Emerging Europe: Economic Review July 2011
Thomas White International
August 12, 2011
The European Bank for Reconstruction and Development (EBRD) has sounded a cautionary note for the east European region in the wake of the announcement of a new $229 billion aid package for Greece by the Euro-zone leaders toward the end of July. The bank, which was established to help the former communist states in their transition to market economies, said Eastern Europe and central Asia are at “serious risk” from the Euro-zone debt crisis, according to a news report published by Bloomberg. Still, the EBRD upped its economic forecast for the current year for the countries where it has investments to 4.8 percent from its earlier forecast of 4.6 percent. However, the bank said growth in these countries may slow down to 4.4 percent in 2012.
The bank said a failure to solve the debt crisis would affect investment and capital flows to countries in Eastern Europe. It also added that the losses made by the Western banks on their exposure to Greece would prompt these banks to cut down on issuing new loans in eastern European countries. Some of these Western banks own more than 70 percent of the area’s lenders. Specifically, the EBRD said banks such as Societe Generale, Erste Group Bank AG, and Unicredit SpA, which had increased their exposure to the region this year, may turn cautious in lending, and in turn, may derail the economic recovery in eastern European countries.
Interestingly, the EBRD singled out Russia and the former Soviet states as the better-off among the lot. The bank said these countries seem to be the least exposed to problems facing the Euro-zone. The bank, though, was quick to point out that energy producers such as Russia would be affected by the slowing demand for commodities if growth slows down in the Euro-zone.
At a Glance
- Russia: The central bank’s fight against inflation was setback with the alarming rise in consumer prices during the first six months of the year. Latest industrial production data also indicated that the economy may be slowly overheating.
- Turkey: Turkish economy clocked a growth rate of 11 percent for the first quarter, mainly driven by consumer spending, making it the fastest growing country in the exclusive G-20 club of nations. Still, the fast pace of growth also triggered concern among economists and policy makers.
- Poland: The annual inflation figures in June came in at 4.2 percent, which were below expectations of 4.8 percent. Yet, the fall in food prices could be attributed to factors such as the E-coli outbreak in Europe, which affected the demand for cucumbers and lettuce in Poland.
- Hungary: Hungary also had its share of good news, with the unemployment rate month falling to 10.8 percent in April-June compared to 11 percent percent during the March-May period, according to data from the Central Statistics Office.
- Czech Republic: The country’s flagship auto sector seems to be firing on all cylinders going by the latest industrial production data emanating out of the country. Industrial output increased 15.2 percent year-on-year in May.
Russia: Fast growth fanning inflation
Russia has been fighting the scourge of inflation for more than a year now. While the country has been reasonably successful in navigating rising fuel prices and the ban on vegetable imports from the European Union so far, the rise in consumer prices now stares the nation in the face. During the six months since the start of the year, Russian consumer prices have increased 5.1 percent, which is alarmingly close to the central bank’s upper limit of 7 percent. The industrial production data for June, which showed a 5.7 percent rise year-on-year, also supported the concerns about the economy slowly beginning to overheat. Encouraged by the growth in factory activity, some investment banks raised their forecasts for the country’s economic growth in 2011. The issue of inflation also assumes political overtones with the country slated to go for presidential elections in 2012. The central bank, which restrained from raising interest rates in June, may have to revisit the policy in the months to come.
The news from the Russian business world has not been glowing either, according to an FT report. After BP’s failed attempt to strike a deal with state-owned oil firm Rosneft, the oligarch partners in its TNK-BP Russian joint venture have alleged that the talks between BP and Rosneft cost the existing joint venture about “$10 billion in lost opportunities,” the report says. Meanwhile, the repercussions of the U.K. phone-hacking scandal, which tainted Rupert Murdoch and his News Corporation, were felt in another European city, Moscow. The media mogul has sold off his Russian advertising business to government-owned VTB Capital and oligarchs-led Alfa Group.
It is no secret that President Medvedev differs with Prime Minister Putin on the question of how to run corporate businesses in Russia. During the recently-held St. Petersburg Economic Forum, Medvedev announced that shares in as many as 20 government-owned companies would be sold off by the year 2015. While the pronouncement itself did not come as a surprise, skeptics could not help but compare the move with Boris Yeltsin’s 1996 election campaign, which launched the controversial “loans for shares” program and led to the creation of a new class of oligarch-businessmen, according to an FT report. Medvedev made his intentions clear when he tried to link the new round of proposed privatization to his re-election as president for a second term.
Turkey: Concern over fast-paced growth
As expected, the Turkish economy clocked a growth rate of 11 percent for the first quarter, mainly driven by consumer spending, making it the fastest growing country in the exclusive G-20 club of nations. The re-elected Prime Minister Erdogan predictably welcomed the good news, but the country’s economists and policy makers are still concerned. With the country’s trade deficit touching an all-time high of $10.1 billion in May, the pressure has increased on the central bank to implement remedial measures, according to a report in the FT. The 11 percent output growth figure came in higher than the economists’ forecast of about 9.8 percent, and interestingly, much higher than the government forecast of a 6 percent growth in the current year. Making the situation more difficult, ruling politicians have had little time to focus on adopting measures to curb demand, with continuing disruptions in Parliament by the opposition parties.
