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MACROECONOMIC OUTLOOK CROATIA: TALE OF A SLOWING ECONOMY Zagreb, 3 rd March, 2008

MACROECONOMIC OUTLOOK CROATIA: TALE OF A SLOWING ECONOMY Zagreb, 3 rd March, 2008 Hrvoje Stojić, Head of Ec onomi c Research. Contents:. GDP Inflation Balance of payments External debt Money market Monetary aggregates Budget Equity market. CONTRIBUTION TO GDP GROWTH (%). 12.

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MACROECONOMIC OUTLOOK CROATIA: TALE OF A SLOWING ECONOMY Zagreb, 3 rd March, 2008

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  1. MACROECONOMIC OUTLOOK CROATIA: TALE OF A SLOWING ECONOMY Zagreb, 3rd March, 2008 Hrvoje Stojić, Head of Economic Research Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 1

  2. Contents: • GDP • Inflation • Balance of payments • External debt • Money market • Monetary aggregates • Budget • Equity market Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 2

  3. CONTRIBUTION TO GDP GROWTH (%) 12 7 10 6 8 5 6 4 4 2 3 0 -2 2 -4 1 -6 Trend growth: 4.3% -8 0 2002 2003 2004 2005 2006 2007E 2008F 2009F DOMESTIC DEMAND NET EXPORT REAL GDP Source: CBS, HAAB Research GFCF, CONSUMER SPENDING AND CREDIT (% YoY) 30 9 8 25 7 20 6 15 5 10 4 5 3 0 2 TOTAL NON-FIN. LENDING (ls) -5 2008E INVESTMENT (2Q average), 6M LAG (ls) 1 CONSUMER SPENDING (2Q average), 6M LAG (rs) -10 0 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 Source: CBS, HAAB Research Economic growth • After the expected 5.9% yoy growth in 2007, GDPto shrinkto 4.6% in 2008 (closer to potential): • Weaker post-election fiscal stimulus • Slower personal consumption growth • (Slightly) tighter credit conditions • ‘Above trend' GDP growth in 2009: • Re-acceleration in external demand • Easier credit conditions • Reduction of industrial output growth towards 5.0%in 2008 due to weaker external demand, slower growth of the real disposable income and less favourable unit labour costs • Inflation pressures, declining purchase power and negative ‘financial wealth effects’→ private consumption growth to slow down to 3.0-3.3% in 1H08; recovery in 2H08 towards 4.5% Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 3

  4. 112 CONSUMER PRICE INDEX (% YoY) 110 108 106 104 102 100 98 Jan.04 Jul.04 Jan.05 Jul.05 Jan.06 Jul.06 Jan.07 Jul.07 Jan.08 Consumer prices Food Source: CBS Services Basic inflation PRODUCER PRICE INDEX (% YoY) 106 112 104 108 102 104 100 100 98 96 96 92 Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Intermediary goods Capital goods Source: CBS Consumer goods Intermed./cons. Inflation • Due to a 16% rise in CRB Food commodity index since early December last year, the food CPI will continue its upward trend in 2008; better weather conditions may provide respite in 2H08 • 2008 average CPI at 5.6%: • 2007 high overshoot • Post-election communal tariff hikes • Higher wage growth than productivity gains • Accelerating PPI • Controlling inflation scare through tighter fiscal policies, deregulation and competition fostering • Medium-term risks: EU-related deregulations of utilities and service sectors (e.g. education, health) Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 4

  5. 115 IFO AND ITBCI BUSINESS CLIMATE INDICESAND CROATIAN EXPORT 35% 30% 110 25% 105 20% 100 15% 10% 95 5% 90 0% 85 -5% 80 -10% 1999 2000 2001 2002 2003 2004 2005 2006 2007 ITBCI IFO EXPORT IN HRK (6mma) Source: CBS; Bloomberg TRADE DEFICIT (% YoY) 30 25 20 15 10 5 0 -5 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: CBS, HAAB Research EXPORT EX. SHIPS AND OIL IMPORT EX. SHIPS AND OIL Trade deficit • Trade deficit to grow from 25.8% of GDP in 2006 to 26.4% in 2007 as a reflection of a 10% yoy growth of non-oil imports, stong manufacturing output, investment and tourism activity • Slowdown in exports to a 7.5% pace in 2008 due to euro-area activity slowdown and NEER rise • Despite weaker personal consumption, FY08 trade gap to rise from EUR9.8bn in 2007 to EUR10.8bn (26% of GDP), under the influence of: • Persistent capital goods imports – prerequisite of capex • Solid tourism activity • Greater reliance on imported energy • Rising import content of exports • Kuna appreciation, especially in view of less favourable labour unit cost dynamics Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 5

