CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HR Rating: The S&P confirmed Croatia’s credit rating on Friday at 'BB', while keeping the outlook stable. We saw a rating cut as a very unlikely option, although a cut in the outlook seemed to be a viable scenario. The rationale did not contain anything we hadn‘t expected, with slow structural reforms and weak growth prospects underlined as the key downsides. Fiscal policy has limited maneuvering space with respect to EDP targets and S&P envisages a 1 year delay (2017) in reaching a fiscal gap below-3% of GDP. Positives are related to mid-term gains from EU entry. Despite the unchanged rating outlook, policy makers are facing substantial challenges in bringing the deficit and public debt towards more sustainable levels, and further delays in adequate policy measures imply further risks to the rating. While rating agencies gave the Cabinet the benefit of the doubt for the time being, Croatia is not out of the woods in terms of its rating outlook and risks remain. Market reaction to the news is likely to be neutral and our capital market forecasts remain unaffected.

Traders’ Comments:

CEE Fixed Income: This week, the CNB rate setting meeting will likely be a non-event but we will also have the NBP inflation expectations and Manufacturing PMI data for both the Czech Republic and Poland. However, market dynamics will be dictated to a large extent by what happens in the US and then there’s also Eurozone CPI numbers to contend with. This is an especially heavy data week in the US with GDP, ISM and Non-Farm Payrolls on the agenda along with the FOMC rate setting meeting on Wednesday. Add geopolitical risks to the mix combined with low levels of turnover due to the holiday season and you end up with a highly unpredictable and potentially convulsive situation for CEE FX and fixed income markets.