Curiously, the central bank continues to insist that it is yet to find evidence of overheating in the economy. In its latest meeting, the central bank decided to continue its policy of keeping interest rates low. Leaving the rates unchanged at 6.25 percent, the central bank said that despite the small rise in inflation indicators in the short term, the increase will be limited and will slow down in tandem with the economic activity in due course. For more than six months, the bank has followed a seemingly unorthodox monetary policy, trying to curb the speculative flow of money into the economy by keeping the benchmark rates low.
Meanwhile, Standard & Poor’s said Turkey’s economy could be heading for a hard landing, according to a report in Reuters. However, the agency noted an improvement in the country’s public debt position. S&P currently rates Turkey two notches below the investment grade, according to the report.
On a different note, embattled Japanese firm Tokyo Electric Power Co or Tepco said it won’t be involved in the construction of a nuclear plant in Turkey as it has to focus on revamping its tsunami-ravaged Fukushima nuclear facility. Power-starved Turkey is focusing on developing alternative sources of electricity as the economy grows at a breakneck pace.
Poland: Good news on inflation front
The annual inflation figure in June came in at 4.2 percent, which was below expectations of 4.8 percent. However, the fall in food prices could be attributed to factors such as the E-coli outbreak in Europe, which affected the demand for cucumbers and lettuce in Poland. The favorable numbers also fueled expectations that the Polish central bank may decide to leave the interest rates unchanged at the current rate of 4.5 percent for the rest of the year. The current rate of inflation brings cheer as the country’s unemployment rate remains high at 12 percent, while wage growth has been moderate.
Poland seems to be making steady progress as far as the privatization of government-owned companies is concerned. The latest company to join the privatization bandwagon is coking coal miner JSW, which could also pave the way for the share sales of two other remaining coal firms. The sale of about 10 percent stake in Poland’s largest bank, PKO BP, is slated for September.
In July, Poland assumed the rotating presidency of the European Union in right earnest. It is a fact that Poland has been one of the biggest beneficiaries of the generous subsidies from the EU. The subsidies have helped the country build much of its infrastructure and have also helped its farmers increase production. As Poland takes on the new responsibility, Donald Tusk has much on his plate. Among other things, he must improve EU’s relationship with Ukraine, and finalize Croatia’s accession to the Union, according to a FT report. However, the Greek crisis will, in all probability, dominate Poland’s EU presidency.
Despite Poland’s commitment to take over the EU presidency, the country’s finance minister has struck a defiant note on the question of the country’s adoption of the euro. The country, which in 2007 had set an adoption target date of 2012, has now backtracked on the pledge and is saying it may take several years for Poland to actually adopt the common currency.
Meanwhile, the Warsaw Stock Exchange (WSE) is going ahead with its expansion plans to secure its reputation as one of the biggest exchanges in the Central and East Europe (CEE) region. The bourse wants to expand its horizons from trade in financial instruments and foray into commodities and energy products. Some progress has been made on that front, with the WSE succeeding in getting the stakeholders of the Polish Power Exchange to sell about 80 percent of the company’s shares recently, according to an FT report.
Hungary: Inflation rate dips further
Hungary's annual headline inflation gauge showed a reading of 3.5 percent in June compared to 3.9 percent in May. The reading was the lowest in the country’s inflation history since April 2009, which also came in below analyst forecasts, according to a Reuters report.
Hungarian retail sales increased in May, the highest in almost eight months, in a sign that domestic demand will supplement an economic recovery that has been powered by exports so far. Sales increased 0.7 percent from the year-ago period after a 1.2 percent drop in April, according to data from a statistics office quoted by Bloomberg. The Hungarian government is targeting a growth rate of 3.2 percent in 2011.
In more good news, Hungary's three-month unemployment rate fell to 10.8 percent in April-June compared to 11 percent percent during March-May period, according to data from the Central Statistics Office. Meanwhile, the Hungarian government said it is standing by its 2011 and 2012 budget deficit targets, according to a Reuters report. Encouraged by the positive economic signals, the Hungarian central bank left its lending rate untouched at 6 percent for the sixth month in succession.
Czech Republic: Auto exports rev up industrial output
It is well known that the Czech Republic’s economic fortunes are directly tied to the health of its biggest trading partner, Germany. On the back of robust German automobile activity, the Czech flagship auto sector seems to be firing on all cylinders going by the latest industrial production data emanating out of the country. Industrial output increased 15.2 percent year-on-year in May, according to a report in the FT. Overall, exports increased 18.2 percent year-on-year. Skoda Motor, the Czech unit of Volkswagen, seems to be driving the industrial production, with the company’s sales rising 20.1 percent year on year during the first half of the year. The flip side to the story is that growth in Germany is forecast to slow down in the second half of the year.
Meanwhile, a senior official of the Czech central bank said recently that considering the lower outlook for Euro-zone interest rates, a rate hike in the country could be delayed, according to a Reuters report. Adding weight to the central bank’s low interest rate stance, Czech consumer prices fell 0.2 percent in June on a month-on-month basis as reported by Reuters. Unlike Hungary or Poland, the Czech Republic is yet to tighten rates.
On a different note, trouble seems to be brewing for Czech power producer CEZ, which is also central Europe’s largest listed company. European Union regulators are expected to investigate whether the government-controlled firm has breached competition rules by driving rivals out of the domestic market. The issue has a wider significance for the Czech Republic and the other new EU members as it is a timely reminder that membership in the exclusive club is not only about subsidies and bilateral relations, but also about the regulators’ power to monitor their domestic economies.
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