EMEA Daily Update

Russia (=)

• CBR announced the launch of a new FX repo facility yesterday: the facility will be available beginning 27 Oct, through the use of weekly auctions in USD and EUR with maturities of 7 and 28 days (first repo for 7days on 30 Oct, first repo for 28days on 29 Oct).
• The CBR has also announced a new FX swap facility to improve dollar liquidity, as also plans to widen collateral for ruble refinancing (which will include mortgage loans and investment loans).
• Our view is that pressure on RUB will continue: CBR will find it difficult to contain the RUB slide simply by using intervention and dollar liquidity tools; a sustainable reversal will likely need some resolution to the sanctions situation and the oil price trend, or in their absence, higher interest rates. One development which could potentially change the trend later today, at least in the interim, would be any positive headlines from Putin's meeting with Poroshenko in Milan; so all eyes on that through the day.


Czech Republic (=)

• Export, import price growth slightly accelerated in Aug, but in our view, this will prove to be temporary: export prices increased 5.3%YoY in Aug vs. 3.9% in Jul; import prices rose 3.3% vs. 1.8%. Since Aug, however, commodity and energy prices have taken a fresh dive, and the Czech Republic's own PPI inflation rate has fallen into negative (-0.3%) as of Sept. Even CNB now suspects that more intense deflationary impetus out of EZ will easily overwhelm the pass-through effect of CNB's FX intervention.


Poland (=)

• Today's Sept IP data will be closely watched as a regional proxy: growth rates around the region showed a sharp dip in Aug because of unusual seasonal variation (larger number of holidays etc), which markets expect to be reversed in Sept; in Poland's case, Sept industrial production growth is expected to rebound to c.2.5%YoY after having fallen to -1.9% in Aug; the underlying manufacturing trend around Germany and the CEE is weakening, but today's data will confirm (or refute) that the Aug decline was technical rather than fundamental (which will then translate to all other countries).
• Core-inflation came in at 0.7% as expected (expectations adjusted after yesterday's slightly higher headline CPI inflation reading).
• The labor market lost momentum slightly and wage growth cooled a notch to 3.4%YoY in Sept; we see wage growth moderating further over coming months to c.2%. Wage growth, at one point this year, had reached 4.5%, and even this had not been considered inflationary; hence, 3.4% wage growth is benign(and policy-neutral).


Hungary (=)

• Fitch downgraded the ratings on two EU bank subsidiaries (KBC subsidiary, K&H, and Erste Hungary), from BBB to BBB-, on concerns regarding govt policy intervention in the banking system which could trigger major losses. Fitch, however, noted that most major banks operating in the CEE want to maintain presence in Hungary.
• AKK has increased planned gross issuance for Q4 up to HUF1.8trn, but slightly toned down net issuance to HUF 181bn (from HUF 187bn). The budget has been lagging behind target slightly as low inflation has dampened tax revenue (and the govt has been using up budget reserves). Usually, the govt would borrow more under the circumstances, but now it needs to keep net issuance minimal because there was significant pre-emptive borrowing already in H1 2014 (and the govt has to try to get public debt ratios down by year-end). Hence, significant additional bond buybacks (possibly using govt deposits at the CB) may be used to lower net issuance as far as possible.


Romania (=)

• The govt has indicated an intention to tap the Eurobond market for at least EUR 1bn ahead of the 2 Nov Presidential election (Budget Minister Valcov informed the media about this plan). Markets had known of a general plan to issue before year-end (as large IMF/WB/EBRD repayments were made this year and will again be made in the next 12 months); we now have specific size and timing guidance. This year's fiscal deficit is well ahead of the 2.2% target and govt debt is within 40% of GDP; we are overweight Romanian credit and anticipate good demand under stable market scenarios.


Serbia (=)

• NBS maintained rates on hold at 8.5% yesterday, on the consideration that difficult global markets demand 'cautious' monetary policy so that capital inflow is not affected (the bank emphasised that there had been moderate increase in Serbia's risk premium and commensurate depreciation pressure on the dinar, in line with other EMs, which shows that foreigners are less willing to invest). Nevertheless, CPI inflation is low and NBS confident of maintaining inflation within the 4±1.5% target band through 2015; hence, we see likelihood that rates will be cut this year once market conditions alleviate.