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CEE Biweekly

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CEE Biweekly

Wed, Jun 4 2008, 15:17 GMT
by Yapi Kredi Bank Economic Research Department

Yapi Kredi Bank

This issue includes:

• - key economic news
• - a country monitoring about Romania and Slovakia
  
• - tables with two-week market movers and risk factors, interest and exchange rates, ratings and monthly indicators.

Romania

GDP growth surprised on the upside in Q1 2008

Romania’s real GDP growth accelerated to 8.2 % yoy in Q1 from 6.6 % in Q4 2007, thus reinforcing concerns about risks of possible economic overheating and persistently high inflationary pressures. Although the GDP breakdown has not yet been released, we anticipate lively consumption and booming investments to have remained the main contributors to this outstrip growth. The National Statistics Office has published the figures for domestic investment which rose by 35.2 % yoy in Q1 2008. While the surge in investment in new construction works was already anticipated (33.1 % yoy) due to a booming construction sector, the investment in equipment, including transport means proved to be very strong as well, rising by 35.4 % yoy in Q1. Moreover, the structure of investment among the main sectors of the economy remains well-balanced. Most of the funds were allocated to the industry (38.7 %) and trade sectors (23.5 %) which together account for 62 % of total investment. Agriculture also benefited from buoyant investment activity, accounting for 9.4 % of total investment.

Local elections results

Local elections were held on 1 June and will be followed by the second ballot on 15 June. The partial results of the first ballot showed that President Basescu’s newly-formed Democratic-Liberal Party (DLP), the leftist Social Democratic Party and the Prime-Minister’s ruling party NLP are the parties that will compete for the city hall and the county council seats in the second round. Although the DLP was believed to stand the strongest chance of winning the seats, both the SDP and NLP manage to regain power in the last months. DLP received most of the votes for the chairmanship of county councils, while SDP won the most votes for the city halls and local councils. In Bucharest, preliminary results place the independent candidate and former member of the SDP Sorin Oprescu in first place with 30.5 % of the votes, followed by the DPL’s Vasile Blaga with 27.2 %. Although initially renegade, after the results were published, the SDP confirmed its support for Oprescu for the city hall. As regards the elections for the General Council of the City of Bucharest, the partial results showed that the DLP obtained 33.6 % of the votes cast, SDP 26 % and NLP 10.9 %.

Slovakia

Central Parity

The central parity of the Slovak Koruna toward the Euro was revaluated on 28th May for the second time during the presence of Koruna in the ERM II. The new level of the central parity was set at the level of SKK/EUR 30.1260, i.e. at the bottom level of the original fluctuation range. The new fluctuation range where the Koruna exchange rate can move was determined at SKK/EUR 25.6071–34.6449. Slovakia thereby created two new precedents: it was the first country in history to revaluate the central parity twice and, at the same time, the last central parity was set at a level at which the exchange rate has never been in history.

The new central parity also reflects the long declared efforts for strong conversion presented mainly by Prime Minister Robert Fico. Revaluation of the central parity was enabled mainly by favourable development of economy. According to comments by the NBS, the main factor which initiated the change of the parity was “an ongoing real convergence of Slovak economy supported by significant GDP growth and differential in the development of labour productivity, in comparison with average values being achieved within the European Union.” However the change was supported also by a strengthening Koruna: “The change was supported also by permanent and growing deviation of nominal exchange rate from the central parity, which was determined in March 2007, as well as development of exchange rate of Slovak Koruna in the last period.”

We expect that the final conversion rate will be set at the current level of the central parity on 8 July. So far in the history, the conversion rate has been determined at the level of current parity in all countries adopting the Euro, therefore we think the European institutions will stick to this level while not creating a further precedent in determination of conversion rate. Indeed, a different choice would be connected with some reputational risk for the European institutions, as by that they would completely deny the foundation of the criterion of exchange rate stability. Moreover, we consider the current level of central parity to be very favourable from many aspects (for Slovakia). It is important for competitiveness of the economy that the new parity was determined close to the expected level of the balanced exchange rate in the next year, i.e. it should not significantly endanger domestic exporters. On the other hand, for citizens, a stronger exchange rate could mean moderation of inflation pressures after accession to the Eurozone. Moreover, a level close to the rounded limit of SKK/EUR 30 will allow easier translation of Koruna to Euro and thereby also better control of potentially unjustified price growth on the account of Euro introduction.

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Published on  Wed, Jun 4 2008, 15:28 GMT