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CEEMEA Weekly Summary - 5 February 2014

Core Content Overview

This report provides an economic outlook for several emerging and developing markets in Central Europe, South Africa, and Turkey, highlighting key trends, risks, and policy developments.

Main Themes

Central Europe: Industrial Muscle

• Industrial Growth: Manufacturing PMIs in Central Europe hit multi-year highs in January, signaling strong industrial expansion expected in early 2014.
• GDP Impact: Due to the high share of industry in regional GDP, this industrial growth is expected to significantly boost overall economic growth.
• External Demand: The main driver of the region's economic recovery remains external demand, although domestic consumption in Poland and Hungary has improved.
• Exchange Rates: Weaker currencies in the region are expected to enhance competitiveness and support exports.
• Risk Factors: The primary risk is a global growth slowdown, which could affect external demand more than Fed tightening, which may have a positive effect on trade.

South Africa: Two Surpluses Don't Make a Summer

• Trade Surpluses: South Africa recorded two consecutive monthly trade surpluses in December, suggesting a slight narrowing of the current account deficit in Q4 2013.
• Current Account Deficit: The deficit is expected to narrow to just under 6% of GDP from 6.8% in Q3 2013, but remains structurally high.
• ZAR Under Pressure: Despite the trade surpluses, the ZAR is likely to remain under pressure due to deteriorating terms of trade, large infrastructure plans, and weak global growth in China and Europe.
• Export Diversification: South Africa is increasingly diversifying its exports within Africa, which now accounts for over 30% of its manufactured exports.
• Capital Flows: Foreign capital outflows have been significant, with around ZAR 29.5bn already recorded year to date, adding to ZAR's weakness.
• Mining Strikes: Continued mining strikes in the platinum sector are expected to hurt export revenues, which are a major component of South African exports.

Turkey: Shields Up

• Inflation Outlook: Turkey's annual inflation is expected to rise to 9% by May and end the year at 8.2%, with upside risks from utility price hikes and further lira depreciation.
• Policy Shift: The Central Bank of Turkey (CBRT) shifted to an orthodox policy framework, raising key rates by 425-550bp and setting the one-week repo rate at 10%.
• Growth Forecast Cut: The Turkish growth forecast for 2014 has been revised downward from 3% to 2.2% due to signs of economic slowdown.
• Current Account Deficit: The current account deficit is expected to narrow to around 6% of GDP, but remain significant.
• Fiscal Policy: The government has reduced the budget deficit to a record low of 1.2% of GDP, but its privatization program has stalled, and fiscal stimulus may be limited.

Key Information

• ECB and US Non-Farm Payrolls: These will be key focal points for the week, with the ECB likely to cut rates further and the US payroll data expected to be uncertain.
• EM Currencies: While some currencies have been better supported, the UAH in Ukraine and the ZAR in South Africa remain under pressure.
• Turkey's TRY: The TRY has partially recovered from its earlier depreciation, but further weakness is expected unless global risk sentiment improves.
• Inflationary Pressures: Inflation in Turkey is expected to remain high, with core inflation rising to 7.6% in January, and potential for further increases if utility prices and FX depreciation continue.
• South Africa's External Imbalances: Despite recent trade surpluses, the country's external accounts are unlikely to rebalance significantly in 2014 due to structural issues and weak global growth.
• Central Europe's Outlook: The region is expected to experience robust GDP growth in early 2014, driven by industrial expansion, but remains vulnerable to global slowdowns.

Summary of Economic Indicators

• Hungary's Industrial Production: Preliminary data for December 2013 was 5.8%, with a forecast of 6.1%.
• Czech Republic's Industrial Production: Preliminary data for December 2013 was 6.2%, with a forecast of 9.3%.
• South Africa's Trade Balance: Recorded a surplus of ZAR 2.8bn in December, with a forecast of ZAR 10.7bn.
• Turkey's CPI Inflation: Rose to 7.5% in January, with core inflation at 7.6%, and expected to reach 8.2% by year-end.
• Turkey's Current Account Deficit: Expected to narrow to USD -7.9bn in December, from USD -3.9bn previously.
• Russia's GDP Growth: Preliminary data confirmed below-consensus expectations for 2013, with no sign of a substantial recovery.
• South Africa's Mining Production: Rose 5.1% year-on-year in December, but continued strikes may affect exports.

Conclusion

The report outlines a mixed economic outlook, with Central Europe showing resilience and growth potential, South Africa facing persistent external imbalances, and Turkey struggling with inflation and a weak growth outlook. The ECB and US non-farm payrolls will be key in shaping market sentiment, while EM currencies like the ZAR and TRY remain under pressure due to global economic uncertainty and domestic policy challenges.