Hungary's Industrial Production Continues to Decline in May; Manufacturing Subsectors Contribute to the Negative Trend

Navigating Slowdown: Assessing CEE Countries' Potential for Growth Amid Global Trends

ING Economics ING Economics 14.06.2023 08:03
Restrictive monetary policy, tighter credit conditions and declining confidence levels point to slowing growth in many parts of the world. The Central and Eastern Europe (CEE) region is no exception, where weakening domestic demand will keep growth rates under pressure. In later sections of this Directional Economics publication, we discuss whether policymakers will be in a position to address this slowdown with easier monetary policy. Yet the prospect of lower policy rates is not the only positive for the region. In this article, we look at which of our selected countries in the CEE region stand to benefit from: (1) a pick-up in trade volumes; (2) the drop in energy prices; and (3) a rebound in tourism   Indices of global exports, energy prices, tourism; 2019 = 100   At a first glance, the CEE is seen as a group of countries that share a few similarities, such as membership in regional economic and political unions, a similar level of income and population, global supply chain specialisation, historical connections, negative current accounts and a high role of trade with the EU. That said, there are differences within the group that call for a separate analysis of the exposure to global trends.   For example, the Czech Republic is a slower-growing developed economy by international standards, while the rest are faster-growing developing economies. There are as well differences in the domestic and foreign policy course that also affect the economic ties.   We see several channels through which the outlined global trends manifest themselves in the economic realities of the CEE. Physical trade volumes and services/tourism are factored into net exports and economic growth, the values of trade are contributing to current accounts and FX expectations, while commodity inputs affect the CPI trends (and the current account).   In this article, we explore the exposure of selected CEE countries, the Czech Republic, Hungary, Poland, Romania and Turkey – as a group and individually – in terms of these channels and see how they factor in the expected economic and financial performance. To set the scene, we look at which countries in the region stand to benefit the most from the pick-up in trade. Global merchandise trade surpassed pre-Covid levels in 2021 but has proved sluggish since. Yet factors like the expected, but so far delayed, Chinese recovery, lower shipping costs and a weaker dollar should support trade over coming years.   The IMF expects global merchandise trade to return to 3-4% pa growth rates in 2024-25 after temporarily slowing to 1.5% in 2023.   Another positive trend we examine is that of the sharp decline in energy prices. After a 63% spike in 2022 (including a 100% spike in natural gas) global energy prices (oil, gas, coal) are expected to post a 40% decline this year, according to the IMF. While we acknowledge that energy prices are subject to upside risks (largely supply related), there are big differences in how lower energy prices will play out across the region – both through energy’s share of imports and weight in CPI baskets. And lastly, we look at the positive expectations for tourism, which unlike merchandise trade has yet to recover to pre-pandemic levels.   This is bouncing back with the removal of epidemiological constraints and a catch up on the previously under-consumed services. According to UNWTO (World Tourism Organization), despite showing 86% YoY growth in 1Q23, the number of international arrivals globally is still 20% below 1Q19 levels. The reopening of China is one of the most important factors supporting expectations of further recovery. UNWTO’s panel experts expect better tourism performance later this year and a return to 2019 levels in 2024 or somewhat later. We take a look at how each of the three factors will impact countries across the region
German Inflation and US Q1 GDP Awaited: Market Focus Shifts

Prospects and Challenges for Central and Eastern European Economies in 2023

ING Economics ING Economics 14.06.2023 08:00
2023 will prove another tough year for global growth. Central bankers in most advanced economies will keep their collective foot on the monetary brake pedal. Yet trade volumes and tourism should improve, plus energy prices are substantially lower than a year ago. In this article, we take a look at how selected Central and Eastern European (CEE) economies could benefit on a relative basis.   Key observations • Looking at what an improvement in the external trade environment could mean for the region, we note Hungary and the Czech Republic are the more open economies, Poland and Romania the more closed. Turkey’s more geographically diversified trade mix has helped. Better trade trends should prove an important offset to weaker domestic demand in the region, although we caution that foreign value-add in exports is quite high. Given the recent Turkish lira depreciation, sectors using imported inputs at the lowest rate, eg, labour-intensive industries, could fare better.   • The spike in energy prices did most of the damage to the external imbalances over 2021-22 and falling prices should now be a welcome boon – especially to Hungary and Turkey. Lower energy prices may also give governments more room to pressure margins of the fuel retailers – helping to make the case for rate cuts especially in the CE4 region later this year. Romania’s relative self-sufficiency in energy suggests it will not be a major beneficiary of this story.   • When it comes to tourism, none of the selected CEE countries we cover in this article come close to the near 20% of GDP that tourism represents in the likes of Croatia, Bulgaria and Montenegro. Yet a further recovery in tourism back to pre-2019 levels would certainly be positive for the likes of Turkey, Hungary and Poland – countries that run net positive balances in terms of tourism receipts.   Current account evolution by components: 2022 vs 2019 (% of GDP)
French Economy Faces Challenges Amid Disinflationary Trend

