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BG: Neutral – Deleveraging of the economy continues throughout March (p2)
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Today’s Events
CR: Flash 1Q GDP / LN: April Retail Sales / RU: Money Supply as of May 23 / SK: April PPI
EEMEA Markets
President Boris Tadic confirmed at a press conference yesterday that the top fugitive from the International War Crime Tribunal for the Former Yugoslavia (ICTY), Ratko Mladic, was captured yesterday morning in a town north of Belgrade. In response to the news the EUR/RSD fell 1.3% to 96.6 and central bank vice governor Markovic stated the NBS stands ready to intervene to smooth excessive dinar strength. This is evidently a positive announcement, which now paves the way for Serbia to achieve candidate country status during 4Q11. We also believe that Mladic’s arrest sharply increases the likelihood of an announcement of a date for the start of EU accession talks for Serbia. ICTY chief prosecutor Brammertz’s report to the UN on 6 June on Serbia’s cooperation with the ICTY will now definitely not be anywhere near as negative as initially feared. In terms of the RSD, we do not expect the central bank to allow further appreciation of dinar, which is already the best performing currency in the region with EUR/RSD appreciating over 9% since the beginning of the year. Following vice governor Markovic’s comments, we expect FX interventions in the coming days on top of the EUR 40mn the NBS already said it would purchase over 20 days from 19 May. Mladic’s arrest will also be a plus for demand at Tuesday’s RSD 10bn 53-week t-bill auction and the 3-year FX-linked EUR100mn t-bond auction on Monday. We therefore see further scope for yield compression.
CBR chairman Sergei Ignatiev has stated that inflation is “in order”, reiterating his 7% target for 2011. He also said that in the next policy meeting on May 30th, the CBR might raise or leave rate unchanged, but mentioned that there is no more excess liquidity in the banking system, expressing concern that rising borrowing costs may create risks to parts of the banking system. The statement came during his speech at the press- conference in St. Petersburg. Overall, we think that the entire speech sounded very cautious with respect to the rate policy prospects, which constrains the possibility of a rate hike next week. However, we note that practically all factors that have pulled rate hike in late April remain well in place and even intensified in May. Thus, inflationary expectations, which CBR mentioned among important factors, remain just as high. Inflation itself is also high at 9.6% yoy and is likely to stay close to this level of even above in May. Moreover, with the announced plan to lift grain export ban from July 1, the headline might renew expansion.
Additionally, we note that economic data for April suggest continued improvement of the underlying growth factors of the economy. Investment demand has finally resumed expansion in yoy terms, reversing 1Q11 contraction despite weak low base effect. Real wage growth also resumed on intensified nominal wage growth, while slowdown of industrial expansion in yoy terms is largely base effect driven. Therefore, we continue to believe that with such ambitious inflation target for 2011, the Central Bank is likely to continue to tighten monetary policy next week. Thus, we expect another 25 bps rate hike, as well as some tightening of minimum reserve requirements.
Goran Saravanja / Vladimir Osakovskiy
UniCredit Research