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SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONresearch.ing.com
FINANCIAL MARKETS RESEARCH
April 2013
EMEA Economics and Strategy TeamSee details at end of report
Directional EMEA EconomicsWho to tango with?
Bulgaria
Croatia
Czech Republic
Hungary
Israel
Kazakhstan
Poland
Romania
Russia
Serbia
South Africa
Turkey
Ukraine
1
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Directional EMEA Economics April 2013
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Contents
Summary 1
Quarterly Outlook 5
EMEA Capital Markets Outlook 19
EM: Who to tango with? 29
Reassessing EMU entry for the CEE 46
Countries 59 Bulgaria ............................................................................................................................60 Croatia .............................................................................................................................62 Czech Republic ................................................................................................................64 Hungary............................................................................................................................68 Israel ................................................................................................................................72 Kazakhstan ......................................................................................................................74 Poland..............................................................................................................................76 Romania...........................................................................................................................80 Russia ..............................................................................................................................84 Serbia...............................................................................................................................88 South Africa......................................................................................................................90 Turkey ..............................................................................................................................94 Ukraine.............................................................................................................................98
Disclosures Appendix 101
EMEA Economics and
Strategy Team
Dorothee Gasser London +44 20 7767 6023 [email protected]
Mateusz Szczurek Poland +48 22 820 4698 [email protected]
Gustavo Rangel London +44 20 7767 6561 [email protected]
David Spegel New York +1 646 424 6464 [email protected]
Gergely Urmossy Hungary +36 1 235 8757 [email protected]
Rafal Benecki Poland +48 22 820 4696 [email protected]
Grzegorz Ogonek Poland +48 22 820 4608 [email protected]
Vlad Muscalu Romania +40 21 209 1393 [email protected]
Mihai Tantaru Romania +40 21 209 1290 [email protected]
Dmitry Polevoy Russia +7 495 771 7994 [email protected]
Egor Fedorov Russia +7 495 755 5480 [email protected]
Sengül Dağdeviren Turkey +90 212 329 0752 [email protected]
Muhammet Mercan Turkey +90 212 329 0751 [email protected]
Ömer Zeybek Turkey +90 212 329 0753 [email protected] Cover photograph courtesy of istockphoto.com Publication date 22 April 2013
Directional EMEA Economics April 2013
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Summary
2013 is increasingly looking like a repeat of 2012. The Eurozone economy remains stuck
in a recession. New bailouts and bail-ins continue in the EMU. The US economy is
getting visibly better, but fiscal headwinds continue to threaten the recovery. Central
banks are accelerating quantitative easing (or catching up with peers), while emerging
market debt markets are rallying as capital flows pour in. Though external refinancing
risks have far from disappeared in the EMEA region, the easy Eurobond placements in
1Q13 suggest that another annual contraction in foreign loans should be comfortably
compensated for by portfolio inflows, chiefly to bonds in CEE.
A direct consequence of this backdrop in the region can be seen in bond yields hitting
fresh lows. However, with Czech 10yr yields now at 1.65%, Polish at 3.3% and Romanian
and Hungarian both at 5.4%, and with easy access to cash inflows from foreigners, the
temptation is growing for governments to halt the fiscal-tightening wave experienced
since 2010. It is also enabling policy-makers to revisit traditional growth-boosting policies,
to the great relief of the soon-to-be-voting masses.
As the Eurozone now enters a triple-dip recession (our Global Economics Team projects
a -0.6% print for this year), the original EMU/CEE GDP slump is hitting previously resilient
Poland and Russia. We revise our Russian growth forecast to 2.8% this year, on slower
exports and investment prospects. Yet, on the other side of the Bosphorus, the sun is
noticeably brighter, with Turkey and Israel confirming their relative resilience.
While Eurozone challenges continue to hang as a Damocles sword on any wider
European recovery and the Chinese growth engine loses steam, 2014 still holds the
promise of a US recovery and evidence of outperformance in some Emerging Markets
(Latam or, as mentioned above, Turkey and Israel). This means there should be room for
EMEA to grasp some external support for GDP. But from where? And who in EMEA will
be best positioned, given their traditional trade ties, to capture the world’s demand growth
in 2013 and 2014?
This is the theme we address in this new version of Directional Economics. As the EMEA
region faces a heavy electoral schedule, political imperatives are set to reignite
international trade ‘courtship’. Having faced the GDP-slump for a few years now, and
having exhausted conventional fiscal possibilities, EMEA politicians need new partners
beyond their national boundaries to get “some” extra economic growth.
The “Who to Tango with” section of this report attempts to identify the main countries set
to contribute most to household consumption growth in the next two years. By
investigating corresponding trade ties, it seeks to establish which EMEA countries can
hope for the largest export contribution to growth this year and the next. It also identifies
which will struggle further.
We reassess the benefits of CEE joining the EMU in a second section. Given core
members’ loss of credibility in recent years, and the persistent contagion risks in the EMU
periphery, the appeal of the Club has receded. This is all the more so since the promise
of cheap and stable financing for new members within the EMU has proven overrated.
Latvia and Lithuania may prove to be the only ones joining the Euro area in this decade.
Dorothee Gasser-Chateauvieux, London (44 20) 7767 6023
Mateusz Szczurek, Warsaw (48 22) 820 4698
Directional EMEA Economics April 2013
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Country Summary : CE4
Czech Republic
Hungary
Eventual recovery in activity is going to be a prolonged affair,dependent on Eurozone stabilisation. For a change, we expect fiscalpolicy to become supportive for growth from mid-2013 onwards, notleast because of the general elections due in 1H14. Apart from theEMU outlook, the risks for growth include the tight debt thresholds inthe fiscal responsibility bill and high participation in the second pillarof the pension system, which could further increase savings. While the seventh-running quarter of the recession is likely to keep CZKweak and official rate expectations anchored at zero, we see 12x15FRAs pricing in no rate change, arguing that this rate is too low. We expect €/CZK to drift above 26.0, still allowing the CNB to abstainfrom actual interventions this quarter.
HUF recovered from above 300 to the 290-300 trading range once the uncertainties around the new NBH leadership and its possible programmes subsided. With Mr. Matolcsy appointed as the new governor, the MPC’s rate cut cycle did not stop, and the key rate was reduced to 5.00% in February. NBH’s Funding for Growth Scheme (FGS) could hardly be called aggressive, but the plans to reduce access to two-week central bank bills has potential to weaken the HUF, or at least shield it from appreciating in line with further bond inflows. While we expect Hungary’s recession to end in 2013, private deleveraging and slow EU growth will keep growth close to zero despite promising signs in industrial output.
Poland
Romania
While Poland should avoid near-zero growth in 1Q13, the case forrecovery in the next quarters remains weak. CPI should remainbelow the MPC target in 2013 and 1H14. The MPC is in 'wait and see’ mode but we expect further easing through 25bp cuts in Juneand July (to 2.75%). MinFin should avoid growth-damaging tightening to meet the deficit target of 3.5% of GDP: it can revise thecentral deficit up or utilise transfers from OFE capital. There is moreto do on the monetary policy side, as real rates - even after 50bps in cuts - should remain the highest in EM. This should attract portfolio capital, despite some cyclical fiscal slippage. Overvaluation of PLNbonds could be halted if yields pick up on core markets or if the MPCcredibly announce the end of the easing cycle.
Romania’s eurobonds have performed strongly in recent months. 5Y CDS spreads compressed to 215, after averaging slightly more than 350 in 2012. While reaching a third consecutive IMF deal remains our base-case scenario, this is probability less likely. The alternative might put some temporary pressure on Romania’s tradable debt, and future developments will depend on the fiscal line chosen by the executive. With the government continuing to talk about fiscal easing (cutting employer social security contributions, cutting VAT for bread and eventually all food items), we attach a reasonable probability to a scenario of fiscal experiments that could limit potential dips in popularity. While recent GDP growth revisions increase the chances of a ratings upgrade, for now a downgrade looks more likely.
Country Summary : other Central & Eastern Europe
Bulgaria
Croatia
Tens of thousands of Bulgarians took to the streets in February in a protest sparked by high utility bills and fuelled by poverty. This led the government to resign and brought forward general elections by about two months to 12 May. The good news is that this increase inpolitical uncertainty has not been reflected in available economic data, so our forecasts have not seen significant changes. The badnews, however, is that polls suggest the elections will not bring aclear winner, limiting the chances for a speedy formation of a new government. The risk of fiscal slippage has increased along withsocial tension. The Socialists’ plan to return to progressive taxationwould probably put the largest pressure on public finances.
HRK continued its weakening trend in 1Q13, with depressed domestic and foreign demand requiring an environment that discourages imports. While the near-term hurdles in the EU accession process were cleared, the economy’s outlook worsened. The two downgrades by Moody’s and S&P left Fitch as the only agency keeping Croatia’s BBB- rating. On the positive side, Croatia retains decent access to external funding. It recently placedUS$1.5bn in 10Y bonds, the first since April 2012. The issue alone covers a quarter of its gross 2013 issuance needs. We expect a continuation of the weakening of the HRK, on sub-average growth and increased pre-EU entry spending in 2Q13.
Serbia
2012 real GDP growth disappointed, down 2% on a poor harvest.2013 should see a return to positive territory, but our 1.1% forecastmakes officials’ 2% look optimistic. Their 3.6% targeted GDP budgetgap will likely be missed, while the CA gap should stay flat at 10% ofGDP, despite a boost in car exports. The government’s commitmentto restructuring has proven commendable so far, and the benignglobal liquidity backdrop has allowed for easing of financingpressures in 1Q13. Unfortunately, this also means stickier FX debtlevels and a less likely compliance with IMF conditions in the short term (with an IMF mission in May). But officials seem committed tonegotiations, as with Kosovo, despite recent bumps and cosinesswith Russia.
Directional EMEA Economics April 2013
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Country Summary : CIS
Russia
Kazakhstan
1Q13 economic weakness has forced us to cut our 2013 GDP call to2.8%, which still looks more optimistic than MinEco’s updated call of2.4%. However, the CPI forecast remains mostly unchanged atmarginally below 6%, with some upside risk in 2014. Thus, we thinkour call for a 25-50bp key CBR rate cut looks balanced in terms ofGDP and inflation risks. RUB had been doing well before early April’ssell-off, and we expect it to weaken further by year-end on a deteriorating BoP outlook and other domestic factors. Room for lowerpolicy rates and attractive OFZ position vs CEE/BRICS peers flagsthat there might be some extra yield compression in OFZ bonds. Key risks are lower rate cuts, a weaker fiscal outlook (vs MinFin’s -0.6%/GDP) and FX risk.
Higher GDP growth than in many DM/EM peers does not imply many changes in the macro story. Due to longer delays in 4Q12 data releases (eg, final GDP, 1Q13 BoP), we mostly stick to earlier GDPforecasts, with some adjustments to key items. We still keep a slightly below-consensus view on GDP, but now see a somewhat better 2H13 inflation profile. This will be beneficial for consumption. Despite the 3% of GDP budget gap, the fiscal profile is secured by the National Oil Fund (NOF), prudent budget planning and a rise in oil export duty. We however note that this looks as unwinding the effect of the 2009-1H10 duty abolition. The main concern is worsening BoP, which puts KZT at risk, barring a renewed commodity price rally.
Ukraine
We resume our Ukraine macroeconomic coverage with a 1.6% YoYGDP call for 2013 (vs 0.2% in 2012), with 1H13 likely to remainrecessionary. UAH devaluation pressure has slightly abated thanks toa calmer political scene post 4Q12 elections, appetite for Ukrainianrisk (both sovereign and corporate) and further hopes of an IMF deal.The mission completed the next round of talks in early April, flagging‘good progress’. Though tail-risks of the deal not going through stillexist, our base case scenario is for the deal to happen in late 2Q13-early 3Q13. The remaining BoP risks, FX reserves at 3-4 months of imports, and limited chance of lower gas price from Russia all call fora weaker UAH as a bare minimum requirement for the deal.
Country Summary : other EMEA
Israel
Turkey
Israel is on course to deliver a solid 3.5% YoY growth in 2013, liftedby the external accounts. The demand side should remain subdued,with heightened prospects of higher fiscal constraints. The latter point,alongside a benign inflation backdrop in 2Q13, should allow the BoI tocut the base rate against a rallying ILS (on a solid current accountprofile), though the window is small and limited to this quarter. DirectFX purchase and verbal signals are thus likely to be intervention toolsof choice in the short term. The fiscal accounts will remain the weakpoint of the country this year and budget noise is likely to increaseuntil August. The new government is settling in, but the alliance isparticularly fragile on the Palestinian issue.
Turkey’s 2012 soft landing, with 2.2% GDP growth, turned out to be faster than expected. That said, bringing along significantly neededexternal rebalancing, it was certainly supportive of sustainability. Last year, the C/A deficit fell from 9.7% to 6.0% relative to GDP, as the non-energy balance turned from a 3.6% deficit into a 0.7% surplus. The expected stabilisation in the C/A deficit at 6.5-7.0% of GDP as growth picks up towards a 5% potential rate this year will support Turkey’s rating outlook. We still expect an investment grade (IG) rating by 3Q13. Inflation and global liquidity will be the key drivers of volatility. We think all policy will be geared towards 4% GDP growth in 2013, while the CBT continues to keep interest rates low, watching out for REER and loan growth, and building up reserves.
South Africa
The South Africa macro mix is not likely to look better in 2Q13. Thefunding of the CA gap is set to be even tighter; as the trade balancedeteriorates further. Inflation should break the 6% threshold earlierthan the SARB anticipated in its last statement, and social noisecould be re-ignited during the wages negotiation season. Unless theauthorities come up with a ground-breaking action plan – a low probability in our view – local assets are likely to underperform EMpeers with overhanging risks of a rating downgrade. Still, it is not alldoom and gloom. Industrial production should show signs of revival and BRICS institutionalisation could offer credible anchors for SA inthe mid term.
Directional EMEA Economics April 2013
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ING Main Macroeconomic Forecasts
Real GDP (% YoY) Exchange rate (quarterly is eop, annual is avg)
1Q13E 2Q13F 3Q13F 4Q13F 2013F 2014F 1Q13E 2Q13F 3Q13F 4Q13F 2013F 2014F
Bulgaria 0.5 1.4 0.9 1.1 1.0 1.7 EURBGN 1.96 1.96 1.96 1.96 1.96 1.96
Croatia -3.2 -1.6 -0.7 -0.2 -1.4 1.0 EURHRK 7.59 7.66 7.60 7.60 7.59 7.61
Czech Rep -1.2 -0.3 1.3 1.5 0.1 2.1 EURCZK 25.76 26.30 26.50 25.70 26.07 25.10
Israel 2.6 3.5 4.3 3.7 3.5 4.7 USDILS 3.60 3.65 3.70 3.75 3.69 3.70
Hungary -0.8 0.1 0.8 1.0 0.3 1.3 EURHUF 304.3 290.0 295.0 295.0 295.6 292.0
Kazakhstan 4.0 4.1 6.6 5.8 5.3 5.8 USDKZT 150.9 152.1 152.5 152.5 151.5 152.8
Poland 0.7 1.0 1.3 1.8 1.2 2.6 EURPLN 4.18 4.16 4.20 4.10 4.17 4.13
Romania 0.7 0.7 2.2 2.1 1.6 2.0 EURRON 4.42 4.40 4.35 4.30 4.39 4.31
Russia 1.3 2.2 3.0 4.1 2.8 3.5 USDRUB 31.06 31.30 31.90 33.00 31.56 33.10
Turkey 3.2 4.4 5.0 5.3 4.5 5.0 USDTRY 1.81 1.80 1.84 1.90 1.82 1.90
Serbia -0.8 1.2 1.4 2.3 1.1 3.2 EURRSD 111.31 112.50 113.00 113.00 112.36 111.61
South Africa 2.4 2.8 2.5 2.7 2.6 3.0 USDZAR 9.23 9.25 9.00 9.10 9.08 9.05
Ukraine -1.1 -2.0 3.6 6.0 1.6 3.0 USDUAH 8.12 8.80 9.00 9.30 8.67 9.55
Eurozone -1.0 -0.8 -0.7 0.1 -0.6 0.9 EURUSD 1.28 1.28 1.25 1.20 1.27 1.22
US 1.8 1.7 1.5 2.2 1.6 2.4
CPI (%YoY) (quarterly is eop, annual is avg) CB rates (%, eop)
1Q13E 2Q13F 3Q13F 4Q13F 2013F 2014F 1Q13E 2Q13F 3Q13F 4Q13F 2013F 2014F
Bulgaria 3.6 4.0 2.2 2.9 3.3 3.4 Bulgaria n/a n/a n/a n/a n/a n/a
Croatia 4.9 4.3 2.9 2.5 3.7 2.3 Croatia 6.00 6.00 6.00 6.00 6.00 6.00
Czech Rep 1.7 1.7 1.9 1.8 1.8 1.8 Czech Rep 0.05 0.05 0.05 0.05 0.25 1.00
Israel 1.4 1.0 1.9 3.2 1.9 2.5 Israel 1.75 1.50 1.50 1.75 1.75 3.00
Hungary 2.7 3.3 2.6 2.8 3.0 3.2 Hungary 5.00 4.25 4.25 4.25 4.25 4.50
Kazakhstan 6.8 6.3 6.1 5.7 6.3 5.8 Kazakhstan 5.50 5.50 5.50 5.50 5.50 5.50
Poland 1.0 0.8 1.4 1.8 1.3 2.1 Poland 3.25 3.00 2.75 2.75 2.75 3.00
Romania 5.3 5.8 4.4 4.6 5.4 4.0 Romania 5.25 5.25 5.25 5.25 5.25 5.25
Russia 7.0 6.2 5.8 5.7 6.1 6.0 Russia 5.50 5.25 5.00 5.00 5.00 5.00
Turkey 7.3 7.8 6.9 6.5 7.1 5.9 Turkey 5.00 5.00 5.00 5.25 5.25 5.50
Serbia 12.5 6.9 2.0 4.6 7.3 6.5 Serbia 11.75 11.75 10.25 9.50 9.50 8.50
South Africa 5.7 6.1 6.5 6.5 6.2 5.5 South Africa 5.00 5.00 5.00 5.00 5.00 4.00
Ukraine -0.8 -0.3 2.5 6.7 3.4 6.8 Ukraine 7.50 7.50 7.50 7.50 7.50 7.00
Eurozone 1.8 1.7 1.6 1.7 1.7 1.7 Eurozone 0.75 0.75 0.75 0.75 0.75 0.75
US 1.5 1.8 1.6 1.6 1.6 1.8 US 0.00 0.00 0.00 0.00 0.00 0.00
Source: National sources, Bloomberg, Reuters, ING estimates
Directional EMEA Economics April 2013
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Quarterly Outlook
The stance of monetary stimulus in EM Exogenous pressures on CPI to ease further Over the quarter ahead, global food price pressures should remain broadly benign for
EM. Various lags in transmission would also argue for heightened food disinflation in local
CPI in 2Q13 versus 1Q13. However, weaker EM currencies versus the USD over 1H13
could still spoil the party – particularly for South Africa.
Fig 1 Reuters CRB and market forecast (ppt)
Fig 2 Reuters CRB and market forecast (% YoY)
200
300
400
500
600
700
800
CRB foodstuffs CRB generic f'cast based on BBG
consensus median
-40
-30
-20
-10
0
10
20
30
40
50
60CRB foodstuffs CRB generic
f'cast based on BBG
consensus median
Source: Bloomberg, ING estimates – CRB: Continuous commodities index Source: Bloomberg, ING estimates
Fig 3 Brent oil price (US$ per barrel)
60
70
80
90
100
110
120
130
Forwards ING
forecast
Source: Bloomberg, EcoWin, ING estimates
On the food prices front, the combination of stronger local currency and a higher
weightage in the CPI suggest that Romania would experience the largest disinflation
drive from exogenous factors in 1H13. At the opposite end of the spectrum, South Africa
would be one of the few still experimenting positive food inflation contributions over the
semester. This poses the additional risk of second-round effects, for a country where core
CPI is already close to the Central Bank tolerance threshold.
Global food and oil price
pressures should be broadly
benign in 2Q13
Romania to benefit most from
global food disinflation…
Directional EMEA Economics April 2013
6
Fig 4 Estimation of exposure to global food price pressures
CRB foodstuff sub-index %ch 1Q13/4Q12 (lc)
CRB foodstuff sub-index%ch 2Q13/1Q13 (lc)
Food weight in CPI (%)
Impact over 1H13 CPI (ppt)
Romania -10.0 3.5 32.0 -1.0Israel -9.0 -1.9 16.8 -0.9Russia -7.5 2.4 27.9 -0.7Turkey -6.0 1.1 24.1 -0.6Poland -6.2 3.4 20.1 -0.3Czech R. -5.7 4.1 17.7 -0.1Hungary -2.9 3.3 20.1 0.0South Africa -4.5 8.4 14.2 0.3
Source: National sources, EcoWin, ING estimates
On the oil prices front, our rough estimate (arguably, fuel does not account for the full
transport weight in the CPI, but energy costs also depend on oil), suggests Israel’s CPI
would benefit the most from the developments in global oil prices and the local currency
rate versus the USD.
Fig 5 Estimation of exposure to global oil prices pressures
CRB foodstuff sub-index %ch 1Q13/4Q12 (lc)
CRB foodstuff sub-index%ch 2Q13/1Q13 (lc)
Transport weight in CPI (%)
Impact over 1H13 CPI (ppt)
Israel -5.3 -5.9 16.2 -0.9Romania -6.4 -1.4 12.4 -0.5Turkey -2.3 -3.0 18 -0.5Russia -3.9 -1.8 13.7 -0.4Poland -2.5 -1.5 10.7 -0.2Czech R. -1.9 -0.8 12.4 -0.2Hungary 0.9 -1.6 15.6 -0.1South Africa -0.7 4.0 16.4 0.3
Source: National sources, EcoWin, ING estimates
Figure 6 presents a summary of both our estimates for 1H13 food and oil prices and the
expected impact on the main CEEMEA CPI. According to the latter, Israel and Romania’s
CPIs will face the strongest ‘exogenous’ price pressure recession. South Africa on the
other hand, appears to be the clear loser.
Fig 6 Exogenous price pressures: winners/losers over 1H13
Israel
Romania
Turkey
Russia
Poland
Czech R.
Hungary
South Africa
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
-1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4
Transport component impact
Fo
od com
ponent im
pact
Source: National sources, EcoWin, ING estimates
Domestic demand – more gloomers still than early bloomers Group 1: Central European countries have broadly disappointed markets and officials on
the private consumption front and high frequency data is still showing that the balance of
risks on the recovery lies on the soft side.
…and Israel to benefit the
most from fuel disinflation
South Africa to benefit the
least from the softer
commodities backdrop
Directional EMEA Economics April 2013
7
Fig 7 Central Europe retail sales (3m-mav, % YoY)
Fig 8 …and other EMs doing better (3m-mav, % YoY)
-30
-20
-10
0
10
20
30
Czech R. Croatia Hungary
Poland Romania Bulgaria
Serbia
-30
-20
-10
0
10
20
30
40
Russia Ukraine South A.
Kazakhstan Israel
Romania and Bulgaria are ex vehicles
Source: National sources, EcoWin
Kazakhstan is volume
Source: National sources, EcoWin
Consumers in Central Europe seem rather depressed (see Figure 7) with real retail sales
growth still in the red – only Hungary retail sales data in the region seem to have offered
an uptick recently. The protracted support offered by the authorities to disposable income
(vs utility price cuts, wage hikes) may be filtering through – but the question that remains
to be answered is whether these costly policies will have a long-lasting impact.
Fig 9 Real wage growth in Central Europe (% YoY)
-15
-10
-5
0
5
10
15
20
25
Poland Hungary (estimates) Czech R. (estimates)
Croatia Bulgaria Romania
Source: National sources, EcoWin, ING estimates
Real wage developments in CE3 (Poland, Hungary and Czech Republic,) continue to
point to subdued household consumption in the months ahead. Only Polish wages
recently turned positive, after a year of nil-growth, thanks to the spectacular collapse of
inflation from 3.7% in September 2012 to 1% in March 2013. This low inflation will provide
some support to consumer spending power, but the higher household savings rate should
prevent an immediate translation into stronger demand.
Group 2: Peripheral countries (Turkey, Baltics, CIS ex Ukraine) seem to be doing better
for different reasons. The time might soon come for a shift back from growth-support to
inflation re-targeting at the Central Bank level. Admittedly, this should not be the case in
the short-term for Russia, but we see upside risks building for 2014’s local CPI outlook.
CEE consumers the most
depressed
CEE peripheries are doing
better
Directional EMEA Economics April 2013
8
Fig 10 Core CPI: the lower tier (% YoY)
Fig 11 Core CPI: the higher tier (% YoY)
-4-202468
1012141618202224
Jan
03
Oct 03
Jul 0
4
Apr 0
5
Jan
06
Oct 06
Jul 0
7
Apr 0
8
Jan
09
Oct 09
Jul 1
0
Apr 1
1
Jan
12
Oct 12
Bulgaria Czech R.Poland UkraineIsrael Romania
-4-202468
101214161820
Jan
03
Oct 03
Jul 0
4
Apr 0
5
Jan
06
Oct 06
Jul 0
7
Apr 0
8
Jan
09
Oct 09
Jul 1
0
Apr 1
1
Jan
12
Oct 12
Croatia HungarySouth A. KazakhstanRussia Turkey
Source: EcoWin Source: EcoWin
Core CPI measures suggest that Central Europe’s disinflation remains broadly intact in
1Q13. In ‘peripheral’ countries however, core inflation measures are all on the upside,
except for Turkey. But for the latter, the disinflation trend that started in 2H11 seems to
have levelled off in recent months.
Fig 12 Private sector credit growth (% YoY)
-20
0
20
40
60
80
100
120
Russia Turkey Kazakhstan South A. Poland
Source: National sources, EcoWin, ING estimates
Another common factor for the peripheral countries is the relative robustness of private
sector credit growth relative to the CE4 (where household credit growth in particular is
below 5% YoY since 2H12). The case of Turkey is of particular interest for 2Q13, given
the recent acceleration in private sector credit growth – and its combination with sticky
core CPI, raising concerns of late at the Central Bank level. Russia could also be a
candidate for inflation ‘trouble’ down the line, while the markets currently focus on the CPI
sharp disinflation outlook and possibility of a rate cut. Indeed, core CPI seems sticky,
while credit growth is expanding at a robust 20% pace and real wages are still growing at
5% YoY at the end of 1Q13 (in spite of having halved this growth vs 1Q12)
Group 3: Some are slipping deeper into an un-virtuous cycle (South Africa, Ukraine) of
higher inflation (on the back of fiscal constraint, with administrative price hikes, electoral
pledges on public wage hikes, coupled with high exogenous price pressure filtering),
struggling domestic demand and balance of payment troubles.
Core CPI pressures
rebuilding at the periphery…
…as private credit growth
gains momentum
Ukraine and South Africa are
facing the hardest mix
Directional EMEA Economics April 2013
9
The end of proactive reflating via policy rates is nearer, but the FX channel may still offer some ammunition The protracted actions of Central Banks in CEEMEA to support growth in the face of a
triple recession risk in the Eurozone, which blossomed in 1Q13, may face a soft
realignment:
• As nominal/real rates are low, room for further easing has shrunk. This goes even
beyond the debate on deficiencies in credit transmission mechanism, Draghi style.
Fig 13 Markets’ discounting of rate action vs ING’s views (updated 15 Apr 2013)
1*4 FRAs ING 3*6 FRAs ING
Poland -14 0 -32 -50Hungary -24 -25 -73 -75Czech R. -3 0 -6 0Russia -20 0 -40 -25Israel 2 0 -8 -25Turkey -15 0 -11 0South Africa -1 0 -1 0
Source: Bloomberg, ING
• FX interventionism is likely to re-emerge more forcefully in 2Q13, allowing for a dual
mandate of easing monetary conditions (when the interest rates tool grips) and
providing a growth lift via the export channel. With the markets yet to digest April’s
Japan QE shock, US risks of tighter labour markets (potentially reigniting the debate
on QE gradual removal) and lingering Eurozone systemic risks, trade-weighted
emerging market currencies are set to appreciate, putting competitiveness at risk.
That said, not all countries are equal in the face of FX reserve accumulation on
sterilisation costs.
Fig 14 EMEA forex intervention risk in 2Q13
Intervention risk
Direction bias Main tool
exp 2Q NTW %ch vs 1Q13
Poland Low Weaker Rate cut, measured verbal jawboning -0.7Hungary Medium Stronger Verbal jawboning +0.2Czech Republic Medium Weaker Verbal so far, direct FX a possibility +3.9Romania Medium Weaker Indirect FX +0.3Russia Low Weaker Verbal jawboning -0.5Ukraine Low - - -3.4Turkey High Weaker Rate cut/measured, gradual rate cut +2.0 (real)South Africa Medium Stronger Verbal jawboning -2Israel Strong Weaker Direct FX/rate cut +2
Source: ING estimates – NTW=nominal trade weighted exchange rate (+ is appreciation)
• The ‘third-wayers’ should continue to test their experiments. At one end of the
spectrum is Turkey, with its sophisticated ‘stabilisers’ strictly framed in the monetary
sphere (inflation/financial flows). At the other end, we have Hungary and its NBH
policy intrusion (inflation/credit stock). We do not see a change of paradigm in 2Q13
on these alternatives. However, we would remark only on one thing for the medium
term: Turkey’s technical tool has been heralded by the markets, but its increased
complication may be eating away investors’ ability to read the CBT. Meanwhile,
Hungary’s MNB has been widely feared to shift to unorthodoxy. Yet so far, the new
monetary policy bias has proven fairly pragmatic – it is the legal framework, tax
policies, and centrally-decreed price changes that are raising eyebrows.
Room for rate cuts is smaller
in 2Q13 …
…but monetary easing via
the FX channel is still an
option
Turkey and Hungary will
continue with their alternative
options
Directional EMEA Economics April 2013
10
Those who have not showed reform efforts will suffer The strong pro-cyclical stringency imposed on the fiscal sphere in the aftermath of the
2008 crisis and the prolonged downturn has heightened emerging markets’ fiscal
idiosyncrasies. At this juncture, the fiscal subject will remain a key 2Q13 theme, though
its impact on local-asset EM prices is far from unilaterally transitive still.
Rating downgrade risks From a direct angle, four years after the onset of the downturn, and with the possibility of
a macro stabilisation – though at a low level – on the cards, there is now a bit more room
for rating agencies to take a step back and assess the ‘pragmatism’ of emerging markets’
country-cyclical strategies (versus so far normalising mostly developed markets ratings, in
tandem with an ex-post reassessment of risks). To sum it up: it is time to check whether
the rise in EM public debt over the past years is now relayed by a thoughtful willingness
to reverse the trend.
Fig 15 1Q13 main EMEA rating actions
Country Agency Date Action taken
Lithuania Fitch 05-Apr Upgrade Turkey S&P 27-Mar Upgrade Hungary S&P 21-Mar Outlook downgrade Egypt Moody’s 21-Mar Downgrade Latvia Moody’s 15-Mar Upgrade Thailand Fitch 08-Mar Upgrade Tunisia Moody’s 28-Feb Downgrade Tunisia S&P 19-Feb Downgrade Slovenia S&P 12-Feb Downgrade Croatia Moodys 01-Feb Downgrade South Africa Fitch 10-Jan Downgrade Ukraine S&P 7-Dec Downgrade Ukraine Moody’s 5-Dec Downgrade
Source: Bloomberg
In our view, the ‘bad pupils’ could face the music again this quarter. South Africa (S&P) is
at risk, but Hungary might be spared by the reasonably conservative NBH measures
package.
At the other end of the spectrum, Moody’s could upgrade Turkey to investment grade on
both the local and foreign long-term debt front. But we believe at this stage it is more
likely to happen in 2H13 rather than in 2Q13.
IMF deals far from certain for 2Q13 Those EM countries struggling amidst a hard combination of constrained fiscal
manoeuvres and high external financing have made little progress in 1Q13 to alleviate
their woes. At this stage, most EM countries still seem reluctant to embark on the
politically costly measures, even with the IMF nuancing its calls for tighter fiscal policy.
Other ‘intrusions’ on the domestic tax, deregulation, or privatisation policies are equally
touchy with elections looming.
• Ukraine: Has not unilaterally taken the IMF route yet, and is trying to play the Russian
option again – mulling a joint-venture with Gazprom on a gas pipeline lease (which
would in turn lower import prices and help the budget). We continue to believe a deal
should be struck on this, but is probably more likely in 3Q13. We thus might get some
more noise from tensing relationships between Ukraine, Russia and the EU in the
near term.
• Romania: The last IMF mission to visit Romania left in January, after agreeing to
extend the ongoing arrangement from March to June due to a lack of progress. While
there is still time for adjustments, and we believe the extension of the SBA will be
Rating actions could
intensify in 2Q13
South Africa and Hungary are
still facing downgrade risks
IMF deals are still slow to
progress
Directional EMEA Economics April 2013
11
agreed on, market participants may soon start pricing in growing chances of an end to
the streak of IMF arrangements.
• Serbia: The case of an IMF deal is still alive, though Serbian authorities have
attempted recently to secure funding elsewhere (ex UAE) – Russia could also offer an
alternative, as it tries to secure new export markets for gas. Whether the Cyprus story
has dented its investment project in the region however has yet to be established…
• Hungary: With the new NBH Governor on board since February, the prospects of an
IMF deal have virtually disappeared for the year. So far the government seems
perfectly able to finance its domestic and foreign financing needs on its own.
• Egypt: The country’s economic situation has worsened dramatically over 1Q13, and
yet the authorities rejected an emergency loan in March. Talks are still ongoing for a
standby US$4.8bn, but negotiations are set to be burdened by the political backdrop
(new parliamentary elections date yet to be agreed on).
IMF negotiations should thus remain protracted and lengthy in 2Q13. But more generally,
it is interesting to note the emergence of an alternative option – a BRICs bank – as hinted
upon at the BRICs summit in Durban. However, its implementation still remains beyond a
six-month horizon at best: after a new meeting agreed for September in parallel to the
G20 in Russia.
Eurozone: the ‘sub-beta’ risk is not dead Another ramification of the fiscal theme in emerging markets in 2Q13 is the persistence of
the Eurozone debt risk. This is particularly relevant for the Central and Eastern region
non-EU member assets, as it kills any further (if possible) convergence trade play and it
further erodes the EMU attractiveness.
Admittedly, the direct reaction to the Eurozone’s ‘sub-beta risk’ highly depends on the
country in distress and the nature of the distress. In the case of Cyprus, the limited CE4
exposure in terms of net FDI to Cyprus offered protection – as opposed to Ukraine and
Russia (for a relative analysis on this issue, please refer to Mateuz Szczurek’s Cyprus and CEE: channels of contagion, 4 April 2013, and Dmitry Polevoy’s RUB: unlikely to avoid Cyprus risk, 20 March 2013). Also, the mid-term effect of the crisis has been
reallocated in the portfolio, from distressed EMU into higher quality CEE. Liquidity coming
out of Japan will reinforce this trend, given the Japanese experience with the CEE
markets.
With various level of pertinence, Slovenia, Malta, and Luxembourg have all been
heralded by the markets as the next ‘sub-beta’ risks. But the bulk of the core EMU –
namely Italy, Spain and France – are the bigger contenders in our view to bring long-
lasting and wider Eurozone debt stress systemic risk still this year.
The core markets backdrop to support EM assets still Core markets view (by Rob Carnell, ING’s Chief International Economist) Our G3 economists feel that the latest bout of Eurozone jitters suggests that not only has
Europe made little progress in the years since the onset of the global financial crisis, but
in some senses has gone backwards.
ING’s Eurozone forecasts are now for further deterioration in activity this year compared
to last, and more weakness in 2014. The lessons of aggressive fiscal austerity under
near-zero interest rates seem to have been learned by the OECD and IMF, but not the
European Commission, or in particular, the politicians of Germany and other core
European countries.
Some things never seem to
change in the developed
market universe
The outlook for the Eurozone
remains extremely
challenged…
Eurozone persistent debt
troubles challenge still the
convergence play
A BRICs bank as an
alternative to the IMF?
Directional EMEA Economics April 2013
12
Self-destructive contractionary fiscal policy continues in many countries, with little to show
for it in terms of deficit improvements, and against a backdrop of a rising mountain of
public debt and collapsing activity.
If there is a change, it is that having sat on their hands for much of the early part of the
crisis, European politicians are now beginning to interfere, evoking fond memories of their
earlier inaction. The Cyprus bail-out/bail-in debacle is a good case in point, with the
integrity of bank deposit guarantee schemes across the single currency region looking
threatened. Attempts at damage limitation may have plugged the potential for a
resumption of capital flight from peripheral Eurozone banks, but having let the genie out
of the bottle once, lingering fears will remain.
Moreover, the hopes that a banking union across the Eurozone would help stem both
capital flight risks and break the pernicious link between bank solvency and sovereign
debt seem utterly out of reach now. Re-capitalisation is seen as a distinctly ‘national’
problem by today’s politicians.
Fig 16 Eurozone bank deposits (€m)
Fig 17 Liquidity from US Fed and BoJ
65
70
75
80
85
90
95
100
105
110
115
120
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
FRNLDEITIEESGRCYP
Jun-2010 = 100
0
0.5
1
1.5
2
2.5
3
3.5
4
-50000
0
50000
100000
150000
200000
11 12 13 14 15
US
JPN
10Y US Treasury
$mn
F'casts
0
0.5
1
1.5
2
2.5
3
3.5
4
-50000
0
50000
100000
150000
200000
11 12 13 14 15
US
JPN
10Y US Treasury
$mn
F'casts
Source: ECB Source: ING
If there is any silver lining, it is that in some countries, as unemployment continues to
mount throughout the Eurozone, the democratic backlash against austerity is
strengthening. The rejection of traditional party politics at the Italian elections in February
are a case in point, and Italy is to embark on some modest fiscal stimulus this year, whilst
France and Spain also seem to be giving up on previous deficit reduction plans.
Is this progress? Does it make the future of the Eurozone look stronger? Many will think
not. And though our house forecasts assume a gradual return to something approaching
normality over the next few years, scope for a future intensification of the Eurozone crisis
may have its roots in the political actions taken over the last few months.
As ever, the story is a somewhat happier one across the Atlantic…though here, the effect
of public spending ‘sequestration’ or spending cuts – the result of US political dysfunction
– and tax rises, are set to undermine what had been a very bright start to the year. Until
now, the US had avoided the Eurozone’s penchant for chasing deficit reduction targets.
But recent soft data suggests that these lessons are only ever learned the hard way.
But though the current set of fiscal measures are likely to dampen growth, they are one-
offs, and a strong housing and corporate sector will likely lift the economy again before
the end of the year, after a new, lower counterfactual for GDP is reached.
The recent debate over the future of QE in the US has centred on the likelihood of a
scaling back of its current US$85bn-per-month asset purchases. But the intensity of that
Progress towards a lasting
solution to the Eurozone
crisis remains perilous
…and politics are adding a
new, unwelcome dimension
The US outlook is
considerably brighter…as
usual…
…though there are some
mounting fiscal headwinds
here too
Directional EMEA Economics April 2013
13
debate is likely to diminish over the coming months as activity softens, and will not pick
up again until later in the year.
Our best guess is that QE remains at US$85bn per month until 4Q13, at which point it will
be cut to about US$40-50bn per month, with the cuts evenly spread between MBS and
Treasury debt. Further, downscaling is likely in 2014, bringing incremental QE to an end
by 2Q14.
But where the US is scaling back, Japan is scaling up. A massive expansion of the BoJ’s
QE scheme, with a targeted doubling of base money over two years and expansion of
purchases across the maturity spectrum of the JGB market, has led to further JPY
weakness, and bolsters an already stimulatory fiscal backdrop – despite their 240+%
GDP debt ratio.
This is a refreshing change to the austerity being practised in the Eurozone. Along with
the resulting much weaker JPY, the outlook for Japanese growth has picked up
considerably. And whilst a new 2% inflation target seems optimistic, an end to deflation
for a time is looking more plausible.
The combination of a resumption of the Eurozone crisis, short-term US weakness, and
massively enhanced Japanese QE means a broad spectrum of support for bonds at the
longer end of the yield curve, though in Europe, mainly in the “core”.
Even with the US downscaling QE by the end of this year, and ending it by mid-2014,
total QE-derived liquidity will be at highly elevated levels over the next twelve months,
and even over a longer time horizon, remain at decent levels.
This only leaves the question of whether the source of QE matters (if for example, money
managers in the two regions had different geographical biases). Falling US QE and a
resumption of growth should lead to slowly rising Treasury yields over the second half of
this year.
But with global liquidity remaining ample, this is likely to be a subdued increase, ending
the year only slightly above recent March highs. Such increases in Treasury yields should
provide some support for the dollar, in particular against the JPY, though also against the
EUR. The search for yield will likely support EM as well as some of the higher yielding
G-3 alternatives – Scandi, and $-Bloc for example, though they may well lean against
increased flows with easier rates policy.
Against this backdrop of ample G3 liquidity, the risk appetite should remain broadly in the
positive this quarter – with relatively low core yields offering a cap to EM’s longer-dated
yields.
However, risk appetite volatility could increase as a few bumps build on the road. First,
the markets are still likely to gyrate on the US QE removal timing. Second, Japan QE
shock is now behind and digested – it is now time for views on the matter to consolidate.
But even if the Fed scales
back on QE this year, the BoJ
is picking up the liquidity
slack…
…and an ample liquidity
environment looks likely for
the foreseeable future
Risks may be thus on
markets consolidating the
Japanese QE shock
Directional EMEA Economics April 2013
14
Fig 18 ING risk appetite index (1m-average, ppt of SD)
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Mar
-95
Aug
-95
Jan-
96
Jun-
96
Nov
-96
Apr
-97
Sep
-97
Feb
-98
Jul-9
8
Dec
-98
May
-99
Oct
-99
Mar
-00
Aug
-00
Jan-
01
Jun-
01
Nov
-01
Apr
-02
Sep
-02
Feb
-03
Jul-0
3
Dec
-03
May
-04
Oct
-04
Mar
-05
Aug
-05
Jan-
06
Jun-
06
Nov
-06
Apr
-07
Sep
-07
Feb
-08
Jul-0
8
Dec
-08
May
-09
Oct
-09
Mar
-10
Aug
-10
Jan-
11
Jun-
11
Nov
-11
Apr
-12
Sep
-12
Feb
-13
Risk appetite
Risk aversion
Normalised index of ‘risk’ indicators: CHF volatility, Gold, 2-10Y US spread, US equity vs corporate spreads, EM equities, US small cap vs big cap, DJ defensive vs S&P500
Source: EcoWin, ING estimates
Fig 19 Risk appetite index over the past 9m (ppt of SD)
Fig 20 EM FX returns vs US%, 1 Jan-13/19 Apr-13
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
Jun-
12
Jul-1
2
Aug
-12
Sep
-12
Oct
-12
No
v-1
2
De
c-1
2
Jan-
13
Feb
-13
Mar
-13
Apr
-13
Risk appetite
Risk aversion see EM fx performance over the period on Fig 6.
-10 -5 0 5 10
ZAR
CZK
COP
HUF
RUB
PLN
TRY
RON
BRL
ILS
MXN
Total return (%) Spot return (%)
Source: EcoWin, ING estimates Source: Bloomberg
Will the great bear-steepening ever come? Amidst broad-based downward revisions on local growth and extension/reactivation of
monetary easing, markets have struggled to find macro-story driven direction on the local
curves in 1Q13.
Yields in CEEMEA edged broadly lower across the board (Figure 21), with Poland and
Hungary outperforming peers. The latter benefitted indeed from significant monetary
easing action, with both the NBP and NBH delivering over the quarter a total of 100bp
cuts.
In 1Q13, CEEMEA local
government yields broadly
edged lower
Directional EMEA Economics April 2013
15
Fig 21 CEEMEA 10Y benchmarks change (actual vs 1 Jan 2013)
Fig 22 Policy rate change over 1Q13 (bp)
0
1
2
3
4
5
6
7
8
-60
-50
-40
-30
-20
-10
0
10
20
Poland -10Y
Hungary- 10Y
CzechR. - 10Y
Russia -10Y
Turkey -10Y
SthAfrica -
10Y
Israel -10Y
Chge (bp) Actual yield (%, rhs)
-120
-100
-80
-60
-40
-20
0
Poland Hungary CzechR.
Russia Turkey SthAfrica
Israel
1Q13 2Q13F
Source: Bloomberg, ING estimates Source: Bloomberg
Looking ahead in 2Q13, we see room for another 25bp cut in Poland and 75bp cut in
Hungary, with another 25bp likely in Poland before their easing cycle ends during the
summer. Israel should also deliver a 25bp monetary easing (in May or June), but chiefly
for the purpose of mitigating bullish pressures on the Shekel.
Following a string of disappointing investment dynamics data (justifying our downward
revision for the country’s 2013 GDP to 2.8% YoY), we now expect the Russian Central
Bank to deliver a 25bp-cut in late 2Q13. Though we admit the risks on this call are biased
towards 50bp, we maintain the view that the CPI outlook does not argue for a deeper
easing cycle at this stage.
In terms of carry attractiveness, Ukraine remains at the top of the list in real terms, with
Hungary and Poland. The latter should climb to second position this quarter: a feature
that should allow expectations of monetary easing looking forward well anchored in the
markets (or at least easily reactivable). Serbia should also see its real carry attractiveness
recover significantly over the quarter, thanks essentially to strong base effects on the CPI
reading. That said, some caution is to be exerted here, considering the risks of potential
additional administrative prices hikes.
