|
Russia
Russia: New USDRUB Forecasts July 07, 2008 By Oliver Weeks | London Changes to Morgan Stanley’s EURUSD forecasts imply changes to our USDRUB forecasts (see FX Pulse, July 3, 2008). We are not changing our forecasts for RUB appreciation against the reference basket, but new EURUSD forecasts – 1.53 for end-2008 and 1.40 for end-2009 – imply a stronger RUB against the USD (and weaker RUB against the EUR). For the RUB basket, we continue to expect a further three 10-kopeck corridor-widening moves this year, taking the unofficial basket corridor to 29.21-30.31. We think that FX policy has decisively shifted towards flexibility and that upcoming tax cuts can help to overcome the resistance of energy exporters to appreciation. Nevertheless, we expect the slow pace of the USD recovery to help keep the pace of band-widening gradual this year, given the focus of exporter lobbyists on RUBUSD. A likely short-term supply-driven fall in food prices can also temporarily reduce political concerns around inflation. While not changing our basket forecast, our end-2008 RUBUSD forecast moves from 24.7 to 23.6. In the near term, the likelihood of CBR intervention within the band appears to be rising. Inflows are currently very high, with FX reserves up US$16.5 billion in the last two weeks. The CBR will be reluctant to validate speculative pressure and may try to stop some positions out before the next band-widening. While oil and gas revenue so far this year has been transferred back to the budget rather than the oil funds, leaving the federal government’s treasury balance at an unprecedented RUB 2.27 trillion (5.4% of GDP), transfers into the oil fund should resume shortly, in our view. MinFin data suggest that by the end of May the budget had already received RUB 1.72 trillion of its targeted energy transfer for the year (RUB 2.15 trillion). Since CBR Governor Ignatyev has linked the size of discretionary intervention by the CBR to that of the (off-market) transfers by the MinFin into the oil funds, this could provide one justification for stepping up intervention. We still expect the impact of discretionary intervention to be temporary and the RUB to return to the strong end of the widening band, but CBR action may provide better entry levels for long RUB positions. We continue to expect more aggressive corridor-widening from the CBR in 2009, made politically easier by USD strength. Underlying inflation pressure seems to us to be unlikely to subside significantly, and PM Putin has reiterated his opposition to slowing growth in response. (Most recently, the PM told United Russia: “Mr Trichet is indicating inflation is more important than growth…we must differ on this”.) We expect consumer tax cuts to go ahead and fiscal policy to remain stimulative, boosted by spending from last year’s transfers to off-budget funds. Despite the best efforts of Finance Minister Kudrin, strong growth and oil prices are already raising pressure for yet another 2008 budget revision – the 2008 budget assumes real GDP growth at 6.7%, against a preliminary 1H estimate of 8.3%, and oil at US$92. A stronger and more flexible RUB, also allowing slightly tighter interest rate policy, still looks to us to be the most feasible policy response. Deputy Governor Korischenko’s recent comments on a +/-5% band were subsequently rejected by others in the CBR and government, and resistance to RUB strength should not be underestimated. Nevertheless, the implication of Dr Korischenko’s reported comments, a corridor eventually around 28.27-31.25, is already very close to our existing end-2009 forecast of 28.20. As the current account surplus declines in 2009, the authorities may become more comfortable with RUB flexibility, though we expect capital inflows to sustain appreciation pressure. With the new EURUSD forecasts, our end-2009 RUBUSD forecast moves from 24.5 to 23.9. We still expect the RUB to quickly reverse its recent weakness against the EUR, reaching 33.5 by end-2009.
South Africa
South Africa: Unpacking the Proposed CPIX July 07, 2008 By Michael Kafe & Andrea Masia | South Africa Statistics While the new CPIX index – just like the existing one – does not include mortgage costs because of their perverse short- term responsiveness to policy, it is not clear to us why the statistical agency decided to strip out owner-equivalent rents from the new one. This, in our view, is a major decision that is likely to attract huge debate in the coming months. Background The key changes made are as follows: (i) The existing CPIX is defined as headline CPI for metropolitan and urban areas, excluding mortgage costs. In the new headline CPI, mortgage costs have been replaced with owner-equivalent rent (OER). The latter has been excluded from CPIX. If the rationale for excluding mortgage costs from the original CPI was driven by their perverse short-term response to monetary policy, then it is not clear that OER should be excluded from the new basket, as there is no such clearly undesirable relationship between OER and policy rates. In our opinion, OER should not be excluded, as one would still be left with a basket that is not the best representation of the average consumer’s basket. (ii) The current CPI measure consists of 17 categories based on the 2000 Income and Expenditure Survey of Households. The proposed index, which is based on the 2005/6 survey, consists of just 12 categories. (iii) The current CPI captures prices of caravans and boats, musical instruments, laundry services, video recorders, etc., while the new index excludes all the above, but introduces minibus taxi fares, internet costs, restaurant and take-away costs, hotel accommodation, tickets to sporting events, CDs and DVDs, etc. Unfortunately, no history has been provided for these newly introduced components – although 12 months of history will be available when the new CPI series kick in on January 1, 2009. (iv) The weight of food and non-alcoholic beverages falls from a