Russia’s fiscal boost, Polish rates & Ukraine’s IMF deal - Capital Economics
Emerging Europe Economics

Russia’s fiscal boost, Polish rates & Ukraine’s IMF deal

Emerging Europe Economics Weekly
Written by Liam Peach

Signs that Russia’s government is ramping up spending have raised hopes that economic growth will strengthen further in the coming quarters, but we don’t think that it will provide the large boost that many are anticipating. Meanwhile, recent developments suggest that the debate on the Polish MPC will increasingly shift towards interest rate cuts and the Ukrainian authorities are edging closer to securing a fresh deal with the IMF.

Russia: boost from fiscal policy seems optimistic

Signs that Russia’s government is ramping up spending have raised hopes that economic growth will strengthen further in the coming quarters. But we don’t think that it will provide the large boost that many are anticipating.

The government had been behind schedule with spending on President Putin’s ‘national projects’ for most of this year, but there are signs that authorities are now playing catch-up. After rising by just 4% y/y in the first three quarters of the year, spending on the ‘national economy’ category rose by 42% y/y in October. This was followed by monthly activity data for October which showed that the economy maintained a solid pace at the start of Q4, following a 1.7% y/y expansion in Q3. (See here.)

This has prompted talk that looser fiscal policy will be able to engineer a faster recovery and with spending likely to be ramped up over the coming quarters, the risk to our forecast for GDP growth of 1.3% next year lies to the upside. But the authorities have been slow to increase spending this year and policymakers seem eager to maintain the strength of the country’s balance sheets. Any boost will probably be small and will take time to feed through.

Comments this week from the central bank governor that low execution of the federal budget was responsible for weaker inflationary pressures in the first half of the year suggest that looser fiscal policy may take the pressure off the central bank to ease policy. With inflation set to fall sharply early next year, this is unlikely to prevent another 50bp of rate cuts. But scope for rate cuts below 6.00% is limited.

Poland: talk of rate cuts likely to increase

All the signs are that the debate on the Polish MPC will increasingly shift towards easing. This week, the minister for state assets stated the government’s intention not to hike electricity prices in January, which has been a major source of uncertainty for the inflation outlook. The central bank expects a chunky 8% rise to push inflation to 3.5% in Q1 2020 and there is a risk that inflation undershoots expectations. What’s more, Polish industrial production softened in October, which came hot on the heels of a slowdown in GDP growth to below 4% in Q3.

MPC members have been vocal in their calls for rate cuts and the minutes of the November MPC meeting reinforced this dovish tone. Talk of rate cuts is likely to grow over the coming months, but with core inflation likely to pick up strongly and the economy unlikely to pick up too much, we don’t think that there will be a majority in favour of easing.

Ukraine edging towards a new IMF deal

The Ukrainian authorities are edging closer to agreeing on a new bank insolvency law, clearing the final hurdle to securing a fresh deal with the IMF.

The Fund has insisted that the government attempt to recover some of the funds used to bail out banks or compensate depositors over the past decade. There has also been pressure to ensure that nationalised PrivatBank is not returned to its previous owners, which include the oligarch Ihor Kolomoisky, who has close connections with President Zelensky.

Passing the new insolvency law, which would address some of these issues, would pave the way for the government to agree a new financing package with the IMF. Prime Minister Oleksiy Honcharuk said this week that a deal will be reached “very soon”. Admittedly, a package of up to $6bn would not cover Ukraine’s external financing needs of around $50bn over the next year. But by underlining the government’s commitment to reform it would provide a fillip to investor sentiment towards Ukraine and help to attract greater foreign investment.

The week ahead

In a quiet week for data, the breakdown of the Q3 GDP data should reveal that strong domestic demand supported growth in Poland and Hungary.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

25th Nov

Pol

Retail Sales (Oct)

(09.00)

(+4.3%)

(+4.3%)

(+4.5%)

26th Nov

No Significant Data Releases

27th Nov

Est

Wage Growth (Q3)

(06.00)

(+7.4%)

Lit

Retail Sales (Oct)

(07.00)

+0.6%(+4.4%)

Hun

Unemployment Rate (Oct)

(08.00)

3.5%

3.5%

Pol

Unemployment Rate (Oct)

(09.00)

5.1%

5.1%

28th Nov

Tur

Economic Confidence (Nov)

(07.00)

89.8

29th Nov

Est

GDP (Q3, q/q(y/y))

(06.00)

+0.4%(+3.6%)

Rom

ILO Unemployment Rate (Oct)

(07.00)

3.9%

Lit

GDP (Q3, Final, q/q(y/y))

(07.00)

+0.1%(+3.6%)

+0.1%(+3.6%)

Tur

Trade Balance (Oct)

(07.00)

-$2.1bn

-$1.8bn

Cze

GDP (Q3, Prov., q/q(y/y))

(08.00)

+0.3%(+2.5%)

+0.3%(+2.5%)

+0.3%(+2.5%)

Hun

Wage Growth (Sep)

(08.00)

(+11.5%)

Hun

GDP (Q3, Final, q/q(y/y))

(08.00)

+1.1%(+5.0%)

+1.1%(+5.0%)

+1.1%(+5.0%)

Pol

GDP (Q3, Final, q/q(y/y))

(09.00)

+1.3%(+3.9%)

+1.3%(+3.9%)

Pol

CPI (Nov, Prov.)