Fig 23 CEEMEA, US and Eurozone real rates (level-CPI eop)
-4
-2
0
2
4
6
8
10
Ukrain
e
Hunga
ry
Poland
Croat
iaIsr
ael
Roman
ia
South
Afri
ca
Serbia
Euroz
one
Kazak
hsta
n
Russia US
Czech
Rep
Turke
y
1Q13 2Q13F
Source: EcoWin, ING estimates
Cuts of 75bp in Hungary and
25bp in Poland, Israel and
Russia are in the pipeline for
2Q13
Ukraine and Poland are the
most attractive in terms of
real carry
Directional EMEA Economics April 2013
16
At the lower end of the spectrum, Turkey stands out. The negative carry would in theory
argue for a hawkish Central Bank stance. But the sophisticated mechanism on the policy
rates front in the country would also recommend exerting caution when analysing the real
carry measure. If anything, the negative print suggests dedication at the CBT level to
mitigate ‘hot money’ inflows.
Looking at intracurve swap dynamics over 1Q13, the picture is not unidirectional.
Steepening pressures were perceivable broadly across the board until mid-February, but
have proved more erratic since then. All in all, most curves appeared at the end of 1Q13
marginally steeper (by 10bp on average, with the exception of the Czech Republic –
where 2-10Y gained 60bp).
Now including early April market actions, the steepening ‘outperformers’ in the CEEMEA
region proved to be Turkey and Hungary, where both Central Banks appear the most
protracted on a monetary easing bias (as opposed to reactive, as in the case of Poland),
though for different reasons.
Fig 24 2-10Y IRS spread CEEMEA (rebased 100 = 1 Jan 2013)
80
90
100
110
120
130
140
150
160
170
180
1 Jan 10 Jan 19 Jan 28 Jan 6 Feb 15 Feb 24 Feb 5 Mar 14 Mar 23 Mar 1 Apr 10 Apr 19 Apr
POLAND CZECH HUNGARY SOUTH A.
ISRAEL TURKEY EU US
Source: Bloomberg
Looking ahead in 2Q13, we expect dynamics broadly similar to 1Q13 to prevail, namely:
• Core rates richness should continue to anchor medium/long-term maturities. In
particular, our Global Economics team continue to expect the critical 2% threshold on
Treasuries to be cleared (sustainably) in 3Q13.
• Further monetary easing should allow for relative resilience of front-end maturities.
However, this driver should be less strong than in 1Q13 considering the smaller scope
of monetary easing yet to be delivered.
This backdrop should continue to challenge the bet of a broad-based bear steepening on
CEEMEA curves. The case for bear-flattening is hard to make as well given the low
growth backdrop. Accordingly, we would expect further alternation of bull
flattening/steepening during the quarter, but probably with higher frequency than in 1Q13.
In terms of sensitivity, we noted in 1Q13 a rise in the 5Y government bonds spread vs
implied EUR/local currency 3m-rates in the CEE region (Figure 25) – which suggests a
weaker correlation between local rates and FX in recent months. This is most striking for
Romania. These dynamics suggest that liquidity – in particular – has been a key driver in
local curves over the quarter, whether fuelled by the benign core market rate backdrop or
technical local features (index inclusion).
And Turkey is the least,
owing to the dedication of the
CBT to mitigate hot money
flows
Hungary and Turkey’s swap
curves have steepened most
in 1Q13
But broad-based steepening
dynamics in CEEMEA are
likely to continue struggling
in 2Q13
CEE local rates sensitivity to
FX has weakened in 1Q13
Directional EMEA Economics April 2013
17
Implied rates and the shape of the local government curve point to the highest correlation
between bonds and FX in Poland and Russia, with Romania, Hungary and the Czech
Republic offering 100-160bp FX-hedged returns. The end of the easing cycle could
normalise the short-end of the Polish curve, eventually, but it is unlikely to happen before
July.
Fig 25 5yr local currency treasury bonds spread over implied €/lc 3M rates
-80
20
120
220
320
420
520
9/11 10/11 11/11 12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 12/12 1/13 2/13 3/13 4/13
PL CZ HU RO RU
Source: Thomson Reuters
Though we believe the liquidity factor will remain important in 2Q13, it should be slightly
weaker than in 1Q13, as: (1) the ‘index inclusion’ factor should disappear; and (2) the
debate on the core markets’ QE could tilt back towards the ‘end’ theme rather than the
‘more’ theme (Japan QE shock is behind also).
South Africa and Romania index inclusions in 4Q12 and 1Q13 are indeed behind us, and
so far, no new EM addition has been mulled over. In relative terms, this feature should
weigh particularly on SA assets.
Russia’s case is a bit more complicated: the OFZ clearing validation in 1Q13 has either
not yet fully materialised owing to administrative bottlenecks, or the pre-event inflows
have triggered the ‘sell-the facts’ dynamic. Still, the new OFZ status should gradually filter
into flows, offering more support for the local curve during the quarter.
Conclusion
All in all, 2Q13 should be seeing a broad gradual bottoming out of rates in CEEMEA
and steepening bull trends could face additional bumps, constrained further by a
benign backdrop in core markets. The liquidity-boosted events of 4Q12-1Q13 are
also behind us, and with no others on the horizon, some bull-drive in local curves is
ebbing away. In the region, we remain bullish on the belly of the Hungarian curve and
Russian long-dated papers (10Y OFZ). We also favour steepeners in Poland and
spread compression in Croatia vs Bund.
Poland and Russia’s curve
remains the most correlated
to FX vs CEEMEA peers
The liquidity factor should be
less compelling in 2Q13 vs
1Q13
Directional EMEA Economics April 2013
18
ING EM FX and local rates views summary Country Foreign exchange Local rates
Poland Weak activity data, the risk of deeper rate cuts and an upward revision
of the fiscal gap call for a weaker PLN. But global liquidity may keep it
in the 4.10-4.15/€ range as real rates in Poland are the highest in the
region. NBP would likely react if it breaches 4.00.
Our models show that 5Y IRS’s in PLN are the most overpriced in the
7 largest EM rates markets. Upside risks on the budget gap coupled
with another 25-50bp rate cut on expected weak activity readings for
2Q13 argue for positioning on 2-10Y IRS steepening in our view.
Hungary The central bank’s new programme is very likely to result in an upward
shift in implied HUF rates. But the dedication of the NBH to lower
policy rates remains and the markets’ gyration on its easing scope
could still bring about volatile exchange rate movements in 2Q13.
We see the 3-10 year spread of c.140bp as too wide, taking into
account that the market’s expectation about the end of the rate cut
cycle is quite extreme and the Japanese QE may generate demand
for the long end of the curve. We thus expect a flattening below 100bp
on the aforementioned tenors.
Czech Republic
The active CNB FX policy has been talked about to death by the board
members, however, and the risk of an immediate action has subsided. We expect the interventions to remain verbal with €/CZK in the CNB
comfort range of 25.5-26.0/€, but the breach of 26.0/€ is possible on
low hedging costs.
High EMU liquidity will keep the Czech curve supported in the near
term, but we are growing increasingly sceptical on the levels. Czech
bonds cannot be treated as safe haven assets – or a proxy for Bunds
– for liquidity reasons, and a drop below 1.7% on 10 years is
excessive.
Romania Most domestic signs point to a weakening RON in 2Q13, in particular
the change at the SBA in June, consolidation post bond index inclusion
and FX intervention. This justifies our buy EUR/RON on dips
recommendation with a 2-3 month horizon and a target of 4.50. Our
year-end forecast, however, stands at 4.30.
Slowing debt supply and a more dovish NBR should allow 3-5Y
ROGB yields to push lower. Though we do not expect the NBR to cut
rates, it is likely to allow short-term rates to drift well below the key
rate when turning into a net debtor position, a change that looks to be
on the near-term radar.
Bulgaria n/a A delay in forming a new government is probably largely expected, so
the biggest threat for Bulgarian assets is in our view post-election
fiscal easing.
Croatia We expect a continuation of the weakening of the HRK vs the EUR on
sub-average growth and increased pre-EU entry spending in 2Q13.
Compared to its troubled neighbour Slovenia, the new EU entrant has
enough flexibility in surviving the economic slowdown. We prefer FX-
denominated instruments though, given the attractiveness of the FX
depreciation route to recovery.
Serbia In spite of the relatively better CA financing backdrop in 2013 vs 2012
and the authorities’ commitment to keep talks open with the EU and
IMF, we expect the NBS to ensure the RSD will remain competitive in
trade-weighted terms to help recovery this year. This should mitigate
outright long RSD position attractiveness despite the carry.
While inflation prints for 1Q13 should remain elevated, strong base
effects of well behaved global food prices should bring the CPI into
the NBH target by year end. Significant easing prospects for 2H13
render 2Q13 a good time to fish for an attractive long T-bills position
entry.
Russia We see risks of further unwinding of RUB-longs on worsening growth
and expectations of looser monetary policy, more limited OFZ flows, an
all-time strong RUB in REER terms, and the MinFin plans to buy FX for
the Reserve Fund directly on the market in 2H13.
Despite the RUB weakening and worse 2013 budget performance risks,
we like 10Y OFZ 26211, as it still offers one of the highest nominal yields,
and a real yield at par with the best in the region.
Ukraine A deal with the IMF remains our best case scenario, despite evidence
in 1Q13 that Ukraine would first try a Russian option to lower import
prices. As the IMF is likely to promote a gradual UAH adjustment, our
best guess now is for a gradual c.15% annually (to start with) once the
deal is sealed.
n/a
Kazakhstan The C/A surplus looks weak due to stable exports vs rising imports;
and FDIs are insufficient to offset the Oil Fund-driven gap in portfolio
flows. Accordingly, the KZT is set to weaken by 2013-end vs the USD.
The CPI peaked in Feb-12 at 7% and is heading to 5.5% by year-end
on retreating food prices and benign non-food CPI. We don’t see the
need for the NBK to touch the official rate at 5.5%, also in particular
as the banking system continues its self-rebalancing
Turkey The CBT will continue to mitigate capital flow pressures in 2Q13 to
ensure real TRY competitiveness. This, plus the upside risk on inflation
increases the risk of a higher nominal weakening for the TRY vs 50:50
EUR:USD FX basket vs the current 2.07 level.
Due to the CBT’s TRY REER focus, the chance of a policy rate cut in
the near term has increased notably. However, we think the fall in
yields will not turn into a sustainable downtrend, and we envisage the
benchmark rate remaining close to the 6.0% level in 2Q13.
South Africa The recent ZAR rally was essential core-markets driven and technical.
The fundamental picture for the currency remains soft, with 1Q13 CA
financing still tight, a rating downgrade and social noise risks. Levels
around 9.10 are good opportunities to buy USD:ZAR on dips.
The local curve flattened drastically in recent sessions on ZAR
movements. The inflation outlook for the quarter could further feed
this trend, though a correction in the Rand level (weaker than 8.90-
9.00 vs USD) will act as a cap. 2Q13 should all in all be a time to
position for 2H13’s steepening outlook.
Israel The strong external position of Israel should continue to underpin
strength for the ILS. But an active BoI at the 3.60 level to start with,
with FX reserves ammunition and a possible rate cut will act as a
buffer this quarter. This, combined with a stronger USD story should
hold the USD:ILS mostly in range in 2Q13.
A potential rate cut in May should anchor front-end rates. Given the
latest re-flattening on core markets view realignment, we see good
entry points for re-steepening on 2-10Y ILGB in the short-term. In the
medium-term, the overall curve direction is up, with bear-flattening
looming for 2H13 on a rapid reflation.
Source: ING
Directional EMEA Economics April 2013
19
EMEA Capital Markets Outlook
EM external financing requirement in 2013 Needs rising, capital inflows slowing, but a comfortable coverage Over 2012, EM’s US$2.03tr external financing needs were amply met by net capital flows
that amounted to US$3.18tr, allowing EM reserves to grow by a record US$1.15tr. The
bulk of external capital reliance remains ST debt, virtually all of which lies in the banking
sector. This highlights the close tie of EM’s external vulnerability with the financial sector
and particularly with ST debt flows. External bond issuance amounted to an all-time
record US$487.24bn, with syndicated loans of US$532.4bn and other loans of US$319bn
providing substantial flows.
Fig 26 External financing analysis (US$bn)
2009 2010 2011 2012 2013F 2014F
External financing gap Current account balance 514.99 560.63 594.28 464.82 213.65 132.07M< loans/bonds due (599.43) (587.23) (673.27) (745.7) (788.96) (806.05)ST debt roll (1,465.89) (1,188.93) (1,494.79) (1,749.63) (1,802.24) (1,906.03)Total external financing needs (1,550.33) (1,215.54) (1,573.79) (2,030.50) (2,377.55) (2,580.00)
Sources of funds ST borrowing 1,188.93 1,494.79 1,743.64 1,998.04 1,995.07 2,091.86EM bond issuance 272.78 344.26 312.6 487.24 409.29 425Syndicated and official loans/credits 318.59 257.58 618.55 851.69 564.49 565.04FDI inward 462.9 546.58 800.87 771.94 804.79 872.52FDI outward (238.82) (267.14) (369.2) (438.97) (524.23) (473.91)Portfolio inward (net of debt) 172 221.46 (2.08) 289.11 196.98 228.45Portfolio outward (123.62) (213.74) (125.12) (238.57) (289.63) (287.64)Other capital flows 100.34 (500.57) (697.56) (540.3) (472.74) (307.54)Total capital flows 2,153.11 1,883.23 2,281.69 3,180.18 2,684.02 3,113.78
Change in reserves 602.79 667.7 707.91 1,149.69 306.47 533.78Reserves 6,671.89 7,513.69 7,973.26 9,122.94 9,429.42 9,963.20
Source: ING
So far in 2013, EM external bond issuance has totalled US$172bn, and we expect a further
US$237bn for the remainder of the year. Signs of slowing syndicated lending and likely lower
official loans should lower the total 2013 contribution of bonds and loans to fund the EM
external gap to US$974bn. Consequently, in total, we anticipate more moderate capital flows
of US$2.68tr, in line with somewhat slower EM growth. This will still prove ample to cover the
US$2.38tr external gap, allowing EM reserves to grow by a more modest US$306bn.
Fig 27 EM external financing needs and capital flows (US$bn)
Fig 28 Composition of EM capital flows (US$bn)
-1,500
-1,000
-500
0
500
1,000
1,500
2009
2010
2011
2012
2013
f
2014
f
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
Net capital flows (rhs) Current account balance (rhs)
M< loans/bonds due (rhs) ST debt roll (rhs)
YoY change of reserves (lhs)
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
2009 2010 2011 2012 2013f 2014f
ST borrowing M< bond/loan issuanceFDI inward FDI outwardPortfolio inward Portfolio outwardOther capital flows
Source: National sources and ING Source: National sources and ING
The bulk of external capital
reliance remains ST debt,
highlighting the potential
vulnerability of country risk
to the banking sector
For an exhaustive analysis,
please refer to our 19 April
2013 Emerging Markets Bi-
Weekly, Capital trends and foreign investment flight risk analysis
Directional EMEA Economics April 2013
20
Still, some risks are evident. Looking at these risks on a regional basis reveals that EM
Europe still presents the highest external refinancing risk by far (Figure 29), with the
external gap at 154% of available reserves. An examination of the regional external
financing gap by category (Figure 30) shows that while less risky ST debt rollover
requirements are high for EM Europe, other external financing pressures from the current
account to loans and bonds are also relatively higher than for other regions. Despite
lingering EM European problems, overall EM risks continue to appear manageable this
year and in 2014, with the external gap just 23.54% of reserves for 2013F and rising
slightly to 27.6% in 2014F.
A mitigating factor within EM Europe is that most of the CEE countries are well advanced
in their sovereign issuance programmes, reducing refinancing risk. What is more, the CA
refinancing estimates for many EU new member states are skewed upwards, thanks to a
structural capital account surplus linked with EU transfers, running between 0.5% and
2.5% of GDP.
Fig 29 2013F external financing requirement relative to available FX reserves and GDP by region (%)
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
EM Total Latam China Asia ex-China EM Europe CIS Middle East Africa
External gap versus GDP External gap vs reserves
Source: ING
Fig 30 Breakdown of 2013F external financing requirement by category versus reserves (%)
-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
EM Total Latam China Asia ex-China EM Europe CIS Middle East Africa
Current account $m M< debt due ST debt
While ST debt rollover risks have proven less of a risk, for EM Europe, other components of the external funding gap are still very high, especially for loan and bond rolls.
Source: ING
Portfolio flows pick up to mitigate other capital inflows moderation/contraction In our Emerging Markets Universe report of 24 January 2011 and subsequent updates, we
revealed a detailed picture of the underlying capital structure of EM and the participation of
foreign investors. While the stock of loans and other investment contracted US$677bn
Yet, some external financing
requirement risks persist in
EM Europe
Directional EMEA Economics April 2013
21
(10%) in 2012, this was fortunately more than offset by FDI and portfolio growth. However,
if direct investment rose most in absolute terms, up US$728bn (8.7%), portfolio investment
grew more on a percentage basis, up 21% YoY, to US$5.33tr.
Fig 31 4Q12 capital structure of EM markets (US$tr)
Fig 32 4Q12 foreign ownership of EM assets
0
5
10
15
20
25
EM Investment abroad (EM assets) Foreign investment in EM (EMliabilities)
Direct investment Equity portfolio Debt/MM portfolioOther investment Reserves GCC estMissing data
Direct investment
47%
Loans (incl ST loans)15%
Trade credits4%
Debt/MM portfolio
12%Equity
portfolio16%
Other liabilities
1%
Currency deposits
5%
US$9.06tr
US$3.11tr
US$2.22tr
US$2.88tr
US$724n
US$1.05tr
"Other investment"
81 EM countries
Source: Domestic sources and ING
81 EM countries
Source: Domestic sources and ING
Admittedly, the share of portfolio flows remains relatively small in EM – just 28% (from
24% in 2011) of foreign-owned EM assets total (Figure 32). The bulk remains more stable
direct investment. This limits EM exposure to capital flight risks in absolute terms. Still, in
relative terms, portfolio flows have historically presented significant risks in light of the
very small window of opportunity offered by EM’s 19% market share of portfolio
securities, as seen in Figure 33.
Fig 33 Global portfolio equity and debt securities supply at end-4Q12
EM local bonds7%
EM equity11%
EU bonds20%
EU equity6%
US bonds23%
US equity12%
EM external bonds1%
Other devl equity3%
Japan equity3%
Japan bonds11%
Other devl bonds3%
US$17.18tr
US$34.4trUS$29tr
US$8.23tr
US$16tr
US$4.6tr
US$15.55tr
US$2.2trUS$11tr
US$4.35tr
US markets continue to represent thelargest single segment of global FM
securities supply.
Although growing nominally, on a relative market share basis, EM securities markets actually shrank versus DM.
Source: National exchanges and ING data
We anticipate that portfolio flows to EM are likely to increase slightly to around US$200bn
this year as investors continue to search for diversification benefits and capitalise on the
better (if slower this year) growth of EM versus DM.
But rising portfolio flows could hold risks for EM It is worth highlighting that relative to EM GDP, the outstanding foreign portfolio stock
(bond and equity) increased by 2.47ppt (to 18.48%) in 2012 versus end-2011. However,
relative to EM FX reserves, it increased by a 6.74ppt increase from 55% in 2011 to 62%
by 4Q12. As seen later in Figure 34, this is above the 10-year median of 54%, which
suggests that while the threat is not similar to 2006/07, the risk posed by rising foreign
investment is rising.
Directional EMEA Economics April 2013
22
The relative rise of foreign portfolio holdings suggests that the ability of EM to withstand
the damaging FX and economic effects of foreign capital flight deteriorated somewhat
over 2012, although, admittedly, conditions have not returned to the worst of the pre-
crisis period.
Fig 34 Foreign investor portfolio debt and equity investments
408 553 464 704 982 1,2201,739
2,891
1,6622,389
3,1162,673
3,046 2,790 2,823 3,114
540731
528635
776667
855
1,131
1,005
1,183
1,5371,694
1,9251,888 2,081
2,221
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1997
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1Q12
2Q12
3Q12
4Q12
20
25
30
35
40
45
50
55
60
EM equity holdings US$bn (lhs) EM debt holdings US$bn (lhs) Debt versus equity % (rhs)
…They have since been on an upward trend, revealing the rising preference of investors for bonds.
Foreign investor equity and debt portfolio positions have surpassed pre-crisis 2007 levels. What is also interesting is that after debt vs equity holdings declined over the 2000-2007 period...
Source: Domestic sources and ING estimates
Who is most exposed to portfolio flight risk? The highest foreign portfolio to GDP ratio: Hungary Observing only the nominal foreign portfolio liability picture may give investors the wrong
impression of risk. On this basis, Russia (US$207bn), South Africa, Poland and Turkey
(each close to US$150bn) stand out.
However, scaling portfolio holdings by GDP presents a better picture of the relative
importance foreign investors play in an economy (dots in Figure 35), and here only
Poland looks exposed, with 31% of GDP foreign portfolio capital outstanding. The
remaining three regional heavyweights rank far behind, with the Russian number at a
mere 10% of GDP. Hungary is particularly high on the list, with foreign investor portfolio
holdings accounting for 48% of GDP.
Fig 35 Foreign portfolio nominal holdings (lhs) and relative to GDP % (rhs)
48
3531 30 29 29
18 18
11 11 10 10 10 10 10 96
31 1 0
5
10
15
20
25
30
35
40
45
50
0
50,000
100,000
150,000
200,000
250,000
nominal (US$bn, lhs) % of GDP (rhs)
See 19 April 2013 Emerging Markets Biweekly Report for underlying country numbers Source: ING
Russia, South Africa, Poland
and Turkey attracted the
largest portfolio inflows in
nominal terms, but Hungary’s
exposure is the biggest
relative to size of economy
Directional EMEA Economics April 2013
23
The highest share of foreign portfolio holding to total outstanding: Baltics, Hungary, Ukraine (bonds/equities combined) Figure 36 and 37 show which countries’ securities markets are most heavily owned by
foreign investors. Economies without a sizeable investor demand base might find their
financial markets – and the cost of funding in domestic markets – more at the whim of
foreign investors.
Of course, the sensitivity of an EM economy and exchange rates to foreign capital flight is
not entirely related to foreigner’s total ownership of securities. Indeed, on this basis,
countries such as the Baltic States, Ukraine or Hungary would all appear to be the most
at risk, since foreign investors own a higher percentage of the underlying securities base
than the total for EM (ie, 18.73% for equities and 15.94 % for debt).
Fig 36 Bond holdings versus total outstanding (%)
Fig 37 Equity holdings versus total outstanding (%)
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
% of foreign ownership of bonds relative to outstanding external and local bond stock (sovereigns and corporates)
Source: ING estimates
Source: ING estimates
However, in many cases, relative to the overall size of the economy or FX reserves cover
in the event of capital flight, the size of the securities markets may not be as large as for
other EMs. Consequently, relative to reserves, the risks presented by foreign ownership
of Ukraine’s debt and equity securities market actually slip down the risk scale (Figure 38)
and Hungary moves up the risk ranking.
Compared over time (Figure 39), foreign investor portfolio positions in all of EM do not
appear alarming when viewed versus EM reserves. That said, at 62% of reserves, they
are actually 8ppt higher than the 10-year median. Given that in 2010 the ratio was 55%,
the more recent trend suggests that risks are starting to rise. Admittedly, while there are
notable country exceptions, on the whole the outflow threat – while rising – is less severe
a risk than in the past.
In many cases, foreign
investors own a sizable
chunk of the EM securities
markets…
…But, in many cases, this is
mitigated by ample FX
reserves cover
Directional EMEA Economics April 2013
24
Fig 38 10% financial portfolio flight versus FX reserves as of 4Q12 (%)
0
5
10
15
20
25
30
Bah
rain
S A
fric
a
Jam
aica
Mex
ico
Bra
zil
S K
orea
Hun
gary
Lith
uani
a
Hon
g K
ong
Indo
nesi
a
Pol
and
Tur
key
Chi
le
Cze
ch R
ep
Ven
ezue
la
Isra
el
Mal
aysi
a
UA
E
Col
ombi
a
Ukr
aine
Phi
lippi
nes
Dom
inic
an R
epub
lic
Arg
entin
a
Kaz
akhs
tan
Cro
atia
Indi
a
Nig
eria
Tha
iland
Sin
gapo
re
Per
u
Egy
pt
Pak
ista
n
Tai
wan
Qat
ar
Latv
ia
Rus
sia
Examining the potential threat of a debt and equity market pullout equivalent to 10% of foreign portfolio positions relative to available reserves to support the BoP position presents a realistic picture of potential BoP and FX risks.
In our January '11 assessment, Turkey had the fifth most "at risk" currency to potential capital flight relative to reserves. The country looks more comfortable now just behind Poland.8
9%
Lithuania, Turkey and Chile have moved down the risk scale from a year ago.
39
%
Source: ING estimates
Fig 39 Foreign investor holdings of EM financial securities and EM reserves (US$bn)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1997
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1Q12
2Q12
3Q12
4Q12
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
Foreign portfolio investment in EM (lhs) EM Reserves (lhs)
Foreign investor positions versus EM reserves % (rhs) 10Y median (rhs)
Relative to reserves, foreign investor equity and debt positions appear to offer less of a threat now than in 2006 and 2007.
However, over the course of 2012, the ratio increased and remains above the 10 year median. Admittedly, the ratio remains well below pre-crisis levels.
Source: ING
EM Europe: still a debt house It is interesting to note in Figure 40 that the asset class distribution (ie, debt versus
equity) in Asia continues to be weighted in favour of equities, whereas in Latam and EM
Europe/CIS the weight of debt is greater. In 2010, the relative weight of equities was
actually higher than debt in the case of Latam and EM Europe and was more pronounced
in Asia. This underscores the international investment trend that has increasingly been
moving in favour of holding bonds (Figure 42). Where in 2007 foreign bond holdings
accounted for just 27% of their EM positions, this has increased to 42% by 4Q12.
Directional EMEA Economics April 2013
25
Fig 40 4Q12 foreign investor holdings in EM (US$tr)
Fig 41 Foreign EM portfolios vs EM and world GDP (%)
1.80
0.630.30 0.28 0.10
0.66
0.73
0.560.20
0.060.00
0.50
1.00
1.50
2.00
2.50
3.00
Asia Latam EMEurope/CIS
ME&Africa Other
Portfolio equity Debt
It is interesting to note that the asset classdistribution in Asia is weighted in favour of
equities. Whereas in Latam and EM Europe/CISthe weight of debt is greater.
2
3
4
5
6
7
8
1997
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1Q12
2Q12
3Q12
4Q12
10
12
14
16
18
20
22
24
26
Foreign debt&equity portfolio holdings % EM GDP (rhs)
Foreign debt&equity portfolio holdings % Global GDP (lhs)
EM crisis versus Developed crisis
“Other” corresponds to 96 mostly small frontier markets (eg, Cuba, Zambia, Syria and Mongolia)
Source: Domestic sources and ING estimates
Source: National sources and ING estimates
Fig 42 Foreign investor portfolio debt and equity investments
408 553 464 704 982 1,2201,739
2,891
1,6622,389
3,1162,673
3,046 2,790 2,823 3,114
540731
528635
776667
855
1,131
1,005
1,183
1,5371,694
1,9251,888 2,081
2,221
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1997
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1Q12
2Q12
3Q12
4Q12
20
25
30
35
40
45
50
55
60
EM equity holdings US$bn (lhs) EM debt holdings US$bn (lhs) Debt versus equity % (rhs)
…They have since been on an upward trend, revealing the rising preference of investors for bonds.
Foreign investor equity and debt portfolio positions have surpassed pre-crisis 2007 levels. What is also interesting is that after debt vs equity holdings declined over the 2000-2007 period...
Source: Domestic sources and ING estimates
Of course, this in part reflects the fact that in many cases EM equity markets have yet to
fully recover to pre-crisis levels, which favours the EM bond weightings (given that bond
prices are far less elastic than equities to financial market shocks). EM equities have
seen a poor 1H13 so far with Poland’s WIG index down 8.7%, the Shanghai Composite
down 1.08% and Bovespa down a significant 12.22%. So it may be some time before
security price effects help the relative dynamic of foreign investors’ relative equity versus
debt. Meanwhile, local EM bonds have benefited from capital upside tied to monetary
easing (as compared with 2007 levels) as well as positive US Treasury effects for
external dollar-denominated bonds where the UST10Y yield dropped 330bp between
2Q07 and 4Q12, which is equivalent to an over 21% price gain for the EMBI Global, or
about 40% of EM bond returns over the past five years. The rally of US Treasuries more
recently is likely to further boost this dynamic relative to EM equities.
Figure 43 shows where foreign portfolio values have seen the best expansion in the
EMEA region. Globally, Hong Kong, Mexico, South Korea, Brazil, Turkey and Poland are
at the front of the line. At the end of the line are Russia, Hungary and Bulgaria, which
have seen foreign portfolios shrink.
...However, admittedly,
market effects have played a
significant factor in the
observed trend
Directional EMEA Economics April 2013
26
Fig 43 2012 YoY foreign debt and equity portfolio changes US$bn and % YoY (Incl flows, FX and market effects)
64%44%
23%
66%
212%
76% 78% 77%56%
109%91%
28% 36%15%
0%14%
-11% -17%
-43%
-11% -6%
-50%
0%
50%
100%
150%
200%
250%
-20
-10
0
10
20
30
40
50
60T
urke
y
Pol
and
S A
fric
a
Cze
ch R
ep
Kaz
akhs
tan
Lith
uani
a
Rom
ania
Cro
atia
Egy
pt
Ser
bia
Latv
ia
Leba
non
Geo
rgia
Est
onia
Isra
el
Mol
dova
Alg
eria
Mor
occo
Bul
garia
Hun
gary
Rus
sia
US$m % YoY
For foreign equity and debt portfolio positions only. See 19 April 2013 Emerging Markets Biweekly report for full list of countries.
Source: ING estimates (estimates based on flow, change in FX and portfolio asset price changes)
EM external bond issuance trends: robust 1Q13 issuances alleviate concerns over foreign loans contraction Throughout 2012, we expressed the concern that while EM bond issuance seemed
sufficient to offset the sharp drop in loans (Figure 44), should bond market sentiment sour,
EM might face refunding risks and capital flight if redemptions exceed issuance levels.
However, although there was a visible US$677bn (10% YoY) drop in loans and other
investments, and it was not fully offset by the US$364bn of net external bond issuance,
there was nevertheless more than a sufficient offset thanks to other forms of capital:
US$728bn (8.7% YoY) extra FDI and US$210bn of portfolio investment (net of debt).
Fig 44 Global EM bond issuance and net new investment flow analysis (US$bn)
Conventional bonds Non-conventional
placements New debt
Grand total Amortisations
Interest payments
Called bonds
Restr debt
Stock of debt
Net new investment in EM ext debt
Sovs Corps
Total Eurobond issuance
Sover eign
Corp PPs&E
MTNs Corp
conver fr
restr issuance Sovs Corps Sovs Corps Sovs Corpsretired
(all corp) change Sovs Corps
Total new inv
Jan 19.64 25.50 45.14 0.40 0.88 0.28 0.00 46.70 4.42 1.82 5.77 3.51 0.00 0.32 0.00 40.14 9.84 21.02 30.86Feb 5.31 34.38 39.69 0.70 4.00 0.55 0.00 44.95 5.31 4.72 3.54 2.29 0.00 0.73 0.00 34.19 (2.84) 31.20 28.36Mar 11.50 29.55 41.05 1.10 1.62 0.36 0.00 44.13 3.59 5.00 4.75 2.98 0.00 1.00 0.00 34.53 4.26 22.54 26.80Apr 9.21 20.76 29.97 0.00 1.63 0.42 0.00 32.02 2.49 5.88 3.40 4.02 0.00 2.30 0.00 21.35 3.32 10.61 13.93May 2.47 14.42 16.89 0.00 8.03 0.00 0.00 24.93 5.02 6.11 2.69 3.62 0.14 3.25 0.00 10.55 (5.39) 9.48 4.09Jun 6.89 16.11 23.00 3.10 2.63 0.05 0.00 28.78 3.03 7.04 3.15 3.10 0.14 2.22 0.00 16.49 3.68 6.42 10.10Jul 8.75 34.50 43.25 0.23 3.37 0.05 0.00 46.89 4.23 4.80 5.15 3.68 0.00 1.15 0.00 36.71 (0.40) 28.28 27.88Aug 1.32 11.02 12.34 0.66 2.59 0.25 0.00 15.85 3.01 3.19 2.15 1.99 0.42 1.62 0.00 8.04 (3.59) 7.07 3.48Sep 12.51 45.39 57.89 0.18 3.55 0.33 0.00 61.95 1.47 4.79 3.98 3.02 0.75 0.20 0.00 55.49 6.49 41.25 47.73Oct 11.57 41.53 53.10 0.50 2.92 0.92 0.00 57.43 2.32 4.22 3.08 3.98 3.05 3.15 0.00 47.75 3.61 34.03 37.64Nov 16.54 38.77 55.31 2.94 2.00 0.46 0.00 60.71 2.80 9.72 1.91 3.66 1.63 0.50 0.00 47.69 13.14 27.36 40.50Dec 4.03 15.32 19.34 0.00 3.26 0.30 0.00 22.90 1.361 8.09 1.44 1.65 1.06 2.22 0.00 11.23 0.16 6.91 7.082012 totals
109.74 327.24 436.98 9.82 36.49 3.95 0.00 487.24 39.06 65.37 41.01 37.50 7.19 18.66 0.00 364.16 32.30 246.16 278.46
2013 Jan 11.62 50.66 62.28 0.00 2.55 0.00 0.00 64.83 4.42 1.82 5.77 3.51 0.00 0.32 0.00 58.27 1.43 47.56 48.99Feb 13.37 17.47 30.84 0.36 1.84 0.50 0.00 33.54 5.31 4.72 3.54 2.29 0.00 0.73 0.00 22.78 4.88 12.07 16.95Mar 3.45 36.02 39.48 0.00 0.79 0.30 0.00 40.57 3.59 5.00 4.75 2.98 0.00 1.00 0.00 30.98 (4.89) 28.14 23.25Apr 10.09 23.36 33.44 0.00 0.00 0.00 0.00 33.44 3.59 5.00 4.75 2.98 0.00 2.30 0.00 22.55 1.75 13.07 14.822013 totals
38.53 127.50 166.03 0.36 5.18 0.80 0.00 172.38 16.92 16.54 18.81 11.76 0.00 4.35 0.00 134.57 3.16 100.84 104.01
1Q10 33.87 41.13 75.00 0.39 2.67 1.68 4.09 83.81 13.89 17.57 11.53 8.08 0.00 4.55 5.10 0.00 8.84 14.27 23.111Q11 26.39 66.47 92.86 2.96 6.07 2.77 0.00 104.66 13.32 11.54 14.06 8.78 0.00 2.47 0.00 77.32 1.97 52.51 54.481Q12 36.45 89.43 125.88 2.20 6.51 1.19 0.00 135.78 13.33 11.54 14.06 8.78 0.00 2.05 0.00 108.86 11.27 74.76 86.031Q13 24.99 75.09 100.08 0.36 5.18 0.80 0.00 106.42 13.33 11.54 14.06 8.78 0.00 2.05 0.00 79.51 (2.04) 58.71 56.67
*Issuance through 18 April. ‘Sovereign’ for Republics, states and municipals. Quasi-sovereign corporate amounts are in ‘Corporate’ numbers. ‘PP’ = Private placements; ‘EMTN’ = Euro Medium Term Notes
Source: Dealogic, BondRadar and ING
Fortunately, contraction of
foreign loans has been more
than offset by a rise of bond
and other forms of capital
funding
Directional EMEA Economics April 2013
27
It is significant that EM bond issuance remains robust, with US$172.4bn of conventional
and non-conventional bonds placed with investors (Figure 44). This, along with continued
evidence of other portfolio and capital flows alleviates some of our concern tied to bank
loan uncertainties and presents a supportive first month for the remainder of 2013.
Indeed YTD issuance has already surpassed the US$167.8bn placed in the full January-
April 2012 period, setting a new all-time issuance record.
But speculative placements are on the rise That said, the level of speculative grade placements has increased to 42%, the highest
since 2Q11. While on one hand, this could be considered as a positive sign as HY
issuance had previously been well below the historical median of 35% (Figure 46), on the
other hand, it indicates that speculative “hot-money” flows may be on the rise in the bond
market as investors stretch for additional yield. One quarter is too short a time frame to
argue definitively that we are ushering in a period of speculative bubble building.
Furthermore, it is worth highlighting that “speculative conditions” were notable for six
consecutive quarters in 2006-2Q07 before the “bubble” finally burst.
In the YTD period (to 18 April), there has been US$104bn worth of net new investment
into EM external bonds. This is also above the US$99.96bn received in the same period
of 2012. The money helped the EM bond market grow by a net US$134.57bn. The bulk of
the new money has been channelled into EM corporate bonds (US$100.84bn new
investment), with sovereigns barely treading water, with just US$3.16bn of inflows.
Fig 45 Quarterly EM loan and bond issuance (US$bn)
Fig 46 EM external bond issuance
0
50
100
150
200
250
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
EM Bond issuance Loan issuance
The rise of EM external bond issuance has not fully offset the drop of loan issuance.
42%
41%
49%54%
66%50%
44%
52%23%
28%
43%29%
13%
9%36%
30%35%
31%
17%
44%
39%
11%
15%
28%17%
36%
-20
0
20
40
60
80
100
120
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
100
200
300
400
500
600
700
800
Post-restructured issuance Retired non-performing
Retired/put/called performing High Grade
Spec Grade EMBIG-Div spread (rhs)
The issuance market has started to show signs of some "froth".
Speculative
Source: ING Includes sovereigns and corporates
Source: ING
EM external bonds remain a small market, with ample room to grow The record levels of net new investment may partly reflect crossover investment from
troubled European bond markets as investors seek alternative debt markets. However,
EM external bonds represent just 2% of global marketable bonds, while local bonds (over
half of which may not be tapped by foreign investors due to capital controls) represent
only a further 7%. This means that EM bonds provide investors a tiny 13% window in the
global investible debt universe (Figure 48). Our analysis last year showed a slightly larger
15% window for EM bonds, which means that the pace of growth for non-EM bond
markets has been greater.
The fact that EM economies have been growing more rapidly than DM economies and
now account a third of global GDP (on a nominal basis) underscores the relative level of
capital markets development. Fortunately, it also means that EM has room to grow,
particularly if it is fuelled by stable crossover investment. After all, bond investors have
YTD bond issuance has
already surpassed January-
April 2012 levels…
There has been US$104bn
worth of net new investment
into EM bond markets this
year. This is also a record sum
EM bond’s tiny 13% window
in the global marketplace
presents opportunities as
well as risks, such as
overinflated asset prices
… However, the level of
speculative bond placements
is now above historical
norms, although it is too
early to make a judgement
whether or not increased hot-
money flows will persist
EM bonds account for only
19% of world GDP, whereas
DM bonds account for 121%
Directional EMEA Economics April 2013
28
been increasing relative exposure to DM, not EM, over 1994-2009. And despite some
declines of DM debt versus global GDP, this has mostly been due to the effect of EM’s
strong contribution to global growth. This has still left DM bond markets representing
121% of global GDP versus less than 19% for EM at end-2012 (Figure 47). That said,
there is the additional risk that excessive demand chasing relatively scarce supply might
eventually lead to inflated prices.
The new bond issuance has helped reverse the decline of EM bonds outstanding versus
EM GDP ratio, notable back in 2008. Although there was a slight increase of EM
bonds/GDP in 2012 (46.4%) versus 2011 (44.5%), the ratio remains below the pre-crisis
peak of 48.7% and still significantly lower than DM marketable bonds to GDP ratio of
204% for 2012. Consequently, while DMs are still highly levered to debt capital markets, it
can be said the EMs are actually still relatively under-levered to DCM, despite new
records being set on the issuance front.
Fig 47 EM and DM bonds versus global GDP (%)
Fig 48 Global cash bond supply at end-4Q12
0
20
40
60
80
100
120
140
160
180
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2Q12
4Q12
Developed marketable bonds to Global GDP (lhs)
Total EM bonds (local & external) vs Global GDP (rhs)
EM's share of the global bond market is a mere 18.84% of global GDP. For developed markets, although there has been some sign of deleveraging versus the global economy, it is 121%.
EM external bonds
2%
EM local bonds11%
EU bonds30%
Japan bonds17%
Other devl bonds
5%
US bonds35%
US$11r
US$29tr
US$16tr
US$34.4tr
US$4.6tr
US$2.2tr
Source: ING Source: National sources and ING
Conclusions for EM Europe In the EM universe, EM Europe stands out as the region with high refinancing needs
relative to reserves. This has to do with current account deficits, and medium- and long-
term debt due. However, large upfront issuance structural capital account surplus related
to EU funds could mitigate much of the risks for most of the CEE economies in 2013. Still,
Ukraine and Belarus do display high 2013 re-financing risk, with funding requirements at
close to 300% of reserves.
For EM overall, we do not see 2013 and 2014 as problematic in terms of refinancing.
That said, growing EM Europe exposure to hot capital flows warrants increasing
attention, despite the improvements that we are witnessing on the fiscal front. Hungary
(47%), Israel (35%) and Poland (31%) are dealing with the highest share of portfolio
capital outstanding relative to GDP.
…Furthermore, on the basis
of respective GDP (ie, not
world GDP), EMs are even
more under-levered than DMs
to debt capital markets
Directional EMEA Economics April 2013
29
EM: Who to tango with?
One of the key themes this year is whether the US economy will overcome fiscal
headwinds – bringing forward the prospects of a local QE ending. But is this a story for
this year or the next? Is it time for emerging markets (EM) to look back to the West to
capture some externally driven growth? And how far West is ‘west enough’? Will/can the
BRIC countries continue to offer a buffer to EM exports squeeze, should recession in the
Eurozone persist and/or a US rebound not materialise?
With a number of elections in the pipeline in CEEMEA for 2014, and a broad-based
backdrop of slowing domestic demand, a more forceful approach (whether actions or
words) from politicians is to be expected on economic policies. And this, at the external
level, is likely to translate into new efforts to orientate/promote trade ties.
It’s time to pick partners.
Fig 49 Political agenda in CEEMEA 2013-14
Presidential Parliamentary Other
Poland May-14 - EU Parliament Hungary May-14 May-14 - EU Parliament Czech R. 2Q14 May-14 - EU Parliament Romania 4Q14 May-14 - EU Parliament Bulgaria May-13 May-14 - EU Parliament Croatia May-13 - Local authorities Turkey 2Q14 2Q14 -Local authorities South Africa 2Q14 2Q14
Source: National sources
At this stage, with the Eurozone falling further into a triple-dip recession, Central and
Eastern Europe seems the least likely to grab some externally-driven growth. This is yet
another element weakening the case for an EMU anchoring, a feature we investigate
later in this publication (please refer to Mateusz Szczurek’s article, ‘Reassessing EMU
entry for the CEE’, pg 46).
The prospects of a stronger-than-anticipated US recovery would at first sight offer LATAM
and developing Asia the strongest export-pull for growth vs EM peers. But this could be a
misconception. What if the US recovery challenged traditional trade ties with EM?
Last but not least, if the US and the Eurozone both fail to gain any traction this year, can
BRIC (continue to) mitigate the core markets squeeze in trade flows? Has the train more
steam to run on? Or are we on the brink of a faster DM/EM re-coupling?
Before investigating further any of these questions, it is worth going back to basics and
try to assess first – quantitatively – where we think export growth will come from this year
and next. This, is in our view critical to establish whether or not the BRIC alternative as
import absorber of the past 3 years is still a valid option, or not.
Where will export growth come from? A lot has been written in the past decade about the transfer of the engine for world growth
from Advanced Economies (AE) to Emerging Markets economies (EM). In 2007, for the
first time, EM economies overtook AE in their growth contribution to world real GDP
growth – with Developing Asia (mostly China, and to a lesser extent India) leading the
pack. Since then, the AE seem to have conceded defeat…
EM growth has been
significantly faster than
advanced economies since
2007
More protracted action to
boost external growth is
ahead given the hefty
political agenda for CEEMEA
Directional EMEA Economics April 2013
30
Fig 50 World real GDP YoY growth contributors
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
CEE CIS Developing Asia Latam
Mena Sub-Saharan Africa Advanced economies Emerging markets
Source: IMF, ING estimates
But does this mean that Emerging Market consumers have overtaken their advanced-
economy counterparts? So far, the data suggests not, at least, not yet.
Figure 51 shows that since 2002, roughly 50% of nominal GDP growth worldwide was
attributable to household consumption. And although emerging market consumption has
been playing catch-up ever since the 80s-90s, since 2002, they have on average ‘only’
contributed to 35% of nominal world household consumption growth (Figure 52).
Fig 51 World household consumption contribution to GDP growth (YoY, nominal)
Fig 52 Main regions’ contribution to world household consumption growth (YoY, nominal)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Remaining contributor (net exports, investment etc…)
Houseshold consumption contribution to nominal GDP growth
ING estimates for 2012-2014
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Advanced economies Emerging markets
ING estimates for 2012-2014
Source: IMF, IFS, ING estimates Source: IMF, IFS, ING estimates
The same message comes out of analysis of world import data, which shows that over
the 2002-11 period, emerging market imports contributed to “only” 39%, on average, of
global import growth (in nominal terms).
