CEE Macroeconomic and Fixed Income Research

Analysts’ View:

Looking Ahead in CEE This Week: This week, on Thursday, we will see final GDP numbers in a few CEE countries for the first quarter, which should underpin that household consumption (likely fuelled by lower oil prices) was a major driving force behind the surprisingly positive growth in 1Q15. The Croatian GDP data will be the first release, however, where supportive external demand might annul weak domestic demand. The Hungarian central bank is also to decide on the rates today, and while the 15bp cut to 1.65% seems to be a done deal, the statement might be interesting with regards to how much the MNB wants to cut more. Last week, Hungarian 12M T-bills fell to a new all-time low to 1.48%. (Our current forecast for the bottom of the rate cutting cycle is at 1.5%, with risks tilted to the downside given the dovish comments of the MNB in recent weeks.) In the meantime, politics seems to be heating up a bit with the Czech government facing a no-confidence vote already today, but as the opposition seems to be lacking the votes to win, we think a vote will have no impact on markets.

PL Macro: Unemployment is expected to drop further to 11.3% in April.
Seasonal factors favor lower number but seasonally adjusted unemployment should not be disappointing as well. Continuous improvement of labor market supports our expectations that private consumption, next to strong investment, was driving force of the growth in 1Q15. Positive development in real economy supports slightly stronger zloty in our view and we expect appreciation of the zloty toward 4.04 at the end of the year.

PL Politics: At the second round of the presidential elections on Sunday, the current President Bronislaw Komorowski (supported by governing party Civic Platform) was defeated by Andrzej Duda, a challenger supported by the opposition party Law and Justice. Duda received 51.55% of votes, while Komorowski got the remaining 48.45%. Although the outcome does not directly have an impact on economic policymaking in Poland, the result is a clear warning sign for the government before the much more important general elections later this year. Thus, it brings uncertainty to the markets about future policy directions and we cannot rule higher volatility in the short-term and after the summer. Although Duda winning elections was negative for the bond market (10Y at 2.93%) and the zloty (EURPLN at 4.11), at the moment, we do not see any major impact on our fiscal and market forecasts: we see 10Y yields at 2.7% at the end of this year, while the EURPLN might be around 4.06 at the end of 2015.

HU Rating: Fitch released its new revision result on Hungary on Friday after market close, as scheduled. Although they kept the sovereign debt rating unchanged at BB+, the outlook was upgraded from stable to positive. In the decision, the low budget deficit (-2.6% y/y), strong GDP growth (3.6% y/y) and current account surplus (4.2% of GDP y/y) in 2014 played important roles.
Moreover, the bank tax reduction also contributed to the better outlook. In their view, the government and banking sector relations may turn in a favorable direction, although it is time to strengthen the trust. They added that, for the upgrade, it will be important to see the confirmation of political stability and a sustained reduction in the public debt ratio and external indebtedness. In our view, the upgrade may come in 1H16. In line with that, we maintain our 10-year bond yield forecast at 4.00% in 4Q15.

RO Bonds: Yesterday, Romania tapped the local market with a 6-month T-bill issue. Decent investor appetite for the short-dated securities helped the debt managers raise the planned amount of RON 400mn, at an average yield of 1.26%. Further monetary easing by the central bank, most likely by cutting the reserve requirement ratio on RON liabilities, could boost demand for T-bills in the coming months. PL Politics: At the second round of the presidential elections on Sunday, the current President Bronislaw Komorowski (supported by governing party Civic Platform) was defeated by Andrzej Duda, a challenger supported by the opposition party Law and Justice. Duda received 51.55% of votes, while Komorowski got the remaining 48.45%. Although the outcome does not directly have an impact on economic policymaking in Poland, the result is a clear warning sign for the government before the much more important general elections later this year. Thus, it brings uncertainty to the markets about future policy directions and we cannot rule higher volatility in the short-term and after the summer. Although Duda winning elections was negative for the bond market (10Y at 2.93%) and the zloty (EURPLN at 4.11), at the moment, we do not see any major impact on our fiscal and market forecasts: we see 10Y yields at 2.7% at the end of this year, while the EURPLN might be around 4.06 at the end of 2015.

HU Rating: Fitch released its new revision result on Hungary on Friday after market close, as scheduled. Although they kept the sovereign debt rating unchanged at BB+, the outlook was upgraded from stable to positive. In the decision, the low budget deficit (-2.6% y/y), strong GDP growth (3.6% y/y) and current account surplus (4.2% of GDP y/y) in 2014 played important roles. Moreover, the bank tax reduction also contributed to the better outlook. In their view, the government and banking sector relations may turn in a favorable direction, although it is time to strengthen the trust. They added that, for the upgrade, it will be important to see the confirmation of political stability and a sustained reduction in the public debt ratio and external indebtedness. In our view, the upgrade may come in 1H16. In line with that, we maintain our 10-year bond yield forecast at 4.00% in 4Q15.

RO Bonds: Yesterday, Romania tapped the local market with a 6-month T-bill issue. Decent investor appetite for the short-dated securities helped the debt managers raise the planned amount of RON 400mn, at an average yield of 1.26%. Further monetary easing by the central bank, most likely by cutting the reserve requirement ratio on RON liabilities, could boost demand for T-bills in the coming months.