CEE:Holding its own against some gusty headwinds Hugo Neuhold, Head of Money Markets & Repos, Unicredit Bank Austria
Summary n 2011 should show growth across the board n 2011 Inflation targets are at risk, though core inflation is contained n Commodities pose a dilemma for central banks n But risk of second round effect is much more limited than in 2008 n External accounts: A global comparison – a significant improvement already occurred n Improving fiscal backdrop – but more work to do in some countries n CEE: capital started flowing back to the region but mostly in the form of portfolio inflows 2
CEE: 2011 should show growth across the board (1) 2011 is the first year in 4 when all 17 countries in our coverage are expected to show positive growth Positive GDP gains for every country this year (%) CEE holds its own once again (real GDP, % YoY) Ukraine Turkey Serbia Advanced economies CEE 14 CIS Developing Asia Russia 12 LATAM/Caribbean Middle East/North Africa Kazakhstan 10 Sub-Saharan Africa Croatia 8 2009 2010 2011 Bos. & Herz. 6 Slovenia 4 Slovakia 2 Romania 0 Poland -2 Lithuania -4 Latvia -6 Hungary -8 Estonia 2007 2008 2009 2010 2011 2012 Czech Bulgaria -20 -15 -10 -5 0 5 10 Source: IMF, UniCredit Research 3
CEE: 2011 should show growth across the board (2) Manufacturing in the region is doing well, supported by strong external demand PMIs point to strong Q1, following up on decent Q4-10 Reflecting a high degree of trade integration, industrial production moves in CE4 moves in line with Germany and EMU 56 2.0 % YoY 20 1.0 15 51 10 0.0 5 46 -1.0 0 CEE manufacturing PMI -5 -2.0 EMU CEE GDP (rhs, % QoQ SA) -10 41 Germany -15 -3.0 CE4 -20 -25 36 -4.0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat, National statistical agencies, UniCredit Research 4
CEE: 2011 should show growth across the board (2) Technicals for GDP more positive this year Most countries enjoy positive carryover into 2011, even if Q4 shows no Some easy gains in GDP still ahead in Russia and Hungary further gains 2.0 pp 6.0 1.0 5.0 0.0 4.0 2009 into 2010 -1.0 3.0 2010 in 2011 -2.0 2.0 -3.0 1.0 -4.0 Contributi on from 0.0 -5.0 inventories to GDP since -1.0 peak in GDP (pp) -6.0 -2.0 -7.0 -3.0 -8.0 -4.0 Czech Estonia Hungary Latvia Poland Slovakia Turkey Croatia Lithuania Russia Slovenia Russia Bulgaria Croatia Czech Estonia Latvia Lithuania Poland Romania Serbia Slovenia Turkey Ukraine Hungary Slovakia Source: National statistical agencies, UniCredit Research 5
CEE: Inflation targets are at risk, though core inflation is contained Higher oil and food prices mean that inflation targets for many central banks in the region currently are out of reach. At this stage Czech Republic and Turkey are the only countries in the region to post inflation below target. 6
CEE: commodities pose a dilemma for central banks For many central banks food and energy inflation soak up all of their inflation allowance, leaving no room for inflation elsewhere 7
CEE: Growth vs. inflation risks = risk of spike is more limited EM output gap versus inflation 4.0 10.0 9.0 3.0 8.0 7.0 2.0 6.0 1.0 5.0 4.0 0.0 3.0 Output gap (LHS) 2.0 Inflation (RHS) -1.0 1.0 -2.0 0.0 2000 2002 2004 2006 2008 2010 2012 Source: IMF, UniCredit Research 8
CEE external accounts: A global comparison (1) CEE does not stack up well relative to the rest of the world, though they have adjusted significantly C/A balances in the EM world C/A balances have adjusted significantly CE3 Balkans % of GDP % of GDP 10 10 10 CIS Turkey 8 Baltics 5 5 6 4 0 0 2 -5 -5 0 -2 -10 -10 -4 2006 2007 2008 -6 -15 -15 -8 2009 2010 2011 -20 -20 -10 2007 2008 2009 2010 CEE CIS Developing Asia Latam Source: IMF, national central banks, UniCredit Research 9
CEE external accounts: A global comparison (2) Total external debt service % of GDP 30 25 2006 2007 2008 With higher external debt comes higher external debt 20 2009 2010 2011 service costs which has the potential to weigh on 15 currencies. 10 5 0 CEE CIS Developing Asia Latam Total external debt service - interest Total external debt service - amortisation % of GDP 2.5 % of GDP 25.0 2006 2007 2008 2009 2006 2007 2008 2009 2 2010 2011 20.0 2010 2011 1.5 15.0 1 10.0 0.5 5.0 0 0.0 CEE CIS Developing Asia Latam CEE CIS Developing Asia Latam Source: IMF, UniCredit Research 10
