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Erste Group: CEE Macro/Fixed Income Daily

October 10, 2011 | Erste Group: CEE Macro/Fixed Income Daily

Analysts’ views:

PL Elections: The exit poll after yesterday’s elections showed the Civic Platform of current Prime Minister Donald Tusk as the likely victor with 39.6% of the vote. The main competitor, the Law and Justice Party, reportedly won 30.1%. The preliminary result will be released about 2 a.m. in Warsaw and final results will be published tomorrow. Whilst the exit poll is market positive, even a favourable outcome of the elections does not fully remove uncertainties regarding the budget outlook. Budget assumptions for next year are likely too optimistic so any new government will have to make changes if it is to be aligned with market expectations. We expect a mildly positive market reaction if preliminary and final results confirm victory of the Civic Platform and if there is no delay forming a new government. However, a combination of budget scepticism and the EMU financial crisis should prevent the zloty from rapid and significant strengthening. The election result should reduce the probability of monetary policy tightening if it is followed up by fiscal reforms. It is our view that the PLN will revert back to 4.10 as soon as the current market turmoil eases up.

RO Fiscal: An IMF mission will arrive in Bucharest on October 25 for another review of the precautionary stand-by arrangement. The discussions could be difficult because the key point will be the state budget for 2012, with a deficit of 3% of GDP (ESA95 methodology). The new IMF forecast for 2012 economic growth is around 2%, down from 3.5%. This requires an additional fiscal adjustment of at least 1% of GDP to compensate for lower economic growth and also for the inclusion of losses registered by some state-owned enterprises in the budget deficit. According to EU rules, a state-owned enterprise must be included as part of the general government when more than half of its resources come from the state over a three-year period. Unofficial information indicates that the government plans to negotiate a higher budget deficit in 2012 but it remains to be seen whether the IMF will agree or not. We think that the government will avoid a major fiscal slippage in 2012. 5Y government yields should fall to 7.3% and the RON appreciate to 4.2 in December 2012.

Traders’ comments:

CEE FX & CDS: The Zloty is responding favourably to the exit polls in Poland and both the HUF and CZK are following suit this morning. The HUF is strengthening in spite of downgrade rumours, so it appears quite a lot of bad news has already been priced in. Technically, SovX CEE CDS have formed a double top and broken the lower channel of the upward trend.

CEE Local Currency Bonds: Croatia was the notable underperformer on Friday for no apparent reason. Poland should get a boost today.

CEE Credit: Erste Group announced extraordinary charges this morning. Exposure to PIIGS has been reduced substantially and goodwill in its operations in Hungary and Romania have been written-down. Erste Group will host a conference call related to today's adhoc release on 10 October 2011 at 1430 CEST (1330 BST, 0830 EDT). Dial-in UK: +4420 7153 2027, dial-in US: +1 480 629 9673. The conference call will also be transmitted live over the internet (http://www.erstegroup.com/en/Investors/Webcasts- Videos) and will subsequently be available as a replay.

For more details please go to our Comments section.


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