Download BBB4 presentation Guillaume TRESCA - CA

Hungary and
the Eurozone
crisis: still
vulnerable?
Guillaume TRESCA
EMEA Strategist
[email protected]
09 September 2011
research.ca-cib.com
Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI)
and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of
our regulation by the Financial Services Authority are available from us on request.
European sovereign debt
crisis
It’s the politics, stupid
09 September 2011
Europe took some major steps already this year…
new
• National fiscal
frameworks by 2012
• Bond buybacks on
secondary market
• Pre-emptive
intervention in « nonnew
programme »
countries
• Recapitalisation of
distressed MFI
3
Portugal
Eurozone
countries
€78bn package (May
2011)
Ireland
Old and new loans:
EFSF
€440bn
(+EFSM €60bn)
IMF
€80bn package
(Nov. 2010)
• Maturity extension
from 7.5 to 15-30
years
new
• interest rate
reduction from 4.5%
to 3.5%
Greece
( €250bn)
First package (May
2010): €110bn
2nd package (July
2011):
ESM
-Takes over in 2013
- No senior status;
- CACs
new
Private Sector
Involvement
- €37bn debt exchange
- 4 options for banks
- €12.6bn bond buybacks
(21% haircut)
09 September 2011
• €109bn (of which
20bn for bank recap
and 30bn guarantee
to ECB for collateral
eligibility)
• €30bn privatisation
• €50bn PSI
• Marshall Plan: BEI
and structural funds
new
…but more needs to be done
4
The 21 July ‘Euro deal’ failed to stabilise market sentiment for 3 main reasons:
The required parliamentary approval implies that the larger and more flexible EFSF will not be operational before end-September.
EFSF 2.0 would prove too small to bail out Spain and Italy should those two countries be cut off from capital markets.
Concerns have risen over the French AAA rating following the US downgrade
If the pressure rises to yet unprecedented levels, there would be basically two options to consider, with both of them facing
strong political opposition:
A (third) increase in the size of the EFSF, through larger state guarantees or a downgrade of the facility from AAA to AA
The issuance of jointly-guaranteed Eurobonds
A minimal Fiscal Union is politically difficult, but technically feasible
Downgrade risks remain
The crisis reached the (semi) core: CDS 5Y
120
12
AA
AA
bp
100
10
AA-
80
number of ratings changes (RHS)
60
A+
A
40
A-
20
BBB+
0
Jan-10
8
avg. Gr+Ir+Po+Sp+It rating (LHS)
6
4
2
BBB
Apr-10
Jul-10
Oct-10
Germany
Source: Bloomberg, Crédit Agricole CIB
09 September 2011
Jan-11
Apr-11
France
Jul-11
BBB-
0
Q2 05
Q2 06
Q2 07
Q2 08
Source: Bloomberg, Crédit Agricole CIB
Q2 09
Q2 10
Q2 11
On the danger of self-fulfilling prophecies
5
Sovereigns can be solvent, yet illiquid. At current market rates, Greece, Ireland, Portugal and Spain are all on
unsustainable public debt paths.
Crucially, the 21 July deal did secure lower borrowing costs for Ireland and Portugal as well.
We believe that PSI and debt restructuring should not be applied to other countries outside Greece.
Pre-emptive restructuring is no panacea. Haircuts would not spare governments drastic primary balance adjustment efforts.
Financial and political contagion risks are likely understated. Most countries are Too-Interconnected-Too-Fail.
Debt restructuring potentially constraints the capacity of fiscal policy to run counter-cyclical policies
Debt-to-GDP ratios at current market rates
Debt-to-GDP ratios at pre-crisis market rates
(2000-2009 average of 10-year yields)
180
%GDP
180
160
160
140
140
120
120
100
100
80
80
60
60
40
%GDP
40
10
11
12
Ireland
13
14
Portugal
Source: Eurostat, Crédit Agricole CIB
09 September 2011
15
16
17
Spain
18
19
Italy
20
10
11
12
Ireland
13
14
Portugal
Source: Eurostat, Crédit Agricole CIB
15
16
17
Spain
18
19
Italy
20
Greece – still lots of hurdles to clear
6
Deficit reduction is
lagging this year
Timing of debt
exchange/rollover/
buybacks still uncertain
+ collateral issue
GDP contraction to reach
5% instead of 3.8%
Source: IIF, Crédit Agricole CIB
09 September 2011
A busy (and risky) second half…
7
Date
5-Jun
24-Jun
29-30 Jun
7 Jul
German Federal Court
unlikely to reject EFSF
ECB expected to hint at
a pause
Obama to save us all?
