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CEE Biweekly

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CEE Biweekly

Wed, Jun 18 2008, 15:01 GMT
by Yapi Kredi Bank Economic Research Department

UniCredit Group

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, monthly indicators. Quarterly GDP and Main indicators

Key Economics News

Bulgaria – Bulgarian GDP grew by a real 7 % yoy in Q1 2008, broadly in line with the 6.9 % yoy growth reported in Q4 2007. The pace of economic expansion was above consensus forecast (5.7 %) and drew support from the combination of buoyant domestic demand and strengthening of export growth. On the negative side CPI, according to the national methodology, accelerated further in May to 15 % yoy and apparently will increase even further in the months to come before any price moderation starts to take place. Following a sizeable one-off drop in March, industrial output and sales grew by 8.4 % and 8.8 % on a yearly basis in April. Surging energy costs and a weaker services balance contributed to the deterioration of April’s CA balance to Euro 680 mn, compared to a Euro 552 mn deficit posted one year ago.

Czech Republic – GDP growth slowed to a seasonally adjusted 5.3 % yoy (5.2 % yoy unadjusted) in Q1 from 6.3 % yoy in Q4, but diverted marginally from the flash Q1 estimate of 5.4 % yoy. The growth structure showed that the slowdown was led by household consumption, whose growth in real terms was largely affected by the inflation surge. With government spending and fixed investment also experiencing a marked pullback from the previous quarter, inventories and net exports kept the GDP growth above 5 % yoy. Our new 2008 growth forecast stands at 4.3 % yoy (up from the previous 4.0 % yoy), with easing demand from the EU and sharp CZK appreciation starting to take their toll on net export growth in H2.

Inflation, both at the consumer and producer level, surprised on the upside in May, adding to CNB worries that the assumed drop in yoy CPI towards the year-end will be slower than forecast. In fact, it looks highly likely now that the CPI will return back to 7 % yoy in the summer months. April reports on foreign trade and industry proved that the weakness seen in March was mainly caused by seasonal factors, with both exports and industrial production again posting double-digit growth rates. If it were not for the latest CZK jump, we would expect the CNB to deliver an additional interest rate hike soon.

Estonia – The slump in economic growth (to a revised 0.1 % yoy in Q1 2008) is due to slackening domestic demand. Private consumption declined by 0.4 % yoy in Q1. Value added decreased in trade, transportation and real estate activities. Value-added growth decelerated in manufacturing, construction and, particularly strongly, in financial intermediation.

Estonia’s current account deficit has begun to improve on declining imports. It narrowed to EUR 661 mn in Jan–April 2008 from EUR 1,043 mn in Jan–April 2007. Imports were 1.9 % lower than the year before in euro terms as exports increased by 8.3 %. At the same time, FDI proved rather resilient and was at EUR 682 mn even EUR 40 mn higher than the previous year. The global liquidity crisis manifested itself mainly by the outflow of EUR 1,079 mn in short-term bank debt, compared with an inflow of EUR 618 mn in Jan-April 2007. This was however offset by higher long-term inflows (EUR 1,488 mn). The relatively robust long-term capital flows will likely combine with a rather flexible reaction of the Estonian economy to re-accelerate economic growth already next year, at least if the Scandinavian countries, Estonia’s main economic partners, avoid a severe slowdown.

Hungary – Contrary to all expectations, instead of continuing to decline, the twelve month CPI picked up to 7 % yoy in May from 6.6 % in April. The mom rate indicated a 1.1 % price increase, up from the 0.3 % in the previous month. Inflation driving factors were again the soaring prices of food and oil dependant goods and services, such as household energy, transportation and catering. Food has become 14 % more expensive since May 2007 and accounted for a 2.2 % price increase for just one month alone. The only hope on the horizon for some degree of easing in food prices lies in the recently published agriculture price index that indicated a 2.3 % decrease in April mom, sharply down from the 4.2 % mom hike in March. Domestic prices of fuel have increased by 16.1 % yoy and 3.2 % mom and are expected to rise further during the coming months. In view of the May CPI we have revised our forecast on average inflation upward to 6.7 % from 6.2 % for 2008, and to 6.0 % from 5.1 % the year end figure. In addition, we expect the National Bank to implement an additional 25 basis point rate hike at the forthcoming MC meeting.

Latvia – In May Latvian CPI inflation jumped to 17.9 % yoy (0.9 % mom) from 17.5 % in April. This increase was mainly the result of an increase in food prices (21.6 %), transport (12.3 %) and gas costs (4.4 %). Growth in prices remained the highest among the 27-nation European Union, while the economy expanded by a revised 3.3 % yoy in Q1, compared to 8.1 % posted in Q4 2007. On the positive side, industrial output in April recovered compared to March rising by 4.4 %, driven by evolving volumes in manufacturing, electricity, gas and water supply. In April Latvia’s CA posted a deficit of 227.1 mn Lats (EUR 0.3 bn) down by almost 18 % yoy on the back of cooling domestic demand resulting from ongoing tightening in lending conditions.

Lithuania – CPI inflation increased by 0.8 % mom in May, totaling +12 % on a yoy basis, the highest level in more than a decade. Food, transport (+18 % yoy), utilities (+18.6 %) and transport (+15.6 %) were the main drivers.

The current account balance deficit narrowed in April, thanks to faster export growth (both exports and imports continue to grow rapidly), to EUR 350 mn from EUR 400 mn a month earlier. However, in the first four months of the year the deficit totaled EUR 1.38 bn, 16 % higher than one year before.

Poland – As expected May CPI accelerated to 4.4 % yoy, up from 4.0 % yoy a month earlier due to a rise in regulated prices. Prices in the category “housing, water, electricity, gas and other fuels” (19 % of the CPI basket) increased by 1.6 % mom (9.0 % yoy), on the back of increases in gas and electricity prices. At the same time food prices rose by 1.2 % mom (7.0 % yoy), while fuel prices went up by 2.6 % mom (7.0 % yoy). The May CPI numbers remain consistent with the scenario of further CPI growth to ca 5.0 % yoy in August and then to fall toward year-end to 4.2 % yoy. On the other hand wages growth slightly slowed to 10.5 % yoy in May, down from 12.6 % yoy in April. A weaker wages dynamic does not change interest rate expectations. Supported by the MPC members we continue to expect the Council to hike rates this month. It is worth noting that the majority of the MPC members pointed out that the new inflation projection shows a slightly worse inflationary path than the one released in February.

Poland’s government approved the 2009 budget guidelines based on economic growth of 5 % and the average inflation rate at 2.9 %. The central budget deficit is set to narrow to PLN 18.2 bn from PLN 18 – 24 bn estimated by the Ministry of Finance at the end of this year. The government assumes that 2009 budget revenues (including the EU funds) will amount to PLN 310.5 bn (increase by 10.2 % in nominal terms compared with 2008), while expenditure will reach the level of PLN 328.7 bn (increase by 6.4 %). The 2009 central budget gap will amount to 1.3 % of GDP as assumed in the updated convergence programme issued earlier this year. The macro assumptions are more optimistic than ours (we look for 4.4 % GDP growth), but still within the realistic boundaries. The biggest risk is that revenue forecasts may be a bit on the optimistic side, all the more that this year’s revenue performance is not as good as it should be given strong growth and high inflation, and this year’s planned performance will be the basis for next year’s forecast.

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Published on  Wed, Jun 18 2008, 15:09 GMT