non-residents holdings of local currency t -bonds & t -bills · m/m, primarily driven by the...

Monday, 14 November 2016

P. 1

The Czech and Hungarian inflation start to awaken

NBP’s new projection with only small changes

CNB’s FX reserves are hitting all-time highs each

month – they already stand at 45% of Czech GDP

Weekly preview: regional GDP figures for 3rd quarter

supported by domestic demand

0

5

10

15

20

25

30

35

40

Czech Rep.(Sep 2016)

Hungary(Aug 2016)

Poland(Sep 2016)

Non-residents holdings of local currency T-bonds & T-bills(in % of total oustanding)

Global bond sell-off has hit the Polish market particularly badly – one reason could be a relatively high share of non-resident holdings.

Chart of the Week: Non-resident bond holdings

Weekly Highlights: Table of contents

Weekly Highlights: 1 Chart of the Week: Non-resident bond holdings 1 Markets & Central Banks 2 Review of Economic Figures 3 Weekly preview 4 Calendar 4 Fixed-income in Charts 5 Medium-term Views & Issues 6 CBs’ Projections vs. Our Forecasts 7 Summary of Our Forecasts 8 Contacts 9


P. 2

NBP’s new projection with only small changes

The National Bank of Poland matched broad expectations and

left its policy unchanged while it evaluated a new forecast. The

forecast itself has changed only slightly, enabling the Monetary

Policy Council (MPC) to retain its view of the economy, with the

current monetary policy settings conducive to sustainable

growth and maintaining the (overall) macroeconomic balance.

Moreover, NBP Governor Glapinski confirmed that neither the

new data nor the draft government budget for 2017 had

changed his (neutral) view of the Polish economy in any way.

The Governor also added that the MPC believed that the fiscal

expansion (through increased child benefits and increased

absorption of EU funds) would encourage the economy next

year, with its parameters to be close to the fairly optimistic

results of the NBP’s new forecast in 2017. Hence, we continue

to think the NBP will stay on hold for foreseeable future, but

Polish government bond might suffer given the global bond

sell-off and high presence of non-resident holdings of Polish

treasuries.

CNB’s FX reserves are hitting all-time highs each month

The Czech National Bank’s FX trading figure for August had

already suggested that the central bank had to make more and

more efforts to keep the koruna above its intervention

threshold, and September bore this out. The volume that the

CNB had to buy in September was almost €3.7bn, thus

continuing to significantly increase liquidity in the Czech

financial environment. Intervention activity is on the rise, but

this is quite logical. With the indicated end of the intervention

policy, more and more foreign players will begin to bet on

future appreciation of the koruna, thus pushing the CNB more

onto the defensive. In addition, these bets are also likely to

attract domestic players, who have probably not been very

involved in this game so far. Therefore, the outcomes of this

game to date have been the huge printing of new korunas, a

fall in market interest rates, and significant appreciation of the

Czech currency on the forward market.

However, a stronger koruna on the forward market will not

please exporters who have postponed their hedging operations

until the situation regarding the exit of the koruna from the

intervention policy is absolutely clear. And as a survey

conducted by the CNB and the Confederation of Industry of the

Czech Republic has shown, the number of such exporters is not

at all low, because the level of hedging exposure to exchange

rate fluctuations is still close to all-time lows. While this can

partly be justified by the trend in natural hedging, which may

result (in addition to high import content in their products)

from increased demand for foreign-currency loans, this

explanation alone is not enough. Thus, September saw strong

activity by the CNB on the forex market, and its intervention

defence does not seem to have waned in October either, when

CNB’s FX reserves rose by more than €5bn to a new all-time

high of €78.4bn (approximately 45% of GDP). This could be

partly attributable to money from the EU, which the central

bank exchanges directly for the state, but most of the amount

was clearly made up of more interventions. We will see the

exact composition in a month’s time, but for now we can say

that the CNB has already bought €26.5bn through its

interventions, thus increasing the volume of koruna liquidity by

almost CZK 700 bn.

LastChange

1W

EUR/CZK 27.1 0.13%

EUR/HUF 310 1.25%

EUR/PLN 4.40 1.66%

LastChange

1W

10Y CZK 1.00 66.67

10Y HUF 2.68 24.65

10Y PLN 2.97 17.07

Markets & Central Banks


P. 3

The Czechand Hunagarian inflation start to awaken

The rise in the Czech consumer price index gained

momentum in October. This time, prices went up by 0.3%

m/m, primarily driven by the seasonal rise in clothing and

footwear prices, accompanied by the continuing increase in

fuel prices on the Czech market. Naturally, more attention

was focused on year-on-year inflation, for which the central

bank sets targets and which jumped from September’s 0.5%

to 0.8%, i.e. 0.2% above the CNB’s forecast. If we look at the

categories of goods where prices are rising most rapidly

compared to last year, we find that these clearly include

cigarettes, alcohol, and footwear. Consumers also have to

pay more for housing-related services, especially sewerage

rates, rent, electricity, and heat. Finally, the improving

demand is also evident in package tour prices.

