emea macroeconomic outlook - saving growth

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EMEA Macroeconomic Outlook

Saving Growth

June 2016

Dorothée Gasser-Châteauvieux| Chief Economist EMEA| Charts & tables sources: Macrobond, ING estimates unless otherwise indicated 1

Dorothée Gasser-Châteauvieux| Chief Economist EMEA| Charts & tables sources: Macrobond, ING estimates unless otherwise indicated

Poland : Overview

2

Solid growth, populist risks

• Our real GDP growth projections for Poland puts the country as one of the top performer in the CEE region over 2016-17: a solid c3.5% YoY growth pace

is forecast, supported fairly equally by private consumption (growth averaging 4% in real terms over 2016-17) and investment (growth c6% in real terms over

2016-17), with net export acting as a drag. Private consumption in particular should be fuelled mainly by rising employment, positive real wages growth (c4%),

pro-cyclical fiscal policy (PiS’s child benefits scheme).

• Inflation has been among the lowest in region over 2013-2015, with dynamics particularly tame at the industrial goods (ex energy) level. More recently the

second round effects of low oil prices added to the modest wages dynamics to contain core CPI trajectory. Though we see the risk of permanent inflation target

undershooting in the next two years, with the CPI ending 2016 at 0.7% YoY, we think the new MPC (members appointed over 1Q16) has limited appetite for rate

cuts in the short-term, due to PLN weakness, financial stability and local saving support concerns. We therefore see the repo rate being left unchanged through

2016 and 2017.

• FX: the PLN has taken a severe hit from PiS victory in the parliamentary elections and more recently from S&P unexpected rating downgrade. We think a lot of

negatives have been priced in. This, coupled with status quo on policy rates should allow the PLN to resist

• Risks:

- Institutional: the Constitutional Court “saga” has set Poland on a collision course with the EU. Yet, Poland risks little in terms of voting rights, as Hungary is

set to use its veto. But contest to the EU could be heightened in the case of a Brexit. The latter should be mostly felt via remittances/migration reversion.

- Domestic economics: PiS populist bias has not yet effectively filtered through its economic policy. Our base case is that it is unlikely to change and that the

fiscal targets are safe – but fringe risk of EDP can be envisaged (cf retirement age cut, VAT cut).

- Domestic politics: the mortgage conversion bill has yet to be approved and implemented. Our base case is for a PLN10-20bn cost for Banks as a one off (ie

on low end of expectations).

ING vs BBG

consensus (green =more

favourable forecast

vs consensus for

local assets)

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 3.4 3.6 3.5 3.5 3.4

CPI (avg, %YoY) 0.0 0.5 -0.1 1.5 1.6

Policy rates (%) 2.00 1.50 1.50 1.50 1.50

EUR/PLN (eop) 4.26 4.29 4.20 4.15 4.05

Poland

0.00

0.33

0.10

-0.05


Poland: What’s hot?

3

FX mortgage conversion

• PLN37bn loss on capital (CHF/PLN), PLN10bn loss on FX spread charged (net bank profits in 2015: PLN13bn)

• CHF28bn potentially to be bought to cover position. NBP post-Belka to be involved. Swap lines with SNB

Low Inflation

Funding the Child benefits (PLN20.5bn)

Banking tax29%

Retail tax10%

Sustaining 23%VAT

33%

Consumption impulse

12%

Other16%

Funding the Tax free amount increase (PLN12bn)

Higher VAT Revenues

33%

Deficit / ZUS cap

modification50%

Sustaining 23%VAT

3%

Consumption impulse

14%

0

10

20

30

40

50

60

70

Share of item in CPI basket in deflation (YoY%)

0

5

10

15

20

25

2010 2014 Q3

CHF loans (% of GDP)


Poland: FX, Rates, Debt

4

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 3.4 3.4 3.6 3.7 3.8 3.5

CPI (eop, %YoY) -0.9 -0.5 0.1 0.7 1.3 1.1

Policy rates (%) 1.50 1.50 1.50 1.50 1.50 1.50

3M (eop, %) 1.67 1.65 1.65 1.65 1.65 1.65

10Y (eop,%) 2.84 3.13 3.21 3.29 3.33 3.47

EUR/PLN (eop) 4.24 4.32 4.25 4.20 4.20 4.17

Poland

3.95

4.05

4.15

4.25

4.35

4.45

ING f'cast Mkt fwd Mkt consensus

Steepener 2-5Y on POLGBs

• Further concerns over the fiscal expansion plans, bunds, should weigh on the back end

• Front end may see speculation build of rate cuts especially since 1Q16 GDP disappointed (on lower GFCF, inventory drag, public investment –cfEU funds)

Switch from Poland EUR into USD over 20’s to 24’s segment

• US$ curve is expensive at the wings vs peers, but the belly rather fair

• The EUR curve is even more expensive

• Based on UST/Bunds f’cast we suggest swapping into US$, from EUR 20’s to US$ ‘24s

Quarterly macroeconomic forecasts EUR/PLN: ING forecasts vs fwd and consensus

-1.000

-0.500

0.000

0.500

1.000

1.500

2.000

Fitted Original

Regression on

UST/Bunds &

EUR/USD ING

f’cast

POLAND USD/EUR spread

-150

-100

-50

0

50

100

150

Poland (2-5yr) Hungary (3-5yr)


Hungary: Overview

5

Pro-cyclical pledge

• Real GDP should moderate further in 2016 towards 2% before reaccelerating in 2017. A substantial slowdown in EU fund absorption (lower EU funds

amount in the new programming period) this year hitting construction activity in particular and investment more generally should be the main culprit. Solid private

consumption (amidst elevated household confidence and rising purchasing power) on the expenditures side will help however buck the trend while industrial

exports (automotive equipment, pharmaceuticals) and favourable base effects in the agricultural sector should do so on the supply side.

• Inflation is not seen returning above target (3%) before 2018, leaving therewith the NBH with room to respond to ECB. Demand-led pressures at the services

prices level have been lately contained by low commodities prices (cf transport fares) and subdued inflation. Additionally, there is always the possibility of

protracted prices cut as applied in past to utilities (cf plan to cut VAT on internet services from 2017). Yet, the NBH has announced the early end to the monetary

easing cycle in May, with a base rate at 0.9% following an April CPI above expectations. Unorthodox easing measures might still be considered at a later stage,

via further adjustment to the interest rate corridor (potentially a deposit auction cap) and fine tuning of interbank markets (BUBOR).

• FX: Risks of unorthodox monetary easing resuming in 3Q16 could weigh on HUF vs EUR. However, on a MT perspective, HUF is underpinned by a very strong

external position (C/A+capital account+FDI = 10% of GDP) – the strongest in the region - and should therewith strengthen vs the EUR.

• Risks:

- Institutional: Orban contestation of the EU institutional framework (cf NBH, migration etc..) could be further bolstered in the case of a Brexit. In the meantime,

the EU is set to maintain pressure on Hungary – cf Probe on Paks nuclear plant, investigation in advertisement tax.

- Domestic economics: the unorthodox framework of the NBH is expanding further with new BUBOR implementation in September 2016. Adjustment to

deposit auction could also materialise, starting by reducing its frequency (currently bi-weekly) and eventually by imposing a cap.

