Emerging Europe

Turkey

Near-term recovery to face stronger headwinds

The region has experienced a rapid recovery, but the re-opening boost has now faded and the region is likely to face stronger headwinds in the near term due to surging COVID-19 cases, rising inflation and supply disruptions. Central European economies are vulnerable to shortages of key production inputs in the auto sector and low vaccine coverage countries such as Russia, Romania and Ukraine look most at risk of imposing tighter containment measures. Inflation is likely to remain stubbornly high over the coming months and central banks are likely to continue their front-loaded tightening cycles well into next year.

20 October 2021

Supply shortages take their toll

The supply shortages that have affected many DMs have also intensified in emerging economies over the past couple of months. The automotive sector has been hit hard by global semiconductor shortages, weighing on recoveries in Mexico, Czechia and Hungary in particular. More broadly, EM manufacturers are struggling to meet new orders, causing backlog of works to increase. Meanwhile, recent power shortages have weighed on recoveries in China, India and Brazil. As shortages continue, they are likely to not just weigh on growth, but also add to upward pressure to core inflation. That will probably keep central banks in Latin America and Central Europe in particular in tightening mode.

18 October 2021

Lower valuations may not help EM equities outperform

We don’t think the low valuations of emerging market (EM) equity indices relative to those of developed markets (DMs) is reason to expect EM equities to outperform over the next couple of years.

18 October 2021
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Erdogan playing with fire, Russia’s commodity boom

After putting the final nails in the coffin of the Turkish central bank's credibility with last month's surprise interest rate cut, the grave started to be dug this week with the firing of three MPC members. Further large interest rate cuts seem increasingly likely and the lira is heading in only one direction - the risk of a balance of payments crisis akin to that in 2018 will mount. Meanwhile, Russia's balance sheets have improved markedly in recent months amid the surge in global commodity prices, but we think any additional boost from loose fiscal policy will be limited and the factors supporting the ruble are likely to turn into slight headwinds next year.

Turkey Industrial Production & Retail Sales (Aug.)

Turkey’s industrial sector bounced back in August following a weak start to the quarter and, while retail sales growth slowed, it looks like the economy recorded another robust increase in GDP in Q3.

Turkey Consumer Prices (Sep.)

Turkey’s headline inflation rate rose further to 19.6% y/y in September and core inflation partially reversed its recent decline, but political pressure means that the central bank is likely to cut interest rates again when it meets later this month.

EM supply constraints mount

Although the emerging market manufacturing PMI ticked up last month, EM industry has been undergoing a slowdown for some time. And the surveys show that supply constraints are mounting, which is likely to weigh on manufacturers’ output in the months ahead.

Loose fiscal policy in CEE, Russia’s natural gas windfall

Government draft budgets approved for 2022 this week in Czechia and Poland and further details of social support in Hungary suggest that fiscal policy will remain supportive of growth in Central Europe. But with spare capacity increasingly limited, this will continue to fuel strong inflation pressures. Meanwhile, European gas prices surged to new highs this week and Russia will be one of the main beneficiaries - gas exports could be as much as $75bn higher in the second half of the year than would otherwise have been the case. This will also support the budget position and may prompt the government to further relax its grip on the public finances.

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