CEEMEA macro and political developments

What has been of interest over the past month in the CEEMEA space, from a macro/micro/political stand point and what are the catalysts or events in the near term that could affect the region?

Israel

There are two major points of interest in Israel. The parliament needs to adopt a budget law for 2023 (it is preparing a budget law for 2023-2024) by May 29, otherwise the parliament will have to disperse and new elections will be called. The budget documents were passed in first reading in the Knesset, two more readings are necessary. While all coalition partners have by now supported the budget, pressures might arise over disagreements regarding the judicial reform.

The judicial reform is the second major event in Israel since the year started. The ruling coalition proposed the reform claiming that it will restore the balance between the judicial and the executive parts of the government. The opposition claims the reform will politicize the justice system and hurt the country’s democratic character by affecting the checks and balances.

Apart from those two there is a third issue that can affect the country. The tensions with the Palestinians have been intensifying for months and there has been an increase in the terror attacks against Jews compared to previous years. During the Passover holiday that just ended, Israel suffered rocket attacks from Gaza, Lebanon and Syria, which is seen as the largest escalation for years. The situation is rather fragile and media reported that former army officials have been warning that Israel is closer to war than to peace.

Hungary

The main issue of interest in Hungary lately has been the conflict on economic policy between the NBH and the government. The conflict intensified with NBH governor Matolcsy and PM Orban publicly exchanging some strong words against each other while previously Orban had not been a direct part of the conflict. The conflict could become some source of volatility in monetary policy making, especially with the appointment of two new members on the MPC, although we consider this a low probability event. A recent meeting between Matolcsy and finance minister Mihaly Varga signalled some efforts to overcome the disagreements but we believe that the factors that caused the conflict in the first place have not been fully overcome so it will likely continue to be issue.

The EU funds remain an outstanding hot topic for Hungary. Hungary had to implement a number of reforms by the end of March but its negotiations with the EC have delayed the process so getting access to the cohesion funds for 2021-2027 and the RRF funds will take longer than expected by the government. Communication from the government has been relatively optimistic though but there still remains a lot of uncertainty as we do not think that the government will want to back down on some issues like the controversial child protection law.

Inflation and monetary policy will be also interesting to watch. Hungary has one of the highest inflation rates in the EU and disinflation has been slow to settle in. This has been admittedly in line with expectations as the NBH has projected disinflation to become more pronounced as of H2. The slow disinflation as well as the lingering risks about the forint make the monetary policy outlook difficult to predict. The NBH employs a dual monetary policy approach at present with a 13.0% policy rate and an emergency instrument in the overnight deposit rate of 18.0%, which was implemented to ward off the downward pressure on the forint in Oct 2022. The overnight deposit rate has become the de facto policy rate and the timing of unwinding this emergency tightening could be a market mover going forward. The real policy rate is likely to be kept unchanged for a longer period than the overnight deposit rate, given the expected slow disinflation in the short term.

Poland

Politically, parties continue to prepare for a general election expected to be held on Oct 15, which happens to be the date chosen by the Polish Episcopate to celebrate 'Saint John Paul II' and one day before Oct 16, the day called by the Sejm to celebrate the same pope. There was a big story aired about a month ago by one of the private TV networks saying that John Paul II, when a cardinal, knew about pedophilia, triggering much defence of him by the senior ruling PiS and the right. This has quieted down, but is likely to be pushed by PiS to rally its voters. The latest polls show about a 50/50 chance for PiS and the far right libertarian Konfederacja to be able to form a coalition or a moderate opposition group led by the Civic Coalition (KO). PiS-Konfederacja would likely be more unstable and more controversial from a political standpoint, especially with Brussels, though it could be more laissez faire in economic terms. A KO-led group would be seen as more market positive since fights with Brussels would be ended quickly, with the economic policy probably only slightly more pro-market than the current one.

The PiS-led government's clashes with Brussels over the rule of law means the Recovery and Resilience Facility (RRF) funds remain frozen. The government did pass a Supreme Court reform that it says the EC says will help unlock the RRF money, but it is now stuck in the Constitutional Tribunal, which is at war with itself over the term limits for its chair. The Tribunal just named May 30 as the date to hear the case. If that means its internal problems have been set aside, perhaps the RRF money does flow before the election.??

Monetary policy sees the MPC's dovish majority continuing to hold rates. This group hopes the flashed slowdown of inflation to 16.2% y/y in March from 18.4% in February is a harbinger of things to come. But the dovish group does not talk of cuts late in the year as much as it did. We believe this likely suggests flat rates for some time, though the council will be very data dependent.

