Poland: Preliminary estimate of the June balance of payments data and the final details of the July CPI inflation data will be released on Friday (11 August). According to the preliminary estimate of the Central Statistical Office, headline inflation picked up to 1.7% yoy in July from 1.5% yoy in June. In our view, the increase in headline inflation was driven by higher food price inflation, which means that core inflation should remain unchanged in July.
Hungary: First, budget data for the calendar-year to July will be published today at 10:00 a.m. London time by the Ministry of National Economy. In June, the deficit widened sharply, taking the cumulative fiscal-year deficit to HUF911bn, from HUF213bn at the end of May and compared to HUF402bn in the period January-June 2016. As a percentage of GDP, the cumulative deficit in 1H 2017 was an estimated 2.6%, compared to 1.2% in the same period in 2016 and 2.5% in 1H 2015. Second, external trade data for June will be released tomorrow at 8:00 a.m. London time by the Central Statistical Office. In May, the trade account recorded a surplus of EUR959mn, which was 29% higher than in May 2016. On a three-month moving average basis the surplus in May was 4.7% higher than in the same period in 2016. Import growth in May, on a three-month moving average euro basis, outpaced export growth for a fifth consecutive month.
Third, consumer price data for July will also be published tomorrow at 8:00 a.m. London time by the Central Statistical Office. We expect that headline inflation increased to 2.1% yoy from 1.9% yoy in June. The Central Statistical Office’s core inflation measure increased to 2.4% yoy, a three-year high. Our estimate of the runrate of core inflation surged to 3.6% yoy in June. The National Bank said of its measures of core inflation for June that they “remained stable, in line with expectations”. The average of the Bank’s three core inflation measures was 1.9% in June, compared to a low of 1.4% in August 2017.
Russia: Headline inflation fell to 3.9% yoy in July, below the central bank’s 4.0% inflation target. According to Rosstat, headline inflation fell to 3.9% yoy in July after a sharp increase to 4.4% yoy in June on the back of higher prices for fruits and vegetables. The outcome was a surprise for the market that expected headline inflation at 4.3% yoy (according to a Bloomberg survey), but actually it was consistent with weekly inflation data (on our estimates, weekly headline inflation fell to 4.0% yoy as of 31 July). July inflation report confirmed the recent developments, especially those with regards to food prices that started rolling back aggressively in July.
This drop in headline inflation was mainly driven by food price inflation that slowed to 3.8% yoy in July after a spike to 4.8% yoy in June. Durable goods inflation fell to 3.7% yoy in July (from 4.0% yoy previously), while services inflation was at 4.1% yoy in July, unchanged from the previous month. Official core inflation fell from 3.5% yoy in June to 3.3% yoy in July, its lowest level on record. Our measure of core inflation (net of all food and energy prices) picked up to 2.3% yoy in July from 2.2% yoy previously. Our estimate of the run-rate of core inflation picked up to 2.2% in July from 1.8% in June, while the run-rate of official core inflation picked up to 2.6% from 2.2% in June. Run-rate of headline CPI inflation picked up to 5.2% in July from 4.1% in June. The increase in the run-rate of official core and headline inflation was due to the impact of higher prices on some food categories. If there are no further disruptions to the harvest, we believe headline inflation will be 3.8%-3.9% yoy in August.
We think that concerns over inflation were not the main reason behind the CBR’s decision on 28 July to keep the policy rate unchanged at 9.00%. In our view, the main argument for keeping the policy rate on hold was the risk related to higher rouble volatility in an environment with increased geopolitical risks. If the impact of the new US sanctions on the rouble turns out to be mild, the CBR will catch up with its easing cycle and cut the policy rate by 50bps to 8.50% in September, in our view.
South Africa: The noteworthy event this week is the National Assembly’s vote on a motion of no confidence in President Zuma tomorrow. Our key thoughts are: First, we do not think the motion will succeed, even if the Speaker decides that the vote should be held in secret. Second, some ANC MPs look likely to vote in favour of the motion, but not enough to make up the shortfall of 50 votes required for the 201 majority. Third, though there may be more MPs that agree with the motion, they likely believe that the leadership crisis is best resolved at the party’s Elective Conference in December, when 4,500 voting delegates will gather. Fourth, if the parliamentary motion were to succeed, then the President and his entire cabinet would have to resign. The speaker of the National Assembly, Baleka Mbete, would then become acting President, while the National Assembly debates and appoints a new President. Fifth, such a scenario, where the motion succeeds, raises a variety of risks for the ANC and the country. The risk of a split in the ANC would increase in our view. Governance of the country could be further weakened.
On Friday (11 August), Moody’s will deliver its second formal review of the sovereign for this year. We don’t think that the agency will make any changes to its ratings or outlook. It looks likely to wait until year-end, by which time the outlook for fiscal policy under Minister Gigaba will be clearer, with the Medium Term Budget Policy Statement published on 25 October. Furthermore, there may also be greater clarity on the direction that the ANC leadership contest is taking. Moody’s has another scheduled review on 24 November.