Political clouds over economic recovery

Political clouds over economic recovery

Political clouds over economic recovery

The FINANCIAL -- Since February, the dominant topic has been the conflict between Ukraine and Russia, which has now resulted in the annexation of Crimea by Russia.

The FINANCIAL -- Since February, the dominant topic has been the conflict between Ukraine and Russia, which has now resulted in the annexation of Crimea by Russia. In Raiffeisen Research’s main scenario, Russian territorial claims into eastern Ukraine and an escalation with military means or severe economic embargoes between the EU, the US and Russia are not expected, according to Raiffeisen Bank Aval.

However, just these elevated tensions and the acrimonious mood between Moscow and Kiev are enough to make the negative effects for both economies and their financial markets even worse. For example, the analysts of Raiffeisen Research recently downgraded the 2014 GDP forecast for Russia from 1.7 per cent to 1 per cent and also lowered the 2015 forecast. The radical restructuring in Ukraine is likely to result in a massive GDP decline of 3-7 per cent in 2014, according to Raiffeisen Bank Aval.


By contrast, the improved economic situation in Central Europe (CE)    continues. Hence, the analysts increased their GDP growth projections for Poland (3.1 percent), Czech Republic (2.3 per cent) and Hungary (2 per cent). The growth projections in SEE are stable, with Romania and Bulgaria taking a leading role in the region.


“For Austria, our 2014/15 GDP estimates have remained unchanged for more than a year now. Leading indicators suggest that the recovery of the Austrian economy will continue to accelerate in the course of this year. The high point in economic activity should be reached during the winter half year 2014/15, as reflected in the projected GDP growth rates of 1.5 per cent for 2014 and 2.3 per cent for 2015,” said Peter Brezinschek, head of Raiffeisen Research at Raiffeisen Bank International AG (RBI).

“In case of economic sanctions between the EU and Russia, which is not our base case, consequences for the Austrian business cycle can be expected. Yet it is important to keep in mind that the trade volume between Austria and Russia is still relatively low. In 2013, Russia accounted for merely 2.8 per cent, or EUR 3.5 bn, of total Austrian goods exports, while only 2.4 per cent of Austrian goods imports, mainly energy and fuel, were coming from Russia,” he added.


The geopolitical tensions have already resulted in significant outflows of capital from both countries involved in the crisis. Since open conflict broke out, Russians have wound up savings in rubles and US dollars and converted them into euros, yen and Swiss francs. The Russian Central Bank has reacted to the faster pace of RUB depreciation since the autumn of 2013 with modest intervention on the FX market and gradual widening of the bands of the currency basket (55 per cent USD/45 per cent EUR) and one significant increase in the key rate. By contrast, the Ukrainian Central Bank has had to take more restrictive administrative measures to keep control over UAH depreciation, despite its interventions, according to Raiffeisen Bank Aval.


“We believe that the ruble will remain weak (towards 37.2 versus USD) until June, followed by a countermove. The UAH/USD parity should settle in between 10.5 and 11.5 over the medium term. We also project a mild recovery for PLN and CZK by year-end,” said Brezinschek the impact of the current geopolitical tensions on monetary policy and exchange rates.

Yields have increased sharply in Russia (temporarily over 9 per cent for 10-years government bonds) reflecting investor skepticism about the country’s political and economic reliability, according to Raiffeisen Bank Aval.


“We hardly see any signs for an easing of tensions on the CEE bond markets in Q2 2014, hence further increases in yields must be anticipated in Poland, Hungary and the Czech Republic. In light of the geopolitical tensions in the region it is no surprise that the CEE stock exchanges had a weak start into the year 2014. We see some possibility for further setbacks in Q2, but as the year progresses we expect more focus on fundamental data and thus a rebound in stock prices,” said Brezinschek.

“The better economic momentum of Austria’s most important trading partners as well as higher economic growth in most CEE countries bode well for a sustainable, positive equity market environment, in our opinion,” said Stefan Maxian, Chief Analyst of Raiffeisen Centrobank (RCB). Furthermore, the persistently low interest rate level continues to underpin equities as an asset class. The ATX is expected to rise from its current level of 2,460 points to some 2,700 points until year-end. The Austrian equity market is currently valued at a P/E ratio 2014 of 13.6, and the dividend yield amounts to about 3 per cent. Similarly, the equity analysts of RCB are also bullish regarding most CEE equity markets. For example, the Polish economy is powering ahead and is anticipated to reach GDP growth of more than 3 per cent in 2014, which should above all benefit companies that are active on the Polish market. For Maxian, “the Moscow Stock Exchange and Hungary will be exposed to somewhat higher risks during the next quarter because of geopolitical tensions and the upcoming parliamentary elections, respectively,” he added.