CEE: Euro adoption on the agenda in Hungary

On the radar

• Real Retail Sales in Poland increased by 9.8% y/y in March, while money supply growth reached 11.5% y/y.
• Today, Hungary releases unemployment rate at 8.30 AM CET, while Poland at 9.30 AM CET.
• At noon CET, Serbia publishes real wage in February.

Economic developments

Readiness of Hungary for euro adoption is one of the topics we cover in our latest Special Report on Hungary (Hungary gets a chance for a U-turn). The new Tisza-led government has placed euro adoption firmly back on the policy agenda, marking a more proactive stance than in previous cycles. The prospective finance minister, András Kármán, has pledged to meet the convergence criteria within four years, an ambitious but potentially credibility-enhancing target. Maastricht criteria should be assessed in last year before euro adoption only. However, if entering on euro adoption path means sustained fiscal discipline and disinflation, the commitment could reduce risk premia and strengthen investor sentiment, though execution and implementation risks remain material. Further, in our view, Hungary is developed enough to embark on this path as looking back at Eastern Europe, only Slovenia started the process at a higher level of GDP per capita. Finally, the Hungarian forint could be the first free-float currency to enter ERM II more than two decades after the Slovak koruna. We would not expect Hungarian forint to strengthen in similar way the Slovak koruna did prior to Eurozone membership. A huge part of the appreciation was backed by strong economic and productivity growth boosted by EU membership and FDI inflows, which had a positive impact on other currencies in CEE. The lack of these factors, as well as much weaker economic momentum, limit the appreciation potential of the forint.

Market movements

Stalemate in talks between US and Iran are translating into pressure on commodity prices. CEE currencies remain slightly weaker against the euro this week, while on the bond market the picture is mixed amid low volatility. European Union leaders signaled that preliminary conditions are in place for Ukraine to begin the first stage of the membership process. However, EU remains elusive regarding any commitment on a date for Ukraine to join the block. The membership process for Croatia, the last country to join, took about a decade. As for local news, interest rates in Poland are likely to remain unchanged for some time according to central banker Zarzecki. According to another central banket Tyrowicz, wages remain a risk factor for inflation in Poland, although their impact on inflationary processes is less significant than that of external shocks. Poland's Ministry of Finance sold Treasury bonds of five for a total of PLN 8.98 billion on Thursday and another PLN 1.186 billion at the top-up auction. Finally, Romania will have a minority government to push through reforms needed to secure EU funds after the largest party in the coalition quit in a dispute over unpopular austerity measures. Bolojan will remain Prime Minister and will face a confidence vote within 45 days.

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