor industrial production
 While CEE inventory reduction stabilized lately
 Domestic demand remains soft:
 Meanwhile confidence in the service sector failed to recover meaningfully as CEE domestic demand remains week
 As there are big differences in CEE banking sectors’ lending ability
 Investments will only be driven higher by rebuilding of inventories in the near term
 Better export demand vs. soft domestic demand leads to significant adjustment in growth structure
 External financing imbalance converted to fiscal imbalance:
 And this backdrop leads to a significant improvement in the CEE region’s Achilles heel = improvement in C/A
 Part of the missing demand was substituted by fiscal stimulus = external financing risk converted to fiscal risk
 Monetary policy outlook:
 CEE monetary policy outlook is on balance still dovish
 While some currencies still look undervalued and Baltics FX is still stretched vs. CEE floating FX
 CEE event risk: devaluation risk did not disappear but contagion to broader CEE could be relatively contained
2
CEE economies were hit by a simultaneous trade and finance
shock
Capital flows into EM collapsed in 2009…
as well as global trade activity
1,400
30.0
USDbn
1,200
Motor vehicles
Chemical
Electrical
Machinery & equipment
20.0
Private sector capital flows
to EM
1,000
800
10.0
Bank lending to EM
600
0.0
400
-10.0
200
0
-20.0
2010f
2009f
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-200
-30.0
2002
2003
2004
2005
2006
2007
2008
2009
Source: IIF, Bloomberg, UniCredit Research
 Finance shock: Private sector capital flows into EM will likely reach the 2002 level in 2009 but some
recovery expect in 2010. Bank lending books will likely contract in 2009 and only a very small recovery is
expected in 2010 as banks are still in deleveraging phase.
 Trade shock: global trade activity came to an almost complete halt in Q4 2009. Recent fiscal stimulus and
inventory cycle has however seen a strong turnaround.
3
Was it a trade or a finance shock for CEE economies (factors
limiting industrial production, Quarterly EC Survey, Aug 09)
Czech Republic and Poland average
EMU
60
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2006-Q3
2006-Q1
2005-Q3
2003-Q3
2009-Q3
2009-Q1
2008-Q3
2008-Q1
0
2007-Q3
0
2007-Q1
10
2006-Q3
10
2006-Q1
20
2005-Q3
20
2005-Q1
30
2004-Q3
30
2004-Q1
40
2003-Q3
40
2005-Q1
50
2004-Q3
Demand
Finance
50
Demand
Finance
2004-Q1
60
Hungary and Romania average
Baltics and Bulgaria average
70
60
Demand
Finance
60
Demand
Finance
50
50
40
40
30
30
2006-Q3
2006-Q1
2005-Q3
2005-Q1
2004-Q3
2004-Q1
2009-Q3
2009-Q1
2008-Q3
2008-Q1
2007-Q3
2007-Q1
2006-Q3
2006-Q1
2005-Q3
2005-Q1
0
2004-Q3
0
2004-Q1
10
2003-Q3
10
2003-Q3
20
20
Source: European Commission, UniCredit Resarch
4
Trade outlook: huge inventory adjustment already behind us but fiscal
stimulus played an important role
New Orders /Inventories ratios in the industrial sector
1.8
1.6
1.4
1.2
1.0
Eurozone PMI
0.8
China PMI
0.6
US ISM
0.4
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Source: PMI, Markit, Bloomberg, UniCredit Research
 At the turn of the year, investment growth collapsed, following the sudden halt in global and domestic
demand. The plunge was unprecedented, both for its depth and its speed. This has been largely the result
of a huge inventory adjustment process: with unsold goods piling up and financing hard to come by,
firms have slashed production even faster than the sudden and unexpected fall in global demand.
 Recent signals coming from business surveys are surely encouraging and hint a sizeable rebound in the
manufacturing sector, thanks to inventory rebalancing. On the back of such a process, most surveys
are now approaching an area consistent with expansion economic activity.
