Czech finance ministry scales down outlook for 2010

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Currencies: Polish zloty nervous on debt talks
Fixed income: Czech finance ministry scales down outlook for 2010

Czech Republic

The Czech koruna continued to move sideways despite some bearish signals from the local Ministry of Finance. It reduced the 2010 GDP growth forecast to a negative reading of 0.5%. The calm reaction of the market could be explained by the fact that the MinFin’s estimate for GDP is very conservative to meet a target for the 2010 budget deficit. We appreciate this cautions approach, while we think that GDP growth should look better in 2010 (our estimate calls for 2 % growth).
Today, the koruna will continue to move sideways and it probably stays in a wait-andsee mode ahead of key US figures released on Thursday and Friday.

The Czech yield curve steepened in bullish session yesterday as the market continued to digest news about an approved austerity package, while dovish central bank talk supported the market too.
Today, the main event for the domestic fixed-income market should be an auction of a euro-denominated government bond with a floating coupon (based on 6M Euribor). The MinFin wants to sell EUR 300mn worth of these bonds, which means a relatively light offer. That is why the action should be subscribed very easy.

Hungary

The Hungarian forint had a slight weakening trend on Tuesday, mirroring the sourer sentiment on equity markets. The pair moved back to above the key 270.00 level, but the downward movement was limited by the better-than-expected current account deficit. The second quarter current account balance swung to €4756m surplus from €1550m deficit a year-ago. This is a bigger improvement than we or the consensus expected. So, Hungary seems to have been repaying its external debt faster than thought.

The 1H09 balance was -86m deficit, but if the external surplus continues during the rest of the year, we can expect a surplus for the full-year, as well. This would be better than the 2-3% of GDP deficit seen by the IMF program. Interestingly, the currency did not react much to this news as probably the weaker tone among emerging market currencies overshadowed it.

The Hungarian fixed income market remained stable during the day. There is hardly any news on the market; the only slightly worrying signal is the widening 5y5y forward spread vs the euro. It could signal that the market has become less optimistic about the outlook, which may open the door for some weakening.

Poland

The Polish zloty got under pressure due to deterioration in sentiment on the global equity markets and continuing public debt worries. The Central bank presented the outlook for debt and pointed to the break above the first threshold of 55% GDP. In that case the government would have to lower its debt burden in 2012. In case of breaching the second threshold of 60% GDP, it would be obliged to cut spending dramatically and present a balanced budget. That could harm growth and that is what investors are really afraid of. It is not the fear of high debt as Polish public debt is still comfortably below eurozone average (70% GDP). It is the fear of compulsory austerity measures ordered by legislation that could kill ongoing recovery.

Although we do not see the risk of these measures as serious, we must reflect the market fear in our short term view. The pair closed yesterday above the crucial technical level (4.21 EUR/PLN) and if that is confirmed today (end of the month), we would turn ourselves bearish for the short term (remaining bullish long-term). The NBP meeting should not attract much attention of the markets as a no-change verdict is widely expected. Following comments should confirm our scenario of interest rate stability for the rest of the year.

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