CEE Macroeconomic and Fixed Income Research

Analysts’ view

TR Macro: The economy posted a disappointingly low 1.7% y/y GDP growth print in 3Q14. Exports continued to drive growth, while domestic demand fell short of meeting expectations for a visible acceleration. We are revising our GDP forecast for 2014 to 2.8% from 3.4%, but continue to foresee 3.8% growth in 2015. In the 2015 Monetary and FX Policy presentation, CBT Governor Erdem Basci explicitly said that the CBT would not be in a hurry to ease despite the better than expected inflation outlook anticipated for 2015.
The CBT has designed a game plan made up of two facets: keep monetary policy tight to lower core inflation and hope that the government’s new food committee will help to lower volatility in food inflation. A 25 bp rate cut in December seems to be off the table. We maintain our “no change” expectation for 2015 unless the Fed’s hikes are delayed.

RS rates: After a surprising 50 bp cut last month (to 8%), we expect the NBS to remain on hold at today’s MPC meeting. Although inflation is still below the target band and we see no major upside pressures to the figure in the short run, pronounced FX volatility and the weakening of the dinar could play a key role in the NBS decision (with a 6% loss YTD, the EUR/RSD broke the 122 mark in December). The weak dinar is already putting pressure on corporate and household balance sheets, as around 75% and 60% of their liabilities are FX-related. In addition, as the IMF precautionary deal has not been formally signed and the 2015 budget has not yet been presented, we also see fiscal uncertainties playing a role in any decision. Looking forward, with the official beginning of the stand-by arrangement, which could reduce fiscal uncertainties and FX volatility, we see some room for additional easing in 1H15.

HR Macro: The CBS published the detailed 3Q GDP breakdown yesterday. A deeper look into the figures raised no eyebrows, as domestic demand remained the strongest burden on both the private consumption and investments side, shaving off approx. 1.5pp in total from the headline figure.
On the other hand, net exports maintained their supportive role, softening the GDP decline as exports growth outpaced the imports uptick. Looking ahead, we expect a similar story to evolve with the current growth constraints fitting well into our FY14 forecast (-0.7%). 2015 will most likely be tagged as another year in the red, with the GDP decline expected to be 0.5% amid a deteriorating investment profile and a more demanding pace of growth in the EU. As for yield forecasts, ample liquidity and favourable global sentiment support our YE14 call of 3.5% for the 7y segment of the HRK yield curve.

HU Rates: In line with our expectations, there were no significant changes in the minutes of the November MPC meeting compared to October. The MPC reiterated the usual sentences as disinflationary pressure in the Hungarian economy remains persistent. In addition, the negative output gap may close within the forecast horizon and so the current key rate is, along with the favourable effects of the Funding for Growth Scheme, sufficient to bolster the dynamics of the real economy from a monetary policy point of view. However, the MPC removed the following sentence from the end of the November minutes: “It was the unanimous view of the council that, with current monetary conditions maintained, inflation was likely to move into line with the target over the medium term.” The removal of this sentence supports our view that the MPC could signal further easing steps in the next Inflationary Report to be released in December after the last rate-setting meeting this year. Our baseline remains that the current 2.1% base interest rate will be kept on hold until end-2015 but we see some risks to the downside.

Traders’ Comments:

CEE Fixed Income: It seems that CEE markets are slowly waking up to the risks that surround them. The move in the PLN sticks out but CDS are also widening along with Russia now that the price of oil has taken another leg lower and the sell-off in Greek bonds puts pressure on the Eurozone periphery. We will see Romanian CPI today and the Treasury will also auction RON 500 m in the RO1418DBN040. ROMGBs have been largely impervious to global events recently so if this auction doesn’t go well in spite of weak inflation, it would be an indicator of a broader negative shift in investor sentiment as we head into year end.