- Domestic politics: the gov’t populist bias, having hit the banking sector, may turn against large foreign retailers (Food chain supervision fee plan ultimately

dropped under EU pressure) /service providers (cf Google Tax).

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 3.6 2.9 2.2 3.0 2.9

CPI (avg, %YoY) -0.2 -0.1 0.5 1.7 2.4

Policy rates (%) 2.10 1.35 0.90 0.90 1.05

EUR/HUF (eop) 314.9 315.9 313.0 308.0 303.0

Hungary

-0.15

-0.40

0.00

0.00


Hungary: What’s hot?

6

Quota Referendum

• 1294 migrants still to be resettled from Greece/Italy in Hungary as per the total Jul-15/Sep-15 commitment

• Constitutional court greenlighted referendum – probably for autumn. 87% of the population are against quotas. €0.5bn fine risk

Further Investment grade validation?

• Fitch finally upgraded Hungary to IG on May 20th

• The next reviews are due on July 8th /November 4th for Moody’s and Sep 16th for S&P. Only Moody’s has a positive outlook. Still, the Bubor revamp and recent fiscal easing package should act as constraints

Fiscal Loosening

• YTD, best budget in a decade

• 2017 budget likely to include VAT tax cuts (Pork, eggs/milk, restaurants), wages hikes, spending hikes (housing markets stimulus scheme, worth HUF100bn)

• 2018 PIT cut

NBH Unorthodoxy continues with BUBOR revamp

• Preserving the base rate level to save ammunition may prompt some fine-tuning with unorthodox measures

• Considering both CPI risks and elections deadline of 2018, there might be a case for keeping ST MM floating rates low (cf fxmortgages vs a steady policy rate)

27479

19215

9305

6182

1294

0

5000

10000

15000

20000

25000

30000

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016 2015 2014 2013

FC LC

S&P BB+ BB+

Moody's Ba1 Ba1

Fitch BBB- BBB-

-100

-50

0

50

100

150

3M Bubor vs base rate (bp)


Hungary: FX, Rates, Debt

7

280

285

290

295

300

305

310

315

320


A pause, but further steepening for the curve ahead

• The 3-10yr swap has steepened by 30bp already over the past 3m, following active communication by the NBH on the easing cycle (Nagy)

• With the latter proving shorter than anticipated the swap curve steepening trend now may pause to pause before resuming

REPHUN vs ROMANI (’23), Switch REPHUN EUR into USD (‘20)

• Solid budget, rating bias is upwards, political stability

• Risks: opportunistic US$ tap on markets conditions, active debt metrics reduction policy now behind

• We like 23’s US$ segment REPHUN vs ROMANI

• We also prefer the US$ curve to the EUR-Switch from REPHUN EUR 20’s into USD 20’s

Quarterly macroeconomic forecasts EUR/HUF: ING forecasts vs fwd and consensus

-400

-300

-200

-100

0

100

200

300

10-3yr HGB spread (bp) 10-3yr HUF IRS spread

0

50

100

150

200

250

300

0 5 10 15

ROMANI REPHUN

Mod. duration

z-spread (bp)

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 0.9 2.1 2.8 2.8 2.5 3.0

CPI (eop, %YoY) -0.2 0.0 0.9 1.0 2.1 1.8

Policy rates (%) 1.20 0.90 0.90 0.90 0.90 0.90

3M (eop, %) 1.20 0.95 0.90 0.90 0.90 0.90

10Y (eop, %) 2.94 3.40 3.40 3.50 3.70 3.80

EUR/HUF (eop) 314.3 315.0 314.0 313.0 310.0 310.0

Hungary


Czech Republic: Overview

8

Flexit Timing

• Real GDP growth should level-off in 2016-17, following a burst through 4% in 2015 on one off factors (EU funds, normalisation of tobacco tax collection, loose

fiscal/monetary policy). With the latter petering out, we expect growth to settle back c.2.5% YoY over 2016-18. Generally, household situation in Czech Republic is

improving on decreasing unemployment (2nd lowest in the EU and closing in on its natural rate) and accelerating wages growth. We note also that household debt

levels have stabilised, at relatively low levels vs the Eurozone’s level (57 vs 97%).

• Inflation has been subdued in 2015 but mostly on supply factors. Core CPI has indeed remained above 1% throughout the year but has not significantly

accelerated either. With supply factors stabilising in 2016 and demand factors taking over (rising wages dynamics etc…), we expect the CNB 2% target to be

reached by early 2017. We see an FX-floor exit by 1Q17 (vs official CNB timeframe mid-2017) following the MPC reshuffle (Rusnok as governor, Benda/Nidetzky

as new MPC members) and a total of 20bp hike delivered over 2H17. However, short-term, the monetary debate in Czech Republic should continue to focus on

the rate differential with the Eurozone that fuels CZK inflows and requires fx interventions to keep the fx floor (we note that the interventions volume has

diminished considerably since February when the negative rate rhetoric kicked off). We believe that the threat of introducing negative rates is real, but won’t

materialise given local banking sector’s already excessive liquidity position.

• FX: we believe the CNB will stay committed to the fx floor throughout 2016 (exit in 1Q17) and intervene regularly to fight off speculation. We estimate that the

“natural” intervention pace to mitigate ECB QE (pre March expansion) is around CZK40bn per month.

• Risks:

- Domestic economics : a Swiss-like fx floor exit is not our base case. Brexit would likely have a significant red-tape costs for Czech R. (based on trade

intensity with the UK). Highest correlation to the German economy in the CEE region could put the country at forefront of a China-induced German slowdown.

In March, YoY export dynamics saw the first YoY decline in exports into Germany since mid -2013

- Domestic politics: Parliamentary elections in 2017. Brexit (if materialised) fallouts, considering that Czech are amidst the most Eurosceptic (alongside

Austrian, Greeks, Cypriots)

-0.37

-0.10

0.00

0.00

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 2.0 4.3 2.1 2.7 2.5

CPI (avg, %YoY) 0.4 0.3 0.8 1.8 2.4

Policy rates (%) 0.05 0.05 0.05 0.25 0.25

EUR/CZK (eop) 27.66 27.00 27.00 25.00 24.30

Czech Republic


Czech Republic: FX, Rates, Debt

9

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5


Local curve facing steepening risks

• Bunds outlook points to a steeper CZGBs curve ahead.

• Fiscal expansion ahead of 2017 parliamentary elections to continue removing CZGBs favourable supply bias (2H15)

CZECH vs SLOVAKIA EUR

• ECB programme impact on SLOVAKIA vs CZECH

• 21’s EUR spread could dip back into negative

• Still better rating (AA-vs A+, stable outlooks)

Quarterly macroeconomic forecasts EUR/CZK: ING forecasts vs fwd and consensus

-50

0

50

100

150

200

250

300

350

CZGB 2-10yr spread Bunds 2-10yr spread

ING f’cast

-50

-40

-30

-20

-10

0

10

20

0.0 5.0 10.0 15.0

SLOVAKIA

CZECH

Log. (SLOVAKIA)

Log. (CZECH)

Z-spread

Mod. duration

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 3.1 2.3 1.7 1.9 2.1 2.4

CPI (eop, %YoY) 0.3 0.6 1.2 1.6 2.0 1.7

Policy rates (%) 0.05 0.05 0.05 0.05 0.05 0.05

3M (eop, %) 0.29 0.25 0.25 0.20 0.20 0.30

10Y (eop,%) 0.44 0.50 0.60 0.75 1.00 1.10

EUR/CZK (eop) 27.05 27.00 27.00 27.00 25.50 25.50

Czech Republic


Romania: Overview

10

Flying High, on rusted engines

• Real GDP growth should cruise above 4% in the next two years – above a potential rate estimated around 2.5-3.0% - boosted in part by the fiscal stimulus voted

in 2015 (“Fiscal Code”, incl. VAT/Dividend tax cut, cancellation of special building tax, extra excise tax on fuel, public wages hikes). Private consumption is a

dominant force in the current expansion phase, with investment lagging. The outlook for private investment is still mixed deterred by overcapacity and rapid labour

cost growth – but FDI structure is improving. From a sector perspective, services – particularly private - are the main driver to growth – taking the reins from

industry.

