EMERGING EUROPE: ECONOMIC REVIEW SEPTEMBER 2011

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Russia: September turns out to be eventful

Recognizing the lower demand for oil amid a slowing global economic recovery, the World Bank slashed its growth forecast for this BRIC economy, which is also the world’s biggest energy exporter. In June, the Washington-based bank had predicted 4.4% growth for Russia this year. The latest update trims that growth forecast for the domestic economy down to 4% in 2011 and 3.8% in 2012. According to a Bloomberg report that details the World Bank’s predictions, economic growth in Russia has fallen below analyst estimates for the last two quarters. However, the World Bank also sees a silver lining amidst the dark clouds hovering around Russia, projecting that the slow pace of growth will help mitigate inflationary pressures. With this, the bank lowered its update for average price growth in 2011 to 7.5% from its earlier view of 8% growth. Revenues from the sale of oil and natural gas contribute 17% of the country’s GDP and 40% of the state budget, Bloomberg says. Russian Finance Minister Alexei Kudrin also said the country’s rate of inflation may fall below 7% this year, according to a report in Bloomberg.

Appearing to move in lockstep with its counterpart, the International Monetary Fund projected a bleak outlook for Russia this year as well as in 2012. At 4.3%, though, the IMF’s growth forecast for the country this year is slightly better than the World Bank’s 4%. According to a Bloomberg report, the IMF also foresees that the Russian economy will slip into a recession if oil prices fall below the level of $50 a barrel next year.

Amid the gloomy predictions, Russia seems to be cementing its reputation as an international creditor, according to a report in the Financial Times. Cyprus is nearing an agreement with Russia to avail of a $3.4 billion emergency loan, according to the report. Russia had also served as a lender of last resort to some of the former Soviet republics, most notably Kyrgyzstan in 2009.

The last week of the month also saw the unfolding of some significant political developments that could impact the Russian economy in the long run. After keeping political and economic commentators guessing for over a year, Russian Prime Minister Vladimir Putin announced that he would be running for president in the March 2012 elections, according to reports by Bloomberg. The decision evoked some sharp reactions, with most of them echoing the sentiment that Putin needs to wean the economy away from its traditional strengths of oil and natural gas. With Putin almost certain to become president, doubts have been raised about Russia’s ties with the West, which had shown signs of improvement during President Medvedev’s term in office.

Separately, Putin, the presidential forerunner, also said Russia will pump in $64 billion into the economy next year for building infrastructure and for other social spending initiatives, according to a Bloomberg report. The prime minister also said Russia will not have a budget deficit in 2011, but will have a deficit to the tune of 0.7% of the GDP in 2014, the report said.

Turkey: Second-quarter growth beats expectations

Amid the global slowdown, Turkey managed to post an annual growth of 8.8% for the second quarter, according to a report in the Financial Times. The increase in GDP during the second quarter was boosted by 14.3% growth in the financial sector, a 13.0% increase in the wholesale and retail sectors, and a 13.2% surge recorded in the construction sector, according to the same report. However, the scorching pace of growth also raised concerns that the economic expansion was not balanced and instead left the economy exposed to external shocks, the FT said. The latest release on the current account deficit also showed that the measure had touched more than 9% of the country’s GDP for the 12 months ending July, according to the same report.

After the rate cut in August, the Turkish central bank left the benchmark interest rate unchanged at an all-time low of 5.75% in September, according to a Bloomberg report. The bank’s decision has to be against the backdrop of its main trading partner, the European Union, and its attempt to resolve the sovereign debt problems. Meanwhile, inflation increased to 6.7% in August from 6.3% in July. The central bank has set a target inflation rate of 5.5% by the end of 2011, according to a Bloomberg report. In a related development, the Turkish central bank decided to relax the cap on bank lending amid slowing economic growth, according to Bloomberg. The central bank had been raising the reserve requirement for Turkish lenders for several months in an effort to cool down a credit boom that boosted demand for imports.

Despite the pace of growth, Turkey could not escape a cut in its forecasted growth by the International Monetary Fund. The IMF reduced its forecast for Turkey’s economic growth to 6.6% in 2011, lower than its 8.7% projection made in July, reported Bloomberg. For 2012, the lender trimmed its growth forecast to 2.2% from its earlier view of 2.5%.

Poland: Economy dependent on the Euro-zone

Although Poland has not adopted the euro as its currency, about 60% of the country’s exports go to the Euro-zone, according to report in the Financial Times. Despite a large domestic market, the success of the Polish economy depends much on the economic conditions in Germany as well as in the larger Euro-zone. Though the economy posted a growth of 4.3% from the year-ago period in the second quarter, the resolution of the sovereign debt crisis in the Euro-zone is key to the economic fortunes of the former communist outpost.

