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CEE
Quarterly
Macro Research
Strategy Research
Credit Research
A path to recovery
1Q2021January 2021 January 2021 CEE Macro & Strategy Research
CEE Quarterly
“Your Leading Banking Partner in
”
Central and Eastern Europe
UniCredit Research page 2 See last pages for disclaimer.January 2021 January 2021 CEE Macro & Strategy Research
CEE Quarterly
Contents
4 A path to recovery
14 CEE strategy: Solid risk appetite and yield in demand
65 Acronyms and abbreviations used in the CEE Quarterly
COUNTRIES
21 Bulgaria: Difficult start to recovery but strong medium-term outlook
25 Croatia: Rough journey to the light at the end of the tunnel
29 Czechia: Getting ready for a fiscal deluge
33 Hungary: Reassessing growth drivers
37 Poland: A swift recovery after the crisis
41 Romania: Looking for normality
45 Slovakia: More-resilient manufacturing to mitigate COVID-19 recession
47 Slovenia: Recovery amid COVID-19 uncertainty
EU CANDITATES AND OTHER COUNTRIES
49 Bosnia and Herzegovina: Smaller contraction in 2020 but slower recovery in 2021
51 North Macedonia: Slow recovery amid pandemic risk
53 Russia: Gradual recovery from shallow recession
57 Serbia: Recovery amid high uncertainty and risks
61 Turkey: A better policy mix
Erik F. Nielsen, Group Chief Economist (UniCredit Bank, London)
+44 207 826-1765, erik.nielsen@unicredit.eu
Dan Bucşa, Chief CEE Economist (UniCredit Bank, London)
+44 207 826-7954, dan.bucsa@unicredit.eu
Artem Arkhipov, Head of Macroeconomic Analysis and Research Russia (UniCredit Russia)
+7 495 258-7258 ext. -7558, artem.arkhipov@unicredit.ru
Gökçe Çelik, Senior CEE Economist (UniCredit Bank, London)
+ 44 207 826-6077, gokce.celik@unicredit.eu
Ariel Chernyy, Economist, Macroeconomic Analysis and Research Russia (UniCredit Russia)
+7 495 258-7258 ext. 7562; ariel.chernyy@unicredit.ru
Hrvoje Dolenec, Chief Economist (Zagrebačka banka)
Published on 13 January 2021 +385 1 6006-678, hrvoje.dolenec@unicreditgroup.zaba.hr
Dr. Ágnes Halász, Chief Economist, Head of Economics and Strategic Analysis Hungary (UniCredit Hungary)
+36 1 301-1907, agnes.halasz@unicreditgroup.hu
Erik F. Nielsen Ľubomír Koršňák, Chief Economist (UniCredit Bank Czech Republic and Slovakia)
Group Chief Economist +42 12 4950-2427, lubomir.korsnak@unicreditgroup.sk
(UniCredit Bank, London)
120 London Wall Elia Lattuga, Co-Head of Strategy Research, Cross Asset Strategist (UniCredit Bank, London)
UK-London +44 207 826-1642, elia.lattuga@unicredit.eu
EC2Y 5ET
Mauro Giorgio Marrano, Senior CEE Economist (UniCredit Bank, Vienna)
+43 50505-82712, mauro.giorgiomarrano@unicredit.de
Imprint: Anca Maria Negrescu, Senior Economist Romania (UniCredit Bank Romania)
UniCredit Bank AG +40 21 200-1377, anca.negrescu@unicredit.ro
UniCredit Research
Am Eisbach 4 Kristofor Pavlov, Chief Economist (UniCredit Bulbank)
D-80538 Munich +359 2 923-2192, kristofor.pavlov@unicreditgroup.bg
Supplier identification: Pavel Sobíšek, Chief Economist (UniCredit Bank Czech Republic and Slovakia)
www.unicreditresearch.eu +420 955 960-716, pavel.sobisek@unicreditgroup.cz
UniCredit Research page 3 See last pages for disclaimer.January 2021 January 2021 CEE Macro & Strategy Research
CEE Quarterly
A path to recovery
Dan Bucsa ■ We expect economies in EU-CEE1 and in the western Balkans, to grow by around 3.3% in 2021
Chief CEE Economist
(UniCredit Bank, London) after slumping by close to 5% in 2020. A weak start to 2021, lower fiscal support, looser labor-
+44 207 826-7954 market conditions, delayed investment and external risks could result in an incomplete recovery.
dan.bucsa@unicredit.eu
■ GDP in EU-CEE and the western Balkans could return to pre-COVID-19 levels in 2022,
when growth could accelerate to more than 4%. Interest rates could be increased in
Czechia at the end of 2021 and in Poland and Romania in 2022.
■ EU support in the form of the European instrument for temporary Support to mitigate
Unemployment Risks in an Emergency (SURE), Next Generation EU (NGEU) and the
2021-27 EU budget could support the recovery in EU-CEE in 2022 and beyond.
■ IN EU-CEE, only the NBR is expected to cut rates in 2021. The CNB could be the first
central bank to increase rates in 2H21, followed by the NBP and the NBR in 2H22. Central
banks could purchase more bonds if state funding needs rise above current plans.
■ In Turkey, economic growth could accelerate from around 1.2% in 2020, to 2.9% in 2021 and
4% in 2022. Without structural reforms, most of the monetary tightening implemented in 2020
could be reversed in 2021 to spur lending and growth. This strategy is not sustainable, and
may only serve to put pressure back on the current account, the currency and rates.
■ After declining by almost 4% in 2020, the Russian economy could grow by 2.2-2.3% in
2021 and 2022. The central bank could keep the policy rate at 4.25% in 2021-22 if inflation
remains below the 4% target.
■ The COVID-19 pandemic will continue to affect CEE countries in 2021, with herd immunity
reached this year only if vaccination accelerates significantly. However, restrictions and
their negative economic impact could be much milder next winter than they are currently.
■ In 2021, government anti-pandemic support will decline compared to 2020 in all CEE
countries but Bulgaria. Indirect support could be less efficient than last year, unless
governments focus on grants, rather than loans to SMEs. Labor-market support may be
needed to avoid a large second wave of layoffs. Support could be withdrawn starting in 2H21.
■ Political noise will be a risk in Bulgaria and Czechia, where parliamentary elections will be
held in 2021.
■ Democracy in CEE would benefit if the US administration returns to multilateralism.
■ In the next two years, EU fund disbursements are unlikely to be tied to observing the rule of law.
2020 recession… In 2020, GDP fell in all CEE countries but Turkey, where the economy grew by around 1.2%,
around 3pp below potential. In the rest of the region, the contraction probably ranged between
1.1% in Serbia to almost 4% in Russia and around 5% in EU-CEE and the western Balkans
(Chart 1). The health crisis caused by the COVID-19 pandemic led to a deeper slump in 2Q20
than that which occurred during the global financial crisis. Economies that are more reliant on
domestic demand and that benefitted from timely government support were more resilient than
the small, open economies in central Europe. The recovery in 3Q20 was proportional to the
2Q20 slump but incomplete. In 4Q20, GDP probably fell again in most CEE countries due to
lockdowns imposed in response to the second wave of the COVID-19 pandemic, both
domestically and by the CEE’s largest European economic partners. Yet, the tightness of
restrictions and compliance with rules varied widely across countries. Thus, Croatia, Czechia,
Slovenia, Slovakia, Hungary and Poland probably suffered more than Romania, Russia and
Serbia. Turkey’s sharp credit adjustment, made as the country attempts to tackle yet another
balance-of-payments crisis, might have led to a GDP slump in 4Q20, despite anti-pandemic
restrictions having not been tightened as much as in central Europe.
1
EU-CEE refers to CEE countries that are members of the EU: Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia and Slovenia.