• Inflation: against a backdrop of low regional price pressures, Romania faces sharp upswing risks on private consumption growth strong momentum. In spite of a

negative headline CPI, inflation excluding VAT cuts is currently near the lower bound of the 1.5-3.5% interval. The mid-point of the target range should be reached

by the headline index in 1Q17, a feature which should prompt some form of monetary tightening by the NBR at the turn of the year. We think the latter will opt for a

reduction of the standing facility corridor in 4Q16 (5% chance at November 4th MPC), before raising the key policy rate in 2Q17. In effect, Romania should be the

first country in the CEE to hike rates – we expect 100bps hike in total in 2017.

• FX: the RON – historically heavily managed- could also be used more forcefully as inflation-mitigator in 2H16/2017.

• Risks:

- Domestic economics: all ingredient of excess demand are already in place – fast tightening labour markets, accelerating wages growth, accelerating

consumer loans (not mortgage…). Greek banking ties remain a vulnerability point. LT eroding competitiveness is key threat. 2017 fiscal slippage risk

- Domestic politics : 2016 local (June) and parliamentary (Nov/Dec) elections (possibly brought forward) – PSD lacking leader / PNL lacking internal

consensus (haunted by legacy). A bipolar political scene (two major parties running neck to neck in recent surveys, many smaller parties which might not make

it past the 5% threshold) make elections a difficult call, but we doubt that either the centre-left PSD or centre-right PNL would pursue fundamentally different

ideas.

- Demographics: negative demographic trend, under-education becoming a threat to potential GDP

- Geopolitics: Romania & Balkans more generally have gained geopolitical “value” with Ukraine/ISIS conflict. Strong EU/NATO membership support

0.20

-1.05

-0.05

-0.04

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 3.0 3.7 4.2 4.1 3.5

CPI (avg, %YoY) 1.1 -0.6 -1.3 2.4 3.0

Policy rates (%) 2.75 1.75 1.75 2.75 2.75

EUR/RON (eop) 4.48 4.52 4.40 4.30 4.20

Romania


Runaway wages?

• Real wages are growing at a 15%YoY pace

• Public wages could still see further upside with current negotiations on hikes (initial talks prompted the Labour Minister resignation)

• Assuming a 10% public wages hike, the budget gap should reach 3.7% of GDP in 2017

Romania: What’s hot?

11

FX mortgage

• The Walkaway bill has been passed, encompassing no Moral Hazard covenant. Demand for FX from banks likely to rise ST on provisioning requirements…

• The bill is set to prompt a correction in real estate markets (c15%) and cost banks for banks c2.8bn EUR

Romania Strategic Position

• Balkans region has gained importance in the the European gas network following Russia/Ukraine standoff

• NATO interest in the region are high too (cflatest Missile base)

• Also for EU, amidst the migrant crisis

Rising risks of early elections

A lost year:- Unchanged fiscal plans

- Same HR

- Lower slippage risk

- Parliament surprises?

Limited collateral damageFire tragedy made PSD stepping back. The

party lacks a face for the upcoming

elections

Have the president...

but loosing his support. A hostile takeover by

Ciolos or another split? No internal consensus

-10

-5

0

5

10

15

20

HH credit (%YoY) Real net wages (%YoY)

0

5

10

15

20

25

2010 2014 Q3

CHF loans (% of GDP)


Romania: FX, Rates & Debt

12

4.30

4.35

4.40

4.45

4.50

4.55

4.60


Box 2-5yr ROMGBs flattener vs POLGBs steepener

• ROMGBs are the steepest vs amidst CE3 on 2-5yr segment

• Front end vulnerable to inflation risk

• Belly supported by domestic ALM

ROMANI prefer EUR to USD

• 35’s ROMANI EUR slightly cheap at the long end vs the curve.

• But they look cheaper vs the USD curve.

• We thus prefer ROMANI EUR 35’s to USD 44’s

Quarterly macroeconomic forecasts EUR/RON: ING forecasts vs fwd and consensus

0

50

100

150

200

250

300

0 5 10 15

ROMANI EURROMANI USDLog. (ROMANI EUR)

z-spread

Mod. duration-0.50

0.00

0.50

1.00

1.50

2.00Poland (5-2yr)

Hungary (5-3yr)

Romania (5-2yr)

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 4.3 4.4 4.2 4.1 4.3 3.4

CPI (eop, %YoY) -3.0 -0.5 -0.2 0.0 2.0 2.5

Policy rates (%) 1.75 1.75 1.75 1.75 1.75 2.25

3M (eop, %) 0.78 0.80 0.80 1.10 1.60 2.35

10Y (eop,%) 3.32 3.55 3.55 3.60 3.70 3.90

EUR/RON (eop) 4.47 4.50 4.45 4.40 4.38 4.35

Romania


Bulgaria: Overview

13

External headwinds to hamper take-off

• Real GDP growth should average 2.5% YoY over 2016-17 –in the middle of the CEE ranking, broadly at par with Hungary and Czech Republic. The growth

profile should be fairly balanced between domestic and external factors, and scattered across all sectors. The conditions are indeed in place in our view for a

private consumption re-start (sentiment, strong domestic savings and liquidity position, fast dropping unemployment but no credit). But 1/ Bulgaria’s potential GDP

remains low -1.4% YoY- amidst lack of public spending and persisting corruption and 2/ risks on our real GDP forecasts are tilted on the downside should private

consumption growth not gather momentum.

• Inflation has been running negative since 2013 (fuelled by administrative prices cuts, low commodities prices) and should continue to do so in 1H16. We expect

the CPI to reach 0% YoY by Dec-16 and 1.8% YoY by Dec-17, mostly on base effects. The overall monetary backdrop should remain loose, thanks to the ECB

easing bias, and support further domestic consumption (compensating for the investment slack).

• FX: BGN peg to stay, currency appears fairly valued at the moment. Reserve coverage of broad money at 50% suggests resilience to financial distress.

• Risks:

- Domestic economics: public debt to GDP ratio doubled in the past 3 years (cf banking issues) and the SOE’s contingent liabilities remain a threat to the debt

profile. Greek banking ties (owing 20% of domestic assets) are a significant headwind for economy (cf Grexit risks)

- Domestic politics: Oct-16 Presidential elections in a politically fragmented country (cf minority issues). We see a 30% risk of the latter triggering

parliamentary elections, which in turn could derail fiscal consolidation. Corruption remain high and the biggest challenge to the country.

