Review

  • Yesterday, the Latvian Parliament unanimously voted for the revised insolvency law, which had been returned to the Latvian parliament by the Latvian President Valdis Zatlers. The new insolvency law significantly strengthens the position of debtors relative to creditors and basically means that debtors are only liable to pay back what the market value of the collateral is rather than the actual loan. This is obviously bad news and quite negative for the Latvian banking sector. In that regard it should be noted that overdue loans in Latvia by the end of June rose to 28.6% of all loans. The credit crisis is hence far from over in Latvia.

  • Hungarian retail sales dropped by 4.8%/y in June – better than our expectation of a 5% y/y drop, but worse than the consensus expectation of a drop of 3.8% y/y. Overall, the numbers further confirms that domestic demand remains very weak in Hungary and with the recent weakening of the Hungarian forint and general increase in investor concern about the Hungarian economy, we have a difficult time seeing any real rebound in retail sales in the near future.

  • Turkish manufacturing confidence increased to 112.7 in July from 111.7 in June – further confirming that the recovery in the Turkish manufacturing sector continues.


Preview

  • There are no economic data releases planned in the region today.


Trading update

  • It has been relatively calm on the EMEA markets over the past 24 hours. However, we note that the Hungarian forint continues to significantly underperform its regional peers. On a positive note it is notable that the South African rand has hit a three-month high against the US dollar. We have a difficult time explaining the strong performance of the rand and continue to look for a negative correction in the rand, which is significantly overvalued.

  • The Polish zloty has performed rather well over the past week despite the continued weakening of the forint. Obviously the weakness in the forint reflects Hungarian worries, but normally we would have seen more spill-over from the forint to the zloty than we have seen. In fact on Monday the Polish central bank governor Marek Belka, in an interview with the Wall Street Journal, voiced his concern about possible contagion passing to the Polish markets from Hungary, by implication (he did not directly mention Hungary). Furthermore, our EMEA FX Scorecard has recently turned negative on the zloty, which indicates that zloty risks are twisted in a weaker direction in the short-term. Longer term we remain more bullish on the zloty.