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CEE Quarterly
The 2021 recovery is likely to be incomplete in all CEE countries but Poland, Serbia and
…followed by an incomplete Turkey. In Poland, quick and targeted support prevented a deeper slump in 2020. Serbia will
recovery in 2021 continue to benefit from large public spending and Turkey from its region-topping potential
growth. That said, all three countries could end 2021 with negative or zero output gaps. At the
other extreme, the Croatian economy is unlikely to return to its pre-pandemic level of activity
before 2023, as the tourism sector could take longer to recover. In 2021, EU-CEE could grow
by around 3.3%, in line with the western Balkans, with both the Russian and the Turkish
economies recovering by close to 2.5% (Chart 2). We see five main reasons why a full
recovery from the 2020 slump will be postponed to 2022 or later in most CEE countries:
1. A weak start to 2021: After small or negative carryover into 2021, economic activity could
remain subdued in 1Q21 if restrictions are maintained throughout the winter. Countries
whose governments reacted indecisively in 4Q20 (Bulgaria, Romania, Russia and Serbia)
could eventually tighten restrictions in 1Q21, leading to a GDP drop during the winter.
2. Lower fiscal and monetary support than in 2020: We expect budget deficits to decline
in all CEE countries but Bulgaria, where anti-crisis support might increase in 2021
compared to last year. Budget shortfalls could narrow less than in official forecasts, even
after governments revised them at the end of 2020. In our opinion, most CEE authorities
are underestimating economic risks from the current pandemic wave. Some of the most
successful support schemes introduced in 2020 might be extended, such as those
backing furlough and part-time work, as well as loan repayment moratoriums. Deferred
taxes could be collected only partially and with a delay. Government guarantees will
remain available for corporate borrowers.
3. Weaker labor-market conditions and their negative impact on consumer spending:
Lengthy restrictions are likely to continue to affect employment, especially in leisure
services and manufacturing. In addition, wage bargaining will mostly occur in 1Q21, when
restrictions and weak foreign demand could lead to much lower wage growth than in
previous years. The first official announcements from car companies in EU-CEE suggest
that wages and bonuses will rise in single digits in 2021 and 2022, compared to 15-25%
annual growth rates in past years. Car manufacturing is a bellwether for at least half of
manufacturing wages in EU-CEE. There has already been a marked reduction in
household plans to make large purchases. We expect a recovery in household investment
in 2H21, at the earliest.
4. Postponed corporate investment: Companies may postpone investment as well, despite
sizeable credit and tax support from governments. While large companies could explore
opportunities to expand their market share or increase productivity, SMEs are less capable
of spending. They started the COVID-19 crisis in a significantly weaker position than their
eurozone counterparts, and preferential loans granted in 2020 increased their leverage to a
point where additional borrowing would be difficult to sustain. Several CEE governments
will hand out grants to SMEs, partly co-financed with EU money, to help them weather a
protracted reduction in demand. However, many SMEs may use grants to repay some of
their debt before venturing into new investment. Besides productive investment,
construction is also likely to suffer from a lack of orders at least until mid-2021. The most
affected will be housing and offices.
5. External demand outlook unclear: The outlook for external demand remains uncertain,
especially when it comes to car exports, tourism and Brexit. The high import content of
exports and muted domestic demand could offset a weak contribution from exports to
GDP in 1H21. Starting in 2H21, exports could rise throughout CEE if growth rebounds in
the eurozone and globally.
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CEE Quarterly
CHART 1: CHART 2:
RECESSION IN ALL CEE COUNTRIES BUT TURKEY IN 2020… …FOLLOWED BY INCOMPLETE RECOVERY IN 2021
yoy (%), Private consumption Public consumption Fixed investment yoy (%), Private consumption Public consumption Fixed investment
pp Net exports Inventories, error GDP pp Net exports Inventories, error GDP
Croatia Croatia
Serbia Serbia
Hungary Hungary
Romania Romania
Poland Poland
Slovenia Slovenia
Bulgaria Bulgaria
Slovakia Slovakia
Turkey
Turkey
Russia
Russia
Czechia
Czechia
-15.0 -10.0 -5.0 0.0 5.0 10.0
-4.0 -2.0 0.0 2.0 4.0 6.0
Source: Eurostat, national statistical offices, UniCredit Research
Financial support from the EU The bright spot in the EU-CEE economic outlook for 2021 is EU support in the form of several
is expected to fuel recovery
in EU-CEE… programs disbursing loans and grants (Chart 3). The first of these loan disbursements has
already arrived from SURE2, with funding already approved for all EU-CEE countries.
Together with NGEU loans, they are expected to replace at least 25% of external issuance in
2021, with grants starting to arrive towards the end of 2021. Together with late disbursements
from the EU’s 2014-20 multiannual financial framework (MFF), these transfers and loans
should smooth the transition to disbursements from the 2021-27 EU budget by ensuring that
public investment does not plummet in 2021-22. We expect EU funding to add 0.1-0.7pp to
GDP growth in 2021, with its smallest contribution in Czechia and its largest in the Balkans3.
…and accelerate growth to
Disbursements from NGEU and the MFF will rise gradually in the coming years. This should
above 4% in 2022 set the stage for a further recovery in 2022, when GDP growth could exceed 4% (Chart 4). If
the negative effects of the pandemic are contained, the private sector could increase
spending, while exports may recover as the eurozone and global economies rebound as well.
This would allow labor-market conditions to tighten again, eliminating most scarring effects by
the end of 2022.
CHART 3: LARGE TRANSFERS FROM THE EU… CHART 4: …WILL BOOST THE RECOVERY IN 2022 AND BEYOND
% of avg. GDP for 2021-27 SURE NGEU loans yoy (%), Private consumption Public consumption Fixed investment
NGEU grants EU budget 2021-27 pp Net exports Inventories, error GDP
Croatia
Croatia
Bulgaria Serbia
Hungary Hungary
Romania
Slovakia Poland
Romania Slovenia
Bulgaria
Slovenia
Slovakia
Poland Turkey
Russia
Czechia
Czechia
0.0 10.0 20.0 30.0 40.0 50.0
-4.0 -2.0 0.0 2.0 4.0 6.0 8.0
Source: national statistical offices, European Commission, UniCredit Research
2
The European instrument for temporary Support to mitigate Unemployment Risks in an Emergency
3
We are less optimistic than the European Commission in our assessment of the potential impact of EU funding on growth in 2021.
UniCredit Research page 6 See last pages for disclaimer.January 2021 January 2021 CEE Macro & Strategy Research
CEE Quarterly
The negative impact of COVID- We expect the COVID-19 pandemic to further affect CEE economies in 2021. While
19 could last throughout 2021
vaccination has started in EU-CEE and Russia (Chart 5) and is picking up, countries need to
accelerate immunization. At the current pace, no CEE country will come close to vaccinating
70% of its population in 2021. Significantly more efforts would be needed in Poland and
Romania, and especially in Bulgaria, Czechia and Russia to make sure that a large-enough
percent of the population receives the vaccine before the end of 2022.
Even if herd immunity is reached earlier due to rising infections, it is likely that the epidemic
will continue to affect lives and economic activity throughout 2021. The best hope for CEE
countries is that restrictions are significantly milder next winter compared to the current one.
Until then, CEE countries face several problems in the second wave of the pandemic4, such
as poor official communication, the lack of test-trace-isolate frameworks, low compliance with
The second wave of the restrictions, high usage of intensive care units and a shortage of health care workers5. In
pandemic could require tighter
addition, most CEE countries continue to test insufficiently and, as a result, the official
restrictions in 1Q21
assessment of the viral spread is inadequate. Daily case estimates from Imperial College
London (ICL) are 2-8 times higher than officially communicated daily cases. The ICL
estimates correlate strongly with the number of deaths (Chart 6) and are a better predictor of
fatalities than officially published infection numbers.
While most CEE governments plan to remove restrictions in February, new viral strains could
delay the exit from lockdowns and even require tighter restrictions before the spring. These, in
turn, would further weigh on economic growth, employment and wage growth.
