Transcription of Directional Economics EMEA Core problems
1 Directional Economics EMEA December 2021. Economic & Financial Analysis EM Economics & Strategy 13 December 2021. Directional Economics EMEA. Core problems Azerbaijan Hungary Romania Turkey Bulgaria Kazakhstan Russia Ukraine Croatia Poland Serbia EMEA Economics and Strategy Team See details at end of report 1. Directional Economics EMEA December 2021. Contents Summary 3. Country summaries: CE3 .. 4. Country summaries: Other Central & Eastern Europe .. 4. Country summaries: CIS .. 5. ING main macroeconomic and financial 6. Core problems 7. The impact of energy prices in CEE inflation .. 7. Outlook for 2022 ..11. The outlook for terminal policy rates ..13. Countries 15. Bulgaria ..18. Croatia ..20. Hungary ..22. Kazakhstan ..26. Russia.
2 35. Serbia ..39. Ukraine ..45. Research Analyst Contacts 47. Chris Turner Global Head of Markets and Regional Head of Research, UK & CEE. Disclaimer 48. Rafal Benecki Chief Economist, Poland Dmitry Dolgin Chief Economist, Russia and CIS. Muhammet Mercan Chief Economist, Turkey Leszek Kasek Senior Economist, Poland Valentin Tataru Chief Economist, Romania P ter Virov cz Senior Economist, Hungary p Piotr Poplawski Senior Economist Cover photograph courtesy of shutterstock Publication date 13 December 2021. 2. Directional Economics EMEA December 2021. Summary Unlike Western economies where inflation should be inflecting lower by the end of 2022, many economies in Central and Eastern Europe (CEE) will be struggling with high core inflation.
3 Across the region the domestic policy mix, designed to protect household purchasing parity, leaves economies open to second round price effects. Expect high core CEE inflation in 2022 to make the case for policy rates staying higher for longer. When we published our last edition of Directional Economics in March Some Like it Hot the focus was very much on which of the central banks in the CEEMEA region were prepared to tolerate or look through high inflation. Since then, the surge in energy prices and the upward drift in inflation expectations have made such a stance untenable. With the exception of Turkey, policy rates are now being raised across the region. Driving headline inflation into the 7-10% YoY area (Turkey 21%) has clearly been energy prices for which the share in the CPI basket lies anywhere between 12% (Russia) and 25% (Poland).
4 But while Western economies should see headline inflation lower through 2022 on energy base effects, the story in CEE will be the legacy of tight labour markets, decent growth rates and loose fiscal policy sending core inflation higher. Many authorities in the region are introducing policies to protect household purchasing power or an inflation shield' as it is being called in Poland. While some measures, such as VAT tax cuts on energy, may temporarily lower headline inflation, common support measures, such as minimum wage hikes, will keep domestic demand strong. For reference, minimum wage hikes in the region are: Turkey (possibly 30%), Hungary (20%), Romania (11%), Russia ( ) and Poland ( ). The political cycle clearly plays a role here as well given Hungarian elections next April and Polish and Turkish elections due in 2023 all suggesting fiscal policy stays loose.
5 In this environment we expect CEE central banks to push the monetary brakes ever harder and look for policy rates to move to the 3% area in Poland and Romania, to in Hungary and to 8%+ in Russia. Turkey will continue on its own path, as the Erdogan administration pursues domestic growth policies. Away from inflation and policy rates, the region will of course have to continue battling the virus. Vaccine hesitancy and institutional mistrust means that some members of the region, particularly Romania, remain vulnerable to continuing waves of the virus. Equally, continued supply chain disruptions, especially in the auto sector, leave a country like Hungary more exposed than a diversified economy like Poland. In addition, Poland and Hungary's battles with Brussels over Rule of Law issues will extend into 2022 and could delay disbursement of EU funds to mid-2022.
6 Yet loose fiscal policy in those countries should soften the effects of any delays. Talking of Brussels and EU funds, Croatia remains one of the largest recipients of EU funds (nearly 12% of 2019. GDP) and the prospect of Eurozone entry in early 2023 will keep upgrade prospects in play. Elsewhere in the region, Covid-19 and inflation have taken its toll on Russian household income and pose a challenge to Russia's plans for fiscal consolidation. Here it looks like Russian GDP will revert closer to the 2% region seen over prior years even if the rouble does stay strong. And the world will continue to closely watch Turkey's pursuit of growth and tolerance of a weaker currency through 2022. As usual, please find a main article, plus detailed country coverage sections from our brilliant economists on the ground in the region.
7 Enjoy! Chris Turner, Global Head of Markets and Regional Head of Research, UK & CEE. 3. Directional Economics EMEA December 2021. Country summaries: CE3. Hungary Poland The Covid-19 pandemic swept through Hungary leaving a YoY Over late 2021, the zloty has suffered very high volatility, linked to recession behind in 2020. Economic policies went all in, spurring a domestic issues (eg, current account is deteriorating fast) and quicker-than-expected rebound in 2021. Real GDP reached its pre- gaining dollar. The Polish currency still remains relatively weak, crisis level by 3Q21 and we see a 7% YoY GDP growth this year. With despite a strong domestic macro story and NBP finally delivering the labour market at the fore of fiscal measures, its strength is now monetary tightening.
8 As such, we expect a gradual appreciation of close to the pre-Covid situation. The key challenge ahead remains the zloty in 2022 albeit expected gains by the dollar limit the scope price pressure as we see average CPI at and YoY in 2021- for PLN gains despite higher interest rates. 2022. Shortages in the economy, an energy crisis and ongoing fiscal Foreign holders are heavily underweighted in local public debt. Very support are all adding to inflation. The central bank has switched to weak zloty, particularly against the dollar, may offer incentives to tightening since June 2021 with more to come, fighting an uphill build long-term positions, especially as soon as headline CPI ceases battle as effective fiscal consolidation won't start before the April to rise (possibly 1Q22).
9 Core inflation will remain elevated, 2022 election and global risk-off puts forint under heavy pressure. potentially for a few years, but stabilising CPI should limit relatively aggressive expectations for NBP rate hikes. Romania Despite there being no electoral clash until 2024, the centre-right government coalition lasted only nine months and, following a prolonged political saga, a new grand coalition was formed between the liberal PNL and socialist PSD. Fortunately, the post-pandemic recovery has been very robust and provided some room for policy complacency. Meanwhile, however, the elephant in the room remains the twin deficits issue. The budget gap has been narrowed to an estimated of GDP in 2021 while the current account deficit (CAD) might close the year above It's a rather grim picture for an otherwise exceptional year growth-wise, which might not be repeated soon.
10 We continue to see robust growth in 2022. and 2023, but growth alone will not save the day again. Country summaries: Other Central & Eastern Europe Bulgaria Croatia After three rounds of general elections in 2021, a government Despite the pandemic context, local policymakers continue to push coalition is finally taking shape with the centrist Continuing the for euro adoption in January 2023, thus offering a strong anchor Change party having surpassed GERB ex-PM Borisov's party in beyond the current grim background. There are challenges the 10 November elections. While we expect the coalition with regarding the convergence targets as the inflation outlook has socialists BSP, There is Such People and Democratic Bulgaria to be deteriorated, but that's much in line with Eurozone developments as sealed, the zero tolerance' to corruption policy promised by the well.
