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Erste Group: CEE Macro/Fixed Income Daily

October 10, 2012
Analysts’ Views: 

SK Macro: Industrial production growth slowed down only very slightly from July’s 18.4% to August’s 17.0% y/y. The higher than expected growth was driven mainly by base effects. The slowdown was largely caused by the shift of holidays at car companies from July to August. In spite of that, cars remain the main driver of growth. Other industries improved slightly. Due to this fact, industrial production was higher than in July - by 0.4 %, even on a seasonallyadjusted basis. Without the manufacture of transportation vehicles, overall industrial production would have grown by a mere 1.5 %. In the coming months, we expect a slowdown of annual industrial production growth due to weaker demand from the Eurozone and Asia. Industrial production is closely related to the foreign trade balance. Recently, the data for 2011 has been revised downwards from EUR 2.5bn to EUR 1bn. This revision is related to incorrect reporting by a major exporter. In August, the trade balance fell significantly from EUR 376mn to EUR 23mn, mainly as a result of higher imports. We forecast 10y government yields at 3.4% at year-end. 

RS Rates: The NBS opted for a 25bp rate hike (the key rate stands at 10.75%), which aligned with our view that the NBS would show prudence and tighten further in 4Q12 to bring inflation down to the inflation targets. We see inflation heading towards the double-digit region towards YE12 and remaining elevated in most of 1H13 because of cost side pressures coming from food prices and one-offs from VAT and excise duties, along with negative pass-through from the weaker RSD. Nevertheless, risks to additional significant monetary policy tightening diminished recently to some extent, given the exchange rate stabilization, the government’s incentives to move towards fiscal consolidation and negotiate a new arrangement with the IMF and declining short-term financing risks given the successful Eurobond placement. Before going on hold, we see some room for an additional 25bp hike in the near term, especially if the exchange rate comes under more severe pressure. Markets showed no major reaction to the news with the RSD currently quoting in the 114.50-80 band. 

TR Macro: The Medium Term Economic Program for 2013-2015 was announced by Deputy PM Ali Babacan yesterday. Accordingly, the government downgraded 2012 GDP growth expectation to 3.2% from 4.0% and 2013 GDP growth expectation to 4.0% from 5.0%. Babacan stated that despite the deceleration in growth rates, the fall in unemployment will continue. The government targets 1.6mn new jobs in the next 3 years. The unemployment rate should decline gradually to 9.0% in 2012, 8.9% in 2013 and 8.8% in 2014. Meanwhile, the government revised up sharply its inflation expectation for 2012. Babacan stated that the government expects the current year-end CPI figure to be 7.4%, higher than the previous estimation of 5.2%, while 2013 yearend CPI is expected to be 5.3%, slightly up from the earlier 5.0% projection. The government also decreased its current account deficit /GDP ratio expectation to 7.3% from 8.0 for 2012. According to MTP estimates, the current account deficit /GDP ratio will continue to decline gradually to 7.1% in 2013 and 6.9% in 2014. Equally important, the government increased its budget deficit/GDP ratio estimations to 2.3% for 2012 from the initial estimation of 1.5%. We forecast 2y government yields at 7% in 2013. 

Traders’ Comment: 

CEE Fixed Income Hungarian Prime Minister Viktor Orban said yesterday that Hungary will face the second-biggest debt challenge in the world next year in terms of debt servicing costs in % of GDP (19%). Investors are accustomed to the rhetoric and aware of the risks but obviously willing to support the Hungarian Treasury nonetheless. Hungary sold HUF 60 bn of 3 month T-bills, 15 bn more than planned, and the yield fell to 6.4%, 4 bps lower than the at the last auction on October the 2nd. Total bids reached HUF139 bn. If there is any appetite for longer tenors remains to be seen. A bond auction is scheduled for the 18th but the issue sizes tend to be very small. A real litmus test of investor confidence would only really become apparent if Hungary attempted to issue a benchmark sized Eurobond in the international markets but the probability of that occurring is currently very remote. We didn’t see any real action in HGBs or REPHUNs in yesterday’s trading session on a quiet day in CEE fixed income markets in general. Czech CPI was in line with market expectations on a day otherwise devoid of a catalyst.