CHART 5: UNEVEN START FOR ANTI-COVID VACCINATION CHART 6: ICL ESTIMATES CORRELATE WITH COVID DEATHS
SARS-CoV-2 vaccination rates Latest data as of 25 December 2020 (ICL) and 5 January 2021 (deaths)
(vaccines per 100 inhabitants) World average 18.0
1.2
16.0 SI
Deaths per million inhabitants
SK
1.0 14.0
CZ HR
12.0
0.8 BG HU
10.0
PL
0.6 8.0
RS
6.0
0.4 RO
4.0
RU
0.2 2.0
TR
0.0
0.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0
BG HR CZ HU PL RO RU RS SK SI TR
Baseline ICL estimate for daily infections per thousand inhabitants
Source: CEE governments, Oxford University, Imperial College London, UniCredit Research
Governments are expected to The risk of further restrictions and economic disruption require CEE governments to maintain
maintain some anti-crisis
support in 2021 some support measures in 2021. While the size will not match what was spent in 2020
(Tables 1 and 2), the implementation of last year’s fiscal and financial packages carry
valuable lessons for authorities.
The most important lesson is that timeliness may be more important than size. Poland is the
Timeliness of disbursements
could improve further most relevant example. The government’s decision to dole out most financial support through
the state-owned sovereign investment fund (PFR) and development bank (BGK) helped the
Polish economy weather the downturn better than its central European peers. At the other
extreme, Czechia pledged the largest indirect support package in the region, but managed to
implement only 7% of it. The good news is that most CEE countries have improved the
channeling of funding to the private sector, be it directly or via the banking sector, and
disbursements could become more efficient still in 2021.
4
While some prefer to call it the third wave, we believe that the second wave never ended in CEE and the decline in the number of cases was mostly due to fewer
tests conducted before Christmas and during the winter holidays. The exception is Czechia, where a tight lockdown reduced the number of infections in 4Q20.
However, the number of cases rose rapidly once restrictions were eased.
5
For details, please see the EEMEA Country Note – Long COVID risk in CEE from policy inaction, 10 December.
UniCredit Research page 7 See last pages for disclaimer.January 2021 January 2021 CEE Macro & Strategy Research
CEE Quarterly
Labor-market support is The second lesson is that labor-market support may have the farthest reaching effects of all
needed throughout the second
pandemic wave support measures. Prompt support for furlough and part time work blunted the rise in
unemployment, but could not prevent employment from falling in 3Q20 even in sectors such
as industry that rebounded strongly. Yet both employment and consumer expectations fell
much less than during the global financial crisis, probably helped by public safety nets.
Maintaining labor-market support in 2021 could be paramount for the recovery, especially if a
protracted second wave of the pandemic leads to another round of layoffs this winter.
SMEs better targeted with The third lesson is that SMEs have limited room to further increase leverage. The take-up of
grants than loans subsidized and/or guaranteed loans slowed towards the end of 2020 in most CEE countries.
For small companies saddled with debt and facing an uncertain future, grants may be a better
option than more loans. EU funding from NGEU and SURE could supplement national
resources in supporting hard-hit sectors (especially services) but also companies in sectors
prioritized by the European Commission, such as IT, environment and energy transition.
2021 support packages are too Taking these lessons into account, 2021 pandemic support packages seem too heavy on
heavy on new lending lending incentives and guarantees. This is especially true in Hungary, where SMEs were
more leveraged than their regional peers even before the pandemic started. More subsidized
lending may achieve little in reducing corporate borrowing costs or spurring growth. The other
EU-CEE countries could use a mix of loans and grants, with Poland and Romania probably
favoring the latter. Russia and Turkey pledged the least indirect support in CEE. The CBR is
already subsidizing funding for banks and appetite for borrowing is very healthy in an
economy that missed out on the CEE credit boom of the mid-2010s. On the other hand, the
CBR is looking to slow credit growth, fearing that current growth rates could threaten financial
stability. The CBRT has also moved to cool down the credit boom it fueled in 2020. The
adjustment will continue at least in 1H21, leading to a negative credit impulse.
Direct support could increase if With the exception of Bulgaria, direct support will be smaller than in 2020, in some cases
the second wave has significantly so. In a repeat of 2020, many governments probably underestimate the negative
significant economic costs
impact the pandemic will have on their economies. Others plan to reduce their budget deficits
and cap public debt before sovereign ratings are threatened. Either way, we expect all EU
countries to ramp up direct support in case of need, with the funding coming partly from the
EU (in EU-CEE and the western Balkans), government reserves (in Russia) and central bank
purchases (in Turkey). If economies start to recover in 2Q21, we expect government support
to be withdrawn in the second half of the year.
TABLE 1: OFFICIAL PANDEMIC SUPPORT IN 2020 TABLE 2: PANDEMIC SUPPORT PLEDGED FOR 2021
Direct s Indirect Total Direct Indirect Total
(% of GDP) upport support support (% of GDP) support support support
Bulgaria 3.2 0.2 3.4 Bulgaria 4.0 2.0 6.0
Croatia 5.1 2.4 7.5 Croatia 1.1 2.3 3.4
Czechia 3.9 1.2 5.1 Czechia 2.0 0.0 2.0
Hungary 4.4 1.0 5.4 Hungary 0.1 3.7 3.7
Poland 2.4 4.8 7.2 Poland 1.0 1.4 2.4
Romania 1.8 3.7 5.5 Romania 1.5 1.6 3.1
Russia 2.0 1.0 3.0 Russia 0.7 0.2 0.9
Slovakia 1.8 0.7 2.5 Slovakia 1.1 1.0 2.1
Slovenia 4.6 0.4 5.1 Slovenia 3.0 1.8 4.8
Serbia 7.5 3.2 10.7 Serbia 0.0 0.5 0.5
N. Macedonia N. Macedonia 0.1 0.9 1.0
Turkey 4.9 5.5 10.4 Turkey 0.4 0.1 0.5
Source: CEE governments, UniCredit Research
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CEE Quarterly
Inflation is expected to be In 2021, low imported inflation, little scope for currency depreciation and weak domestic demand
inside target ranges in 2021-22
could keep inflation safely inside target ranges in EU-CEE, Russia and Serbia
(Chart 7). Inflation is expected to rebound in 2022, without leaving target ranges in any of the
aforementioned countries. In EU-CEE, only the National Bank of Romania is expected to deliver
limited rate cuts from here on, while the Czech National Bank is contemplating rate hikes in
2021 if fiscal spending fuels inflationary pressure. By 2H22, the Polish, Romanian and Russian
Rate hikes are possible in central banks might consider increasing interest rates without giving up on negative real interest
Czechia in 2H21 and in Poland, rates. However, the CBR could leave the policy rate at 4.25% for longer if inflation remains
Romania and Russia in 2H22
below the 4% target and economic growth does not accelerate above potential.
Turkey’s permanent target miss could extend to the coming years. We expect the CBRT to
reverse most of its rate hikes from 2020 in the second half of 2021, once disinflation resumes. In
Turkey is likely to reverse the absence of structural reforms, the authorities may revert to the credit-driven growth model
monetary tightening in 2021
that has led to several balance-of-payments crises – combined with TRY depreciation and sharp
swings in GDP dynamics – in the past decade. Such growth spurts are shorter, and the effect of
credit booms increasingly smaller, due to high leverage in the private sector. As a result, the
Turkish economy could grow below potential in 2021-22, which would revive the specter of
higher unemployment and populist spending ahead of 2023 parliamentary elections.
CHART 7: INFLATION INSIDE TARGET RANGES IN ALL CHART 8: 2020 BOND PURCHASES GIVE AN INDICATION OF
COUNTRIES BUT TURKEY THE SCOPE FOR CENTRAL BANK PURCHASES IN 2021
annual inflation (eop, %) 2020E 2021F 2022F Inflation target bond purchases since the start of Other bonds
14 the crisis, % of GDP Government bonds
6
12
10 5
8 4
6
3
4
2
2
0 1
-2 0
SI SK PL HR RS CZ BG BH RO RU HU TR CNB* NBP NBH NBS CBRT NBR
*CNB stands for the Croatian National Bank. Source: statistical offices, central banks, ministries of finance, UniCredit Research
CEE central banks could Some CEE central banks could continue bond purchases in 2021 due to high budget deficits.
purchase more bonds in 2021
We believe that purchases in 2020 (Chart 8) are a good indicator of how active central banks
may be in 2021. Besides the NBH, which still has around HUF 1.1tn in bonds to buy before
reaching its self-imposed limit, the Croatian and Serbian central banks are the likeliest to buy
bonds, followed by the NBP. However, actual purchases could be smaller than they were in
2020 as budget deficits decline. They could also target the longer end of the yield curve more
than they did in 2020, which is what the NBH is doing.