(09.00)

+0.2%(+2.5%)

+0.1%(+2.5%)

+0.2%(+2.5%)

Lat

GDP (Q3, Final, q/q(y/y))

(11.00)

+0.7%(+2.8%)

+0.7%(+2.8%)

Lat

Retail Sales (Oct)

(11.00)

-1.0%(-0.4%)

Also expected during this period:

25th – 29th

Pol

Budget Balance (Oct, YTD, PLN)

-1786m

Selected future data releases and events

2nd Dec

Rus

Markit Manufacturing PMI (Nov)

(06.00)

47.2

Tur

PMI (Nov)

(07.00)

49.0

Tur

GDP (Q3)

(07.00)

(-1.5%)

Hun

Markit Manufacturing PMI (Nov)

(08.00)

51.9

Pol

Markit Manufacturing PMI (Nov)

(08.00)

45.6

Cze

Markit Manufacturing PMI (Nov)

(08.30)

45.0

3rd Dec

Tur

CPI (Nov)

(07.00)

+2.0%(+8.6%)

4th Dec

Pol

Interest Rate Announcement

1.50%

Rus

Markit Services PMI (Nov)

(06.00)

55.8

5th Dec

Rom

GDP (Q3, Prov., q/q(y/y))

(07.00)

+0.6%(+3.0%)

Slk

GDP (Q3, Final)

(08.00)

(+1.3%)

Bul

GDP (Q3, Final, q/q(y/y))

(09.00)

+0.7%(+3.7%)

6th Dec

Est

CPI (Nov)

(06.00)

-0.1%(+1.6%)

Rus

CPI (Nov)

(13.00)

+0.1%(+3.8%)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics


Main Economic and Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

2008-17

GDP

Consumer Prices

World 1

Ave.

2018

2019

2020

2021

2018

2019

2020

2021

Russia

3.2

1.3

2.3

0.8

1.3

1.0

2.9

4.5

3.3

3.5

Turkey

1.7

5.1

2.6

0.3

3.8

2.5

16.3

16.0

13.5

15.0

Poland

0.9

3.4

5.1

4.3

3.0

2.5

1.6

2.5

3.0

2.8

Romania

0.4

2.7

4.1

4.5

3.0

2.0

4.6

4.0

3.8

3.3

Ukraine

0.3

-1.4

3.3

3.5

2.8

3.0

11.0

8.3

6.0

5.0

Czech Rep

0.3

1.5

3.0

2.5

2.0

2.3

2.1

2.8

2.5

2.3

Hungary

0.2

1.1

4.9

4.3

2.5

2.3

2.9

3.3

3.5

3.3

Slovakia

0.1

2.4

4.1

2.8

2.5

2.5

2.5

2.8

2.5

2.3

Bulgaria

0.1

1.9

3.1

3.3

3.0

3.0

2.8

3.0

3.0

3.3

Croatia

0.1

-0.1

2.6

3.0

2.8

2.8

1.5

0.8

1.0

2.0

Lithuania

0.1

1.5

3.5

3.3

2.5

2.8

2.6

2.5

2.5

2.3

Latvia

0.04

0.2

4.8

3.0

3.0

2.8

2.6

2.5

2.8

3.0

Estonia

0.03

0.9

4.8

3.5

2.3

2.8

3.4

2.5

2.8

2.8

Emerging Europe

7.4

2.6

3.1

1.8

2.3

1.8

6.2

6.8

5.8

6.0

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2018, PPP terms (IMF estimates).

Table 2: Central Bank Policy Rates

Forecasts

Policy Rate

Latest

(22nd Nov.)

Last Change

Next Change

End

2019

End

2020

End

2021

Russia

1W Repo Rate

6.50

Down 50bp (Oct 19)

Down 25bp (Dec 19)

6.25

6.00

6.00

Turkey

1W Repo Rate

14.00

Down 250bp (Oct 19)

Down 100bp (Dec 19)

13.00

14.00

17.50

Poland

Reference Rate

1.50

Down 50bp (Mar 15)

None on horizon

1.50

1.50

1.50

Czech Rep

2W Repo Rate

2.00

Up 25bp (May 19)

Down 25bp (Q3 20)

2.00

1.00

1.00

Hungary

O/N Deposit Rate

-0.05

Up 10bp (Mar 19)

Up 10bp (Q3 20)

-0.05

0.35

1.25

Romania

Reference Rate

2.50

Up 25bp (May 18)

Up 25bp (Q3 20)

2.50

3.00

4.00

Ukraine

Policy Rate

15.50

Down 100bp (Oct 19)

Down 50bp (Nov 19)

15.00

11.50

9.00

Sources: Bloomberg, Capital Economics

Table 3: Currencies and Stock Markets

Forecasts

Forecasts

Currency

Latest

(22nd Nov.)

End

2019

End

2020

End

2021

Stock Market

Latest

(22nd Nov.)

End

2019

End

2020

End

2021

Russia

RUB/US$

63.7

65.0

67.0

66.0

MOEX

2,942

2,850

3,000

3,150

Turkey

TRY/US$

5.70

6.00

7.50

8.50

ISE100

106,990

99,850

109,825

112,025

Poland

PLN/EUR

4.30

4.35

4.40

4.35

WIG

57,959

58,000

61,000

64,000

Czech Rep

CZK/EUR

25.5

25.7

26.0

25.5

PSE

1,083

1,060

1,110

1,170

Hungary

HUF/EUR

334

338

345

343

BUX

43,771

42,000

44,000

46,250

Romania

RON/EUR

4.77

4.90

5.15

5.25

BET

9,723

9,650

9,850

10,000

Ukraine

UAH/US$

24.1

28.0

29.5

30.5

PFTS

519

520

525

530

Sources: Bloomberg, Capital Economics


Liam Peach, Emerging Europe Economist, +44 20 7808 4990, liam.peach@capitaleconomics.com