Another rumbling story is the CHF mortgage situation. Everyone is waiting for the full CJEU to rule on whether banks and borrowers can charge for interest for capital used. The CJEU advocate general opinion on Feb 16 that borrowers could sue for this but banks could not continues to suggest banks will have to up reserves for legal losses. But all will depend on the final CJEU ruling. If it goes against banks, the government might try to launch a systemic solution, which seems likely to compel banks to offer settlements to borrowers, with the tax situation of borrowers also potentially to worsen if they refuse a deal.

Lastly, Poland continues its staunch support of Ukraine, but cracks have appeared. Ukrainian grain has flooded into Poland but then gotten stuck and not gone elsewhere. This has seriously hurt farmers, who have been protesting. There is a deal to stop or slow such imports temporarily, but this could be a political problem for PiS heading toward the election.

Turkey

Devastating earthquakes in south-eastern Turkey on Feb 6: The earthquakes killed more than 50,000 people, left around 300K buildings collapsed or unusable due to heavy damage. The government estimated the economic toll of earthquakes at USD 103.6bn.

Parliamentary and presidential elections due May 14: The most important current agenda as opinion surveys point to a tight race between the ruling alliance and the opposition. Opposition victory may bring major changes in economic policy, most importantly return to more orthodox monetary policy.

Fiscal expansion in quake aftermath and pre-election spending: The government delivered three types of one-off cash support to quake survivors, and already launched reconstruction of residential buildings in the quake area. For the purposes of election campaigning, the government enacted early retirement scheme that enabled 5mn people to get access to pensions earlier. The government also delivered substantial hikes in lower retirement pensions.

Lira depreciation: The lira exchange rate depreciation has intensified in recent weeks as the elections come closer. The central bank and the government attempt to address lira depreciation via altering macroprudential measures.?

Czech Republic

The main development of interest is the government's goal to lower its structural budget deficit by CZK 70bn in 2024. For reference, the budget deficit target at state government level is CZK 295bn in 2023;

It involves several pieces of reform legislation, the first of which will deploy revenue-side measures. These involve consolidation of the two reduced VAT rates (10% and 15%) into a single one (current proposal is 14%), while the general rate will remain at 21%. However, there is disagreement within the ruling coalition, as the current proposal would raise the rates on services such as central heating and water, as well as on medicines. In order to avoid public scandals, a blackout on comments about tax changes has been imposed, and debate will be behind closed doors until a final proposal is drafted, expected to happen "this spring", though a delay cannot be ruled out;

Other potential tax changes include higher excise taxes on alcohol, tobacco and gambling, as well as higher property tax. No details on these have been revealed yet, but all ruling parties appear to support them;

Another important piece of legislation is pension reform. Due to an ageing population, pension expenses will only rise in the next couple of decades, and the government wants to reduce the fiscal burden from it. However, initial plans to raise the retirement age from 65 to 68 years have met widespread hostility, though far from the extent seen in France. A reform proposal had to be initially presented by end-March, now it is due in April, but it may be further delayed and announced together with tax changes;

No surprises on the macro front, as indicators are largely in line with expectations. Inflation is slowing down but remains high (15% y/y in March), the economy is technically in a recession but it is seen as mild one (a decline within 0.5% q/q), external deficits are gradually closing down, reflecting lower energy and other commodity prices;

Monetary policy remains unchanged. The Czech central bank (CNB) was one of the first to start tightening in CEE, but it stopped in the middle of 2022 and has maintained its policy rate at 7% ever since (it was 0.25% at the start of the tightening cycle in mid-2021). While local markets expect rate cuts to start in Q3, CNB board communication has been a lot more hawkish, especially recently, so we expect cuts not to start before Q4, and to be limited within 50bps. Strong labour market tightness and early signs that nominal wages may rise above 10% in 2023 have given the CNB pause;

Not a lot is going on politically, as the next general election is due in the autumn of 2025. While there have been recent disagreements on fiscal policy, they are far from a point that could break the current centre-right ruling coalition. There is a lot of political will this government to be successful, so no major crises are likely. The Czech Republic is a staunch supporter of Ukraine, a position that is not going to change as long as the current government is in power.

South Africa

Developments over past month:

-?????????????Escalating power cuts as result of capacity shortage

-?????????????Public sector wage talks

-?????????????Transnet impasse with locomotive supplier

Events in near term:

-?????????????Developments in energy sector and impact on rand

-?????????????Gupta brothers’ extradition from UAE

-?????????????BRICS summit in August at which Putin is invited