As borne out again above, the CNB can be satisfied with

inflation’s development. Not only that headline inflation is

on the rise, but also monetary policy inflation (0.6%) and,

notably, what is known as adjusted inflation (1.2%), which is

similar to core inflation, are now higher. Adjusted inflation

excludes the almost unpredictable fuel and food prices.

With the downside effects of energy and fuel prices on

inflation running out of steam, it is likely that inflation will

continue to rise in the months to come. After all, inflation

acceleration is already evident in the prices of services

(+1.6%). While fuel prices may go down slightly in the weeks

to come – hand in hand with the delayed adaptation of

markets to the probable (non-)agreement of oil-exporting

countries – this will not break the commenced inflationary

trend in the Czech economy.

The Hungarian inflation accelerated from 0.6% Y/Y in

September to 1% Y/Y in October in line with our

expectation. Core inflation remained at 1.4% Y/Y. The main

driver of headline CPI was the fuel price increase due to the

rise of the excise duty. Imported inflation is still low. On the

other hand the market services prices increase gradually

which reflects the stable growth of domestic consumption.

We see year-end CPI at 1.5% Y/Y, while the average inflation

may be 0.4% Y/Y in 2016 and 2% Y/Y in 2017.

Czech and Hunagrian industries disapointed in September

The Hungarian industrial production was surprisingly weak

in September, it fell by 3.7% Y/Y, which means that the

production was smaller in 3Q16 than in 2Q16, so it might

not boost the GDP in 3Q16. We don’t expect substantial

acceleration for 4Q16 and as the YTD industrial production

growth was only 1.5% Y/Y, it looks like that the full year

dynamic might remain below 2% Y/Y in 2016.

The Czech industrial production for September came out

below expectation. Despite that, the figures still remain

solid, again mainly thanks to car industry. Although the

figure confirms significant deceleration of economic growth

in the third quarter (to about 2% Y/Y), we still keep our

forecast for 2016 economic growth at 2.5%.

Review of Economic Figures


P. 4

TUE 9:00

Q3-16 Q2-16 Q3-15

GDP (q/q) 0.4 0.9 1.0

GDP (y/y) 2.0 2.6 4.8

CZ GDP (change in %)

TUE 10:00

Q3-16 Q2-16 Q3-15

GDP 3.2 3.1 3.4

PL GDP (y/y change in %)

CZ: GDP decelerated the 3rd quarter

The preliminary GDP growth forecast for the third quarter of the year

is unlikely to be very satisfactory. We expect the growth rate of the

economy to ease to some 2%, mainly because of lower investment

activity. On the other hand, we anticipate a positive contribution from

consumption in particular. Regarding GDP creation, industry is likely to

grow at a much slower rate. The extent to which the adjustment by

three calendar days by which Q3 ‘shrank’ compared to Q2 will

influence the data for the third quarter remains a technical question.

An economic deceleration should not be that surprising, and therefore

we are keeping our full-year GDP growth forecast at 2.5%.

PL: Economy maintains 3% growth

Poland’s economic growth for the third quarter was similar to that for

the first half of the year, but the economy was fuelled more by

accelerating private consumption, encouraged by increased child

benefits and low interest rates. While retail sales rose more rapidly

(year-on-year), the performance of industry was slightly worse in the

past quarter – even though foreign trade remained in good condition.

