Croatia and Slovenia to report 4Q20 GDP figure

This week in CEE

At the end of this week, we will get to know how the Croatian and Slovenian economies performed in 4Q20. These two CEE economies, which have been the hardest-hit by COVID-19, will conclude a string of 4Q20 GDP growth releases in CEE, which have surprised mostly on the upside. In Croatia, about -7% y/y growth is expected in 4Q20, after the -10% y/y reported in 3Q20, which should bring the full-year 2020 growth to about -8.5%. In Slovenia, due to the very challenging epidemic situation in 4Q20, we expect about a -7% y/y contraction, i.e. a worsening compared to the -2.5% y/y seen in 3Q20. Several CEE countries will report unemployment rates and retail sales for January, which should show some deteriorations. Croatia, Serbia and Slovenia will publish their January inflation figures, which should remain benign. In Hungary, the central bank will hold its MPC meeting. Neither rates nor the communication are to be changed before the more decisive March rate-setting meeting. Cautiousness is warranted, due to the more uncertain inflation outlook.

The CEE Recovery Index continued to move in a narrow range in the week ending February 13. Mobility across all categories deteriorated, with the biggest drop observed in mobility to grocery stores. On the other hand, electricity consumption and air pollution went up. All in all, the CEE Recovery Index has remained anchored at similar levels since the reintroduction of restrictions in the last quarter of 2020, suggesting that considerable improvement in economic activity can only be expected in the event of a visible easing of restrictions.

FX market developments

Last week, the Czech koruna corrected towards 25.90 vs. the EUR after a short-lived appreciation below 25.7, on the back of higher than expected inflation in January. We see the current level of the EURCZK as more appropriate, as the monetary policy outlook is less clear in our view and uncertainty remains high. Increasing weakening pressure on the Romanian leu pushed the central bank to effectively tighten monetary conditions last week, as the NBR accepted all bids at its deposit tender at the key rate level, reducing excess liquidity from the market. The EURPLN stayed below the 4.50 margin, supported by very high headline inflation at the start of the year, which in our view rules out any possible further easing in the coming quarters. This week’s central bank meeting in Hungary should be a non-event and we expect the MNB to remain in wait-and-see mode as long as the forint remains relatively stable.

Bond market developments

Yields on CEE bond markets moved up last week, following an increase of yields on major markets triggered by very positive sentiment indicators. The strongest yield increase could be seen in Romania (the 10Y went up almost +50bp w/w), amplified by local factors. There are clearer signals that another rate cut is becoming increasingly unlikely. We also dropped the last 25bp cut (originally expected in March) from our forecasts. Meanwhile, the mid-part of the CZGB yield curve moved up, with 5Y yields increasing +25bp w/w. Spreads on Eurobonds remained almost unchanged. In Serbia, the government is planning to sell EUR100mn of bonds with 20Y maturity this week.

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