Elections could trigger fiscal Elections will add to noise in other CEE countries, with Bulgaria and Czechia holding
populism in Bulgaria and
Czechia parliamentary elections in 2021. While populist fiscal spending may rise ahead of these polls,
both countries start from a very strong fiscal position. Strong institutions in Czechia and the
process of euro adoption in Bulgaria could deter legislation that would affect the rule of law.
The return of multilateralism is The election of Democratic candidate and former Vice President Joe Biden as the next US
good news for democracy
in CEE president could lead to more-targeted US involvement in the region if Mr. Biden follows in
Barack Obama’s footsteps. That said, we do not expect crippling sanctions to be placed on
Russia, while Turkish authorities could try to appease concerns in Washington to avoid conflict
with the incoming US administration.
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For EU-CEE, a return to multilateralism may strengthen democratic values while dampening the
prospects of those politicians who have tried to escape the process of further European
integration. None of the small, open economies in EU-CEE can afford to leave the EU, a reality
that could be made all the more clear by the effects of Brexit.
EU fund disbursements may The deal struck by EU governments to adopt the NGEU and the 2021-27 EU budget gave some
not be tied to the rule of law in
the next couple of years respite to Hungarian and Polish governments in their attempt to avoid linking EU fund
disbursements to observing the rule of law. However, this respite might be temporary and will
depend on how quickly European authorities define the rule of law and the European Court of
Justice (ECJ) rules whether the link between financial transfers and rule-of-law conditionality is
in agreement with European treaties. It might be much easier to back such conditionality for
NGEU than for the EU budget. Thus, the ruling could depend on whether the ECJ decides to
treat the two financing frameworks together. Thus, Hungary and Poland may have bought
themselves up to two years and a resolution could be issued close to the Hungarian
parliamentary elections expected in spring 2022.
In the medium term, additional reforms to take decisions in the European Council by a qualified
majority, rather than unanimously, and for European authorities to have a bigger say in national
legislative processes may be unavoidable if the EU does not choose the path of multi-speed
European integration.
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CEE Quarterly
OUR GLOBAL FORECAST
GDP growth, % CPI (Avg), % Policy interest rate** 10Y bond yield (EoP),% Exchange rate (LC vs. US)
2020E 2021F 2022F 2020E 2021F 2022F 2020 2021F 2022F 2020 2021F 2022F 2020 2021F 2022F
Eurozone -7.4 3.0 4.5 0.3 0.7 1.6 -0.50 -0.50 -0.50 -0.26 0.00 0.20 1.22 1.28 1.32
Germany -4.8* 3.3* 4.2* 0.4 0.9 1.7 -0.57 -0.30 -0.10
France -9.5 3.2 5.1 0.5 0.5 1.5
Italy -9.2 2.8 4.4 -0.1 0.1 0.8 0.55 0.85 1.40
UK -11.2 4.3 6.3 0.9 1.4 1.9 0.10 0.10 0.10 1.37 1.36 1.40
USA -3.8 1.8 3.5 1.2 1.9 2.1 0.25 0.25 0.25 0.91 1.30 1.75
Oil price, USD/bbl 43 41 50
*Non-wda figures. Adjusted for working days: -5.2% (2020), 3.3% (2021) and 4.2% (2022); **Deposit rate for ECB Source: UniCredit Research
THE OUTLOOK AT A GLANCE
Real GDP CPI (EoP) C/A balance
(% change) 2019 2020E 2021F 2022F (% change) 2019 2020E 2021F 2022F (% GDP) 2019 2020E 2021F 2022F
EU-CEE 3.8 -4.9 3.3 4.1 EU-CEE 3.4 2.1 2.3 2.9 EU-CEE -0.4 1.1 0.6 0.4
Bulgaria 3.7 -5.5 2.7 4.5 Bulgaria 3.8 0.7 2.5 2.6 Bulgaria 3.0 2.7 3.2 3.4
Czechia 2.2 -6.4 2.0 4.9 Czechia 3.2 2.3 2.3 2.7 Czechia -0.3 3.6 2.7 1.2
Hungary 4.6 -5.6 4.1 4.3 Hungary 4.0 2.6 3.6 3.7 Hungary -0.2 0.0 -0.1 1.1
Poland 4.6 -3.0 3.5 3.1 Poland 3.4 2.3 1.9 3.2 Poland 0.5 3.0 1.5 1.4
Romania 4.2 -5.5 3.7 5.0 Romania 4.0 2.2 2.9 2.6 Romania -4.7 -4.9 -4.7 -4.8
Croatia 2.9 -9.1 4.6 4.8 Croatia 1.4 0.3 2.0 2.0 Croatia 2.7 -2.9 0.7 0.5
Russia 2.0 -3.9 2.3 2.2 Russia 3.0 4.9 3.5 3.5 Russia 3.9 2.5 1.0 1.8
Serbia 4.2 -1.1 4.2 4.2 Serbia 1.8 1.3 2.1 2.4 Serbia -6.9 -5.7 -5.5 -5.5
Turkey 0.9 1.2 2.9 4.0 Turkey 11.8 14.6 10.8 11.5 Turkey 0.9 -5.3 -3.0 -2.8
Extended basic
balance (% External debt General gov’t
GDP) 2019 2020E 2021F 2022F (% GDP) 2019 2020E 2021F 2022F balance (% GDP) 2019 2020E 2021F 2022F
EU-CEE 2.5 4.1 3.7 3.7 EU-CEE 66.6 72.5 69.4 66.4 EU-CEE -1.1 -7.4 -5.9 -3.9
Bulgaria 5.5 6.3 7.3 8.7 Bulgaria 58.0 66.1 65.2 63.2 Bulgaria 2.1 -3.7 -5.6 -2.8
Czechia 1.3 4.5 4.2 2.8 Czechia 76.2 82.4 80.7 81.4 Czechia 0.3 -7.0 -7.8 -6.0
Hungary 1.3 3.8 4.4 3.6 Hungary 91.0 111.5 104.5 97.6 Hungary -2.0 -9.2 -6.0 -2.7
Poland 4.1 6.9 4.8 5.1 Poland 59.7 58.0 52.0 47.1 Poland -0.7 -6.0 -4.6 -3.2
Romania -1.5 -2.4 -1.2 -1.0 Romania 33.3 42.9 46.5 46.9 Romania -4.3 -9.8 -7.0 -4.0
Croatia 6.7 2.5 5.8 5.7 Croatia 75.3 88.1 82.8 79.2 Croatia 0.4 -8.0 -3.5 -2.6
Russia 4.5 1.5 0.4 1.1 Russia 28.5 31.1 28.7 28.4 Russia 1.8 -5.0 -3.4 -1.8
Serbia 0.8 -0.8 0.3 0.3 Serbia 61.5 64.4 66.7 63.2 Serbia -0.2 -8.0 -3.5 -2.0
Turkey 1.7 -5.1 -2.3 -1.9 Turkey 57.1 62.0 59.4 58.3 Turkey -5.3 -5.6 -5.4 -5.1
Gov’t debt Policy rate FX vs. EUR
(% GDP) 2019 2020E 2021F 2022F (%) 2019 2020 2021F 2022F (EoP) 2019 2020 2021F 2022F
EU-CEE 44.1 56.8 58.7 58.9 EU-CEE EU-CEE
