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Emerging Europe: Variety is the spice of life
On the back of the healthier rebound in global growth and improved outlook for some of the EME countries we raised our broad CEE-17 2010 growth forecast to 2.3% (from 1.4%). The upgrade comes mostly from our revision to the bigger countries (Turkey & Russia) whilst some smaller countries will still experience recession in 2010.
CEE recovery is underway but growth differentiation will remain relatively strong in 2010 as countries have different abilities to support their export growth via weaker exchange rates and domestic demands will remain weak. Inflation will remain off the agenda in CEE but in the case of Turkey stronger growth will warrant rate hikes starting in Q3. Fiscal situation has deteriorated but still looks better than in many of the Western European countries (public sector debt is below 60% in all countries apart from Hungary).
Key macro forecast highlights: 1. Although Poland is outperforming at the moment we still believe that this reflects the late cycle nature of its economy, and expect this to turn into a moderate underperformance in 2011. This is the key reason behind our dovish NBP rate forecast (only 25bp hike). 2. We upgraded our 2010 Turkish GDP growth to 4.5% and now expect the CBT to be first central bank to hike rates in 2010. 3. We keep our Russian GDP forecast (2.7%) slightly below consensus due to weak domestic demand. 4. We expect Hungary, the Baltic Countries, Bulgaria, and Romania to underperform.
FI/FX market outlook: We continue to see scope for underperformance of CEE FX vs. other asset classes, though we see value in selected relative value trades. We prefer TRY (due to monetary policy direction) and PLN (due to fundamental support). In the rates space we’d keep moderately long duration in Hungary and reduce Turkey. We believe that CEE credit could continue to outperform EMU periphery.
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