- Demographics: aging population/low fertility ratio are set to cause the labour force to lose 1/3rd members by 2060 and therewith weigh on growth. Lack of

education is also a constrained on potential growth.

- Geopolitics: Bulgaria is almost entirely dependent on Russian gas and relies heavily on Russian tourism. Its export exposure may also prove a vulnerability

(Turkey, Greece, China, Russia). Migration is another hot topic (cf minority issue) relative to EU integration/Schengen.

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 1.5 3.0 2.4 2.7 2.5

CPI (avg, %YoY) -1.4 -0.1 -0.8 1.8 1.9

Policy rates (%) n/a n/a n/a n/a 0.00

EUR/BGN (eop) 1.96 1.96 1.96 1.96 1.96

Bulgaria

-0.08

-1.20

0.00


Bulgaria: FX, Rates & Debt

14

1.950

1.952

1.954

1.956

1.958

1.960

1.962


BGN REER

• Relative to its LT , the REER appears fairly valued.

• However, when ULC are adjusted to the exchange rate, Bulgaria does seem to be in worse shape than its CEE peers.

• Bulgaria’s FX reserves were up by 11.8% in Apr-16, at EUR19.3bn. This covers well over 8 months of imports.

BGARIA could make a comeback vs ROMANI

• Both ROMANI/BGARIA EUR curve are trading in synch at the long end – for a similar rating on average

• If risk of snap elections subside in Bulgaria (current risk at 30%), and rating reviews (due on June 3rd) are not bringing any surprise, BGARIA could find bullish momentum

Quarterly macroeconomic forecasts EUR/BGN: ING forecasts vs fwd and consensus

-400

-300

-200

-100

0

100

200

300

0.0 5.0 10.0 15.0

BULGARIA ROMANI

z-spread (bp)

Mod. duration75

80

85

90

95

100

105

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 2.9 2.7 2.2 2.3 1.6 2.2

CPI (eop, %YoY) -1.5 -0.9 -0.8 0.0 1.7 1.6

Policy rates (%) n/a n/a n/a n/a n/a n/a

3M (eop, %) 0.20 0.10 0.10 0.10 0.10 0.10

10Y (eop,%) 2.67 2.50 2.65 2.85 2.95 3.15

EUR/BGN (eop) 1.96 1.96 1.96 1.96 1.96 1.96

Bulgaria


Croatia & Serbia : Overview

15

Diverging political environments foster diverging reform prospects

• In Croatia, the economy is on a more stable footing with GDP growth steadily trending upwards, strengthening external balances and improving fiscal metrics.

The political environment, crucial for the successful implementation of the reform program, is however looking increasingly unstable. While Croatian politics takes

a turn for the worse, political uncertainty is at a minimum in Serbia with the 24 April re-election of PM Vucic and his SNS party. Stronger growth and continued

fiscal consolidation helps improve the fiscal metrics, which should pave the way for a positive IMF review in June.

• Risks:

- Domestic economics: A potential reversal of the politically imposed CHF-conversion in Croatia. The high share of NPLs in the Serbian banking system.

- Domestic politics: In Croatia, there is a non-negligible risk of snap elections, which would seriously threaten the much needed reform momentum. In Serbia,

near-term risks relate to the IMF reviews , where the authorities have to show that the public sector right-sizing is on track to get a positive assessment.

0.05

2.00

0.45

-0.40

0.00

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) -0.4 1.6 1.6 1.9 2.0

CPI (avg, %YoY) -0.2 -0.5 1.6 1.9 2.0

Policy rates (%) n/a n/a n/a n/a n/a

EUR/HRK (eop) 7.66 7.64 7.56 7.59 7.77

Croatia

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) -1.8 0.7 2.2 2.3 2.5

CPI (avg, %YoY) 2.1 1.4 1.6 3.1 3.6

Policy rates (%) 8.00 4.50 4.00 4.25 5.00

EUR/RSD (eop) 121.4 121.5 122.0 121.0 121.0

Serbia


Croatia & Serbia: FX, Rates & Debt

16

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 1.8 1.5 1.3 1.6 1.7 1.8

CPI (eop, %YoY) -1.7 -0.5 0.1 0.4 0.9 1.5

Policy rates (%) 3.00 n/a n/a n/a n/a n/a

3M (eop, %) 0.58 0.86 0.85 0.86 0.87 0.88

10Y (eop,%) 3.64 3.42 3.58 3.75 3.84 3.84

EUR/HRK (eop) 7.53 7.48 7.45 7.56 7.60 7.55

Croatia

7.40

7.45

7.50

7.55

7.60

7.65

7.70

7.75

ING f'cast Mkt fwd

Quarterly macroeconomic forecasts EUR/HRK: ING forecasts vs fwd and consensus

113.0

115.0

117.0

119.0

121.0

123.0

125.0


Quarterly macroeconomic forecasts EUR/RSD: ING forecasts vs fwd and consensus

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 3.5 1.2 3.5 1.8 1.6 1.7

CPI (eop, %YoY) 0.6 1.5 0.6 1.1 1.9 2.4

Policy rates (%) 4.25 4.50 4.25 4.25 4.00 4.00

3M (eop, %) 3.30 3.83 3.30 3.51 3.41 3.39

10Y (eop,%) n/a n/a n/a n/a n/a n/a

EUR/RSD (eop) 122.78 121.52 122.78 122.50 122.30 122.00

Serbia


Turkey: Overview

17

Muddling through

• Real GDP growth should remain sub-potential over the next two years, amidst trouble with key trading partners in the region (Syria, Iraq, Libya, Russia). The

domestic economy resisted better than originally feared in 2H15, thanks to some TRY stabilisation and elation post November general elections. Yet, renewed

deterioration of the security situation locally and Russian sanctions are set to weigh on consumption growth momentum (underpinned by solid real wages growth

and a tightening labour markets in 2015) this year. The recent re-acceleration of EU chapter talks (following the migration deal) is a slight positive for investment

locally.

• Inflation remains a thorn on Turkey’s side and should keep the CBT on a defensive mode on the key policy rates front but less so on the monetary framework

normalisation – at least until the CPI dynamics deteriorate on base effects (late 3Q16/4Q16). The CBT governor nomination has eased markets concerns (with the

appointment of Cetinkaya), but two new MPC members have yet to be replaced at the end of June and collusion concerns may resurface. Yildrim nomination and

Simsek confirmation have dismissed a worse case for foreign investors sentiment, but sensitivity to political matters has been reignited. The shift to a de jure

presidential system is set to fuel the latter further.

• FX: Turkey’s high external debt level leaves it vulnerable to global risk appetite gyration. Though lower oil prices have allowed a significant reduction in the C/A

deficit (to 5.5% of GDP in 2015), the latter remain large and set to re-widen as tourism flows suffer from the security concerns and oil prices stabilises. This

leaves significant depreciation risks for the TRY vs the USD over 2016-2017.

• Risks

- Geopolitics: Turkey/Syria/Iraq/Russia - Turkey’s diplomatic stance has weakened considerably since the Arab spring. Having most recently alienated Russia,

it is struggling to contain/deal with rising international support for Kurds and secure more diverse gas suppliers. It is now attempting to re-establish leverage

with EU and Iran, and has recently re-sparked ties with Israel. But this is a juggling exercise.