Central European and Eurasian Local Rates Outlook: Opportunities and Challenges

ING Economics ING Economics 14.06.2023 07:59
Czech Republic - local rates views summary The CZK still has a lot to offer - high carry, balanced market positioning and a central bank ready to intervene in the FX market if the koruna weakens. In addition, the CZK has by far the highest beta against EUR/USD in the region, making it a good proxy for a global story view with a high CEE carry element. We believe the market has gone too far with the pricing of the CNB rate cuts this year and along with the heavy received market positioning we see an opportunity for an upward re-pricing of the IRS curve. CZGBs offer good value with the prospect of a near halving of supply next year.     Hungary - local rates views summary We expect that the market will continue to favour the HUF, which will continue to maintain a significantly higher carry within the region in the second half of the year. In our view, the playing field for the forint will be in the range of EUR/HUF 368-378 and we target year-end at 372. The market is pricing in a large portion of NBH normalisation, but we believe that the fast disinflation and a strong forint will support further market bets on policy easing. We see a lower and steeper curve. HGBs are getting expensive after the recent rally.   Poland - local rates views summary The Polish zloty has closed the gap with the CEE region and although it should remain on a strengthening trajectory it is no longer undervalued in our view. We target 4.45 EUR/PLN for the end of the year. However, currently, the significant long positioning of the market and election noise over the coming months will be hurdles. The NBP is the most dovish central bank in the CEE region and with inflation falling, the market will price in more rate cuts both this year and next. Moreover, inflation has the potential to surprise to the downside. POLGBs are seen as the cheapest bonds in CEE, while funding is fully under control, pricing too many negatives.     Romania - local rates views summary The new range is likely to be 4.94-4.98 EUR/RON, with no expectation of moves to the lower levels. We envisage at least one more upward shift before the year-end. We target the EUR/RON level of 5.02 for the end of the year. ROMGBs offer the best funding situation and disinflation profile in the CEE region. In addition, they are the only ones to offer a steep curve and reward for duration. However, spreads against CEE peers and heavy long positioning may indicate a problem for the next rally. The overall direction remains clear, further gains may be at a slower pace.   Ukraine - local rates views summary FX reserves exceeded nearly US$36bn in May, for the first time since 2011. This reflected continued foreign aid and lower monthly costs of FX interventions. This significantly deceases near-term odds of another devaluation of the UAH, as the central bank may prefer a stable currency to combat inflation. The fundamentals behind UAH remain unsupportive though. Ukraine has benefited from declines in global commodity prices and the CPI is dampened by the high statistical base. However, we expect the NBU to wait for a more decisive period of disinflation and start rate cuts in early 2024. Public and external financing needs have been met by foreign flow. The fiscal position is set to deteriorate further but improve gradually in the medium term.     Kazakhstan - local rates views summary KZT appreciation since 3Q22 was based on the substantial atypical net private capital inflow, which could prove volatile. USD/KZT has now almost recovered to levels seen before February 2022, and the new fiscal rule assumes lower state sales of FX out of NFRK. In addition, risk of Russia-related secondary sanctions may push Kazakhstan be more cautious about trade flows   Turkey - local rates views summary Under the CBT policy with indirect FX interventions and regulations to control locals' FX demand, gross FX reserves have been under pressure since the beginning of this year. Given this backdrop, there is a consensus that points to a normalisation in the conduct of the monetary policy. We target 26.0 USD/TRY for the end of the year. The CBT has maintained its purchases from the secondary market, still below 6% vs the limit set at 7% of total assets of the CBT weekly statement. In the aftermath of elections, signals implying a change in policy direction are likely to determine the bond market outlook. Markets are pricing in more orthodoxy in the policy ahead than anticipated earlier.

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