Group Economics
Emerging Markets
Emerging Europe Watch
Arjen van Dijkhuizen
Tel: +31 20 6288052
arjen.van.dijkhuizen@nl.abnamro.com
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
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Last editing of this publication on 25 March 2014.
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