But EM internal demand only
contributed to 35% of world
household consumption
growth over 2002-12
Directional EMEA Economics April 2013
31
Fig 53 Contributions from main regions to world import growth
-20
-15
-10
-5
0
5
10
15
20
25
198
1
198
2
198
3
198
4
198
5
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
Emerging markets economies imports contribution to world export growth (pt)
Advanced economies imports contribution to world export growth (pt)
Source: IMF DOTS, ING estimates
Taking all this into account, it seems fair to assert that even if emerging markets are still
not on par with advanced economies in their role as world import absorber, they have
certainly reached a size now where they can act as important buffers in a context of an
advanced-economy squeeze.
But what is valid as a group, hides a number of country specific differences. Who then is
a key “consumption” force within EM? And critically, which EM can effectively compete –
in size- with the key consumption poles in the advanced economies group?
But before going any further, we would like first to note some limitations to our study. Due
to data constraints, we limited our analysis to the relationship between household
consumption growth and import growth. Clearly, investment also plays a part in the import
component, but data were unfortunately not available for a broad-based analysis. This
bias underplays the significance of EM in our import-absorption capacity analysis: as it
has been well documented now that the import to production ratio for capital goods is
negatively correlated with economic development. However, since the GDP per capita of
the countries of our interest in the EM spectrum are significantly above the EM average
(with the noticeable exception of India, see Figure 54), this constraint should not distort
the overall picture significantly.
Fig 54 GDP per capita, main EM countries (2012, US$)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Source: IMF
EM internal demand is an
efficient buffer for advanced
economies’ slump, but not an
alternative, yet
Lack of data on investment
limits the scope of our study
Directional EMEA Economics April 2013
32
Another risk of distortion in our analysis lies in the composition of consumption-related
imports. One could argue that EM countries might have their import absorption capacity
skewed by higher food/commodities needs. The line of argumentation would be that even
if a region in EM could be in absolute size as big an export destination as a DM region,
the sharp commodities intake makes it interesting, chiefly for commodities exporters. In
other words, EM import markets bear a higher risk of being “polarised” to specific
exporters.
On the food front, this argument may be worth it for low income countries, but not so
much our smaller asset “trading” EM world. Of course, disparities exist between
countries, but on average, the latter group’s food import share in their total import is
consistent with levels seen in developed countries, ie, in a 5-10% range. This is not the
case for African and MENA countries, which records level in the 15-20% range (Figure
55).
But the opposite case can be made for fuel – and the assumption that DM hold a stronger
fuel-import bias than EM. This is again not true for all EM: developing Asia in particular
has a fuel-import share in total imports higher than both the US and the Eurozone.
All in all, the commodities angle in EM/DM trade ties is worth mentioning, but would
probably need a separate report to investigate fully. We believe that the high GDP per
capita in our region of interest (“EM asset trading”) means that the distortions from
investment and soft commodities will not fundamentally alter the conclusions arising from
assessing import growth prospects via the household consumption channel.
Fig 55 % share of fuel, food and manufacture imports in total imports (2011)
Fuel Imports Food Imports Manufactures Imports
Main core countries United States 20.6 5.1 67.9Euro Area 17.2 9.0 65.9Japan 32.1 9.2 47.5Main EM regions BRIC 18.0 5.6 60.6Central & Eastern Europe 12.1 6.7 65.3CIS 6.1 11.8 72.5Developing Asia 21.2 5.4 55.8LATAM & Carribean 14.8 6.5 73.9MENA 5.7 15.9 68.0SUB-SAHARAN AFRICA 16.8 15.2 61.9Main EM countries of interest Poland 12.8 7.8 71.3Hungary 12.3 5.1 71.2Czech Republic 10.0 5.6 78.9Romania 11.4 7.4 74.3Bulgaria 23.0 9.3 53.3Croatia 21.8 10.9 63.2Turkey 8.5 4.5 60.6South Africa 21.4 6.1 63.7Ukraine 34.9 7.4 53.2Russia 1.8 12.3 74.9Kazakhstan 12.9 10.4 74.6China 16.8 4.6 56.6Brazil 18.6 4.5 71.9India 38.5 3.7 46.9
Source: IMF, World Development Indicators
Who is the strongest import absorber? This is an easy one. In absolute size, China’s household consumer market appears to be
a serious contender to the main advanced-economy players: at US$2.5tr, it ranks third
after the US and Japan. Brazil is not far off either, with a domestic household
consumption of US$1.5tr. The BRIC countries (Brazil, Russia, India, and China) offer an
Amidst EM, China is the
biggest household
consumption market
Can EM commodities
polarisation in imports skew
our study results?
Evidence do not point to a
clear EM/DM opposition on
food balances
But the case of fuel import is
more complicated
Directional EMEA Economics April 2013
33
aggregate US$6tr household market: rivalling the US$7.4tr Eurozone, but not the US yet
(Figure 56).
The picture turns less positive when adjusted for population. As Figure 57 shows, the
BRIC countries are nowhere near the same league as the US. This is no surprise: simply
a reflection of lower income levels. But in a context of constrained global demand
(sentiment, indebtedness, slowing/declining disposable income etc.), it is worth asking
what commercial strategy for exports is more efficient: targeting a few of the rich, or a lot
of the poor? Ultimately it all depends on the type of goods exported.
Fig 56 Top household consumers in US$bn (2011)
Fig 57 Household consumption per head, US$ (2011)
0
2000
4000
6000
8000
10000
12000
Un
ited
Sta
tes
Eur
ozo
ne
BR
IC
Japa
n
Ch
ina
Ge
rman
y
Fra
nce
Bra
zil
Un
ited
Kin
gdo
m
0
5000
10000
15000
20000
25000
30000
35000
40000
Un
ited
Sta
tes
Eu
rozo
ne
BR
IC
Japa
n
Ch
ina
Ge
rman
y
Fra
nce
Bra
zil
Un
ited
Kin
gd
om
Source: IMF, IFS, ING estimates Source: IMF, IFS, ING estimates
Fig 58 Household consumption per head, main markets and regions US$ (2011)
0
5000
10000
15000
20000
25000
30000
35000
40000
Aus
tra
lia US
Japa
n
Ca
nad
a
UK
Eur
ozon
e
Oth
er A
E
CE
E
LAT
AM
ME
NA
CIS
BR
IC
Dev
elo
ppin
g A
sia
Sub
-sah
aran
Afr
ica
Source: IMF, IFS, EcoWin
Looking at the metrics (see Figure 59), and taking 2011 as a base, BRIC household
consumption growth needs to be 1.8 times higher than that of the US to provide the
global market with the same amount (in US$bn) of extra demand. This is not unrealistic:
our estimations suggest that BRIC household consumption grew by 8.2% YoY in 2012,
versus 3.1% YoY in the US.
Looking at 2013 household consumption prospects, the table below indicates that apart
from the US, only the BRIC countries can make a significant impact on global demand.
The BRIC region is the only one with a household consumption growth rate forecast
BRIC internal demand is a
competitor to the Eurozone’s,
but not the US’s yet
BRIC household
consumption growth needs
to be almost twice as high as
the US to compete with it
Directional EMEA Economics April 2013
34
higher than the one implied by the multiplier (so providing the market with at least the
same increment in value as the US).
Fig 59 Nominal household consumption YoY growth (in US$ terms)
US Australia Canada UK Japan EurozoneOther
advanced BRIC CEE CISDeveloping
Asia LATAM MENA
Sub-Saharan
Africa
Multiplier (2011 base) 1.0 13.4 11.3 7.4 3.0 1.5 4.3 1.8 8.6 33.3 7.7 5.6 9.8 13.8
2012 estimated 3.1 4.8 1.9 2.4 1.2 (7.7) 0.9 8.2 (2.5) 11.0 7.5 5.4 13.5 5.0Implied by multiplier 41.7 35.2 22.9 9.4 4.5 13.4 5.5 26.6 103.4 24.0 17.5 30.5 42.82013 forecast 3.3 6.5 3.6 3.7 0.8 1.3 1.6 8.0 4.7 11.0 9.0 6.2 6.5 7.7Implied by multiplier 44.3 37.4 24.3 10.0 4.8 14.3 5.9 28.3 109.9 25.5 18.6 32.4 45.5
Source: IFS, IMF, ING estimates – Multiplier is US household consumption size divided by national household consumption size
According to our estimates, household consumption worldwide should reach US$42.6tr in
2013 and US$44.9tr in 2014 vs US$40.9tr in 2012. Of the extra US$4tr over the two
years, 31% is expected to be generated in the BRIC countries, vs 21% in the US (on
average).
Figure 60 shows the various regions/main country contributions to 2013 household
consumption increments – which should also have a bearing on exporters’ growth
prospects.
Fig 60 Contributions by region to 2013 and 2014 household consumption growth (forecasts in US$)
30.9
21.6
7.9 7.45.2 4.8 3.7 3.4 3.3 3.2 2.4 2.3 2.1 1.7
0
5
10
15
20
25
30
35
BR
IC US
De
velo
ppin
g A
sia
LAT
AM
Eur
ozon
e
ME
NA
Sub
-sah
ara
n A
fric
a
CE
E
UK
Aus
tra
lia
Oth
er a
dva
nced
econ
omie
s CIS
Ca
nada
Jap
an
%
2013F 2014F
Source: IFS, IMF, ING estimates
The charts below indicate that the countries likely to do the best at achieving export
growth are those exposed chiefly to both the US and BRICs, according to a comparison
of household consumption size/growth – and with a 59-41% split between the two regions
over the next two years.
Of course, actual performance will also critically depend on the export products involved,
in particular for energy exporters (see the fuel-import bias commented upon in the
previous section).
If household consumption in advanced economies were to deteriorate further in the year
ahead, which countries in EM will be the most vulnerable?
For 2013-14, we expect BRIC
to generate 31% of extra total
world household
consumption, vs 21% for the
US
Countries to extract most
growth from their exports will
have to approximate a 59-
41% US/BRIC destination mix
Directional EMEA Economics April 2013
35
Fig 61 Household consumption annual increment (US$bn) – main contributors
Fig 62 Household consumption annual increment (US$bn) – other regions
-800-600-400-200
0200400600800
10001200
US Japan
BRIC other advanced
Developing Asia LATAM
Eurozone
ING f'cast
-300
-200
-100
0
100
200
300
Australia CanadaUK CEECIS MENASub-saharan Africa
ING f'cast
Source: IFS, IMF, EcoWin Source: IMF, IFS, EcoWin
EM export exposure to key regions Now that we have identified an ‘optimal’ export destination mix, it is time to look at the
various EM ties to the main export absorbers (region-wise).
Eurozone: doom and gloom? The case for the Eurozone as a trading partner has not been compelling over the past
couple of years. Given the persistent debt issue and poor confidence, we doubt this will
change in the coming two years. Accordingly, CE4 countries will struggle most to
generate growth from their external accounts relative to EM peers, as they are sending,
on average, 50% of their total exports to the Eurozone.
Fig 63 Main EM regions’ % of exports to the Eurozone (vs total exports, 2011)
0
10
20
30
40
50
60
CEE CIS DeveloppingAsia
LATAM &Carribean
MENA Sub-saharanAfrica
Source: IMF DOTS
The Czech Republic appears to be the most vulnerable on this front (vs Figure 64) of the
CE4 (Poland, Hungary, Czech Republic, and Romania), with Romania the least
vulnerable. The Baltic States are less exposed directly, owing to ties with Russia,
Sweden and the other CEE countries, while Turkey has more diversified export
destinations, with the highest rate of exports to the US versus CEE peers, and one of the
highest rates of exports to EM ex BRICs, also versus the same group.
Exposure to Eurozone points
to limited external drive
growth for CE4 vs EM peers
The Czech Republic is
particularly vulnerable,
Turkey should fare the best
Directional EMEA Economics April 2013
36
Fig 64 CEE exports to Eurozone as % of total exports
Fig 65 CIS exports to Eurozone as % of total exports
0
10
20
30
40
50
60
70
80
Alb
ani
a
Cze
ch R
epub
lic
Bos
nia
Hu
ngar
y
Pol
an
d
Ro
ma
nia
Cro
atia
Mon
ten
egro
Mac
edo
nia
CE
E a
vg
Bul
gar
ia
Ser
bia
Lith
uan
ia
Tur
key
Latv
ia
0
10
20
30
40
50
60
70
80
Ge
orgi
a
Kyr
gyz
Rep
ublic
Uzb
ekis
tan
Taj
ikis
tan
Mol
dova
Ru
ssia
Ukr
ain
e
CIS
avg
Bel
aru
s
Arm
enia
Tur
kme
nis
tan
Aze
rba
ijan
Kaz
akh
sta
n
Source: IMF DOTS (2011) Source: IMF DOTS (2011)
CIS countries are, on average, less exposed to the Eurozone – but the high ratio in
Eurasia republics is distorted by the energy component. It is worth noting however, that
Kazakhstan exports have the smallest exposure to the Eurozone vs peers in the region.
For the remaining EM countries, one has to highlight the particular vulnerability of Tunisia
– which sends 70% of its exports to the Eurozone (ties inherited from its colonial past with
France).
Fig 66 EM exports to Eurozone (% total exports, 2011)
0
10
20
30
40
50
60
70
80
Source: IMF DOTS
The US: Be careful what you wish for… Across the pond, the outlook looks brighter for household consumption – though
admittedly the balance of risk for the latter is capped by US public spending sequestration
in the short-term. This should keep LATAM and developing Asia trade accounts on a
better footing than CEE and CIS: both regional groups export on average 39% and 15%,
respectively, of their total exports to the US.
North African country
exports are also set to
struggle
LATAM has the highest
exposure to the US vs EM
peers
Directional EMEA Economics April 2013
37
Fig 67 EM main regions % of export (vs total) to the US (2011)
0
5
10
15
20
25
30
35
40
45
Central &Eastern Europe
CIS DeveloppingAsia
LATAM &Carribean
MENA Sub-saharanAfrica
Source: IMF DOTS
Looking at the breakdown by country in these two main groups, Mexico appears to be the
clear winner, with almost 80% of its exports sent to its neighbour – courtesy of the
NAFTA and energy trade agreements. For the rest of LATAM, the main countries of the
region send ‘only’ c.10% of their exports to the US (eg, Brazil and Chile, and Argentina
even less, with 5%). In comparison with LATAM peers, some countries in Asia have a
higher export share to the US (eg, China, India, Thailand, Vietnam, the Philippines,
Malaysia, and Indonesia).
Within Developing Asia, it is interesting to note that China is not at the top of the list, but
at 17%, it is still above the region’s average. Cambodia, Sri Lanka and Vietnam hold the
lead – and with the exception of Vietnam – export good types are chiefly of a
manufacturing nature (ie, clothes/footwear, electronics).
Fig 68 LATAM exports to the US (% total)
Fig 69 Developing Asia exports to the US (% total)
0
10
20
30
40
50
60
70
80
0
5
10
15
20
25
30
35
40
Source: IMF DOTS - 2011 Source: IMF DOTS - 2011
But Mexico distorts the
picture
Asian countries seem more
homogenously exposed to
the US
Directional EMEA Economics April 2013
38
Fig 70 EM exports to US (% of total exports, 2011)
0
10
20
30
40
50
60
70
80
Source: IMF DOTS
On a medium-term basis however, key paradigm shifts in the US could alter trade ties
with its traditional export partners.
First paradigm: US energy dependency. Shale energy production is emerging in the
US and is more advanced than in any other shale endowed country to date.
In the case of shale gas, the US is on course to raise – according to the EIA – its current
33% shale production as a total of gas production to 50% by 2034 (ie +85%) (see also
Frack in the US, 27 June 2012 and In search for the holy shale, 13 January 2013). This
should raise total US gas production by 30% by then, and imply in particular significant
substitution effects versus traditional gas. This latter point would likely squeeze the US’s
main EM gas trading partners, namely: Algeria, Nigeria, Russia, Mexico, and Brazil
(Figure 71).
Fig 71 US gas import main partners (% of total imp.)
Fig 72 US crude import main partners (% total imp.)
0
10
20
30
40
50
60
70
80
90
Ca
nada
Alg
eria
Nig
eria
No
rwa
yR
uss
iaM
exic
oE
quat
oria
l Gu
ine
aB
razi
lLi
bya
Ne
the
rland
sB
elg
ium
Do
min
ican
Rep
.T
aiw
an
Per
uU
KT
rinid
ad &
TV
enez
uel
aG
erm
any
Sth
Kor
eaT
urke
yF
inla
nd
Fra
nce
Sin
gap
ore
Liquified petroleum gases Natural gas
0
5
10
15
20
25
Ca
nada
Sau
di A
rab
iaM
exic
oV
enez
uel
aIr
aqN
iger
iaC
olo
mbi
aK
uwai
tA
ngol
aB
razi
lE
cuad
or
Alg
eria
Ru
ssia
Ch
adLi
bya
Ga
bon
Equ
ator
ial G
uin
ea
Egy
ptC
ong
o (B
razz
avill
e)
Trin
idad
an
d T
oba
goA
zerb
aija
nA
rgen
tina
Un
ited
Kin
gdo
mT
haila
ndN
orw
ay
Om
anV
ietn
am
Source: US department of Commerce Source: US department of Commerce
What is good for gas is also good for oil. Already, the US has experienced a significant
increase in production since 2009, largely due to shale oil recovery (data on the subject
are not detailed unfortunately) as shown in Figure 73.
Key US paradigm shift
however might challenge US-
biased exporters in the
medium-term
Shale energy production
could redefine trade ties,
mostly for natural gas and
gas partners
Directional EMEA Economics April 2013
39
Fig 73 US crude fields production (%YoY)
-15
-10
-5
0
5
10
15
20
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Source: EIA
Looking at the long-term outlook, however, the picture for oil is less clear than for gas, as
the US EIA assumes a broadly flat production in 2034 vs 2012 (in spite of a pick-up of 8%
in 2013, 5% in 2014, 2% for 2015 and 3% for 2016). The share of oil as an energy source
in the US is also set to continue dropping through to 2030 (from 35% in 2012 to 30% by
2030 according to BP). That said, those less upbeat projections for oil versus gas seem
pessimistic to us.
But beyond the uncertainties related to the US oil production outlook, if US production
continues to increase as a result of shale recovery, this would be bad news for MENA
(Saudi Arabia, Kuwait, Iraq, Algeria) but also for Mexico, Nigeria, Brazil and Russia
(Figure 72).
The second paradigm shift to impact EM exporters to the US in the medium term is the
manufacturing ‘renaissance’. On the back of lower energy prices, a lower labour cost
gap vs trade partners (particularly in EM), heightened FX/commodities volatility
(impacting transport prices) and legal/quality issues (compliance, reliability), the
temptation for the US to on-shore or re-shore manufacturing within its frontiers has
increased in recent years.
Since the recovery from the global financial crisis, growth in the US seems to be driven
mainly by goods-producing sectors (durable and non-durable) and not the services and
construction sector, in stark contrast to previous post-WWII growth slumps (see also Re-
industrial - revolution, 24 July 2012). Also, as well as national output, labour data shows
that manufacturing employment is also recovering faster than in previous recovery
episodes.
US oil production outlook is
not as rosy as gas
MENA crude exports could
struggle in the short-term still
US ‘reindustrialisation’ is the
new fashion
The current US recovery is
driven by goods-producing
sectors
Directional EMEA Economics April 2013
40
Fig 74 This recession (real GDP)
Fig 75 Last recession (real GDP)
-400.0
-200.0
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
Jun-09 Jun-10 Jun-11
Durables non-durables Services Structures
-200.0
-100.0
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
Mar-01 Mar-02 Mar-03
Durables non-durables Services Structures
Source: BEA Source: BEA
Admittedly at this stage, there is still little evidence that the revival of the manufacturing
sector in the US is translating into an export boost – a feature that questions the
sustainability of this ‘re-manufacturing’ of the US economy in the long-term. Still, this new
dynamic suggests potential import substitution, which could hit EM exporters to the US.
As we mentioned before, one of the key rationales for the ‘re-industrialisation’ of the US is
the labour cost gap reduction between EM countries and the US. The cost advantage for
EM countries to produce labour-intensive goods for re-export to DM countries is
diminishing.
And this is certainly true of the US, where the growth of real wages has been in negative
territory for the past two years (Figure 76). A similar reasoning for the Eurozone is less
compelling, considering the growth pickup of real wages in the region over the same
period.
Fig 76 Real wages growth (% YoY)
Fig 77 The dangers of extrapolation, US vs Chinese wages
-10
-5
0
5
10
15
20
US China Germany
0
50000
100000
150000
200000
250000
China US
We are here2022
$
Source: EcoWin Source: EcoWin, ING estimates
The level of available data do not, unfortunately, allow for the identification of sectors
leading the way in this US manufacturing renaissance. But anecdotal investment
evidence (foreign and local) point to several industries:
• Steel/chemicals (plastics, rubber) due to the energy production boost
• Furniture/appliances in connection with high transport costs and quality issues
But no impact on US exports
is visible yet
The main rationale for the US
manufacturing renaissance is
closing the labour cost gap
with EM countries
Steel, chemicals, furniture
and appliances could be first
to face import substitution
Directional EMEA Economics April 2013
41
This would put the following countries in a vulnerable position within EM: China, Mexico,
Brazil, Vietnam, Indonesia, Russia, South Africa, Malaysia, Thailand, and Turkey to name
a few significant partners in the product areas presented above.
It is still too early to anticipate a radical change in the US trade pattern. We find it hard at
this stage to envisage a reversal of robust trade ties – with East Asia in particular – based
on the “global value chains”.
BRICs to the rescue? Looking now at Emerging Markets and the countries that we expect to provide the largest
increment in household consumption over 2013-14 (aggregated), it is no surprise that, the
BRIC countries appear in the top 15. But it is worth noting the relative underperformance
of India in the ranking relative to its absolute size, as well as Kazakhstan’s
outperformance (again relative to its size) pointing to a possible over-heating.
At the other end of the spectrum, Ukraine and the CEE countries (Romania, Hungary)
look like the worst destinations for EM goods exports for the two years ahead.
Another point to make is that even if as a region the BRICs appear to be the main world
household consumption growth contributor, on average, over the next two years, the
aggregate value of the remaining EM countries is actually larger (with a 26.7% share in
overall world household consumption growth), mostly courtesy of Indonesia, Mexico, Iran,
Thailand, Malaysia, Nigeria, Chile and Columbia (in that order). All of these, except
Columbia, are expected to add more individually to world household consumption than
India over the next two years…
Fig 78 Main EM household consumption growth contributors (US$bn)
Fig 79 Worst EM household consumption growth contributors (US$bn)
0
100
200
300
400
500
600
700
800
900
1000
for 2013 and 2014
-30
-25
-20
-15
-10
-5
0
for 2013-2014
Source: IMF, ING estimates Source: IMF, ING estimates
To extract better export growth potential from BRIC markets, it thus seems a focus on
China, Russia and Brazil would likely pay more than a focus on India. In terms of
products, this suggests favouring exporters of manufactured goods (Russia and Brazil
have the highest manufacturing goods share in their total import compared to the
remaining BRICs, see Figure 55).
In terms of EM exposure to the BRICs, Africa seems to hold the top of the list, with Sub-
Saharan Africa sending 34% of its total exports to the region. MENA follows suit with a
20% ratio – with both pointing to a heavy energy/mineral/metal component in the trade
ties. Interestingly, developing Asia ranks last but one, with only 9% of its total exports
going to the BRICs (in spite of the neighbouring Chinese powerhouse).
But strong ‘trade ties’ will be
hard to break
BRIC countries lead the EM
pack as ‘import absorbers’,
but India seems to
underperform
CEE/CIS fare the worst
BRIC import absorption
should mostly favour EM
manufactured goods
exporters
Africa and MENA exports’
highest exposure to BRICs vs
EM is distorted by the
commodities component
Directional EMEA Economics April 2013
42
Fig 80 EM exports to BRICs (% total exports, 2011)
Fig 81 EM exports to EM ex BRICs (% total exports, 2011)
0
5
10
15
20
25
0
5
10
15
20
25
30
35
40
45
Source: DOTS Source: DOTS
Who has the best export mix? Going back to our household consumption projections for 2013-14, we have established
that the best export destination mix to optimise external growth would be as follows:
Fig 82 Export optimal mix: main household consumption ‘incrementer’ over 2013-14 in % of total increment
Region Share in %
EM ex BRIC 26.7China 22.2US 21.3Advanced economies (ex US, Eurozone and Japan) 11.7Eurozone 6.0Russia 4.6Japan 3.6Brazil 3.1India 0.8Total 100.0
Source: ING estimates
Those ratios applied for each EM country to the respective export-share of each region in
the country’s total gives us the following results in Figure 83 and 84.
On a regional perspective, it seems that LATAM is the best positioned – with its current
export destination mix – to grab most of the global household consumption growth
dynamic over 2013-14 versus EM peers. Central and Eastern Europe however, ranks last
owing to its relatively low exposure to the BRICs and the US (vs other EM), and their
higher exposure to the Eurozone.
LATAM as a region seems
the best positioned to
capitalise on household
consumption dynamics over
2013-14
Directional EMEA Economics April 2013
43
Fig 83 Main EM region export mix vs world consumption outlook performance ranking (ppt)
0
2
4
6
8
10
12
14
16
18
20
LATAM &Carribean
CIS Sub-saharanAfrica
Developing Asia MENA Central &Eastern Europe
Rank = sum of the export shares per region weighed by this region’s share in world’s household consumption increment (2013-14)
Source: ING estimates
Looking now at the breakdown by country, Mexico, India and Brazil are the countries that
should benefit most from the world household consumption growth pattern over 2013-14.
The outperformers within Europe are Russia and Turkey – though Russia’s picture is
distorted by its energy trade component.
A surprise for us is the relatively good performance of South Africa, in the top 10, of the
countries “optimal” exposure list. It appears SA’s high exposure to Emerging Markets (ex
BRIC) compensates for a relatively large exposure to the Eurozone. Accordingly, it would
not “need” a fundamental shift its trade destination to capture the best of the expected
recovery in global household consumption over 2013-2014. It is still worth highlighting,
however, the high commodities component in South Africa’s export mix.
Russia’s export mix also looks relatively good on paper. But again, as for South Africa,
the results have to be taken with a pinch of salt owing to the large energy component in
the country’s trade ties.
Fig 84 EM export mix per country, weighed by household consumption growth avg share (2013-14)
0
5
10
15
20
25
Source: IMF DOTS, ING estimates
Mexico, Brazil and India at
the top of the list
Directional EMEA Economics April 2013
44
Looking now at the bottom of the list, Central Europe and Northern Africa appear to have
the worst export mix to capture world growth dynamics. Exposure to the Eurozone is the
main reason for this, but also relatively modest exposure to BRICs vs other EM (ex
BRIC).
Czech Republic and Poland in particular emerge as the worst performers vs the other
CEE countries – owing essentially to a lower exposure to EM ex BRICs vs CEE peers
(Figure 85). For the opposite reason, Turkey should be doing better than CEE peers –
though its overall ranking still puts it close to the average.
Of the peripheral CEE countries (Baltics, Balkans), Serbia seems to hold the better
position thanks to its higher exposure to Emerging Markets in general.
Fig 85 CEE regional exposure score board (ppt)
Fig 86 Main “CEE periphery” exposure score board (ppt)
0
2
4
6
8
10
12
US Eurozone Japan BRIC EM exBRIC
Advancedeconomies
ex G3
Poland Hungary Romania Czech R. Turkey
0
2
4
6
8
10
12
14
US Eurozone Japan BRIC EM exBRIC
Advancedeconomies
ex G3
Ukraine Serbia Lithuania Croatia Latvia
Export share by region, weighed by region's household consumption increment to the world's
Source: ING estimates
Export share by region, weighed by region's household consumption increment to world's
Source: ING estimates
It is also worth noting China’s relatively poor performance on this index – owing to its
export polarisation on advanced economies vs Asian peers in general, and India in
particular. As Figure 87 shows, the country has a much higher exposure to EM (ex
BRICs) than China’s – justifying the higher ranking in the overall country list.
Fig 87 Main Asian countries performance exposure score board (ppt)
0
2
4
6
8
10
12
14
US Eurozone Japan BRIC EM ex BRIC Advancedeconomies ex
G3
Indonesia China Malaysia Thailand India
Source: ING estimates
CEE and Northern Africa
region will fare worst owing
to Eurozone exposure
Czech Republic and Poland
are most vulnerable
Directional EMEA Economics April 2013
45
In this “performers”/”underperformer” analysis, a feature seems to be repeating itself:
exposure to non-BRIC countries appears to be a key factor in providing an extra “boost”
to export growth prospects for the next two years.
Figure 88 details the largest of those EM, ex-BRIC, per household consumption size
(average for 2013-14, ING estimates). Out of the list, we can already remove Poland –
where local consumption dynamics are poor, and Egypt – facing a potential financing
crisis amidst persisting political uncertainties. This leaves us with a few targets: Mexico,
Indonesia, Turkey, Iran, South Africa (to consider with caution though, considering the
large income distribution gap, rising unemployment and modest household consumption
momentum), and further down the line, Thailand, Nigeria, Malaysia and the Philippines.
Fig 88 2013-14 average estimated household consumption market (bn US$)
0
100
200
300
400
500
600
700
800
Source: ING estimates
So it seems that rather than wooing the West – whether near or far – Emerging Markets
hoping to capture some household consumption momentum to boost their exports should
rather be courting the South…
In absolute terms, LATAM appears to have the best export profile to capitalise on
world household consumption dynamics over 2013-14. But of EM countries in focus
in this publication, South Africa, Turkey and Serbia lead the pack. CEE and Poland in
particular, will fare the worst – at both an absolute and relative level. The common
feature of the “best positioned” countries to “capture” the various household
consumption regional boosts in 2013-14 is a balance between the US, BRIC and
critically EM ex BRICs export exposure. Time to Tango with Mexico then?
Export exposure to non-BRIC
countries is likely to make a
difference in 2013-14
Directional EMEA Economics April 2013
46
Reassessing EMU entry for the CEE
Weak demand in the Eurozone is just one factor that could make the non-EMU member
states rethink their drive towards the final stage of the EU integration – the membership in
the common currency area. Although all new member states are obliged by the EU treaty
to join the EMU, the EMU itself is changing before our eyes, and we can argue that the
past agreement was referring to a different construct. To begin with, the candidate
countries may wonder what are the rules of the game – what is required of the members
and what can they count on from their partners in the Eurozone. Cyprus capital controls
are one extreme example of such an unpredictable drift, but with each year of high
unemployment in the periphery, the social tensions in the recession-struck countries will
rise. This could potentially lead to further financial, economic and political turbulence in
the EMU – a powerful argument for the new member rates to wait for the final result.
In this section, we look at the arguments for and against the euro adoption in view of the
events of the past four years in the EMU. We argue that while the list of pros and cons of
the euro adoption has not really changed, the relative weights of the points have, tipping
the balance against Eurozone entry for the bigger new member states.
Fig 89 Pros and cons of the EMU adoption at a glance
Pros Cons
Elimination of FX risk premium Inappropriate interest rate (structural or cyclical) Macro stability and increased competitiveness Loss of FX, interest rates, bank regulations as shock absorbers
Lower interest rates Risk of an inappropriate entry exchange rate Financial market integration Asset price misalignments Increase in investments Conversion costs, one-off price jump International trade promotion via lower costs Maastricht criteria costs Political power within the EU Net costs of future member bailouts Gaining policy credibility of the ECB Freeing up FX reserves
Source: ING
The prime macroeconomic argument for the EMU membership, in our view, had been
linked with the ease and durability of access to external capital. This access is especially
important for the new member states (NMS) that are catching up, given their limited
domestic savings on one side, and low accumulated capital and the need for high
investments on the other. This broad argument encompasses the first five points on the
pros and cons list in Figure 89.
Cutting the FX risk premium: not a big deal anymore Elimination of the FX risk premium should make lower interest rates available to
business, households and governments. One measure of such a premium is the spread
between the local currency and the foreign currency treasury yield of a country
(Figure 90).
Weak economy, mounting
political tensions, uncertain
rules – is EMU still attractive?
Directional EMEA Economics April 2013
47
Fig 90 Local currency versus Eurobond sov 10Yr spreads
Fig 91 1Yr €/lc cross-currency basis swap spread (mid and bid-offer spread)
-100
-50
0
50
100
150
200
250
300
Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13
RO 9yrs PL 9yrs HU 7yrs
HR 9yrs BG 10yrs CZ 8yrs
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
HRK RON HUF CZK PLN
Source: Thomson Reuters Source: ICAP, Tullett Prebon
There is a substantial variation between these estimates across the CEE countries,
ranging from 172bp for Romania to -51bp for the Czech Republic. It is, to a large degree,
a function of national rates differential, as implied by the covered interest rate parity, but
also of relative liquidity considerations linked with the issuance strategy. An elimination of
the central bank rate differential would be equivalent to cutting the policy interest rate, a
subject covered further on. Cross-currency basis swap spreads (Figure 91) are perhaps a
better measure of pure FX risk premium, reflecting also the access to funding for the local
banking systems. Here, benefits of the EMU entry vary between 140bp (Croatia) and
13bp (Poland). At the onset of the global financial crises, these additional costs were by
an order of magnitude higher, but have since fallen to below pre-crisis levels in some
countries, thanks to the generous liquidity provisions by the ECB.
Another measure of the FX risk costs is linked with option pricing. Figure 92 shows the
cost (in percentages) of 3M ATM hedge, at the average volatility in the past two years.
These should be treated as the absolute upper bound of the FX risk costs – assuming
100% hedge, the importer/exporter cannot lose more than the amounts below, while it
can gain on the favourable FX movements.
Fig 92 Cost of hedging using 3M ATM €/lc option (% of local currency, average in the past two years)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
CZK RON PLN HUF
Source: ING
Funding in euro steadily
becomes cheaper relative to
local currency, as implied by
basis swaps
1.7-2.7% will secure full FX
hedge for the CE4
Directional EMEA Economics April 2013
48
Gaining EMU credibility: is anyone still craving for it? The reduction in the cost of funding could also come via improved monetary and fiscal
policy credibility under the EMU. This argument gets weaker with every year of the EMU
crisis – the worry for the potential new EMU entrants might not only be the lack of policy
flexibility in the face of asymmetric shocks (we deal with that below), but also the risk of
misguided policies for the Eurozone as a whole, such as the ECB rate hike in April 2011.
Either because of perceived Eurozone-specific vulnerabilities or because of other reasons,
the cost of funding of CEE countries in euro is actually quite low relative to their ratings.
Padhraic Garvey, ING Global Head of Developed Markets Debt Strategy has been
analysing treasury yields in euro-denominated instruments relative to the sovereign ratings.
The natural relationship (worse rating – higher yield) seems to break down if we apply the
model estimated for the EMU to the ‘greater Europe’ universe. Yields in the Czech
Republic, Poland, Bulgaria, Romania, Hungary, Croatia and Turkey are too low relative to
ratings, judging by the relationship that works in the Eurozone (Figure 93). This points to too
low ratings and too low yields, or, as Padhraic Garvey suggests, much lower volatility of the
CEE Eurobond yields justifying lower returns (Figure 94). Whatever the reason, there
seems to be little evidence of EMU membership making euro funding substantially cheaper.
While Slovakia also belongs to the ‘low yield – not so low ratings’ group, Slovenia does not.
Fig 93 Sovereign bond yields (€, %): Actual and implied by ratings
Fig 94 Basis point volatility
0 2 4 6 8 10 12
Cyprus CCCGreece CCC
Slovenia A-Portugal BB+Hungary BB+Spain BBB+
Italy BBB+Croatia BB+
Romania BBB-Ireland BBB+
Turkey BBSlovakia ACzech A+
Bulgaria BBBPoland A-
Belgium AAFrance AA+Austria AAA
Netherlands AAAFinland AAA
Germany AAA
0 2 4 6 8 10 12 14
Predicted yield Market yield
0 100 200 300 400 500 600 700
CyprusGreece
SloveniaPortugal
ItalyHungary
SpainCroatiaIreland
BulgariaRomaniaGermany
AustriaFranceFinland
BelgiumNetherlands
TurkeyPoland
SlovakiaCzech
Implied yields are calculating using the regression estimated for EMU yield-rating relationship
Source: Bloomberg, ING estimates
Historical volatility multiplied by 10yr yields
Source: ING estimates
Another example of the EMU membership potentially increasing the cost of funding is the
case of Denmark and Finland, countries similar in many respects and sharing the same
exchange rate thanks to the Danish FX regime. During periods of Eurozone stress,
Danish yields fell well below those of Finland, the former benefitting not only from
potentially more willing lenders of last resort, but also from the long-standing DKK
attachment to the DEM.
The key to cheaper funding during the crisis is not EMU membership, but indebtedness
mostly in own currency. EMU members are increasingly perceived as being indebted in
external currency over which they have limited influence.1 From this point of view, being
“important enough” for the fate of the Eurozone could prove to be a better indicator of stable
and cheap financing than having low debt and a responsible macroeconomic policy.
1 See Paul De Grauwe (2011): “Managing a Fragile Eurozone” (http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Recently_published_articles/CESifo-Forum-Managing-Fragility-Eurozone.pdf)
Directional EMEA Economics April 2013
49
Another argument for EMU entry is the benefit of financial integration for growth and
development. The arguments are the same as for free capital flows, which in principle
allow for better global allocation of capital, and force the ‘right policies’.
A quick look at the health of the Eurozone countries versus the CEE shows the latter
argument to be quite weak. Low inflation and similar fiscal policy has been pursued
almost regardless of EMU membership (Figures 95 and 96). Core inflation in the CEE
has been above the EMU average, but the performance, especially in the CE3, still
qualifies as price growth that does not serve to distort economic activity. While the
primary balance in the CEE countries has been worse than the EMU average in 2011, the
debt remains much lower.
Fig 95 Core inflation (% YoY, excluding energy and food)
Fig 96 2011 EU public debt and primary balance as % of GDP
0
1
2
3
4
5
6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
EMU SP,IR,GR,PT CE3 CEE
-SPA
-UK
MAL
AUS
-IRE
-ROM-LIT
-POL-LAT
-BG-CZ
-SK
-SI
-CYP
-NED-FRA
-EMU-POR
-BE
-GRE
EST
LUX
SWE HUNGER
ITAFIN
-DEN
-10
-8
-6
-4
-2
0
2
0 50 100 150 200
Public debt as % of GDP
Primary balance, % of GDP
Source: Eurostat Source: Eurostat
Freeing reserve money? One benefit from inheriting ECB’s credibility is the freeing up of national central banks’ FX
reserves. The ECB charter states that FX reserves after paying towards the ECB capital
remain in the national central banks. While the transactions with the remaining balances
are subject to the ECB’s approval (especially when they concern large FX interventions),
they could, in principle, be transferred to the government, eg, for deficit financing or debt
repayment. For example, the potential Polish contribution to the ECB capital and reserves
would be €5.5bn, against €81.5bn in total NBP reserves, leaving some €76bn, 20% of
GDP available for debt repayment, future pensions or healthcare etc. The amounts for
other candidate countries are bigger – up to 33% of GDP for Hungary.
Fig 97 FX reserves at the disposal of national central banks after the EMU entry (% of GDP)
0
5
10
15
20
25
30
35
Poland Latvia Romania Croatia Bulgaria CzechRepublic
Hungary
Source: ING estimates
EMU promotes financial
integration, which should
help in more efficient
allocation of capital…
Directional EMEA Economics April 2013
50
A quick estimate of the actual value of such an operation is the spread between the
effective interest on reserves and the effective yield on government debt. The rate of return
on NBP FX reserves measured in foreign currency (to filter out exchange rate effects) in the
five years ending in 2011 was 3.98%. Poland paid 5.1% to service its debt in that period.
The 20% of GDP of netted out debt is thus worth some 0.23% of GDP per annum2. The
convergence in LT rates is likely to tighten this spread for the more credible sovereigns,
while the more exposed governments and national central banks might want to maintain a
higher level of reserves. So while the reduction of gross debt might be tempting, the net
effect of spending the reserves would for public finances would be almost negligible.
Further financial integration: are free capital flows beneficial? We consider the translation from financial market integration to higher economic growth (as
opposed to banking system growth) as an even more doubtful argument. The doubts are
not new – the scepticism regarding free capital flows was underlying the 1944 Bretton
Woods agreement. Figure 98 shows that the growth rate of per capita GDP 1982-1997 had
nothing to do with capital account openness. As the authors of the 2003 paper3 conclude, “if
financial integration has a positive effect on growth, there is as yet no clear and robust
empirical proof that the effect is quantitatively significant.”
Fig 98 Growth rate of per capita GDP 1982-1997 versus capital account openness
Growth is measured by growth in real per capita GDP. Conditioning variables are: initial income, initial schooling, average investment/GDP, political instability and regional dummies
Source: Prasad, Rogoff, Wei and Kose (2003)
A quick look at Spain’s performance before and after EMU entry (Figure 99) is also quite
disturbing. Total real growth was 48.3% in the 13 years preceding the EMU entry and
38.9% in the 13 years since. What is more, the period ‘after’ included a spectacular drop in
interest rates, a significant increase in capital flow volatility and a rapid deterioration of
external balance (Figure 100), linked with credit booms, wage growth and loss of
competitiveness. Even without the post-2008 recession, the macroeconomic gains are not
apparent, even if the EMU entry as any other form of financial market integration shifts
income within the country.
A similar argument can be made with regard to trade promotion. With trade as free as it is
within the EU, further easing of obstacles by Eurozone membership will contribute more to
income transfers within the EU than to eliminating deadweight losses and to promoting overall
GDP growth.
2 This assumes that the positive effect of gross debt reduction is equal to the negative effect of lower central bank reserves on the funding costs. 3 Prasad, Eswar, Kenneth Rogoff, Shang-Jin Wei, and M. Ayhan Kose (2003). “Effects of Financial Globalization on Developing Countries: Some Empirical Evidence.” IMF Occasional Paper #220
…but opening capital
accounts have been bringing
surprisingly little growth
benefits
Directional EMEA Economics April 2013
51
Fig 99 Spanish real GDP, not SA, log scale
Fig 100 Spanish balance of payments (€bn, net)
10
100
1,000
1980 1983 1986 1989 1992 1995 1997 2000 2003 2006 2009 2012
48.3% real growth in 13 years before EMU
vs 38.9% in the 13 years after
10
100
1,000
1980 1983 1986 1989 1992 1995 1997 2000 2003 2006 2009 2012
48.3% real growth in 13 years before EMU
vs 38.9% in the 13 years after
-110
-60
-10
40
90
140
190
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Current and capital account Portfolio+FDI investments
EMU brings higher capital flow volatility
... along with the current account deficit
-110
-60
-10
40
90
140
190
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Current and capital account Portfolio+FDI investments
EMU brings higher capital flow volatility
... along with the current account deficit
Source: IMF IFS Source: EcoWin
The Cyprus debacle provides an additional twist to the argument justifying EMU entry on
the grounds of freer capital flows and business convenience. The recent bailout/bail-in
required the introduction of stricter capital controls than in Argentina in 2002, and the
controls still remained in place at the time of the publication.
Dealing with common interest rates Even with currency risk costs falling, interest rates in most of the non-EMU CEE countries
are above the Euribor. This is related to the independent monetary policy, the end of
which would forcibly cut the interbank rates to the Euribor level, allowing for cheaper
funding, higher investment and a faster catching-up process, without policy credibility loss
that could accompany such a cut in official rates without the EMU entry.
The first problem with this mechanism is that it seems to translate into cheaper funding
only when the “times are good.” As the ECB has mentioned many times, the interest rate
transmission is broken during the crisis, as businesses in the crisis-stricken Eurozone
countries face higher funding costs. Whether it is linked with banking system issues,
higher business risk in a recession or higher sovereign risk, it does not really matter – the
changes in relative interest rates are strengthening business cycle deviations.
The second problem with this mechanism is the risk of facing an inappropriate interest
rate with insufficient policy freedom to counterbalance it. This is the standard optimum
currency area (OCA) debate, not quite settled with respect to the original Eurozone. The
interest rate might be unsuitable for structural reasons (abundant labour, scarce capital),
or for cyclical reasons (booming periphery versus struggling core or vice versa).
The lack of interest or exchange rates as shock absorbers can be substituted with fiscal
policy, macro- or micro-prudential banking regulation, labour mobility, real wage flexibility
or intra-EMU transfers. The viability of each might need to be revaluated in light of the
past few years’ experience.
It is now apparent that fiscal policy freedom might require a much tighter fiscal policy
during the boom time in order to allow for a counter-cyclical fiscal loosening during the
slump. The fact that Ireland and Spain, considered paragons of fiscal responsibility, were
forced into deep austerity programmes during the private sector deleveraging is a case in
point. The contingent liabilities related to banking system vulnerabilities and externalities
of the EMU-wide fiscal tightening increase the fiscal needs in times of stress. The
necessary swings to major budget surpluses should be a substantial political challenge,
Cyprus capital controls are
lowering the convenience of
doing business, on top of
reduced policy flexibility
Common interest and
exchange rate policy requires
other flexibilities
3% of GDP deficit limit is too
restrictive in times of stress
and vastly inadequate during
booms
Canges in relative interest
rates are strengthening
business cycle deviations in
the EMU
Directional EMEA Economics April 2013
52
but the near-term problem is related to the market and EU partner acceptance of a much
looser fiscal policy – difficult when faced with intra-EMU capital flight risk.
Counter-cyclical banking regulation is another method of taking away the punch bowl
in good times. It remains to be seen how much such regulations could vary within
countries when a common European regulator would take over. If anything, the risk of a
one-size-fits-all policy is heightened with the current plans.
Labour mobility will be the crucial way of venting off public frustration with 20%+
unemployment. The fact that Romania, Bulgaria and Croatia are not part of the common
labour pool is a severe obstacle for the sensibility of their EMU entry bid, in our view.
