Group Economics Emerging Markets Emerging Europe Watch Arjen van Dijkhuizen Tel: +31 20 6288052 [email protected] Will the Crimea conflict spoil the party? 25 March 2013 • Turmoil in Ukraine and Russia’s annexation of Crimea have dominated the headlines over the past months. In reaction to the Russian moves, the EU and the US have tightened the so-called ‘stage 2 sanctions’ targeted at individuals and one bank. The EU and US have also announced the use of ‘stage 3’ economic sanctions in case of further destabilisation in Ukraine by Russia. These were confirmed during the G7/EU meeting in The Hague Monday night, on margins of the Nuclear Security Summit. • The (threat of further) Russian sanctions have already hit financial assets and the rouble, although some correction took place more recently. Earlier in March, we downgraded our Russian growth forecasts for 2014/ 2015 by 0.5%-point to 2.0% and 2.5%, respectively. Downward risks remain significant, even in the scenario of ‘muddling through around the current status quo’ and certainly in an adverse escalation scenario (with developments in East/South Ukraine key to watch). Meanwhile, Ukraine is now looking westwards for external support to prevent major economic collapse and external default. An IMF support package, tranched and with the usual conditionality, will likely be announced at short notice, backed by an EUR 11 bn contribution from the EU and other bilateral contributions. Even so, Ukraine’s political and economic situation will remain very fragile. • Although negative developments in Russia and Ukraine have an impact on the rest emerging Europe too, in our base scenario we still expect a modest acceleration of regional growth this year, to 2.3% (from a post credit crisis low of 1.9% in 2013). This acceleration is export-led, as Central Europe will profit from the eurozone’s recovery, with spill-overs to domestic demand. Downward risks to this picture stem from an escalation of the (geo)political situation, stronger-than-anticipated capital outflows or a disappointing recovery in the eurozone. • Contents: This publication will focus on Czech Republic, Hungary, Poland, Russia, Turkey and Ukraine. Main economic indicators/forecasts GDP growth (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging marke ts total 2012 5.8 2.1 2.9 1.6 4.3 2013e 6.1 1.6 2.4 1.3 4.3 2014e 6.1 2.3 3.0 3.2 4.7 2015e 6.0 2.9 3.5 3.7 4.9 -0.6 2.8 2.9 -0.4 1.9 2.8 1.3 3.3 3.7 1.8 3.9 3.8 2012 -2.2 -1.7 -2.6 2.3 2013e -2.5 -2.0 -3.0 -0.5 2014e -2.5 -1.0 -3.5 -1.5 2015e -2.5 -2.0 -3.0 -1.0 Eurozone -3.7 -3.1 US -6.8 -4.1 Source: EIU, ABN AMRO Group Economics -2.6 -3.1 -2.0 -2.4 Eurozone US World Budget balance (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa Inflation (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total Eurozone US World Current account (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa Eurozone US 2012 4.4 6.4 7.8 8.5 5.5 2013 4.4 5.2 8.5 13.7 6.1 2014e 4.3 4.7 11.2 8.9 5.9 2015e 4.5 4.4 9.0 8.0 5.6 2.5 2.1 3.9 1.4 1.5 3.8 0.5 1.7 3.8 0.8 2.0 3.7 2012 1.2 -0.9 -1.6 9.2 2013e 1.5 -1.0 -2.5 6.5 2014e 1.0 -1.0 -2.5 4.5 2015e 0.5 -1.5 -2.5 4.5 1.3 2.5 2.7 2.8 -2.7 -2.3 -2.2 -2.4 * figures Emerging Markets regions are rounded 2 Emerging Europe Watch - Will the Crimea conflict spoil the party? - 25 March Czech Republic Economy Economic growth and Manufacturing PMI Real GDP, % yoy index 8 70 4 60 0 50 -4 40 -8 30 08 09 10 11 Economic growth (lhs) 12 13 14 Manufacturing PMI The Czech Republic shows increasing signs of strength, after the highly export-oriented economy contracted during the euro crisis by around 1% on an annual basis in 2012 and 2013. The economy moved out of a protracted recession in Q2 of 2013. Growth dynamics have improved significantly in Q4 of 2013. Quarterly growth jumped to a seven-year high of 1.9% qoq, driven by next exports and investment. For the first time since November 2011, annualised growth was positive in Q4, at 1.3% yoy. High frequency data also point to an economic acceleration. Retail sales reached a three-year high (6.4% yoy) in January. Industrial output and construction output also show decent growth rates recently. The forward looking Manufacturing PMI jumped to 55.9 in February, the highest level since December 2010. We expect the economic improvement to continue isupported by the eurozone’s ongoing recovery, reaching 2.0% in 2014 and 2.5% in 2015. Sources: Bloomberg, Markit/HSBC Hungary Economy, inflation and central bank Inflation and policy rate Just as the Czech Republic, growth dynamics for Hungary are improving thanks to by higher export growth to the recovering eurozone. Hungary moved out of recession in late 2012 and with annual growth clearly accelerating in the course of last year, annual growth reached 1.1% in 2013 (2012: -1.7%). We expect economic growth to reach 2% in 2014 and 2015, remaining below Central European peers as the government’s unorthodox and populist policies have undermined business confidence and FDI. Headline inflation has fallen sharply to around zero in early 2014, driven by lower energy and food prices. Core inflation has also fallen below the 3% medium-term target. Combined with a fall in Hungary’s risk premium, this has stimulated the central bank (MNB) to continue lowering the policy rate (for a cumulative 440 bps in 20 consecutive meetings, although with small steps recently). We think room for further easing is limited; the MNB could even be forced to change course should market sentiment turn against Hungary once more. % yoy / % 12 10 8 6 4 2 0 08 09 10 Headline inflation 11 12 Core inflation 13 14 Base rate Sources: Bloomberg, Thomson Reuters Datastream. Poland Economy, inflation, central bank Economic growth and Manufacturing PMI Real GDP, % yoy index 8 70 4 60 0 50 -4 40 -8 30 08 09 10 11 Economic growth (lhs) 12 13 Manufacturing PMI Sources: Bloomberg, Thomson Reuters Datastream. 