- Domestic politics: tensions with PKK, Gulen movement, EU (visa liberalisation), collusion government/CBT, new Constitution draft and Referendum risk

- External vulnerabilities: high corporate fx indebteness, high C/A financing needs implying fx depreciation risks and potential strain on banking sector.

0.19

-0.89

-0.45

0.15

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 2.9 3.6 3.5 3.9 4.2

CPI (avg, %YoY) 8.9 7.7 7.4 7.6 6.8

Policy rates (%) 8.25 8.00 7.50 8.50 10.00

USD/TRY (eop) 2.32 2.92 3.20 3.45 3.70

Turkey


Turkey: What’s hot?

18

Syria impact

• Syrian refugees = 3.1% of Turkey population

• Expenditures for Syrians in Turkey at US$7bn, 6% funded by external sources

• ST : higher unemployment + lower wage rates, sharp rises in food prices and rents in border cities

• Peace talks faltering, mid/End June deadline

Iran & sanction lifting

• Hopes for favourable impact on Turkish trade once sanctions are lifted

• Diversification of gas import channels

• But Iran-Turkey relationship are complex, cf Syria’s Assad

Referendum or/and Early elections

• AKP submission of the immunity bill pointed to chances of a referendum to amend the Constitution

• In June, AKP is likely to further “test” waters to see how much amendments it can push through

• Early elections is next risk if referendum fails

EU-Turkey deal

• Migrants flows seem to have dwindle since the deal

• Turkey unlikely to complete the Visa benchmark by the summer. EU parliament to vote at best on it in July

• Turkey only received some US$71mn so far of the first US$3bn promised

USD6.8bn by Internal

Resources

(Turkish

Government and NGOs)

94%

USD0.4bn by External

Resources (UN

& EU)

6%

2.5 mn Syrians as of Jan-16

0

5

10

15

20

25

30

35

40

Export Import Total

Turkish Export

Association f'cast

00

5000

10000

15000

20000

25000

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Italy Greece Bulgaria

Migrants arrival per

week Post March

18th EU-Turkey

deal

AKP, 317CHP, 133

HDP, 59

MHP, 40 Indept., 1


Turkey: FX, Rates & Debt

19

1.65

1.85

2.05

2.25

2.45

2.65

2.85

3.05

3.25


The carry at the front end hard to ignore

• ST the inflation story should remain supportive and the window for normalising the monetary framework constrained (frontloading risk)

• Political noise will remain in the background. Contentious appointments/dismissals are mostly behind and the referendum story will take time to unfold

More conservative on TURKEY

• Steep US$ curve, rich and highly vulnerable to risk-off moment, but oil could turn more supportive in 3Q16

• Watch for rating downgrade risk (on fiscal weakening) over the summer (Moody’s review on Aug 5th, Fitch on Aug 19th)

• We prefer EUR to US$

• AZERBJ vs TURKEY

Quarterly macroeconomic forecasts USD/TRY: ING forecasts vs fwd and consensus

-200

-150

-100

-50

0

50

100

150

200

250

2Y-policy rate (bp)

(3yr)

0

50

100

150

200

250

300

350

400

0.0 5.0 10.0 15.0

TURKEY EURTURKEY USDLog. (TURKEY USD)

z-spread

Mod. duration

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 3.2 3.2 2.9 3.6 3.8 4.1

CPI (eop, %YoY) 7.5 6.8 7.0 7.8 7.9 8.1

Policy rates (%) 7.50 7.50 7.50 7.50 7.50 8.00

3M (eop, %) 11.34 10.22 10.02 9.85 10.00 10.15

10Y (eop,%) 9.95 9.34 9.62 9.87 10.23 10.89

USD/TRY (eop) 2.82 2.92 3.06 3.20 3.26 3.33

Turkey


Russia: Overview

20

Behind the worst

• Real GDP growth should remain negative this year, but the trough is likely behind. A mild recession is in the pipeline still for 2016, driven by domestic

demand. At the private consumption level, the “sanction/oil” impact has merely heightened a deteriorating trend in place since 2011, fuelled by fundamental

weakness in income/lending on poor wage-productivity dynamics and shrinking fiscal “firepower”. We do not see much scope for drastic improvement there with a

new reality of low nominal wage growth to persist as Corporates adjust costs further (especially with capped unemployment rise) and public wages remain frozen

(to curtail MinFin coffers). At the investment level, the broad-based decline was mostly due to lower public sector spending. Private investment resisted better,

with the recent rebound in profits (since 50% of capex is financed from own funds) looking encouraging – if sustained. Better RUB liquidity is probably the only

tangible positive for investment recovery at this time. An interesting element we note however is that at the sector level, 2015-16 industrial contraction is not as

severe as 2008-09, thanks mostly to import substitution, food import ban and RUB effects.

• Inflation is poised to ease significantly this year; we are amidst the most optimistic forecasters seeing it end-16 at 6.9% YoY and 4.5% YoY in 2017 with no-

monetary induced pressure (low wages pressures, manufacturers having already adjusted prices to dearer utility/gasoline prices). This should allow the CBR to

cut rate further and deliver an additional 200bp in 2016 and 150bps in 2017. Fiscal-driven liquidity thrust boost to monetary base flag monetary risks on CPI for

2H17 onwards.

• FX: Low and volatile oil prices have been a bad mix for RUB last year. Our projection for this year are more supportive on the oil level, but we cannot guarantee

lower volatility. The latter, coupled with lower carry (rate cut) should challenge RUB performance this year in spite of better BoP, lower external debt repayment.

• Risks:

- Domestic economics: fiscal risks have risen with federal/general budget balance gap widening. Banking sector still fragile (rising NPLs).

- Domestic politics: Dec-16 parliamentary elections – Support to United Russia, Putin and current system still strong. Risk is if Putin underestimate further

sentiment erosion as well as loyalty within UR ranks. Tail risk of Duma turning more towards left, and challenge current prudent fiscal/monetary policies

- Geopolitics: No sanction lifting likely this year - US extension to 1Q17 and a protracted Minsk II implementation to weigh on EU sanction revision (Jul-16)

US/EU sanctions impact on

Russia:

Official estimates were for a total net

1.5ppt drag on growth in 2015. The

effects should be marginal in 2016

and beyond as the initial adjustment

already happened

-0.20

-0.30

-0.55

-2.44

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 0.7 -3.7 -1.7 1.1 1.5

CPI (avg, %YoY) 7.8 15.5 7.7 5.5 4.0

Policy rates (%) 17.00 11.00 9.00 7.50 7.50

USD/RUB (eop) 60.74 72.89 65.60 55.80 50.00

Russia


Russia: What’s hot?