Similarly damaging are the service sector labour market restrictions in several countries
including Germany. The rise of anti-migration sentiment in the Netherlands, France, Italy
and the UK is another factor potentially dismantling the foundation of the Eurozone (but
then, so far, the calls for tighter labour market regulations have been restricted to the
countries experiencing recessions, so the cycle-equalising argument is not strong in this
case).
Real wage flexibility as a way of replacing the lacking nominal exchange rate adjustment
to balance of payments flows is a slow and painful process, because of nominal wage
rigidities and low in partner economies. The newest Eurostat numbers on hourly labour
costs (excluding public administration and agriculture) are shown in Figure 99. True,
Greece, Portugal and Ireland labour costs did grow less than the EMU average (the
difference is 19.4, 8.9, 8.3 and 0.7%, respectively), but for an adjustment process that
lasted for four years, it is not particularly impressive, given the initial competitiveness
adjustment needs at the onset of the crisis.
Fig 101 Hourly labour costs (€, %ch 2008-12), excluding agriculture and public administration
-15% -5% 5% 15% 25% 35% 45%
Bulgaria NorwaySwedenAustria
SlovakiaFinland
BelgiumLuxembour
Denmark FranceCyprus
GermanyEMUMalta
ItalyEU27Spain
EstoniaNetherlands
SloveniaRomania
UnitedLatvia
IrelandPortugal
LithuaniaPoland
HungaryCroatiaGreece
Bulgaria’s indicated wage cost growth of 42.3% most likely reflects minimum wage growth and under-reporting of total wages in 2008
Source: Eurostat
Transfers, or debt forgiveness, as a method of easing the imbalances are a thorny
enough issue within a single country; a long-lasting transfer stream of the W-E Germany,
or N-S Italy type needs a different Europe than we have now, as shown during the recent
2014-20 budget debate. The discussion was about less than 1% of the EU GDP, a
marginal amount compared with the recent bailout costs or the ESM capital allocations
(see below). While the support for the Eurozone remains high amongst German voters,
we expect bail-out fatigue to mount amongst core taxpayers as we get closer to the
German elections.
EMU cannot be an optimum
currency area without labour
mobility – this works against
Romania, Bulgaria and
Croatia entry
Wage adjustment is possible,
but slow
Large transfers need different
voters in donor countries
Directional EMEA Economics April 2013
53
Compared with the EMU members stuck in a long-run recession, this tool is probably of
smaller importance for the EMU candidate countries that have lower debt and can still
influence their external balance via the appropriate choice of entry exchange rate.
The benefits of FX flexibility A loss of competitiveness and the related external imbalances caused by credit booms
and too-low interest rates – asymmetric shocks – might eventually require a correction
when financing dries out. While current account can be brought into balance with a
recession, as shown by a number of European countries, this is suboptimal. A better
option is to cut the reliance on external savings via real exchange adjustment, and a
nominal exchange rate is the quickest way to achieve it.
Employment loss, given the same CA gap, does tend to be somewhat lower for countries
experiencing real exchange depreciation (Figure 103), but the statistical significance of
the relationship is weak.
Fig 102 Pre- and post- adjustment CA (% of GDP, sorted by the 07-11 difference)
-24
-19
-14
-9
-4
1
6
Turke
y
Ukrain
e
Russia
Czech
Rep
ublic
Poland
Slovak
ia
Croat
ia
Hunga
ry
Roman
ia
Latvi
a
Bulgar
ia
2007 2011
Source: National sources
Such analysis ignores the fact that the initial CA gap itself might have been connected to
the exchange rate policy (see Figure 102, the highest starting-point CA gaps were seen
in fixed exchange rate countries). A regression of employment change in crisis versus the
openness of the economy, REER depreciation and the share of FX credit in GDP shows
the latter factors significantly influencing the job loss cost of the recent crisis (Figures 103
and 104).
It is worth noting that while nominal exchange rate depreciation can have dangerous side
effects for the domestic demand due to FX borrowing exposure, the real wage deflation
channel is effectively equally damaging, but more prolonged: income falls relative to the
value of the loans for a big part of the population.
Weaker exchange rate did
save jobs in CEE, but
statistical relationship after
controlling for the size of CA
is weak…
…but fixed exchange rates
might have contributed to the
external imbalances
Directional EMEA Economics April 2013
54
Fig 103 Employment versus REER change (%)
Fig 104 Employment versus FX credit/GDP
Turkey
Ukraine
Russia
Poland
Czech
Slovakia
Croatia
HungaryRomania
Latvia
Bulgaria
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
-25 -15 -5 5 15 25
RE
ER
app
reci
atio
n (%
, 20
07-2
011)
Employment change (%, 2007-2011)
Turkey
Ukraine
Poland
Czech
Croatia
HungaryRomania
Latvia
Bulgaria
0
10
20
30
40
50
60
70
80
90
100
-30 -20 -10 0 10 20
FX
den
omin
ated
deb
t/GD
P
Employment change (%, 2007-2011)
Source: IMF IFS Source: IMF, national sources
Another reason that creating varying responses of the economies in an environment of
falling CA deficits could be the lack of output diversification, making import substitution
difficult. If the majority of the industry is concentrated in, for example, the car
manufacturing sector, the short-term scope for real exchange rate-linked net export gains
is mostly limited by the external demand, and not costs.
Such peculiarities are difficult to catch in a small sample. Time series estimates for
individual countries point to a consistently high and negative translation of weaker growth
into CA improvement. The importance of real effective exchange rate (unit labour cost-
corrected measure has been used) is much more patchy. While the sign is right for most
countries, significance is marginal. In particular, annual 2000-11 data show Turkey,
Slovakia, the Czech Republic and Hungary external balances responding in a limited
fashion to the exchange rate swings. REER in Croatia, Romania, Poland and, in
particular, Ukraine, tends to coincide with CA swings, after controlling for GDP. This is
especially visible in the crisis years as shown in Figures 103, 104, 105 and 106.
Fig 105 REER and CA change in Poland
Fig 106 REER and CA change in Czech Republic
-4-3-2-101234-30
-25-20-15-10
-505
101520
REER (% YoY, rhs) CA (YoY diff, % of GDP)
-10
-5
0
5
10
15-3
-2
-1
0
1
2
3
4
5
CA (YoY diff, % of GDP) REER (% YoY, rhs)
Source: ING estimates, OECD Source: ING estimates, OECD
More diversified economies
stand to benefit more from
the REER adjustments
Poland, Romania and Croatia
enjoy bigger FX shock-
absorbing than the Czech
Republic or Hungary
Directional EMEA Economics April 2013
55
Fig 107 REER and CA change in Romania
Fig 108 REER and CA change in Croatia
-6-4-202468101214-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
CA (YoY diff, % of GDP) REER (% YoY, rhs)
-6
-4
-2
0
2
4
6-6
-4
-2
0
2
4
6
CA (YoY diff, % of GDP) REER (% YoY, rhs)
Source: EcoWin, ING estimates Source: EcoWin, ING estimates
The importance of the exchange rate as a shock absorber varies across the NMS. It
appears significant in Poland, Croatia or Romania, but for the Czech Republic or Hungary
the best that can be said is “significant yet small.”
Political factors versus costs of future bailouts A new argument for EMU entry is the political power to shape the European Union. The
Eurogroup meetings increasingly shape bank regulations, bailouts and fiscal rules that
have a direct or an indirect (eg, via parent banks) influence over the non-EMU
economies. Staying outside exposes the NMS to “regulation without representation.”
Another factor speaking for entry could be the deepening of the financial links via the
EMU entry as a geopolitical protection (similar to the arguments for hosting US troops or
ballistic missiles).
The political power in the EU is becoming increasingly linked (via the Lisbon treaty and
double majority voting in most areas starting from 2014) to population. So far, however,
the realities of the political power in EMU decision-making have been constantly
changing. This also applies to the "rules of the game" of the bail-outs. One example is the
contrast in the range of bailed-in investors in Ireland and in Cyprus. Another is the
German retreat from the idea of bank bail-outs separated from sovereign support. And
generally, we expect size and systemic importance, as well as internal political logic of
the creditor countries to have an important influence over the governance of the EMU.
What is more, population, along with its potential political influence also carries financial
responsibilities within the EMU. Article 29 of the statute of the ECB sets the key for
capital subscription along the following rules, which apply also to the ESM capital key.
The key for subscription of the ECB’s capital, fixed for the first time in 1998 when the
ESCB was established, shall be determined by assigning to each national central
bank a weighting in this key equal to the sum of:
50% of the share of its respective Member State in the population of the Union in the
penultimate year preceding the establishment of the ESCB;
50% of the share of its respective Member State in the gross domestic product at
market prices of the Union as recorded in the last five years preceding the
penultimate year before the establishment of the ESCB.
Figure 109 shows the hypothetical capital subscription of the new members, as a
percentage of GDP and in nominal terms calculated on the assumption that the country in
question is the only one joining. NMS with a lower GDP per capita would contribute a
disproportionally higher share of their income to the European Stability Mechanism. The
potential burden would have been much greater without the correction mechanism
Being ‘in’ might bring some
power over the shaping of
the EMU and the EU...
…but it does not come
cheap. ESM capital
subscription alone might
weigh by 7-10% of the CEE
GDP
Directional EMEA Economics April 2013
56
benefitting the countries with GDP/capita below 75% of the EU average. The Czech
Republic and Slovenia are the only countries in the region that enjoy income above that
level (thus, the Czech Republic’s is the highest capital subscription to the ESM, as a
percentage of GDP).
The estimates of the banking union benefits and costs also do not favour the NMS
without systemically important banks (Figure 108), with bigger countries particularly
disadvantaged.
In short, any political clout that the new entrants would gain would be quite expensive if
new ESM rescue mechanisms were to be arranged in the future.
Fig 109 Hypothetical ESM capital subscription
Fig 110 Net effect for countries joining the banking union
0
2
4
6
8
10
12
Sweden UK
Slovak
ia
Latvi
a
Lithu
ania
Poland
Hunga
ry
Croat
ia
Roman
ia
Bulgar
ia
Czech
Rep
ublic
0
20
40
60
80
100
120
ESM % of GDP ESM €bn (RHS)
-7 -2 3 8 13
GermanyPoland
ItalyFrance
RomaniaGreeceAustria
BelgiumCzech Republic
HungaryBulgariaSlovakia
LithuaniaSlovenia
LatviaCyprus
DenmarkNetherlands
SwedenSpain
United Kingdom
Note: Assuming EMU expansion by only the particular country
Source: ING estimates based on Eurostat data
Note: Net effects sum up to zero, % of EU-total gains minus % of total costs
Source: Dirk Schoenmaker, Arjen Siegmann (2013) (http://papers.tinbergen.nl/discussionpapers/13026.pdf)
Internal politics Ultimately, the key factor on the NMS’ way to the EMU should prove to be local support
for the adoption of the euro. There is a puzzling disconnect between the public support
for the EMU and the trust in the ECB. Support for the common currency tends to be low
in the non-EMU members and high in the Eurozone (Figure 111). The candidate
countries that have more people declaring their support than opposition to the common
currency are Bulgaria, Romania, Croatia and (barely) Hungary. Opposition to the EMU is
high not only in the Czech Republic and Poland, but even in Latvia and Lithuania, both
close to join the EMU. At the same time, EMU members generally distrust the ECB, while
only in Hungary, Latvia and Croatia does such distrust prevail.
Directional EMEA Economics April 2013
57
Fig 111 Support for the EMU
Fig 112 Do you trust the ECB?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
EU27 BG CZ LV LT HU PL RO SK HR
For Against neither
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
EU27 BG CZ LV LT HU PL RO SK HR
Tend to trust Tend not to trust Neither
Source: Eurobarometer, spring 2012 wave Source: Eurobarometer, autumn 2012 wave
These results do influence the governments’ drive for EMU entry, as shown in Figure 113.
With the exception of Latvia and Lithuania, not a single candidate country has a firm date set
for joining the EMU. Firmer declarations are at most limited to "readiness to join", but often
the calendar is open ended, as in "not before".
Fig 113 Maastricht criteria check
HICP (%)
Public finance deficit (%)
Public debt (%)
ERM-II LT IR (%)
Latest political declaration
Reference 2.5 3 60 2 yrs 4.81
Bulgaria 2.5 1.0 19 No 4.03 Suspended indefinitely Czech Republic 2.9 5.2 46 No 2.44 Not to decide before 2014 elections Hungary 4.9 2.4 79 No 7.23 Not before 2020 (assuming unchanged gov)Latvia 1.6 1.5 42 May 05 4.00 Jan-14 Lithuania 2.8 3.2 41 Jun 04 4.53 Jan-15 Poland 3.0 3.5 56 No 4.61 Criteria in 2015, no date set Romania 3.9 2.9 38 No 6.43 Previous 2015 target to be pushed, or
completely removed Croatia 4.0 4.6 54 No 5.73
Source: Eurostat, national sources
Conclusions The past five years revealed a number of deficiencies in the functioning of the EMU, while
most of the CEE continued maturing as credible economies. The key benefits of the EMU
membership are either proving overrated (balance of payments stability, policy credibility
of an economic superpower) or come with undesirable side effects (easier access to
capital, lower interest rates). Even though the convenience in doing day-to-day business
outweighs the inflation and transition costs, the macroeconomic issues are show-
stoppers for bigger new member states.
The candidate countries without derogation can postpone entry indefinitely (legal criteria
can be missed for as long as the country wishes), so the timing is up to the candidate
country.
Maastricht criteria are not sufficient to ensure a smooth functioning within the Eurozone.
To deal with unsuitable interest rates, the candidate might want to:
• Wait for the natural interest rate to converge to the EU core.
• Ensure a better investment environment to channel demand to potential growth-
enhancing investments, not consumption or real estate. This could include industrial
or innovation policy and a shift away from labour costs as the key trade driver.
The balance of benefits has
shifted against the EMU entry
for bigger CEE economies…
…and anyone still
considering entry must be
prepared to deal with the
problems that hit the 2000s’
outperformers
Directional EMEA Economics April 2013
58
• Devise and secure the right to use bank regulations allowing for cooling consumption
or real estate booms.
As a way of dealing with reduced policy flexibility, public finances in good times must be
sufficiently good to allow for a much looser policy in bad times.
While we learned more about the risks connected with the functioning of the EMU, the
knowledge and policy prescriptions could still be tested by the changing structure of the
EMU governance (banking union) or fresh bailouts. Slovakia showed there is little hope in
negotiating lower share in pan-EMU rescue costs for the new member states.
With uncertainties that large, the risk of post-crisis nominal appreciation of the floating
CEE currencies spoiling the entry terms is worth taking in our view.
The countries standing to benefit the most will tend to be richer, smaller, more open and
maintaining the currency board or fixed exchange rates anyway. Latvia and Lithuania
have been living with the currency board for years; they learned to count mostly on
themselves (and Swedish parent banks), and thanks to their tiny population, the potential
costs would be counterbalanced by easier access to ECB facilities. For Bulgaria, similarly
open and running the same exchange rate policy, the ESM costs are politically
prohibitive. The shifting cost-benefit balance is likely to leave the Czech Republic,
Hungary, Poland and Romania out of the EMU and with their own interest and exchange
rates for at least a decade.
The Baltic states are likely to
remain the only entrants in
2010s
Directional EMEA Economics April 2013
59
Countries
Bulgaria Directional EMEA Economics April 2013
60
Bulgaria [email protected]
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) 0.3 0.5 1.4 0.9 1.1 1.0 1.7HH consumption (%YoY) 0.5 1.5 2.0 1.7 3.4 2.2 2.5Fixed investment (%YoY) -1.0 0.5 0.0 -0.4 1.2 0.3 1.8CPI (%YoY)* 4.2 3.6 4.0 2.2 2.9 3.3 3.4Current account (% of GDP) -1.3 -2.1 -2.7 -0.6 -2.2 -2.2 -3.0FX res. import cover (mths) 6.6 6.3 6.0 6.1 5.9 5.9 5.8Policy interest rate (%)* n/a n/a n/a n/a n/a n/a n/a3-mth interest rate (%)* 1.36 1.23 1.50 1.60 1.60 1.50 1.703-year yield (%)* 1.85 1.55 1.90 2.00 2.10 1.80 2.2010-year yield (%)* 3.45 3.44 3.40 3.50 3.70 4.40 4.60USDBGN* 1.48 1.51 1.53 1.57 1.63 1.54 1.60EURBGN* 1.96 1.96 1.96 1.96 1.96 1.96 1.96
Tens of thousands of Bulgarians took to the streets in Feb in a protest sparked by high utility bills and fuelled by poverty, leading the government to resign and bringing forward general elections by about two months to 12 May. The good news is that this increase in political uncertainty has not been reflected in available economic data, so our forecasts have not seen significant changes. The bad news, however, is that polls suggest the elections will not bring aclear winner and this limits the chances for a speedy formation of a new government. The risks for fiscal slippages have increased along with social tension and the Socialists’ plan to return to progressive taxation would probably put the largest pressure on public finances.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
Opinion polls - latest vs pre-protest outbreak (ppt)
The Socialist Party calls for return of progressive tax
18.619.7
5.0 5.23.0
22.6 22.1
1.2
7.34.8
0
5
10
15
20
25
GERB SocialistParty (BSP)
Attack MRF Bulgaria forthe Citizens
Mar Feb
The protests did not manage to spawn a fresh political construction and it was the far-right party, Attack, that saw its support increase by the largest margin (~2-3ppt). The former ruling party, GERB, is still leading the polls, but by a very thin margin (1-4ppt, depending on the poll) over the Socialist Party. Ex-PM and GERB leader said he plansto focus on increasing income and taming youth unemployment on top of his former priority: fiscal stability that awarded Bulgaria a good rating and helped lure investors. The Socialists talk about switching from the 10% flat income tax to progressive taxation (with the first two rates set at 0% and 10%). Such a system is significantly more lenient than the 20-24% rates in force before 2008 and sounds difficult to implement without visibly widening the budget deficit.
Source: Reuters, Gallup
GDP components (% YoY, real growth)
Economic sentiment jumped in 1Q13
-30
-20
-10
0
10
20
30
40
1Q082Q
083Q
084Q
081Q
092Q
093Q
094Q
091Q
102Q
103Q
104Q
101Q
112Q
113Q
114Q
111Q
122Q
123Q
124Q
12
-10-8-6-4-202468
Household consumption Fixed investments GDP (rhs)
Bulgaria narrowly avoided contraction in 4Q12, stagnating QoQ, and, in spite of the political uncertainty, business confidence saw the largest increase in 1Q13 since 2010. At the same time, industrial output is on track to report that 1Q13 was one of the strongest in the past couple of years, while the contraction in household credit is slowing, which led us to operate only a small revision to our growth projections although ING now expects Eurozone growth to contract by 0.6% in 2013, similar to 2012, but well worse than the 0% forecasted earlier this year. We now look for 1% growth in 2013 and 1.7% in 2014 (vs 1.2% and 2.1% previously) as external headwinds will be, to some extent, buffeted by the easier fiscal policy as the government targets 1.4% of GDP vs 0.5% in 2012.
Source: NSI, ING estimates
Economic Sentiment Indicator (quarterly change)
Progressive taxation – the biggest near-term threat
Domestic debt has corrected a good part of the negative price action that followed February’s events, with 10Y yields easing 30bp after a 70bp jump. A delay in forming a new government is probably largely expected, so the biggest threat looks like post-election fiscal easing. Pre-election easing does not seem like a risk and most telling is that gas prices were recently cut (for the second time in 2013) at the expense of private distributors and not the fiscal purse.
Trade recommendation
Entry date Entry level Exit level S/L
-15
-10
-5
0
5
10
Mar-0
8
Sep-08
Mar-0
9
Sep-09
Mar-1
0
Sep-10
Mar-1
1
Sep-11
Mar-1
2
Sep-12
Mar-1
3
- - - -
Source: DG ECFIN, ING estimates
Bulgaria Directional EMEA Economics April 2013
61
Bulgaria
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 5.5 6.7 6.4 6.5 6.4 6.2 -5.5 0.4 1.8 0.8 1.0 1.7 2.8Private consumption (%YoY) 6.8 7.7 6.7 8.6 9.0 3.4 -7.6 0.1 1.5 2.6 2.2 2.5 2.9Government consumption (%YoY) 8.5 5.8 4.8 2.1 -1.6 -1.5 -4.9 -0.5 0.3 -0.4 2.5 2.3 2.0Investment (%YoY) 13.0 13.7 30.7 13.1 11.8 21.9 -17.6 -18.3 -6.5 0.8 0.3 1.8 2.7Industrial production (%YoY) 12.8 12.7 7.0 6.1 9.7 0.3 -18.2 2.3 5.7 -0.2 1.1 2.8 3.3Unemployment rate year-end (%) 13.7 12.0 10.1 9.0 6.9 5.6 6.8 10.2 11.3 12.3 12.3 11.0 10.2Nominal GDP (BGNbn) 36 40 45 52 60 69 68 71 75 78 81 85 91Nominal GDP (€bn) 18 20 23 26 31 35 35 36 39 40 41 44 47Nominal GDP (US$bn) 21 25 29 33 42 52 49 48 54 51 53 53 58GDP per capita (US$) 2,658 3,264 3,749 4,332 5,521 6,852 6,440 6,372 7,317 6,987 7,200 7,300 7,900Gross domestic saving (% of GDP) 10.8 11.3 12.5 14.6 14.4 17.0 20.5 21.0 21.9 20.1 22.4 23.0 23.2Lending to corporates/households (% of GDP) 25.3 33.8 39.6 43.1 60.6 69.8 73.3 71.9 69.5 69.4 65.0 63.8 63.3
Prices CPI (average %YoY) 2.3 6.2 5.0 7.3 8.4 12.3 2.8 2.4 4.2 3.0 3.3 3.4 3.3CPI (end-year %YoY) 5.6 4.0 6.5 6.5 12.5 7.8 0.6 4.5 2.8 4.2 2.9 3.3 3.5PPI (average %YoY) 5.4 7.2 8.0 12.3 7.7 10.6 -6.6 8.7 9.4 4.2 3.0 4.0 4.7Wage rates (%YoY, nominal) 6.3 6.0 9.5 9.6 20.6 22.7 13.3 9.7 8.7 8.7 7.0 6.0 6.4
Fiscal balance (% of GDP) Consolidated government balance (ESA 95) -0.4 1.9 1.0 1.9 1.2 1.7 -4.3 -3.1 -2.0 -0.8 -1.9 -1.5 -1.4Consolidated primary balance 1.8 3.8 2.7 3.2 2.3 2.6 -3.6 -2.5 -1.4 n/a n/a n/a n/aTotal public debt (ESA 95) 44.4 37.0 27.5 21.6 17.2 13.7 14.6 16.2 16.3 18.5 17.6 18.1 19.3
External balance Exports (€bn) 6.7 8.0 9.5 12.0 13.5 15.2 11.7 15.6 20.3 20.8 21.8 23.3 25.0Imports (€bn) 9.6 11.6 12.5 15.4 21.9 25.1 16.9 19.2 23.4 25.5 26.9 28.8 30.9Trade balance (€bn) -2.9 -3.6 -3.0 -3.4 -8.3 -9.9 -5.2 -3.7 -3.1 -4.7 -5.1 -5.5 -5.9Trade balance (% of GDP) -16.1 -17.9 -13.0 -12.9 -27.1 -27.9 -14.8 -10.2 -8.2 -11.8 -12.3 -12.6 -12.7Current account balance (€bn) -1.0 -1.3 -2.7 -4.6 -7.8 -8.2 -3.1 -0.5 0.0 -0.5 -0.9 -1.3 -1.7Current account balance (% of GDP) -5.3 -6.4 -11.6 -17.6 -25.2 -23.1 -8.9 -1.5 0.1 -1.3 -2.2 -3.0 -3.8Net FDI (€bn) 1.3 2.1 3.5 6.2 9.0 6.7 2.4 1.2 1.7 1.5 0.9 1.0 1.3Net FDI (% of GDP) 6.9 10.3 14.9 23.5 29.4 19.0 7.0 3.2 4.5 3.7 2.2 2.3 2.8Current account balance plus FDI (% of GDP) 1.6 3.8 3.3 5.9 4.2 -4.1 -1.9 1.7 4.6 2.4 0.0 -0.7 -1.0Foreign exchange reserves ex gold, (€bn) 5.0 6.4 6.8 8.3 11.2 11.9 11.9 11.6 11.8 13.9 13.1 13.8 14.1
Import cover (months of merchandise imports) 6.2 6.7 6.5 6.5 6.2 5.7 8.5 7.2 6.0 6.6 5.9 5.8 5.5
Debt indicators Gross external debt (€bn) 10.6 12.6 15.5 20.7 29.0 37.2 37.8 37.0 36.2 37.6 35.5 36.5 37.7Gross external debt (% of GDP) 58 62 67 78 94 105 108 103 94 95 86 84 81Gross external debt (% of exports) 160 157 164 172 215 245 323 238 179 181 163 157 151Total debt service (€bn) 1.3 2.6 6.0 5.6 6.9 7.3 7.4 7.4 6.9 6.9 6.5 6.9 7.3Total debt service (% of GDP) 7.3 12.9 25.9 21.1 22.5 20.5 21.1 20.5 17.8 17.4 15.8 15.8 15.7Total debt service (% of exports) 20.0 32.8 63.7 46.5 51.2 47.7 63.1 47.4 33.9 33.3 29.9 29.6 29.2
Interest & exchange rates Central bank key rate (%) year-end n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aBroad money supply (avg, %YoY) 19.5 23.1 23.9 27.0 31.3 8.9 4.2 6.4 12.2 8.5 7.0 8.0 8.33-mth interest rate (Sofibor, avg %) 3.8 2.8 2.7 3.1 4.8 7.2 5.7 4.1 3.8 2.3 1.5 1.7 1.83-mth interest rate spread over Euribor (ppt) 147 66 53 -1 51 251 450 329 237 169 124 111 993-year yield (avg %) n/a n/a 3.4 3.8 4.5 5.2 5.4 4.5 3.6 2.6 1.8 2.2 2.210-year yield (avg %) 6.5 5.4 4.1 4.4 4.8 5.4 7.4 6.0 5.3 4.5 4.4 4.6 4.6Exchange rate (USDBGN) year-end 1.55 1.44 1.65 1.48 1.34 1.40 1.37 1.46 1.51 1.48 1.63 1.56 1.56Exchange rate (USDBGN) annual average 1.73 1.57 1.57 1.56 1.43 1.33 1.40 1.47 1.40 1.52 1.54 1.60 1.56Exchange rate (EURBGN) year-end 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96Exchange rate (EURBGN) annual average 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96
Source: National sources, ING estimates
Croatia Directional EMEA Economics April 2013
62
Croatia [email protected]
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) -2.3 -3.2 -1.6 -0.7 -0.2 -1.4 1.0HH consumption (%YoY) -4.2 -4.8 -1.0 -1.6 0.5 -1.6 0.5Fixed investment (%YoY) -4.9 -5.1 -3.0 -2.1 -0.4 -2.6 0.3CPI (%YoY)* 4.7 4.9 4.3 2.9 2.5 3.7 2.3Current account (% of GDP) 0.1 0.3 -0.1 0.6 0.9 0.9 -0.7FX res. import cover (mths) 8.6 8.1 8.3 8.5 8.6 8.6 8.7Policy interest rate (%)* 6.00 6.00 6.00 6.00 6.00 6.00 6.003-mth interest rate (%)* 1.67 1.10 1.30 1.50 1.50 1.40 2.203-year yield (%)* 4.28 3.80 4.00 4.00 4.20 4.00 4.807-year yield (%)* 5.00 5.00 5.20 5.30 5.20 5.10 5.00USDHRK* 5.72 5.92 5.98 6.08 6.33 5.97 6.24EURHRK* 7.55 7.59 7.66 7.60 7.60 7.59 7.61
HRK continued its weakening trend in 1Q, as the depressed domestic and foreign demand requires an environment that discourages imports. While the near-term risks to the EU accession process were cleared, the economy’s outlook worsened. The two downgrades left Fitch as the only agency keeping Croatia’s BBB-rating. On the positive side, Croatia retains decent access to external funding, having managed to place US$1.5bn in 10Y bonds, for the first time since Apr 2012. The issue alone covers a quarter of its gross 2013 issuance needs. We expect a continuation of the weakening of the HRK on sub-average growth and increased pre-EU entry spending in 2Q.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
€/HRK and CDS spreads (bp)
Welcome to the EU
150
200
250
300
350
400
450
500
550
Oct 08 Sep 09 Aug 10 Jun 11 May 12 Mar 13
7.1
7.2
7.3
7.4
7.5
7.6
7.7
5yr CDS (bp) €/HRK (RHS)
As expected, the EC confirmed in its last monitoring report that Croatia is ready to join the EU, triggering Belgian and Dutch ratification of the entry treaty, with Germany and Denmark likely to follow shortly. Slovenia, having been threatening to derail Croatia’s entry ratified the treaty, after a memorandum on the failed Ljubljanska Banka deposit claim dispute was signed.
Similarly to the case of Romania and Bulgaria, the EU entry will leave Croatia out of the Schengen zone. Moreover, the Netherlands and Germany opted to exclude Croats from their labour market for at least two years. This is particularly painful for Croatia, given the recession and its high unemployment.
Source: Reuters
Growth and its main components (ppt)
Internal and external demand headwinds
-10
-5
0
5
10
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
Priv consumption Fixed inv
Net exports GDP (%)
The Croatian economy will not only be struggling with an ever-deepening consumption slump and sustained weak investments, but also with the wrong set of trading partners within the EU. With Italy expected to contract 1.3% and Slovenia around 2% this year, the outlook for Croatia’s recovery rests, to a large extent, on the public investment push, which we think will prove insufficient. Unemployment has been growing 1.5ppt YoY to 21.5% and real wages have fallen around 4% YoY, but we expect retail sales (which were poor in 1Q) to recover on a pre-EU spending spree experienced by many EU entrants. Still, we revise our 2013 growth forecast to -1.4%, with all main domestic demand components staying negative.
Source: EcoWin, ING estimates
Eurobond spreads vs bunds
Policy flexibility to the rescue?
Croatia is distancing itself from its troubled neighbour, Slovenia, as the initial HC spread widening around the Cyprus crisis was reversed. 20.5% capital adequacy of the banking system, only 70% of GDP in private lending and 50% of GDP public debt, own currency and 7% of GDP FX debt, give the new EU entrant enough flexibility to withstand the slowdown. We prefer FX-denominated instruments though, given the attractiveness of the FX depreciation route to recovery.
Trade recommendation
Entry date Entry level Exit level S/L
250
325
400
475
550
625
700
Nov 11 Mar 12 Jun 12 Sep 12 Dec 12 Apr 13
Slovenia 01/21 Croatia 7/18
Buy Croatia 7/18 vs bund 19-Apr 372 290 405
Source: Thomson Reuters
Croatia Directional EMEA Economics April 2013
63
Croatia
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 5.4 4.1 4.3 4.9 5.1 2.1 -6.9 -1.4 0.0 -2.0 -1.4 1.0 1.8Private consumption (%YoY) 3.9 4.2 4.1 3.2 6.4 1.4 -7.5 -1.3 0.2 -2.9 -1.6 0.5 1.7Government consumption (%YoY) 1.9 3.8 2.5 4.5 5.0 -0.3 0.5 -2.1 -0.6 -0.8 0.8 1.2 2.0Investment (%YoY) 24.5 5.3 4.9 11.5 7.3 8.7 -14.1 -14.9 -6.4 -4.6 -2.6 0.3 2.1Industrial production (%YoY) 3.5 4.4 2.9 4.0 5.4 0.1 -9.9 -2.2 -0.9 -5.0 0.5 2.0 3.0Unemployment rate year-end (%) n/a n/a n/a n/a 9.6 8.3 9.0 11.7 13.5 15.9 17.3 16.5 15.0Nominal GDP (HRKbn) 229 247 267 291 318 343 329 324 330 330 338 350 367Nominal GDP (€bn) 30 33 36 40 43 48 45 44 44 44 45 46 49Nominal GDP (US$bn) 34 41 45 50 59 70 62 59 62 56 57 56 61GDP per capita (US$) 6,729 7,340 8,014 8,842 9,656 10,585 9,974 9,905 9,906 9,805 9,953 10,272 10,881Gross domestic saving (% of GDP) 20.4 21.2 21.6 23.2 22.7 .23.6 22.4 22.2 21.9 21.9 22.0 21.0 21.0Lending to corporates/households (% of GDP) 45.7 48.1 53.0 60.2 63.3 67.4 70.6 74.9 76.8 72.1 73.0 74.5 75.6
Prices CPI (average %YoY) 1.8 2.1 3.3 3.2 2.9 6.1 2.4 1.0 2.3 3.4 3.7 2.3 3.0CPI (end-year %YoY) 1.7 2.7 3.6 2.0 5.8 2.9 1.9 1.8 2.1 4.7 2.5 2.0 3.3PPI (average %YoY) -0.1 0.3 -0.2 0.0 0.3 -0.1 -0.4 4.3 7.1 5.6 5.0 4.5 2.0Wage rates (%YoY, nominal) 5.9 5.9 4.9 5.2 5.2 7.0 2.6 0.6 1.5 1.0 1.0 2.9 3.5
Fiscal balance (% of GDP) Consolidated government balance (ESA 95) -4.5 -4.3 -4.0 -3.0 -2.5 -1.4 -4.1 -5.2 -5.5 -4.8 -4.0 -3.2 -3.0Consolidated primary balance -2.5 -2.2 -1.8 -1.0 -0.7 0.1 -2.4 -3.1 -3.2 -2.2 -1.3 -0.4 -0.2Total public debt (ESA 95) 40.9 43.2 43.7 35.5 32.9 28.9 35.3 42.2 46.7 51.5 54.3 55.7 56.1
External balance Exports (€bn) 5.6 6.6 7.2 8.4 9.0 9.6 7.5 8.9 9.6 9.6 9.8 10.1 11.5Imports (€bn) 12.5 13.3 14.7 16.8 18.8 20.8 15.2 15.1 16.3 16.2 15.7 15.9 16.2Trade balance (€bn) -7.0 -6.7 -7.5 -8.4 -9.8 -11.2 -7.7 -6.2 -6.7 -6.6 -5.9 -5.8 -4.7Trade balance (% of GDP) -23.0 -20.4 -20.9 -21.1 -22.7 -23.6 -17.2 -14.0 -15.1 -14.9 -13.2 -12.6 -9.7Current account balance (€bn) -1.8 -1.4 -1.9 -2.6 -3.2 -4.3 -2.3 -0.5 -0.4 0.0 0.4 -0.3 -1.0Current account balance (% of GDP) -6.0 -4.1 -5.3 -6.7 -7.3 -8.9 -5.1 -1.1 -0.9 0.1 0.9 -0.7 -2.1Net FDI (€bn) 1.7 0.7 1.3 2.6 3.5 3.3 1.5 0.4 1.1 1.1 2.0 2.2 1.0Net FDI (% of GDP) 5.5 2.0 3.5 6.4 8.0 6.9 3.4 1.0 2.4 2.4 4.5 4.8 2.1Current account balance plus FDI (% of GDP) -0.5 -2.1 -1.7 -0.2 0.7 -2.1 -1.7 -0.1 1.5 2.5 5.4 4.1 0.0Foreign exchange reserves ex gold, (€bn) 6.0 6.4 7.0 8.4 9.3 9.7 9.2 10.6 11.2 11.5 11.3 11.5 11.9Import cover (months of merchandise imports) 5.8 5.8 5.7 6.0 5.9 5.6 7.3 8.4 8.2 8.6 8.6 8.7 8.8
Debt indicators Gross external debt (€bn) 19.9 22.9 26.0 29.7 33.7 39.2 42.5 45.4 46.7 46.0 46.2 47.3 51.0Gross external debt (% of GDP) 66 69 72 75 78 82 95 102 105 105 104 103 105Gross external debt (% of exports) 357 347 360 352 375 409 565 510 488 479 471 468 443Total debt service (€bn) 3.2 2.8 3.1 3.7 5.9 6.1 9.2 9.9 8.3 13.1 10.1 9.8 10.2Total debt service (% of GDP) 10.5 8.4 8.7 9.4 13.7 12.9 20.5 22.3 18.7 29.9 22.7 21.3 20.9Total debt service (% of exports) 56.9 41.8 43.4 44.2 65.9 63.9 121.9 111.3 86.5 136.5 103.0 97.0 88.7
Interest & exchange rates Central bank key rate (%) year-end n/a n/a 3.7 3.5 3.6 5.3 6.0 6.0 6.0 6.0 6.0 6.0 6.0Broad money supply (avg, %YoY) 4.6 5.4 7.3 6.2 4.5 5.7 7.2 9.0 2.2 4.7 3.5 3.7 4.03-mth interest rate (Zibor, avg %) 5.4 7.3 6.2 4.5 5.6 7.2 8.9 2.4 3.2 3.4 1.4 2.2 3.03-mth interest rate spread over Euribor (ppt) 311 521 403 139 137 254 773 162 177 284 114 161 2193-year yield (avg %) n/a n/a n/a 4.5 4.4 5.9 7.9 5.5 5.6 5.8 4.0 4.8 4.37-year yield (avg %) n/a n/a n/a 4.6 5.2 5.9 7.9 6.4 7.2 6.4 5.1 5.0 4.9Exchange rate (USDHRK) year-end 6.1 5.7 6.2 5.6 5.0 5.2 5.1 5.5 5.8 5.7 6.4 6.1 6.0Exchange rate (USDHRK) annual average 6.7 6.0 5.9 5.8 5.4 4.9 5.3 5.5 5.3 5.8 6.0 6.2 6.0Exchange rate (EURHRK) year-end 7.65 7.67 7.38 7.35 7.33 7.32 7.31 7.39 7.53 7.55 7.64 7.57 7.50Exchange rate (EURHRK) annual average 7.56 7.50 7.40 7.32 7.34 7.22 7.34 7.29 7.43 7.52 7.59 7.61 7.54
Source: National sources, ING estimates
Czech Republic Directional EMEA Economics April 2013
64
Czech Republic Next elections : Parliamentary / May-2014 (tentative)
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) -1.7 -1.2 -0.3 1.3 1.5 0.1 2.1HH consumption (%YoY) -4.0 -3.8 -1.0 0.0 1.0 -0.9 2.0
Fixed investment (%YoY) -5.0 -3.0 -1.7 0.4 1.5 2.0 4.5
CPI (%YoY)* 2.4 1.7 1.7 1.9 1.8 1.8 1.8
Current account (% of GDP) -2.1 -1.4 -1.2 -1.3 -1.5 -2.0 -2.6
FX res. import cover (mths) 3.4 3.4 3.5 3.6 3.6 3.6 3.4
Policy interest rate (%)* 0.05 0.05 0.05 0.05 0.05 0.25 1.00
3-mth interest rate (%)* 0.50 0.50 0.50 0.50 0.55 0.50 0.88
2-year yield (%)* 0.50 0.50 0.50 0.80 0.90 0.68 1.20
10-year yield (%)* 2.00 1.86 1.75 1.80 2.00 2.10 2.37
USDCZK* 18.98 20.10 20.55 21.20 21.42 20.48 20.59
EURCZK* 25.05 25.76 26.30 26.50 25.70 26.07 25.10
Eventual recovery in activity is going to be a prolonged affair, dependent on Eurozone stabilisation. For a change, we expect fiscal policy to become supportive for growth from mid-2013 onwards, not least because of the general elections due in 1H14. Apart from the EMU outlook, the risks for growth are the tight debt thresholds in the fiscal responsibility bill, and high participation in the second pillar of the pension system, which could further increase savings. The seventh-running quarter of the recession is likely to keep CZK weak and official rate expectations anchored at zero, but we see 12x15 FRAs pricing in no rate change as it is too low. We expect €/CZK to drift above 26.0, still allowing the CNB to abstain from actual interventions this quarter.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
Real GDP %YoY growth contributions
Macro digest
- 8- 6- 4- 2 0 2 4 6
1Q082Q
083Q
084Q
081Q
092Q
093Q
094Q
091Q
102Q
103Q
104Q
101Q
112Q
113Q
114Q
111Q
122Q
123Q
124Q
121Q
132Q
133Q
134Q
13
Private consumption Public consumptionFixed Investments InventoriesNet exports GDP
Source: Ecowin, ING forecasts
Cumulative budget balance (CZKm)
(200,000)
(150,000)
(100,000)
(50,000)
0
50,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008 2009 20102011 2012 2013
Source: Ecowin
Inflation indices
-1012345678
Jun
03
Jul 0
4
Aug 0
5
Sep 0
6
Oct 07
Nov 0
8
Jan
10
Feb 1
1
Mar
12
Apr 1
3
Jun
14
Headline CPI Policy-relevant inflation
The Czech economy still remains firmly stuck in a recession, which, while shallower than in 2009, is already the longest since transformation. 1Q13 is likely to constitute the seventh quarter of the recession, as the promising signals from the PMI (jumping to 50 for a month) and a slow, yet steady acceleration of corporate lending failed to translate into better activity numbers.
There has been some improvement in the noisy WDA-adjusted industrial output numbers (down 2.8% YoY on average in the first two months of the year vs -5% in the 4Q), but the MoM gains probably arrived too late to ensure any meaningful improvement. Even more worryingly, new orders have been trending substantially lower, declining over 7% YoY (WDA) in Jan-Feb, twice the speed of the 4Q decline.
While it is impossible to argue that the Czech private sector is over-leveraged, the household savings rate will not provide the recovery impulse for the industrial sector – consumer loan growth is steadily slowing, continuing a process that started in 2007. That leaves external demand as a trigger for investments and overall recovery, but neither our current EMU forecasts, nor the near-term outlook for the CEE trading partners, spell a quick end to the recession. Apart from the negative WD effect this quarter, snowy spring weather might prove to be quite disruptive for the construction activity in March. Consequently, we revise our 2013 GDP forecasts substantially lower, in line with lower Eurozone growth and more sluggish activity in 1Q. Our 0.1% 2013 forecast and expectations of a recovery to 2.1% are more optimistic than the ones in the official CNB forecast.
Growth underperformance is the dark side of the fiscal tightening success. While the 2012 ESA95 deficit jumped from 3.25% to 4.38% of GDP, it actually represents a substantial austerity effort, as without one-off factors (eg, church restitution law and grants returned to the EU), the public finance deficit would be merely 1.9% of GDP. From the point of view of the good 2012 results, 2013 budget plans might turn out growth-supportive for a change. The official target of 2.9% is not only looser than the 2012 realisation, but, after 1Q results, it actually seems achievable. March’s cumulative budget surplus was matched only during the boom of 2006.
As elsewhere in the region, and consistently with the poor domestic demand, inflation has been falling below the central bank’s target, with the core CPI actually falling below the 1-3% CNB target range. We expect headline inflation to remain below 2% well into 2014, as the inflationary VAT hike effect will disappear by then.
Source: Ecowin, ING forecasts
Czech Republic Directional EMEA Economics April 2013
65
New EU budget proposal
Not doing so well in the EU budget negotiatons
0
10
20
30
40
50
60
70
80
PL RO BG HU CZ0%
5%
10%
15%
20%
25%
30%
35%
40%
Cohesion 2007-2013 2014-2020Cohesion CAP as % of GDP (RHS)
The 2014-20 EU budget is not yet a done deal, as the European Parliament factions were quick to remind after a deal was struck. Most of the CEE governments were quick to hail the 8 February agreement as a success, although they were tellingly quoting different statistics to prove it. The Czech Republic government has the toughest job defending the deal before the public, as gross cohesion and structural funds are down by 23% in nominal terms. Including CAP, the proposal points to gross allocation of 19% of GDP, much below the 29-32% agreed for the other three CE4 countries. Per capita, the difference is much less striking. Because of fiscal austerity, corruption and administrative problems, the Czech Republic failed to benefit much from the current round of EU money.
Source: EU
Net savings by institutional sectors: everyone saves!
Introduction of second pillar dangerous for recovery?
-6
-4
-2
0
2
4
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
Corp+financial Households Government
The Czech Republic plunges on with the pension system reform following the backtracking on the second-pillar contributions in the neighbouring countries. We find the increase in retirement age in2011 to be far more important for the public finances than the latest reform introducing second-pillar private pension funds. By linking second-pillar participation with the additional 2% private contribution, the Czech system tries to avoid the problem of diverting a large part of the social security contribution to the private pension funds, leading to an unchanged total savings rate – the larger budget gap balanced theincreased private savings. But the increased household savings is the last thing the Czech economy needs six quarters into a recession.
Source: Czech statistical office
Budget reponsibility bill provisions (draft)
Fiscal responsibility law – higher thresholds necessary
Parameters – public debt
Between 40.0% and 45.0% of GDP
Between 45.0% and 48.0% of GDP
Between 48.0% and 49.99% of GDP
> 50.0% of GDP
• Explain to parliament
• Freeze at least 3% of expenditures of the approved state budget
• Proposal for a balanced or surplus state budget;
• Should ask for a vote in confidence in the lower house
Required
Government
Action
• Come up with a set of austerity measures
• Cut salaries of constitutional officials (president, MPs, judges)
• A balanced or surplus budgets of all state funds and regional governments
• Freeze salaries of public sector's employees
After dismissing the EU fiscal pact, the ruling Czech coalition voted its own fiscal responsibility bill. Similar to the Polish public finance law, it sets precautionary debt/GDP thresholds, the crossing of which would limit fiscal policy options. The thresholds proposed in the first reading are actually quite tight at 40% and 50%. The new constitutional law would require a two-thirds majority, which the coalition does not have. Also, key opposition party CSSD demands to join the EU fiscal pact and to relax the thresholds by 5 points to 45% and 55%. As the 2012 ESA95 debt reading was 45.76% of GDP, we do not see CSSD supporting the final reading of the bill without the higher thresholds. With official rates at zero, fiscal policy is going to be a tool of choice for the new government.