Portugal
EU
Greece
EMU
Event
Portuguese general election
EU Council summit (Euro Plus Pact)
Relevance
+
+++
Greek vote on austerity measures
++
ECB meeting (25bp rate hike)
+++
13 Jul
EU
EU bank stress tests release
++
21 Jul
EU
EU Council summit (Greek package + EFSF 2.0)
+++
5 Aug
US
US downgrade from S&P
+++
8 Aug
EMU
ECB starts buying Italian and Spanish bonds
+++
9 Aug
US
FOMC (ZIRP commitment until mid-2013)
+++
16 Aug
FR-GE
Franco-German summit
++
26-28 Aug
World
Jackson Hole Symposium
+++
3 - 10Y Bond auctions
+++
30 Aug
Italy
30 Aug
Greece
Fifth IMF Programme Review (delayed)
Early Sep
Greece
Disbursement of 6th tranche for Greece (EUR8bn)
5Y Bond auction
+
1 Sep
Spain
4 Sep
Germany
6 Sep
Greece
Germany, Holland and Finland hold a meeting on the Greek collateral issue
+
6 Sep
France
Parliament sessions in France & Finland on EFSF contributions
+
7 Sep
Germany
8 Sep
EMU
+++
8 Sep
German elections in Mecklenburg-Vorpommern
German Constitutional Court hearing on first Greek aid, EFSF
+++
ECB meeting
+++
US
President Obama proposals on fiscal policy
+++
9 Sep
Italy
Italian parliament vote on fiscal consolidation package
+
9 Sep
Greece
Greek bondholders to give their commitment to Greek debt exchange offers
++
11 Sep
Germany
12 Sep
Greece
13 Sep
Italy
14 Sep
Ireland
Parliament reconvenes in Ireland
15 Sep
Spain
Bond auction
15 Sep
EU
16-17 Sep
EU
18 Sep
Germany
20 Sep
US
23-25 Sep
09 September 2011
Country
World
German elections in Lower Saxony
Fifth IMF Programme Review (tbc)
++
5Y-plus Bond auctions
++
++
Presentation to IMF board of first reviews in Portugal/Ireland
Informal Eurogroup/EcoFin meetings
German elections in Berlin
FOMC
++
+
+++
IMF-World Bank meeting in Washington
27 Sep
Italy
2Y Zero coupon bond auction
28 Sep
Italy
Linker auction
+
+
29 Sep
Germany
Parliament session in Germany on EFSF changes
++
29 Sep
Italy
3 - 10Y Bond auctions
++
Greece – debt dynamics post 21 July deal
8
The second bailout package for Greece includes.
EUR109bn of IMF/EFSF money (of which 20 bn for GGB buybacks, 35 bn to credit-enhance the new exchanged GGBs, 20bn for
bank recapitalisation and 34 bn for deficit financing)
EUR30bn of privatisations; EUR50bn of PSI; Marshall Plan: BEI and structural funds.
Until the exact numbers are known for the debt exchange, the final impact on the debt dynamics looks uncertain
The package should improve Greece’s fiscal position, provided that it is implemented in full including PSI, credit
enhancement, privatisations, buybacks, and structural reforms. IIF projections point to a decline in the debt-to-GDP ratio
from 2013 to around 120% by 2020.
Greece: debt-to-GDP ratio official forecasts
Greece: Debt Sustainability Matrix (PB to stabilise debt in 2013)
Interest rates
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Nominal GDP growth
1.0
2.0
4.4
2.7
5.2
3.5
6.0
4.3
6.8
5.1
7.6
5.9
8.4
6.7
9.2
7.5
10.1
8.3
10.9
9.2
Source: Eurostat, Crédit Agricole CIB
09 September 2011
3.0
1.1
1.9
2.7
3.5
4.3
5.1
5.9
6.7
7.5
4.0
-0.5
0.3
1.1
1.9
2.7
3.4
4.2
5.0
5.8
5.0
-2.1
-1.3
-0.5
0.3
1.1
1.8
2.6
3.4
4.2
6.0
-3.6
-2.8
-2.0
-1.3
-0.5
0.3
1.0
1.8
2.6
Source: IIF, Crédit Agricole CIB
Idée reçue – Greece has to default and/or to exit the Euro area
9
Concerns over a Greek default have intensified on: a) negative surprises on budget data (2010 revision+Q111 revenue
slippage); b) a political shift towards a harder line in core countries (Germany, Finland).
One merit of the restructuring debate is to try and address the underlying issue of solvency while making it clear that any
financial support cannot come without conditionality.
However, we view as completely irrational the option of Greece leaving the Eurozone.
No Member State can be expelled from the EMU. Even if an exit is agreed upon, the country would have to leave the EU
(Athanassiou ECB working paper 2009).
The Greek banking system would likely be devastated, losing access to ECB refinancing.
Regaining monetary sovereignty would leave Germany with a very strong Deutsch Mark and a high risk of contagion.
Exposure to Greek public debt by bank nationality
Eurozone break-up: costs outweigh benefits
PROS
GERMANY
- No further bailouts
CONS
- Stronger currency weighing on export
growth
- National monetary policy. Lower
inflation.
- Contagion to the banks’ balance
sheets
- Likely recessions in the main trading
- Lower borrowing costs (flight-to-safety) partners
EXITING
COUNTRY
- Currency devaluation. Temporary rise - Bank runs, capital outflows, no access
in price competitiveness.
to global debt markets
- IMF support in case of debt
restructuring
- QE?
- Likely restructurings of the sovereign
and the banks
- Exit of the EU
- Negative impact of currency
devaluation in the long-run
- Higher inflation
09 September 2011
140
USDbn
120
100
80
Q2 2010
Q3 2010
60
40
20
0
Greece
Germany
France
Source: BIS, Crédit Agricole CIB
Other EMU
Italy
Spain
Ireland and Portugal on track, so far
10
News from Ireland in particular, and from Portugal to a lesser extent (despite some slippage), have been encouraging
since the beginning of their programme. The main risk, in our view, remains on nominal GDP growth in the current
environment.
