Post-Recession CEE: Relative Potential Amid The Global Recovery

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A presentation delivered to the EBRD\'s Eastern European Business Information Conference on the opportunities and risks in post-recession Central and Eastern Europe. Particular emphasis on the global …

A presentation delivered to the EBRD\'s Eastern European Business Information Conference on the opportunities and risks in post-recession Central and Eastern Europe. Particular emphasis on the global outlook and the relative positioning of individual CEE economies.

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  • 1. This can be your title page EBRD 8 th Eastern European Business Information Conference December 10th, 2009 Strand Palace Hotel, London
  • 2. Post-Recession CEE: Relative Potential Amid The Global Recovery By: Justin Patrie Head of Emerging Europe Analysis Business Monitor International [email_address]
  • 3. Outline
    • Global Outlook
        • Developed States
        • Emerging Markets
    • Emerging Europe
        • Selectivity Is Key
        • Where are the opportunities?
        • Where are the risks?
    • Persisting Risks
  • 4. Global Outlook: Developed States
    • Big US bounce in 2009, but rooted in base effects and restocking
    • Deflation over inflation
    • Protracted monetary easing
    • Asset price inflation, weak US$
    • Double-Dip Risks
  • 5. Global Theme 1: A Bounce, But Not A Recovery
  • 6. Unprecedented Monetary Easing Source: United States Federal Reserve
  • 7. ‘ Helicopter’ Ben Restores Liquidity…
  • 8. … But Fails To Restore Bank Lending Source: United States Federal Reserve
  • 9. So… The Solvency Crisis Remains Unresolved Source: Case-Shiller
  • 10. But Stocks And Bonds Are Benefiting… Yields falling… …and stocks are rising.
  • 11. And Commodities Too… Brent Crude, US$/bbl Gold, US$/oz
  • 12. Source: Business Monitor International 92.00 92.00 92.00 87.00 85.00 61.00 Brent Crude US$/bbl 5.80 6.00 6.20 6.45 6.72 6.84 CNY/US$ 1.26 1.27 1.34 1.40 1.45 1.40 US$/EUR . Exchange Rates/Oil (avg) 4.00 4.00 3.50 2.50 1.50 1.00 ECB Refinancing Rate 4.25 4.00 3.00 2.00 0.00 0.00 US Fed Funds Interest Rates (eop) 2.8 3.1 3.2 3 2.7 2 World 2 1.7 2.2 2.5 2.8 0.3 China 1.6 1.7 1.9 1.6 0.8 0.1 Eurozone 2.3 2.2 1.9 1 1.2 -0.5 USA Consumer Inflation (avg) 3.4 3.6 3.6 3.2 2.7 -1.9 World 7.1 7.6 8.6 7.5 8.8 8.4 China 1.9 1.9 1.9 1.7 0.6 -3.9 Eurozone 2.3 2.3 2.3 1.8 2.4 -2.5 USA Real GDP Growth, % 2014f 2013f 2012f 2011f 2010f 2009f
  • 13. Suppressed US Demand Reflected In Current Account, Savings Rate Source: Forecasts – Business Monitor International
  • 14. Inventory Re-Stocking: >50% Contribution To Headline Growth Source: Business Monitor Forecast
  • 15. Big Swing = Big Contribution To Growth Source: Forecasts – Business Monitor International
  • 16. Eurozone To Underperform
    • Less impact from base effects (0.4pps versus 0.8pps in the US)
    • ‘ An Economic House Divided’: Aggregate growth to be weighed down by weak links in Spain, Ireland, Italy, Greece and Portugal
    • Euro appreciation to limit export sector performance
  • 17. The G7 Fiscal Fiasco Source: Business Monitor International
  • 18. Global Outlook: Emerging Markets
    • Total decoupling is a myth, but rebalancing will occur
    • EM is in a better position to take advantage of a global recovery than US, UK and Eurozone
    • Convergence should continue at a rapid pace
    • EM can no longer be treated as a single asset class
  • 19. Global Theme 2: EM Over Developed States
  • 20. BMI’s Emerging Markets Checklist
    • Less leveraged and well-capitalised banking system
    • Limited levels of private sector debt
    • Strong demographics with growing middle class consumer potential
    • Resource rich
    • Market friendly policy commitment with healthy fiscal position
        
  • 21. The ‘EM Story’ In 2 Charts EM and Developed World GDP, US$bn EM GDP, % of World Total Source: Business Monitor International
  • 22. EM Leads The Way… Source: Business Monitor International
  • 23. Source: Business Monitor International
  • 24. CEE Core Theme: Selectivity is Key
  • 25. 2009: Not A Good Year… Source: Business Monitor International
  • 26. 2010: Recovery Highlights Relative Value Source: Business Monitor International
  • 27. CEE Outlook:
    • High degrees of economic, capital market and political differentiation will create wide disparities in performance post-recession
    • We continue to favour Turkey, Poland and Czech. We remain very concerned about Baltics, Ukraine and Bulgaria.