Source: CEE Market Watch
Voting preferences
Centre-left CSSD ahead in the 2014 elections race
0
5
10
15
20
25
30
Mar
10
May
10
Jul 1
0
Sep 1
0
Nov 1
0
Jan
11
Mar
11
May
11
Jul 1
1
Sep 1
1
Nov 1
1
Jan
12
Mar
12
May
12
Jul 1
2
Sep 1
2
Nov 1
2
Jan
13
Mar
13
ODS CSSD KSCMKDU-CSL TOP 09
Centre-left CSSD remains a clear leader in the 2014 elections race, although their support is projected to secure 40% of the lower house seats. Natural partner KDU-CSL is still below the 5% threshold, and communist KSCM is too extreme for a workable coalition; a minority CSSD government is thus the most likely outcome. The policy tack under the new management would encompass looser fiscal policy (see above), and possibly a more open approach towards the EMU entry. We doubt the latter shift would be decisive though, given the scepticism of the general public towards the EMU entry. 2014 will be a super-election year with the lower house, the European Parliament (likely to be staged together in May), one-third of senate and local government posts up for grabs.
Source: CVVM, CEE Market Watch #
Czech Republic Directional EMEA Economics April 2013
66
Czech Republic FX / MONEY MARKETS / DEBT STRATEGY LC Ratings (M/S&P/F): A1/AA/AA-
FX – spot vs forward and INGF
FX / Money Markets Strategy
23.5
24.0
24.5
25.0
25.5
26.0
26.5
Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14
ING f'cast Mkt fwd
Source: Bloomberg, ING estimates
FRA curve: rates expected to stay at zero for years
The short-term official and money market rate outlook is as benign as it can be. CNB rates remain at 0.05%, while the central bank staff forecasts PRIBOR rates lower than the current level in 2H13. This would require negative official rates, or otherwise looser monetary policy, which, according to the CNB board members means FX interventions weakening the koruna. The active CNB FX policy has been talked about to death by the board members, however, and after €/CZK moved above 25.7/€, the risk of an immediate action has subsided. What is more, the latest board meeting minutes express concerns over the consumption-depressing impact of weaker CZK via food and commodity prices. A more decisive drop in food and fuel would strengthen the case for FX interventions in our view. The board also mentions “further discussion of the monetary policy options available for responding to current and future shocks”, perhaps alluding to a measure stimulating flagging household credit.
We expect the interventions to remain verbal, with €/CZK well above the CNB minimum acceptable of 25.5. We doubt an explicit FX intervention will happen, but with funding rates low, we see a risk of 26.0 being broken. Still, as the RUB remains at risk from looser policy and the aftershocks of the Cyprus crisis, we recommend closing the long RUB/CZK opened in the previous Quarterly.
Trade recommendation
Entry date Entry level Exit level S/L0.30
0.35
0.40
0.45
0.50
0.55
0.60
1x4
2x5
3x6
4x7
5x8
6x9
7x10
8x11
9x12
12x1
5
15x1
8
21x2
4
Close long RUB/CZK 28-Jan 0.632 0.648 0.621
Source: Thomson Reuters
Local curve (%)
Debt Strategy
0.0
0.5
1.0
1.5
2.0
3m 6m 2Y 10Y
Now -3 Months +3 Months
Source: Bloomberg, ING estimates
10yr yield vs 3M implied rate – CZ becoming attractive
The FRA market is pricing no change, or a slight decline to PRIBOR rates for another two years (second chart), which, considering the 0.05% official rate, makes paying the longest FRAs a safe bet – we assume fiscal policy will become more supportive for growth and inflation from 2014 onwards.
10Y Czech local currency treasury bonds reached yet another record, hitting 1.65% in. mid April. However, unlike Poland or Hungary, the spread to bunds remains above late January levels, indicating some resistance to strengthening. Unlike bunds, Czech bonds cannot be treated as safe haven assets – low public debt and above-average growth prospects compared to the EMU are unable to compensate for their limited liquidity. Although, near-term macro releases and high EMU liquidity should keep the Czech curve supported, we find further gains limited by the liquidity considerations. In any case, any inflows into the bond market would likely be FX hedged - our favoured entry mode would involve funding 5yr CZGB via basis swaps, allowing for an extra 35bp pickup, while avoiding the CZK FX risk.
Trade recommendation
Entry date Entry level Exit level S/L
100
200
300
400
500
600
700
Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13
HU (bps) CZ (bps)
Pay 12x15 CZK FRA 19-Apr 0.43 0.75 0.3
Source: Thomson Reuters
#
Czech Republic Directional EMEA Economics April 2013
67
Czech Republic
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 3.8 4.6 6.8 7.2 5.7 2.9 -4.5 2.5 1.9 -1.3 0.1 2.1 2.4Private consumption (%YoY) 5.3 3.1 3.0 4.4 4.1 3.0 0.2 1.0 0.7 -3.5 -0.9 2.0 2.8Government consumption (%YoY) 6.0 -3.3 1.6 -0.6 0.4 1.2 4.0 0.5 -2.5 -1.0 0.8 0.8 0.8Investment (%YoY) 0.6 2.8 6.1 5.9 13.2 4.0 -11.0 1.0 -0.7 -1.7 2.0 4.5 5.0Industrial production (%YoY) 1.6 10.4 3.9 8.3 10.6 -1.8 -13.2 8.6 6.1 -0.6 3.0 8.5 8.0Unemployment rate year-end (%) 10.3 9.5 8.9 7.7 6.0 6.0 7.1 7.4 6.8 7.4 8.8 8.0 7.6Nominal GDP (CZKbn) 2,688 2,925 3,114 3,357 3,667 3,846 3,759 3,800 3,841 3,843 3,962 4,100 4,273Nominal GDP (€bn) 84 92 105 118 132 154 142 151 156 153 152 163 182Nominal GDP (US$bn) 96 114 130 149 181 227 198 200 218 197 193 199 228GDP per capita (US$) 9,342 11,151 12,701 14,471 17,503 22,040 19,404 19,604 21,303 17,980 18,721 19,593 22,440Gross domestic saving (% of GDP) 25.8 27.9 29.2 30.8 32.5 31.3 27.9 28.0 28.6 29.2 30.6 29.2 28.0Lending to corporates/households (% of GDP) 24.7 26.4 30.1 34.7 39.6 44.2 51.6 51.6 53.9 55.3 55.1 56.0 57.3
Prices CPI (average %YoY) 0.1 2.7 1.9 2.5 2.8 6.3 1.0 1.5 1.9 3.6 1.8 1.8 2.3CPI (end-year %YoY) 1.0 2.8 2.2 1.7 5.4 3.6 1.0 2.3 2.4 2.4 1.8 2.2 2.3PPI (average %YoY) -0.3 5.7 3.0 1.6 4.1 4.5 -3.1 1.2 5.6 2.2 2.5 3.0 3.0Wage rates (%YoY, nominal) 5.8 6.3 5.0 6.6 7.2 8.3 4.0 1.9 2.2 2.7 2.8 3.3 4.5
Fiscal balance (% of GDP) Consolidated government balance (ESA 95) -6.7 -2.8 -3.2 -2.4 -0.7 -2.2 -5.8 -4.8 -3.3 -4.4 -3.2 -3.0 -3.0Consolidated primary balance -5.7 -1.8 -2.2 -1.3 0.4 -1.2 -4.6 -3.5 -1.7 -2.8 -1.4 -1.0 -0.8Total public debt (ESA 95) 28.6 28.9 28.4 28.3 27.9 28.7 34.2 37.8 40.8 45.8 48.1 49.3 50.1
External balance Exports (€bn) 43.1 54.1 57.8 68.1 77.6 84.9 71.0 86.1 99.6 105.0 108.4 116.0 127.6Imports (€bn) 45.2 54.5 56.2 66.0 75.9 83.8 67.7 84.0 95.8 101.0 103.8 111.7 124.2Trade balance (€bn) -2.2 -0.4 1.6 2.1 1.7 1.0 3.3 2.1 3.8 4.0 4.6 4.4 3.4Trade balance (% of GDP) -2.6 -0.5 1.6 1.8 1.3 0.7 2.3 1.4 2.4 2.6 3.1 2.7 1.9Current account balance (€bn) -5.0 -4.7 -1.0 -2.4 -5.7 -3.3 -3.4 -5.9 -4.5 -3.2 -3.0 -4.2 -4.8Current account balance (% of GDP) -6.0 -5.1 -1.0 -2.0 -4.3 -2.1 -2.4 -3.9 -2.9 -2.1 -2.0 -2.6 -2.6Net FDI (€bn) 1.7 3.2 9.4 3.2 6.5 1.5 1.4 3.8 3.0 4.5 4.0 5.3 5.3Net FDI (% of GDP) 2.0 3.5 9.0 2.7 4.9 1.0 1.0 2.5 1.9 2.9 2.6 3.2 2.9Current account balance plus FDI (% of GDP) -4.0 -1.6 8.0 0.7 0.6 -1.2 -1.4 -1.4 -0.9 0.9 0.7 0.7 0.3Foreign exchange reserves ex gold, (€bn) 23.6 22.7 23.6 24.8 25.2 24.9 29.5 31.6 30.8 28.4 31.0 32.0 33.0Import cover (months of merchandise imports) 6.3 5.0 5.0 4.5 4.0 3.6 5.2 4.5 3.9 3.4 3.6 3.4 3.2
Debt indicators Gross external debt (€bn) 27.6 33.2 39.5 43.5 51.7 60.5 61.9 70.5 72.8 78.6 81.7 85.8 90.1Gross external debt (% of GDP) 33 36 38 37 39 39 44 47 47 50 54 53 49Gross external debt (% of exports) 64 61 68 64 67 71 87 82 73 75 75 74 71Total debt service (€bn) 5.5 6.4 6.3 4.5 5.9 5.3 6.5 6.6 6.6 7.2 7.4 7.1 7.1Total debt service (% of GDP) 6.5 6.9 6.1 3.8 4.4 3.5 4.5 4.4 4.2 4.6 4.8 4.3 3.9Total debt service (% of exports) 12.7 11.7 11.0 6.5 7.6 6.3 9.1 7.7 6.6 6.9 6.8 6.1 5.6
Interest & exchange rates Central bank key rate (%) year-end (2W repo) 2.00 2.50 2.00 2.50 3.50 2.25 1.00 0.75 0.75 0.05 0.25 1.00 1.00Broad money supply (avg, %YoY) 6.90 4.40 8.00 9.90 13.20 6.60 4.30 3.34 5.20 3.40 6.40 9.00 9.003-mth interest rate (Pribor, avg %) 2.30 2.30 2.00 2.45 3.53 3.98 1.54 1.28 1.17 0.83 0.50 0.88 1.003-mth interest rate spread over Euribor (ppt) -3 19 -18 -63 -74 -66 32 46 -22 26 24 29 192-year yield (avg %) 2.47 3.02 2.33 2.94 3.80 4.09 2.60 3.10 1.52 0.91 0.68 1.20 2.6010-year yield (avg %) 4.12 4.82 3.54 3.80 4.30 4.66 4.71 3.87 3.59 2.69 2.10 2.37 3.40Exchange rate (USDCZK) year-end 25.75 22.47 24.50 20.84 18.25 19.27 18.49 18.72 19.93 18.98 21.42 19.12 18.40Exchange rate (USDCZK) annual average 28.12 25.64 23.94 22.55 20.25 16.97 18.97 19.00 17.66 19.50 20.48 20.59 18.76Exchange rate (EURCZK) year-end 32.41 30.47 29.01 27.50 26.62 26.93 26.47 25.04 25.80 25.05 25.70 23.90 23.00Exchange rate (EURCZK) annual average 31.84 31.90 29.79 28.34 27.75 24.96 26.45 25.20 24.59 25.07 26.07 25.10 23.45
Source: National sources, ING estimates
Hungary Directional EMEA Economics April 2013
68
Hungary Next elections : Parliamentary/May 2014
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) -2.7 -0.8 0.1 0.8 1.0 0.3 1.3HH consumption (%YoY) -1.4 -0.9 -0.1 0.8 1.4 0.4 1.1Fixed investment (%YoY) -5.6 -1.5 -3.0 -0.9 0.5 -1.1 0.7CPI (%YoY)* 5.0 2.7 3.3 2.6 2.8 3.0 3.2Current account (% of GDP) n/a n/a n/a n/a n/a 1.9 2.1FX res. import cover (mths) n/a n/a n/a n/a n/a 4.9 4.4Policy interest rate (%)* 5.75 5.00 4.25 4.25 4.25 4.25 4.503-mth interest rate (%)* 5.33 4.71 4.10 4.30 4.30 4.49 4.703-year yield (%)* 5.61 5.12 4.50 4.70 4.70 4.85 5.3010-year yield (%)* 6.11 6.27 5.50 5.40 5.80 5.78 6.20USDHUF* 220.8 237.4 226.6 236.0 245.8 232.2 239.6EURHUF* 291.3 304.3 290.0 295.0 295.0 295.6 292.0
HUF recovered from above 300 to the 290-300 trading range once the uncertainties around the new leadership of NBH and its possible programmes subsided. With Mr. Matolcsy appointed as the new governor, the MPC’s rate cut cycle did not stop, and the key rate was reduced to 5.00% in February. NBH’s Funding for Growth Scheme (FGS) could hardly be called aggressive, but the plans reduce access to two week central bank bills that have the potential to weaken the HUF, or at least shield it from appreciating in line with further bond inflows. We expect Hungary’s recession to end in 2013, but private deleveraging and slow EU growth will keep growth close to zero despite promising signs in industrial output.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
Real GDP growth contributions
Macro digest
-8
-6
-4
-2
0
2
4
6
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
Agriculture Industry Construction
Services GDP (% YoY)
Source: EcoWin, ING estimates
Inflation measures (% YoY)
0
2
4
6
8
10
Jan 06 Feb 07 Apr 08 May 09 Jul 10 Aug 11 Oct 12 Dec 13
CPI Core CPI
CPI adjusted for tax changes Inflation target
ING f'cast
Source: EcoWin, NBH, ING estimates
Consumption and wages dynamics
-10
-5
0
5
10
15
20
25
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Consumption (% YoY) Net real wage (% YoY, RHS)
Economic activity contracted in 2012, with GDP shrinking 1.7% YoY, according to unadjusted data by HCSO. Data adjusted for seasonal and calendar effects reflected a 1.8% YoY contraction. As elsewhere in Southern Europe, big declines were seen in the agricultural sector (-16.9% YoY) due to unfavourable weather conditions (ie, a drought during the summer) and the high base. Industrial production failed to reach the previous year’s level since car manufacturers reduced their output in late 2012, while Nokia and Flextronics closed their plants. Domestic demand remained subdued, and this was reflected by a decrease in final consumption (-1.7% YoY). Propensity to invest has been stuck on a downward path, and gross capital formation declined 11.7% YoY. The deceleration spilled over to trading dynamics, but growth in export volume was able to reach 2.0% YoY, while that of imports stagnated (0.2% YoY). The latest data shows that there could be room for a slow recovery this year since industrial output grew on a MoM basis in February for a second consecutive month (2.9% MoM in January and 0.3% MoM in February). PMI (55.7ppt) indicated expansion in manufacturing, which is in line with our forecast that GDP may grow 0.3% YoY due to a pick-up in industrial production and a rebound of external (mainly EU) conjuncture. The optimistic business climate needs to be treated with caution though, as Hungarian PMI has been above its CE3 peers throughout 2012 with little growth to show for it. Also, domestic demand is likely to remain weak this year.
After last year’s high CPI (average 5.7% YoY), there is substantial moderation this year. Inflation collapsed to 2.2% after the domestic utility cost cuts took effect in February, and we expect it to fluctuate below the 3% inflation target. Government officials stressed there should be further steps to utilities’ cost reduction 2H13, which could take effect in 3Q13, at the earliest, and could push the headline below the 2.5% YoY average. However, core inflation got stuck around 3.6% YoY in February, which reflected that without the 10% utility cost cut, CPI would have remained at around 3.3-3.5% YoY.
Given the low CPI, there may be real wage growth this year after a 3.5% YoY net real wage decrease in 2012. Net real wage growth finally moved into positive territory (0.2% YoY) in January, and this rate is expected to accelerate. Employment statistics remain gloomy since only the fostered work programme fuels them. The unemployment rate (for ages 15-64) reached 11.1% in Dec12-Feb13. Due to the government’s measures, the activity rate has been growing and has increased to 58%. The labour market should remain loose, and the unemployment rate is not expected to drop below 11%.
Source: EcoWin, ING estimates
Hungary Directional EMEA Economics April 2013
69
Activity: Monetary trend : Looser Fiscal trend: Looser David Nemeth
External debt redemption profile
Debt structure
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan
13
Feb 1
3
Mar
13
Apr 1
3
May
13
Jun
13
Jul 1
3
Aug 1
3
Sep 1
3
Oct 13
Nov 1
3
Dec 1
3
Jan
14
Feb 1
4
Mar
14
Apr 1
4
May
14
Jun
14
Jul 1
4
Aug 1
4
Sep 1
4
Oct 14
Nov 1
4
Dec 1
4
HGB REPHUN IMF loan
Paid back
Hungary has been facing heavy redemption in 2012-14 due to the repayment of EU and IMF loans. While the new IMF programme. Although the IMF agreement is now fully out of the picture, Hungary has no problem regarding financing. Debt Management Agency (AKK) issued USD3.25bn Rephun in February, which was enough tocover February and March repayment. AKK is focusing more on local currency refinancing in order to moderate the FC debt ratio from 40% to 30%. Additionally, HUF funding collapsed to within 10bp of the hard currency funding costs. The government still has huge reserves (around €6bn), which provide significant financing flexibility as they can cover funding needs until mid-2014.
Source: Bloomberg, AKK, ING estimates
Two-week bond stock vs base rate
New NBH leadership
0%
2%
4%
6%
8%
10%
12%
14%
Jan 08 Jan 09 Feb 10 Mar 11 Mar 12 Apr 13
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
NBH 2-week bond (stock, HUFbn, RHS) Base rate (%)
After Mr. Matolcsy was appointed the new NBH governor, he chose Mr. Balog as his deputy governor and Mr. Pleschinger as an external member. The Monetary Policy Council (MPC) consists of the governor, one deputy and five external members. Deputy Király stepped down in April before her mandate expired. Under the new management, NBH announced the Funding for Growth scheme, similar to the BoE’s FLS. The goal is to melt the SME sector’s huge stock of FX loans and to improve their investment willingness by giving them cheap HUF loans. The third leg of the plan is reducing the outstanding two-week NBH bills. The idea is to cut access to them for foreign investors, and to replace them with deposits surfaced. If implemented, it would be equivalent to a major cut in ST cash rates.
Source: NBH, ING estimates
Hungary’s foreign currency long-term credit rating
Credit ratings: negative feedback
0
1
2
3
4
5
6
Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13
0
1
2
3
4
5
6
Moody's (LHS) Standard & Poor's FITCH Ratings
BBB+
BBB
BBB-
BB+
BB
BB-
Baa3
Baa1
A2
Baa2
A3
Ba1
A-
Ba2
After a series of ratings changes (see chart), S&P affirmed Hungary’s BB rating for a change, but cut the outlook to negative. In the rating agency’s opinion, “the predictability and credibility of Hungary’s policy framework has continued to weaken”. The appointment of Mr Matolcsy as the NBH governor has raised concerns whether the central bank could remain independent of the government in the future. S&P frowns upon so-called “unorthodox” measures since they “could erode Hungary’s medium-term growth potential”. This is important because low growth keeps public debt at an elevated leveldespite the austerity efforts. The rating agency stressed that the probability of a downgrade is only 30%, but that the government needs to implement an investment-bolstering economic policy.
Source: NBH
Average of opinion polls in March 2013 (%)
Frozen political scene
Együtt 2014 (new party)
9%
Other1%DKP
2%
FIDESZ (governing party)
46%
MSZP (former governing party)
23%
LMP (green party)4%
Jobbik (far right-wing party)
15%
Last year, it seemed that the new party founded by former PM Bajnai could challenge the reigning Fidesz-led government in 2014. However, according to the latest polls, the left wing will have a difficult time reaching out to undecided voters and reactivating them. Mid-term municipal elections have been held in small towns, and in some, Fidesz candidates did not win. These small victories will fuel the opposition and keep them keen for the next cycle. The left-wing parties are competing with each other, and they will definitely not be able to defeat Fidesz unless they form a coalition. The campaign will definitely be harder for these parties, since the new electoral system allows Fidesz-appointees to regulate campaign ads aired or shown in any medium.
Source: Gallup, Tarki, Median, Szondaipsos, Szazadveg, Nezopont #
Hungary Directional EMEA Economics April 2013
70
Hungary FX/MONEY MARKETS/DEBT STRATEGY LC Ratings (M/S&P/F): Ba1/BB/BBB-
FX – spot vs forward and INGF
FX/Money market strategy
250
260
270
280
290
300
310
320
330
Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14
ING f'cast Mkt fwd
Source: Bloomberg, ING estimates
HUF performance vs the PLN and CZK
The HUF has strengthened against the EUR since early April. On one hand, the massive easing programme started by the Bank of Japan has been fuelling positive sentiment in international financial markets, which has also affected the HUF. On the other hand, the Funding for Growth Scheme (FGS) introduced by the Matolcsy-led NBH has given markets hope that the MPC will not carry out aggressive monetary stimulus or implement unconventional monetary tools. The HUF has broken out of its weak 300-310 channel and returned to the stronger 290-300 trading range. The central bank intends to shrink the stock of money kept in two-week NBH bonds and participate more actively in the FX-swap market, which is very likely to result in a shift in implied HUF rates. It has to be underlined that the current Hungarian economic environment is still supported by relatively high interest rates, but that is challenged by the recent plans to cut access to cenbank bills, strengthening the divergence in 5y CDS and 10-year bond yields’ correlation divergence seen since end-2012. One explanation is that the continued rate cut cycle makes it less attractive for international investors. In our view, we are slowly approaching the stage when lower interest rates would generate uncertainty, which could result in excessive vulnerability of the national economy and hectic and volatile exchange rate movements.
Trade recommendation
Entry date Entry level Exit level S/L
-100
0
100
200
300
400
500
600
Jan
03
Dec 0
3
Nov 0
4
Oct 05
Sep 0
6
Sep 0
7
Aug 0
8
Jul 0
9
Jun
10
May
11
May
12
Apr 1
3
HUF PLN CZK
- - - -
Source: Bloomberg
Local curve (%)
Debt Strategy
3.5
4.0
4.5
5.0
5.5
6.0
6.5
3m 6m 3Y 10Y
Now -3 Months +3 Months
Source: Bloomberg, ING estimates
Five-year CDS vs the EUR/HUF
With the NBH having started the rate cut cycle, the MPC eased monetary conditions for an eighth consecutive month (200bp) in March when the base interest rate reached 5.00%. The council took a more cautious stance this year, but is likely to continue this gradual rate-setting policy. According to its last statement in March, rate reduction should continue if inflationary processes remain moderate and uncertainties surrounding the financial markets fade. Markets priced further rate cuts as the key rate is expected to drop to 3.50% by the end of this year. In our opinion, this might prove to be too optimistic a forecast. MPC might turn increasingly cautious in the coming months. We revise our forecast, as we expect the MPC to reduce the key rate to the 4.25% level and pause there. Demand for HGBs deteriorated slightly in the past few months, although the bid-cover ratio remained above 2 in the whole period.
As the market has already (correctly) priced in much lower short-end cash and implied rates, we find the best way to play the news to buy 5yr HGB, hedged by a 3M FX swap, securing a 150bp spread. Any backing off from the original proposal would send the implied rates back higher, and if the NBH stays with its proposal, the bond market will still remain attractive, as the only viable vehicle for investing in HUF rates.
Trade recommendation
Entry date Entry level Exit level S/L
0
100
200
300
400
500
600
700
800
Jan 08 Nov 08 Oct 09 Aug 10 Jul 11 May 12 Apr 13
225
240
255
270
285
300
315
330
5-year CDS (LHS) EURHUF
Buy 5yr HGB 19-Apr 143bp 100bp 165bp
Source: Bloomberg
Financed with 3M €/HUF FX swap #
Hungary Directional EMEA Economics April 2013
71
Hungary
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 4.0 4.5 3.2 3.6 0.8 0.9 -6.8 1.3 1.7 -1.7 0.3 1.3 1.7Private consumption (%YoY) 8.0 2.0 2.6 1.9 -0.9 -0.2 -5.7 -2.7 0.1 -2.3 0.4 1.1 1.6Government consumption (%YoY) 4.0 -0.3 0.4 4.1 1.8 -0.2 2.6 1.1 -1.3 4.2 2.2 2.7 2.4Investment (%YoY) 1.5 7.2 4.5 -2.7 4.3 2.9 -11.0 -9.7 -5.4 -2.0 -1.1 0.7 1.5Industrial production (%YoY) 6.3 7.1 7.3 10.6 8.5 -0.5 -17.3 10.3 5.8 -1.3 2.3 5.5 7.2Unemployment rate year-end (%) 5.5 6.3 7.3 7.5 7.7 8.0 10.5 10.8 10.7 10.7 10.5 10.2 9.8Nominal GDP (HUFbn) 18,738 20,665 22,018 23,675 24,990 26,543 25,626 26,607 27,886 28,276 29,169 30,434 31,880Nominal GDP (€bn) 74 82 89 90 99 105 91 96 100 98 99 104 110Nominal GDP (US$bn) 84 102 110 113 136 154 127 128 139 126 126 127 137GDP per capita (US$) 7,287 8,112 8,790 8,894 9,879 10,513 9,115 9,664 10,000 9,807 9,954 10,517 11,104Gross domestic saving (% of GDP) 14.8 17.5 17.8 16.7 15.2 16.2 17.8 19.8 20.4 18.9 20.5 21.0 21.3Lending to corporates/households (% of GDP) 46.4 50.5 56.2 60.9 67.5 75.8 74.5 73.2 68.3 54.4 49.5 49.0 49.3
Prices CPI (average %YoY) 4.7 6.8 3.6 3.9 8.0 6.1 4.2 4.9 3.9 5.7 3.0 3.2 3.5CPI (end-year %YoY) 5.7 5.5 3.3 6.5 7.4 3.5 5.5 4.7 4.1 5.0 2.8 3.5 3.5PPI (average %YoY) 2.4 3.5 4.3 6.5 0.2 5.0 4.9 4.5 4.2 4.3 4.0 3.5 3.0Wage rates (%YoY, nominal) 12.3 6.5 8.7 8.2 8.1 7.7 0.5 1.5 5.2 4.7 3.2 3.5 3.4
Fiscal balance (% of GDP) Consolidated government balance (ESA 95) -7.2 -6.4 -7.8 -9.2 -4.9 -3.4 -4.6 -4.3 4.3 -1.9 -3.0 -3.3 -2.8Consolidated primary balance -2.2 -2.2 -3.2 -5.3 -0.8 0.8 0.5 0.6 7.6 1.5 1.1 0.2 0.3Total public debt (ESA 95) 58.1 59.4 61.8 65.6 65.7 72.6 79.8 81.8 80.4 79.2 78.0 76.5 75.8
External balance Exports (€bn) 38.4 44.5 49.7 58.4 67.8 72.1 57.4 69.0 75.2 76.6 81.2 86.9 92.1Imports (€bn) 41.3 47.6 52.2 60.8 68.5 73.3 55.0 65.8 71.9 72.4 76.4 81.8 86.7Trade balance (€bn) -2.9 -3.1 -2.5 -2.5 -0.7 -1.2 2.3 3.2 3.4 4.2 4.8 5.2 5.4Trade balance (% of GDP) -3.9 -3.8 -2.9 -2.7 -0.7 -1.2 2.6 3.3 3.4 4.3 4.9 4.9 4.9Current account balance (€bn) -6.6 -6.9 -6.0 -6.6 -7.2 -7.8 -0.2 1.0 0.9 1.5 1.9 2.2 2.4Current account balance (% of GDP) -8.9 -8.4 -6.8 -7.4 -7.3 -7.4 -0.2 1.1 0.9 1.5 1.9 2.1 2.2Net FDI (€bn) 0.4 2.7 4.4 2.3 0.2 2.7 0.1 0.7 0.1 2.2 1.0 1.5 1.8Net FDI (% of GDP) 0.6 3.3 5.0 2.6 0.2 2.6 0.1 0.8 0.1 2.2 1.0 1.4 1.6Current account balance plus FDI (% of GDP) -8.3 -5.1 -1.8 -4.8 -7.1 -4.8 -0.1 1.8 1.0 3.7 2.9 3.5 3.8Foreign exchange reserves ex gold, (€bn) 10.1 11.7 15.7 16.4 16.4 24.0 30.7 33.7 37.8 33.9 31.0 29.8 28.6Import cover (months of merchandise imports) 2.9 2.9 3.6 3.2 2.9 3.9 6.7 6.1 6.3 5.6 4.9 4.4 4.0
Debt indicators Gross external debt (€bn) 46.0 59.8 71.8 86.7 104.0 123.5 137.1 138.2 132.3 124.0 115.3 115.0 114.0Gross external debt (% of GDP) 62 73 81 97 105 118 151 143 133 127 117 110 104Gross external debt (% of exports) 120 134 144 148 153 171 239 200 176 162 142 132 124Total debt service (€bn) 6.4 7.9 9.2 8.7 10.0 14.8 19.5 18.8 22.4 20.6 18.7 17.5 16.9Total debt service (% of GDP) 8.7 9.6 10.4 9.7 10.1 14.2 21.4 19.5 22.5 21.1 18.9 16.8 15.4Total debt service (% of exports) 16.8 17.7 18.6 14.8 14.8 20.6 33.9 27.2 29.8 26.9 23.0 20.1 18.3
Interest & exchange rates Central bank key rate (%) year-end (2W repo) 12.50 9.50 6.00 8.00 7.50 10.00 6.25 5.75 7.00 5.75 4.25 4.50 5.00Broad money supply (avg, %YoY) 12.0 11.6 14.5 13.8 11.0 8.7 3.5 2.9 5.9 -3.4 4.5 4.9 5.03 -mth interest rate (Bubor, avg %) 8.5 11.0 6.7 7.0 7.6 8.9 8.2 5.4 6.1 6.7 4.5 4.7 4.83-mth interest rate spread over Euribor (ppt) 617 894 456 392 328 429 701 460 470 613 425 411 3993-year yield (avg %) 8.1 10.0 6.8 7.6 7.2 9.5 9.3 6.8 7.1 7.3 4.8 5.3 5.510-year yield (avg %) 7.0 8.2 6.6 7.1 6.7 8.3 9.1 7.4 7.7 7.7 5.8 6.2 5.9Exchange rate (USD/HUF) year-end 207.9 180.3 213.6 191.6 172.6 187.9 188.1 208.7 240.7 220.9 245.8 240.0 229.6Exchange rate (USD/HUF) annual average 224.3 202.7 199.6 210.4 183.6 172.1 202.3 207.9 201.1 225.1 232.2 239.6 232.0Exchange rate (EUR/HUF) year-end 261.7 244.4 252.9 252.9 251.8 262.7 269.2 279.1 311.6 291.5 295.0 300.0 287.0Exchange rate (EUR/HUF) annual average 254.0 252.2 248.3 264.3 251.7 253.2 282.2 275.8 279.9 289.4 295.5 292.0 290.0
Source: National sources, ING estimates
Israel Directional EMEA Economics April 2013
72
Israel [email protected]
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) 2.6 2.6 3.5 4.3 3.7 3.5 4.7HH consumption (%YoY) 2.6 4.0 3.6 3.3 2.1 3.3 2.9Fixed investment (%YoY) -4.6 4.9 4.0 6.6 0.0 3.9 5.7CPI (%YoY)* 1.6 1.4 1.0 1.9 3.2 1.9 2.5Current account (% of GDP) 1.2 -2.5 3.0 0.5 5.2 1.6 2.0FX res. import cover (mths) 12.8 13.4 13.4 14.2 12.6 12.6 11.8Policy interest rate (%)* 2.00 1.75 1.50 1.50 1.75 1.75 3.003-mth interest rate (%)* 1.69 1.67 1.50 1.52 1.80 1.59 2.842-year yield (%)* 1.77 1.98 2.00 2.12 2.30 2.08 3.0710-year yield (%)* 3.19 3.77 3.90 3.87 3.95 3.89 4.65USDILS* 3.73 3.60 3.65 3.70 3.75 3.69 3.70EURILS* 4.92 4.61 4.67 4.63 4.50 4.69 4.51
Israel is on course to deliver a solid 3.5% YoY growth in 2013, lifted by the external accounts. The demand side should remain subdued with heightened prospects of higher fiscal constraints. The latter point, alongside a benign inflation backdrop in 2Q13, should allow the BoI to cut the base rate against a rallying ILS (on solid current account profile), though the window is small and limited to this quarter. Direct FX purchase and verbal jawboning are thus likely to be intervention tools of choice in the short term. The fiscal accounts will remain the weak point of the country this year and budget noise is likely to increase until Aug. The new government is settling in, but the alliance is particularly fragile on the Palestinian issue.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
Political parties
Political stability for now
Hadash3%
Meretz5%
Labour party13%
Shas9%
Likud-Beitenu25%
Yesh-Atid16%
Hatenua5%
National Democratic Assembly3%
HaBayit HaYehudi10%
Ra`am-Ta`al3%
United Torah Judaism6%
Kadima2%
A 68-member/120-strong coalition was struck mid-Mar by Likud-Beitenu (right-wing) Netanyahu with Yesh-Atid (center-left), HaBayit HaYehudi (far-right), Hatenua (centrist), clearing the path for the 2013 budget to be submitted to the Knesset by early August (deadline extended). The task for new FinMin (neophyte in the matter) Lapid is challenging, but his electoral bid and recent outings lies in the ‘tough’ public spending cut direction. He might face strong opposition though, particularly from unionists. We doubt the 3% budget deficit target will be achieved this year as a new policy direction is unlikely to invert the trend on only 25% of the fiscal year. One thing is sure: tax hikes are looming – the question is whether Lapid will have the political strength to do it sooner rather than later.
Source: Knesset, ING estimates
Real interest rate vs US and USDILS
BoI to gear up against ILS strength
-1,000
-500
0
500
1,000
Jan
96
Jan
97
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Jan
13
3.0
3.5
4.0
4.5
5.0
5.5
Real interest rate spread vs the US (bps)USDILS (1m-avg, RHS, inverted)
BoI fx intervention
ING f’cast
The relative performance of the Israeli economy in the region, boosted this year by the kick-off of gas production in the Tamar field, and the robust external stance of the country, are a strong anchor for ILS strengthening this year. Exporters have already voiced their concerns as the USDILS approaches the critical 3.60 level. Given the current low inflationary backdrop, the BoI has a small window, we think, to deliver a rate cut (just one) – but Governor Fisher is likely to stay put until a clearer picture is offered on the budget front. We still have a 25bp cut pencilled in for May, just a month before Fisher departs. In the meantime, more aggressive verbal jawboning and direct FX interventions are on the cards. A change at the BoI head should, in our view, not bring too much noise this quarter.
Source: EcoWin, ING estimates
Current account balances (12m-rolling, % GDP)
Potash Corp. still trying
Though rejected in November by the authorities, Canada Potash Corp. reaffirmed in Feb its intention to gain control of ICL Israel Chemical (of which it holds 14%, and which has a USD15bn market cap). Now that a government has been formed, the company may attempt to again convince PM Netanyahu. This is a potentially strong positive for the ILS in the mid-term.
Trade recommendation
Entry date Entry level Exit level S/L
-8-6-4-202468
Mar
97
Mar
98
Mar
99
Mar
00
Mar
01
Mar
02
Mar
03
Mar
04
Mar
05
Mar
06
Mar
07
Mar
08
Mar
09
Mar
10
Mar
11
Mar
12
Mar
13
Mar
14
Mar
15
Current account Trade ServicesIncome Transfers
ING f’cast
Long USD:ILS 16-Apr 3.61 3.80 3.50
Source: EcoWin, ING estimates
Israel Directional EMEA Economics April 2013
73
Israel
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 1.8 4.6 5.1 5.8 5.9 4.3 0.6 5.2 4.7 2.9 3.5 4.7 3.2Private consumption (%YoY) 0.1 5.1 3.4 5.1 8.3 1.6 2.1 4.9 4.3 2.6 3.3 2.9 2.2Government consumption (%YoY) -2.5 -1.8 1.8 3.1 3.5 1.9 2.0 3.1 2.8 3.0 3.0 5.0 2.5Investment (%YoY) -4.0 -0.2 3.5 11.7 12.5 4.4 -3.4 11.3 17.5 3.4 3.9 5.7 8.0Industrial production (%YoY) -0.4 7.3 4.2 8.8 5.5 6.8 -6.0 8.2 2.6 3.2 4.7 3.4 1.5Unemployment rate year-end (%) 10.9 10.0 8.8 7.9 6.8 6.4 7.2 6.4 5.4 6.9 6.7 6.6 6.8Nominal GDP (ILSbn) 539 567 600 647 683 723 766 814 872 928 996 1,066 1,143Nominal GDP (€bn) 105 102 108 116 121 137 140 164 175 188 212 237 236Nominal GDP (US$bn) 119 127 134 145 166 202 195 218 244 241 270 288 295GDP per capita (US$) 17,602 18,429 19,145 20,412 22,981 27,388 25,859 28,355 31,127 30,211 33,247 34,864 35,026Gross domestic saving (% of GDP) 14.8 16.3 18.0 19.1 18.4 20.4 19.3 20.0 20.6 20.7 21.0 21.9 22.5Lending to corporates/households (% of GDP) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Prices CPI (average %YoY) 0.7 -0.4 1.3 2.1 0.5 4.6 3.3 2.7 3.5 1.7 1.9 2.5 3.5CPI (end-year %YoY) -1.9 1.2 2.4 -0.1 3.4 3.8 3.9 2.7 2.2 1.6 3.6 0.9 4.6PPI (average %YoY) 4.4 5.4 6.3 5.7 3.5 9.7 -6.2 4.0 7.8 4.3 3.6 2.5 2.7Wage rates (%YoY, nominal) -2.3 2.0 3.1 3.5 2.1 4.2 0.4 3.3 3.9 3.3 4.3 4.7 4.8
Fiscal balance (% of GDP) Consolidated government balance -5.8 -4.0 -2.4 -1.0 -0.2 -2.0 -5.0 -3.4 -3.3 -4.7 -5.0 -4.5 -3.7Consolidated primary balance 0.0 1.6 2.7 3.7 4.4 1.7 -1.3 0.1 0.2 -1.2 -1.6 -1.2 -0.5Total public debt 99.4 97.8 93.9 84.9 78.5 77.1 79.5 76.0 74.0 74.0 73.9 72.3 70.9
External balance Exports (US$bn) 30.4 36.9 40.4 43.9 50.8 58.1 46.8 56.4 64.2 61.5 67.5 73.7 75.0Imports (US$bn) 33.3 39.5 43.9 47.2 56.0 64.4 46.0 58.1 72.0 71.4 74.6 79.9 82.3Trade balance (US$bn) -2.9 -2.6 -3.5 -3.2 -5.2 -6.3 0.8 -1.7 -7.8 -9.9 -7.1 -6.1 -7.3Trade balance (% of GDP) -2.5 -2.0 -2.6 -2.2 -3.1 -3.1 0.4 -0.8 -3.2 -4.1 -2.6 -2.1 -2.5Current account balance (US$bn) 0.6 2.1 4.1 7.0 5.3 2.9 8.1 8.1 3.4 -0.2 4.4 5.7 3.7Current account balance (% of GDP) 0.5 1.7 3.1 4.8 3.2 1.4 4.1 3.7 1.4 -0.1 1.6 2.0 1.3Net FDI (US$bn) 1.2 -1.6 1.9 -0.2 0.2 3.7 2.7 -3.6 7.8 7.2 5.9 7.1 2.2Net FDI (% of GDP) 1.0 -1.3 1.4 -0.1 0.1 1.8 1.4 -1.6 3.2 3.0 2.2 2.5 0.8Current account balance plus FDI (% of GDP) 1.6 0.4 4.5 4.7 3.3 3.3 5.5 2.1 4.6 2.9 3.8 4.4 2.0Foreign exchange reserves ex gold, (US$bn) 26.1 27.0 27.9 29.0 28.6 42.7 60.6 71.3 74.7 75.9 78.6 78.7 78.7Import cover (months of merchandise imports) 9.4 8.2 7.6 7.4 6.1 8.0 15.8 14.7 12.5 12.8 12.6 11.8 11.5
Debt indicators Gross external debt (US$bn) 72.1 78.7 77.5 56.7 89.6 87.0 93.5 106.5 103.6 93.6 94.8 99.6 104.5Gross external debt (% of GDP) 61 62 58 39 54 43 48 49 42 39 35 35 35Gross external debt (% of exports) 237 213 192 129 176 150 200 189 161 152 141 135 139Total debt service (US$bn) 8.3 6.7 7.5 8.9 14.9 7.6 6.5 9.2 7.3 11.8 9.0 8.9 8.5Total debt service (% of GDP) 7.0 5.3 5.6 6.1 8.9 3.8 3.3 4.2 3.0 4.9 3.3 3.1 2.9Total debt service (% of exports) 27.4 18.2 18.6 20.3 29.3 13.1 13.8 16.4 11.4 19.2 13.3 12.1 11.3
Interest & exchange rates Central bank key rate (%) year-end (base rate) 5.20 3.90 4.50 5.00 4.00 2.50 1.00 2.00 2.75 2.00 1.75 3.00 3.75Broad money supply (avg, %YoY) 1.7 3.9 5.7 4.5 14.4 8.8 16.3 3.1 9.1 7.5 5.3 8.3 9.43-mth interest rate (Telbor, avg %) 7.6 4.6 4.1 5.5 4.4 4.0 1.3 1.8 2.9 2.2 1.6 2.8 3.63-mth interest rate spread over US$-Libor (ppt) 638 297 55 33 -86 105 60 146 260 181 127 232 2862-year yield (avg %) 7.0 5.0 5.0 5.9 4.8 4.5 2.8 2.8 3.5 2.3 2.1 3.1 3.510-year yield (avg %) 7.9 6.3 5.2 6.3 5.5 5.8 5.0 4.7 4.8 3.9 3.9 4.6 4.6Exchange rate (USDILS) year-end 4.39 4.32 4.60 4.21 3.85 3.78 3.79 3.52 3.81 3.73 3.75 3.75 4.00Exchange rate (USDILS) annual average 4.54 4.48 4.48 4.45 4.11 3.58 3.92 3.73 3.57 3.85 3.69 3.70 3.88Exchange rate (EURILS) year-end 5.52 5.85 5.45 5.56 5.62 5.28 5.42 4.71 4.93 4.92 4.50 4.69 5.00Exchange rate (EURILS) annual average 5.14 5.57 5.58 5.59 5.63 5.27 5.47 4.95 4.98 4.95 4.69 4.51 4.85
Source: National sources, ING estimates
Kazakhstan Directional EMEA Economics April 2013
74
Kazakhstan [email protected]
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) 5.0 4.0 4.1 6.6 5.8 5.3 5.8HH consumption (%YoY) 7.0 7.5 5.9 11.5 8.2 8.4 7.8Fixed investment (%YoY) 5.0 6.5 7.0 7.4 7.6 7.2 8.7CPI (%YoY)* 6.0 6.8 6.3 6.1 5.7 6.3 5.8Current account (% of GDP) 1.2 8.8 2.1 -2.1 -1.5 1.2 0.6FX res. import cover (mths) 5.6 5.7 5.5 5.2 5.0 5.0 4.6Policy interest rate (%)* 5.50 5.50 5.50 5.50 5.50 5.50 5.503-mth interest rate (%)* 4.50 3.50 3.70 4.30 5.00 4.13 4.50yield (%)* n/a n/a n/a n/a n/a n/a n/ayield (%)* n/a n/a n/a n/a n/a n/a n/aUSDKZT* 150.4 150.9 152.1 152.5 152.5 151.5 152.8EURKZT* 198.5 193.4 194.6 190.6 183.0 192.8 186.2
Higher GDP growth than in many DM/EM peers does not imply many changes in the macro story. Due to longer delays in 4Q12 data releases (eg, final GDP, 1Q13 BoP), we mostly stick to earlier GDPforecasts with some adjustments to key items. We still keep a slightly below-consensus view on GDP, but now see a somewhat better 2H13 inflation profile. This will be beneficial for consumption. Despite the 3% of GDP budget gap, the fiscal profile is secured by the National Oil Fund (NOF), prudent budget planning and a rise in oil export duty. We though note that this looks as unwinding the effect of the 2009-1H10 duty abolishment. The only concern is worsening BoP, which puts KZT at risk, barring a renewed commodity price rally.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
GDP and key components (YoY)
Soft landing may soon turn to some recovery
-25%
-15%
-5%
5%
15%
25%
35%
Household consumption Fixed investment GDP
55%
GDP was 5% in 2012 vs INGF 4.8%. A 0.6ppt drag from the production sector was offset by net taxes, so services sector (still a high single-digit consumption story) was a key driver. IP growth rose from 0.5% in Dec-12 to 0.9% on better mining sector growth and despite slower manufac/utilities gains. With the base effect in the manufac. sector expected to be favourable in 2Q13, and still rising consumption/investments, we expect a stronger 2H13 pace. This is also supported by the 2.9% YoY gain in the Kazstat proxy (2.1% in Dec-12) and improving industry/trade sentiments. High base in incomes/consumption should constrain 1H13 GDP at c.4%, with low unemployment, slowing CPI, 20%+ retail lending, rising corp. profits and pro-growth state drive to flag growth recovery in 2H13 to c.6%.