Date

11/14/2016

11/14/2016

11/14/2016

11/14/2016

11/14/2016

11/15/2016

11/15/2016

11/15/2016

11/15/2016

11/16/2016

3.1

-0.4

3Q/2016 *A

3Q/2016 *P

3Q/2016 *P

10/2016

1

0.9

%

%

%

%

2.1

9.3

09/2016

Previous

y/y

09/2016

2.6

2.6

0 0

m/m y/y

-1047-605

0.8 0.4

0.9

14:00

y/y m/mm/m

Consensus

-0.74

CPI

121PL 14:00

CZK B

EUR MPL 14:00 Current account

CZ 10:00 Current account

11/16/2016

11/18/2016

Trade balance

%

EUR M

10/2016 *F

09/2016

Indicator PeriodForecast

Country Time

PL

CZK 3Q/2016

0.5

-509

-0.2

-2 0.3 -2.4% 10/2016

0.1 3.9% 10/2016 1.5 4.2PL 14:00

CZ 9:00 GDP 0.4 2 0.5

CZ 0:00 Earnings Philip Morris

Wages

CZ 9:00 PPI

14:00 Money supply M3 % 10/2016

0.2

8.8

-0.2-0.30.3PL 14:00 Core CPI

0.3

PL 10:00 GDP

HU 9:00 GDP

3.2 0.8

1.7

3

PL

Calendar

Weekly preview


P. 5

Source: Reuters

0,0

0,2

0,4

0,6

0,8

1,0

1,2

2Y 4Y 6Y 8Y 10Y

%

CZ IRS

14/11/16 07/11/16

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2Y 4Y 6Y 8Y 10Y

%

HU IRS

14/11/16 01/12/14

1,40

1,60

1,80

2,00

2,20

2,40

2,60

2,80

3,00

3,20

2Y 4Y 6Y 8Y 10Y

%

PL IRS

14/11/16 07/11/16

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

2/8

/2016

3/8

/2016

4/8

/2016

5/8

/2016

6/8

/2016

7/8

/2016

8/8

/2016

9/8

/2016

10/8

/2016

11/8

/2016

%

FRA 3x6

Slovakia

Czech Republic

Poland

Hungary

0

1

1

2

2

3

3

4

4

5

5

2/4

/2016

3/4

/2016

4/4

/2016

5/4

/2016

6/4

/2016

7/4

/2016

8/4

/2016

9/4

/2016

10/4

/2016

11/4

/2016

%

10Y GB Yields

Czech Republic

Poland

Hungary

020406080

100120140160180200

2/8

/2016

3/8

/2016

4/8

/2016

5/8

/2016

6/8

/2016

7/8

/2016

8/8

/2016

9/8

/2016

10/8

/2016

11/8

/2016

bp

s

CDS 5Y

Slovakia

Czech Republic

Poland

Hungary

Fixed-income in Charts


P. 6

The Czech Republic Hungary Poland

Gro

wth

& k

ey is

sue

s

After last year’s exceptionally strong

GDP growth, the growth rate is gradually

decelerating this year. The demand side

is being primarily driven upwards by

household consumption and exports. By

contrast, investment activity has

decelerated significantly. Despite

record-breaking employment and wage

growth acceleration, inflation remains

well below the Czech National Bank’s

target. The current government is not

expected to put in place any significant

economic and political reforms or

changes except the unified electronic

records of sales. Likewise, the Czech

Republic is unlikely to take any steps to

adopt the euro in the near future.

Second quarter GDP figure confirmed our view

that the household consumption provides a

stable base for Hungarian economy as it

increased by 5% Y/Y. The main driver of

consumption is the increasing employment and

growing real wages. Taking in account the

tightness of Hungarian labor market, the

elevated net real wage growth may remain in

the next year, but the increase of employment

may slow down. As the households maintained

the relatively high level saving willingness so

far, we see room for extra demand coming from

the lower saving rate in next year. Although the

GDP growth may be only around 2% Y/Y in this

year, we expect a acceleration to around 3%

Y/Y in 2017 driven by the EU funds money

usages, but fundamentally the private

investments are still missing, which deteriorates

the medium term outlook of Hungarian

economy.

Prospects of the Polish economy

remain good in our view. For the

whole year 2016 we expect GDP

growth may reach 3.0 – 3.5 percent.

Apart from low interest rates (further

cuts cannot be excluded) and a

relatively weak zloty, we expect the

economy to draw additional support

from policy measures of the new

government (stimuli for private

consumption). The risks thus stem

mainly from a possible deterioration

in the external environment, most

notably in China, Russia and other

emerging markets.

Ou

tlo

ok

for

off

icia

l & m

arke

t ra

tes

The inflation forecast still envisages meeting

the inflation target in the second half of 2017,

thus freeing the CNB’s hands to discontinue

its exchange rate system, with the CNB Board

expecting the discontinuation in the middle

of next year. At the same time, the central

bank predicts a significant rise in short-term

market rates as early as in the third quarter,

but we see this as very unlikely. Moreover,

when timing the departure from its

interventions and rate hikes, the CNB will also

have to take the ECB policy into account to

avoid unnecessarily triggering excessive

inflows of speculative capital. For the sake of

completeness, we can add that the idea of

putting negative interest rates in place in the

Czech Republic is not on the agenda at all.

The inflation is still well below the 3% Y/Y

inflation target and it is unlikely to exceed

that level in the next six quarters. It means

that NBH may continue the loose

monetary policy, although no further rate

cut is expected, some unconventional

tools may be introduced in the next

months. The NBH focuses on pushing

down the Bubor rate (the reference rate

of lending), which policy was quite

successful in previous months. The NBH

also channels with its actions money into

government bonds in the domestic

financial sector, which may keep bond

yields at historic low level in the following

weeks, Also a possible upgrade of

Hungarian rating may keep bonds yield

low.