    • Broadly speaking, convergence will continue
    • Ongoing macro rebalancing should constrain growth in 2010
    • Trend growth over long-term will settle well below pre-crisis average
  • 28. From Outperformer To Underperformer Source: Business Monitor International
  • 29. Rebalancing To Be Key... Source: Historic Data – Respective Central Banks Forecasts – Business Monitor International Current Accounts, % of GDP
  • 30. But External Debt Levels Remain High Source: Historical Data – Respective Central Banks Forecasts – Business Monitor International Total External Debt, % of GDP
  • 31. … CEE Will Still Outperform Developed Source: Business Monitor International
  • 32. Why Turkey Will Be A Strategic Outperformer…
    • Stable, well-capitalised and low leveraged banking sector
    • Structural shift downward in interest rate and inflationary environment
    • Relatively limited external asymmetries and low foreign indebtedness
    • Favourable demographics
    • Strategic location between EU, MENA and CIS
    • Perceptual gap among foreign investors
  • 33. Less Leverage = More Stable Source: Respective Central Banks, end-2008 Banking Sectors: Loans To Deposits Ratio, %
  • 34. Turkey: Conservative Bank Asset Allocations Banking Sector: Asset Breakdown, TRYbn Source: Central Bank of the Republic of Turkey
  • 35. Turkey: Single-Digit Inflation For The First Time In Modern History Source: Turkish Statistical Institute
  • 36. Turkey: Single Digit Rates For The First Time In Modern History Source: Central Bank of the Republic of Turkey
  • 37. *All macroeconomic data in % of GDP, 2009 Business Monitor Forecasts ** ‘CDS Peak’ refers to widest point in benchmark 5-year sovereign credit default swap spread between September to December 2008 No No 4,986 -9.2 79.1 16.1 0.3 B-/CCC+ Ukraine No Managed 650 -4.8 75.5 23.5 -8.7 BB-/BB- Serbia Cand. Yes 849 -6.9 43.6 15.8 -2.0 BB+/BB- Turkey Yes No 1,193 -8.2 133.2 9.0 7.5 BB+/BB Latvia No Managed 1,117 -9.1 36.1 3.1 3.6 BBB/BBB Russia Yes Managed 769 -6.7 72.3 6.8 -3.0 BBB/BBB Romania No No 1,646 -1.8 84.5 1.8 -4.2 BBB-/BBB- Kazakh. Yes Yes 638 -4.4 111.3 22.0 -1.1 BBB/BBB- Hungary Cand. Managed 601 -2.4 88.5 9.6 -5.2 BBB-/BBB Croatia Yes No 698 -1.5 112.6 6.3 -11.4 BBB-/BBB Bulgaria Yes No 850 -11.0 85.8 13.4 0.3 BBB/BBB Lithuania Yes No 737 -5.5 111.7 3.8 3.2 BBB+/A- Estonia Yes Yes 415 -2.1 65.3 21.3 -0.8 A-/A- Poland Yes Yes (EUR) 262 -7.5 55.4 14.1 -3.1 A+/A+ Slovakia Yes Yes 350 -5.2 40.6 7.7 -1.1 A+/A Czech Yes Yes (EUR) 258 -7.8 183.6 64.5 -0.7 AA/AA Slovenia EU? Floating FX? CDS Peak Fis Balance Ext Debt Pub Ext Debt C/A Fitch/S&P