Source: Kazakhstan Statistics Agency
Inflation and real interest MM rates (YoY)
CPI evolves as expected/NBK rates to remain flat
-10%
-5%
0%
5%
10%
15%
Jan 09 Jul 09 Jan 10 Aug 10 Feb 11 Aug 11 Mar 12 Sep 12 Apr 13
Headline CPIFood CPIReal interest rate (3m KazPrime vs 12m ahead CPI)
Inflation has evolved in line with our expectations. Near 4% YoY PPI print in 1Q13 was fuelled by an 18% YoY advance in utilities tariffs after early-year hikes, on the back of a benign trend in mining and manufacturing items. With an unchanged US$105-110/bbl oil price and better grains harvest expected, PPI should not pose a risk. CPI seems to have peaked in Feb 2012 to 7%, now heading to c.5.5% by year-end on retreating food prices (including via import channel) and benign non-food CPI. The latter should come from normalisation of private consumption, relatively stable KZT and decelerating growth in monetary aggregates reflecting somewhat reduced liquidity overhang in the banking sector. Thus, there is still no need to touch the official 5.5% rate as the banking system continues its self-rebalancing.
Source: Kazakhstan Statistics Agency
Current account vs FDI/portfolio investments (US$bn)
BoP on the brink of deficit/state hikes oil export duty
2H12 saw BoP at -US$5bn and a weakening KZT. Flat FX reserves in 1Q13 indicate it moved from red to zero. CA surplus looks weak due to stable exports vs rising imports and FDI is insufficient to offset the Oil Fund-driven gap in portfolio flows. So, KZT is set to weaken by end-2013. The fiscal gap was 3% of GDP, but the rise in export duty from US$40/t to US$60/t will improve the figure in 2013 and beyond. Yet, the NOF at US$60bn still keeps the overall fiscal backdrop benign.
Trade recommendation
Entry date Entry level Exit level S/L
-20-15-10
-505
101520
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
Current account (4Q rolling)
Net FDI (4Q rolling)
Net portfolio investment (4Q rolling)
Rising Oil Fund assets drives the gap
Long USD/KZT 19-Apr 151.1 152.5 150.0
Source: Kazakhstan Statistics Agency, NBK
Kazakhstan Directional EMEA Economics April 2013
75
Kazakhstan
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 9.3 9.6 9.7 10.7 8.9 3.3 1.2 7.3 7.5 5.0 5.3 5.8 6.0Private consumption (%YoY) 11.9 14.1 10.9 12.7 10.9 7.8 0.6 11.8 10.9 9.7 8.4 7.8 7.5Government consumption (%YoY) 8.9 10.6 10.8 7.3 14.0 2.6 1.0 2.7 11.3 8.8 4.0 4.6 4.5Investment (%YoY) 8.0 22.5 28.1 29.7 17.3 1.0 -0.8 3.8 3.9 3.9 7.2 8.7 9.0Industrial production (%YoY) 7.8 11.7 3.1 7.1 6.2 2.6 2.7 9.6 3.8 0.5 4.5 5.5 5.7Unemployment rate year-end (%) 8.8 8.6 8.2 7.8 7.3 6.7 6.6 5.8 5.4 5.3 5.1 5.0 4.9Nominal GDP (KZTbn) 4,612 5,870 7,591 10,214 12,850 16,053 17,008 21,816 27,334 30,074 32,461 35,939 40,000Nominal GDP (€bn) 27 35 46 65 77 91 83 112 134 157 168 193 210Nominal GDP (US$bn) 31 43 57 81 105 134 115 148 186 202 214 235 262GDP per capita (US$) 2,076 2,874 3,771 5,297 6,771 8,532 7,159 9,073 11,222 11,956 12,529 12,995 13,948Gross domestic saving (% of GDP) 34.3 34.9 38.9 44.1 43.8 46.3 41.0 43.8 46.6 43.0 39.6 38.2 37.0Lending to corporates/households (% of GDP) 21.2 25.3 34.1 45.9 56.5 46.5 44.9 34.8 31.8 33.0 34.5 36.3 39.1
Prices CPI (average %YoY) 6.4 6.9 7.5 8.6 10.7 17.3 7.3 7.1 8.3 5.1 6.3 5.8 5.6CPI (end-year %YoY) 6.8 6.7 7.5 8.4 18.8 9.5 6.2 7.8 7.4 6.0 5.7 5.9 5.3PPI (average %YoY) 9.9 16.9 23.7 18.9 12.2 38.4 -20.2 27.1 28.0 3.7 3.0 5.8 6.0Wage rates (%YoY, nominal) 14.5 21.2 18.1 22.2 28.2 16.4 10.9 14.7 15.9 13.9 10.3 12.0 12.0
Fiscal balance (% of GDP) Consolidated government balance 0.0 1.7 0.6 0.8 -1.7 -2.1 -2.9 -2.4 -2.1 -2.8 -1.8 -1.2 -0.9Consolidated primary balance 0.9 3.1 1.0 1.1 -1.4 -1.7 -2.5 -2.0 -1.7 -2.1 -1.1 -0.5 -0.3Total public debt 13.5 9.9 6.8 6.9 5.5 6.3 10.4 11.4 11.9 12.2 14.9 16.0 18.0
External balance Exports (US$bn) 13.2 20.6 28.3 38.8 48.4 72.0 43.9 61.4 87.5 92.1 89.7 93.8 98.6Imports (US$bn) 9.6 13.8 18.0 24.1 33.3 38.5 29.0 32.9 40.7 47.4 52.6 58.0 64.5Trade balance (US$bn) 3.7 6.8 10.3 14.7 15.1 33.5 15.0 28.5 46.8 44.7 37.1 35.8 34.1Trade balance (% of GDP) 11.9 15.7 18.1 18.1 14.4 25.1 13.0 19.2 25.1 22.2 17.3 15.2 13.0Current account balance (US$bn) -0.3 0.5 -0.5 -2.0 -8.3 6.3 -4.4 1.4 12.3 7.7 2.5 1.3 3.5Current account balance (% of GDP) -0.9 1.2 -0.8 -2.5 -7.9 4.7 -3.8 0.9 6.6 3.8 1.2 0.6 1.3Net FDI (US$bn) 2.2 5.4 2.1 6.7 8.0 14.8 10.7 3.7 9.2 12.4 7.9 9.2 13.0Net FDI (% of GDP) 7.1 12.5 3.7 8.3 7.6 11.1 9.2 2.5 4.9 6.1 3.7 3.9 5.0Current account balance plus FDI (% of GDP) 6.3 13.7 2.9 5.8 -0.3 15.8 5.5 3.4 11.5 10.0 4.9 4.5 6.3Foreign exchange reserves ex gold, (US$bn) 4.2 8.5 6.1 17.8 15.8 17.9 20.6 25.2 25.2 22.1 22.0 22.0 24.0Import cover (months of merchandise imports) 5.3 7.4 4.1 8.8 5.7 5.6 8.5 9.2 7.4 5.6 5.0 4.6 4.5
Debt indicators Gross external debt (US$bn) 22.9 31.9 43.5 74.0 96.9 107.7 111.7 118.2 125.2 137.1 145.0 155.0 170.0Gross external debt (% of GDP) 74 74 76 91 92 81 97 80 67 68 68 66 65Gross external debt (% of exports) 173 155 154 191 200 150 254 193 143 149 162 165 172Total debt service (US$bn) 5.3 6.5 6.9 12.9 15.8 16.2 17.0 9.7 16.6 15.2 13.8 10.0 10.0Total debt service (% of GDP) 17.0 15.1 12.1 16.0 15.1 12.1 14.8 6.5 8.9 7.5 6.4 4.3 3.8Total debt service (% of exports) 39.7 31.5 24.4 33.3 32.6 22.5 38.7 15.8 19.0 16.5 15.4 10.7 10.1
Interest & exchange rates Central bank key rate (%) year-end 7.00 7.00 8.00 9.00 11.00 10.00 7.00 7.75 7.50 5.50 5.50 5.50 5.50Broad money supply (avg, %YoY) 27.0 69.8 25.2 78.1 25.9 35.3 25.6 28.5 20.3 7.5 14.0 16.0 15.03-mth interest rate (KazPrime, avg %) 5.4 4.8 2.5 3.6 7.3 8.5 8.3 4.1 1.8 2.5 4.1 4.5 5.03-mth interest rate spread over US$-Libor (ppt) 419 318 -107 -165 196 561 761 372 144 207 380 398 429yield (avg %) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/ayield (avg %) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aExchange rate (USDKZT) year-end 144.22 130.00 133.98 126.79 120.68 120.88 148.36 147.37 148.49 150.44 152.50 153.00 152.00Exchange rate (USDKZT) annual average 149.00 136.04 132.88 125.97 122.52 120.00 147.60 147.29 146.66 149.15 151.47 152.75 152.50Exchange rate (EURKZT) year-end 181.52 176.25 158.63 167.31 176.06 168.96 212.39 197.14 192.22 198.49 183.00 191.25 190.00Exchange rate (EURKZT) annual average 168.71 169.23 165.34 158.28 167.94 176.54 205.83 195.37 204.19 191.78 192.77 186.16 190.63Brent price, annual average (US$/bbl) 29 38 55 65 73 98 62 80 111 112 108 114 115
Source: National sources, ING estimates
Poland Directional EMEA Economics April 2013
76
Poland Next elections : EU Parliament / June-2014
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) 0.7 0.7 1.0 1.3 1.8 1.2 2.6HH consumption (%YoY) -0.2 -0.5 -0.3 0.7 1.1 0.2 2.0Fixed investment (%YoY) -4.1 -4.0 -4.0 -4.3 -4.5 -4.3 2.2CPI (%YoY)* 2.4 1.0 0.8 1.4 1.8 1.3 2.1Current account (% of GDP) -3.5 -3.1 -2.9 -2.7 -2.6 -2.6 -3.0FX res. import cover (mths) 6.0 6.7 6.5 6.5 6.5 6.9 6.6Policy interest rate (%)* 4.25 3.25 3.00 2.75 2.75 2.75 3.003-mth interest rate (%)* 4.11 3.39 3.02 3.02 3.02 3.22 3.122-year yield (%)* 3.12 3.15 2.68 3.06 3.16 3.07 3.6110-year yield (%)* 3.74 3.95 3.55 4.06 4.28 3.84 4.59USDPLN* 3.10 3.27 3.33 3.44 3.42 3.33 3.39EURPLN* 4.09 4.18 4.16 4.20 4.10 4.17 4.13
Poland should avoid near-zero growth in 1Q13, but the case for recovery in the next quarters remains weak, and CPI should remain below the MPC target in 2013 and 1H14. The MPC, having delivered a surprising 50bp-cut in March, is in a 'wait and see’ mode but we expect further easing from a 25bp cut in June and July (to 2.75%). MinFin should avoid growth-damaging tightening to meet the deficit at 3.5% of GDP: it can revise the central deficit up or utilise transfer from OFE capital. There is more to do on the monetary policy side, as real rates, even after 50bps cuts, should remain the highest in EM. This should attract portfolio capital, despite some cyclical fiscal slippage. Overvaluation of PLN bonds would be halted if yields pick up on core markets or if the MPC credibly announce the end of the easing cycle.
*Quarterly data is EOP, annual is avg. Source: National sources, ING estimates [email protected]
GDP components (% YoY, real)
Macro digest – stagnation scenario
-15%
-10%
-5%
0%
5%
10%
15%
20%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
0%
1%
2%
3%
4%
5%
6%
7%
Household Consumption Fixed Investment GDP (RHS)
ING f'cast
Source: GUS, ING estimates
Industrial output and business confidence
-15
-10
-5
0
5
10
15
Nov 06 Aug 07 Jun 08 Apr 09 Feb 10 Dec 10 Oct 11 Aug 12 Jun 13
-35
-30
-25
-20
-15
-10
-5
0
Industrial output (3m-mav, %YoY, RHS)
Industry, EC confidence indicator (sa, LHS)
ING f'cast
Source: GUS, EC, ING estimates
Retail sales and wage bill
-10
-5
0
5
10
15
20
Jan-08 Mar-09 May-10 Jul-11 Sep-12 Dec-13
8
9
10
11
12
13
14
Retail sales (real, 3m-mav, %YoY)Wage bill (real, %YoY)Unemployment rate (SA, %, RHS)
ING f'cast
We stick to our sub-consensus GDP forecast for 2013, as we still don’t see any signs of a turning point in domestic demand, while the external orders increase was halted by a recent softening of business confidence in Eurozone and Germany. Admittedly, GDP should avoid close-to-zero growth in 1Q13, but the case for recovery in the next quarters remains weak. The leading manufacturing sector should remain in contraction territory in 2Q13 to the tune of -1.4% YoY vs -1.6% YoY in 1Q13, as the slight improvement in orders was offset by the inventories build-up. Public investments did not hit bottom, and their surprising revival in 4Q12 has disappeared in subsequent revisions. Private consumption is unlikely to contribute positively to GDP growth in 1H13. We also doubt it could reach its long-term average contribution of 2ppt in 2014. In 3Q12, there was a slight pick-up in the household savings rate after consumption smoothing brought it to almost zero in 1H12. The process of replenishing savings was quite intensive judging by the size of the deposits. However, we still doubt that consumption will rebound once the buffers are refilled. Our poll among retail clients revealed that 50% of them cut expenditures in 2H12 due to insufficient income, while less than 20% mentioned higher propensity to save as the main reason for lower spending. So it takes a true improvement on the income side for consumption recovery. It might improve in real terms thanks to the quick disinflation, but it is the job security issues (GDP may struggle to reach a labour market neutral pace of growth before 2015) and the little scope for wage hikes that may still keep spirits low in 2013. The Labour Ministry showed a more active approach, which can be read from an increase in employers’ registered job offers in Feb – 83k vs 61k a year ago. On the other hand, layoff plans in the private sector adjusted for seasonal factors pushed above the highs reached in post-Lehman 2009 (but not the record high from Dec-08). The Labour Ministry intervention has dampened the trend in the unemployment rate, but we have not seen any growth in demand for labour yet to make this a more long-lasting achievement. The most that can be done is to push on with a special law to lower labour hoarding costs. We upgrade GDP growth forecasts for 1H13, but this is offset by weaker expectations for 2H13. We see less steep GDP acceleration in 2014 due to sluggish domestic demand (especially consumption) and postponed Eurozone recovery. 2014 should bring GDP growth to 2.6% YoY, still below the break-even level of 3% for the Polish economy, which would trigger the labour market recovery. Thus, we don’t expect MinFin to provide additional tightening measures to meet its 3.5% deficit target. There is more to do on the monetary policy side, so easing expectations should remain in place even after the 50bp cut we expect.
Source: GUS, EC, ING estimates [email protected], [email protected]
Poland Directional EMEA Economics April 2013
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Activity: Monetary trend : Looser Fiscal trend : Neutral [email protected]
CPI and NBP inflation target
The second round of monetary easing
0
1
2
3
4
5
6
Jan-07 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
CPI (%YoY) Core CPI (%YoY) NBP target with +/-1% band
The MPC, having delivered a surprising 50bp cut in March, is in a ‘wait and see mode’, but we expect further easing: 25bp in June and 25bp in July (to 2.75%). Our sub-consensus view assumes CPI falling below the NBP projection in 2013, which has been highlighted as a prerequisite for further action. On the other hand, the withdrawal from the VAT cut makes CPI in 2014 higher than in the NBP projection. It gives MPC hawks an argument to postpone, but not prevent, further easing, as the lack of production recovery in 2Q13 and continued weak growth in the Eurozone bodes poorly for expected recovery in 2H13-2014. The bond market rally may result in further PLN strengthening in 2Q13 so the risk is skewed to the downside for our rates view.
Source: GUS, NBP, ING estimates [email protected]
Central budget deficit (% of the yearly plan)
Revise (central deficit) or not?
0%
20%
40%
60%
80%
100%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2013 YTD budget 2012 YTD budget
2011 YTD budget 2010 YTD budget
MinFin is deliberating whether to revise the deficit. The revenue shortfall could reach PLN18bn, but MinFin can offset that with higher dividends from public caps, PLN5.5bn of NBP profit or OFE (private pension funds) capital. It is trying to avoid growth-damaging fiscal tightening due to record weak domestic demand, but on the other hand, expects the excessive deficit procedure to be lifted by the EC, so it needs a credible fiscal path in April’s update of the Convergence Programme. The recent price rally in the local debt market shows that investors ignore the cyclical budget worsening due to a strong track record from 2011-12. So MinFin may finally decide to revise the deficit up. Also, rating agencies prefer more transparent solutions.
Source: MinFin [email protected]
Assets of OFE (private pension funds)
Pension system revision
Shares38%
Others1%
Treasury bond and bills
45%
Non-treasury debt instruments
11%
Bank securities and deposits
5%
The government is undergoing a (planned) review of the private pension funds (OFE). It should choose the payer of pensions fromthe OFE. The proposals that leaked to the press indicate that the capital of workers who are 10 years younger than the pension age would be gradually moved from OFE to ZUS (public social security institution). Assuming the flow will be spread over 10 years, in 2013 or 2014 ZUS (effectively budget) would get cash of PLN20bn, while the remaining PLN26bn would flow in over the next 10 years. In this case, OFE would avoid an equity sell-off to rebalance the portfolios, while on the other hand, PLN20bn would help with the central budget. Moody’s has stated that the operation would be credit-neutral.
Source: KNF [email protected]
Support for Euro adoption
Euro adoption – festina lente (make haste slowly)
20
30
40
50
60
Dec-09 Jun-10 Sep-11 Oct-12
For Against
NBP governor Marek Belka stated that Poland should ask the European Commission for an exemption from the EMU entry criterion regarding the exchange rate. His argument was that the depth of the Polish market makes keeping in the ERM-2 highly risky. No FX criterion could encourage a more active FX policy, up to a point of entry exchange rate manipulation. But we also see Marek Belka’s view in a broader context. There are two approaches in the government to the issue of euroadoption. Foreign affairs minister Radoslaw Sikorski promotes quick EMU entry, while MinFin Jacek Rostowski and Marek Belka are more pragmatic in setting additional internal criteria, making readiness to enter, not entry, the actual goal. Postponement and testing the EC’s resolve seem beneficial for Poland.
Source: Ipsos/MinFin [email protected], [email protected]#
Poland Directional EMEA Economics April 2013
78
Poland FX / MONEY MARKETS / DEBT STRATEGY LC Ratings (M/S&P/F): A2/A/A
FX – spot vs forward and INGF
FX/Money market strategy
3.8
3.9
4.0
4.1
4.2
4.3
4.4
4.5
4.6
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14
ING f'cast Mkt fwd
Source: Bloomberg, ING estimates
CA deficit and adjusted with capital account (% of GDP)
Weak local activity data, a risk of deeper rate cuts and the upward revision of the fiscal deficit all call for yet another return towards 4.20/€. And yet this local story may become temporarily irrelevant – global factors facilitating yield hunting may keep PLN under appreciation pressure due to the fact that real rates in Poland are the highest in the region. €/PLN should stay between 4.10-4.15/€, depending on the scale of inflows to the bond market; just like in 2H12, foreign demand for bonds gave the zloty resistance to growth deterioration and monetary easing. PLN appreciation below 4.00/€ should be seen as a warning signal that the bubble in the Polish bond market is getting risky and this may force more aggressive MPC action. The 50bp-cut in March set a precedent and the Council is now significantly less cautious than it was before. On a 6-month horizon we assume temporary PLN weakening when core market yields inch up again, forcing PLN bonds into a temporary sell-off. But ultimately, higher yields in the Eurozone would be accompanied with a better growth outlook in Germany, which is PLN positive. The weakness of domestic demand caused trade gap rebalancing and the current account adjusted with the capital account should stay close to 1% of GDP, also preventing negative actions on the FX market.
[email protected], [email protected]
Trade recommendation
Entry date Entry level Exit level S/L
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Feb 1
3
CA CA + capital account
EU accession
- - - -
Source: NBP
Local curve (%)
Debt Strategy
2.5
3.0
3.5
4.0
4.5
3m 6m 2Y 10Y
Now -3 Months +3 Months
Source: Bloomberg, ING estimates
PLN10Y IRS, EM10Y IRS, NBP rates (%)
The aggressive easing by the BoJ, the dovish ECB, and the US soft patch expected in 2Q13 all fuelled the new wave of yield hunting on EM bond markets that sent PLN yields 30-60bp below the historical lows reached in Dec-12. The PLN curve performed in line with the average movement in the seven-largest EM rates markets, but this adds to the strengthening of the PLN curve in the same magnitude experienced after the surprising 50bp cut in March. Thanks to these two factors, 2Y yields have dropped by 65bp since the beginning of March while the 10y have dropped by 50bp, which calls for technical correction. Again our models show that 5Y IRS’s in PLN are the most overpriced among the seven-largest EM rates markets. Foreign investors seem to be ignoring the long end negative fact that the central deficit reached 70% of the yearly plan after 1Q13 and the MinFin is trying to avoid revising the deficit upward with another fudging on OFE. We expect CPI to stay below 1% in 2Q13, and the lack of industrial production recovery in 2Q13 should again soften the MPC’s stance, so additional 50bp cuts to 2.75% are likely. The easing expectations could stay in place (FRA price cuts to 2.5%), as even after the cuts we expect real rates to remain among the highest in the EM space. The trigger for correction should come from a yield increase in core markets or a warning from rating agencies. We recommend setting 2Y vs 10Y steepener on the PLN bond curve.
Trade recommendation
Entry date Entry level Exit level S/L
5.5
6.0
6.5
7.0
7.5
8.0
8.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Mar-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13
NBP rate PL10Y IRS EM 10YIRS (rhs)
Sell 10Y Buy 2Y POLGB 10-Apr 59bp 75bp 45bp
Source: NBP, Reuters, ING
Poland Directional EMEA Economics April 2013
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Poland
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 3.9 5.3 3.6 6.2 6.8 5.1 1.7 3.9 4.5 1.9 1.2 2.6 3.0Private consumption (%YoY) 2.0 4.4 2.0 5.0 4.9 5.8 2.0 3.1 2.6 0.8 0.2 2.0 3.0Government consumption (%YoY) 4.9 3.1 5.2 6.1 3.6 7.4 2.0 4.2 -1.7 -0.2 0.7 1.1 0.2Investment (%YoY) -0.1 6.4 6.5 14.9 17.5 9.6 -1.1 -0.4 8.5 -0.9 -4.3 2.2 7.0Industrial production (%YoY) 8.6 13.1 4.1 12.0 9.4 3.0 -3.6 11.1 6.8 1.4 -0.6 3.3 3.6Unemployment rate year-end (%) 20.0 19.0 17.6 14.8 11.2 9.5 12.1 12.4 12.5 13.4 14.7 14.5 14.4Nominal GDP (PLNbn) 843 925 983 1,058 1,211 1,276 1,345 1,417 1,528 1,595 1,622 1,703 1,805Nominal GDP (€bn) 183 191 217 272 320 356 309 354 371 382 389 412 461Nominal GDP (US$bn) 207 237 270 342 438 524 431 469 516 491 487 502 576GDP per capita (US$) 5,419 6,242 7,143 9,106 11,724 14,017 11,547 12,620 13,867 13,214 13,117 13,541 15,539Gross domestic saving (% of GDP) 17.2 19.0 19.8 20.6 24.6 20.8 21.3 20.6 21.7 21.8 21.9 22.7 23.2Lending to corporates/households (% of GDP) 29.7 27.9 29.8 34.1 38.4 50.3 51.8 53.5 56.6 54.7 54.8 54.7 53.4
Prices CPI (average %YoY) 0.8 3.5 2.1 1.0 2.5 4.2 3.5 2.6 4.3 3.7 1.3 2.1 2.8CPI (end-year %YoY) 1.7 4.4 0.7 1.4 4.0 3.3 3.5 3.1 4.6 2.4 1.8 2.3 3.2PPI (average %YoY) 2.6 7.0 0.7 2.3 2.0 2.2 3.3 2.1 7.6 3.4 -0.2 2.8 2.6Wage rates (%YoY, nominal) 2.6 4.3 3.2 5.0 9.1 10.6 4.2 3.5 4.9 3.5 2.4 3.0 3.7
Fiscal balance (% of GDP) Consolidated government balance (ESA 95) -6.2 -5.4 -4.1 -3.6 -1.9 -3.7 -7.4 -7.9 -5.0 -3.9 -3.5 -3.0 -2.0Consolidated primary balance -3.2 -2.6 -1.3 -1.0 0.4 -1.5 -4.7 -5.0 -2.0 -0.5 -0.5 -0.1 0.1Total public debt (ESA 95) 47.1 45.7 47.1 47.7 45.0 47.1 50.9 54.8 56.2 55.6 57.4 57.0 54.9
External balance Exports (€bn) 53.8 65.8 77.6 93.4 105.9 120.9 101.8 125.0 139.3 143.0 154.2 170.7 198.1Imports (€bn) 58.9 70.7 80.1 99.2 119.7 141.8 107.2 133.9 149.4 148.6 154.8 173.8 205.7Trade balance (€bn) -5.1 -4.8 -2.5 -5.8 -13.8 -20.9 -5.4 -8.9 -10.1 -5.6 -2.0 -4.5 -9.1Trade balance (% of GDP) -2.8 -2.5 -1.2 -2.1 -4.3 -5.9 -1.8 -2.5 -2.7 -1.5 -0.5 -1.1 -2.0Current account balance (€bn) -4.9 -10.7 -5.9 -10.4 -19.2 -23.8 -12.2 -16.5 -15.9 -13.5 -10.0 -12.5 -15.8Current account balance (% of GDP) -2.7 -5.6 -2.7 -3.8 -6.0 -6.7 -3.9 -4.7 -4.3 -3.5 -2.6 -3.0 -3.4Net FDI (€bn) 3.8 9.5 5.5 8.6 13.2 7.1 6.0 2.5 6.6 2.5 5.9 7.0 8.5Net FDI (% of GDP) 2.1 5.0 2.6 3.2 4.1 2.0 1.9 0.7 1.8 0.9 1.5 1.7 1.8Current account balance plus FDI (% of GDP) -0.6 -0.7 -0.1 -0.7 -1.9 -4.7 -2.0 -3.9 -2.5 -2.9 -1.0 -1.3 -1.6Foreign exchange reserves ex gold, (€bn) 25.8 26.6 34.5 35.2 48.4 42.5 52.7 66.5 71.7 78.4 90.3 96.9 106.1Import cover (months of merchandise imports) 5.3 4.5 5.2 4.3 4.9 3.6 5.9 6.0 5.8 6.3 6.9 6.6 6.1
Debt indicators Gross external debt (€bn) 85.1 95.3 112.3 129.0 158.6 173.7 194.4 237.4 248.1 276.1 310.1 313.6 332.2Gross external debt (% of GDP) 39 46 52 48 50 48 63 67 67 72 80 76 73Gross external debt (% of exports) 158 145 145 138 150 144 191 190 178 193 202 185 170Total debt service (€bn) 11.4 18.0 23.5 18.4 27.4 33.6 34.0 44.6 48.5 50.0 54.0 54.9 58.5Total debt service (% of GDP) 5.3 8.7 10.8 6.8 8.6 9.3 11.0 12.6 13.1 13.1 13.8 13.4 12.8Total debt service (% of exports) 21.3 27.4 30.3 19.7 25.9 27.8 33.4 35.7 34.8 35.0 35.1 32.4 29.9
Interest & exchange rates Central bank key rate (%) year-end (1W repo) 5.25 6.50 4.50 4.00 5.00 5.00 3.50 3.50 4.50 4.25 2.75 3.00 3.75Broad money supply (avg, %YoY) 5.8 9.4 10.3 16.0 12.9 18.6 8.1 8.8 12.5 4.5 2.4 4.5 5.73-mth interest rate (Wibor, avg %) 8.8 5.7 6.2 4.2 4.8 6.3 4.3 3.9 4.6 4.9 3.2 3.1 3.73-mth interest rate spread over Euribor (ppt) 644 356 406 112 52 170 309 312 318 430 297 252 2922-year yield (avg %) 5.48 6.97 4.95 4.58 5.11 6.26 5.24 4.76 4.85 4.25 3.07 3.61 4.3710-year yield (avg %) 5.84 6.85 5.21 5.26 5.51 6.04 6.13 5.83 5.97 4.95 3.84 4.59 4.96Exchange rate (USDPLN) year-end 3.74 2.99 3.26 2.91 2.76 2.94 2.85 2.96 3.41 3.10 3.42 3.20 3.08Exchange rate (USDPLN) annual average 4.07 3.90 3.64 3.09 2.76 2.43 3.12 3.02 2.96 3.25 3.33 3.39 3.14Exchange rate (EURPLN) year-end 4.71 4.05 3.86 3.84 4.02 4.11 4.08 3.97 4.42 4.09 4.10 4.00 3.85Exchange rate (EURPLN) annual average 4.61 4.85 4.53 3.88 3.78 3.58 4.35 4.00 4.12 4.17 4.17 4.13 3.92
Source: National sources, ING estimates
Romania Directional EMEA Economics April 2013
80
Romania Next elections : Presidential -4Q14
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) 1.1 0.7 0.7 2.2 2.1 1.6 2.0HH consumption (%YoY) 1.1 1.4 1.2 1.9 1.2 0.6 1.4Fixed investment (%YoY) -4.2 -2.7 -0.5 1.7 5.3 1.6 7.8CPI (%YoY)* 5.0 5.3 5.8 4.4 4.6 5.4 4.0Current account (% of GDP) -3.6 -3.7 -3.6 -3.3 -3.1 -3.1 -3.3FX res. import cover (mths) 7.2 7.4 7.3 7.2 7.0 7.0 6.3Policy interest rate (%)* 5.25 5.25 5.25 5.25 5.25 5.25 5.253-mth interest rate (%)* 6.05 5.20 4.20 4.30 4.20 4.80 4.503-year yield (%)* 5.95 5.39 4.80 4.70 4.70 5.10 4.905-year yield (%)* 5.95 5.46 5.00 4.90 4.80 5.20 5.00USDRON* 3.36 3.44 3.44 3.48 3.58 3.45 3.54EURRON* 4.43 4.42 4.40 4.35 4.30 4.39 4.31
Romania’s eurobonds have performed strongly over the past couple of months as 5Y CDS compressed to 215 after averaging slightly more than 350 in 2012. Reaching a third consecutive IMF deal remains our base-case scenario, though it’s probability softened. The alternative might put some temporary pressure on Romania’s tradable debt, and future developments will depend on the fiscal line chosen by the executive. Since it continues to talk about fiscal easing plans (cutting social security contributions of employers, cutting VAT for bread and eventually all food items), we attach a non-negligible probability to this scenario of fiscal experiments that could limit potential dips in its popularity. Recent GDP growth revisions beef the chances for a ratings upgrade; for now, this looks more like a risk.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
Contributions to GDP growth (ppt)
Macro digest
7.9 6.3 7.4
-6.6
-1.2
2.2 0.7
-8-6-4-202468
10
2006 2007 2008 2009 2010 2011 2012
Services Industry Construction
Agriculture Net taxes GDP growth
Source: INS, ING Estimates
Industrial output data - revised vs old (%YoY)
-5.5
0.0
5.65.5
-5.5
2.4
7.55.5
-8-6
-4-2
02
46
810
2009 2010 2011 2012
Industrial output previous data Industrial output new
Source: INS, ING Estimates
Lending stalled in late 2012
-20
0
20
40
60
80
Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
Local currency credit (%YoY)Local currency credit (%YoY, EUR terms)Lending growth index (%YoY, limits FX impact)
Greek ties and loud political scandals have plagued Romania in 2012 and, as such stress has visibly decreased, Romania can resume the long road of convergence. One of the brightest spot on the macro map is that 2012 GDP figures have been revised sharply higher, from 0.2% growth presented by flash data to 0.7% by the second revision, and that the poor harvest had a very strong negative contribution to last year’s growth (excluding agriculture, Romania’s growth in 2012 was 2.1%). This means that the underlying trend of economic activity is stronger than portrayed by previous data and this has led us to upgrade our GDP growth projections to 1.6% for 2013 (from 0.5% previously). Excluding agriculture, this would mean a deceleration to 0.9%, worse than 2012 or 2011.
Our growth forecasts upgrade is tempered by the fact that ING now believes the euro area will post a 0.6% contraction in 2013 vs flat growth expected at the release of the previous quarterly report. On a more positive note, Romania’s monthly indicators suggest that most sectors performed significantly better in 1Q13 than in 4Q12 in quarterly terms and this should lead to GDP growth acceleration. This would be an interesting feat since 4Q12 saw a relatively brawny 0.4% seasonally-adjusted quarterly GDP growth and Romania has not seen two consecutive quarters of growth for almost two years.
Unfortunately, a stronger start in 2013 does not look like the beginning of a strong trend, but rather a correction after a soft patch in 2H12. Beyond past trends and hopes for a stronger harvest, Romania’s picture is not particularly rosy. Inflation is set to outpace private sector wage growth and this would be a first since the beginning of the crisis. Lending remains depressed, posting a slight contraction in real terms. The lack of improvement in home markets where the mother institutions of Romania’s main banks operate suggests a local improvement is not on the near-term radar.
The negotiations for a new precautionary arrangement with the IMF should start in June, and given the authorities’ strong verbal commitment to a new deal, we would guess that a sudden end to the IMF relationships would surprise most market participants.
However, there are growing chances for such an outcome as some early deadlines agreed in the last letter of intent (leaked in the local press) have been apparently missed and the April 5% gas price hike was postponed. We have previously said that a partial completion of the targets agreed with the Fund should provide a favourable negotiation starting point and stick to this view, but the current lack of clear progress is worrying.
Source: NBR, ING estimates
Romania Directional EMEA Economics April 2013
81
Activity: Monetary trend : Looser Fiscal trend : Neutral [email protected]
Real wage growth (% YoY, 3m-mav)
Real wage growth in private sector nears decade low
-10
-5
0
5
10
15
20
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Jan
13
Total Private sector
Private sector real wage growth has dropped to -3.3% in Jan and 2013 is on track to be the first year since the beginning of the crisis to post negative real growth. The government has awarded several pay hikes for civil servants, pushing their real wage growth beyond 10%. This is one of the fastest paces since 2009, but as past wage hikes suggest, this should not necessarily improve the consumption trend. The reparative hikes that followed the 2010 +25% wage cuts did not bring visibly stronger consumption as a good part of theincome increase looks to have been used to deleverage. Consumer sentiment corrected the bout of optimism seen last spring after the government change and the lack of game-changing actions by the policymakers should fuel more disappointment.
Source: Source: INS, ING Estimates
Inflation dynamics (%YoY)
Rate cut hopes are rising
0
1
2
3
4
5
6
7
Jan 12 Apr 12 Aug 12 Dec 12 Apr 13 Aug 13 Dec 13
CPI CORE3 NBR target
ING f'cast
The last rate-cutting cycle was cut short in May 2012 (after 100bp of cuts to 5.25%) as financial stability concerns overshadowed the weak growth picture. The twin threat of Greek concerns and domestic political uncertainties drove 5Y CDS towards 500 by June, but these have now turned; 5Y CDS is a touch below 215, and NBR finds the near-term inflation outlook favourable. This has allowed the NBR governor to say that the next rate move will be a cut, but wouldnot come soon as inflation expectations are elevated. We guess this is hinting towards 2H13, when volatile food price deflation should drive inflation lower. While keeping this risk scenario in mind, we stick to our view of no change for this year, as we currently believe 2013 will see another inflation target miss.
Source: INS, ING Estimates
CDS vs treasury deposits (eop)
Striking a new IMF deal – a difficult mission
0
100
200
300
400
500
600
700
Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
0
5
10
15
20
25
30
35
Treasury deposits (RONbn) CDS (bps, LHS)
The last IMF mission to visit Romania left in Jan after agreeing to extend the ongoing arrangement from Mar to Jun due to a lack of progress. The letter of intent picked up anonymously by the local press showed most of the corrective actions needed for a successful review were achievable, focusing on SOE reform and arrears reduction. Some actions were introduced with a delay (healthcare copayments started in Apr, not Mar), others are late (private management should have been installed by Mar for Romgaz and Hidroelectrica), while one action has been skipped (Apr should have brought a 5% corporate gas price increase). While there is still time for adjustments, market participants may soon start pricing in growing chances of an end to the streak of IMF arrangements.
Source: INS, Reuters, ING estimates
Current share of seats in parliament
The governing alliance: a difficult connection
38% 13% 11%
3%5%
30%
0%
10%
20%
30%
40%
50%
60%
70%
USL PDL PPDD UDRM Otherminorities
PSD
PNL
It is hard to see a government alliance spanning from centre-left to centre-right as a lasting construction. Being the two largest parties (together holding almost 70% of the MPs), this is still the best current option for a majority. With no political hurdle on the near-term radar (presidential elections will be organised probably in Dec 2014), the alliance still holds, but there are visibly growing rifts between the socialists and liberals. Their working relationships have been dented by what looks like minute issues – after the recent nomination by thesocialists leader (and PM) of the head of the National Anticorruption Directorate, the liberal leader said they could consider leaving the alliance. A more difficult test, like maybe failed talks with the Fund, could permanently split this unusual alliance.
Source: Chamber of Deputies, ING estimates #
Romania Directional EMEA Economics April 2013
82
Romania FX/MONEY MARKETS/DEBT STRATEGY LC Ratings (M/S&P/F): Baa3/BB+/BBB
FX – spot vs forward and INGF
FX/money markets strategy
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14
ING f'cast Mkt fwd
Source: Bloomberg, ING estimates
Bond and money market yields spread (ppt)
Most domestic signs point to a weakening RON, but the current risk-friendly environment, interest rate differentials and traditional FX interventions constrain our bias to only buy EUR/RON on dips during the summer, with a 2 to 3-month trade horizon. Still, difficult negotiations for a successor for SBA, a persisting soft growth outlook, improving liquidity, a shaky political scene and ING’s house view of a firmer USD suggest the RON is biased to the soft side. Originally, the domestic debt index inclusion news in January converted us to optimists; justifying our forecast of the RON firming to 4.30/EUR by year-end, in what would be the first year of gains since 2007. But with most of the index inclusion hype behind us, and some of its impact curbed by FX interventions, downside risks to our RON view have increased somewhat. We now expect it could temporarily move close to 4.50/EUR during the summer. The June negotiations for a successor SBA look like the biggest hurdle, but early signs of reform fatigue could weigh on the RON before the summer. We reluctantly stick to the view that another deal will be reached and expect that the alternative could put some limited pressure on the RON as the improved investors’ perception visible in Romania’s CDS trajectory, helped by strong FX reserves and growing fiscal buffers, should limit large moves. A rating upgrade remains the largest positive risk, but its chances look limited by the unstable political scene.
Trade recommendation
Entry date Entry level Exit level S/L
4.50es
4.53 4.67 4.91
2.78
0.790.26
3.15
5.12
0
1
2
3
4
5
6
RO HU PL CZ
3M (spread vs EURIBOR) 5Y(spread vs 10Y DE)
- - - -
Source: Reuters, ING estimates
Local curve (%)
Debt strategy
3.8
4.3
4.8
5.3
5.8
3m 6m 3Y 5YNow -3 Months +3 Months
Source: Bloomberg, ING estimates
Share of non-resident RON debt holdings (%)
We missed the entry point in the domestic debt rally induced by the index inclusion of Jan, but the MinFin’s strong appetite for funding provided a correction and opportunity for us to highlight that the 3-5-year segment could move from 5.7-5.8% towards 5.3%. Apart from the index news, our call was mainly based on prospects of slowing debt supply. Now the 3-5Y trades 5.0-5.1% and this argument still holds: after 1Q13, the public debt managers had already covered almost 40% of projected financing needs. Moreover, since Feb, the NBR has turned visibly more dovish and the liquidity picture is on a much stronger improving trend than we had anticipated, making us bump our targets for the 3-5Y segment to 4.8%. For the moment, we do not think a rate cut is likely, believing the food-driven disinflation of 2H13 will be softer than the NBR projects, expecting it to miss the inflation target. Still, it may allow an easing of monetary conditions by allowing short-term rates to drift well below the key rate when the bank turns into a net debtor position, a change that looks to be on the near-term radar. The operations of the treasury are bound to improve the liquidity picture; it plans to finance the fiscal gap with both RON and FX funding, so liquidity injected by running a fiscal gap will be larger than the liquidity taken from the market through domestic net debt issuance.
