Morning Note /

EMEA Daily: Growth concerns highlighted in latest IMF World Economic Outlook

  • EMEA growth estimates revised lower by IMF

  • ZAR sells off as idiosyncratic issues mount

  • Dovish CBR rhetoric drives Russian bond yields lower

Danny Greeff
Danny Greeff

Financial Market Analyst

Edmond Muzinda
Daron Hendricks
ETM Analytics
20 April 2022
Published byETM Analytics

Global growth concerns highlighted in latest IMF WEO

Talking Points: EMEA growth estimates revised lower by IMF 

Global: Global growth concerns have intensified this week as both the World Bank and IMF revised their 2022 growth forecasts lower. On Monday, the World Bank cut its global growth forecast by 0.9 percentage points to 3.2%, followed by the IMF's 0.8% percentage point cut to 3.6% yesterday. Both institutions cited the impact of the Russia-Ukraine war, and warned that inflation was becoming a clear and present danger across the globe. 

South Africa: Local CPI data for March will provide fresh insights into SA's inflation dynamics today, with consensus expectations as per Bloomberg surveys pointing to a rise from 5.7% y/y to 6.0% y/y. This would mark the first time since 2017 that inflation tested the upper limit of the SARB's 3%-6% inflation target, primarily reflecting the impact of high food and fuel prices due to the Russia-Ukraine war. Note that core inflation is rising as SA's economic gradually recovers from the pandemic, but remains well contained and near the mid-point of the SARB's target range. ETM's inflation-risk indicator is not yet pointing to any risk of runaway inflation, owing to the SARB's prudent stance towards monetary policy and SA's structurally-weak demand dynamics. Inflation may temporarily rise to or even above 6%, but ultimately the risk of an inflation spiral in SA is very low. Accordingly, the SARB is expected to stick to a gradual, but hawkish, policy normalisation process in the months ahead, with 50bps rate hikes only on the cards if second-round inflationary effects become more apparent.

Turkey: During an interview with NTV television, Turkey's Labour Minister Vedat Biglin reiterated that the government has no plans to raise the minimum wage. This comes after some officials in the government proposed a minimum wage hike amid the soaring inflation, which is eroding the real income of working citizens and a deterioration in purchasing power. Vedat said that the government's economic program focuses on fighting inflation and implementing a sliding scale system on wages would introduce the danger of hyperinflation.

Russia: Russian President Vladimir Putin signed off on legal amendments on April 16 that require Russian companies to delist their overseas shares, winding up a process that has gathered pace with the annexation of Crimea in 2014. This will likely force many Russian companies to reconfigure the ownership structure of businesses they hold. Under the amended law, foreign holders of the cancelled depository receipts would receive ordinary shares that are placed on non-resident accounts in Russia. However, since the invasion, capital controls ban foreigners from selling Russian securities, making it impossible for now to sell the ordinary stock and repatriate the proceeds.

Hungary: In the latest International Monetary Fund World Economic Outlook report released yesterday, Hungary's economic growth forecasts were lowered on the back of the spillover effects of Russia's invasion of Ukraine and the sanctions imposed by the West and its allies on Russia. According to the multilateral institution, Hungary's GDP will expand 3.7% in 2022, a cut from 5.1% in the October WEO. Economic growth is expected to slow down further in 2023 to 3.6% in 2023. From an inflation perspective, the IMF expects annual consumer price growth to reach 10.3% this year before decelerating to 6.4% in 2023. The 2022 forecast is above the NBH's 7.5%-9.8% projections. Meanwhile, the current account deficit is expected to widen to 1.3% in 2022 (from -0.9% previously estimated) before swinging back to a surplus of 0.1%, the year after.      

Poland: The IMF projects Poland's economic growth to rise to 3.7% in 2022, a downward revision from 4.7% previously estimated in the January WEO report. Meanwhile, next year, Poland's GDP growth is expected to slow down further to 2.9% compared with a previous projection of 3.7% as the impact of the war prolongs. Headline inflation is expected to remain above the NBP's inflation threshold of 2.5%±1pp for the next two years, with the IMF forecasting average annual CPI reaching 8.9% in 2022 and 10.3% in 2023. Labour dynamics are expected to remain tight, with unemployment projected at 3.2% and 3.0% in 2022 and 2023, respectively. The minimum level of slack in the labour market could help offset some of the economy's headwinds.

Czech Republic: The economic calendar heats up today, with industrial producer prices scheduled for release. The releases have topped estimates in the past, and the March reading is likely to come in above the pencilled-in figure of 23.3% y/y due to the commodity price shock from the Ukraine war. Leading indicators, such as the PMI, showed input costs rising at near-record rates, implying that consumers are in for a period of higher prices.

Forex: ZAR sells off as idiosyncratic issues mount  

South Africa: Yesterday, the ZAR recorded its biggest one-day decline since late February, when Russia brought turmoil to global financial markets by unexpectedly invading Ukraine. Suffice it to say, the market did not take well to news of stage four load-shedding. It was a big red flag to investors that highlighted SA's idiosyncratic risks, and came at a particularly unfortunate time for the ZAR as the economic and fiscal impact of the floods in Kwa-Zulu Natal were only just beginning to be digested. Amid the significant ZAR selloff at the start of the week, the USD-ZAR temporarily broke above the 15.0000 mark overnight for the first time in a month. However, this break was not sustained, and the pair has since dropped back to its 50-session moving average around 14.9400, which has provided technical support ahead of the local open. This suggests some profit-taking is in play after yesterday's move, especially since the USD has tentatively corrected lower more broadly.

