Central Europe’s Russia/Deflation Hit

Central Europe has not yet been hurt  badly by the Russian trade and investment hiatus and draws commodity import relief but is grappling with deflation as Slovak Republic bond yields go negative and stock markets slip with company pricing ability. In Poland headline CPI is -1 percent as the central bank slashed the benchmark rate 50 basis points despite 3 percent growth and a 55 PMI reading. Auto manufacturing and consumer demand have been solid in advance of national elections, with the main opposition party introducing Swiss franc mortgage breaks into the debate. Monetary officials argue that blanket solutions could compromise banking system health and encourage voluntary individual client workouts. Hungary has continued easing through conventional and special channels, the latter focusing on discount small firm lending schemes which get popular support despite the Orban administration’s loss of its sweeping legislative majority. EU-backed projects continue to aid 3 percent growth despite Brussels’ denunciations of strongman tendencies. The Czech Republic will keep its own currency cap through 2016 with no inflation recorded last year as the start of ECB massive bond-buying will add a crowning touch to the strategy.

Kazakhstan stocks shed 20 percent among the worst MSCI frontier results as February’s previous currency devaluation anniversary passed with no reset against the ruble as non-deliverable forwards anticipate an adjustment of the same magnitude, and President Nazarbaev in power since independence called early end-April elections. All parliamentary members except one urged the snap polls as the regime scrambles to preserve economic and political confidence with the oil and Russia crisis effects. GDP growth may be only 1 percent this year on 5 percent inflation that would spike with presumed exchange rate change. Banks find few borrowers at double digit interest rates as they cope with a 30 percent NPL legacy from the 2008 crash. Both private and multilateral advisers urge faster write-offs through tax incentives and a nascent central resolution agency, but the saga has been mired in family and ruling party intrigue as the President’s former son-in-law was found hanged in a foreign jail cell and another alleged conspirator against the state lenders awaits extradition from Italy. Shares have also suffered from insider maneuverings in dual London-listed ENRC and indefinite delays in partial public enterprise selloffs promised under a “popular capitalism” program. Full exploitation of the giant Kashagan field remains distant with international funding and technical partners now gaining leverage with the global slump which has battered fellow CIS oil producer Azerbaijan. The longstanding currency peg to the dollar there was abruptly ended and the government petroleum company plans another Eurobond to bolster its position after sovereign wealth fund losses. The Aliev regime was already under criticism for imprisoning journalists ahead of hosting a major international event, and the hydrocarbon-endowed Turkmenistan chief has in turn been condemned for authoritarianism as remittances from Russia may drop 30 percent this year.