14 The acceleration of the Polish economy that started in early 2013 continued throughout the past year. Decent quarterly growth at around 0.6-0.7%qoq in the past three quarters have contributed to an annual growth rate of 2.7% yoy in Q4 of 2013. This acceleration has been driven by net exports, but domestic demand has picked up as well. The Manufacturing PMI jumped to 55.9 in February, the highest level since December 2010. We expect growth to rise to 3% in 2014 and 3.5% in 2015, supported by an ongoing eurozone recovery but with a growing contribution from domestic demand. Downward risks stem from the Crimea crisis (also giving Poland’s tough stance versus Russia’s annexation) and possible effects on exports to Russia and crisis-struck Ukraine. Inflation remains very low (below 1%). The central bank recently extended its ‘forward guidance’ to stay ‘on hold’ until the end of Q3-2014. 3 Emerging Europe Watch - Will the Crimea conflict spoil the party? - 25 March Russia Economy, politics CDS premium and exchange rate Sovereign, 5 yrs, USD, bps RUB per USD 350 40 300 35 250 200 30 150 100 25 10 11 12 CDS premium (lhs) 13 14 Exchange rate (rhs) Sources: Bloomberg, Thomson Reuters Datastream. Russia’s prospects for economic growth and creditworthiness have been hurt after its recent annexation of Crimea, in response to the ousting of Russia-leaning president Yanukovich in Ukraine. Although EU/US sanctions have remained relatively ‘light-touch’ so far, basically targeting individuals in the form of visa bans and asset freezes, the (threat of further) sanctions have already impacted Russia’s risk premium, financial assets and the rouble. Capital outflows, a structural phenomenon, have intensified, reaching USD 60 bn in the first part of 2014 (comparable to total capital outflows in 2013). Both S&P’s and Fitch changed their outlook surrounding Russia’s BBB investment grade rating from stable to negative. We have lowered our 2014 and 2015 growth forecasts by 0.5%-point, to 2% and 2.5% respectively (2013: 1.3%). Downward risks remain significant and would certainly materialise should Russia intervene further in Eastern Ukraine, as that would trigger economic sanctions, a further loss of confidence and a widening of Russia’s risk premium. Turkey Economy, politics Current account deficit and external financing* USD bn (12 months rolling) 60 40 20 0 -20 -40 -60 -80 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Net portfolio flows Source: Bloomberg Net FDI Current account balance * Other external financing but FDI and portfolio not shown Turkish assets and the lira have been volatile in the past months, reflecting external and political vulnerabilities against the background of regular EM-selloffs against the background of Fed tapering. Political turmoil has increased in the wake of a heavy election schedule in 2014 (local elections late March, presidential elections in August) and 2015. Moreover, the large current account deficit (CAD, 8% of GDP in 2013) makes Turkey vulnerable to swings in market sentiment as shown by the recent drop in portfolio inflows. The sharp rate hikes (around 400-500 bps) by the Turkish central bank (CBRT) in late January and other measures to limit credit and consumption growth should be seen in that context. Looking at January’s CAD (- USD 4.9 bn) – which halved compared to December 2013 and fell by 16% compared to January 2013 – these measures seem to have some effect. Moreover, the 12-months rolling CAD fell a bit in January, for the first time since March 2013. Still, much remains to be done to get Turkey’s external finances in safer territory. Ukraine Economy, politics CDS premium and exchange rate Sovereign, 5 yrs, USD, bps UAH per USD 1400 12 1200 11 1000 10 800 9 600 8 400 200 7 10 11 CDS premium (lhs) Source: Bloomberg 12 13 Exchange rate (rhs) 14 Developments in Ukraine are still highly ‘in flux’, political turmoil remains high and the economic situation is very fragile. Tensions with Russia have become under severe pressure after ormer president Yanukovich was ousted in February and a pro-EU interim government was formed. Russia first suspended its support package announced in late 2013. Moreover, in early March Russia annexed Crimea, stating that this move was aimed at protecting the Russian majority on this peninsula. The political situation remains highly vulnerable, also given that regions in Eastern/Southern Ukraine are Russia-oriented. Meanwhile, the interim government has started to look westward for external support needed to prevent Ukraine from a complete economic collapse and external default. An IMF support package will likely be announced at short notice, cofinanced by an EUR 11 bn contribution from the EU and other bilateral contributions. 4 Emerging Europe Watch - Will the Crimea conflict spoil the party? - 25 March All publications of ABN AMRO on macro-economics and sector developments can be found on: insights.abnamro.nl/en. You can also download our Market Insights App on abnamro.nl/marketinsights or directly in de App Store. Follow Group Economics on Twitter: https://twitter.com/sectoreconomen Disclaimer Last editing of this publication on 25 March 2014. Copyright 2014 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics.The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such n i formation. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you andyour investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2014 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").