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Erste Group: CEE Macro/Fixed Income Daily

October 18, 2012
Analysts’ Views: 

HU Budget: Yesterday, Economics Minister Matolcsy announced an additional fiscal adjustment package amounting to HUF 367bn. Although the ministry had already revealed some adjustment measures for 2013 two weeks ago, these could be insufficient to reach the increased deficit goal of 2.7% of GDP in 2013, according to the opinion of the EU. (In order to get out of the effect of the EDP and not lose resources from EU funds, the cabinet has to keep the deficit below 3% of GDP in 2013). An important element of the package is that, despite the earlier agreement between the government and the sector, the banking tax will not be halved in 2013, which could bring an additional HUF 72bn into the budget. In addition, the rate of the financial transaction tax will be doubled from 0.1% to 0.2%, meaning an additional HUF 90bn. The government expects more revenues (by HUF 40bn) from the state Treasury, due to the increased financial transaction tax, and will introduce a public utility tax, expected to provide HUF 30bn. Changes in the basis of local business tax and the taxation of cafeterias, as well as enhancing the efficiency of tax collection, are also parts of yesterday’s package. We think that implementation risks around the measures are considerable, but they still seem to be sufficient to keep the budget deficit below 3% of GDP in 2013. The negative flipside of the coin is that the new measures - especially the remaining banking tax - would further hurt Hungary’s investment and growth prospects and increase the inflation rate. Poor lending activity in the banking sector would not improve either next year, partly due to the high burdens on the sector. We think that the probability of a smooth agreement with the IMF/EU has fallen further, as international organizations are likely to take a negative view of the unfavorable structure of the package and unpredictability of the economic policy. 

PL Macro: Another piece of data surprised the market on the downside. The industrial production figure came in at -5.2% y/y, well below our and market expectations. This is the first month with a negative figure since October 2009, and the slowdown is visible in all sectors of industry (all of them contracted on a y/y basis). Together with the drop in PPI to 1.8% y/y, the weak industry performance calls for a 25bp cut in November and the start of a rate cutting cycle). As a result of monetary easing, we expect the PLN to depreciate to 4.15 EURPLN by the end of the year. 

TR Rates: We expect a 50 bp -100 bp cut in the upper band of the corridor at today’s MPC meeting due to be announced at 13:00 CET. This is also the consensus view and is priced in by markets. The CBT may also raise the reserve option coefficients by a meagre move of 0.1 but we do not expect this to have a meaningful impact on banks or the markets. If the CBT surprisingly cuts the lower bound of the corridor or the policy rate, we would expect a positive reaction in the stock market and the short end of the bond market. However, the TRY is likely to be hit both in nominal terms and relative to peers in such a case. We forecast a small drop in 2y yields to 7% by year end and a stronger TRY vs USD (1.75 by year end). 

raders’ Comment: 

CEE Fixed Income: Such is the positive investor sentiment at the moment, that the risk premium on Hungarian CDS continued to power lower even as the HUF and HGBs sold off following the radical reaction of the Hungarian government to quickly fill a HUF 400 bn gap in the budget in a desperate attempt to fend off the risk of a suspension of development funds from the EU. Whilst the kneejerk reaction smacks of desperation and various analysts expect the measures to not only cripple growth prospects but also to fail to impress the IMF, the HUF recovered all of its losses and has started today’s trading session stronger. The government is signaling a willingness to do whatever it takes to keep the hope of international financial aid alive, a strong contradiction to the message it sends to voters, but markets don’t vote at the ballot box. Fact is, the government acted swiftly which indicates how important securing international financial aid is for them and the market has picked up on that so we should expect HGBs to trade higher today. We maintain our cautious stance and stick to short duration investments in Hungary because there is plenty of room for those hopes to be dashed and the correction will likely be vicious. At the moment, a wall of money is simply brushing fundamental concerns aside.