Trade recommendation
Entry date Entry level Exit level S/L4
8
12
16
20
Sep 10 Dec 10 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13
Long 3Y-5Y ROM GB 07-Feb 5.7% 4.8% 5.3%
Source: MinFin, ING estimates
#
Romania Directional EMEA Economics April 2013
83
W
Romania
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 5.3 8.5 4.1 7.9 6.3 7.4 -6.6 -1.2 2.2 0.7 1.6 2.0 3.0Private consumption (%YoY) 8.3 15.8 10.0 12.9 12.0 9.2 -10.5 -0.2 1.2 0.9 0.6 1.4 1.6Government consumption (%YoY) 10.5 -9.9 2.2 -11.8 2.7 6.8 9.5 -13.6 0.3 2.3 2.5 1.2 1.5Investment (%YoY) 8.7 11.0 15.3 19.9 30.3 15.8 -28.0 -2.0 7.3 5.0 1.6 7.8 5.5Industrial production (%YoY) -0.8 1.5 -2.9 9.9 10.0 2.6 -5.4 4.8 7.6 2.8 3.4 4.5 6.0Unemployment rate year-end (%) 6.8 8.0 7.2 7.3 6.4 5.8 6.9 7.3 7.4 6.8 6.7 6.6 6.4Nominal GDP (RONbn) 197 247 289 345 416 515 501 524 557 587 620 670 730Nominal GDP (€bn) 53 61 80 98 125 140 118 124 131 132 141 155 170Nominal GDP (US$bn) 60 76 99 123 171 206 165 165 183 170 180 189 212GDP per capita (US$) 2,414 2,811 3,682 4,525 5,780 6,492 5,501 5,796 6,135 6,900 7,400 8,200 8,900Gross domestic saving (% of GDP) 14.5 14.7 13.1 14.4 17.1 18.2 19.3 19.8 21.6 21.9 23.8 23.2 22.7Lending to corporates/households (% of GDP) 15.3 16.6 20.7 26.8 35.6 38.5 39.9 40.0 40.1 38.4 35.7 34.0 35.5
Prices CPI (average %YoY) 15.3 11.9 9.0 6.6 4.8 7.9 5.6 6.1 5.8 3.3 5.4 4.0 4.2CPI (end-year %YoY) 14.1 9.3 8.6 4.9 6.6 6.3 4.7 8.0 3.1 5.0 4.6 3.8 3.9PPI (average %YoY) 18.6 19.3 16.5 6.7 6.4 12.7 2.5 4.4 7.1 5.4 5.5 6.2 6.0Wage rates (%YoY, nominal) 25.4 22.5 23.7 16.8 21.0 22.9 7.7 1.8 4.9 4.9 5.3 4.4 7.5
Fiscal balance (% of GDP) Consolidated government balance (ESA 95) -1.5 -1.2 -1.2 -2.2 -2.9 -5.7 -9.0 -6.8 -5.6 -2.9 -3.0 -2.9 -2.7Consolidated primary balance 0.1 0.2 0.1 -1.4 -2.2 -5.0 -7.5 -5.3 -4.1 -1.1 -0.9 -1.0 -0.9Total public debt (ESA 95) 21.5 18.7 15.8 12.4 12.8 13.4 23.6 30.5 34.7 37.8 38.0 40.3 42.1
External balance Exports (€bn) 15.6 18.9 22.3 25.9 29.5 33.7 29.1 37.4 45.3 45.0 46.4 48.5 50.9Imports (€bn) 21.2 26.3 30.1 37.6 47.4 52.8 36.0 44.9 52.7 52.4 53.1 56.1 60.0Trade balance (€bn) -5.6 -7.3 -7.8 -11.8 -17.9 -19.1 -6.9 -7.6 -7.4 -7.3 -6.7 -7.6 -9.1Trade balance (% of GDP) -10.6 -12.0 -9.8 -12.0 -14.3 -13.7 -5.8 -6.1 -5.6 -5.5 -4.8 -4.9 -5.3Current account balance (€bn) -3.1 -5.1 -6.9 -10.2 -16.7 -16.2 -4.9 -5.5 -5.9 -5.0 -4.4 -5.1 -6.6Current account balance (% of GDP) -5.9 -8.4 -8.6 -10.4 -13.4 -11.6 -4.2 -4.4 -4.5 -3.8 -3.1 -3.3 -3.9Net FDI (€bn) 1.9 5.1 5.2 9.1 7.2 9.5 3.5 2.2 1.8 1.6 1.6 1.8 2.1Net FDI (% of GDP) 3.6 8.4 6.5 9.3 5.8 6.8 3.0 1.8 1.4 1.2 1.1 1.2 1.2Current account balance plus FDI (% of GDP) -2.3 0.0 -2.1 -1.1 -7.6 -4.8 -1.2 -2.6 -3.1 -2.6 -2.0 -2.1 -2.7Foreign exchange reserves ex gold, (€bn) 6.4 10.8 16.8 21.3 25.3 26.2 28.3 32.4 33.2 31.2 31.0 29.5 31.4Import cover (months of merchandise imports) 3.6 4.9 6.7 6.8 6.4 6.0 9.4 8.7 7.6 7.2 7.0 6.3 6.3
Debt indicators Gross external debt (€bn) 17.8 21.5 30.9 41.2 58.6 72.4 81.2 92.5 98.7 99.2 104.2 111.3 116.7Gross external debt (% of GDP) 34 35 39 42 47 52 69 74 75 75 74 72 69Gross external debt (% of exports) 114 114 139 159 198 215 279 247 218 220 225 230 229Total debt service (€bn) 4.3 5.0 13.6 19.8 29.9 45.6 49.0 43.8 46.2 50.5 47.1 49.7 52.1Total debt service (% of GDP) 8.1 8.1 17.0 20.2 24.0 32.6 41.5 35.2 35.2 38.3 33.3 32.0 30.7Total debt service (% of exports) 27.3 26.3 61.0 76.6 101.3 135.1 168.6 117.1 102.1 112.2 101.5 102.5 102.3
Interest & exchange rates Central bank key rate (%) year-end 21.25 17.00 7.50 8.75 7.50 10.25 8.00 6.25 6.00 5.25 5.25 5.25 5.25Broad money supply (avg, %YoY) 23.3 37.1 36.5 28.1 34.0 17.3 8.3 6.1 6.3 4.6 7.4 6.3 7.13-mth interest rate (Robor, avg %) 19.9 20.7 9.8 8.8 7.8 13.0 11.7 6.7 5.8 5.3 4.8 4.5 5.03-mth interest rate spread over Euribor (ppt) 1754 1863 766 569 351 840 1050 593 443 477 454 391 4193-year yield (avg %) 14.8 15.5 7.4 7.4 7.6 11.5 11.1 7.4 7.2 6.3 5.1 4.9 5.25-year yield (avg %) n/a n/a 7.3 8.1 7.5 10.6 10.8 7.3 7.3 6.5 5.2 5.0 5.3Exchange rate (USDRON) year-end 3.27 2.93 3.11 2.56 2.47 2.85 2.95 3.20 3.34 3.36 3.58 3.44 3.36Exchange rate (USDRON) annual average 3.32 3.26 2.91 2.81 2.43 2.50 3.04 3.17 3.04 3.47 3.45 3.54 3.44Exchange rate (EURRON) year-end 4.11 3.97 3.68 3.38 3.61 3.99 4.23 4.28 4.32 4.43 4.30 4.30 4.20Exchange rate (EURRON) annual average 3.76 4.05 3.62 3.52 3.34 3.68 4.24 4.21 4.24 4.46 4.39 4.31 4.30
Source: National sources, ING estimates
Russia Directional EMEA Economics April 2013
84
Russia Next elections : Parliamentary / Dec-2016
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) 2.1 1.3 2.2 3.0 4.1 2.8 3.5HH consumption (%YoY) 5.8 3.4 4.4 5.3 4.7 4.5 5.3Fixed investment (%YoY) 1.4 0.0 2.6 4.3 7.7 4.8 7.3CPI (%YoY)* 6.6 7.0 6.2 5.8 5.7 6.1 6.0Current account (% of GDP) 6.3 8.4 3.2 1.4 2.8 1.4 0.9FX res. import cover (mths) 17.4 16.9 16.5 16.0 15.3 15.3 14.1Policy interest rate (%)* 5.50 5.50 5.00 5.00 5.00 5.00 5.003-mth interest rate (%)* 7.47 7.13 7.20 7.00 6.90 7.00 6.732-year yield (%, zero-cpn)* 6.37 6.00 5.80 5.70 5.70 5.91 5.7010-year yield (%, zero-cpn)* 7.00 7.40 7.00 6.90 6.80 7.02 6.80USD/RUB* 30.53 31.06 31.30 31.90 33.00 31.56 33.10EUR/RUB* 40.27 39.81 40.06 39.88 39.60 40.16 40.34
1Q13 economic weakness has forced us to cut our 2013 GDP call to 2.8%, which still looks more optimistic than MinEco’s updated call of 2.4%. Still, the CPI forecast remains mostly unchanged at marginally below 6% with some upside risk in 2014. Thus, we think our call for a 25-50bp key CBR rate cut looks balanced in terms of GDP/inflation risks. RUB has been doing well before the sell-off since late March, and we expect it to weaken further by year-end on a deteriorating BoP outlook and some other domestic factors. Room for lower policy rates and anattractive OFZ position vs CEE/BRIC peers flags that there might be some extra yield compression in OFZ bonds. Key risks are lower rate cuts, a weaker fiscal outlook (vs MinFin’s -0.6%/GDP) and FX risk.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
GDP and key components (YoY)
Macro digest
-22.5%
-15.0%
-7.5%
0.0%
7.5%
15.0%
22.5%
1Q082Q
083Q
084Q
081Q
092Q
093Q
094Q
091Q
102Q
103Q
104Q
101Q
112Q
113Q
114Q
111Q
122Q
123Q
124Q
12
-12%
-8%
-4%
0%
4%
8%
12%
Household consumption Fixed investment
GDP (RHS)
Source: Rosstat, ING
Industrial output, retail sale and investments (YoY)
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan 07 Nov 07 Oct 08 Aug 09 Jul 10 May 11 Apr 12 Feb 13
Retail sales Fixed capital investmentsIP total IP manufacturing
Source: Rosstat, ING
Unemployment and personal income indicators (YoY)
0%
2%
4%
6%
8%
10%-20%
-10%
0%
10%
20%
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Real wage Real disp. income
Unemployment (inverted, rhs)
The GDP growth slowdown wasn’t a surprise, apart from the scale, atonly 1.1% YoY growth in 1Q13, reflecting dire investment and exports under more resilient private consumption. Still, GDP growth has bottomed out and is set to accelerate to c.2% in 2Q13 and to 3-3.5% in 2H13 on a better global outlook, a rebound in domestic demand and a somewhat stronger oil price from the current US$90/bbl levels. Still, we cut our 2013 call from 3.5% to 2.8% and from 3.8% to 3.5% in 2014.
The goods-producing sector is likely to remain only a small contributor to growth, as in 2012 (+0.5ppt vs 1.5-1.7ppt in 2010-11). A positive is that agriculture will likely reverse its -0.1ppt in 2012 to 0.1-0.2ppt this year due to a 25-30% rise in grains harvest. The mining sector will hardly add much on tight capacity constraints in oil and a poor gas export outlook. Manufacturing will likely follow tepid export deliveries and slower domestic demand (vs 2012). After a calendar/high base-driven fall in IP in 2M13, there was relief in Mar-13, but the outlook remains challenging, with the PMI and similar IEP poll flagging low output and demand ahead, tight inventory management under marginal staff adjustments and only subdued hunger for price hikes. Investment plans have become marginally positive after a recessionary 4Q12, which flags some growth ahead, but still well below average at 8% YoY in 2010-1H12. The latter would be a result of nearly flat profit growth in 2013, fragile demand, a falling role of bank loans in funding capex and limited room for an extra fiscal boost to investments. Recall that in 2012 of the 3.8% nominal capex growth of big & medium companies (70% of total) 5.3ppt and 0.5/0.6ppt was from own funds and bank/non-bank loans vs -0.5ppt from fiscal side and -2.1ppt from other sources. Thus, we cut our investment call from 6.4% to 4.8% in 2013, while still pencilling in a rebound to 7.3% in 2014 on a better macro story.
Private consumption still looks more secured on low unemployment, 25-30%YoY retail lending, a lower CPI in 2H13-1H14 and positive real wage growth. Yet, we see the latter at 4-4.5% in 2013 vs 8% due to lower private sector wage hikes (its adding to nominal wage growth was nearly flat at 10ppt since 2011, now falling to high single-digits) and an only 10-15% rise in public wages vs c.30% last year. Our moderate optimism is mostly backed by a healthier above-50 PMI services gauge and a 1Q13 rise in consumer confidence (-7 vs -8) across all key components including readiness to durable purchases.
Net exports will likely be a drag on growth again due to outperforming import growth vs exports. Another worry is zero-adding from public consumption, with only the positives of rising budget outlays seen via a pass-through of public wages/pension hikes to incomes. And this below-one public spending multiplier is the biggest task to address.
Source: Rosstat, ING
Russia Directional EMEA Economics April 2013
85
Activity: Monetary trend : Looser Fiscal trend : Looser [email protected]
Inflation and real interest MM rates (YoY)
Inflation will likely subside, but for how long?
-10%-5%0%5%
10%15%20%25%
Jan 07 Nov 07 Oct 08 Sep 09 Aug 10 Jul 11 Jun 12 May 13
Headline CPICore CPIFood CPIReal interest rate (3M vs 12M ahead CPI)
The CPI fell from 7.3% to 7.0% in Mar-13 on lower food/services inflation,with the core CPI down to 5.7%. Services CPI will remain at 7.5-8% on the July utilities tariffs hike. Under unchanged (vs Jul-12) rise in gas/heating, consumers’ electricity bill will add 12-15% with similar YoY gains for producers. This will only widen the gap between core manufacturers (2.5% since Jan-12) and oil, gasoline, and utilities inflation (15%, 4%, 6%), either forcing PPI hikes or killing profits (-17% YoY in Jan-13) or/and investments even under lower energy inflation ahead. The non-food/core CPI will likely be benign under low M2 and GDP growth. The key hope is on lower grains/food prices under the 25-30% rise in grains harvest, but we don’t envisage as sharp a drop as in 2010-11. So, we see CPI down to 5.7% in 2013 before up to 6.4% in 2014.
Source: Rosstat, CBR, Bloomberg
Current account vs FDI/portfolio investments (US$bn)
Capital flight still looks (ir)reversable
-60
-30
0
30
60
90
120
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
4Q -rolling
-300
-250
-200
-150
-100
-50
0
Current accnt Net PI Net FDI Current accnt, non-energy (RHS)
US$28bn C/A surplus in 1Q13 was a plus for external balances, but still accompanied by a huge (and rising on a 4Q-basis) non-energy C/A gap at US$58bn. This is the first reminder of high RUB fragility. The second is owed to continuing capital flight (US$26bn vs US$8bn in 4Q13, US$54bn in 2012). The Rosneft/TNK-BP deal did distort the figure sharply, but US$9bn left the country via a “Doubtful deals” line, ie, as much as on avg. in 1Q11-4Q12. Assuming US$105-110/bbl Urals price, the C/A should reach US$7.5-10bn in 2Q13-3Q13. We have also downgraded our capital flight call from US$20-25bn to US$35-40bn on 1Q13 data, non-improving net FDI and limited upside in portfolio inflows. The Cyprus issue does not look like a game-changer, but still may add extra pain given its offshore status.
Source: CBR
Federal budget performance (% of GDP)
Fiscal story may see some headwinds from regions
-4%
-2%
0%
2%
4%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2013 YTD 2011 20122013 plan 2011 plan 2012 plan
1Q13 budget dynamics were similar to 1Q12, with a big gap in Feb and a correction in March (to -0.9%/GDP in 1Q13). Key reasonswere a faster spending pace (24.2% of annual plan vs 23.6% in 1Q12) but also slower non-oil & gas income growth on weaker GDP,personal income and corp. profits. The MinFin upgraded the federal budget gap call from -0.8%/GDP to -0.6% on new macro and oil assumptions (US$105/bbl oil vs US$97/bbl now). We see it close to -1.0%/GDP, complicating the MinFin’s task of seeking RUB500bn for extra outlay. This would argue for a bigger privatisation agenda. Another fiscal risk stems from the regional coffers facing weakening incomes/profits tax intake (50% of total revenues). If confirmed, this would imply a higher – but already stretched – federal budget transfer.
Source: MinFin, ING
What president should Putin be focused on?
More anti-corruption fight in the paternalistic country
Apr-06 Mar-08 Mar-12 Mar-13
GDP growth 73 59 59 53
Anti-corruption drive - 35 46 46
Establish order 55 43 42 42
Social equality, income growth 62 53 44 39
Compliance with law - 30 28 28
Science, education, culture 31 23 21 23
Crime control 39 28 23 23
Higher defence capability 24 14 19 20
Stonger geopolitical weight 19 16 18 15
Religious development 17 11 13 10
Personal freedom, democracy 13 10 12 9
Environment 16 10 7 7
Interethnic issues 12 8 8 6
Property right, economic freedom 7 5 7 5
There have always been strong calls for properly-working institutions in Russia and the importance of low corruption as a key factor for stronger growth (eg, zero public adding to GDP), low inflation (unfortunately, corruption is out of CBR’s control) and a more stable RUB (the corruption-driven item of capital flight looks huge). It seems the general populace is becoming more concerned about the issue, with corruption being set as a top-2 priority for Mr. Putin right after GDP growth. The third priority of establishing order is simply another representation. The state’s anti-corruption drive did firm up recently (top-level accusations, a law on foreign property/deposits ban for top-state employees). Well done! But it risks being just for show, as the importance of democracy & personal/economic freedom has not been fully recognised.
Source: Levada Centre polling agency #
Russia Directional EMEA Economics April 2013
86
Russia FX / MONEY MARKETS / DEBT STRATEGY LC Ratings (M/S&P/F): Baa1/BBB/BBB
FX – spot vs forward and INGF
FX / Money Markets Strategy
27
28
29
30
31
32
33
34
Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14
ING f'cast Mkt fwd
Source: Bloomberg, ING
Real RUB exchange rate vs imports (index, Dec-03=1)
It seems investors have been neutral-to-positive on the RUB since 4Q12 on the back of the OFZ rally and bets on supportive seasonality. But falling oil and a fragile risk appetite has recently seen the RUB underperforming major commodity/EM currencies. We see risks of further cuts/unwinding of RUB-longs ahead as: (1) RUB fundamental story will start deteriorating from 2Q13 onwards; (2) OFZ-driven inflow may be limited as the CBR saw foreign share in OFZs already at 20% vs sub-10% in 2012; (3) the RUB trades at all-time highs in REER terms; (4) the MinFin plans to buy FX for the Reserve Fund directly on the market in 2H13; (5) ING keeps its 1.20 year-end EUR/USD call; and (5) bets on front-loaded CBR rate cuts remain. Under Putin’s nominee Nabiullina, the CBR will continue to shift toward inflation targeting, but with an eye on growth. After Duma’s approval, she said current rates leave room for manoeuvre if GDP slows, unemployment rises and the state addresses the utilities tariff issue. She flagged that flexible RUB and CBR policy consistency are also worth pursuing, with an enhancement of the current refinancing tools being a priority (eg, floating-rate longer-term loans, FX-swap auctions, REPO basket). So, given all this and our updated GDP/CPI projections, we still expect 25-50bp key rate cuts from June at the earliest, even though chances for a first move as early as in May have risen. The current April tax period may also give a better entry point in a long USD/RUB trade from 31.30-31.50/USD levels.
Trade recommendation
Entry date Entry level Exit level S/L
1.01.11.21.31.41.51.61.71.81.92.0
Dec 0
3
Nov 0
4
Oct 0
5
Sep 0
6
Aug 0
7
Jul 0
8
Jun
09
May
10
Apr 1
1
Mar
12
Mar
13
1.01.21.41.61.82.02.22.42.62.83.0
RUB/USD RUB/€
RUB effective Import, SA (RHS)
Stronger RUB
1.01.11.21.31.41.51.61.71.81.92.0
Dec 0
3
Nov 0
4
Oct 0
5
Sep 0
6
Aug 0
7
Jul 0
8
Jun
09
May
10
Apr 1
1
Mar
12
Mar
13
1.01.21.41.61.82.02.22.42.62.83.0
RUB/USD RUB/€
RUB effective Import, SA (RHS)
Stronger RUB
Long USD/RUB long 19-Apr 31.50 32.50 30.95
Source: Bloomberg, CBR, ING
Local curve (%)
Debt Strategy
5
6
7
8
3m 6m 2Y 10Y
Now -3 Months +3 Months
Source: Bloomberg, ING estimates
Yields metrics on 10Y local sovereign bonds
We see room for further MM rate tightening in 2Q13 on technical factors. As the 3m-MosPrime rate lost its “prime” status after the exit of key foreign banks (ING is still in) and entry of a local name (with talks on inclusion of more locals), it added 15bp even despite stronger expectations of policy easing. As key MM-derivatives (eg FRA, IRS) are linked to the 3m-MosPrime, liquidity deteriorated for these instruments, increasing even the risk of manipulation (many local banks link actual corporate loan rates to 3M MosPrime). This newfeature of the MM markets act as a strong constraint to any trade recommendations – at least in the short-term. Also, FRAs already price in up to 50bp rate cuts by year-end. In OFZs, the curve has already flattened after a record steepening in late March-early April (2Y-14Y at120bp vs 140bp then). But we believe there might be room for further flattening as we approach 2H13. Indeed and relative to CEE/BRICS peers: (1) the 10Y yield at c.7% is still one of the most attractive in the region; (2) there is room for significant policy easing in Russia vs EM peers; (3) after the recent RUB weakening, the FX-unhedged yield vs the 50%/50% USD/EUR basket of c.6% lags behind only those in Mexico, Brazil and S.Africa, which all have 10%+ figures; and (4) with around 1.0-1.1% real yield (based on INGF for 2013 CPI) it looks comparable with Poland, Mexico, Romania and well above negative prints for Czech and Turkey. On the curve, we like 10Y OFZ 26211, but we look for better entry levels. Key risks are weak 2013 fiscal performance, lower-than-expected rate cuts and a much weaker RUB.
Trade recommendation
Entry date Entry level Exit level S/L
-4
0
4
8
12
16
Czech
China
Poland
Mex
ico
Roman
ia
Hunga
ry
S.Afri
ca
Russia
Turke
yIn
dia
Brazil
Real yield (2013 CPI)Nominal yieldFX-adj. yield (under INGF vs equal-weight USD&EUR basket)
Buy 10Y RFLB 23 19-Apr 6.87% 6.70% 7.11%
Source: Bloomberg, ING estimates.
#
Russia Directional EMEA Economics April 2013
87
Russia
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 7.3 7.2 6.4 8.2 8.5 5.2 -7.8 4.5 4.3 3.4 2.8 3.5 3.2Private consumption (%YoY) 7.7 12.5 12.2 12.2 14.3 10.6 -5.1 5.5 6.4 6.8 4.5 5.3 5.0Government consumption (%YoY) 2.4 2.1 1.4 2.3 2.7 3.4 -0.6 -1.5 0.8 -0.2 0.1 0.5 0.5Investment (%YoY) 13.9 12.6 10.6 18.0 21.0 10.6 -14.4 5.9 10.2 6.0 4.8 7.3 7.0Industrial production (%YoY) 8.9 8.0 5.1 6.3 6.8 0.6 -9.3 8.2 4.7 2.6 2.0 2.6 2.5Unemployment rate year-end (%) 8.6 8.3 7.7 6.9 6.1 7.8 8.0 7.0 6.0 5.1 5.1 5.1 5.0Nominal GDP (RUBbn) 13,208 17,027 21,610 26,917 33,248 41,277 38,807 46,309 55,800 62,599 66,489 73,011 79,940Nominal GDP (€bn) 380 475 614 788 948 1129 876 1150 1363 1568 1656 1810 1903Nominal GDP (US$bn) 430 591 764 990 1300 1661 1222 1525 1898 2016 2107 2206 2379GDP per capita (US$) 2,978 4,110 5,337 6,954 9,153 11,695 8,547 10,670 13,284 14,071 14,734 15,447 16,673Gross domestic saving (% of GDP) 31.4 32.6 33.2 33.8 33.9 33.3 24.6 29.8 32.9 32.2 30.3 30.7 29.5Lending to corporates/households (% of GDP) 19.7 22.4 24.8 30.4 37.6 40.8 42.4 40.2 42.9 45.8 50.6 53.7 61.0
Prices CPI (average %YoY) 13.7 10.9 12.5 9.8 9.1 14.1 11.8 7.0 8.0 5.3 6.1 6.0 6.3CPI (end-year %YoY) 12.0 11.7 10.9 9.1 11.9 13.3 8.8 8.8 6.1 6.6 5.7 6.4 6.0PPI (average %YoY) 16.7 23.3 20.9 12.5 14.1 21.8 -6.6 11.3 17.8 7.2 4.7 11.2 9.7Wage rates (%YoY, nominal) 24.8 24.0 25.2 25.5 26.0 27.4 9.1 12.8 11.7 13.1 10.7 10.8 9.6
Fiscal balance (% of GDP) Consolidated government balance 1.3 4.5 8.1 8.4 6.0 4.9 -6.3 -3.4 1.5 0.4 -1.2 -1.0 -0.7Consolidated primary balance 3.1 5.8 9.2 9.1 6.6 5.3 -5.6 -2.9 2.8 1.0 -0.5 -0.2 0.0Total public debt 31.2 23.2 14.2 9.0 7.2 6.5 8.3 9.3 9.8 12.0 12.9 13.7 14.3
External balance Exports (US$) 135.9 183.2 243.8 303.6 354.4 471.6 303.4 400.6 522.0 529.3 519.2 546.4 565.2Imports (US$) 76.1 97.4 125.4 164.3 223.5 291.9 191.8 248.6 323.8 335.4 360.6 385.4 389.7Trade balance (US$) 59.9 85.8 118.4 139.3 130.9 179.7 111.6 152.0 198.2 193.8 158.6 161.0 175.5Trade balance (% of GDP) 13.9 14.5 15.5 14.1 10.1 10.8 9.1 10.0 10.4 9.6 7.5 7.3 7.4Current account balance (US$) 35.4 59.5 84.6 94.7 77.8 103.5 48.6 71.1 98.8 74.8 30.3 20.9 28.4Current account balance (% of GDP) 8.2 10.1 11.1 9.6 6.0 6.2 4.0 4.7 5.2 3.7 1.4 0.9 1.2Net FDI (US$) -1.7 1.5 -1.5 6.6 9.2 19.4 -7.2 -9.2 -11.8 0.4 -18.4 -2.8 1.5Net FDI (% of GDP) -0.4 0.3 -0.2 0.7 0.7 1.2 -0.6 -0.6 -0.6 0.0 -0.9 -0.1 0.1Current account balance plus FDI (% of GDP) 7.8 10.3 10.9 10.2 6.7 7.4 3.4 4.1 4.6 3.7 0.6 0.8 1.3Foreign exchange reserves ex gold, (US$) 73.2 120.8 175.9 295.6 465.9 412.5 416.7 443.0 454.0 486.6 459.3 453.9 468.5Import cover (months of merchandise imports) 11.5 14.9 16.8 21.6 25.0 17.0 26.1 21.4 16.8 17.4 15.3 14.1 14.4
Debt indicators Gross external debt (US$) 185.7 213.5 257.2 313.2 463.9 480.5 471.6 488.9 538.8 631.8 681.5 736.9 792.9Gross external debt (% of GDP) 43 36 34 32 36 29 39 32 28 31 32 33 33Gross external debt (% of exports) 137 117 105 103 131 102 155 122 103 119 131 135 140Total debt service (US$) 21.0 46.8 64.2 65.5 49.4 88.0 126.2 139.8 158.5 181.0 100.0 66.0 70.0Total debt service (% of GDP) 4.9 7.9 8.4 6.6 3.8 5.3 10.3 9.2 8.4 9.0 4.7 3.0 2.9Total debt service (% of exports) 15.4 25.5 26.3 21.6 13.9 18.7 41.6 34.9 30.4 34.2 19.3 12.1 12.4
Interest & exchange rates Central bank key rate (%) year-end (refi rate) n/a n/a n/a n/a n/a n/a 6.00 5.00 5.25 5.50 5.00 5.00 5.00Broad money supply (avg, %YoY) 51.0 35.8 38.6 48.8 47.5 1.7 16.3 28.5 21.5 15.0 16.0 15.0 15.03-mth interest rate (Mosprime, avg %) 5.4 3.6 4.9 5.2 5.6 11.1 11.5 4.1 5.5 7.1 7.0 6.7 6.63-mth interest rate spread over US$-Libor (ppt) 416 198 134 1 28 819 1083 372 516 672 668 620 5892-year yield (avg %, zero-coupon terms) 7.0 5.4 6.0 6.0 6.0 7.5 9.3 5.9 6.7 6.9 5.9 5.7 5.710-year yield (avg %, zero coupons terms) 8.7 7.2 7.8 6.7 6.5 7.6 11.2 7.6 8.6 8.2 7.0 6.8 6.7Exchange rate (USDRUB) year-end 29.24 27.72 28.74 26.33 24.54 29.38 30.24 30.54 32.14 30.53 33.00 33.50 33.90Exchange rate (USDRUB) annual average 30.68 28.81 28.30 27.18 25.58 24.85 31.77 30.37 29.41 31.06 31.56 33.10 33.60Exchange rate (EURRUB) year-end 36.80 37.58 34.03 34.74 35.80 41.07 43.30 40.85 41.60 40.27 39.60 41.88 42.38Exchange rate (EURRUB) annual average 34.74 35.83 35.21 34.15 35.06 36.56 44.30 40.28 40.94 39.93 40.16 40.34 42.00
Source: National sources, ING estimates
Serbia Directional EMEA Economics April 2013
88
Serbia [email protected]
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) -2.0 -0.8 1.2 1.4 2.3 1.1 3.2HH consumption (%YoY) -2.1 -2.7 -1.6 -0.3 1.3 -0.8 1.4Fixed investment (%YoY) -15.9 8.2 -1.7 15.4 21.1 10.7 20.2CPI (%YoY)* 12.2 12.5 6.9 2.0 4.6 7.3 6.5Current account (% of GDP) -8.5 -12.0 -6.9 -6.7 -14.8 -10.1 -8.9FX res. import cover (mths) 8.5 9.3 9.2 8.6 8.5 8.5 8.6Policy interest rate (%)* 11.25 11.75 11.75 10.25 9.50 9.50 8.503-mth interest rate (%)* 11.25 10.20 10.60 9.20 8.50 9.62 9.032-year yield (%)* 12.86 14.06 14.51 13.01 12.31 13.63 12.835-year yield (%)* n/a 15.07 15.57 14.07 13.37 14.48 13.89USDRSD* 85.11 86.84 87.89 90.40 94.17 88.28 91.58EURRSD* 112.30 111.31 112.50 113.00 113.00 112.36 111.61
2012 real GDP growth disappointed, down 2% on poor harvest. 2013 should see a return to positive territory, but our 1.1% forecast puts officials’ 2% on an optimistic foot. Their 3.6% GDP budget gap target will likely be a miss, while the CA gap should stay flat at 10% GDP despite a boost in car exports. But the government’s commitment to restructuring has proven commendable so far, and the benign global liquidity backdrop has allowed for easing of financing pressures in 1Q13. Unfortunately, this also means stickier FX debt levels and a less likely anchoring to the IMF in the short term (mission in May). But officials seem committed to negotiations, as with Kosovo, despite recent bumps and cosiness with Russia.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
Fiscal dynamics (% of GDP)
Looking for cash, and getting some
-8
-6
-4
-2
0
2
4
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
10
20
30
40
50
60
70
Consolidated budget balance Primary balance
Public debt (RHS, inverted)
ING f'cast
Serbian authorities have launched a rather successful funding search in 1Q13, which lessens the imminence of an IMF deal. EBRD confirmed its intent to provide EUR625m by year-end and EIB announced EUR500m to FSA (FIAT JV). On the foreign government side, in its search to find new originators, Serbia secured a US$400m loan with the UAE, also raising interest for a 49% stake in struggling JAT Airways. Relationships with Russia warmed further, with a US$500m loan signed off to support the 2013 budget, on top of the Jan US$800m loan, and a gas contract (good news for FDIs, CPI). With US$1.5bn raised with Feb Eurobond, Serbia’s financing looks better in the short term, which is supportive for the RSD. But this will imply sticky debt levels for 2013 and maybe heightened FX risks in the mid term (vs US$ denomination).
Source: Serbia Ministry of Finance, ING estimates
CPI vs policy rate
Monetary standstill at last, but no easing yet
0
4
8
12
16
20
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Jan
13
Jan
14
Jan
15
0
3
6
9
12
15
18
CPI (%, YoY) Policy rate (%, RHS)
ING f'cast
Inflation remained stubbornly high at the turn of the year, with CPI at 12.4% in Feb, on the back of adverse base effects, gas price hikes(+10.4% over Jan-Feb) and limited food disinflation. Further administrative prices hikes in the pipeline for 2Q13 (electricity, tobacco/alcohol) should keep inflation in double digits and thus the NBS in a wait-and-see mode, having halted a 9-month 225bp hiking cycle in Feb. But strong favourable base effects, a moderate nominal trade weighted RSD appreciation and benign global food prices environment should allow the CPI to dive down in 2H13 inside the 4% +/- 1.5% band and allow the NBS to act significantly in 2H13, given the lacklustre demand-pull pressures (negative real household consumption growth in 2013).
Source: EcoWin, ING estimates
Current account and RSD
CA gap still large, but easier financing
In spite of the FIAT export boost and higher income balance, stronger import growth on rebounding consumption should keep the CA gap flat at 10% of GDP in 2013. Better FDI and portfolio entries, however, should ease structural pressures on the RSD. But given the fiscal stance and always potential political noise, it would be nice to have a stronger official commitment to FX reserves building.
Trade recommendation
Entry date Entry level Exit level S/L
-24-18-12-606
12182430
Dec 0
2
Dec 0
3
Dec 0
4
Dec 0
5
Dec 0
6
Dec 0
7
Dec 0
8
Dec 0
9
Dec 1
0
Dec 1
1
Dec 1
2
Dec 1
3
Dec 1
4
Dec 1
5
-25
-20
-15
-10
-5
0
Trade-weighted RSD (% YoY) CA (% of GDP, RHS)
ING f'cast
Buy 53W T-bills* 21-May <9.40% (mid) 8.50% 9.60%
Source: EcoWin, ING estimates *hedged
Serbia Directional EMEA Economics April 2013
89
Serbia
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 2.6 9.2 5.4 3.6 5.3 3.8 -3.5 1.1 1.7 -1.9 1.1 3.2 4.1Private consumption (%YoY) n/a 7.4 6.5 5.9 7.8 6.9 -2.7 -1.0 -1.2 -2.0 -0.8 1.4 3.4Government consumption (%YoY) n/a -0.6 3.3 2.4 12.6 5.7 -1.8 0.4 1.0 1.9 -0.5 -0.1 1.4Investment (%YoY) n/a 24.8 3.3 18.0 31.5 10.3 -21.9 -6.1 8.0 -2.5 10.7 20.2 10.7Industrial production (%YoY) -2.9 6.5 0.6 4.3 4.4 1.7 -12.7 2.9 2.3 -3.3 2.0 3.0 2.9Unemployment rate year-end (%) 14.6 18.5 20.8 20.9 18.1 13.6 16.1 19.2 23.0 25.7 25.6 25.3 25.0Nominal GDP (RSDbn) 1,126 1,381 1,683 1,962 2,277 2,661 2,720 2,882 3,209 3,386 3,628 3,964 4,305Nominal GDP (€bn) 17 19 20 23 28 32 29 28 31 30 32 36 39Nominal GDP (US$bn) 20 24 25 29 39 48 40 37 44 39 41 43 49GDP per capita (US$) 2,624 3,163 3,370 3,978 5,317 6,546 5,533 5,086 6,103 5,135 5,393 5,649 6,371Gross domestic saving (% of GDP) 1.0 4.2 4.1 2.7 -0.6 -2.9 -3.8 -2.0 0.3 -0.3 1.5 3.4 4.4Lending to corporates/households (% of GDP) n/a 23.6 29.5 29.9 35.5 41.0 45.7 54.5 51.9 53.8 55.4 57.0 58.4
Prices CPI (average %YoY) 10.0 11.0 16.1 11.8 6.4 12.5 8.2 6.1 11.2 7.3 7.3 6.5 5.3CPI (end-year %YoY) 8.2 13.1 17.1 6.0 11.2 8.6 6.6 10.2 7.0 12.2 4.6 6.7 4.6PPI (average %YoY) 5.9 9.2 14.1 13.4 5.9 12.4 5.6 12.7 14.5 5.6 5.5 6.2 4.0Wage rates (%YoY, nominal) 25.1 22.8 23.6 24.5 28.0 18.1 9.3 7.5 11.3 9.1 8.4 9.6 11.3
Fiscal balance (% of GDP) Consolidated government balance (ESA 95) n/a n/a 1.1 -1.5 -2.0 -2.6 -4.5 -4.7 -4.9 -6.4 -4.6 -3.6 -2.2Consolidated primary balance n/a n/a 2.2 0.1 -1.2 -2.0 -3.6 -3.5 -3.5 -4.4 -1.9 -0.9 0.1Total public debt (ESA 95) n/a n/a 50.8 40.0 31.1 26.8 34.4 44.7 47.6 61.4 64.8 61.4 55.7
External balance Exports (€bn) 2.9 3.3 4.0 5.1 6.4 7.4 6.0 7.4 8.4 8.8 9.9 11.5 13.5Imports (€bn) 6.5 8.5 8.3 10.1 13.5 15.9 11.1 12.2 13.8 14.3 15.6 17.6 20.2Trade balance (€bn) -3.5 -5.2 -4.3 -5.0 -7.1 -8.5 -5.1 -4.8 -5.3 -5.4 -5.7 -6.1 -6.7Trade balance (% of GDP) -20.4 -27.4 -21.2 -21.4 -24.8 -26.2 -17.7 -17.1 -16.9 -18.2 -17.8 -17.2 -17.1Current account balance (€bn) -1.3 -2.6 -1.8 -2.4 -5.1 -7.1 -2.1 -2.1 -2.9 -3.2 -3.2 -3.2 -3.4Current account balance (% of GDP) -7.8 -13.8 -8.8 -10.1 -17.7 -21.7 -7.2 -7.4 -9.1 -10.5 -10.1 -8.9 -8.6Net FDI (€bn) 1.2 0.8 1.3 3.3 1.8 1.8 1.4 0.9 1.8 0.2 0.6 0.9 1.3Net FDI (% of GDP) 6.9 4.1 6.2 14.3 6.4 5.6 4.7 3.1 5.8 0.8 1.9 2.5 3.3Current account balance plus FDI (% of GDP) -0.9 -9.7 -2.6 4.2 -11.4 -16.1 -2.5 -4.4 -3.3 -9.8 -8.2 -6.4 -5.3Foreign exchange reserves ex gold, (€bn) 2.7 3.0 4.7 8.8 9.4 7.9 10.3 9.6 11.5 10.1 11.1 12.6 14.4Import cover (months of merchandise imports) 4.9 4.2 6.9 10.5 8.4 6.0 11.1 9.4 10.0 8.5 8.5 8.6 8.5
Debt indicators Gross external debt (€bn) 10.9 9.5 12.2 14.2 17.1 21.1 22.5 23.8 24.1 25.7 26.2 26.6 27.9Gross external debt (% of GDP) 63 50 60 61 60 65 78 85 77 86 81 75 71Gross external debt (% of exports) 370 288 304 278 269 284 376 321 286 292 266 231 207Total debt service (€bn) n/a 0.8 1.4 2.3 3.0 3.5 3.3 3.4 4.1 4.3 4.7 5.4 5.9Total debt service (% of GDP) n/a 4.0 7.0 9.9 10.5 10.7 11.4 12.2 13.1 14.5 14.5 15.2 15.0Total debt service (% of exports) n/a 23.1 35.3 44.9 46.9 46.8 55.3 46.1 48.9 49.2 47.5 46.9 44.1
Interest & exchange rates Central bank key rate (%) year-end 10.63 15.46 15.46 14.00 10.00 17.75 9.50 11.50 9.75 11.25 9.50 8.50 8.00Broad money supply (avg, %YoY) 24.5 15.7 27.2 30.5 42.6 24.9 7.2 2.3 0.7 10.8 1.1 6.5 12.83-mth interest rate (t-bill, avg %) 18.2 21.3 17.2 13.5 6.5 4.9 13.1 10.4 12.4 12.0 9.6 9.0 7.63-mth interest rate spread over Euribor (ppt) 1587 1920 1503 1038 221 30 1188 958 1101 1143 937 844 6772-year yield (avg %) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 13.6 12.8 11.45-year yield (avg %) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 14.5 13.9 12.5Exchange rate (USDRSD) year-end 54.12 57.94 72.74 60.39 54.91 63.90 66.97 79.20 82.71 85.10 94.17 88.80 87.20Exchange rate (USDRSD) annual average 57.41 58.38 66.93 67.19 58.34 55.68 67.43 77.71 73.25 87.90 88.28 91.58 87.36Exchange rate (EURRSD) year-end 68.12 78.55 86.12 79.69 80.11 89.32 95.87 105.95 107.07 112.28 113.00 111.00 109.00Exchange rate (EURRSD) annual average 65.01 72.63 83.28 84.42 79.97 81.91 94.03 103.08 101.98 113.03 112.36 111.61 109.21
Source: National sources, ING estimates
South Africa Directional EMEA Economics April 2013
90
South Africa Next elections : Presidential & Parliamentary / spring-2014
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) 2.5 2.4 2.8 2.5 2.7 2.6 3.0HH consumption (%YoY) 3.9 3.0 2.8 3.0 3.4 3.1 4.1Fixed investment (%YoY) 4.7 4.2 6.6 3.0 6.2 5.0 5.6CPI (%YoY)* 5.6 5.7 6.1 6.5 6.5 6.2 5.5Current account (% of GDP) -6.0 -6.9 -6.6 -6.3 -6.6 -6.6 -6.2FX res. import cover (mths) 5.2 5.1 5.1 5.4 5.4 5.2 4.7Policy interest rate (%)* 5.00 5.00 5.00 5.00 5.00 5.00 4.003-mth interest rate (%)* 5.13 5.13 5.10 5.15 5.10 5.10 4.442-year yield (%)* 5.07 5.29 5.30 5.41 5.30 5.18 5.0410-year yield (%)* 6.79 6.82 6.67 6.88 7.40 7.08 7.19USDZAR* 8.45 9.23 9.25 9.00 9.10 9.08 9.05EURZAR* 11.15 11.83 11.84 11.25 10.92 11.56 11.03
The South Africa macro mix is not likely to look better in 2Q13. The funding of the CA gap is set to be even tighter; as the trade balance deteriorates further, inflation should break the 6% threshold earlier than the SARB anticipated in its last statement, and social noise could be re-ignited during the wages negotiation season. Unless the authorities come up with a ground-breaking action plan – a low probability in our view – local assets are likely to underperform EM peers with risks of a rating downgrade hanging like a Damocles sword. Still, it is not all doom and gloom. Industrial production should show signs of revival and BRICS institutionalisation could offer credible anchors for SA in the mid term.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
Real GDP trend and employment
Macro digest ES
-4-202468
Mar
-04
Feb-0
5
Jan-
06
Dec-0
6
Nov-0
7
Oct-08
Sep-0
9
Aug-1
0
Jul-1
1
Jun-
12
May
-13
Apr-1
4
Mar
-15
-5
0
5
10
15
Actual real GDP (% YoY) Trend real GDP (% YoY)
Employment (% YoY, RHS)
ING f'cast
Source: EcoWin, ING estimates
Real GDP growth contribution
-6-4-202468
1012
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
-4
-2
0
2
4
6
8
Household consumption Gv't consumptionInvestment ResidualNet Export GDP (% YoY, RHS)
ING f'cast
Source: EcoWin, ING estimates
Budget dynamics, 12m-rolling
-8-6-4-20246
Mar
99
Mar
00
Mar
01
Mar
02
Feb 0
3
Feb 0
4
Feb 0
5
Feb 0
6
Jan
07
Jan
08
Jan
09
Dec 0
9
Dec 1
0
Dec 1
1
Dec 1
2
Nov 1
3
-10-50510152025
Debt services costs (% of GDP) Primary budget (% of GDP)
Revenues % (YoY, RHS) Expenditures (% YoY, RHS)
ING f'cast
Real GDP growth failed to impress in 4Q12, printing a modest 2.5% YoY from 2.3% YoY in 3Q12. Primary sectors (agriculture and mining) were the main drags, amputating 0.2ppt off real GDP YoY growth. This reflected mainly the impact of the strikes, which crippled production over 2H12. The secondary sector recorded 3% growth (from 2.3% YoY in 2Q13), pushed up almost exclusively by utilities, oil-related and transport equipment sectors. The tertiary sector consolidated vs 2Q12 at an uninspiring 2.4% YoY amidst lacklustre domestic demand. On the expenditures side, recovery of household consumption and investment was tepid, reflecting poor sentiment, a persistently high indebtedness ratio, and slowing real disposable income. Related high frequency data so far in 1Q13 did not suggest any significant change in patterns, pointing to a probably flat 1Q13 GDP reading. At this juncture, we consider the treasury’s 2.7% forecast for 2013 a tad optimistic, mainly on its investment and net balance assumptions (CA gap officially seen at 6.2% GDP vs our 6.6% GDP forecast).
The lack of impulse at the GDP growth level did not meet decisive policy actions in the FY13-14 budget statement. Arguably, the fiscal manoeuvre is extremely tight; though the FY12-13 national budget deficit might actually come in lower than discounted in the fiscal plan (set at 5.7% GDP), it will remain above the 5% mark. Officials pencilled in a 5.2% GDP gap in FY13-14, discounting a ZAR7bn income tax relief (vs ZAR9.5bn in FY12-13), but introduced in parallel a string of sin and green taxes hikes. Beyond the limited leeway to boost directly disposable income and private capex, the treasury did not provide more details on economic policy direction: the Youth wage subsidy, the financing of National Security & Retirement Fund and the National Insurance Fund financing, a new tax framework for the mining sector were all critical issues left un-tackled. Also, consolidation (or lack of) presented by the treasury still left the public net loan to GDP ratio climbing above the 40% mark by end-FY15-16, a threshold heralded by many rating agencies as decisive for action. We fear this backdrop of fiscal inertia could face a tougher environment in 2Q13. Not so much due to a risk of authorities yielding to drastically higher wage demand during the seasonal negotiation process (macro pragmatism remain well entrenched within the ANC), but due to a risk of rising social contestation and political infighting –especially with the presidential elections ahead – diverting the government from focusing on laying framework, such as the NDP, to tackle SA structural issues. Unionists, great losers of the ANC December conference, have expectedly emerged on a war-mongering mood in 1Q13 and could prove particularly disruptive.
Source: EcoWin, ING estimates
South Africa Directional EMEA Economics April 2013
91
Activity: Monetary trend : Looser Fiscal trend : Tighter [email protected]
SA trade balance main drivers: 2012 “perfect storm”
Little hope for improvement before mid-year
-12
-10
-8
-6
-4
-2
0
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Jan
13
0
2
4
6
8
10
12
Manufacturing (% of GDP)
Metals (base and precious, % of GDP, RHS)
4Q12 CA sent shockwaves, with a 6% GDP deficit, from an upwardly revised 6.7% reading the previous quarter. Trade balance widened further, from a 2.5% GDP drag in 3Q12 to 2.8% GDP – burdened by the mining strikes impact. But beyond the ‘cyclical’ culprits on the export side (social noise, core markets weakness), SA trade dynamics are a concern due to the stickiness of its import intake –particularly against a backdrop of a prolonged sluggish domestic demand and weaker trade-weighted ZAR. Some argue a ‘J-curve’ effect implies a rapid import slowdown in the near term. We are not so optimistic considering the country’s critical infrastructure needs (and the electoral agenda). All in all, 2013 trade gap should widen further to 2.9% GDP on our USD/ZAR assumptions.
Source: EcoWin, ING estimates
Portfolio flows funding: a short reprive in 1Q13
Financing should be even tighter in 1Q13
-120
-90
-60
-30
0
30
60
Mar
00
Mar
01
Mar
02
Mar
03
Mar
04
Mar
05
Mar
06
Mar
07
Mar
08
Mar
09
Mar
10
Mar
11
Mar
12
Mar
13
Net purchases of equities and bonds (bn ZAR)Net portfolio flows (bn ZAR)
4Q12 financial account was another bad news. Already structurally weak in the FDI field, SA recorded a 2.2% GDP net outflow in 4Q12, and a broadly nil reading for 2012. Net portfolio flows settled at 1.7% GDP in 2012, just at a tad above their 12-year average, but showed in 4Q12 signs of consolidating. Unsurprisingly, ‘other investments’ and ‘unrecorded transactions’ provided the bulk of the financing – so mostly short-term and versatile capital. This pattern should linger in 1Q13, but with a wider CA gap. Portfolio inflows data have so far this year pointed to a marginally better reading than 1Q13, but their outlook is challenged: limited perspective of lower local rates, higher core yields in 2H13 and rating downgrade risks, sluggish local growth and consolidating metal prices (weighing on stocks).
Source: SARB, EcoWin, ING estimates
BRICS FX reserves (US$bn)
BRICS Bank to the rescue?
0
500
1,000
1,500
2,000
2,500
3,000
3,500
China (Dec-12)
Russia (Feb)
Brazil (Mar)
India (Feb)
South Africa(Feb)
South Africa external weakness puts the recent BRICS Summit in Durban in the spotlight. A US$100bn pool of reserves was agreed to support BoP pressures – but no details filtered on who will contribute to what. With US$44bn of FX reserves at end-2012, South Africa compares poorly with its peers (vs chart) – the coming months until a new BRICS gathering in Sep will probably be determinant to define SA’s participation scale. That said, this US$100bn is an ‘a propos’ cushion for the country. But the Durban Summit failed to provide any clear details on the establishment of a New Development Bank deemed a South-South alternative to the IMF. It is a shame, as we deem it would be a credible anchor for SA to navigate through this challenging macro time.