Ireland’s public debt dynamics under extreme scenarios
140
Portugal’s public debt dynamics under extreme scenarios
(central + EUR20bn additional
net bank recapitalisation)
%GDP
130
120
140
%GDP
(nom. GDP 2.5%; IR 5.5%; PB 0%)
130
(nom. GDP 3.5%; IR 6.5%; PB 0%)
120
110
110
100
100
(nom. GDP 6%; IR 5%; PB +1%)
90
(nom. GDP 5%; IR 4.5%; PB +2%)
90
80
80
10
11
12
13
14
15
16
17
18
19
20
10
Source: Eurostat, Crédit Agricole CIB
09 September 2011
13
14
15
16
17
18
19
20
Portugal: Debt Sustainability Matrix (PB to stabilise debt in 2013)
Ireland: Debt Sustainability Matrix (PB to stabilise debt in 2013)
Interest rates
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
12
Source: Eurostat, Crédit Agricole CIB
Source: Eurostat, Crédit Agricole CIB
Nominal GDP growth
1.0
2.0
2.1
1.0
2.6
1.5
3.1
2.1
3.6
2.6
4.1
3.1
4.7
3.6
5.2
4.1
5.7
4.6
6.2
5.1
11
central case (nom.GDP 4%; IR 5%; PB +1% + EUR6bn privatisations)
central case (nom.GDP 5.5%; IR 5.5%; PB +1.0%)
3.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.6
4.1
4.0
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
5.0
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
6.0
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Interest rates
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Nominal GDP growth
1.0
2.0
1.3
0.3
1.8
0.8
2.3
1.3
2.8
1.8
3.3
2.3
3.8
2.8
4.3
3.3
4.8
3.8
5.4
4.3
Source: Eurostat, Crédit Agricole CIB
3.0
-0.7
-0.2
0.3
0.8
1.3
1.8
2.3
2.8
3.2
4.0
-1.7
-1.2
-0.7
-0.2
0.3
0.7
1.2
1.7
2.2
5.0
-2.7
-2.2
-1.7
-1.2
-0.7
-0.2
0.2
0.7
1.2
6.0
-3.6
-3.1
-2.7
-2.2
-1.7
-1.2
-0.7
-0.2
0.2
ECB rates – time for a break
11
The ECB will have to re-assess the fundamental outlook for activity and price conditions in the Euro area.
As a result of downside risks to activity and, to a lesser extent, lower inflation risks, the Governing Council is likely to leave
policy rates on hold in the near-term. We expect no more rate hike for this year.
A rate cut is highly unlikely in our view unless the Eurozone falls back into recession and deflation risks re-emerge.
The rates normalisation process could resume in H2 2012, with a tightening bias moving into 2013, provided that economic
growth picks up and the situation stabilises in the sovereign debt markets.
Falling leading indicators…
3.0
… no longer consistent with ECB rate hikes
std dev.
50
bp
64
2.0
60
1.0
25
56
0.0
-1.0
0
52
-25
48
-2.0
-3.0
-4.0
44
-5.0
-50
-6.0
99
00
01
02
03
PMI composite
04
05
06
07
08
Econ. Sentiment Index
09
10
11
Eurocoin
Source: Markit, European Commission, Crédit Agricole CIB (business confidence
surveys are normalised over the 1999-2007 period)
09 September 2011
40
change in Repo rate
Eurozone PMI composite
-75
99
00
01
02
03
04
Source: Markit, Crédit Agricole CIB
05
36
06
07
08
09
10
11
12
Ouzo crisis: Hungary is
not immune
09 September 2011
Hungary: still vulnerable, remember one year ago
13
Vulnerability index
Eastern Europe looks like the most vulnerable region, only partly
due to the trade exposure to Europe.
Asia and LatAm are safer with strong economic recovery based on
domestic demand.
Eastern Europe ahead
Arithmetic average
EM average
Asia
Latam
Central Europe
MEA
EM members of G20
BRICs
09 September 2011
2.46
2.20
2.28
3.44
2.23
2.29
2.29
Vulnerability ranking (from
riskiest to safest)
Hungary
3.68
Czech rep.
3.45
Romania
3.41
Poland
3.21
Vietnam
3.21
Ukraine
3
South Africa
2.89
Turkey
2.87
India
2.55
Morocco
2.53
Brazil
2.52
Kazakhstan
2.47
Mexico
2.44
Russia
2.41
Israel
2.31
Malaysia
2.27
Egypt
2.21
Philippines
2.2
Indonesia
2.17
Korea
2.15
Thailand
2.13
Taiwan
2.03
Singapore
2
Argentina
1.88
Hong Kong
1.85
UAE
1.84
China
1.69
Saudi Arabia
1.57
Hungary: where are the risks coming from?