5
While CEE inventory reduction stabilized lately as new order vs.
inventory ratio started moving higher
New order inventory ratio stabilized lately
1.5
But there is still some excess inventory in some countries
Normalised confidence indicators: new order minus
inventory
0
1.0
-10
0.5
-20
0.0
-30
-0.5
-1.0
Poland, Czech R. avg.
-40
Baltics, Bulgaria avg.
-50
-1.5
Hungary, Romania avg.
-2.0
-60
-2.5
-70
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
(New orders minus stock of finished goods) minus 10y
-80
EE
CZ
EU
SK
LV
LT
HU
BG
RO
PL
Source: European Commission, UniCredit Resarch, Bloomberg
 New order to inventory ratios deteriorated during the crisis but started to stabilize in the last 4-5
months as slightly improved demand saw low level of inventories. The chart shows very little differentiation
based on macro vulnerabilities = the inventory cycle seems more of a unified process. Baltic rebalancing
started earlier. (chart 1)
 But some countries (CZ and EE) still had relatively significant overhang compared to EU and to other
countries in the region. Poland, Romania and Bulgaria look relatively better from this perspective. (chart
2)
6
This will support countries with a more open economies whilst
these suffered the most in the slump
Significant difference in openness
Export growth closely followed Germany/EU
40.0
30
70
30.0
20
60
20.0
10
50
10.0
0
40
0.0
80
Exports % GDP
30
-10
Averge HUF, CZK,
PLN, TRY and RUB
export growth (y-o-y)
German factory orders
(y-o-y growth), RHS
-10.0
20
-20.0
10
-30.0
-20
-30
-40
Jul-09
Apr-09
Oct-08
Jan-09
Jul-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Oct-06
Jan-07
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
-50
Apr-05
-40.0
Jan-05
Slovakia
Hungary
Czech Rep.
Slovenia
Kazakstan
Estonia
Bulgaria
Ukraine
Lithuania
CEE-17
Poland
Russia
Bosnia-H.
Latvia
Romania
Croatia
Serbia
Turkey
0
Source: UniCredit Resarch, Bloomberg
 Slovakia, Hungary and Czech Republic set to benefit the most from improving external demand for their
exports, they suffered the most in the downturn (chart 1)
 Recent acceleration in German factory orders is boding well for the coming months (quarters)
 Countries with a more closed economies have to rely on domestic demand where the health of the local
banking sector is crucial. We are most constructive on Turkey, Poland and the Czech Republic from this
perspective.
7
Big differences in banking sectors’ lending ability. Credit growth
showed correlation with retail sales
Bank sector dependency on financial markets vs. deposits
Consumption growth is correlated with credit growth
Correlation between retail sales growth and real household credit growth
300
0.80
Loan to deposit ratios (%)
0.70
250
0.60
200
0.50
0.40
150
0.30
100
0.20
0.10
50
0.00
-0.10
Croatia*
Poland*
Bulgaria*
Hungary*
Latvia*
Romania*
Ukraine+
Slovak R.
Czech R.
-0.20
Russia
Philippines
Malaysia
Brazil
Indonesia
India
Mexico
China
Argentina
Israel
Thailand
Chile
Korea
Czech R.
Slovakia
Turkey
Poland
Croatia
Bosnia
Bulgaria
Russia
Romania
Serbia
Hungary
Slovenia
Kazakhstan
Lithuania
Estonia
Ukraine
Latvia
0
Source: UniCredit Resarch, Fitch, IMF
 The more difficult (and more expensive) financing environment means that CEE banking sectors are
actively reducing their loan to deposit ratios. (chart 1)
 There are however big differences in the region as the Baltics, Ukraine and Kazakhstan relied more on non
deposit financing. Loan to deposit ratios were well exceeding 150% in these countries running into the
crisis. Bringing these loan to deposit ratios to 150% (still high) over two years would require about 10-15%
annual contraction of the loan book (assuming a 5% per annum deposit growth).