21

Funding deteriorating budgets

• Spending structure worse, SWF @ 10% GDP vs 19% in 2008

CBR focus shifting to liquidity profile

• Funding the fiscal gap via RF has fuelled banking sector with liquidity – nearly fully erasing structural deficit

• Yet the surplus won’t likely push bond yields further – so lending rates still need key rate cut

Import substitution

• Signs of import substitution in the retail markets

• Particularly food items

Real estate vs durables investment

• Part of incomes previously spent on imported durables could be reallocated to real estate (bigger multiplier for GDP)

• Length of railways dropped by 1% since 1999, vs +82% for highways

20

25

30

35

40

45

50

Im ports in retail sales

Food im ports in food retail

25%

27%

29%

31%

33%

35%

37%

39%

41%

43%

45%

% share of mortgage loans

% share of non-food retail

2015 2016 BL 20 vs 2000 30 vs 2300 40 vs 2600 50 vs 2900 60 vs 3200 70 vs 3500 80 vs 3800

GDP 80,268 85,830 88,138 85,538 84,739 84,667 84,961 85,464 86,099

Revenues 13,656 13,739 10,848 11,697 12,409 13,066 13,697 14,312 14,919

Expenditures 15,611 16,099 16,099 16,099 16,099 16,099 16,099 16,099 16,099

Deficit/Surplus - FB -1,955 -2,360 -5,251 -4,402 -3,690 -3,033 -2,402 -1,787 -1,180

% of GDP -2.4% -2.7% -6.0% -5.1% -4.4% -3.6% -2.8% -2.1% -1.4%

Deficit/Surplug - GG -6,801 -5,930 -5,117 -4,326 -3,545 -2,771 -1,999

% of GDP - - -7.7% -6.9% -6.0% -5.1% -4.2% -3.2% -2.3%

Funding sources

Total - FB 1,955 2,360 5,251 4,402 3,690 3,033 2,402 1,787 1,180

Total - GB - - 6,801 5,930 5,117 4,326 3,545 2,771 1,999

Reserve Fund need - FB 2,663 2,137 5,028 4,178 3,467 2,810 2,179 1,564 957

Reserve Fund neded - GB - - 6,578 5,707 4,894 4,103 3,322 2,547 1,776

Other sources -708 223 223 223 223 223 223 223 223

Reserve Fund 5,060 3,879 3,289 2,935 2,699 2,530 2,404

National Wealth Fund 40% 2,927 2,244 1,903 1,698 1,561 1,464 1,390

2015 reserve/10% cuts/anti-crisis 630 630 630 630 630 630 630

Local debt (doable) 200 200 200 200 200 200 200

Privatization (doable) 500 500 500 500 500 500 500

50% dividend payout/taxation 300 300 300 300 300 300 300

RF+NWF end of 2016 - FB 4,589 3,575 3,354 3,452 3,710 4,060 4,467

Urals in US$/bbl vs Urals in RUB/bbl

(480 + 400 -250)

200

300

500

US$50.6bn

US$29.3bn-2500

0

2500

5000

7500

10000

-2500

0

2500

5000

7500

10000

Int raday Lombard312-P in RUB REPO in RUBFX swap FX REPO/312-P (RUB equiv)Bank funds in the CBR


Russia: FX, Rates & Debt

22

Local bond curve’s rally on monetary easing might already be in

price

We prefer Kazakhs to Russia at the long-end

Quarterly macroeconomic forecasts USD/RUB: ING forecasts vs fwd and consensus

26.5

32.5

38.5

44.5

50.5

56.5

62.5

68.5

74.5

80.5

86.5


20 25 30 35 40 45 50 55 60 65 70

Oil-RUB correl 88.9 83.3 78.2 73.5 69.3 65.6 62.4 59.6 57.3 55.5 54.2

BoP-based 98.0 91.0 83.5 76.0 69.8 64.5 60.2 56.3 53.0 50.2 48.0

Budget-based 151.0 131.0 111.0 96.0 81.0 74.0 67.0 63.0 59.0 55.8 52.5

0

50

100

150

200

250

300

350

400

450

0.0 5.0 10.0 15.0

RUSSIA KAZAK Mod. duration

z-spread (bp)85

95

105

115

125

135

0

5

10

15

20

Repo rate (%)

Russia local bond index (inverted, rhs)

Regression on policy rate and USD/RUB (inverted, rhs)

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) -1.2 -2.0 -1.8 -0.3 0.0 1.4

CPI (eop, %YoY) 7.3 7.9 7.5 6.9 6.2 5.5

Policy rates (%) 11.00 10.50 9.50 9.00 8.00 7.50

3M (eop, %) 11.80 11.00 10.00 9.50 8.50 8.00

10Y (eop,%) 9.11 8.60 8.50 8.25 8.00 8.00

USD/RUB (eop) 66.86 67.00 67.55 65.60 62.70 61.25

Russia


Ukraine: Overview

23

Local politics remain Achilles' heel

• Ukraine has gone through the biggest part of its economic adjustment, and we expect a mild recession in 2016 (less optimistic than consensus). 4Q15

already started to show some encouraging rebound in construction and a modest contraction in industrial activity (ex Donbass region) but 1Q16 print looked

particularly weak. At the expenditures level, the moderating recession should be mostly driven by the external position in 2016 i.e. via mainly import contraction.

We fear domestic politics –challenging sentiment- and not-yet-convalescent banking sector will impede investment recovery this year. Private consumption should

also continue to fall amidst double-digit inflation, limited wages growth hope (negative profitability still in many sector, no fiscal leeway) and no recovery in bank

lending.

• Inflation should remain comfortably in double digit territory over 2016-17, as utilities prices hikes (electricity, gas, heating) are still due – in accordance with

the IMF deal (4-year EFF)-. The NBU will however strive to reduce the local cost of financing – with a 400bp window in our view over the remainder of the year.

• FX: We see the NBU maintaining relatively tight control on the currency throughout 2016-17 (mainly the compulsory 75% sale of fx earnings for companies). The

latest relaxation (Mar-16) raised 1/ the allowed cash-withdrawal to UAH 50,000 from fx-account per day, 2/ the banks-allowed fx-cash sale amount to UAH6,000

p/d. Note that on a REER basis, we estimate a fair value for the UAH vs USD around 25-30.

• Risks:

- Domestic politics: local politics are a key challenge to Ukraine’s macroeconomic adjustment. The recent gov’t reshuffle illustrated the volati lity of domestic

politics, and its corollary challenge to both Minsk II and IMF standby agreement implementation (3rd tranche disbursement delayed in February as the coalition

broke apart). Poroshenko bloc loosing popularity is unlikely to call snap elections.

- Domestic economics: a too optimistic budget is a risk: New Tax Code (CIT at 18%, PIT at 18%, VAT at 20%, social contribution at 22%) revenues -expected

to compensate for the one-off non-tax revenue boost from NBU profit withdrawal and 3G licence sales- are based on the assumption that real GDP growth will

reach 1% in 2016…. Delays in utilities prices hikes is also challenging IMF disbursement

- Geopolitics: Minsk II (local elections in rebel area still a bone of contention), Gazprom/Naftogaz legal battle, Russian sanctions

Russia/Ukraine sanctions

Russia embargoed Ukrainian food and

suspending free trade Jan-16

Ukraine suspended free trade with Russia

for 1Y Jan-16 and a range of imports from

Russia banned till Aug-16

-2.00

-1.76

-1.05

-0.50

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) -7.0 -10.5 -1.0 2.0 2.0

CPI (avg, %YoY) 12.1 49.6 14.3 13.6 8.0

Policy rates (%) 14.00 22.00 14.00 10.00 7.00

USD/UAH (eop) 15.82 24.03 28.00 29.00 29.00

Ukraine


Ukraine: What’s hot?