Bulgaria 19.9 25.0 28.3 29.1 Bulgaria - - - - Bulgaria 1.96 1.96 1.96 1.96
Czechia 30.2 38.1 44.4 47.3 Czechia 2.00 0.25 0.50 0.75 Czechia 25.4 26.2 25.6 25.0
Hungary 63.7 84.6 85.4 83.4 Hungary 0.90 0.60 0.60 0.60 Hungary 331 365.1 353 360
Poland 45.4 58.7 58.5 58.2 Poland 1.50 0.10 0.10 1.00 Poland 4.26 4.61 4.45 4.45
Romania 35.3 46.8 49.4 49.9 Romania 2.50 1.50 1.00 1.00 Romania 4.78 4.87 4.95 5.05
Croatia 72.8 89.6 87.9 84.9 Croatia - - - - Croatia 7.44 7.53 7.53 7.53
Russia 12.5 18.3 19.4 20.8 Russia 6.25 4.25 4.25 4.50 Russia 69.3 90.7 90.2 95.0
Serbia 52.9 59.0 59.4 58.2 Serbia 2.25 1.00 1.00 1.00 Serbia 117.6 117.6 117.9 118.3
Turkey 32.6 40.0 40.7 41.4 Turkey 12.00 17.00 12.00 12.00 Turkey 6.67 9.08 10.11 11.67
Source: National statistical agencies, central banks, UniCredit Research
UniCredit Research page 11 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
EM VULNERABILITY HEATMAP
BG CZ HR HU PL RO RS RU SK TR UA MX BR CL SA ID IN CN AG
External Liquidity
Current account (% of GDP) 0.7 2.4 -1.5 -0.9 2.8 -4.7 -5.4 2.3 -1.3 -4.2 4.2 1.4 -0.8 0 0.8 -1.3 1.3 1.5 1.6
Extended Basic Balance (% of GDP) 3.2 4.0 3.1 1.8 6.6 -2.3 0.2 1.3 0.6 -3.6 4.6 3.1 1.1 0.6 0.2 -0.2 3.0 2.0 1.9
FX Reserves coverage (months of imports) 9.8 9.1 8.9 2.9 5.2 5.0 6.8 14.8 - 2.2 4.7 5.5 18.9 6.5 6.9 8.9 10.1 16.3 7.9
External Debt (excl.ICL, % of GDP)* 36.8 75.2 67.6 54.3 40.6 38.0 65.0 20.7 92.1 59.3 79.8 44.7 69.7 83.0 51.0 37.9 21.4 16.1 57.8
Short-term debt (% of GDP) 12.3 41.1 26.4 10.8 8.2 6.5 4.2 4.0 43.9 18.3 10.8 4.0 5.2 7.9 9.1 4.1 7.8 9.1 8.1
REER (Index, 2010=100) 106.8 99.4 101.2 83.5 91.2 98.3 126.2 72.3 - 51.6 91.2 80.5 144.1 83.9 90.3 90.8 107.8 123.3 -
Domestic Finances
Corporate debt (% of GDP) 47.3 52.3 65.3 56.3 44.6 38.8 46.2 58.8 54.4 77.6 60.5 42.3 45.2 94.8 58.6 38.8 47.3 162.5 15.2
Household Debt (% of GDP) 23.7 39.3 39.0 22.6 35.2 21.1 20.5 19.1 45.6 17.8 5.7 17.1 31.4 37.6 35.6 16.6 13.5 59.1 5.0
Nonresident holdings of gov.debt (% total) 1.0 33.9 - 28.9 17.0 19.5 26.1 25.6 48.1 5.2 - 22.2 11.3 - 29.7 30.0 - 9.5 -
Banking System
Credit Impulse (% of GDP) -0.7 -0.1 3.1 0.6 -2.1 -1.0 1.9 4.3 3.9 12.7 9.7 -0.6 2.4 -1.4 -2.1 -3.2 1.2 8.5 1.5
Loans/deposit ratio (%) 70.7 63.7 79.1 66.6 82.5 68.9 88.1 89.8 102.8 104.2 143.4 92.3 101.9 111.4 99.1 90.6 111.2 75.5 130.8
NPL (% of total loans) 8.6 2.4 7.6 2.8 3.8 3.9 3.4 6.1 2.8 4.0 45.6 2.0 2.2 1.6 4.0 3.2 8.4 1.9 4.8
Domestic Banks CAR (%) 22.9 21.5 25.0 17.9 17.9 22.8 22.4 12.8 19.7 19.4 21.9 17.2 16.3 14.3 15.9 23.8 14.5 14.5 22.0
Domestic Banks RoE (%) 6.9 8.6 5.5 3.8 7.0 10.5 7.7 16.7 3.6 11.3 26.2 13.4 14.7 7.3 16.6 10.4 0.1 12.1 -
*External debt incl ICL for CZ, RS, TR, MX, CL and SA Source: Haver, Bloomberg, National Statistics Offices, Central Banks, IMF, BIS, UniCredit Research
Legend
Low vulnerability
Moderate vulnerability
Significant vulnerability
High vulnerability
UniCredit Research page 12 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
EM VULNERABILITY HEATMAP (CONTINUED)
BG CZ HR HU PL RO RS RU SK TR UA MX BR CL SA ID IN CN AG
Policy
Policy Rate, nominal (%) - 0.25 - 0.60 0.10 1.50 1.00 4.25 0 17.00 6.00 4.25 2.00 0.50 3.50 3.75 4.00 4.35 38.00
Real policy rate (%) - -2.3 - -2.0 -2.8 -0.7 -0.5 -0.7 -1.5 2.1 2.1 0.9 -2.2 -2.2 0.3 2.1 -2.8 0.6 1.6
Real Money market rate (%) - -2.2 -1.8 -1.9 -2.8 -0.3 -0.7 0 -2.0 2.9 1.7 1.0 -3.7 -3.3 0.1 2.4 -3.1 4.5 -3.8
Headline inflation (% yoy) 0.4 2.7 -0.2 2.7 3.0 2.1 1.7 4.9 1.5 14.6 3.8 3.3 4.3 2.7 3.2 1.6 7.0 -0.6 35.8
Core Inflation (% yoy) 0.6 2.4 0.8 3.9 4.3 3.4 1.9 3.9 1.4 14.3 3.9 3.7 2.0 2.3 3.3 1.8 5.7 0.4 37.8
GG Fiscal balance (% of GDP) -2.3 -4.0 -3.1 -4.6 -5.5 -8.5 -7.5 -5.1 -4.7 -3.9 -8.5 -2.5 -13.7 -7.5 -10.7 -5.0 -6.3 -5.5 -8.9
GG Primary balance (% of GDP) -1.8 -3.2 -1.0 -2.3 -2.6 -7.1 -5.6 -4.1 -3.4 -1.2 - 0.7 -8.9 -6.6 -6.2 -3.0 -2.9 n.a. -
Government Debt (% of GDP) 24.6 38.4 85.3 74.3 51.6 44.0 57.6 18.3 60.2 42.6 79.8 48.2 80.8 49.6 75.2 60.2 56.2 63.0 70.4
Markets
External Debt Spread (10Y, bp)** 57.7 20.0 105.4 92.2 47.7 181.5 153.9 126.3 43.2 454.0 504.2 110.0 210.5 53.5 298.6 150.3 105.0 -6.9 -
Local Currency Curve (5Y, %)*** 0.2 0.8 0.4 1.5 0.4 2.6 2.6 5.4 -0.6 13.4 4.9 4.8 5.1 1.6 8.0 5.2 5.4 2.9 52.0
Local currency bond spread (2s10s)**** 62.6 115.2 44.9 117.3 117.0 68.5 139.7 150.0 13.9 -142.0 285.7 141.0 261.5 397.0 283.0 192.7 151.9 56.6 -270.2
CDS (10Y, bp) 61 44 122 87 89 117 149 140 71 328 384 140 225 85 300 116 128 30 1400
FX 3m implied volatility (%) - 5.6 4.0 7.2 6.4 2.3 - 15.4 - 16.9 - 15.0 20.3 13.8 17.2 10.2 5.9 5.8 15.0
Structural*****
IBRD Doing Business 61 41 51 52 40 55 44 28 45 33 64 60 124 59 84 73 63 31 126
WEF Competitiveness Ranking 49 32 63 47 37 51 72 43 42 61 85 48 71 33 60 50 68 28 83
Unemployment (%) 4.9 2.9 6.7 4.4 3.4 5.1 9.5 6.3 7.2 12.7 9.3 4.4 14.3 10.8 30.8 7.1 6.5 5.2 11.9
** Spread between 10Y EUR government bond yields and the corresponding German government bond yields for BG, HR, HU, PL, RO. For CZ, the spread refers to the 5Y yield. For the other countries, the spread is computed with respect to US
government bond yields
*** Data for UA refer to the generic USD bond. Data for HR refer to the 4Y bond
**** Data for UA refer to the generic USD bond. Data for CL refer SA to the spread between 8Y and 2Y bond and 9Y and 2Y bond respectively. Data for HU refer to spread between 10Y and 3Y bond.
