Erste Group: CEE Macro/Fixed Income Daily

Analysts’ Views: RO Current Account: C/A deficit narrowed to EUR 1.23bn (from EUR 1.61bn) on better trends in the service balance which shifted to surplus (EUR 102bn) and higher inflows of net current transfers (+24%). As we see the economy easing off at 1.2% this year from 2.5% in 2011, the C/A deficit is likely to remain below 5% of GDP. We see 5-year T-bond yields at 6.8% in December and an FX rate at 4.45. This scenario assumes that Greece remains in the Eurozone. TR Budget: The budget balance in May generated a TRY 4.6bn surplus, while the primary surplus was at TRY 7bn compared to last year’s levels of TRY 2.8bn and TRY 6.9bn, respectively. The strong performance was mainly due to the TRY 6.9bn tax revenues shifted to May from April. The year-to-date budget balance, on the other hand, generated a TRY 0.4bn deficit compared to the previous year’s TRY 0.2bn, while the primary surplus was higher, at TRY 23.9bn, compared to last year’s TRY 20.6bn. And although the overall budget performance since the beginning of the year seems strong, we should expect some deterioration in tax revenues due to slowing economic activity. Indeed, tax revenues were only 3.2% higher than last year in real terms, mainly due to weak consumption taxes and taxes on foreign trade. Non-interest expenditures, on the other hand, have posted 6.9% real growth since the beginning of the year. Although it is good to see the Ministry of Finance saying that they were ready to take steps to reach the year-end target of a TRY 21.2bn budget deficit (1.5% of GDP), we find this somewhat optimistic and keep our year-end deficit estimate at TRY 36bn (2.5% of GDP). TR Unemployment: March’s unemployment rate declined to 9.9% from 10.8% last year, while the seasonally-adjusted unemployment rate remained unchanged at 9.1% from a month ago. It is encouraging to see that the labor market does not show any deterioration, despite the ongoing slowdown in economic activity. However, we do not see these March numbers pointing to the sort of robust employment generation that would create wage pressure meriting fresh policy action. PL Current Account: Poland's April C/A came in as a positive surprise, posting a deficit of EUR 573mn, far better than EUR 920mn expected. The main factor behind is the narrowing of the trade balance deficit as imports dropped by 3.9% while exports added 0.9% y/y, due to the effect of weaker zloty. We retain our forecast of a current account deficit of 3.5% in 2012 and a firming of the PLN to 4.15 at the year-end. Traders Comments: CEE Fixed Income: Based on the results of Greek election and overnight equity market reaction, a major fear of some sort of confrontation between the Greek government and Europe has abated. According to the interior ministry projections, Greece’s centre-right new Democracy party has managed to gain most votes (29.7%) and thus is likely to command 129 seats in the 300 member parliament. Syriza, the coalition of radical left, led by Alexis Tsipras gained 26.9% of the votes which will give the party 71 seats in the Parliament. The next steps of formulation of coalition government and any demands by potential coalition partners to renegotiate austerity package imposed on Greece will be watched closely. Another positive political development over the weekend was survey results of French parliamentary seats, which predicted an absolute majority to the French Socialist (prediction of 320 sits, where 289 required for majority, however on low turnout). In CEE a mixed reaction is seen with PLN trading weaker vs EUR after an initial strengthening in earlier hours of morning. HUF still holding its gains vs EUR and currently trades at EURHUF of 291. It remains to be seen how the Troika will approach in dealing with Spain which should be the major concern at the moment that can have a detrimental impact on global and CEE debt/FX markets in the short term.For more details please go to our Comments section.

Erste Group: CEE Macro/Fixed Income Daily

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