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CEE Biweekly

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CEE Biweekly

Wed, Jul 2 2008, 15:36 GMT
by Yapi Kredi Bank Economic Research Department

UniCredit Group

In this issue

• Key Economic News
• Tables
• Two-week market movers and risk factors
• Interest and exchange rates
• Ratings
• Monthly indicators
• Quarterly GDP
• Main indicators

Key Economics News

Bulgaria – The National Revenue Agency announced that despite the replacement of progressive scale of taxation with a single 10 % flat tax rate on personal incomes, revenues realised in the Jan–May period increased by 17.6 % to BGN 800 mn. Likewise, cutting the corporate tax rate to 10 % boosted fiscal revenues collection by 31.2 % to BGN 1,309 mn. End May data for the performance of the consolidated fiscal program in Bulgaria is due to be released in early July. The Central Bank revised upward its year-end inflation projection to 7.9 % (from 6.4 % previously) citing increasing pressure stemming from higher prices of primary energy resources. In May credit growth to non-financial institutions slowed to 55.5 % yoy after increasing by 63.6 % for full-year 2007.

Czech Republic – Despite mounting inflation pressures, the CNB kept interest rates unchanged at its June meeting, with the benchmark 2-week repo remaining at a six-year high of 3.75 %. The key argument against policy tightening proved to be the crown’s rapid appreciation which has now amounted to 17 % yoy against the euro and 29 % yoy versus the dollar. Governor Tuma said after the meeting that anti-inflation factors are too strong to allow the bank to hike rates although he sees the overall risks as slightly pro-inflationary.We do not expect these anti-inflation risks to ease substantially by early August when the CNB meets again. For this reason, we assume the most likely outcome will be no change in the interest rate. However, with the ECB now ready to hike this week and with chances diminishing that domestic inflation will quickly drop within the CNB’s target, we have shifted our rate hike expectation to this year’s Q4 from Q1 2009. In line with this, we forecast CPI to increase in June, to 6.9 % yoy from May’s 6.8 % yoy, with housing rents, fuel and cigarettes prices as the major drivers.

Estonia – The parliament amended the budget law (negative supplementary budget in Estonian language) on 19 June. It cut budgeted revenues by EEK 6.1 bn (EUR 0.39 mn, 1.2 % of GDP) from the original target of EEK 96.3 bn and expenditures by EEK 3.2 bn from EEK 93.6 bn. The extra budget was passed by the 101-seat chamber with 57 to 34 votes. The decrease is triggered by lower than expected tax collection, notably the social tax and VAT because of slack economic growth. Current expenditures will be cut by 7 % on average. In addition, about EEK 0.7 bn (out of the EEK 3.2 bn) lower in allocations to the Health Insurance Fund and the second pillar of the pension system will be made. The latter cuts will not, however, immediately result in a decrease of pensions or health spending. The negative growth effect will be mitigated by allowing a budget deficit this year.We expect the GDP to grow some 2 % in 2008.

Hungary – In line with other Central European currencies, the Forint appreciated in recent months – by 7 % from early May – and on 20 June broke through the psychological level of 240 HUF/EUR, the strong end of the NBH’s former official intervention band. This appreciation was mainly supported by the recent interest rates hikes by the central bank. However, we believe that in an uncertain global financial climate the currency still remains volatile. In any event, the rapid appreciation of the Forint against the Euro, together with weak retail figures and only slowly improving employment and purchasing power, served as arguments for the Monetary Council of the National Bank of Hungary to leave the base rate at 8.5 % at its 23 June meeting. Q1 current account deficit rose by 4.4 % yoy, to EUR 1.16 bn as the EUR 428 mn improvement in the balance of external trade and services was impaired by the EUR 477 mn deterioration in income and current transfers.

Latvia – In May, Latvian retail sales fell by an annual 5.5 % (unadjusted), representing the biggest decline in more than six years, as domestic demand cools down. Sale of food products registered the biggest drop (down by 5.6 % yoy) due to tightening lending conditions and an eroded consumer purchasing power resulting from CPI inflation still in the double-digits area. At the same time, sales of non-food products also fell by 5.4 % yoy. Producer prices grew by 1.3 % in May compared to the previous month (11.9 % yoy) mainly on the back of the increasing cost of electricity and natural gas prices.

Lithuania – The Lithuanian economy grew by 7 % in the first quarter of this year, according to the final revision made by the Institute of Statistics. The figure compares with a previous estimate of 6.9 % and, despite being relatively good, represents a significant slowdown if compared with the previous two quarters (+8 % in Q4 2007 and 10.8 % in Q3). However, growth drivers have held. The GDP composition in the first quarter saw an acceleration in both households’ consumption (+12.2 % from 9.4 %) and corporate investment (+22.4 % from 6.9 %), but was dragged down by the strong pace of imports.

Poland – Poland’s Monetary Policy Council (MPC) announced a 25 bps hike during its June rate-setting meeting, for the eighth time since the start of the monetary policy tightening cycle, increasing the reference rate to 6.00 %.

The MPC highlighted its new inflation and GDP projections. Using the assumption of constant interest rates, the headline CPI remains above the NBP’s top target of 3.5 % for 2010. The risks on the inflation path mentioned in the Report on Inflation are clearly on the upside, especially taking into account food prices and net core inflation forecasts. The Central Projection assumes that food prices will decline by 1.9 % yoy on average in 2010 after increasing by 6.3 % yoy in 2008 and by 1.6 % yoy in 2009. Moreover, the estimated growth rates on a “new” measure of core inflation (headline excluding prices of energy and food) are 4.0 % for 2009 and 3.8 % for 2010. These numbers are clearly hawkish, provided that the MPC members regard these projections as meaningful.

The new GDP forecast is slightly lower than February’s projection. The central bank expects GDP growth at 4.7 % for 2008, 4.8 % for 2009 and at 5.2 % for 2010. Taking into account the Q1 GDP breakdown and recent macroeconomic data, we believe that the NBP’s prediction for this year’s economic activity is pessimistic, thus our expectation of 5.2 % yoy for 2008 is rather cautious – the market consensus and Ministry of Finance estimations stand at 5.5 %. Summing up, based on the June inflation projection we think that the probability of further rate hikes is increasing significantly. A factor that will now attract more attention will be food prices, as the entire long-term optimism of the projection relies on these numbers.

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Published on  Wed, Jul 2 2008, 15:43 GMT