*****IBRD and WEF indicators for 2018
Source: Haver, Bloomberg, National Statistics Offices, Central Banks, IMF, BIS, UniCredit Research
Legend
Low vulnerability
Moderate vulnerability
Significant vulnerability
High vulnerability
UniCredit Research page 13 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
CEE strategy: Solid risk appetite and yield in demand
Elia Lattuga ■ As markets shift focus towards economic recovery, and while monetary policy at key central
Co- Head of Strategy Research,
Cross Asset Strategist banks remains accommodative, financing conditions on global markets should help fuel the
(UniCredit Bank, London) performance of risky assets and keep yield hunting alive. Developments pertaining to the
+44 207 826-1642
pandemic and to long-term US yields are key sources of risk that should be monitored.
elia.lattuga@unicredit.eu
■ CEE assets are set to benefit from negative net supply in the eurozone, the yield hunting
environment and positive developments in bond supply. Higher-yielding exposure might be
preferred, but portfolio flows might also sustain higher-rated issuers.
Asset performance in 2020 With large swings in asset performance and unprecedented stimulus by fiscal and monetary
authorities, 2020 has been an extremely volatile year for global markets. At the end of the year,
the MSCI World Index was 14% higher than it was a year earlier after posting a staggering 68%
rally from March lows. In spite of some upward pressure at the long end of the curve, 10Y UST
yields are still 80bp below their YE 2019 levels. Credit spreads across both US and European
markets have been tightening steadily in recent months, and broad indices have returned to
levels that prevailed a year ago. A return of implied volatility on US equities in the 20 points area
and the weakening of the USD, which lost over 10% (DXY) from March peaks, also supported a
general easing of financial conditions. EM bonds benefited from such improvement and posted
a sharp tightening in credit spreads. However, this was not enough to fully recover from earlier
widening, leaving spreads in broad indices a tad wider than they were a year ago. In total-return
terms, however, EM bonds managed to close 2020 with a positive performance. Across several
segments of the market, total returns exceeded 5%, a very good performance when one
considers the extent of 1Q20 losses. LatAm and lower-rated buckets across EM bond indices
underperformed, displaying, in some cases, sharp losses that were heavily affected by the large
drop recorded in 1Q. A selective approach paid off during volatile times. EMEA did well,
especially across hard-currency indices.
Investors focus on economic 2021 started on a positive note for risky assets, after a very strong performance in the latter part
recovery over the medium term
of 2020. Uncertainty surrounding short-term development in contagion curves is still high, and a
number of countries have stepped up restrictions in recent weeks and this bodes ill for GDP
growth over 1Q, but risk appetite has remained solid. Markets are taking a constructive stance
with respect to the effectiveness and rapid distribution of COVID-19 vaccines and treatments,
which should limit the need for additional lockdowns down the road and pave the way for a
sustainable recovery in 2021.
CHART 1: TOTAL RETURNS (USD) CHART 2: FINANCING CONDITIONS
4Q20 3Q20 2Q20 1Q20 8
40% 10Y USD RY DXY VIX US HY
2019 2018 2020 7
30% 6
20% 5
Standardized levels
10% 4
3
0%
2
-10%
1
-20% 0
-30% -1
-40% -2
LatAm Asia EMEA LatAm Asia EMEA A Baa Ba B Caa 1-3 7-10
Year Year -3
Jan 17 Oct 17 Jul 18 Apr 19 Jan 20 Oct 20
LC HC-USD HC-USD HC-USD
Source: Bloomberg, UniCredit Research
UniCredit Research page 14 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
Moreover, lingering support by central banks and the hunt for yield should contribute to limiting
the impact of negative growth news in the short term while keeping investors focused on
economic recovery over the medium term. Indeed, central banks ended 2020 by conveying a
clear message of support for financial markets and will act to avoid that a tightening in financial
conditions might derail progress before an economic recovery gains pace and inflation outlooks
improve (which might still be several quarters off). Both the Fed and the ECB are expected to
leave their official rates at their currently low levels for several years, while net asset purchases
(and thus balance-sheet expansion) continues into 2021. This will help markets digest lower, but
still high, borrowing needs as fiscal policy remains accommodative.
Strategy view for 2021 In this scenario, we think that risky assets are well-positioned to outperform. We expect to see
equity indices delivering returns in the 10% area in 2021. We believe that credit-spread
tightening has more room to run as yield hunting pushes investors to move into riskier
segments of the market, while interest-rate levels remain subdued. Indeed, we forecast a
gradual adjustment towards higher yield levels and steeper USD-denominated and
EUR-denominated government-bond curves. More specifically, we expect that the 10Y UST
yield will increase to 1.30% by the end of next year and to 1.75% by the end of 2022, while we
project that 10Y Bund yields will close 2021 at -0.30% and 2022 at -0.10%, representing a
moderate drag on total returns in the IG space. In spite of some widening in the transatlantic
spread at the long end, we believe that EUR-USD will continue to move north and close 2021
at 1.28, as the correlation between equity prices and the US dollar remains negative. In a
nutshell, moderately higher risk-free rates, tighter credit spreads and a weaker dollar should
keep financing conditions for EM paper attractive, while investors struggle to find yield.
The main risks to our call Our positive call with regard to risky assets is very much dependent on an assumption that
for 2021
vaccine distribution will allow a broader and more-solid recovery in global growth in 2021.
Hence, that recovery expectations could be jeopardized by negative news regarding vaccine
distribution, or more in general, regarding health conditions might weigh on appetite for risk at a
time when equities reflect earnings growth in the 20-30% range for this year and the next.
Moreover, after Democratic Senate candidates won run-off elections in the US state of Georgia,
thereby avoiding a split Congress, 10Y UST yields rose above 1% for the first time since March,
and reflation expectations and bear steepening are regaining popularity. We think that inflation
breakevens have limited upside. However, as the US economy recovers and as GDP begins to
return to pre-crisis levels, markets might start to react in anticipation of some tapering and
possibly to a halting of net asset purchases by the Fed. In such a scenario, a sharp repricing of
US rates could spillover on credit markets, given narrow spreads and high leverage – and
possibly on equity valuations and on the US dollar. This is a key risk to monitor in our view.
CHART 3: VOLATILITY AND CENTRAL BANK LIQUIDITY CHART 4: NON-RESIDENT BOND PORTFOLIO MONTHLY FLOW
VIX G10 FX EM FX ECB, Fed, SNB, BoJ, PBoC assets (rs) 80 EM EU EM Asia LatAm Africa-ME
80 25
60
70
20 40
60
1M implied volatilitu
20
USD bn
Assets, USD tn
50
15
40 0
10 -20
30
20 -40
5
10 -60
Apr 17
Apr 15
Oct 15
Apr 16
Apr 18
Apr 19
Apr 20
Oct 20
Jan 15
Jul 15
Jan 16
Jul 16
Oct 16
Jan 17
Jul 17
Oct 17
Jan 18
Jul 18
Oct 18
Jan 19
Jul 19
Oct 19
Jan 20
Jul 20
0 0
Jan-10 Sep-12 Jun-15 Mar-18 Dec-20
Source: IIF, Bloomberg, UniCredit Research
UniCredit Research page 15 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
Currency volatility Central-bank action has also eased implied volatility across a number of assets. The Chicago
Board Options Exchange Volatility Index (VIX) has begun approaching the 20-point level
again. This is at the low end of the VIX range that has prevailed since March. FX volatility has
been following a similar path, but EM currency volatility remains high compared to G7
currency volatility. As the growth outlook improves and the recovery broadens, and with major
central banks remaining committed to providing liquidity, we expect markets to become
calmer over the coming months, albeit with risks of short-lived spikes. Lower FX volatility
would contribute to channeling more funds towards EM markets from crossover investors.