combined 28% to 17.9%, while alcoholic beverages and tobacco rise from a combined 3.1% to 6.4% (within the food basket, however, the conspicuous high-inflation food items such as grains, meat, fats & oils and dairy products have been given greater prominence). Medical care and health costs drop from 7.7% to 1.7%, while the share of transport rises from 15.3% to 21.4%. Within the transport category, running costs (mainly petrol) will hold a similar weight of 4.47% versus 5.03% previously, although the cost of vehicles gains significantly from 5.7% to 12.8%. (v) We could not help but notice, with some relief, that the share of electricity has almost been halved from 3.6% to 1.9%. (vi) Whereas the old index had different forms of insurance captured under their respective categories (e.g., health, housing, vehicles, etc.), the new index puts the different forms of insurance under one sub-index, within a newly created ‘miscellaneous’ category. No history is provided for the reconstructed insurance composite (vii) A number of other categories have also been shifted around. For example, the previously distinct housing and fuel & power sub indices, accounting for a combined 15.9%, have now been merged into a single housing & utilities composite, which includes items such as rental rates, property assessment rates and municipal services, with a 12% weighting. (viii) Finally, the ‘other’ category, which had a 3.6% weight, is to be replaced with a catch-all ‘miscellaneous’ category with a 15.5% weighting. This new sub-index has been broadened to include items such as personal care products and services, insurance (housing, medical, transport and other), financial services (including interest costs on non-mortgage related debt) and other services (mainly funeral costs). On the whole, given the above changes, services inflation now holds a 38.3% weighting, versus 33.8% previously, while the share of goods has fallen from 66.2% to 61.7%. The risk here is that the present down-side bias in the new index could change very quickly once commodity price inflation levels off while services inflation gains momentum. Data Mining Given the above changes, we attempt to reconstruct the new CPIX index from 2005 to date. We also provide forecasts based on the new weights. We must stress, however, that this new CPIX index is no more than a fictitious index, as we have had to make a few bold assumptions, given the paucity (and in some cases, full absence) of data points: • First, where no history is given (e.g., glassware, tools for house and garden, health, restaurants and hotels, insurance, and other services), we assumed that the sub-index grew in line with overall CPIX. This assumption relates to roughly 17% of the basket. • Second, we matched the constituents of the new CPIX with the closest proxy that we could find from the existing basket. For example, we matched household supplies and services with the old domestic worker costs index; and matched financial services to the old ‘other’ sub-index, as this is dominated by non-mortgage debt. Clearly these indices do not match one-for one, but they are the best substitutions that we could make, given all the information currently available. We would therefore approach the results of our findings with a fair amount of skepticism. Revised CPIX: Implications We make the following observations upon constructing the new CPIX index, based on the assumptions discussed earlier: • The re-weighted CPIX has an average downward bias of some 0.8pp, although this bias has fallen as low as 1.6pp in the recent past. • The sharp divergence between the two CPI measures in 1H08 is primarily as a result of surging food inflation, which rose by more than twice the average increase across the rest of the basket. This gap reaches a maximum in 4Q08 (where we forecast a peak in food prices), and comes off in 2009 as food inflation slows. Beyond this technical correction in 2009, the two indices tend to grow at a similar pace. • Importantly, our preliminary forecast suggests that the revised CPIX does not fall below 6%Y any sooner than the current measure.
Turkey
Turkey: Is Growth Holding On and Inflation Near Peak? July 07, 2008 By Tevfik Aksoy | Istanbul Strong 1Q Growth Might Only Offset Downside Risks for 2008 1Q GDP growth came out higher than expected at 6.6%Y. While the figure suggests at first sight that the deceleration in economic activity might be absent, we believe that the true reflection of declining consumer sentiment, higher interest rates and loan growth as well as the adverse impact of political uncertainty are yet to come. We keep our full-year GDP forecast of 3.5%Y unchanged and consider the stronger-than-expected 1Q GDP print to only lower the downside risks, which were quite considerable, given the sharp rise in energy costs as well as signs of economic weakness in Europe. The 6.6%Y GDP growth in 1Q08 came out higher than both our (4%Y) and consensus (4.9%Y) forecasts on the back of stronger-than-expected private consumption as well as investment expenditures. Part of this strength was due to the presence of a relatively strong base effect, especially on the part of investment expenditures. Fixed capital formation (investments) growth at 9.5%Y was clearly a robust figure and constituted the fastest growth rate since 3Q06, but we do not think that there was much to this other than the strong base year effect. In fact, a similar growth rate in investments in 2Q would not be surprising for the same reason. Separately, government spending rose by 4.2%Y, contributing marginally (0.4pp) to growth in 1Q. Meanwhile, 1Q witnessed strong growth both on the part of exports (12.2%Y) and imports (11.0%Y) that led to another negative contribution to growth by net exports (-0.6pp). On the supply side, the main driver of growth was industrial production at 7.2%Y; this came as no surprise, given the already high monthly IP data reported by TURKSTAT. Construction growth was rather weak