We expect the NBP to keep official

rates stable in the foreseeable future

as indicated by official statements

and comments of members of the

Monetary Policy Council.

Although we expect the next move

will be to the upside, we think short-

term risks are tilted to the downside.

Fore

x O

utl

oo

k

The development of the economy so far,

including inflation, wages, and GDP

growth, has been consistent with the

Czech National Bank’s forecast. This will

enable the CNB to abandon its exchange

rate commitment after the end of

201Q1 – if, of course, continued trends

in the economy and the ECB policy so

allow. We believe that slightly lower

than expected inflation should not be a

problem either, as it will still significantly

approach the CNB’s target. The timing of

the exit will probably come as a surprise,

in order to minimize further speculative

capital inflows.

The EUR/HUF is traded in a relatively tight

range, but it was able to break the 310

level. The fundamentals (high trade and

current account balance, decreasing

external debt etc.) suggests further HUF

strengthening especially in the current low

interest environment. We see strong

resistance level around 307.5 and 305, and

we think that NBH's action may stop the

HUF strenghtening around that levels. In

medium term we expect trading range

between 305 and 313.

We think that zloty’s sell-off related

to markets’ fears coming from

appointment of new members of the

Monetary Policy Council (MPC) is

over now. Nevertheless, while

domestic fundamentals should be

relatively supportive for the zloty,

the currency should be mostly driven

by sentiment in emerging markets

and the ECB or the Fed policy actions

respectively.

Medium-term Views & Issues


P. 7

Source: CNB, NBP, NBH, KBC

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

CZ: GDP outlook (Y/Y, %)

diff

ČNB

our est.

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

CZ: Inflation outlook (Y/Y, %)

diff

ČNB

our est.

target

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

PL: GDP outlook (Y/Y, %)

diff

NBP

our est.

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

PL: Inflation outllok (Y/Y, %)

diff

NBP

our est.

target

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

HU: GDP outlook (Y/Y, %)

diff

NBH

our est.

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

2015Q

1

2015Q

3

2016Q

1

2016Q

3

2017Q

1

2017Q

3

HU: Inflation outlook (Y/Y, %)

diff

NBH

our est.

target

CBs’ Projections vs. Our Forecasts


P. 8

Official interest rates (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. 2W repo rate 0.05 0.05 0.05 0.05 0.05 0.05 -20 bps 9/27/2012

Hungary 2W deposit r. 0.90 0.90 0.90 0.90 0.90 0.90 -10 bps 5/24/2016

Poland 2W inter. rate 1.50 1.50 1.50 1.50 1.50 1.50 -50 bps 3/5/2015

Short-term interest rates 3M *IBOR (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. PRIBOR 0.00 0.25 0.25 0.29 0.29 0.28

Hungary BUBOR 0.72 1.01 0.88 0.90 0.90 0.90

Poland WIBOR 1.73 1.71 1.71 1.70 1.70 1.70

Long-term interest rates 10Y IRS (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. CZ10Y 1.00 0.50 0.53 0.88 0.95 1.03

Hungary HU10Y 2.68 2.18 2.00 2.80 2.80 2.90

Poland PL10Y 2.98 2.22 2.33 2.50 2.70 2.80

Exchange rates (end of the period)

Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3

Czech Rep. EUR/CZK 27.07 27.06 27.02 27.02 27.02 26.20

Hungary EUR/HUF 310 315 309 315 310 313

Poland EUR/PLN 4.40 4.37 4.30 4.32 4.28 4.27

GDP (y/y)

2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4

Czech Rep. 2.6 2.0 2.2 2.3 2.1 2.3 2.4

Hungary 2.6 2.8 3.0 3.6 3.2 2.8 3.3

Poland 3.1 3.4 3.6 3.7 3.8 3.8 3.8

Inflation (CPI y/y, end of the period)

2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4

Czech Rep. 0.1 0.5 1.2 1.5 1.6 1.7 1.9

Hungary -0.2 0.6 2.4 2.5 2.1 2.2 2.4

Poland -0.8 -0.5 0.0 0.4 0.8 1.2 1.5

2016 2017 2016 2017

Czech Rep. 1.6 1.7 Czech Rep. -0.5 -0.7

Hungary 4.1 3.5 Hungary -2.0 -2.5

Poland -1.5 -1.3 Poland -2.9 -3.0 Source: KBC, Bloomberg

Last change

Public finance balance as % of GDPCurrent Account

Summary of Our Forecasts


P. 9

Brussels Research (KBC) Global Sales Force

Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Mathias van der Jeugt +32 2 417 51 94 Institutional Desk +32 2 417 46 25 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85

ALL OUR REPORTS ARE AVAILABLE ON WWW.KBCCORPORATES.COM/RESEARCH

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Contacts

../WWW.KBCCORPORATES.COM/RESEARCH

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