14
A highly leverage banking sector
Despite the credit crunch, the banking sector is still printed high credit-to-deposit ratio, 133%, which suggests that the
leveraging is still significant and so the sector could be very sensitive to another bout of risk aversion
The external debt threat
Very high external debt which has hardly declined
Significant portfolio inflows -> share of foreigners in bond market has steadily increased
High FX government debt (roughly 38%)
The Hungarian external debt threat
160
Credit-to-deposit ratio: a leveraged banking sector
%GDP
140%
Hungary: 133%
140
120%
120
100%
100
80%
80
60%
60
40
40%
20
20%
0
0%
RUB
TRY
CZK
RON
PLN
KZT
UAH
HUF
E Europe
MEA
Asia
Latam
Source: Moody’s, Bloomberg, DataStream, Crédit Agricole CIB
09 September 2011
Ouzo crisis: Hungarian bank exposure is not worrying
15
Key channel is external bank funding
Any EZ debt restructuring would trigger tensions in the European System.
But the Vienna Initiative has made things smoother.
Leveraged banking sector.
CEE bank banks exposed to EU Periphery banks
Hungary is not the worst one.
Some local subsidiaries of foreign banks are funded from domestic sources.
But leveraged banking sector.
But any freeze of interbank markets would be disastrous
CEE banks are exposed
0.2%
0.0%
0.0%
0.0%
0.0%
Source: Bloomberg, BIS, Crédit Agricole CIB
Czech
Republic
Estonia
Latvia
Russia
Hungary
Poland
Turkey
Romania
Bulgaria
09 September 2011
2.7%
0.3%
0.2%
0.0%
0.0%
0.0%
Czech
Republic
1.7%
0%
Estonia
4.3%
5%
17.1%
Latvia
10%
18.7%
Hungary
12.5%
15%
CEE claims on Greece as % of total foreign claims
Russia
20%
38.3%
Poland
25%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Turkey
CEE claims on Greece as % GDP
Romania
29.8%
30%
Bulgaria
35%
Hungary: Highly sensitive to the Eurozone slowdown
A very opened economy
16
Automotive sector is slowing down (auto sales)
Highly sensitive to the EU slowdown
4.5
Boosted by Germany but…
mn, annual rate
seasonally-adj.
4.0
3.5
Exports are dragging higher the economy
3.0
Export revenue posted double digit growth
2.5
It boosts IP sector but it should slow in the remainder of the year
2.0
The slack is unlikely to be filled by the private consumption
1.5
1.0
Automotive, the backbone of the Central Europe recovery
0.5
05
06
07
08
Allemagne
90%
77%
11
Espagne
Italie
40%
35%
70%
30%
Germany: 26%
60%
25%
50%
20%
40%
15%
30%
10%
21%
20%
5%
UAE
Mexico
Brazil
Philippines
India
Indonesia
Saudi
Egypt
Korea
Argentina
Israel
China
Taiwan
Thailand
South
EU
Turkey
East.
Eur.
Ukraine
Asia
Malaysia
USA
Vietnam
Middle
East
Morocco
Africa
Russia
Japan
Romania
LatAm
0%
Singapore
2%
Kazakhsta
1%
Hong
1%
Poland
1%
0%
Czech
0%
4%
Hungary
10%
France
10
Exports to EU : Hungary highly sensitive (% of GDP)
Exports structure (%exports)
80%
09
Source: Bloomberg, Moody’s, Credit Agricole CIB
09 September 2011
The German economy is not immune to the confidence shock
17
The sovereign debt crisis and the fears of a US double-dip have weighted on business confidence.
The German IFO in particular suffered a ‘reality check’ in August, although current conditions remain supportive.
German GDP slowed down sharply in Q2 (to +0.1% QoQ), but this came after a very strong performance in Q1 (+1.3%
QoQ) and the first indication for Q3 are consistent with a modest rebound.
The two main pillars of German ‘boom’ remain in place as both exports and investment in machinery and equipment have
risen further in Q2.
In our central case, we look for a deceleration in German GDP growth to 1.4% in 2012, from 2.9% this year.
German Q2 GDP still strong on average
German confidence surveys suffer a ‘reality check’
std dev.
4
3.0
3
2.0
2
1.0
1
0.0
0
-1.0
-1
-2.0
-2
-3.0
IFO
-3
-5.0
2008
ZEW
-5
00
01
02
03
04
05
06
Source: Markit, ZEW, Cesifo, Crédit Agricole CIB
09 September 2011
GDP
-4.0
PMI manuf.
-4
QoQ %
07
08
09
10
11
2009
Private consumption
2010
Investment
Source: Destatis, Crédit Agricole CIB
Net exports
2011
Inventories
Hungary: a convalescent economy
18
Hungary is lagging the global recovery
The economy will likely post a meager 2% in 2011-12
Well below the 6.3% EM growth expected
Nasty Q2, Q3 should not be better according to PMIs data
Exports is the only driver and it will slowdown
The good 2010’s performance will not be replicable
Muted domestic demand will not offset the exports slowdown
Fiscal measures impact?
Activity: it is better but not the old good days
20
YoY%
GDP level is far from pre-crisis levels.
