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CEEMEAnomics Summary - 7 October 2015

Core Content

This report provides an analysis of economic and political developments in Central and Eastern Europe (CECE), South Africa, and the Gulf Cooperation Council (GCC) for the week of 7 October 2015. It outlines the potential impact of global and regional economic conditions on monetary policy, inflation trends, and political dynamics.

Main Themes of the Week

1. Central Europe: Monetary Policy and the US Fed

• The US Federal Reserve is expected to delay its first rate hike to March 2016, rather than December 2015.
• A quarter's delay is unlikely to significantly affect Central European monetary policy.
• A longer delay or no hike at all in 2016 could lead to more substantial monetary easing in the region.
• Central European central banks are expected to gradually tighten policy from late 2016 onwards, based on the assumption of robust growth and rising inflation.
• Taylor-rule calculations suggest that a 1pp slowdown in global growth would result in 50-75bp of interest rate cuts in Poland and 125bp in the Czech Republic and Hungary.
• The report maintains its base-case forecasts for Central Europe, but monitors external developments closely.

2. South Africa: Labour's Love Lost

• The National Union of Mineworkers (NUM) has accepted a 10% annual increase in entry-level pay for the gold sector over three years.
• The Association of Mineworkers and Construction Union (AMCU) has rejected the deal, potentially leading to a strike at Sibanye Gold, the largest gold producer in the country.
• In the coal sector, a strike has begun, with the union demanding a 13% pay increase instead of the 8.5% offer.
• Despite the strikes, the economic impact is likely to be minimal due to healthy coal stockpiles and highly mechanized operations.
• Labour relations in South Africa are among the worst globally, according to the World Economic Forum.

3. GCC: Living with Low Oil Prices

• Low oil prices have deteriorated fiscal and external balances in the GCC.
• The GCC needs to cut fiscal spending and adapt to the new economic reality.
• Rate forecasts have been adjusted in line with the new US Fed outlook.

Key Data and Forecasts

CEEMEA Economic Outlook

• CEEMEA PMIs indicate robust manufacturing activity, with the exception of Poland, likely due to pre-election uncertainty.
• Czech Republic and Hungary are expected to see rising inflation due to strong internal demand and seasonal food price increases from the severe drought.
• Poland's inflation slowed slightly in September to -0.8% y/y, but is expected to increase in the coming months.
• Czech Republic may keep its koruna cap in place in 2015 and 2016, with inflation likely to stabilize below 2% y/y.
• Hungary is expected to tighten monetary policy next year due to rising CPI and strong growth expectations.

Russia's Inflation

• Russian inflation fell to 15.7% y/y in September, slightly below forecasts.
• Food inflation slowed to 17.4% y/y, partly due to a good harvest and falling prices of fruit and vegetables.
• Services inflation also declined, but non-food goods inflation increased due to RUB depreciation.
• The RUB weakened by only 2% against the USD and EUR in September, which is positive for inflation trends.
• October inflation is expected to increase by 0.1-0.2pp due to recent LPG and bottled gas price hikes.
• CPI inflation is forecast to reach 8.3% by year-end.

GDP and Imports

• Q1 2016 GDP contraction is possible due to falling imports and weak global demand.
• August and September imports contracted by $3bn on a 12-month rolling basis, with September's contraction at 25%.
• Weak global conditions could lead to more policy easing in Central Europe.

Political Developments in South Africa

1. ANC Leadership Succession

• The debate over who will succeed President Jacob Zuma as ANC leader in December 2017 is intense and premature.
• The National General Council (NGC), to be held in October, could influence rules and voting strength for the 2017 National Conference.
• The NGC is seen as a critical event for shaping the political landscape.

2. Cyril Ramaphosa's Position

• Cyril Ramaphosa, the ANC deputy president, is seen as a natural successor.
• However, he is vulnerable due to political distrust, wealth, flamboyance, and alleged involvement in the Marikana massacre.
• Some factions within the ANC may seek to prevent Ramaphosa from becoming president to protect Zuma from prosecution.

3. Calls for a Woman President

• The push for a woman president is seen as a strategic move to support Nkosazana Dlamini Zuma, Zuma's ex-wife.
• This is not a genuine feminist sentiment, but rather a political maneuver.

Key Candidates for ANC Leadership

• Nkosazana Dlamini Zuma: A three-time cabinet minister and chair of the African Union Commission. She is unlikely to support Zuma's prosecution.
• Zweli Mkhize: A medical doctor, exile, and ANC treasurer general. He is part of the powerful 'top six'.
• Cyril Ramaphosa: Beloved by financial markets due to his business background and ANC negotiation history. He was the first choice of Mandela and Slovo to be the second president.

Key Charts

• Chart 1: Central European GDP growth rates
• Chart 2: Central European CPI inflation rates
• Chart 3: Central European policy rates
• Chart 4: Central European 10y bond yields
• Chart 5: NUM assent covers most gold companies
• Chart 6: Real risk of more concentrated strike at Sibanye
• Chart 7: Overall coal stockpiles healthy for now
• Chart 8: Labour relations a major economic constraint

Disclaimer

This analysis has been produced by BNP Paribas Cadiz Securities (Pty) Ltd and has been reviewed, but not amended, by BNP Paribas. BNP Paribas is an indirect shareholder of the firm with a 60% stake. This analysis does not contain investment research recommendations.

Conclusion

The report highlights the interplay between global economic trends and regional monetary policy, with a focus on Central Europe and South Africa. It suggests that while Central European economies are expected to grow and tighten monetary policy in late 2016, South Africa faces labour-related challenges that could affect confidence and investment. The political dynamics within the ANC are also critical, with succession debates and labor strikes influencing the economic outlook.