Portfolio reallocation CEE bond markets are well-positioned in this respect to attract inflows as EUR-denominated
benefiting CEE
bond markets will be bid and increasingly owned by the Eurosystem. With governments
funding their fiscal expansions and corporates transforming their short-term liquidity sources
into capital-market borrowing, 2020 has been characterized by very intense supply pressure
on global markets. The very large gross and net supply has been digested smoothly, thanks
to the support of central banks’ asset-purchasing programs and strong demand from private
investors. In the euro area, PEPP and APP flows have led to a massive increase in demand
for bonds. This has taken gross supply net of redemptions and central-bank purchases to
negative levels in spite of large funding needs. In the past, sharply negative net supply
(including quantitative easing) in the euro area has fueled portfolio reallocations, also
benefiting CEE countries. In 2016-17, however, euro-area bond markets offered much better
entry levels for those willing to add duration or credit risk. Yield curves were steeper, and
spreads were wider and more dispersed. The share of eurozone bonds trading at negative
yield levels has increased steadily over the past few months, and scarcity has become a more
material issue across several segments of the market. The ECB’s asset purchases will
continue over the coming quarters and, according to our calculations, will more than offset net
borrowing for both government and non-financial corporate debt over the course of 2021.
CEE bonds appear well-positioned to benefit from portfolio reallocation in such an
environment. Higher-yielding exposures, such as to Romania or Hungary might be favored,
but given their scarcity of yield and higher-rated paper, exposure to Poland and Czech bonds
might also be of interest – if volatility on the currency market subsides.
CHART 5: PORTFOLIO INFLOWS INTO CEE DEBT (12M SUM) CHART 6: YIELD CURVES EUR-DENOMINATED BONDS
EA net issuance* (rs, inv.) CZK RON PLN HUF Romania Hungary Poland Euro Swap
25 -300 3
20
2.5
-200
15
Portfolio inflows USD bn
2
10
-100
EA issuance
5 1.5
0 0 1
-5
0.5
100
-10
0
-15
200
-20 -0.5
-25 300
-1
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 2019 2024 2030 2035 2041 2046 2052 2057
*Euro-area net issuance refers to net government and non-financial corporations’ gross issuance net of redemptions and of ECB APP and PEPP flows, which are
calculated as a three-month rolling sum.
Source: Haver, Bloomberg, UniCredit Research
UniCredit Research page 16 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
Reduced supply pressure In 2021, three additional factors will reduce net borrowing needs in CEE, supporting bond
in CEE
prices: 1. budget deficits will fall compared to 2020; 2. up to 25% of funding needs could be
covered out of the market by borrowing from EU facilities such as SURE and NGEU. This is
especially true for higher yielders such as Croatia and Romania, which have a larger incentive
to tap funds at a cost below market levels. However, even Bulgaria, Hungary and Poland
could decide to tap EU loans to extend debt duration at below-market costs. The availability of
such funds will also allow greater flexibility for issuers, reducing further supply risk;
3. remaining gross external borrowing needs will either be below redemptions or fall short of
the purchases needed to maintain the current allotment by index-trackers (in percent of
assets under management).
In EU-CEE, we continue to prefer Romanian bonds to their regional peers, both outright and
in spreads. We believe that the downgrade premium should be completely priced out in 2021,
besides investors having to anchor yield expectations lower due to cheap EU funding. In
Russia, a more stable currency could persuade foreign investors to take exposure back to
early 2020 levels as the OFZ curve could bull flatten further after 2020’s rate cuts. In Turkey,
investors could prefer an outright carry trade in 1Q21 as the CBRT remains hawkish and
inflation continues to rise. However, likely rate cuts in 2H21 could see investors pile into
TURKGBs for a while. Lower real rates may end the attractiveness of this trade before year-
end due to potential currency depreciation.
UniCredit Research page 17 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
Updating our REER models
PLN
■ The last few weeks have seen some volatility on EUR-PLN
Model (rs) EUR USD
but the pair has recently approached the 4.50 handle, 5.00 15%
nearly 2% higher compared to the December lows.
4.50 10%
■
REER under/over valuation
In REER terms, the zloty trades close to the average over
4.00 5%
the past six months; according to our model, it is broadly
Spot FX
in line with its fair value.
3.50 0%
■ The short-term outlook for the currency is positive and we
3.00 -5%
see EUR-PLN dropping below 4.45. This level should
prove as a good anchor for developments during the year. 2.50 -10%
We do not envisage departures from the 4.40-4.50 range
over the forecast horizon, as the NBP could intervene to 2.00 -15%
Mar-07 Dec-09 Sep-12 Jun-15 Mar-18 Dec-20
keep the pair from falling below 4.40. Levels above 4.50
offer good selling opportunities, in our view.
CZK
■ The CZK closed 2020 on a solid footing, having recovered
Model (rs) EUR USD
most of the losses recorded in September and October 50 15%
against the EUR. Breaking below 26.0 would take the pair 45
10%
to its lowest level since March.
REER under/over valuation
40
■ Our REER model for the CZK displays the currency as 35
5%
slightly overvalued, after the last few months’ recovery.
Spot FX
30 0%
However, this should not prevent the CZK from gaining
against the EUR in the medium term. 25
-5%
20
■ We think that EUR-CZK might break below 26.0 and -10%
15
approach 25.5 by the end of 2021. The CNB is more hawkish
than its peers, supporting CZK appreciation. In the short 10 -15%
Jan-00 Sep-02 Jun-05 Mar-08 Dec-10 Sep-13 Jun-16 Mar-19
term, the PLN might outperform the CZK.
HUF
■ EUR-HUF has displayed large swings in the 355-365 area
Model (rs) EUR USD
425 15%
over the past four months, with only short-lived deviations
outside of the range. The pair remains at the upper end of
375 10%
the 2020 range, and also in REER terms the recovery has
REER under/over valuation
been limited. 325 5%
■ According to our REER model, the HUF remains
Spot FX
275 0%
moderately undervalued, having recovered only part of its
undervaluation compared to the crisis period. 225 -5%
■ We forecast EUR-HUF within the 355-360 area over the next 175 -10%
few quarters. While the NBH tried to decouple monetary
125 -15%
policy decisions from HUF fluctuations, the currency remains Jan-00 Feb-04 Mar-08 Apr-12 Jun-16 Jul-20
the favorite short for investors in central Europe.
Source: Haver, Bloomberg, UniCredit Research
UniCredit Research page 18 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
RUB
■ The RUB seems to have stabilized in the 72-75 area
Model (rs) REER
against the USD. The rise in commodity prices and the 120 20%
overall weakness in the USD over the past few months 110 15%
have been supportive but the currency remains almost
REER under/over valuation
10%
20% weaker than a year ago in REER terms. 100
5%
■ Our REER model for the RUB depicts the currency as 90
REER
0%
broadly in line with its fair value, after a long streak of 80
-5%
overvaluations was reined in.
70
■ We think that the CBR is done with rate cuts for the time
-10%
60 -15%
being, with a diminishing short-term risk that the inflation
target will be undershot. This might pave the way to a 50 -20%
Dec-00 Sep-03 Jun-06 Mar-09 Dec-11 Sep-14 Jun-17 Mar-20
return towards the lower end of the 70-75 range for USD-
RUB over the coming quarters.
TRY
■ Monetary tightening and moves by the CBRT to simplify
Model (rs) REER
the monetary policy framework have contributed to a 110 20%
sharp U-turn on USD-TRY. The pair trades 13% below 100 15%
October peaks, but is still 25% above YE19 levels.
REER under/over valuation
10%
90
■ Such recovery has reduced the undervaluation of the TRY 5%
80
in REER terms, which remains above 10%. Recent hikes
REER
0%
have taken real rates back into positive territory, which 70
-5%
should support the currency in the short term.
60
-10%
■ The medium-term picture remains more challenging, and 50 -15%
the risk that the USD-TRY will approach the 8.00 area
40 -20%
again by YE21 is material, in our view, if disinflation in Mar-03 Dec-05 Sep-08 Jun-11 Mar-14 Dec-16 Sep-19
2H21 is accompanied by a too-quick reversal of recent
policy actions.