60
130
15
55
10
5
120
45
115
-5
Poland
Czech
110
-10
Industrial production
-15
Hungarian PMI (rhs)
40
Jun-06
Jun-07
Hungary
105
35
-20
-25
Jun-05
Romania
125
50
0
base 100=2005
Jun-08
Jun-09
Jun-10
30
Jun-11
100
95
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Source: HSO, PSO, RSO, CZO, Crédit Agricole CIB
09 September 2011
And the domestic demand is still muted
19
Muted domestic and private demand
The FX loan burden
The domestic demand will not be enough to offset the export
slowdown
No strong rebound expected
90
% of total loan
80
230
HUF depreciates
210
70
Unemployment still high even it is improving
60
% of FX loan
50
CHF/HUF (rhs)
New fiscal measures may cap demand? Ricardian equivalence
40
Higher savings due to the pension system reform
30
Credit is capping the domestic demand rebound
10
190
170
20
150
0
Jun-04
Hammered banks and the new tax levy will not favor credit supply
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
130
Jun-11
Credit growth far from its pre-crisis level.
Source: NBH, HSO, Bloomberg, Crédit Agricole CIB
FX loans issue resolved? Not yet…
Domestic demand will not be enough
70
%
Consumer credit
Employment market: still convalescent
%
retail sales (rhs, yoy%)
60
50
retail sales growth = 0
000'
10
%
unemployment (thousands)
8
550
6
500
12
450
10
4
14
private wages (3mmm, yoy%,rhs)
40
2
30
0
400
8
20
-2
350
6
300
4
-4
10
-6
0
-10
Jun-05
-8
Low credit growth, retail sales still negative
09 September 2011
Jun-07
Jun-09
-10
Jun-11
250
200
Jun-01
tax changes
Jun-03
Jun-05
Jun-07
Jun-09
2
0
Jun-11
Budget deficit: it is not yet over but it is not Greece
20
The March reform is on track but the real test is ahead
Markets have bought the fiscal reform and the pension assets have secured the 2011 financing
Still implementation risks. It will be crucial
But for how long? Important is the 2012 budget discussions
Exposed to market sentiment
Short term gain, long term pain
IMF and EU reimbursement will kick in 2012-13
But for how long? Important is the 2012 budget discussions
Budget: it is better but for how long?
Foreign holding of HGB is getting higher
(% total)
YoY%
20
HUF bn
0
expenditures
15
12m rolling budget balance (rhs)
revenue
-200
10
-400
5
-600
-800
-5
-1000
-10
-1200
-15
Jun-08
Jun-09
Jun-10
-1400
Jun-11
Source: NBH, Bloomberg, Crédit Agricole CIB
09 September 2011
Eurozone convergence: not yet for sure
21
Eurozone Convergence Index
0.60
0.58
0.56
0.54
0.52
0.50
0.48
0.46
0.44
0.42
0.40
Jun-03
Czech Rep
Hungary
Poland
0.43 signals in the past
Euro convergence
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Hungary is lagging
Czech Republic
Hungary
Poland
Romania
not before 2014
>2020
no rush but still desire
2015, wants to join
2016 at best
not in view
2015 at best
2015 is too optmist
3
0
2
1
Budget balance (% of GDP)
2011 EC estimate
-4.6
-4.7
-6.6
-4.9
Public sector debt (% of GDP)
2011 EC estimate
43.5
77.8
57.3
35.8
HICP inflation
(YoY%, average over past 12 months)
1.5
4.4
2.6
6.5
+460
+310
+360
No
No
No
Government EUR entry date
Crédit Agricole CIB estimate of EUR entry date
Maastricht criteria met (out of 5)
10Y bond/bund spread
(bp, 12-month average)
FX stability
(Member of ERM II)
09 September 2011
+107
No
Source: Bloomberg, Crédit Agricole CIB
22
Rates and FX: bumpy
road ahead
09 September 2011
Rates outlook: It is an FX story
23
NBH on the side lines
It front-loaded rates hikes in Q4 10 and 11
Mild inflationary pressures: Inflation increase was an excuse to hike
It is targeting inflation but FX and risk aversion are the monetary drivers finally
Rates on hold through 2011 but be aware of any surprising rate move!
Higher inflation due to external factors – food and energy prices
Domestic demand pressures are limited but core inflation is rising
Wage increases remain moderate
The central bank seems to have a slight tightening bias.
Market is now pricing in far-fetched cuts
Building inflationary pressures
25
10
YoY%
bp
today
forecast
9
inflation
forecast
core inflation
8
1m ago
3m ago
0
7
6
5
-25
4
3
2
-50
1
0
Jul-07
1m
Jul-08
09 September 2011
Jul-09
Jul-10
Jul-11
Jul-12
2m
3m
6m
9m
Sources: Bloomberg, Credit Agricole CIB
12m
Inflation is not an issue
24
EM policy rates: how low is too low?
