EMEA Daily Update

Bulgaria/Serbia(=)

Interesting to see both countries' monetary authorities commenting about measures to protect their respective banking sectors from any Greek Euro exit (including recommending a reduction of exposure to Greek official assets). Bulgaria remains at the top of the list of countries exposed to Greece through the export (7% of total) and banking sector channels (23% of total bank assets owned by Greek banks), followed by Macedonia, Albania, Serbia and Romania.

Ukraine(=)

According to media, talks between top Ukrainian officials and the IMF at the weekend show that both sides are looking for a quick wrap-up of restructuring talks with the private sector. Indeed, it looks as though Ukraine wants to complete talks before the IMF review mission plans to come to Ukraine on 22 May. Although we continue to see no need for a haircut, it seems clear the authorities, and especially the FinMin are doing everything they can to push bondholders to agree to a haircut, including warning investors that any alternative would be detrimental for them...as far as the size is concerned, it would seem likely that the authorities would take the opportunity to go for as big a haircut as possible

Czech Republic (=)

Czech export and import prices continued to decline y/y in Feb, with import price decline at almost -2% y/y (Jan: -1.7%) outpacing export price decline at -0.7% y/y (Jan: -0.4%). Hence, although the economy's manufacturing profitability improved because of lower raw material prices, the disinflationary outlook only intensified -- the data also go to show that CNB's current EURCZK floor of 27.00 is not effective enough in generating inflation pass-through anymore, and would need to be raised by c.6% if CNB wanted to generate similar amount of inflation pass-through as it created last year; such an increase in coming months is our base-case.

Poland (=)

A couple of unusually hawkish data from Poland last Friday with 1) Wage growth accelerating abruptly to almost 5% y/y (previous: 3.2%), although a closer look reveals that delayed bonuses in the mining sector could explain much of the surprise; that said, the divergence between wage growth and general inflation continues to widen; 2) Q4 GDP growth was revised up to 3.3% from 3.1% y/y and full-year 2014 revised up to 3.4% on stronger than originally estimated consumption expenditure; very strong investment spending as well at 8.6% y/y.
We view the data as policy neutral as the rate cycle is in a "pause", but the data will strengthen the hand of MPC hawks in forthcoming discussions.

Turkey (-)

In its latest review the WB cut its 2015 GDP growth forecast for Turkey from 3.5% to 3% on continuing weak sentiment and household consumption indicators, which add to the already weak export and fixed investment outlook. WB does forecast the CAD to narrow to 4.4% of GDP this year, a huge positive driven by the lower oil price this year. Clearly risks to growth have multiplied in recent weeks as a sliding lira has re-emerged as a monetary policy problem.
To make things worse, the Mar inflation data accelerated from Feb at headline level, and inflation expectations deteriorated in the past couple of months, with the Apr CBT survey showing 1-year inflation expectations at c.7% compared to a 5.5% CB target.
We find that expectations are largely adaptive -- recently when inflation was at 9%-plus, expectations gradually rose to this level too, only to plummet to sub-7% when actual inflation began to fall -- hence, rising expectation is not a fundamental problem; but it is a policy problem (it is awkward for CBT to ignore).

Israel (=)

PM Netanyahu will request the President today for a 2-week extension to be able to fully explore all coalition possibilities and be in a position to form a govt; so far, the Likud party has not been able to sign any coalition agreements with other smaller parties, and it now appears that the next govt will not be announced until around 6 May.