24

Deposit by currency (%YoY)

• UAH deposit are gaining momentum

• High lending rate continue to weigh on UAH loans

Debt payments profile (US$bn)

• Debt payments to climb to 2019

• Key is to get US$3.4bn from 2015 (cf IMF), US$2.5bn pa (over 2016-18) and US$1.1bn

• IMF tranches: 3rd

(US$1.7bn) delayed to July. US$1bn US-guaranteed loans.

New government lost two reformers Elections spectres

• Economic woes have cost the Poroshenko bloc. Batkivshchyna’spopularity is currently rising fast. Snap elections are unlikely

• Local elections in rebel area still bone of contention

0

2

4

6

8

10

Ext. debt principal Ext. debt coupon

Dom. debt principal Dom. debt coupon

Position Old kabmin Party allignment New kabmin Party allignment

Prime Minister Yatsenyuk A. People's front Hroysman V. Poroshenko bloc

Vice PM Kirilenko V. People's front Kirilenko V. People's front

Vice PM Voshchevskiy V. Radical Party Kistion V. -

Vice PM - - Rozenko P. Poroshenko bloc

Vice PM on EU Integration issues - - Klimpush-Cincadze I.Poroshenko bloc

Ministry of Economy and Trade Abramavichus A. Unaligned (PB) Kubiv S. -

Ministry of Regional Development Zubko G. Unaligned Zubko G. Unaligned

Ministry of Interior Avakov A. People's front Avakov A. People's front

Ministry of Defence Poltorak S. Unaligned Poltorak S. Unaligned

Ministry of Education and Science Kvit S. Poroshenko bloc Grinevich L. People's front

Ministry of Finance Jaresko N. Unaligned (PB) Danilyuk O. -

Ministry of Youth and Sports Zhdanov I. Batkyvshchyna Zhdanov I. -

Ministry of Foreign Affairs Klimkin P. Unaligned Klimkin P. Unaligned

Ministry of Agriculture Pavlenko A. Samopomich Kutovoy T. Poroshenko bloc

Ministry of Energy and Coal Industry Demchishin V. Unaligned (PB) Nasalik I. Poroshenko bloc

Ministry of Culture Kirilenko V. People's front Nishchuk E. -

Ministry of Infrastructure Pivovarskiy A. Unaligned (PB) Omelyan V. -

Ministry of Justice Petrenko S. People's front Petrenko S. People's front

Ministry of Social Policy Rozenko P. Poroshenko bloc Reva A. -

Minister of Kabmin Onishchenko A. Unaligned (PF) Saenko O. -

Minister of Ecology and Nat. Resources Shevchenko I. Unaligned Semerak O. People's front

Ministry of Informational Policy Stets Y. Poroshenko bloc Stets Y. Poroshenko bloc

Ministry of Occupied Territory issues - - Chernysh V.

Ministry of Health Kvitashvili O. Unaligned (PB) Vacant -

0%

10%

20%

30%

40%

50%

PB&PF Rest of Coalition

Poroshenko bloc (PB) Batkivshchyna

People Front (PF) Ex-Yanukovich

-40%

-20%

0%

20%

40%

60%

80%

-40%

-20%

0%

20%

40%

60%

80%

UAH FX Deposits


Ukraine: FX, Rates & Debt

25

BoP estimates of equilibrium USD/UAH

• The BoP re-adjustment helped to stabilize the UAH over 2015…

• Even though 1Q16 saw a renewed pressure towards 27-28/USD

REER valuation and components

• The double-digit inflation will continue eroding the REER, so a weaker UAH is needed in 2016-17

Quarterly macroeconomic forecasts USD/UAH: ING forecasts vs fwd and consensus

0.0

6.0

12.0

18.0

24.0

30.0

36.0


0.0

0.5

1.0

1.5

2.0

2.5

3.0

REER CPI NEER

Fcst

5

10

15

20

25

30

35

5

10

15

20

25

30

35

USD/UAH, actual USD/UAH, C/A-based

USD/UAH, BoP-based

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) 0.0 0.5 -1.5 -2.0 -1.0 1.6

CPI (eop, %YoY) 21.0 6.1 8.5 12.9 17.0 15.7

Policy rates (%) 22.00 18.00 16.00 14.00 13.00 11.00

3M (eop, %) 23.00 20.50 18.75 16.50 15.50 12.00

10Y (eop,%) 9.54 9.50 8.50 8.50 8.50 8.50

USD/UAH (eop) 26.20 26.00 27.00 28.00 28.50 28.50

Ukraine


Kazakhstan: Overview

26

Pulling out of recession

• Real GDP should post a drop in 2016, on the absorption of the oil/KZT shock – with 2Q16 reading likely to print the worst reading (in the -3/-4% range).

However some encouraging signs have already materialised at the turn of the year with the taming of dollarisation at the retail deposit level (household net sellers

of FX for the first time in a decade since Feb-16) illustrating lower consumers concerns over further devaluation (CB credibility), rebounding nominal wages

(public thrust in 1Q16). It is early days arguably and domestic demand should remain the main drag on the annual real GDP growth performance (-5.5/-2.7% YoY

for private consumption/GFCF respectively).

• On the inflation front, high dependence on oil expectedly pushed PPI inflation into red, while KZT weakness kept manufacturing PPI more resilient, especially in

consumers items. The CPI response to the KZT drop was much more pronounced than in 2014 mostly due to massive non-food stuff re-pricing. The CPI peak is

imminent in 2Q16, but the prospect of a sharp deceleration for 4Q16 (out of April 16.3% YoY CPI print, 10ppt are due to FX pass-through, and the seasonally-

adjusted print moving back to the target 6-8% range), a better anchored KZT should prompt the NBK to frontload the monetary easing cycle kicked off in May (cut

from 17% +/-2% to 15% +/-1%), so as to support credit.

• C/A rebalancing should continue in 2016, and a surplus (+1.5% of GDP) is expected on import contraction vs recovering export (cf oil prices). The KZT fair

value based on BoP/C/A stands in the 300-350 range while the acceptable RUB/KZT range from the NBK (3.5-4.5) suggest below 300 reading for the USD/KZT

already. Note that since Feb/March 2016, the NBK has turned net buyer of FX (to the tune of US$1.7bn), illustrating the better fundamentals underpinning the

Tenge.

• Risks:

- Domestic politics: Nazarbayev is aging, still. The snap elections in March did not bring any surprise. Nazarbayev’s daughter did not run in the elections, to

maintain a deputy PM position and therewith ensuring probably the family “clout” amidst the executive. Ultimately, President Nazarbayev may try to use the

accumulated political capital for the announced changes in the political system via the Constitution amendments aimed at power redistribution from president

to the parliament and/or the government, making the power transition smoother and flagging an organic shift to a more democratic setup.

- Domestic economics: the oil outlook remain critical to Kazakhstan's ability to manage its way out of recession. But the NOF is a buffer.

-1.50

0.00

0.00

2014 2015 2016F 2017F 2018F

Real GDP (%YoY) 4.3 1.2 -0.8 3.0 3.5

CPI (avg, %YoY) 6.7 6.7 14.3 5.1 5.0

Policy rates (%) 5.50 16.00 10.00 9.00 9.00

USD/KZT (eop) 207.70 370.10 310.00 260.00 260.00

Kazakhstan


Kazakhstan: What’s hot?

