GDP growth in Croatia, first set of data for the second quarter

This week, first-quarter GDP growth will be published in Croatia. This publication will complete the data on the economic performance in the region in the first three months. In general, GDP growth dynamics were solid and above expectations across CEE. In Croatia, we see the growth at 4.7% y/y in 1Q22. We should also see the first data for the second quarter, as April retail sales will be published in Croatia, Poland and Slovenia. In all three countries, we expect to see a solid growth trajectory. Furthermore, the unemployment rate is expected to drop in Hungary and Poland, while the PPI Index in Slovakia is likely to remain elevated well above 30% y/y in April. Finally, we will see the set of business and consumer indicators that will give us a flavor of the sentiment in the second quarter.

FX market developments

CEE currencies strengthened over the course of last week. Forint marked the most visible strengthening by 1.5% to 384.6 against the euro, even as the central bank kept the one-week deposit rate at 6.45%. It reacted to the better-than-expected GDP growth data and central bank comments that positive real interest rate are needed to curb inflation. It seems that the ongoing rate-hiking cycle will be longer-lasting (into 2H22, too), albeit market pricing has scaled back some of its very aggressive rate-hiking expectations recently. Polish zloty firmed towards 4.64 vs. EUR, helped by stronger-than-expected GDP growth and comments supporting further monetary tightening (MPC member Kotecki). The Czech koruna ended the week close to 24.67 vs. EUR. Minutes from the May 12 extraordinary meeting of the central bank show that most policymakers supported the proposal for FX interventions to prop up koruna in mid-May. Another rate hike may be expected, but its size remains unclear. Croatian central bank Governor Vujčić said high inflation should not stop Croatia from meeting the convergence criteria and entering the Euro Area next January. According to Vujčić, two steps remain - Croatia needs to get the confirmation of nominal convergence in June and then final approval by the European Council.

Bond market developments

The last week brought a visible correction of LCY yields in CEE (5Y and 10Y down 30-40bp w/w), but the situation remains tense for ROMGBs, where bonds with maturity longer than 2Y are still hovering around 8% or above. The result in the last domestic auction was rather weak (bid-to-cover ratio at 1.23 in the auction of 7Y ROMG), as RON liquidity is being negatively affected by NBR interventions against the depreciation of the RON. The pressure on the currency can be seen in the elevated yields implied from currency forwards, which have gone up 200bp since the beginning of April. Given the very high financing costs for governments on the domestic market, governments are eyeing foreign borrowing. Poland and Romania returned to international markets already last week. Poland issued EUR 2bn of 10Y EUR-denominated Eurobonds @MS+110bp, while Romania offered USD 1.75bn in two parts (5.5Y @MS+240 and 12Y @MS+310). This week, the Czech, Hungarian, Romanian and Polish MinFins will borrow on their domestic markets, testing the domestic capacity to lend, as foreign investors prefer a wait-and-see mode.

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