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Erste Group: CEE Macro/Fixed Income Daily

December 17, 2012
Analysts’ views: 

RO Politics: This morning, President Basescu will hold common consultations with the representatives of all political parties represented in the future Parliament. The political alliance between the Social-Liberal Union (USL) and ethnic minorities will have 74.8% of the seats in the new Parliament. The Right Romania Alliance, the political successor of the Democrat Liberal Party that governed Romania in recent years, will account for 13.6% of the total number of MPs, while the populist People’s Party will be represented by 11.6% of MPs. Victor Ponta, incumbent PM and co-head of USL, will be proposed as future PM by the winning political alliance. The new Parliament will meet on Wednesday. Romanian media reports that President Basescu already met the leaders of USL last Wednesday and that they discussed future developments within the constitutional environment. A swift solution to the political uncertainty could support Romanian markets in the short term. We continue to see the EURRON at 4.52 in June 2013 and 4.5 in December 2013 and see risks coming from a heavy repayment calendar of the NBR and MinFin to the IMF. The disappointing evolution of EU funds absorption also creates risks for the EURRON in 2013. 

HR Rating: After the Fitch outlook revision to negative, S&P went one step further, kicking Croatia out of the investment grade region (see Short Note). The rating was cut to BB+ with a stable outlook. The rationale brought no surprise, with a lack of fiscal consolidation, weak growth prospects and slow structural reforms topping the list. We see fiscal factors, namely the higher than expected target deficit for 2013 (3.8% vs. 3.0% of GDP), delayed public debt stabilization and the expected violation of the Fiscal Responsibility Law as the main triggers. From our point of view, the S&P decision came as no surprise with elevated risks stemming from the 2013 budget. The timing of the action itself was unfavourable, given the MoF’s previous plans to tap the Eurobond market in January. As for the market reaction, we see yields coming under upward pressure, and while intensity remains a question mark, our assessment in a scenario of fiscal slippage forecasts yields in the 5+% region. The key factor in the near term should be the exchange rate pattern; if the exchange rate heads toward 7.60, we would expect to see a CNB response, with a draining effect on the currently comfortable liquidity situation, suggesting clear upside risks to MM and T-bill rates from current levels. 

RS Rates: At the last rate-setting meeting in 2012, the NBS decided to hike the key rate by 30bp to 11.25% with more or less unchanged rhetoric. The key risks remain food prices and administrative prices, while exchange rate stabilization suggests a more comfortable position for the NBS along with an ongoing disinflationary effect from weak domestic demand. We anticipate a reversal in open market operations and tighter liquidity management to support the RSD. We think the cycle of restrictive monetary policy is close to its peak (still not totally excluding an additional 25bp in 1Q) based on our assumption that there will be a gradual moderation in inflation later in 1H13 and diminished risks in the near term regarding public financing needs. Afterwards, apart from the inflation trajectory, we see the rate-cutting pace in 2H13 being determined by the external environment and the progress of the IMF talks. The exchange rate showed some strength on the news, moving towards the 113 mark versus the Euro, but we still expect the RSD to weaken toward 115 in the near term.