27

Floating KZT buffeted risks on SWF

• KZT has kept NOF from bigger decline in face of oil price tumble

• It still stands >30 % of GDP

• The impact on fiscal coffers however has not been fully felt

Better liquidity

• Dollarisation seem to have peaked

• Deposit rates finally allowed to spike in early 16 (as the ceiling was raised from 10% to 14%)

• NBK net creditor to banking sector and net buyer of FX (since Feb/Mar)

Still recessionary

• ST indicators suggests a deeper dive in the red for GDP in 2Q16

• Agriculture and construction are the only one to add to growth in 1H

RUB/KZT vs USD/RUB matrix

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

15%

20%

25%

30%

35%

National Oil Fund State budget balance (rhs)

-2.0% of GDP - updated

MinFin plan for 2016

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

-10%

-5%

0%

5%

10%

15%

20%

ST econ. indicator GDP growth (rhs)

0%

5%

10%

15%

20%

25%

0%

5%

10%

15%

20%

25%

KZT deposits FX deposits

KZT loans FX loans


Kazakhstan: FX, Rates & Debt

28

BoP estimates of equilibrium USD/KZT

• The actual KZT rate has been closely following the fair estimate…

• …and we see it slowly returning to 310/USD in 2016 and below in 2017

KAZAKHs still looking good

• YTD rally for KAZAKHs brought a 33/23bp z-spread compression

• It trades cheap at the long-end vs INDO (c80bps differential in z-spread) and RUSSIA – while most of the bad news in our view are behind (rating particularly)

Quarterly macroeconomic forecasts USD/KZT: ING forecasts vs fwd and consensus

100.0

150.0

200.0

250.0

300.0

350.0

400.0


50

100

150

200

250

300

350

50

100

150

200

250

300

350

C/A-based BoP-based USD/KZT-40 -20 0

KAZAKS 3.875 24

KAZAKS 5.125 25

KAZAKS 6.5 45

KAZAKS 4.875 44

1Q16 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F

Real GDP (%YoY) -0.2 -3.4 0.0 1.2 3.8 5.8

CPI (eop, %YoY) 15.7 17.1 16.0 7.7 6.4 5.3

Policy rates (%) 17.00 15.00 12.00 10.00 9.50 9.50

3M (eop, %) 17.00 16.00 13.00 11.00 10.00 10.00

10Y (eop,%) n/a n/a n/a n/a n/a n/a

USD/KZT (eop) 344.59 335.00 325.00 310.00 285.00 275.00

Kazakhstan


ING EM Economics Team

29

City Name Title Telephone Email

UK Dorothée Gasser-Châteauvieux

Deanie Haugaard-Jensen

Chief Economist EMEA, South Africa,

Israel

EM Economist, Croatia, Serbia

44 20 7767 6023

44 20 7767 [email protected]

[email protected]

US Gustavo Rangel Chief Economist, LATAM 1 646 424 6464 [email protected]

Czech R. Jakub Seidler Senior Economist, Czech Republic 420 257 474 432 [email protected]

Hungary Peter Virovacz Senior Economist, Hungary 36 1 235 8757 [email protected]

Philippines Joey Cuyegkeng Economist, Philippines 632 479 8855 [email protected]

Poland Rafal Benecki

Jakub Rybacki

Chief Economist, Poland

Economist, Poland

48 22 820 4696


[email protected]

Romania Ciprian Dascalu

Silviu Pop

Chief Economist, Romania

Junior Economist, Romania

40 21 209 1393


[email protected]

Russia Dmitry Polevoy

Egor Fedorov

Chief Economist, Russia & CIS

Senior Credit Analyst, Russia & CIS

7 495 771 7994


[email protected]

Singapore Tim Condon

Prakash Sakpal

Chief Economist, Asia

Economist, Asia

65 6232 6020

65 6232 [email protected]

[email protected]

Turkey Muhammet Mercan Chief Economist, Turkey 90 212 329 0751 [email protected]

ING Global Forecasts



2016F 2017F

Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY

United States

GDP (%QoQ, ann) 0.5 1.3 1.6 2.4 1.6 1.8 2.6 2.3 2.3 2.1

CPI headline (% YoY) 1.1 0.9 1.3 1.8 1.3 2.2 2.4 2.2 2.1 2.2

Federal funds (%, eop) 0.25 0.25 0.50 0.50 0.50 0.75 0.75 1.00

3-month interest rate (%, eop) 0.40 0.65 0.90 0.85 0.90 1.05 1.15 1.30

10-year interest rate (%, eop) 1.90 1.90 2.00 2.10 2.20 2.30 2.40 2.40

Eurozone

GDP (% QoQ, ann) 2.3 1.2 1.4 1.7 1.6 1.7 1.7 1.7 1.9 1.7

CPI headline (% YoY) 0.0 0.0 0.6 1.0 0.4 1.3 1.4 1.4 1.5 1.4

Refi minimum bid rate (%, eop) 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.00

3-month interest rate (%, eop) -0.22 -0.26 -0.27 -0.28 -0.28 -0.28 -0.27 -0.25


Japan

GDP (% QoQ, ann) 0.3 1.1 1.5 1.9 0.5 4.2 -6.2 -0.6 1.3 0.4

CPI headline (% YoY) 0.2 0.2 0.3 0..6 0.3 1.2 2.4 2.5 2.4 2.1

Excess reserve rate (%) -0.1 -0.1 -0.01 -0.1 -0.1 -0.1 -0.1 -0.1

BoJ asset purchase total 370 390 410 430 450 470 490 505


10-year interest rate (%, eop) -0.09 -0.15 -0.07 -0.02 0.00 0.05 0.05 0.10



2016F 2017F

Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY

China

GDP (% YoY) 6.7 6.6 6.5 6.3 6.5 6.7 6.6 6.4 6.4 6.5

CPI headline (% YoY) 2.1 2.0 1.9 1.8 2.0 1.8 1.5 1.3 1.0 1.4

PBOC 1yr deposit rate (% eop) 1.50 1.50 1.25 1.25 1.25 1.25 1.25 1.25

PBOC 1yr best lending rate (% eop) 4.35 4.10 4.10 4.10 4.10 4.10 4.10 4.10

7-day repo rate (% eop) 2.90 2.25 2.00 2.00 2.00 2.00 2.00 2.00

10-year T-bond yield (%, eop) 2.89 2.90 3.00 3.00 3.00 3.00 3.00 3.00

UK

GDP (% QoQ, ann) 1.6 1.1 1.4 2.7 1.8 2.9 2.5 2.7 2.7 2.5

CPI headline (% YoY) 0.3 0.6 0.9 1.6 0.9 2.5 2.9 3.0 2.9 2.8

BoE official bank rate (%, eop) 0.50 0.50 0.50 0.50 0.75 0.75 1.00 1.00

BoE Quantitative Easing (£bn) 375 375 375 375 375 375 375 375



FX & Oil

EUR/USD (eop) 1.10 1.10 1.15 1.15 1.20 1.20 1.20 1.25

USD/JPY (eop) 112 108 95 100 105 108 110 110

USD/CNY (eop) 6.45 6.53 6.52 6.54 6.53 6.52 6.51 6.50

EUR/GBP (eop) 0.80 0.80 0.76 0.74 0.76 0.77 0.78 0.80

Brent Crude ($/bbl, avg) 35 40 35 40 50 55 60 65


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34

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emea macroeconomic outlook - saving growth

Economy & Finance