  • 38. Source: Fitch Ratings, as of December 7, 2009 ↓ 3 B- BB- Ukraine ↑ 2 BB+ BB- Turkey – BB- BB- Serbia ↓ 1 BBB BBB+ Russia ↓ 1 BB+ BBB Romania – A- A- Poland ↓ 3 BBB A Lithuania ↓ 1 BB+ BBB- Latvia ↓ 1 BBB- BBB Kazakhstan ↓ 2 BBB A- Hungary ↓ 2 BBB+ A+ Estonia – A+ A+ Czech – BBB- BBB- Croatia ↓ 1 BBB- BBB Bulgaria Rating Move Current Rating Rating at Mid-2008
  • 39. Turkey: Healthy Market Performance During Crisis Source: Central Bank of the Republic of Turkey
  • 40. A Re-pricing Of Relative Value: Spread: Russia 5-year CDS – Turkish 5-year CDS, bps Source: Bloomberg, Business Monitor International Calculation
  • 41. Russia: Illiquidity Crisis Is Over
  • 42. Russia: BoP Dynamics Stabilising Financial Account, US$bn Current Account, US$bn Source: Central Bank of Russia
  • 43. Russia: Reserves Rebuilding Central Bank of Russia International Reserves Source: Central Bank of Russia
  • 44. Source: Business Monitor International 624.4 567.7 506.9 469.3 469.3 447.0 438.2 477.9 FX Reserves, US$bn 27.8 28.6 29.7 31.2 32.3 34.9 35.4 29.6 RUB/basket, eop 25.0 25.5 26.0 26.5 27.0 28.5 29.4 24.6 RUB/US$, eop 5.5 6.0 6.5 8.0 9.5 9.0 13.3 11.9 Inflation, % y-o-y eop -1.2 -1.6 -3.2 -5.5 -7.5 -9.1 4.2 5.6 Budget Balance, % GDP -851 -1,028 -1,853 -2,893 -3,473 -3,734 1,697 1,782 Budget Balance, RUBbn 4.0 4.5 4.8 4.8 4.7 3.6 6.4 6.3 Current Account, % GDP 113.9 114.2 108.4 94.5 78.3 47.2 102.4 78.3 Current Account, US$bn 208.2 206.1 192.4 165.8 140.5 98.4 179.7 130.9 Trade Balance, US$bn 358.1 308.7 275.7 237.6 201.4 175.1 291.9 223.5 Imports, US$bn 566.3 514.8 468.0 403.5 341.9 273.5 471.6 354.4 Exports, US$bn 20,615 18,251 16,078 14,035 11,894 9,406 11,327 8,768 GDP per capita, US$ 4.5 4.5 4.6 4.4 3.4 -8.1 5.6 8.1 Real GDP, % y-o-y 71,674 65,039 58,701 52,480 46,368 41,171 39,954 31,880 GDP, RUBbn 2,839 2,526 2,236 1,962 1,671 1,328 1,607 1,247 GDP, US$bn 2014f 2013f 2012f 2011f 2010f 2009f 2008 2007
  • 45. Russia: Labour Market Still Looks Weak Source: Federal State Statistics Service
  • 46. Russia: Asset Quality Will Be A Drag Source: Central Bank of Russia Banking Sector Overdue Loans, % of Total
  • 47. Central Europe: Poland On Top, Hungary At Bottom Source: Historical Data – Respective National Statistical Offices Forecasts – Business Monitor International
  • 48. Source: Business Monitor International 2.4 2.4 2.4 2.2 0.8 1.5 3.0 1.9 Inflation, % ave 3.2 3.7 3.4 3.0 1.5 -4.9 6.4 10.4 Real GDP, % y-o-y Slovakia 245.00 248.92 255.81 251.81 272.00 311.81 263.62 252.10 HUF/EUR, eop 2.5 2.5 2.7 3.0 3.5 4.3 3.5 7.4 Inflatino, % ave 3.5 3.9 3.1 2.6 0.1 -6.4 0.5 1.1 Real GDP, % y-o-y Hungary 22.00 22.00 23.00 23.00 23.00 24.00 26.76 26.38 CZK/EUR, eop 2.40 2.40 2.40 2.50 2.30 1.00 3.30 5.49 Inflation, % ave 3.5 3.6 3.9 3.1 1.8 -3.8 3.2 6.0 Real GDP, % y-o-y Czech 3.30 3.80 4.00 4.30 4.38 4.45 4.15 3.60 PLN/EUR, eop 2.5 2.5 2.5 2.6 2.7 3.0 4.3 2.5 Inflation, % ave 4.1 4.3 4.0 3.8 3.4 1.2 4.9 6.6 Real GDP, % y-o-y Poland 2014f 2013f 2012f 2011f 2010f 2009f 2008 2007