 Historical correlation shows that credit growth was positively correlated with retails sales growth (chart 2)
8
Indeed lending growth slowed dramatically in the last year with
many countries already showing negative y-o-y figures
Private sector lending growth (annualized 3M moving avg.)
EE
LV
LT
BG
RO
80.0
70.0
60.0
50.0
Private sector lending growth (annualized 3M moving avg.)
CZ
RU
KZ
TR
PL
UA
100.0
80.0
60.0
40.0
30.0
40.0
20.0
20.0
10.0
0.0
0.0
-10.0
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
Sep-06
-20.0
Jul-06
-20.0
Source: UniCredit Research, IMF IFS
 Private sector lending is contracting at around 10% annualized rate in the Baltic countries (chart 1).
Bulgaria and Romania are still showing positive numbers but the trend is downward here as well.
 Other countries avoided loan portfolios contraction so far (also “helped” by FX weakness in some countries)
but again the trend is downward as well.
 Despite lower loan to deposit ratios lending in Turkey, Poland and Czech Republic is also slowing but this
is probably more related to demand factors as well.
9
And this backdrop leads to a significant improvement in the CEE
region’s Achilles heel = improvement in current account balances
Romania: financing gap
Poland: financing gap
2.00%
3.00%
0.00%
2.00%
-2.00%
1.00%
-4.00%
0.00%
-6.00%
-1.00%
12M cumulated (C/A +
FDI) / GDP
6M cumulated (C/A +
FDI) / GDP
-8.00%
-10.00%
12M cumulated (C/A +
FDI) / GDP
6M cumulated (C/A +
FDI) / GDP
-2.00%
-3.00%
Turkey: financing gap
1.00%
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Dec-05
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
-4.00%
Dec-05
-12.00%
Latvia: financing gap
15.00%
12M cumulated (C/A +
FDI) / GDP
6M cumulated (C/A +
FDI) / GDP
0.00%
-1.00%
12M cumulated (C/A +
FDI) / GDP
6M cumulated (C/A +
FDI) / GDP
10.00%
5.00%
0.00%
-2.00%
-5.00%
-3.00%
-10.00%
-4.00%
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
-25.00%
Jun-06
-6.00%
Mar-06
-20.00%
Dec-05
-5.00%
Dec-05
-15.00%
Source: National Central Banks, UniCredit Research
10
Part of the missing demand was substituted by fiscal stimulus =
external financing risk converted to fiscal risk
Budget deficit / GDP (2010 minus 2007)
Public sector debt (% of GDP)
2.0
90
0.0
80
2008
2009E
2010E
70
-2.0
60
-4.0
50
-6.0
40
30
-8.0
Hungary
Poland
Turkey
Latvia
Croatia
Slovakia
Czech R.
Serbia
Romania
Ukraine
Slovenia
Bulgaria
HU
LT
SK
TK
RO
IT
HR
PL
UA
SRB
CZ
DE
LV
BG
SI
US
JP
UK
EE
RU
KZ
-14.0
Lithuania
0
Kazakstan
-12.0
Estonia
10
Russia
20
-10.0
Source: Finance ministries, UniCredit Research
 Kazakhstan & Russia faces the biggest deterioration in budget deficit partly due to falling commodity
prices and lower revenues. Hungary seems to be the only country which manages to have lower budget
deficit in 2010 than in 2007. (chart 1)
 But the level of total public sector debt is the lowest in Russia, Kazakhstan whilst Hungary will still have the
highest debt. Dynamics is however moving in favour of Hungary vs. Poland for instance (chart 2).
 Recently investors focused on Poland and Turkey due to sharply deteriorating dynamics and some
concerns about credibility.
