EMEA Daily Update

Poland (=)
- Polish markets are likely to come under pressure following an upset at the weekend presidential election: Opposition PiS candidate, Duda, who was trailing far behind incumbent President Komorowski in polls, managed to capture a lead in actual voting – based on exit polls, Duda may have got 35% vs. Komorowski’s 33%; official results will be out only tomorrow.

- It is a big surprise that both Duda and newcomer rock-star, Kukiz, won far more votes than polls had indicated, and this may be bad news in terms of electorate fatigue with ruling PO. Duda has not won outright of course -- a run-off on 24 May will still be required. There is some probability that the situation will turn around in this second phase, based on the observation that participation rate was very low this weekend, and one interpretation could be that Komorowski supporters had observed his secure position in polls and did not bother to vote.

- Whether such a probability is high or low, markets will now move to discount a PiS presidency, until proven otherwise. If Duda finally wins, it will then also enhance PiS’ visibility for the autumn general election, and increase uncertainty about an already close race.

- In terms of policy implications: PiS and PO are a world apart in terms of ideology; PiS would like to 1) Roll back pension changes, especially retirement age increase, 2) Bring an EU-skeptic and anti-Russia stance to the govt, and 3) Adopt policies which would impose losses on banks, such as conversion of FX loans at old exchange rates, or a tax on banks.

- If PiS holds only the presidency but not parliament, it will delay PO’s reform agenda and bring a 5-year period of policy limbo, but there would be no largescale policy overhaul. But, markets will now fret about the possibility that PiS will win both presidency and parliament.

- Weekly fuel price data showed continued increase in gasoline prices through early May, following an estimated 12% y/y decline for Apr; the rate of change year-on-year is of course expected to remain negative in May too, but probably by c.9%-10%; this means that the deflationary impact on headline CPI will narrow from 1pp a few months ago to c.0.6pp in May. Similar trends are being observed in Hungary (see below) and Czech Republic too, where the rising oil price has already influenced CB views about the need for additional easing.

Hungary (=)
- Apr CPI data came in stronger than expected, with deflation narrowing from 0.6%y/y to 0.3%y/y, one of the strongest readings since Q3 2014; seasonally and tax-adjusted measures of core inflation were all slightly up (from 1% to 1.2% for most underlying measures). Food prices continued to be helpful as in recent months, but energy prices within CPI accelerated as may be expected. Surprisingly, service prices picked up in Apr, too, with travel, tourism, healthcare and telephone services all displaying upward momentum.

- All said, the inherent bias of NBH is dovish at this time, hence this does not change our view that rates will be cut at least until 1.5%; but the latest CPI data reduce the likelihood of further downward revision to our rate forecast for this year.

NBH has warned that Hungarian banks will possibly suffer from two headwinds over the coming year: 1) Low interest rates are likely to limit margins, and 2) the conversion of FX-denominated loans into local currency will also squeeze interest margins by c.HUF 90bn a year. In addition, banks' mandatory contribution to the deposit insurance fund and investor protection fund is set to be increased by HUF 20-30bn. Because of all these reasons, the govt has decided to offer relief in the form of a phased reduction in the bank tax by HUF 60-80bn a year over 2016-2018. And of course, FX loan conversion has now eliminated HUF 13-15bn of losses which were accumulating on the govt's older CHF mortgage fix scheme. As a background, Hungarian banks made net losses amounting to HUF 446.5bn in 2014, but this was mainly because banks pre-provisioned for FX loan related losses after the legislation was finalised. Since then, the situation has calmed down, and while loan demand from private banks has remained weak, the extraordinary charges are likely to diminish too.

Turkey (=)
- Better economic data after several months: industrial production rebounded to 4.8% y/y in Mar from only 0.9% y/y in Feb and vs. expectation of near-zero for Mar; this was the strongest increase since Oct, and was driven by inventory re-building in capital and durable goods (which could partly be because the lira began to depreciate sharply around this time, and manufacturers wanted to pre-empt rising input cost by manufacturing earlier).

- The Q1 average manufacturing growth rate works out to 1.3%, which is consistent with the EconMin's guidance of 1.5% GDP growth during Q1. The forward guidance from the ministry now is for noticeably stronger growth in Q2, c.3%, driven by mild recovery in external demand, but crucially also a pick-up in consumption demand after it suffered a sharp hit in Q1. The PMI, however, is still well below 50, and such a rebound could well be temporary, which is why we recently revised down our 2015 growth forecast to 2.5%.