Real policy rates (current - %)
6%
4%
China and
Brazil: not the
most at risk
Turkey: rates far
below their precrisis level
ZAR
BRL
CNY
RON
2%
TRY
0%
MXN
CZK
RUB
-2%
-4%
-6%
-1200
HKD
SAR
M ost EM CBs could quikly fall
behind the curve, should
global commodity prices surge
-1000
-800
-600
INR
-400
SGD
-200
0
200
Policy rates: current vs. beg-2008 (nom inal - bp)
Inflation (QoQ saar)
14%
12%
10%
8%
6%
4%
2%
0%
-2%
06
07
08
09
10
11
Source: Bloomberg, DataStream, Credit Agricole CIB
09 September 2011
HUF: it is a risk aversion story
25
Past strong performance is far-fetched
Improvement as the government said nothing while the environment has not changed
Not really hurt by the MENA turmoil
Strong expectations about the fiscal package
Crystal ball and risk aversion
A scoop: we do not have a model
In a worse case scenario, a spike above 300 is likely
It should remain above 270 until the parliamentary approval of the Greek package ratification
Structural issues stil cap the appreciation trend
FX liabilities
Long term deficit issue
Widening of the CA deficit as the domestic demand will pick up
CACIB forecast for Central Europe
Central Europe
06-Sep
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Czech Rep.
EUR/CZK
24.4
24.0
24.0
23.8
23.8
23.8
Hungary
EUR/HUF
277
268
268
268
268
268
Poland
EUR/PLN
4.22
3.95
3.95
3.90
3.90
3.90
Romania
EUR/RON
4.25
4.20
4.20
4.20
4.20
4.20
Sources: Bloomberg, Credit Agricole CIB
09 September 2011
HUF: it is a risk aversion story
26
Room for appreciation is limited (REER term)
Capital flows to Ems are back
1400
Private capital f low s to EMs (total)
FDI
Commercial bank lending
25%
1200
20%
REER: now vs. Average (mid-07 to mid-08)
15%
1000
10%
800
5%
600
0%
IIF
forecasts
USD Bn
400
-5%
200
-10%
0
-15%
-200
-20%
BRL
IDR
ZAR
RON
HUF
RUB
THB
CZK
PLN
TRY
95
KRW
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Risk aversion and HUF
295
EURHU
60
EURHUF
290
50
VIX (rhs)
285
280
40
275
30
270
265
20
260
10
255
250
Jan-10
0
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Sources: Bloomberg, Credit Agricole CIB
09 September 2011
CHF: it is a risk aversion story, as well!
27
CHF: Widening peripheral bond spreads to provide further lift
Widening European bond spreads have lifted CHF
Risk aversion demand
CHF sensitivity: a 1% widening in Spain-German 10Y bond spread
= 3.86% CHF NEER
170
CHF Index
%
3.5
160
CHF NEER
Appreciation potential until September
3.0
150
Spread Spain Germany 10Y (rhs)
Can Switzerland take the currency pain?
2.5
140
2.0
A 50% decrease in competitiveness
130
But Switzerland is different->balance of payments peculiarities,
luxury goods are less price sensitive, significant importer
120
Swiss bank intervention -> rate cuts, swap liquidity auctions
100
Sep-08
1.5
1.0
110
0.5
0.0
Sep-09
Sep-10
Forecasts (CHF and HUF)
06-Sep
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Switzerland
EUR/CHF
1.20
1.20
1.28
1.30
1.34
1.38
Hungary
EUR/HUF
277
268
268
268
268
268
CHF/HUF
231
223
209
206
200
194
Sources: Bloomberg, Credit Agricole CIB
09 September 2011
4.0
CHF: the SNB is not doomed to fail but…
28
The SNB decision to set the minimum exchange rate against the EUR at 1.20 is a brave step
It will accumulate rather than run down its FX currency reserves. Therefore, it does not face a constraint in terms of scale
on this front.
Switzerland is not facing an inflation threat
Most in the market would accept the CHF had become overvalued