11
Some CEE currencies still look undervalued and Baltics FX is still
stretched vs. CEE floating FX
Fixed FX still around 10% overvalued vs. floating FX
RUB, RON & PLN still undervalued vs. 5y REER trend
Current REER / 5y trend REER
4.0%
30.0%
Baltics, Bulgaria REER vs. CEE free floating REER
25.0%
2.0%
20.0%
0.0%
Overvalued
15.0%
-2.0%
Fixed FX overvalued
vs. free floating FX
10.0%
-4.0%
-6.0%
5.0%
Undervalued
-8.0%
0.0%
-10.0%
-5.0%
Lithuania
Hungary
Croatia
Estonia
Latvia
Bulgaria
Turkey
Czech R.
Poland
Romania
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Russia
-12.0%
-10.0%
Source: BIS, UniCredit Research
 Baltic and Bulgarian real effective exchange rate still looks around 10% overvalued vs. CEE free
floating FX but the level of divergence significantly declined recently on the back of CEE appreciation.
(chart 1)
 The RUB, RON and PLN still look about 5-10% undervalued vs. its own 5y trend whilst the other currencies
are around their respective fair values. (chart 2).
12
Your contacts
UniCredit Group
Gyula Toth
Vice President
EEMEA Economics & FI/FX Strategy
Global Economics & FI/FX Research
UniCredit Markets & Investment Banking
UniCredit CA IB AG
Tel: +43-(0)50505-82362
Imprint
Markets & Investment Banking
UniCredit CA IB AG
Global Economics & FI/FX Research
Julius Tandler Platz
1090 Vienna
13
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or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Any reports provided herein are provided for general information purposes only and cannot substitute the obtaining of independent financial advice. Private investors
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14
Disclaimer
The information in this publication is based on carefully selected sources believed to be reliable but we do not make any representation as to its accuracy or completeness. Any opinions herein reflect our judgement at the date hereof and are subject to change without notice. Any
investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Any reports provided herein are provided for general information purposes only and cannot substitute the obtaining of
independent financial advice. Private investors should obtain the advice of their banker/broker about any investments concerned prior to making them. Nothing in this publication is intended to create contractual obligations on any of the entities composing UniCredit Markets & Investment
Banking Division which is composed of (the respective divisions of) Bayerische Hypo- und Vereinsbank AG, Munich, Bank Austria Creditanstalt AG, Vienna, Bayerische Hypo- und Vereinsbank AG, Milan branch and certain of their subsidiaries.
Bayerische Hypo- und Vereinsbank AG is regulated by the German Financial Supervisory Authority (BaFin), Bank Austria Creditanstalt AG is regulated by the Austrian Financial Market Authority (FMA) and Bayerische Hypo- und Vereinsbank AG, Milan branch is regulated by
Commissione Nazionale per le Società e la Borsa (Consob).
Note to UK Residents:
In the United Kingdom, this publication is being communicated on a confidential basis only to clients of UniCredit Markets & Investment Banking Division (acting through Bayerische Hypo- und Vereinsbank, London Branch ("HVB London") and/or CA IB International Markets Limited
and/or CAIB Corporate Finance Limited) who (i) have professional experience in matters relating to investments being investment professionals as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ("FPO"); and/or (ii) are falling
within Article 49(2) (a) – (d) ("high net worth companies, unincorporated associations etc.") of the FPO (or, to the extent that this publication relates to an unregulated collective scheme, to professional investors as defined in Article 14(5) of the Financial Services and Markets Act 2000
(Promotion of Collective Investment Schemes) (Exemptions) Order 2001 and/or (iii) to whom it may be lawful to communicate it, other than private investors (all such persons being referred to as "Relevant Persons"). This publication is only directed at Relevant Persons and any
investment or investment activity to which this publication relates is only available to Relevant Persons or will be engaged in only with Relevant Persons. Solicitations resulting from this publication will only be responded to if the person concerned is a Relevant Person. Other persons
should not rely or act upon this publication or any of its contents.
