Estonian deflation deepens. In June, Estonian consumer prices dropped 0.9% y/y, down from -0.3% y/y in May. We had forecast -0.8% y/y. The deepening of deflation is essentially an internal devaluation – and if it continues the impact on the Estonian economy will be the same as a nominal devaluation. As consumer prices continue to decline, debt ratios are set to continue to rise even if households, banks and the Estonian government do not take on new debt. Hence, debt servicing costs will accelerate as deflation deepens. This is deeply worrying.
Latvia. Yesterday, Bloomberg reported that the European Commission expects a budget deficit in Latvia of 11% of GDP in 2009 and public debt to rise to 64% of GDP in 2010. This is well above the Maastricht criteria for euro adoption of 60% of GDP and more or less in line with our expectation. Furthermore, it makes it clear that swift euro adoption is not a possible “exit strategy” to solve the Latvian crisis. Hence, even after a very significant tightening of fiscal policy in Latvia, the outlook for public finances is very bleak. New data shows that government revenues in June were 15.3% lower than originally planned. The main reason for this short-fall was VAT revenues coming in 20.9% below target.
Preview
Latvian inflation numbers for June will be published today. We expect the sharp deceleration of inflation to have continued, and forecast -3.4% y/y in June from - 4.7% y/y May. In reality Latvia is already seeing deflation – as consumer prices continue to drop on a month-on-month basis.
Turkish industrial production for May is due today. The consensus expectation of -16.7% y/y might look negative, but it actually corresponds to a rise of 6% m/m. Should this be the outcome it increases expectations that industrial activity has stabilised. Given last week’s positive surprise on Turkish PMI (see comment), we could see some upside for the Turkish economy in the coming months.
Trading update
Yesterday, sentiment was slightly negative and most EMEA currencies dropped a little with no specific news out. The Turkish lira (TRY) outperformed its peers ending the day in positive territory. The Turkish Finance Minister, Mehmet Simsek, said yesterday that Turkey is negotiating with the IMF for a three-year stand-by agreement and would push through fiscal tightening measures whether it received an agreement or not. Based on the latest underperformance in Turkish markets compared to its peers in EMEA, we see value in relative plays against e.g. Hungarian markets – either through FX- or fixed income markets – by receiving Turkish swap rates versus paying Hungarian swap rates.
