CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

CZ Macro: According to the final revision, Czech GDP growth went down slightly to 2.5% y/y in 2Q14 (the first figure compiled on the basis of the ESA 2010 standard) from the previously estimated 2.7% y/y. Yesterday's figure is basically in line with our expectation of 2.5% growth of the Czech economy for 2014, which is expected to be driven mainly by the expansion of the manufacturing sector. Regarding the switch to the new ESA 2010 methodology (the most important impacts are related to a change in the definition of capital formation, which now includes R&D expenditure and smaller assets like computers, tablets and smartphones), the Czech Statistical Office also released a positive retroactive revision of the GDP data since 1995. As a result, nominal GDP went up 4.1% on average during the period of 1995- 2013. With respect to the impact of ESA 2010 on government debt, the Czech general government debt-to-GDP ratio went down to 45.74%, from 46% in 2013. The news does not have an impact on our market forecasts.

HR Macro: The August retail trade release painted a somewhat better picture than we and the market anticipated (both expectations at -1% y/y), with consumption posting 0.3% y/y (WDA) growth, thus revealing a marginal rebound vs. the 2% y/y decline from July. We see this modest improvement as driven predominantly by the favorable seasonal component, with the tourism results reporting 5.3% y/y more overnight stays in August. Nevertheless, we continue to see consumption following a weaker path in the coming months, as weak fundamentals (i.e. unsupportive labor market trends, weak credit and declining consumer confidence) prevent it from a more sustainable recovery. As for the forecasts, we maintain our year-end call for HRK yields at 3.50%.

HR FX: The 2Q current account deficit increased 25% y/y, with the headline figure taking a hit from the further deterioration of the current transfer surplus (- 54% y/y), courtesy of contributions to the EU budget. The income account was also on the weak side, with a 36% y/y higher deficit only adding to the headline figure deterioration in 2Q. On the other hand, the merchandise account worked in the other direction, with the trade gap narrowing 10%, amid a strong export increase, due to the favorable external demand impulse. The service account also had a supportive tone. Weaker 2Q figures shaved off 0.1pp of GDP on the 4Q trailing basis, with the current account surplus slightly narrowing to 0.4% of GDP. Looking ahead, we continue to see support from the trade and services side offsetting negative pressures, thus allowing for a modest current account surplus of around of 1% of GDP. As for the implications on the exchange rate, we see the CNB standing ready to tame excessive pressures on the currency. The EURHRK should stand at around 7.65 at the end of 2014.

PL Politics: Yesterday, the new government was approved by parliament. Ewa Kopacz, the new Prime Minister, presented an ambitious plan; the realisation seems to go beyond the one year period that is left until elections. The change was neutral for markets that focus more on global events, especially on today’s ECB meeting. We expect yields to remain low (10Y at 3.0% at the end of the year).

Traders’ Comments

CEE Fixed Income: CEE bonds performed well yesterday with most local and FX currency bonds tightening in yield. MoF in Romania announced that it intends to issue over 10Y maturity Eurobonds to pre-fund 2015 needs. The focus of the day will be the ECB with some market participants expecting more aggressive moves by the ECB following a report by the FT that Mario Draghi could include Greek and Cypriot lenders in the plan to buy bundles of bank loans. In new issues CELTELEM issued a CZK 1.5 bn bond with a maturity of 5 years pricing at 6m CZK Pribor + 46 bps.