Focus on potential Polish budget problems has increased after the Polish Finance Minister Rostowski in an interview on Friday said that the Polish budget deficit could increase to more than 7% of GDP in 2010. This is not a major surprise to us, but it is nonetheless a reminder that, despite the Polish economy doing relatively well compared to other CEE economies, the budget situation is likely be challenging in 2010.
Estonian inflation – or rather deflation - was -0.9% y/y in August, down from -0.7% y/y in July. This was slightly lower than our expectation. A key driver for the lower inflation was the lower food prices, mostly due to seasonally lower fresh fruit and vegetable prices. As it was broadly expected, the higher VAT rate did not break the deflationary trend. Going forward, the deflationary trend should continue going into next year. We expect average inflation around zero this year and at -0.8% y/y in 2010.
Preview
We expect Lithuanian and Latvian inflation to follow the same pattern as the Estonian data showed yesterday – i.e, lower inflation in August.
Industrial production is on the agenda in Turkey, Hungary and Romania. Will we begin to see a recovery, or did the crisis in manufacturing deepen in July?
Trading update
Both the Polish FX and fixed income markets underperformed peers in EMEA yesterday. This was undoubtedly due to the negative news concerning the budget outlook for 2010. Looking ahead, this issue could resurface in the coming months, but for now we do not see it as major short-term market mover.
Otherwise, there was fairly limited action in EMEA markets yesterday with US markets closed for Labor Day. Overall the risk appetite was mildly positive.