More credible than a peg. The SNB has had some modest success already using other forms of intervention.
Invariably, the SNB also faces a number of problems.
A “line in the sand” which will be an inevitable target for the market to test the ECB’s resolve. A more opaque target may
not have had the same announcement effect, but it could have allowed for greater flexibility
The SNB is not just fighting against the market, it is fighting against peripheral fundamentals
Initial success does not mean lasting success. The announcement effect has been large today for a market caught the
wrong way
09 September 2011
29
Forecasts
09 September 2011
Forecasts - Macroeconomics
09 September 2011
USA
JAPAN
EUROZONE
Germany
France
Italy
Spain
Greece
Norway
Sweden
Switzerland
Canada
Australia
New Zealand
United Kingdom
Asia
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
Latin America
Argentina
Brazil
Mexico
Emerging Europe
Czech Republic
Hungary
Poland
Russia
Romania
Turkey
Africa & Middle East
Algeria
Egypt
Kuwait
Lebanon
Morocco
Qatar
Saudi Arabia
South Africa
United Arab Emirates
Tunisia
Total
Industrialised countries
Emerging countries
Real GDP (YoY. %)
10
11
12
3.0
1.6
1.8
4.0
-0.7
2.9
1.7
1.7
1.1
3.6
2.9
1.4
1.4
1.6
1.3
1.2
0.8
0.6
-0.1
0.6
0.4
-4.4
-4.5
-1.3
0.3
0.7
2.2
5.4
4.3
2.5
1.6
1.9
2.2
3.1
2.8
3.1
2.7
2.5
3.1
1.5
2.0
3.5
1.4
1.1
1.2
9.2
7.8
7.9
10.3
9.3
9.0
6.8
6.3
6.5
8.5
7.4
7.8
6.1
5.8
5.8
6.1
5.1
6.0
7.2
4.0
5.5
7.6
4.9
5.4
14.5
6.7
6.9
10.8
5.8
6.3
7.8
4.7
5.7
6.8
5.8
6.2
6.6
4.0
4.4
7.0
4.0
4.0
7.5
4.0
4.3
5.3
4.0
4.8
4.2
3.7
3.4
2.3
2.3
2.5
1.2
1.9
2.0
3.8
3.6
3.5
4.0
3.7
3.3
-1.3
1.5
2.9
7.5
5.0
4.0
4.2
4.2
4.3
4.1
4.1
4.3
5.2
1.9
4.0
3.2
3.5
4.4
7.5
1.3
6.0
3.2
3.5
4.4
14.0
15.8
6.0
3.8
5.5
4.4
2.5
3.5
4.0
2.0
3.4
3.8
3.4
1.0
3.0
4.9
3.7
3.9
2.7
1.4
1.8
7.6
6.3
6.4
10
1.3
-1.0
1.6
1.2
1.7
1.6
2.0
4.7
2.4
1.2
0.7
1.8
2.9
2.3
3.3
4.6
3.3
2.4
9.5
5.1
3.0
1.7
3.8
2.8
1.0
3.3
9.2
6.8
17.0
5.8
4.2
7.0
1.5
4.9
2.6
8.8
6.1
8.3
5.0
3.9
11.1
4.0
4.3
1.4
-2.2
5.3
4.3
1.0
4.4
3.1
1.2
5.3
CPI (YoY. %)
11
3.0
0.6
2.6
2.6
2.2
2.2
2.9
3.1
1.7
3.1
1.0
3.0
3.5
3.9
4.5
6.0
5.3
4.7
9.0
6.1
4.1
2.9
4.9
5.6
2.4
4.2
17.8
6.3
17.0
5.0
4.0
6.9
2.3
4.3
4.3
8.5
7.0
7.0
5.6
4.8
10.0
4.2
5.6
3.0
2.7
5.6
4.7
3.1
4.7
4.3
2.6
6.1
12
1.8
0.9
1.8
2.3
1.7
1.3
1.9
1.8
1.8
2.6
1.2
2.1
3.3
3.3
2.7
4.6
4.0
3.8
6.4
5.8
3.6
2.5
4.8
4.0
2.8
4.5
11.5
6.1
17.0
4.5
4.0
7.8
2.0
3.5
3.1
11.0
5.0
7.0
5.2
4.3
9.3
4.3
3.0
2.7
3.9
4.1
5.0
3.9
5.0
3.4
1.8
5.3
Current Account (% GDP)
10
11
12
-3.2
-3.3
-3.3
3.6
2.7
3.3
-0.4
-0.3
0.2
5.7
5.3
5.4
-1.7
-2.6
-1.2
-3.3
-2.7
-2.4
-4.6
-4.1
-3.6
-10.4
-7.4
-4.7
14.0
15.0
13.1
7.0
7.0
7.3
9.5
8.0
9.0
-3.1
-2.6
-2.3
-2.6
-3.5
-2.8
-2.3
-2.9
-2.7
-2.2
-1.6
-1.2
3.6
2.6
2.3
5.2
3.3
2.7
8.7
10.1
10.5
-2.8
-2.9
-2.8
0.9
1.5
1.7
2.8
2.8
3.1
12.8
11.5
11.6
4.4
4.2
3.5
22.2
23.8
23.6
9.4
8.2
8.3
4.6
3.6
3.9
-5.5
-5.5
-5.2
-1.2
-1.7
-1.8
1.5
1.5
1.1
-2.3
-3.0
-2.8
-0.6
-1.0
-1.5
0.5
-1.3
-2.6
-3.0
-2.8
-3.5
2.3
1.0
0.0
-2.6
-4.5
-4.0
4.8
3.0
0.0
-5.8
-6.9
-6.4
-5.0
-7.5
-7.0
4.2
4.2
5.3
4.2
5.6
4.1
0.3
0.4
1.8
32.1
29.1
28.3
-12.0
-15.0
-7.0
-5.4
-13.0
-9.0
13.0
29.0
34.8
9.5
9.7
9.9
-3.5
-4.0
-4.0
5.5
6.1
7.2
-1.5
-10.3
-3.3
0.6
0.1
0.1
-1.0
-1.1
-0.9
2.5
1.5
1.3
30
Forecasts – Policy rates
31
06-Sep
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
6.56
0.50
8.00
6.75
3.25
3.00
4.50
-0.34
1.88
3.50
9.00
6.56
0.50
8.25
6.75
3.50
3.00
4.75
-0.08
2.00
3.50
9.00
6.56
0.50
8.25
6.75
3.50
3.00
5.00
0.30
2.00
3.50
9.00
6.56
0.50
8.25
6.75