at 2.8%Y and the sector posted its second-weakest growth rate (after 4Q07) since 1Q02. We expect the trend to remain weak throughout the year, with lack of demand for housing on the back of high financing costs as well as easing interest on part of foreign demand. In fact, home ownership (1.5%Y) and real estate, renting and business activities (-0.5%Y) showed a rather weak picture. Finally, agricultural output growth at 5.6%Y had been a relief but, considering that the sector shrank by 6.9% during the same quarter last year, we do not consider this to be a sign of strength, but rather a partial recovery from last year’s drought conditions. In summary, we consider the 1Q08 growth rate as encouraging only in regard to allaying concerns about the downside risks to our bearish 3.5% full-year GDP growth forecast. Especially considering that most of the deterioration in consumer sentiment occurred in 2Q, exacerbated by the rise in the political uncertainty, we maintain our cautious view. With no impact from 1Q growth on our overall view, we maintain our inflation and monetary policy forecasts. Negative Inflation Brings Partial Relief A surprise drop in food prices helped headline inflation to post a negative print in June. Against our 0.6%M forecast and the consensus estimate of 0.5%M, the headline CPI came out at -0.36%M. The monthly figure lowered the annual inflation rate marginally to 10.6%Y from 10.7% of May. The main driver of the surprise was the 3.4%M decline in food prices (28.6% weight in the basket). Otherwise, most of the sub-groups posted broadly seasonal figures. The slight (-0.4%M) decline in clothing and shoes prices confirmed the seasonality and, in our view, heralds the upcoming sharp drop in July; this should be of significant help to the headline figure, given the adverse implications of the recent sharp (~20%) rise in electricity prices. The 1.6%M rise in housing prices pulled the 12-month trailing housing price inflation to 16.3%Y. This remains as the sub-group that runs the highest annual inflation among all items in the CPI basket. Not surprisingly, this is followed by a 14.3%Y inflation rate in restaurants and cafes (mostly in relation to rent and utility prices), and of course food at 14%Y. Core Inflation Presents a Mixed Picture – Not So Favorable Looking into the details of the CPI data, we see that core inflation indicators (which are labelled from ‘A’ to ‘I’ with various exclusions from the headline CPI) posted noticeably different figures. For instance, CPI excluding seasonal goods was actually 1%M, indicating the influence of the decline in unprocessed food prices on headline inflation, while CPI excluding energy was -0.73%M. The standard core inflation (CPI excluding unprocessed food and energy) was again 1%M, which brought the 12-month trailing figure up to 10.4%Y. Some of the CBT’s favorite core inflation measures such as ‘H’ (CPI excluding unprocessed food, energy, alcoholic beverages, tobacco and gold) and ‘I’ (CPI excluding energy, food, non-alcoholic & alcoholic beverages, tobacco and gold) came out at 1.11%M and 0.77%M, respectively. Hence, we do not believe that the core inflation indicators are that encouraging, especially from the CBT’s policy-making perspective. Keeping Our Below-Consensus Year-End CPI inflation Forecast Unchanged Following the adverse headline reading in May and the worsening dynamics on the inflation front, we revised our inflation figure up to 9.6%. With a lower-than-expected reading in June, we would normally consider a downward revision; however, the sharp rise in electricity prices imposed as of July 1 and the ongoing rise in oil prices are likely to result in a certain deterioration in price dynamics during the current and upcoming months. Hence, despite our expectation of a sharp fall in clothing prices as well as a mild decline in food prices in the short term, we keep our year-end CPI inflation forecast unchanged at 9.6%. We believed that the risks to inflation were tilted to the upside, but the surprise print in June might just offset this expectation. No Change in Our Monetary Policy Call Either We now expect inflation to peak during the August-September period at 12.1%Y and anticipate a gradual decline in 4Q08 with the support of the base-year effects and easing domestic demand pressure. In terms of monetary policy, we keep our call unchanged that it will be a close call for the CBT to choose between a 25bp and a 50bp hike (we chose to go with 50bp to remain on the cautious side) at the July MPC. After that, we expect the CBT to stop the tightening cycle – especially if the currency remains relatively stable. A Key Step on the FDI Front: One of the crown jewels of the privatization portfolio – the electricity distribution grid – had been in the pipeline for some time, and the auction of the two regions, Following the failed attempt to enact the UN’s Annan Plan back in April 2004 and the inclusion of Moody’s Draws Attention to Rising Credit Risks An interview with Kristin Lindow – According to Moody’s, Turkey’s rising external financing requirement (mostly in relation to the rising current account deficit) amid a deteriorating global environment for risk appetite is clearly a negative, and the ongoing issues surrounding the closure case against AKP as well as macroeconomic uncertainties do not help. According to Vatan Daily, citing Ms. Lindow, Turkey’s current rating reflects all of these risk factors and, to a large extent, the maintenance of the rating had been a reflection of the improvement in fundamentals in recent years. That said, the lack of success in curbing inflation and the rising foreign trade deficit constitute the main macro risks. A Revision to a ‘Negative’ Outlook Is Possible, but Should Not Affect Asset Prices In our view, the agency might lower the outlook to ‘negative’ in the near future, and this could be contingent on the extent of the deterioration in the macro indicators and/or the outcome of the |