Source: EcoWin, ING estimates
South Africa ratings per agencies
The rating challenge
Rating Outlook Latest actionS&PLT local ccy A- negative 12/10/2012 Rating downgradeLT foreign ccy BBB+ negative 12/10/2012 Rating downgradeMoody'sLT local ccy Baa1 negative 27/09/2012 Rating downgradeLT foreign ccy Baa1 negative 27/09/2012 Rating downgradeFitchLT local ccy BBB+ stable 10/01/2013 Rating downgradeLT foreign ccy BBB stable 10/01/2013 Rating downgrade
The combination of a stressed external position and a strained fiscal backdrop is putting South Africa at risk of a rating downgrade in 2Q13. Admittedly, SA faced its share of action already in 3Q12, with Moody’s and S&P downgrading both local and foreign currency ratings, switching to Negative outlook. Fitch followed in January, but left its outlook Stable. Still, the persistent lack of clarity on economic policies (Gordhan’s FY13-14 budget failed on this front, in our view) and the ‘actionability’ of the National Development Plan pose the risk of another rating late 2Q13 (post wage negotiations round), early 4Q13. Anything later could be seen as disruptive with the political agenda. We mostly see risks for the local debt rating, with S&P still one notch above Moody’s and Fitch.
Source: EcoWin, ING estimates #
South Africa Directional EMEA Economics April 2013
92
South Africa FX / MONEY MARKETS / DEBT STRATEGY LC Ratings (M/S&P/F): Baa1/A-/BBB+
FX – spot vs forward and INGF
FX/money markets strategy
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14
ING f'cast Mkt fwd
Source: Bloomberg, ING estimates
Nominal trade weighted ZAR vs equities flows
The rand is likely to remain under pressure in 2Q13, owing to the persisting stress on the external accounts, risk of a downgrade, heightened equities outflows and potential noise surrounding the wage negotiations process. We have discounted a 9.20 end-of-quarter reading on this basis vs the USD, but risk of a slippage to 9.50 is material. At this level, we would expect the SARB to be more proactive to support the currency, mostly via verbal jawboning. Its ammunition package is indeed limited given the difficult CA gap financing need backdrop and the incumbent necessity to maintain an attractive carry without endangering already sluggish domestic demand. Also, sterilisation costs – and to some extent its FX reserves level (particularly if SA has to contribute to the BRICS FX reserves pool) remain a deterrent to direct intervention. Note that early April pullback of the USD/ZAR towards the 9.00 level has been mostly technical: a combination of EUR/USD trend reversal and hedges removal. A return to these levels in the short term could still materialise, provided strengthening of risk appetite, consolidating commodities, and a further halt in the EUR/USD downward trend (but not our base-case scenario). But as the difficult macro-mix of SA won’t show signs of improvement in 2Q13, the rand should remain on a back foot. We would thus take ZAR short-term rallies vs USD below 9.10 as a buy USD/ZAR on dips opportunity.
Trade recommendation
Entry date Entry level Exit level S/L
-40
-20
0
20
40
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
40
60
80
100
120
Non-resident net purchase of shares (bn ZAR)
Nominal trade-weighted ZAR index (pt, 1m-lag, RHS)
Long USDZAR 11-Apr 8.90 9.30 8.80
Source: EcoWin, ING estimates
Local curve (%)
Debt Strategy
4.5
5.0
5.5
6.0
6.5
7.0
3m 6m 2Y 10Y
Now -3 Months +3 Months
Source: Bloomberg, ING estimates
2-5Y swap vs CPI
Inflation has surprised on the upside in recent months, settling at 5.9% YoY in March. Adverse base effects, administrative price adjustments and a weaker ZAR are set to push the YoY CPI above the SARB 6% limit as soon as 2Q13 vs officials’ expectations for 3Q13. While we discount still room for a small rate cut (growth-support style) at the beginning of next year, the balance of risks on this call is admittedly skewed on the no-change side. In parallel, given the sluggish growth backdrop and the need to avoid foreign investor outflows (by triggering bond profit-taking in case of a rate hike, or equities profit-taking on tighter monetary conditions dampening the growth outlook), we doubt the SARB will take the chance to raise the repo rate when it readjusts its inflation projections.
This backdrop should keep front-end rates well locked over the quarter, with confirmation of poor inflation-related data feeding into bear-steepening on money market rates. On this inflation rationale, 2-5Y should develop a more pronounced flattening bias (as per the chart below) – but USD/ZAR downward consolidation will be key for this trend to gain any steam. Short-term, the 2-5Y should stabilise in the 60-70bp range. This should offer good entry levels to position for 2H13 steepening outlook on the aforementioned tenors.
Trade recommendation
Entry date Entry level Exit level S/L-150
-100
-50
0
50
100
150
200
May 97 Sep 99 Jan 02 May 04 Sep 06 Jan 09 May 11 Sep 13 Dec 15
0
2
4
6
8
10
12
14
2-5Y IRS spread (1m-avg, bps) CPI (% YoY, RHS, inverted)
ING f'cast
Rec 2Y Pay 5Y SA IRS 19-Apr 63bp 85bp 45bp
Source: EcoWin, ING estimates
#
South Africa Directional EMEA Economics April 2013
93
South Africa
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 2.9 4.6 5.3 5.6 5.5 3.6 -1.5 3.1 3.5 2.5 2.6 3.0 3.6Private consumption (%YoY) 2.8 6.2 6.1 8.3 5.5 2.2 -1.6 4.4 4.8 3.5 3.1 4.1 4.5Government consumption (%YoY) 6.0 6.0 4.6 4.9 4.0 4.6 4.8 5.0 4.6 4.2 3.1 3.0 3.6Investment (%YoY) 10.2 12.9 11.0 12.1 14.0 13.0 -4.3 -2.0 4.5 5.7 5.0 5.6 6.6Industrial production (%YoY) -2.1 4.0 3.1 4.8 4.8 0.7 -12.5 4.9 2.5 2.2 3.9 3.2 3.6Unemployment rate year-end (%) 29.3 26.4 24.2 23.1 23.6 21.9 24.2 24.0 23.9 24.9 24.8 24.5 24.2Nominal GDP (ZARbn) 1,273 1,415 1,571 1,767 2,016 2,256 2,406 2,659 2,918 3,155 3,424 3,728 4,083Nominal GDP (€bn) 149 177 199 208 209 186 206 275 289 299 296 338 361Nominal GDP (US$bn) 169 221 248 262 287 274 287 364 403 385 377 412 452GDP per capita (US$) 3,667 4,713 5,212 5,460 5,925 5,649 5,895 7,340 8,070 7,663 7,465 8,131 8,871Gross domestic saving (% of GDP) 18.7 17.7 17.5 17.2 18.4 19.6 18.2 18.6 18.5 17.1 16.9 16.5 16.2Lending to corporates/households (% of GDP) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Prices CPI (average %YoY) 6.0 1.4 3.4 4.6 7.1 10.3 7.2 4.3 5.0 5.7 6.2 5.5 4.3CPI (end-year %YoY) 0.3 3.4 3.6 5.8 9.0 8.9 6.3 3.5 6.1 5.7 6.5 4.9 3.7PPI (average %YoY) 2.3 2.4 3.6 7.7 11.0 14.3 0.2 6.0 8.3 6.2 5.6 4.0 4.8Wage rates (%YoY, nominal) 6.7 8.1 3.7 11.2 7.9 12.8 11.7 13.6 7.2 8.0 11.0 8.0 8.7
Fiscal balance (% of GDP) Consolidated government balance -1.7 -3.2 -0.1 1.1 0.9 -0.1 -4.9 -4.4 -3.8 -3.5 -4.4 -4.3 -3.7Consolidated primary balance 2.0 0.2 3.2 4.1 3.6 2.4 -2.5 -2.0 -1.3 -0.8 -1.8 -1.8 -1.1Total public debt 37.0 35.8 34.6 32.4 28.3 27.8 31.3 35.8 39.6 42.3 44.0 44.7 44.8
External balance Exports (US$bn) 38.7 48.4 56.5 66.3 76.5 85.4 66.4 85.7 103.0 93.6 91.3 101.9 120.1Imports (US$bn) 35.2 48.6 56.8 70.6 81.7 89.7 66.1 82.0 100.7 102.8 102.3 113.5 132.4Trade balance (US$bn) 3.5 -0.2 -0.3 -4.3 -5.2 -4.3 0.3 3.7 2.3 -9.2 -10.9 -11.6 -12.4Trade balance (% of GDP) 2.1 -0.1 -0.1 -1.7 -1.8 -1.6 0.1 1.0 0.6 -2.4 -2.9 -2.8 -2.7Current account balance (US$bn) -1.7 -6.7 -8.6 -13.9 -20.0 -19.6 -11.6 -10.3 -13.6 -24.1 -24.9 -25.4 -26.3Current account balance (% of GDP) -1.0 -3.0 -3.5 -5.3 -7.0 -7.2 -4.0 -2.8 -3.4 -6.3 -6.6 -6.2 -5.8Net FDI (US$bn) 0.2 -0.6 5.7 -6.6 2.7 12.2 4.3 1.3 6.3 0.2 0.4 2.7 5.4Net FDI (% of GDP) 0.1 -0.3 2.3 -2.5 1.0 4.4 1.5 0.4 1.6 0.1 0.1 0.7 1.2Current account balance plus FDI (% of GDP) -0.9 -3.3 -1.2 -7.8 -6.0 -2.7 -2.5 -2.5 -1.8 -6.2 -6.5 -5.5 -4.6Foreign exchange reserves ex gold, (US$bn) 6.5 13.1 18.6 23.0 29.5 30.1 35.2 38.4 43.0 44.2 46.2 49.2 51.4Import cover (months of merchandise imports) 2.2 3.2 3.9 3.9 4.3 4.0 6.4 5.6 5.1 5.2 5.4 5.2 4.7
Debt indicators Gross external debt (US$bn) 37.1 43.3 46.2 58.4 75.3 71.8 78.6 104.4 113.1 136.0 153.6 169.7 180.7Gross external debt (% of GDP) 22 20 19 22 26 26 27 29 28 35 41 41 40Gross external debt (% of exports) 96 89 82 88 98 84 118 122 110 145 168 167 150Total debt service (US$bn) 3.0 3.0 5.0 7.2 4.9 6.0 4.4 6.2 6.5 6.5 6.5 6.5 6.5Total debt service (% of GDP) 1.8 1.4 2.0 2.8 1.7 2.2 1.5 1.7 1.6 1.7 1.7 1.6 1.4Total debt service (% of exports) 7.8 6.2 8.8 10.9 6.3 7.1 6.7 7.3 6.3 7.0 7.1 6.4 5.4
Interest & exchange rates Central bank key rate (%) year-end (repo rate) 8.00 7.50 7.00 9.00 11.00 11.50 7.00 5.50 5.50 5.00 5.00 4.00 4.00Broad money supply (avg, %YoY) 15.8 12.2 15.8 19.7 19.7 16.0 5.8 2.0 6.3 6.7 8.0 9.0 10.03-mth interest rate (Jibar, avg %) 8.4 7.2 7.2 7.2 10.3 7.3 8.2 6.5 5.6 5.4 5.1 4.4 4.33-mth interest rate spread over US$-Libor (ppt) 715 562 361 198 498 440 749 614 524 494 478 391 3592-year yield (avg %) 9.7 8.4 7.4 7.2 8.9 9.8 7.1 6.8 6.6 5.4 5.2 5.0 5.310-year yield (avg %) 9.6 9.6 8.1 8.0 8.1 9.1 8.7 8.4 8.2 7.4 7.1 7.2 7.5Exchange rate (USDZAR) year-end 6.68 5.64 6.31 6.99 6.84 9.44 7.39 6.60 8.07 8.45 9.10 8.85 9.00Exchange rate (USDZAR) annual average 7.52 6.41 6.35 6.75 7.03 8.25 8.38 7.30 7.25 8.20 9.08 9.05 9.04Exchange rate (EURZAR) year-end 8.40 7.65 7.47 9.22 9.98 13.20 10.58 8.83 10.44 11.15 10.92 11.06 11.25Exchange rate (EURZAR) annual average 8.52 7.98 7.90 8.48 9.63 12.13 11.68 9.68 10.09 10.54 11.56 11.03 11.30
Source: National sources, ING estimates
Turkey Directional EMEA Economics April 2013
94
Turkey Next elections: Local and Presidential 2014/Parliamentary 2015
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (% YoY) 1.4 3.2 4.4 5.0 5.3 4.5 5.0HH consumption (% YoY) -0.8 3.0 4.0 5.0 5.0 4.3 5.0Fixed investment (% YoY) -3.8 2.3 7.6 8.3 8.9 6.8 9.2CPI (% YoY)* 6.2 7.3 7.8 6.9 6.5 7.1 5.9Current account (% of GDP) -6.0 -6.1 -6.4 -6.4 -6.6 -6.6 -6.9FX res. import cover (mths) 5.6 5.4 5.5 5.3 5.2 5.4 5.3Policy interest rate (%)* 5.50 5.00 5.00 5.00 5.25 5.25 5.503-mth interest rate (%)* 5.79 6.30 5.53 5.55 5.60 5.63 5.752-year yield (%)* 6.16 6.35 5.74 5.84 6.30 5.93 6.5210-year yield (%)* 6.66 7.13 6.70 7.30 7.70 7.03 7.90USD/TRY* 1.78 1.81 1.80 1.84 1.90 1.82 1.90EUR/TRY* 2.35 2.32 2.30 2.30 2.28 2.32 2.32
Turkey’s 2012 soft landing, with 2.2% GDP growth, turned out to be faster than expected; yet, bringing along significantly needed external rebalancing, it was certainly supportive of sustainability. Last year, the C/A deficit fell from 9.7% to 6.0% relative to GDP, as the non-energy balance turned from a 3.6% deficit into a 0.7% surplus. The expected stabilisation in the C/A deficit at 6.5-7.0% of GDP as growth picks up towards a 5% potential rate this year will support Turkey’s rating outlook. We still expect an investment grade (IG) rating by 3Q13. Inflation and global liquidity will be the key drivers of volatility. We think all policy will be geared towards 4% GDP growth in 2013, while the CBT continues to keep interest rates low, watching out for REER and loan growth, and building up reserves.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates [email protected]
CBT bias cannot be easily defined as hawkish or dovish
Macro digest
TOOLS Hike Cut
ROC Works against CAPITAL INFLOWS / Absorb FX liquidity
Works against CAPITAL OUTFLOWS / Release FX Liquidity
O/N Borrowing Rate
Works against CAPITAL OUTFLOWS / depreciation
Works against CAPITAL INFLOWS / appreciation
O/N lending Rate
Works against falling risk appetite / Tightening bias abroad (CAPITAL OUTFLOWS)
Works against rising risk appetite / Easing bias abroad (CAPITAL INFLOWS)
1-week repo policy rate
Structural - Works against RISING medium term INFLATION RISKS AND/OR LT depreciation pressure on TRY
Structural - Works against FALLING medium term INFLATION RISKS AND/OR LT appreciation pressure on TRY
RRR Works against INFLOWS & LOAN GROWTH
Works against OUTFLOWS & RISING GROWTH RISKS
Source: CBT, ING Bank
2012: Seeking sustainability/2013: Higher growth
-20
0
20
40
60
80
-10
-5
0
5
10
15
Real GDP (4Q-avg, eop, YoY %)
Inflows to real economy (4Q-rolling, excl. reserve acc., USD bn, RHS)
Capital inflows (4Q-rolling, USD bn, RHS)
Source: CBT, Turkstat, ING Bank
Inflation hardly a demand problem as rates mirror ROW’s
0
2
4
6
8
10
12
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
34567891011
Real GDP (4Q-avg, eop, YoY %)CBT's Effective Cost of Funding (avg, %, RHS)Inflation CPI (eop, % YoY, RHS)
On the verge of an IG rating that will bring more challenges regarding capital flow management in Turkey, the CBT’s well-earned credibility and policy mix since end-2010 remain a significant safeguard against volatility. With the energy deficit being a structural problem, usually tackled via increasing the share of renewable energy, the 2013 priority seems more related to achieving accelerating growth towards the 4% target. This attempts “to keep rates low in the economy” while seeking “balanced growth”, as often stated by the CBT governor.
Turkey’s growth outlook, with its savings deficiency, is mainly driven bycapital inflows. The capital flow and 12-month rolling GDP growth chart shows this quite well. However, the most interesting observation last year, especially in 2H12, was that stronger capital inflows did not stop the soft landing as growth continued to lose pace. Hence, although last year’s growth figure turned out to be weaker than expected, it was policy-driven and mostly related to an automatic mechanism named Reserve Option Mechanism that the CBT has used since mid-2012 to boost official reserves as short-term inflows strengthen. In other words, it was not the CBT’s rate policy but rather its reserve policy that had the most significant effect on growth in 2H12 as “capital inflows directed to real economy” continued to decline. This trend materialised while the CBT, with a more medium-to-long-term sustainability perspective, prioritised reserve coverage of short-term debt (external debt due in the following 12 months), pulling it successfully from 76.7% in May 2012 to 93.7% as of January 2013. Looking at 2013, though, a more relaxed reserve approach might be necessary to stimulate growth early in the year and is likely to be a challenge for CBT policy, especially if capital inflows continue to weigh more on the short term.
Regarding price stability, which has rarely been a problem related to excess demand (not recently at least), continuing slack in the economy remains a key source of volatility this year. Food and regulated price volatility is often the source, but with the TRY targeted to remain stable in real terms, core inflation inertia of around 5.5% is also a threshold to pass. We revise our inflation forecasts up slightly to 6.5% in 2013 and 5.7% in 2014. However, in the current flexible inflation-targeting framework, the CBT is likely to allow local rates mirror the rest of the world’s (ROW), as long as capital inflows remain strong to safeguard 4% GDP growth. A 25bp-cut in the structural one-week repo policy rate remains highly likely, and other tools are to be micromanaged. After an unexpected 50bp cut in the 1W-repo rate and a similar shift in the rates corridor in April, we think policy rates will remain stable in 2Q13 while other tools are to be micromanaged.
Source: CBT, Turkstat, ING Bank [email protected]
Turkey Directional EMEA Economics April 2013
95
Activity: Monetary trend : Looser Fiscal trend : Neutral [email protected]
Unemployment vs NPLs
Unemployment rate on an uptrend recently
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
8%9%
10%11%12%13%14%15%16%
Unemployment rate (sa, LHS) NPLs (RHS)
Due to the slowing growth performance and a rising labour force participation rate of 50.9%, in seasonally adjusted (SA) terms – an all-time high – the unemployment rate (SA), which dipped to 8.9% in mid-2012, the lowest figure since 2005, adopted an uptrend thereafter and reached 9.5% at end-2012, improving only slightly in Jan-13. It should decline gradually with the rebound in activity this year. Meanwhile, after bottoming out at 2.6% in 2011, the NPL ratio deteriorated slightly to 2.8% in 2012 and to 2.9% in March 2013, consistent with weak momentum. Almost half of the 2013 NPL rise so far came from consumer loans and CCs, but with no sign of immediate threats, hinting that NPLs have been manageable through recent economic cycles, the ratio is expected to weaken only moderately in 2013.
Source: Turkstat, BRSA, ING Bank [email protected]
C/A vs FDI (12m rolling - USDbn)
12M rolling C/A deficit set to rise
-20
0
20
40
60
80
100
Feb 0
8
Aug 0
8
Mar
09
Oct 09
Apr 1
0
Nov 1
0
Jun
11
Dec 1
1
Jul 1
2
Feb 1
3
Current account deficit Net FDI
Net Portfolio Investments
February C/A print signalled the end in the deficit’s shrinking trend that started in November 2011, reaching US$48.4bn in annual terms. The non-energy C/A surplus also ceased its recovery, dropping from a level close to May 2010 high. Both were attributable to a gradual pick-up in activity. Albeit still slow, the recent expansion in the trade deficit suggests that an inflection point has just been passed, with the 12m-rolling deficit re-widening on the back of improving domestic demand. On the financing side, short-term inflows dominated, fuelled in particular by rating upgrade prospects – but higher volatility has emerged recently on rising global uncertainty and CBT’s “defensive” strategy vs hot money. Overall, FX inflows have exceeded the C/A gap since last April, feeding into FX reserves.
Source: CBT, ING Bank [email protected]
Budget performance relative to GDP (%)
On track, but primary spending accelerates
-12-10-8-6-4-20246
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Budget Balance Primary Balance
ING f'cast
The fiscal balance improvement that started in 4Q12 continued in 1Q13, on the back of a pick-up in tax revenues, along with arecovery in domestic demand and measures taken last year, as well as a substantial drop in the Treasury’s average cost of borrowing. This was despite accelerating non-interest expenditure (especially due to current transfers that constitute close to 50% of total primary spending). In the breakdown, revenue expansion seems healthy, offering a better revenue generation outlook for 2013, and a fall in interest expenditure continues to support year-end targets. Given comments from officials that expenditure will be curbed in the coming period, our deficit-to-GDP forecast of 2% still seems attainable.
Source: Ministry of Finance, ING Bank [email protected]
On the verge of an investment grade
Another upgrade expected in 2013
Moody's Standard & Poor's Fitch Ratings
A2 Poland, Slovakia A Slovakia A Israel
A3 Malaysia A- Poland, Malaysia A- Poland, Malaysia
Baa1 Russia, Thailand, Bahrain, Mexico, S.Africa
BBB+ Thailand, Kazakhstan BBB+ Kazakhstan, Thailand
Baa2 Kazakhstan, Brazil, Bulgaria
BBB Bulgaria, Russia, Bahrain, Mexico, Brazil, S.Africa, Latvia
BBB Brazil, Russia, Bahrain, Mexico, Spain, Latvia, S.Africa
Baa3 Romania, India, Latvia, Indonesia, Azerbaijan, Spain
BBB- India, Azerbaijan, Spain
BBB- TURKEY, Bulgaria, India, Azerbaijan, Romania, Indonesia
1 notch to IG 1 notch to IG At the IG
Ba1 TURKEY, Hungary, Philippines
BB+ TURKEY (TL rating upgraded to BBB),Romania, Indonesia, Philippines
BB+ Philippines, Hungary, Portugal
Ba2 Jordan BB Portugal, Hungary BB El Salvador
Ba3 Bangladesh, Portugal, Nigeria
BB- Bangladesh, Nigeria BB- Nigeria, Serbia
S&P upgraded Turkey’s sovereign rating to BB+ (one notch below anIG) and the LT local currency to BBB, with a stable outlook, driven by the rebalancing in the economy, with a strong fiscal performance and political developments on the Kurdish issue. Given the adjustment trend in the external balance, as well as continuing structural reform drive, IG by Basel standards (getting a minimum two sovereign IG ratings) in 2013, in the absence of a global turmoil, looks highly likely. On the political side, efforts on the Kurdish issue catch attention as a credit positive (eg, Moody’s commented that the “prospect of peace promises to boost investor confidence”, supporting regional trade/FDI/development, but constitutional overhaul and unrest in neighbouring countries remain risk factors.)
Source: ING Bank [email protected]#
Turkey Directional EMEA Economics April 2013
96
Turkey FX/MONEY MARKETS/DEBT STRATEGY LC Ratings (M/S&P/F): Ba1/BBB/BBB
FX – spot vs forward and INGF
FX/Money market strategy
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14
ING f'cast Mkt fwd
Source: Thomson Reuters, ING Bank
FX reserves at all-time highs
The CBT, still committed to supporting balanced growth by closely watching REER and lending expansion, certainly looked more worried about capital outflows at March MPC. But, in April, the bank switched back to a macro-prudential stance against capital inflows by cutting policy rate(s) by 50bp and adjusting further ROCs. Looking ahead in 2Q13, we believe this CBT will remain mostly focused on to capital inflows dynamics, particularly if markets volatility re-appears.
But the latest swift rate cut action by CBT was also indicative of concerns over downside risks to export growth, with softening commodity prices potentially dampening MENA imports. This suggests the CBT will remain alert to the real value of the TRY in the months ahead. Finally, with regards to lending expansion, the CBT believes sterilising excess inflows (via ROM) will cap loan growth. In other words: it will not allow domestic demand to recover too quickly – so as to mitigate the impact of weakening exports on the external balance. Overall, we expect the TRY to remain in a 2.05-2.07 channel against a 50:50 EUR:USD basket until 4Q13, given the CBT’s policy guidelines to reduce volatility in general. However, with higher inflation forecast and the CBT’s REER targeting, we revise our 50:50 EUR:USD FX basket call for end-2013 to 2.09.
Trade recommendation
Entry date Entry level Exit level S/L
57
67
77
87
97
107
Aug 1
0
Oct 10
Dec 1
0
Feb 1
1
Apr 1
1
Jun
11
Aug 1
1
Oct 11
Dec 1
1
Feb 1
2
Apr 1
2
Jun
12
Aug 1
2
Oct 12
Dec 1
2
Feb 1
3
Apr 1
3
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
CBT Official Reserves (US$ bn)50:50 EUR:USD Basket - RHS
- - - -
Source: Thomson Reuters, CBT, ING Bank
Local curve (%)
Debt strategy
5.0
5.5
6.0
6.5
7.0
3m 6m 2Y 10Y
Now -3 Months +3 Months
Source: Thomson Reuters, CBT, ING Bank
Bond yields to converge to sustainable levels
The yield curve shifted upwards in March, but followed an entirely opposite pattern in April. The CBT Governor’s verbal intervention hinting at measured policy rate cuts if the REER exceeded the 120 threshold (exactly at this level in March), the consequent 50bp cut in all policy rates in April MPC, S&P’s recent upgrade and hopes for another by Moody’s, all created a strong risk appetite for TRY assets early 2Q13, paving the way for a broad-based downward shift in the local curve.
Not surprisingly, with steady inflation expectations, the CBT’s easing bias created a sharper reaction at the front-end of the curve. However, 2Y benchmark yields down from the 6.3-6.4% range at end-March to the c.5.50% level currently are overreacting to the CBT’s stance in our view: core inflation should cap the CBT rate cut window in the medium term. Accordingly, we believe if local yields could hold to below 6% in 2Q13, they should gradually return on an upward path in 2H13.
Trade recommendation
Entry date Entry level Exit level S/L
5
6
7
8
9
10
11
Jan
12
Mar
12
Apr 1
2
Jun
12
Jul 1
2
Sep 1
2
Oct 12
Nov 1
2
Jan
13
Feb 1
3
Apr 1
3
2Y benchmark (% cmp, bid close)10Y benchmark (% cmp, bid close)
- - - -
Source: Thomson Reuters, ING Bank
#
Turkey Directional EMEA Economics April 2013
97
Turkey
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 5.3 9.4 8.4 6.9 4.7 0.7 -4.8 9.2 8.8 2.2 4.5 5.0 5.0Private consumption (%YoY) 10.2 11.0 7.9 4.6 5.5 -0.3 -2.3 6.7 7.7 -0.7 4.3 5.0 5.0Government consumption (%YoY) -2.6 6.0 2.5 8.4 6.5 1.7 7.8 2.0 4.7 5.7 4.0 4.5 4.5Investment (%YoY) 14.2 28.4 17.4 13.3 3.1 -6.2 -19.0 30.5 18.0 -2.5 6.8 9.2 9.2Industrial production (%YoY) 8.8 9.7 5.4 7.7 6.9 -0.9 -10.4 12.4 9.7 2.5 4.4 5.3 5.5Unemployment rate year-end (%) 10.5 10.8 10.6 10.2 10.3 11.0 14.0 11.9 9.8 9.2 8.9 8.6 8.6Nominal GDP (TRYbn) 455 559 649 758 843 951 953 1,099 1,297 1,417 1,585 1,763 1,950Nominal GDP (€bn) 270 316 389 421 474 501 442 552 558 615 685 773 825Nominal GDP (US$bn) 305 390 481 526 649 742 617 732 774 786 871 928 1069GDP per capita (US$) 4,559 5,764 7,022 7,586 9,240 10,438 8,559 10,022 10,466 10,504 11,491 12,098 13,549Gross domestic saving (% of GDP) 15.1 15.7 15.4 15.9 15.1 16.3 13.0 13.7 12.1 14.8 14.7 15.2 16.0Lending to corporates/households (% of GDP) 14.6 17.8 24.1 28.9 33.9 38.7 41.2 47.9 52.7 56.1 58.0 60.0 62.0
Prices CPI (average %YoY) 25.3 10.6 8.2 9.6 8.8 10.4 6.3 8.6 6.5 8.9 7.1 5.9 5.3CPI (end-year %YoY) 18.4 9.3 7.7 9.7 8.4 10.1 6.5 6.4 10.4 6.2 6.5 5.7 5.3PPI (average %YoY) 25.6 11.1 5.9 9.3 6.3 12.7 1.2 8.5 11.1 6.1 4.0 4.6 4.6Wage rates (%YoY, nominal) 22.9 13.4 12.2 11.5 9.5 7.7 -1.9 15.8 14.9 9.0 7.0 6.0 6.0
Fiscal balance (% of GDP) Consolidated government balance -8.8 -5.2 -1.1 -0.6 -1.6 -1.8 -5.5 -3.6 -1.4 -2.0 -2.0 -2.1 -2.1Consolidated primary balance 4.0 4.9 6.0 5.4 4.1 3.5 0.1 0.8 1.9 1.4 1.8 1.8 1.8Total public debt 67.7 59.6 52.7 46.5 39.9 40.0 46.1 42.3 39.2 36.1 35.5 34.2 33.2
External balance Exports (US$bn) 52.4 68.5 78.4 93.6 115.4 140.8 109.6 120.9 143.4 163.3 168.5 181.3 203.8Imports (US$bn) 65.9 91.3 111.4 134.7 162.2 193.8 134.5 177.3 232.5 228.9 243.6 263.1 294.7Trade balance (US$bn) -13.5 -22.7 -33.1 -41.1 -46.9 -53.0 -24.9 -56.4 -89.1 -65.6 -75.1 -81.8 -90.8Trade balance (% of GDP) -4.4 -5.8 -6.9 -7.8 -7.2 -7.1 -4.0 -7.7 -11.5 -8.3 -8.6 -8.8 -8.5Current account balance (US$bn) -7.6 -14.2 -21.4 -31.8 -37.8 -40.4 -12.2 -45.4 -75.1 -46.9 -57.3 -63.9 -73.4Current account balance (% of GDP) -2.5 -3.6 -4.5 -6.0 -5.8 -5.4 -2.0 -6.2 -9.7 -6.0 -6.6 -6.9 -6.9Net FDI (US$bn) 1.2 2.0 9.0 19.3 19.9 17.2 7.1 7.6 13.7 8.3 12.0 15.0 15.0Net FDI (% of GDP) 0.4 0.5 1.9 3.7 3.1 2.3 1.2 1.0 1.8 1.1 1.4 1.6 1.4Current account balance plus FDI (% of GDP) -2.1 -3.1 -2.6 -2.4 -2.7 -3.1 -0.8 -5.2 -7.9 -4.9 -5.2 -5.3 -5.5Foreignexchange reserves ex gold, (US$bn) 33.6 36.0 50.5 60.9 73.3 71.0 70.7 80.7 78.5 100.2 105.0 118.0 130.0Import cover (months of merchandise imports) 6.1 4.7 5.4 5.4 5.4 4.4 6.3 5.5 4.0 5.3 5.2 5.2 5.3
Debt indicators Gross external debt (US$bn) 144.1 161.0 170.5 208.3 250.3 281.0 269.2 291.9 304.2 336.9 381.6 405.0 449.2Gross external debt (% of GDP) 47 41 35 40 39 38 44 40 39 43 44 44 42Gross external debt (% of exports) 275 235 218 223 217 200 246 241 212 206 227 223 220Total debt service (US$bn) 27.8 30.5 36.8 40.1 48.7 53.8 58.9 55.8 50.7 52.3 71.0 75.3 81.1Total debt service (% of GDP) 9.1 7.8 7.6 7.6 7.5 7.3 9.6 7.6 6.5 6.6 8.2 8.1 7.6Total debt service (% of exports) 53.1 44.5 47.0 42.8 42.2 38.2 53.7 46.2 35.3 32.0 42.1 41.5 39.8
Interest & exchange rates Central bank key rate (%) year-end (1W repo) 26.00 18.00 13.50 17.50 15.75 15.00 6.50 6.50 5.75 5.50 5.25 5.50 5.50Broad money supply (avg, %YoY) 32.2 35.1 40.1 23.4 15.4 27.5 12.9 19.0 11.5 10.3 13.0 12.9 12.33-mth interest rate (TRLibor, avg%) 37.7 22.7 15.1 16.6 17.3 17.6 10.2 7.4 8.5 8.7 5.6 5.7 5.73-mth interest rate spread over US$-Libor (ppt) 3,650 2,105 1,149 1,143 1,197 1,465 951 705 821 825 531 522 5032-year yield (avg %) n/a n/a n/a n/a 18.7 19.3 11.4 8.4 9.1 8.1 5.9 6.5 6.510-year yield (avg %) n/a n/a n/a n/a n/a n/a n/a 9.8 9.6 8.5 7.0 7.9 8.0Exchange rate (USDTRY) year-end 1.40 1.34 1.34 1.41 1.16 1.51 1.51 1.55 1.91 1.78 1.90 1.90 1.85Exchange rate (USDTRY) annual average 1.49 1.42 1.34 1.43 1.30 1.29 1.55 1.50 1.67 1.79 1.82 1.90 1.85Exchange rate (EURTRY) year-end 1.75 1.83 1.59 1.86 1.71 2.14 2.16 2.05 2.46 2.35 2.28 2.28 2.43Exchange rate (EURTRY) annual average 1.69 1.77 1.67 1.80 1.78 1.90 2.15 1.99 2.32 2.30 2.31 2.28 2.36
Source: National sources, ING estimates
Ukraine Directional EMEA Economics April 2013
98
Ukraine [email protected]
Forecast summary
Country strategy
4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2013F 2014F
Real GDP (%YoY) -2.5 -1.1 -2.0 3.6 6.0 1.6 3.0HH consumption (%YoY) 6.9 7.0 -0.5 0.5 4.0 2.8 5.0Fixed investment (%YoY) -7.5 -10.0 -13.5 8.0 6.3 -2.3 4.8CPI (%YoY)* -0.2 -0.8 -0.3 2.5 6.7 3.4 6.8Current account (% of GDP) -10.3 n/a n/a n/a n/a -7.7 -7.0FX res. import cover (mths) 3.0 2.8 2.5 2.3 2.2 2.2 2.2Policy interest rate (%)* 7.50 7.50 7.50 7.50 7.50 7.50 7.003-mth interest rate (%)* 24.75 10.25 10.88 12.85 11.39 12.21 12.003-year yield (%)* n/a n/a n/a n/a n/a n/a n/a8-year yield (%)* n/a n/a n/a n/a n/a n/a n/aUSDUAH* 8.04 8.12 8.80 9.00 9.30 8.67 9.55EURUAH* 10.61 10.56 11.26 11.25 11.16 11.03 11.64
We resume covering the Ukraine macro with a 1.6% YoY GDP call for 2013 (vs 0.2% in 2012), yet 1H13 will likely remain recessionary. UAH devaluation pressure has slightly abated thanks to a calmer political scene post 4Q12 elections, appetite for Ukrainian risk (both sovereign and corporate) and further hopes of an IMF deal. The mission completed the next round of talks early April, flagging ‘good progress’. Though tail-risks of the deal not going through still exist, our base case scenario is for the deal to happen in late 2Q13-early 3Q13. Indeed, the call for the deal is still loud, what with the remaining BoP risks, FX reserves at 3-4 months of imports, and limited chance of lower gas price from Russia as it would be too costly for EU-Ukraine relations. In all cases, the IMF would require a weaker UAH for its money.
*Quarterly data is eop, annual is avg. Source: National sources, ING estimates
GDP and key economic indicators (YoY)
Only sluggish growth ahead after a recessionary pace
-40%-30%-20%-10%
0%10%20%30%40%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
GDP Retail sales IP
Real wage Headline CPI
The technical recession in 3Q-4Q12 was an outlier in the EM universe. Despite solid consumption, destocking and a negative pass-through of faltering export demand weighed on GDP. The latter will likely continue in 1H13 with a better trend appearing later in 2013 and on. One factor to count on is better agricultural output this year, which took 1.3/0.3ppt off GDP in 3Q12/4Q12. The domestic story is likely to also show weaker momentum with moderating wages, higher CPI, shrinking lending and expected gradual FX devaluation. The planned two-year US$45-47bn public development programme might meet funding challenges at this stage. We see investments declining 2.3% in 2013. Fortunately, weaker UAH will eventually translate into better investment opportunities, which we see from 2014 onwards.
Source: Ukrstat
Current account vs FDI/portfolio investments (US$bn)
External imbalances remain…
-20-15-10-505
1015
1Q072Q
073Q
074Q
071Q
082Q
083Q
084Q
081Q
092Q
093Q
094Q
091Q
102Q
103Q
104Q
101Q
112Q
113Q
114Q
111Q
122Q
123Q
124Q
12
Current account (4Q-rolling)
Net FDI (4Q-rolling)
Net portfolio investment (4Q-rolling)
After swelling to 8.4%/GDP in 2012, the C/A deficit showed marginally improving dynamics in Jan/Feb-13 on the back of more resilient total exports (-0.6% YoY owing to still-expanding agricultural and chemicaldeliveries) and contracting imports in goods and services (-5% YoY). Metals & mining related exports saw a 12% YoY decline and a still-challenging outlook for global metals prices/demand will keep the items in a depressed mode. Despite weaker FDI, the financial account reached US$2.5bn in 1Q13 -well above the US$1.5bn from 4Q12 –thanks to external debt rollover for banks/non-financials and a US$1bn sovereign debt issue. Yet, even though 2013 may see a slightly lower C/A gap, the F/A will remain a hostage of the US$60bn payback in foreign debt, including US$7.6bn for the government and NBU.
Source: NBU
USDUAH – spot vs market forwards
…so the unknown is only the scale of UAH devaluation
BoP-related risks, together with a challenging fiscal outlook, means that the UAH needs to pursue its efforts to find external financing, so as to avoid a scenario of abrupt devaluation. As the IMF will likely promote a gradual UAH adjustment, our best guess is for a gradual c.15% annually (to start with) once the deal is sealed.
Trade recommendation
Entry date Entry level Exit level S/L
7.70
8.20
8.70
9.20
9.70
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14
ING f'cast Mkt fwd
- - - -
Source: Bloomberg
Ukraine Directional EMEA Economics April 2013
99
Ukraine
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Activity Real GDP (%YoY) 9.5 12.1 3.0 7.4 7.6 2.3 -14.8 4.1 5.2 0.2 1.6 3.0 4.0Private consumption (%YoY) 11.2 13.0 20.1 15.9 17.2 13.1 -14.9 7.1 15.7 11.7 2.8 5.0 4.7Government consumption (%YoY) 6.9 1.7 2.3 4.0 1.8 1.1 -2.4 4.0 -3.0 2.2 -1.5 1.0 1.5Investment (%YoY) 22.3 20.4 3.9 20.9 24.4 -1.2 -40.0 3.9 7.1 0.9 -2.3 4.8 5.4Industrial production (%YoY) 15.8 12.5 3.1 6.2 7.6 -5.2 -21.9 11.2 7.6 -1.8 2.7 2.5 3.6Unemployment rate year-end (%) 9.1 8.6 7.2 6.8 6.4 6.4 8.8 8.1 7.9 8.1 7.9 7.6 7.5Nominal GDP (UAHbn) 267 345 441 544 721 948 913 1,083 1,302 1,409 1,517 1,664 1,835Nominal GDP (€bn) 44 52 69 86 104 122 82 103 117 136 138 143 146Nominal GDP (US$bn) 50 65 86 108 143 180 115 136 163 175 175 174 183GDP per capita (US$) 1,053 1,372 1,836 2,310 3,078 3,901 2,500 2,980 3,571 3,843 3,860 3,857 4,054Gross domestic saving (% of GDP) 24.6 28.8 23.5 21.9 22.5 20.0 15.4 15.6 14.5 9.9 12.0 12.3 13.0Lending to corporates/households (% of GDP) 25.4 25.3 32.2 45.1 59.6 77.4 78.4 65.6 59.7 56.3 55.0 55.4 56.7
Prices CPI (average %YoY) 5.2 9.0 13.6 9.1 12.8 25.3 16.0 9.4 8.0 0.6 3.4 6.8 6.0CPI (end-year %YoY) 8.2 12.3 10.3 11.6 16.6 22.3 12.3 9.1 4.6 -0.2 7.0 6.5 5.5PPI (average %YoY) 7.7 20.3 17.0 9.7 20.3 35.5 7.2 20.9 19.0 3.7 2.7 5.0 7.0Wage rates (%YoY, nominal) 22.8 27.5 36.7 29.2 29.7 33.7 5.5 20.0 17.6 14.9 8.3 11.2 10.5
Fiscal balance (% of GDP) Consolidated government balance -0.2 -3.2 -1.8 -0.7 -1.1 -1.5 -4.1 -6.0 -1.8 -4.0 -3.2 -2.6 -2.5Consolidated primary balance n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aTotal public debt 29.0 24.4 18.2 13.2 11.2 18.3 32.4 38.2 35.7 36.6 41.5 40.5 41.0
External balance Exports (US$bn) 23.1 32.7 34.3 38.4 49.2 67.7 40.4 52.2 69.4 69.8 72.0 76.5 85.0Imports (US$bn) 23.0 29.0 36.1 45.0 60.7 83.8 44.7 60.6 85.7 90.2 91.5 96.2 106.0Trade balance (US$bn) 0.1 3.7 -1.9 -6.7 -11.4 -16.1 -4.3 -8.4 -16.3 -20.4 -19.5 -19.7 -21.0Trade balance (% of GDP) 0.1 5.7 -2.2 -6.2 -8.0 -8.9 -3.7 -6.2 -10.0 -11.7 -11.1 -11.3 -11.5Current account balance (US$bn) 2.9 6.9 2.5 -1.6 -5.3 -12.8 -1.7 -3.0 -10.2 -14.4 -13.5 -12.2 -10.5Current account balance (% of GDP) 5.8 10.6 2.9 -1.5 -3.7 -7.1 -1.5 -2.2 -6.3 -8.4 -7.7 -7.0 -5.8Net FDI (US$bn) 1.4 1.7 7.5 5.7 9.2 10.0 4.6 5.8 7.0 6.6 8.0 8.2 8.5Net FDI (% of GDP) 2.8 2.6 8.7 5.3 6.5 5.6 4.0 4.2 4.3 3.8 4.6 4.7 4.7Current account balance plus FDI (% of GDP) 8.6 13.3 11.7 3.8 2.8 -1.5 2.5 2.0 -2.0 -4.5 -3.1 -2.3 -1.1Foreign exchange reserves ex gold, (US$bn) 6.9 9.3 19.1 21.8 32.0 30.8 25.6 33.5 30.4 22.7 17.0 17.5 18.0Import cover (months of merchandise imports) 3.6 3.8 6.3 5.8 6.3 4.4 6.9 6.6 4.3 3.0 2.2 2.2 2.0
Debt indicators Gross external debt (US$bn) 23.8 30.6 39.6 54.5 80.0 101.7 103.4 117.3 126.0 132.0 138.0 145.0 155.0Gross external debt (% of GDP) 47 47 46 51 56 56 90 86 77 76 79 83 85Gross external debt (% of exports) 103 94 116 142 162 150 256 225 182 189 192 190 182Total debt service (US$bn) 2.8 3.0 3.2 3.5 4.8 9.3 24.5 29.3 32.2 34.9 60.9 n/a n/aTotal debt service (% of GDP) 5.5 4.5 3.7 3.2 3.4 5.2 21.3 21.5 19.8 20.0 34.8 n/a n/aTotal debt service (% of exports) 11.9 9.0 9.3 9.1 9.7 13.7 60.6 56.1 46.4 50.0 84.6 n/a n/a
Interest & exchange rates Central bank key rate (%) year-end 7.00 9.00 9.50 8.50 8.00 12.00 10.25 7.75 7.75 7.50 7.50 7.00 7.00Broad money supply (avg, %YoY) 46.5 32.4 54.8 34.5 51.7 29.9 -5.5 23.1 14.2 13.1 10.5 13.0 14.03-mth interest rate (KievPrime, avg %) 15.5 17.6 13.4 13.4 9.8 18.1 21.7 10.2 11.6 20.4 12.2 12.0 12.03-mth interest rate spread over US$-Libor (ppt) 1,427 1,599 988 823 452 1,520 2,099 987 1,121 1,998 1,189 1,148 1,1293-year yield (avg %) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a8-year yield (avg %) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aExchange rate (USDUAH) year-end 5.33 5.31 5.05 5.05 5.05 7.70 7.99 7.96 8.03 8.04 9.30 9.80 10.30Exchange rate (USDUAH) annual average 5.33 5.32 5.12 5.05 5.05 5.27 7.95 7.94 7.99 8.06 8.67 9.55 10.05Exchange rate (EURUAH) year-end 6.71 7.19 5.98 6.66 7.37 10.76 11.43 10.65 10.39 10.61 11.16 12.25 12.88Exchange rate (EURUAH) annual average 6.04 6.62 6.38 6.35 6.92 7.75 11.09 10.53 11.12 10.36 11.03 11.64 12.56
Source: National sources, ING estimates
Directional EMEA Economics April 2013
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Research analyst contacts
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Directional EMEA Economics April 2013
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FINANCIAL MARKETS RESEARCH
April 2013
EMEA Economics and Strategy TeamSee details at end of report
Directional EMEA EconomicsWho to tango with?
Bulgaria
Croatia
Czech Republic
Hungary
Israel
Kazakhstan
Poland
Romania
Russia
Serbia
South Africa
Turkey
Ukraine
1
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