Turkey: The USD-TRY consolidation theme remains intact as the pair traded relatively flat yesterday, as a result of the continued FX intervention by the central bank to manage volatility. However, the bias in the pair is skewed to the upside amid the underlying weak macroeconomic fundamentals and the more hawkish signals from the US Fed. Despite the steady performance, the TRY is significantly undervalued by more than 40% on a REER basis, which is justifiable given the factors mentioned above.

Russia: The RUB has firmed against a broadly-stronger USD during the early stages of the week, and is currently trading around 78.50/$. Capital controls continue to prevent significant currency weakness, despite the risks facing Russia at present. Simultaneously, the RUB continues to enjoy support from Russian energy exports, with oil and gas prices remaining extremely elevated relative to historical norms. Not much can be read into the RUB's ongoing strength, however, other than that it will relieve inflationary pressures in Russia.

Hungary: The EUR-HUF continued to retreat yesterday, extending its losing streak to six successive sessions. The correction in the cross comes as investors continue to reposition following HUF's sharp drop during the first week of this month. The cross has pared back more than 1.94% since reaching 379.28 to the EUR on April 6. However, the EUR-HUF remains high compared to levels seen pre-invasion. The losses are being capped by lingering concerns over the Ukraine war and the EC's announcement of disciplinary action against Hungary, which will deny Budapest access to EU backstops.   

Poland: The EUR-PLN snapped the retreat seen in the previous sessions despite the hawkish comments from the NBP rate setter. The cross firmed more than 0.50%, erasing some pre-Easter losses and, ending the day, slightly below the 4.65 mark. As a result, the cross has moved back between the 50-and 100-SMAs, where it has been ebbing and flowing since the start of this month. Topside bias in the EUR-PLN could be a result of the downward revision in Poland's economic growth by the IMF and progressively more aggressive tightening signals from the US Fed, buoying UST yields and the greenback.  With no local data scheduled for release, investors will look to offshore developments for direction today.

Czech Republic: The EUR-CZK firmed to 24.458 yesterday, in line with its Visegrad counterparts, as the market returned after the long weekend. Despite this, the pair traded in a narrow range, even though Ukraine war headlines and the IMF's domestic growth outlook supported additional gains. The EUR-CZK has retreated in pre-market trade this morning amid a slight improvement in risk appetite. The CZK bulls may receive some support from the PPI figures, with the potential for a dip below the 24.400 mark. Moves lower may be capped at around 24.300.

Fixed Income: Dovish CBR rhetoric drives Russian bond yields lower    

South Africa: Steepening pressure in the curve abated with the R2048-R186 spread stabilising on the back of R186 yield kicking higher. The underperformance of the front end suggests that the SARB's aggressive hike resolve is still considered realistic. The week ahead could feature more of the same unless the ZAR comes back under control. FRA rates, meanwhile, are ultimately consolidative given the circumstances although did turn paid yesterday. That being said, the current policy outlook as priced into the market is still more aggressive than SARB guidance and upside rates pressure should abate.

Turkey: Turkish USD-denominated bonds came under some strong selling pressure on Tuesday, with yields rising across the curve through the session. Moves were more pronounced at the long end of the curve, leading to a bear-steepening thereof on the day. This was consistent with the market's broader trend, which has seen the Turkish USD yield curve steepen sharply over the last four or so months. The bias also remains to the topside going forward, as global financing conditions look set to continue tightening in the weeks and months ahead.

Russia: Russian bond yields dropped sharply on Tuesday, with moves especially pronounced at the short end of the curve. This follows as CBR Governor Elvira Nabiullina hinted at monetary easing to support the Russian economy, saying that the central bank should work on increasing credit availability to the economy. Should CBR rhetoric remain dovish, RUB bond yields could continue to fall in the weeks ahead, leading to a further bull-steepening of the curve.  

Hungary: Appetite for Hungarian T-bills dropped during yesterday's auction, with total demand coming in at HUF51.1bn versus HUF88.9bn a week ago. This is unsurprising given the lingering geopolitical risks as the war in Ukraine rages on and the rising prospects of aggressive rate hikes by the US Fed, triggering a rotation towards haven assets. The drop in demand prompted the AKK to sell HUF40.0bn of discounted three-month T-bills, slashing the original offer by HUF10.0bn and generating a cover ratio of 1.28 (down from 1.78 a week ago). The average clearing yield rose during the auction, with the T-bills clearing 8bps higher than the yield at the previous auction and 22bps over the secondary market benchmark, which matures about a month later. Clearing yields have been on the rise recently, buoyed by the elevated global inflation pressures stoking the central bank to tighten monetary policy.   

Poland: Polish bonds came under selling pressure yesterday on the back of more hawkish comments from an NBP official. Councilmember Henryk Wnorowski told Business Insider that interest rates might go up to 7.5% as the central bank continues to fight to combat inflation. Wnoroski said that "we operate in a situation in which we cannot impose any limits, no boundaries and the assumption that the rate-hiking cycle will end at 6.5% may be too optimistic." Given this hawkish account, the local bond yield curve shifted higher, with more pronounced increases seen from the belly to the long end of the curve. For context, the 5yr and 10yr POLGB yields drifted higher by more than 32bps apiece to multi-year highs of 6.79% and 6.26%, respectively. At the front, the 2yr tenor's yield climbed more than 27bps to 6.45%.

Czech Republic: The yield on the Czech 10yr government bond rose to a decade high of 4.319% yesterday as investors continue to sell off government bonds due to escalating tensions in the Russia-Ukraine conflict, downgraded global growth projections from the World Bank and the IMF and signs of even faster tightening from major central banks. The current battle by central banks worldwide to curb inflation will continue to prop up bond yields. There is growing speculation of a 75bps interest rate hike by the Federal Reserves next month, which will continue to see US Treasury yields surge higher, keeping broader bond markets under pressure.