CEE: Improving fiscal backdrop (1) Budget deficits in the region continue to consolidate but on the whole remain wider than in other emerging market regions and pre-crisis ratios. From an average budget deficit of 7% of GDP in 2009, this year budget deficits in the region should average 5.4% of GDP before narrowing to 4.7% of GDP next year. Public debt will continue to rise but remains broadly in line with other emerging market regions globally. More work to be done on budget deficits in CEE than elsewhere Public debt to GDP has caught up with other EM regions % of GDP % of GDP 2 45 2007 2010 2011 40 1 35 0 30 -1 25 -2 20 -3 2007 15 -4 2010 10 -5 2011 5 -6 0 CEE LATAM EM Asia CEE LATAM EM Asia Source: IMF, UniCredit Research 11
CEE: Improving fiscal backdrop (2) Adjustment in primary balance required to stabilise public debt to GDP at 2010 ratios n In Romania, Serbia and Latvia the IMF continues to pp of GDP 7 6 impose discipline. Hungary’s commitment to its 5 deficit target is questionable but seems to have 4 improved of late. 3 2 n Amongst the larger countries, Turkey outperforms 1 while Poland continues to disappoint. 0 -1 -2 RSD KZH PLN TRY HUF EEK UAH BGN BOS SKK SIT CZK EMU RUB HRK LVL RON LTL Deterioration in Poland is a concern (monthly budget deficit performance) CEE shapes up much better than elsewhere PLNbn % of GDP 10.0 140 120 0.0 100 -10.0 80 -20.0 60 40 2007 -30.0 2008 20 2009 -40.0 0 2010 BGN RON UAH RSD EMU RUB KZT SIT BOS LIT HRK CZK SKK LVL TRY PLN Spain HUF Portugal Ireland Greece -50.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Eurostat, UniCredit Research 12
CEE: Improving fiscal backdrop (3) While deficits are headed in the right direction, there is still plenty of work to do. Eurostat estimates structural budget deficits next year in excess of the EMU periphery average (5.9% of GDP) in Poland, Latvia and Lithuania. Watch out for excessive deficit procedure Structural budget balances in the new EU countries 2004 2005 2006 2007 2008 2009 2010 2007 Structural 4 Bulgaria 1.6 1.9 3 0.1 1.8 -3.9 -4.5 BGN towards budget balance (% of GDP) surplus Czech -3 -3.6 -2.6 -0.7 -2.7 -5.9 -5.3 2 Spain Germany Estonia 1.6 1.6 2.5 2.6 -2.7 -1.7 -1.3 0 Ireland Hungary -6.4 7.9 -9.3 -5 -3.8 -4 -3.8 SIT PLN -2 -1 -0.4 -0.5 -0.3 -4.1 -9 -8.6 LIT SKK EEK Latvia CZK -4 Lithuania -1.5 -0.5 -0.4 -1 -3.3 -8.9 -8.1 Portugal LVL RON HUF Poland -5.4 -4.1 -3.6 -1.9 -3.7 -7.1 -7.9 -6 towards 2011 Structural Romania -1.2 -1.2 -2.2 -2.5 -5.4 -8.3 -6.8 deficit -8 budget balance (% Greece Slovakia -2.4 -2.8 -3.5 -1.9 -2.3 -6.8 -7.8 of GDP) -10 -2.2 -1.4 -1.3 0 -1.7 -5.5 -6 Slovenia -10 -8 -6 -4 -2 0 2 4 Source: Eurostat, UniCredit Research 13
CEE: Capital inflows are largely portfolio in nature (1) Emerging market equities market capitalisation & investor allocations CEE, as with the rest of EM, is benefitting from 18 a return of capital inflows, though there is 16 Share of emerging market strong differentiation across the region. Unlike equities in total U.S. 14 holdings (%) in LATAM and Asia, most central banks in the Share of emerging market 12 region have taken little if any action to limit equities in world market 10 capitalization (%) these inflows. The CBT is the exception. 8 6 4 2 0 2004 2009 Portfolio Flows to Emerging Markets and Developing Countries (USDbn) USDbn 600 Potential portfolio flows resutling from 1% reallocation of global 500 equity and debt security holdings 400 300 200 100 0 -100 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: IMF, UniCredit Research 14
CEE: Capital inflows are largely portfolio in nature (2) Portfolio flows dominate inflows E&O EURbn 250 Other invest non-govt Other invest govt Over Q1-Q3 10 CEE saw capital inflows of 200 Portfolio EUR67.2bn, compared with inflows of only FDI 150 Capital A/C EUR14.8bn for the entirety of 2009. Total 100 50 0 Of concern is the make up of capital inflows. -50 Over Q1-Q3 2010 the region saw portfolio -100 inflows of EUR46.7bn – higher than any full 2004 2005 2006 2007 2008 2009 Q1-Q3 year performance on record. Inflows into the '10 capital account also accelerated, reflecting EU payments. Meanwhile FDI remains well below pre-crisis levels while there is little sign that FDI to the region has not shown signs of recovery yet foreign banks have begun to invest in the EURbn region once again. 35.0 30.0 CEE 25.0 20.0 15.0 10.0 5.0 Source: National central banks, UniCredit Research 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 15
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