EMEA Daily Update

Czech Republic (=)

March CPI inflation at 0.2% y/y was weaker-than-expected (consensus: 0.3%), and even weaker if fuel is excluded; so, inflation stays near-zero; but the reading was above CNB’s own monthly forecast (0.1% y/y) because of higher than expected administered prices and higher fuel prices, while food continued to be deflationary. CNB expects inflation to turn up noticeably in 2016 as imported deflation fades and base-effects reverse; we, however, see risk to the downside longer-term, with inflation remaining low and possibly even trending lower again in 2016 in adverse commodity price scenarios -- hence, we think that CNB will need to weaken the koruna decisively as such scenarios become more realistic.

Poland (=)

FinMin Szczurek remarked to the media yesterday that recent zloty appreciation does not pose a major risk to the economy, nor to the ministry's 3.4% GDP growth target for this year; Szczurek highlighted that domestic consumption will be slightly boosted by the resulting low inflation, while at current levels, a stronger zloty is only a weak threat to exporters.
We think that the FinMin is reiterating what NBP research has anyway outlined, i.e. a EURPLN level of c.3.90 as a pain threshold for exporters (Q4 calculation). At the current 4.02 level, the squeeze on exporters is manageable; but, given the rapid pace of decline recently in EURPLN, the govt is likely getting cautious. In our view, the CB will 1) Verbally intervene, 2) Then actually intervene, and 3) Finally, cut rates again. We foresee 50bps further easing in Q3, once other intervention measures have been tried out.

Hungary (=)

The PM's office informed the media yesterday that the cabinet will target a 5.3% tax on advertising, this time with a structure more in line with EU norms; smaller companies will be exempt, but the size threshold has not been finalised yet. The fresh proposal will be brought by the cabinet to parliament soon. As bank and telecom taxes are set to be unwound over the coming years, the govt is trying to balance those with more modest taxes on a wider base of services.
Separately, Hungarian media reported that the govt had recently debated acquiring the loss-making Sberbank Hungary (via the state-owned development bank MFB), but reportedly decided against it on NBH's advice; media had earlier reported that this acquisition had been discussed during Pres Putin's visit to Hungary in Feb.

Romania(+)

Yesterday's Apr 2020 RON bond reopen faced a 4x oversubscription, while the average yield fell almost 20bp to 2.36%, when compared to the same reopen in March. Not surprising, given the positive spillover effects from the ECB QE and the expectations from the Fiscal Council that CPI would end this year at around 0%, following the VAT cut on food to 9% from 24% as of June.
Indeed, looking ahead into 2016, the planned general cut in VAT from 24% to 20% is going to have obvious downside effects on CPI, which should simply keep the NBR in dovish mode for some time as of now, with rate cuts likely to err on the larger side than our 50bp expectations

Russia(+)

An overall solid current account surplus at USD 23.5bn in Q1, or only 2.5bn less than Q114. The huge 36%YoY drop in imports is obviously countering the loss of energy export revenues.
And, a look at the capital account shows net private capital outflows at USD 33bn or less than half of Q414 when the RUB rout hit private sector confidence. The drop in RUB volatility and its appreciation bear witness to the turnaround in flows as of Jan. We continue to look for the current account surplus to make up for around 80% of private sector outflows but that ratio can increase if peace in eastern Ukraine sustains

Turkey (=)

There is persistent media speculation that former Istanbul stock exchange chief, Ibrahim Turhan, may replace deputy PM Babacan as head of economic policy after the Jun elections; Turhan has policy experience from his days as CBT deputy governor between 2008 and 2011 and is likely to be a favoured candidate for PM Davutoglu, who included Turhan in his recent investor meetings.
Foreign investors view Mr Babacan very favourably as a guide to policy of course, but when the time comes to accept a new head of economic policy, market participants will eventually approach it constructively, provided the policy guidance is sensible. The prospect of another economic policy head taking over from Babacan is stronger given the PM’s remark this week that space needs to be created for ‘new blood’, and therefore a non-elected head of economic policy is less likely.
In independent communication, Pres Erdogan and CBT Gov Basci offered assessment on the economy: 1) Gov Basci reiterated that he expects core inflation to steadily moderate over coming months; 2) That food inflation needs to be tackled by non monetary tools; 3) Pres Erdogan assessed the latest behaviour of the lira as satisfactory, and appeared to concur with Basci that the lira is about fairly valued at present.
Bottomline: President Erdogan has stopped asking for urgent rate cuts, and now he sees the benefit in the form of a more stable exchange rate; in our view, CBT will take its time and cut rates only by the magnitude that core inflation declines; as base-case we expect 100bps lower rates by end-Q2, although clearly any delay in the drop of core CPI would push back our view.

Serbia(+)

The NBS went ahead with a 50bp cut yesterday to a 7% policy rate, given the mild core CPI pressure and headline CPI hovering way below the 2.5% lower band. With the RSD holding up against the EUR, no real inflationary pressure in sight, and a generally better foreign investor perception + IMF support, we see room for more rate cuts ahead and remain constructive on the Serbian external debt backdrop too.