Poland would remain the biggest recipient of funding from the European Union through 2020, according to Regional Development Minister Elzbieta Bienkowska quoted in a Bloomberg report. On a net basis, the country with a population of 38 million, received around $97 billion in EU aid during 2007-2013, the report pointed out.

Meanwhile, Poland’s industrial output growth in August came in above forecasts. Taking this into account, the Polish central bank may not opt for interest rate cuts soon, a Bloomberg report said. Industrial production for the month grew 8.1% from the year-ago period even as it recorded 1.8% growth in July, according to data from the Central Statistical Office. On a different note, the core inflation rate increased to 2.7% in August, compared to a 2.4% rate recorded in July.

Meanwhile, Goldman Sachs made some observations on the Polish economy. The country must overhaul its public finance system to encourage investors and to receive a credit-rating upgrade, a Goldman economist said in a Bloomberg report. Speeding up the privatization of state assets, the reversal of tax cuts, and the removal of cuts in social contributions were some of the measures suggested. The country’s budget deficit had touched 7.9% of its GDP last year, which is much higher than the European Union limit of 3%. However, Polish Finance Minister Jacek Rostowski said even if the country’s economic growth slows down, its budget deficit for next year will not increase. The minister added that Poland’s economic growth this year is above expectations and would make up for any shortfall next year.

Hungary: Economic growth slows in the second quarter

Hungary’s economic growth slowed in the second quarter as exports fell and investments dried up, prompting the government to reduce its growth forecast for next year. The economy clocked a growth rate of 1.5% in the second quarter, compared to 2.5% recorded in the first quarter. The government cut its growth estimates for 2012 to 1.5%, according to a statement from Economy Minister Gyorgy Matolcsy reported in Bloomberg. The export-dependent economy of Hungary is powered primarily by exports to the euro region. Industrial production accounts for almost 25% of the country’s GDP.

The government’s aim is to keep its budget deficit within 3% of its GDP by next year. In an effort to plug the hole in the country’s budget due to slowing growth, Hungary has decided to raise sales taxes in 2012 to about 27% from the current rate of 25%. The government plans to raise about 150 billion forint from the higher value-added tax, according to a Bloomberg report.

Meanwhile, the Hungarian central bank seems to be following a “wait-and-watch” monetary policy approach. As expected, the bank left the benchmark interest rate unchanged at 6%, according to a news report in Bloomberg. Most of the central banks across Eastern Europe have left borrowing costs steady amid slowing economic growth in the region.

Hungarian Prime Minister Viktor Orban has stirred up a hornet’s nest among bankers with his proposal. According to a WSJ report, the PM wants to allow “borrowers in foreign currency to pay off their debts through a single payment at a fixed exchange rate” with Hungarian banks asked to bear the losses. The controversial law was passed by the Hungarian parliament recently, but the association of Hungarian banks is planning to engage the country’s courts to fight the move. Italy’s Unicredit Bank, which has an extensive network in the country, said it would keep its expansion plans in Hungary on hold for the time being.

Czech Republic: Tax increase in the cards for next year

Following close on the heels of Hungary, the Czech government’s budget for 2012 will seek to garner additional revenue from an increase in value-added taxes. The proposal is part of Prime Minister Petr Necas’s plan to narrow the country’s budget deficit and to curb debt growth, according to a Bloomberg report. Signaling the cloudy outlook for the economy, the International Monetary Fund lowered its expectations for economic growth in the Czech Republic to 2.3% this year from its earlier view of a 2.9% growth. The Czech government also said its economic growth for 2012 is likely to be lower than its current forecast of 2.5%.

The Czech central bank left the interest rate unchanged at its latest meeting in September considering the economic slowdown in the Euro-zone and a subdued outlook for borrowing costs, a news report from Bloomberg pointed out. Like Hungary, the Czech Republic is dependent on the European Union for much of its revenues, especially automobile exports from Skoda Auto. The country’s slowing economy was reflected in the second-quarter numbers, which indicated growth of 2.2% compared to a 2.8% growth during the first quarter.

Meanwhile, the central bank governor said changes in Czech interest rates in the future will depend much on the movements in country’s currency koruna. As a Bloomberg report highlighted, the currency has gained 0.5% to the euro since the beginning of 2011. The main risk factor leading to a rise in inflation would be a weakening of the koruna, according to the central bank.