Current accounts in CEE to deteriorate mildly this year
|‘How sensitive will current account balances be to increasing domestic demand this year?
Croatia: Although we do expect somewhat stronger pressures on imports in 2017 (stronger domestic demand and oil prices), in our baseline scenario we see CA balance staying comfortably in a positive region, above 2% of GDP. As the main offsetting factors we see continuation of solid exports profile footprint, stable tourism inflows (although to some lesser extend due to a strong base effect), intensification of EU-funds inflows, milder pressures on the government interest payments (more favorable refinancing) and expected increase of remittances inflows (as Croatia recorded relatively strong emigration trend in recent years). Main risks to this view come from a potential slowdown in EA (political uncertainties), lower than expected EU funds absorption and rising political tensions in SEE which could affect the tourism picture if Croatia becomes perceived as a relatively risky country.
Czech Republic: The contribution of foreign trade to overall growth will still be positive, but lower than in the last year. Despite the strengthening CZK, the overall current account balance will be positive at CZK 60bn, i.e 1.2% of GDP. The end of the intervention regime and solid consumption growth will push imports up. The effect on exports, however, will be rather delayed, due to hedging. Our forecast does not anticipate overall imports to outweigh exports, as the strengthening of the CZK will only be gradual.
Hungary: In Hungary, we expect declining trade surplus for 2017, thanks to improving consumption and investments. The revival of households' consumption should rather burden trade balance of processed goods which may somewhat worsen this year. However, improving demand from households should not only appear in bigger volume of imports but may translate into higher CPI inflation, as well. As for the expected improvement of investments, it may raise imports of raw materials and machinery, too. All in all, we expect higher import bills for this year, thanks to increasing domestic demand, however this may partly be offset by the expected revival of exports, as global economy is experiencing a cyclical upswing. Moreover, the overall C/A balance should further be supported by money transfers of people working abroad. To sum all these up, the surplus on the C/A balance could be lower, however it is still not expected to drop below 4% of GDP, either 2017 and 2018.
Poland: Current account deficit has been continuously narrowing over last couple of years and reached -0.3% of GDP in 2016, according to our estimate. Relatively high trade surplus and EU funds supported heavily such development, especially in most recent years. Further strengthening of domestic demand, in particular strong private consumption growth, as well as increasing commodity prices are the main reasons why we expect current account to widen this year. Our point estimate is at -0.6% of GDP as relatively weak real effective exchange rate (driven mostly by nominal depreciation of the zloty) should be positive for exports dynamics.
Romania: Romania's C/A deficit doubled to 2.4% of GDP in 2016 from only 1.2% of GDP in 2015 due to an increase in trade deficit and higher profit repatriation of foreign companies. For 2017 we already know we will be dealing with a hefty fiscal impulse (estimated at 1.4% of GDP) with a most direct impact on consumption growth, which we thus expect to remain quite sanguine (if only somewhat slower due to a base effect related to agricultural goods own consumption). On top of that, the high wage growth induced by the public sector and especially the significant hike of the minimum wage (by 16%) as of February, will continue to act in the direction of eroding the competitiveness of local producers, at least in the base case scenario where the real exchange rate will move only symbolically. As such, we expect the trade gap to continue to widen further at a relatively fast pace, leading to further deterioration of the current account deficit by almost 1 pp. of GDP (our forecast being 3.3%). As a mild offset, we also expect exports to rise a bit faster than in 2016, in the context of accelerating external demand, in line with somewhat faster Eurozone growth. Despite the higher current account gap, we still expect coverage in terms of EU funds and FDI inflows to remain relatively comfortable for this year, hence we don't see very significant pressures building up at the level of the exchange rate, at least not in 2017.
Serbia: In recent years Serbian exports sector became more dynamic and diversified and attracted foreign investors in various sectors (e.g. automotive, tobacco, pharmacy, electrical equipment etc.), putting the growth figure in the double digit region (2016 11.5% y/y). Thus in our view export performance in upcoming years will keep the relatively strong footprint, additionally supported by more favorable macro outlooks in the region and main EU trading partners (Germany and Italy important for Fiat). As for the imports, we expect upside pressures, coming not only from the stronger domestic demand but also from stabilizing and rising oil prices, which could push the import side of net exports equation also in the double digit region. However, given the expected solid performance on the exports side (offsetting effect) and stronger economic footprint (denominator effect) we expect CA deficit to stay around 4.5%-5% of GDP in the upcoming period.
Slovakia: Slovakia is running foreign trade surpluses of around 3.5% of GDP in past 5 years (C/A surplus at around 0.5% of GDP in respective periods). Despite improving labor market the domestic consumption growth was rather modest, not strong enough to cause any visible imbalances in the current account. We do not expect this situation to change much in 2017.
Slovenia: While domestic demand definitely gained on importance, more notably on the private consumption side, resilient exports performance ensured positive footprint on the current account side continued throughout 2016, despite rising imports pressures. However, since we expect to see even stronger performance of the domestic demand in this year, especially as investments activity also picks-up after temporarily halt in 2016, we see imports pressures overpowering still solid exports dynamic, thus resulting in somewhat milder current account surplus vs. 2016, but nevertheless remaining high at 6% of GDP levels in 2017.
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