CEE Quaterly

15 Iulie 2009

UNICREDIT TIRIAC BANK S.A.

 

CEE: Rebalancing proceeding fast, but don’t fall for a false dawn…

■ Rebalancing proceeding fast: We revised further lower our 2009 GDP forecasts during 2Q, though significantly improved our current account outlook. To the extent that the CEE rebalancing process is proceeding faster than expected, changes to our 2010 forecasts in 2Q were limited. We now forecast full year 2009 CEE17 GDP to contract 5.8% (from 3.5% previously) and for the regional current account balance – ex Kazakhstan and Russia – to improve to 2.8% (from 4.2% forecast previously).

■ CEE no longer the bogey man: Following a tough 1H 09, we see 3Q09 proving relatively benign for CEE. The sharpest period of rebalancing is behind us, ECB policy is set to remain accommodative and regional financial stability risks will only likely crystallize in the medium term (e.g. 2010). This should prove relatively FX and sovereign credit friendly inthe near term.

■ We'd be careful about falling for a false dawn, however: A combination of slow burning second round risks from 1Q 09's growth crunch and a likely challenging longer-term global backdrop means near-term stabilization could to some extent mark a false dawn. From this perspective, 2H09 marks a window of opportunity for regional policy makers to put in place realistic medium-term fiscal plans, issue debt and bolster FX reserves. Countries which doare likely to see the most positive sovereign credit ratings newsflow.

■ Latvian devaluation risk continues, despite EU payout in July: Although devaluation is not inevitable, it is our central scenario in the next 18 months given: the scale of nominal GDP contraction, the level of LVL overvaluation, the extent of private sector FX short positions and 2010 parliamentary elections. We see contagion risks from any Latvian devaluation as being relatively contained, however.

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