Bulgaria’s Euro Ambition Ambit
Bulgarian stocks showed losses on the MSCI Index through the third quarter along with other East European and Balkans markets, as it prepared to join the euro and EU banking union in a first phase next July. The ECB must complete an assessment before it enters the supervisory mechanism, and inflation running at 3.5% will continue to place price stability pressure on fiscal policy with the currency board in place until then. First half growth was over 3% on good domestic demand and cohesion fund-driven public investment to offset slumping exports to Turkey, which accounts for 7.5% of the total. Corruption and crime marks are still poor on Brussels reviews, but are unlikely to sidetrack long awaited single-currency expansion with Central Europe abandoning plans amid the debt crisis outbreak. The Czech Republic after ending the koruna cap has lifted rates with inflation at 2.5% and energy and wage forces increasing. Hungary’s bias is dovish with inflation in the 3-4% band as it continued unconventional tools like targeted central bank small business lending while phasing out interest swaps and mortgage bond buying. Poland grew at a breakneck pace above 5% at mid-year on strong consumption, but PMI weakening signals industrial crawl in the coming months which should postpone potential tightening. In Romania 5% inflation may have peaked on 4% growth, but the government will likely trigger Brussels excessive deficit procedure with an over 3% of GDP result, and the current account hole still suggests economic overheating. The central bank will introduce macro-prudential limits on household debt after years of 20% expansion, and may turn outright hawkish if currency depreciation worsens. To divert attention the ruling coalition has emphasized a referendum to uphold traditional social values and reverse same-sex marriage recognition. However popular apathy was reflected in low turnout which will sustain such “liberal” social practice.
In Croatia too the cabinet mix hangs by a thread with a 51% bloc majority, as the senior HDZ party should finish well in elections but faces fresh anti-establishment opposition. Controversy over the Agrokor conglomerate rescue has spilled over into shipbuilder help debate with the high third quarter tourist season on track for a double-digit visitor bump. Labor shortages are widespread, as tax and pension reforms go into effect on relative budget balance. To extend 3% growth tax relief is slated for 2019 to reinforce previous packages. Serbia’s 4.5% growth is the fastest in a decade despite next export drag. Household and investment spending have picked up with good progress on the IMF program, and 2.5% inflation is not yet enough to rattle the central bank, which recently battled deflation. Western sell-side research often picks stocks and bonds for recovery value, but cultural and commercial ties with Russia sharing the Cyrillic alphabet instill caution. Russian companies have been removed from external borrowing since new US sanctions in April, and the Treasury Department is studying a full securities ownership ban. International reserves and foreign debt are roughly equal in the $450 billion range, but the ruble continues to slip against the dollar as world oil prices may soften in the near future. With this scenario budget adjustment envisioned delay in the retirement age provoking mass outcry, for a dent in President Putin’s popularity and fiscal soundness.