3.50
3.25
5.00
0.48
2.00
3.50
9.00
6.81
0.50
8.50
6.75
3.75
3.25
5.00
0.72
2.13
3.75
9.50
6.81
0.50
8.50
6.75
4.00
3.50
5.00
1.05
2.25
4.00
9.50
7.06
0.50
8.75
6.75
4.00
3.50
5.25
1.65
2.38
4.00
9.50
7.06
0.50
8.75
6.75
4.00
3.50
5.25
2.15
2.50
4.00
10.00
7.31
1.00
8.75
6.75
4.00
3.50
5.25
2.51
2.50
4.00
10.00
7.31
1.50
9.00
6.75
4.00
3.50
5.25
3.11
2.50
4.00
10.00
3M deposit
Overnight/Selic
Overnight rate
12.05
12.00
4.50
12.00
11.00
4.50
12.50
11.00
4.50
12.50
11.00
4.50
12.50
11.50
4.50
12.00
12.50
4.50
12.00
12.50
4.75
11.50
12.50
5.25
11.50
12.50
5.50
11.50
12.50
5.75
14D repo
2W repo
7D repo
2W repo
O/N Deposit rate
1W repo rate
0.75
6.00
4.50
6.25
3.50
5.75
0.75
6.00
4.50
5.75
3.50
5.75
1.00
6.00
4.50
5.50
3.50
6.00
1.25
6.00
4.50
5.50
3.50
6.50
1.50
6.00
4.50
5.50
4.00
7.00
1.50
6.00
4.50
5.50
5.00
7.00
1.75
6.00
4.50
5.50
6.50
7.00
1.75
6.00
4.50
5.50
8.00
7.00
1.75
6.00
4.50
5.50
8.75
7.00
1.75
6.00
4.50
5.50
9.00
7.00
5.50
1.00
2.00
5.50
1.00
2.00
5.50
1.00
2.00
5.50
1.00
2.00
5.50
1.25
2.25
5.75
1.75
2.75
6.00
1.75
2.75
6.25
1.75
2.75
6.50
1.75
2.75
7.00
1.75
2.75
Asia
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
1Y lending rate
Base rate
Repo rate
BI rate
Call rate
OPR
Repo rate
6M SOR
Redisc
Repo
Base rate
Latin America
Argentina
Brazil
Mexico
Emerging Europe
Czech Rep.
Hungary
Poland
Romania
Russia
Turkey
Africa & Middle East
South Africa
Repo
UAE
Repo
Saudi Arabia
Repo
09 September 2011
Jun-13
Sep-13
Dec-13
Forecasts – FX rates
06-Sep
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
1.32
USD Exchange rate
Industrialised countries
Euro
EUR/USD
1.41
1.40
1.38
1.36
1.34
Japan
USD/JPY
77
80
81
82
83
85
United Kingdom
GBP/USD
1.61
1.57
1.59
1.58
1.58
1.57
Switzerland
USD/CHF
0.79
0.86
0.93
0.96
1.00
1.05
Canada
USD/CAD
0.99
0.950
0.935
0.930
0.920
0.900
Australia
AUD/USD
1.06
1.06
1.07
1.08
1.09
1.10
New Zealand
NZD/USD
0.83
0.82
0.82
0.83
0.84
0.84
Asia
China
USD/CNY
6.39
6.30
6.24
6.18
6.11
6.05
Hong Kong
USD/HKD
7.79
7.77
7.77
7.77
7.77
7.77
India
USD/INR
46.0
44.5
43.8
43.1
42.6
42.0
Indonesia
USD/IDR
8558
8460
8420
8380
8340
8300
Malaysia
USD/MYR
2.98
2.96
2.95
2.94
2.93
2.92
Philippines
USD/PHP
42.4
41.5
41.2
41.0
40.7
40.5
1.23
Singapore
USD/SGD
1.21
1.24
1.24
1.24
1.23
South Korea
USD/KRW
1075
1040
1030
1015
1000
985
Taiwan
USD/TWD
29.1
28.1
27.9
27.7
27.5
27.2
Thailand
USD/THB
29.9
29.2
29.0
28.8
28.6
28.4
Vietnam
USD/VND
20832
21400
22100
22100
22800
22800
Argentina
USD/ARS
4.20
4.20
4.25
4.30
4.35
4.40
Brazil
USD/BRL
1.64
1.70
1.70
1.70
1.75
1.80
Mexico
USD/MXN
12.58
11.40
11.35
11.30
11.25
11.20
USD/ZAR
7.10
6.90
7.00
7.10
7.20
7.30
TRY/ZAR
4.02
4.06
4.38
4.44
4.50
4.56
Latin America
Africa
South Africa
Emerging Europe
Poland
USD/PLN
2.98
2.75
2.78
2.79
2.82
2.84
Russia
USD/RUB
29.40
30.59
29.42
30.79
31.65
32.26
Basket/RUB
34.85
36.10
34.45
35.78
36.49
36.90
USD/TRY
1.77
1.70
1.60
1.60
1.60
1.60
Czech Rep.
EUR/CZK
24.4
24.0
24.0
23.8
23.8
23.8
Hungary
EUR/HUF
277
268
268
268
268
268
Poland
EUR/PLN
4.22
3.95
3.95
3.90
3.90
3.90
Romania
EUR/RON
4.25
4.20
4.20
4.20
4.20
4.20
Turkey
Central Europe
09 September 2011
32
Disclaimer
Certification
The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not receive any compensation for providing
a specific recommendation or view in this report.
Guillaume Tresca, Frederik Ducrozet
Disclaimer
© 2011, CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK All rights reserved.
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