The information provided herein (including any report set out herein) does not constitute a solicitation to buy or an offer to sell any securities. The information in this publication is based on carefully selected sources believed to be reliable but we do not make any representation as to its
accuracy or completeness. Any opinions herein reflect our judgement at the date hereof and are subject to change without notice.
We and/or any other entity of the UniCredit Markets & Investment Banking Division may from time to time with respect to securities mentioned in this publication (i) take a long or short position and buy or sell such securities; (ii) act as investment bankers and/or commercial bankers for
issuers of such securities; (iii) be represented on the board of any issuers of such securities; (iv) engage in "market making" of such securities; (v) have a consulting relationship with any issuer. Any investments discussed or recommended in any report provided herein may be unsuitable
for investors depending on their specific investment objectives and financial position. Any information provided herein is provided for general information purposes only and cannot substitute the obtaining of independent financial advice.
HVB London is regulated by the Financial Services Authority for the conduct of investment business in the UK. CA IB International Markets Limited, London, and CA IB Corporate Finance Limited, London, two subsidiaries of Bank Austria Creditanstalt AG, are authorised and regulated
by the Financial Services Authority.
Notwithstanding the above, if this publication relates to securities subject to the Prospectus Directive (2005) it is sent to you on the basis that you are a Qualified Investor for the purposes of the directive or any relevant implementing legislation of a European Economic Area ("EEA")
Member State which has implemented the Prospectus Directive and it must not be given to any person who is not a Qualified Investor. By being in receipt of this publication you undertake that you will only offer or sell the securities described in this publication in circumstances which do
not require the production of a prospectus under Article 3 of the Prospectus Directive or any relevant implementing legislation of an EEA Member State which has implemented the Prospectus Directive.
Note to US Residents:
The information provided herein or contained in any report provided herein is intended solely for institutional clients of UniCredit Markets & Investment Banking Division acting through Bayerische Hypo- und Vereinsbank AG, New York Branch and HVB Capital Markets, Inc. (together
"HVB") in the United States, and may not be used or relied upon by any other person for any purpose. It does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other US federal or state securities laws, rules or
regulations. Investments in securities discussed herein may be unsuitable for investors, depending on their specific investment objectives, risk tolerance and financial position.
In jurisdictions where HVB is not registered or licensed to trade in securities, commodities or other financial products, any transaction may be effected only in accordance with applicable laws and legislation, which may vary from jurisdiction to jurisdiction and may require that a
transaction be made in accordance with applicable exemptions from registration or licensing requirements.
All information contained herein is based on carefully selected sources believed to be reliable, but HVB makes no representations as to its accuracy or completeness. Any opinions contained herein reflect HVB's judgement as of the original date of publication, without regard to the date
on which you may receive such information, and are subject to change without notice.
HVB may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in any report provided herein. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past
performance should not be taken as an indication or guarantee of further performance, and no representation or warranty, express or implied, is made regarding future performance.
HVB and/or any other entity of UniCredit Markets & Investment Banking Division may from time to time, with respect to any securities discussed herein: (i) take a long or short position and buy or sell such securities; (ii) act as investment and/or commercial bankers for issuers of such
securities; (iii) be represented on the board of such issuers; (iv) engage in "market-making" of such securities; and (v) act as a paid consultant or adviser to any issuer.
The information contained in any report provided herein may include forward-looking statements within the meaning of US federal securities laws that are subject to risks and uncertainties. Factors that could cause a company's actual results and financial condition to differ from its
expectations include, without limitation: Political uncertainty, changes in economic conditions that adversely affect the level of demand for the company‘s products or services, changes in foreign exchange markets, changes in international and domestic financial markets, competitive
environments and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.
UniCredit Markets & Investment Banking Division
Bayerische Hypo- und Vereinsbank AG, Munich; Bank Austria Creditanstalt AG, Vienna; CA IB International Markets AG, Vienna; Bayerische Hypo- und Vereinsbank AG, Milan branch
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