  • 49. Baltics: Core Forecasts Source: Historical Data – Respective Central Banks and Statistics Offices Forecasts – Business Monitor International -0.8 -0.9 -0.4 1.8 2.1 0.3 -12.4 -14.6 Current Account, % GDP 4.1400 4.1400 4.1400 4.1400 4.1400 3.4528 3.4528 3.4528 LTL/EUR, eop 4.0 3.5 3.0 2.5 2.0 0.1 8.5 8.1 Inflation, % y-o-y eop 3.9 4.3 4.0 3.7 -1.2 -15.2 3.2 8.9 Real GDP, % y-o-y Lithuania 6.7 7.4 8.1 9.0 9.1 7.5 -10.9 -23.8 Current Account, % GDP 0.8887 0.8887 0.9029 0.9384 0.9598 0.7065 0.7130 0.7023 LVL/EUR, eop 3.2 3.4 3.8 4.3 2.0 -2.0 11.2 14.1 Inflation, % y-o-y eop 4.0 4.6 4.3 3.9 -2.3 -18.4 -2.0 10.2 Real GDP, % y-o-y Latvia -0.2 0.0 0.7 1.5 2.4 3.2 -9.3 -18.0 Current Account, % GDP 15.65 15.65 15.65 15.65 15.65 15.65 15.65 15.65 EEK/EUR, eop 2.5 2.5 2.5 2.5 0.5 -1.5 7.0 9.6 Inflation, % y-o-y eop 3.6 4.2 4.1 4.6 -1.1 -14.0 -3.6 6.4 Real GDP, % y-o-y Estonia 2014f 2013f 2012f 2011f 2010f 2009f 2008 2007
  • 50. Frontier Market Selection
    • Russia/CIS – Mongolia *
    • Huge mineral resources
    • Democratic government with no major geo-political disputes
    • Despite hiccoughs, very much in favour of Western investment
    • Western Balkans – Macedonia
    • Impressive improvements to business environment in recent years
    • Broad consensus towards EU convergence
    • Limited leverage and stable banking sector
    • Wild Card – Armenia
    • Breakthrough in relations with Turkey and resolution of Nagorno-Karabakh would be a ‘game changer’
    • Banking sector has proven remarkably resilient despite massive real GDP contraction in 2009
    *Mongolia is not a member of the CIS, though for historic and structural economic reasons, we classify the country broadly under the scope of this region.
  • 51. Core Risks To Outlook:
    • EM Investment Bubble
      • Does EM have the capacity to absorb the expected rise in capital inflows going forward?
    • Global Double-Dip
      • How will EM cope in the event of another US recession in 2011-2013?
    • Economic Policy Risks
      • Will EM governments be able to unwind the 2009 budget deficits quickly and remain committed to market reforms?
    • Geopolitical Risks
      • Where are there risks of sustained military conflict?
  • 52. This can be your title page Thank You Business Monitor International [email_address]