Source: Haver, Bloomberg, UniCredit Research
UniCredit Research page 19 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
Countries
UniCredit Research page 20 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
Bulgaria Baa1 stable/BBB stable/BBB stable*
Outlook
Additional fiscal measures were announced at the end of 2020 to mitigate the damages caused by the second wave of the
COVID-19 pandemic. We expect the early phase of the recovery in Bulgaria to be somewhat weaker than in most CEE
economies for two reasons. First, Bulgaria was among the countries worst hit by the second wave of COVID-19 infections.
Second, Parliamentary elections will lead to a slow start for the NGEU program and to delays in some infrastructure projects
initiated under the previous government. However, economic recovery is likely to gain stronger momentum in 2022 and 2023
once the health crisis ends and Bulgaria’s absorption of NGEU funds shifts to a higher gear.
Strategy
Sovereign’s funding needs are set to rise this year, as Bulgaria is the only CEE country where budget deficit is expected to
increase. To meet these needs, a combination of new Eurobond issue, domestic bond issuance, and low-cost borrowing
provided under SURE financial assistance instrument will be used. The first tranche of low-cost borrowing from NGEU is
expected in 2022.
Author: Kristofor Pavlov, Chief Economist (UniCredit Bulbank)
MACROECONOMIC DATA AND FORECASTS
KEY DATES/EVENTS 2018 2019 2020Е 2021F 2022F
■ Mid-Feb: Labor force 4Q20 data GDP (EUR bn) 56.1 60.7 58.4 61.1 65.4
Population (mn) 7.0 7.0 6.9 6.9 6.8
■ Mid-Feb, Early-Mar: GDP data (4Q20 flash estimate and GDP per capita (EUR) 8,012 8,728 8,458 8,909 9,603
structure, preliminary data for 2020)
Real economy, change (%)
■ End March or early April: General elections GDP 3.1 3.7 -5.5 2.7 4.5
Private consumption 4.4 5.5 -2.9 1.7 3.3
Fixed investment 5.4 4.5 -8.4 4.7 13.3
GDP GROWTH FORECAST Public consumption 5.4 2.0 2.5 4.2 4.0
Exports 1.7 3.9 -12.5 5.6 7.5
yoy (%) Private consumption Public consumption Fixed Investments
Imports 5.7 5.2 -9.3 5.3 8.5
Net exports Inventories GDP, real growth
8
Monthly wage, nominal (EUR) 586 651 701 748 806
3.7 4.5 Real wage, change (%) 7.7 8.0 5.9 4.9 5.2
3.5
4 3.1
2.7 Unemployment rate (%) 5.2 4.2 5.4 5.6 4.7
Fiscal accounts (% of GDP)
0
Budget balance 2.0 2.1 -3.7 -5.6 -2.8
Primary balance 2.7 2.7 -3.1 -5.0 -2.2
-4
Public debt 21.8 19.9 25.0 28.3 29.1
-5.5 External accounts
-8 0.6 1.8 1.6 1.9 2.2
2017 2018 2019 2020E 2021F 2022F Current account balance (EUR bn)
Current account balance/GDP (%) 1.0 3.0 2.7 3.2 3.4
Extended basic balance/GDP (%) 3.3 5.5 6.3 7.3 8.7
INFLATION FORECAST Net FDI (% of GDP) 1.4 1.4 1.7 1.5 2.1
Gross foreign debt (% of GDP) 60.3 58.0 66.1 65.2 63.2
yoy (%)
5 FX reserves (EUR bn) 25.1 24.8 28.9 31.6 34.2
Months of imports, goods & services 8.0 7.6 10.3 10.3 9.9
4 Inflation/monetary/FX
CPI (pavg) 2.8 3.1 1.7 1.9 2.5
3
CPI (eop) 2.7 3.8 0.7 2.5 2.6
Central-bank reference rate (eop) -0.50 -0.61 -0.70 -0.60 -0.56
2
USD/BGN (eop) 1.71 1.74 1.66 1.53 1.47
1 EUR/BGN (eop) 1.96 1.96 1.96 1.96 1.96
USD/BGN (pavg) 1.66 1.75 1.72 1.59 1.50
0
Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 EUR/BGN (pavg) 1.96 1.96 1.96 1.96 1.96
Source: Bulgarian National Bank, Eurostat, National Statistical Institute, UniCredit Research
Source: National Statistical Institute, UniCredit Research
*Long-term foreign-currency credit ratings as provided by Moody’s, S&P and Fitch, respectively
UniCredit Research page 21 See last pages for disclaimer.January 2021 CEE Macro & Strategy Research
CEE Quarterly
Difficult start to recovery but strong medium-term outlook
The outlook is for a subdued After GDP contracted by around 5.5% in 2020, our baseline scenario envisages only a partial
economic recovery in 2021
recovery of 2.7% this year. Recovery will take a stronger hold in 2022 and 2023, when we
anticipate GDP growth to accelerate to something between 4% and 5% annually. We expect
GDP to return to its pre-crisis level in mid-2022. Getting back to full employment is likely in the
end of 2023. Uncertainty over the near-term outlook remains elevated. Risks to our baseline
macro scenario are dominated by pandemic dynamics and local politics related factors.
Bulgaria was hit hard by the The economy faces a difficult winter. The main reason is the surge in COVID-19 infections (see
second wave
lhs chart) that have led to the adoption of new restrictions in November. The new restrictions are
milder than those implemented during the first wave of the pandemic, but are likely to remain in
place for longer. We expect the economy to contract in both 4Q20 and 1Q21. The fall in GDP is
likely to be more modest compared to the first wave of the pandemic, because some sectors are
excluded from the restrictions, including most importantly the manufacturing sector.
A genuine relaxation of the restrictions will start in March, when we expect the pandemic
In 2021, economic growth will curve to become more promising. The spring will limit the spreading of the disease, similarly,
depend on path of virus to what we witnessed in 2020. We expect GDP to rebound in 2Q21 and beyond, as the direct
impact of the pandemic on the economy eases, and fiscal stimulus provide further support.
Another difficult season for However, consumption in tourism and other sectors most exposed to the pandemic’s impact
summer tourism is expected will remain subdued. This is because the positive impact from vaccination will take time to
materialize, thereby causing many people to continue behaving cautiously and maintaining
some sort of voluntary physical distancing throughout the summer months of 2021.
Share of vaccinated people to The strength and speed of the recovery will depend on the timing and effectiveness of the roll-out
become the most closely of the vaccines. Opinion poll conducted by Alpha research in December suggests that the share of
watched indicator
the population who want to be vaccinated is similar to the rest of Europe (see right chart). We hope
that the share of people wishing to be vaccinated will increase, as information about the pros and
cons of doing so becomes more widely available and as leaders in politics, business and the arts
presumably lead a large-scale campaign to boost vaccination rates.
No need for new restrictions in Rising vaccination levels (closer to the one required to reach collective immunity) will prevent
winter 2021-22 the need for new restrictions in winter 2021-22. We expect spending to rise and consumption
patterns to slowly start to normalize, boosting GDP growth in 4Q21 and further into 2022.
Fiscal support likely to The strength of the recovery will depend on the size and efficiency of the fiscal policy
increase in 2021 response. Initially, Bulgaria’s fiscal policy response was more delayed and timid than in the
other CEE countries. The scale of the fiscal support was gradually increased thereafter and
we expect it to have reached 3.2% of GDP in 2020.
BULGARIA BADLY HIT BY SECOND WAVE OF PANDEMIC WILLINGNESS TO GET COVID -19 VACCINE IS MORE THAN 50%
10 most badly hit European countries from the second wave:
New COVID-19 deaths per 1 mn inhabitants
700 15%
Nov-20 Dec-20
600 Want to be
Share of Bulgarians who vaccinated
500 say they want/don`t want 45%
to be vaccinate against
400 Don't want to be
COVID-19. (Dec'20)
vaccinated 40%
300
200 Want to be vaccinated,
but will wait to see if
100 the vaccines had
negative effects
0
Croatia
Austria
Czechia
Slovenia
Hungary
Bosnia and
Macedonia
Italy
Lithuania
Bulgaria
H.
Source: Worldometer, Alpha Research, UniCredit Research
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