  6. BoP (% of GDP) 25 15 5 -5 -15 -25 Source: CNB, HAAB Research -35 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f Trade balance Services Income Transfers Balance of payment FDI NET FDI / BoP RATIO (%) 250 200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f Source: CNB, HAAB Research Balance of payments • Temporary C/A deficit fall from 2007’s 8.5% of GDP to 7.8% in 2008, based on sluggish consumption, weaker post-election fiscal stimulus and higher transfers • Over EUR1.5bn in bank capital increases and FDIs in tourism and oil sectors ensure a 96% cover of the C/A deficit • 5% tourism revenue growth profile for the next several years comprises EUR2bn+ investments, hoteliers’ restructuring and active destination management • Greenfield investments in tradeable sectors key for repairing external imbalances • In the environment of rising global risk aversion and in the absence of proper demand management policies → the medium-term C/A deficit climb towards 10% of GDP justifies CNB’s more restrictive monetary policy Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 6

  7. 33,000 EXTERNAL DEBT (in mil. EUR) 33 31,000 29,000 28 27,000 23 25,000 18 23,000 13 21,000 19,000 8 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Source: CNB Debt amount Growthrate (YoY) FOR. DEBT STRUCTURE (%) 50 45 40 35 30 25 20 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 State Banks Corporate Source: CNB External debt • Gross foreign debt climbed to EUR32.6bn (87.8% of GDP) at YE07, with a temporary stabilization in the foreign debt vs. exports at (still high) 170% solely thanks to EUR1.5bn+ in banks’ capital hikes • Intensified substitution of lending to local companies with external credit at a monthly pace of EUR400m (compared to EUR220m in 2006). • Restrictive monetary policy in 2008 will cause corporates to drive external indebtedness to offset the lack of domestic credit • Core scenario of external debt staying above 88% of GDP in 2008 is due to the 8% of GDP C/A deficit and a 2Q08 EUR750m+ eurobond issue. Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 7

  8. REAL 1Y INTEREST RATE (%) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Source: MinFin, CBS, HAAB Research Basic balance and EURHRK exchange rate 1 7.6 0 7.5 -1 7.4 -2 7.3 -3 -4 7,2 2002 2003 2004 2005 2006 2007f 2008f 2009f C/A+FDI (% of GDP) EUR/HRK (rs) Source: CNB; HAAB Research Money market • Factors working in favour of a strong kuna are: • CNB’s anti-inflation monetary setup with a more restrictive liquidity policy and a FX cap at 7.35 • Banks’ preference for stable or lower FX rate to enable an over 1% growth • Banks’ capital hikes of about EUR1.0bn • Direct external corporate indebtedness at EUR400m+ mom • Stabilizing factors: • Investment funds’ diversification abroad • Higher profit repatriation • We expect short-term interbank rates to stay in a broader 5-9% region (increased volatility) • MinFin’s plan to satisfy most of its financing needs (ca. HRK11bn) in 2008 abroad  positive for kuna bond market;dampening factors are ongoing negative (or around zero) real interest rates and greater attractiveness of similar FX-linked debt. Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 8

  9. CREDITS VS. DEPOSITS (%) 100 80 60 40 20 0 -20 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Corporate deposits Retail deposits Corporate loans Retail loans Source: CNB 250,000 OUTSTANDING BANK LOANS 4.0 3.5 200,000 3.0 2.5 150,000 2.0 100,000 1.5 1.0 50,000 0.5 0 0.0 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 Dec.05 Dec.06 Dec.07 BANK LOAN AMOUNT MoM growth (3MMA) Source: CNB Monetary aggregates • An 18.0% yoy M4 monetary aggregate growth at YE07 reflects a strong kuna and foreign currency term deposit activity • Retail credit growth (+18% yoy) again exceeds corporate lending, since firms increasingly rely on foreign debt • Domestic retail credit still supported by: • Solid labour market prospects • Expected 8% minimum wage hike • Pension corrections • Strong kuna profile • Corporate financing supported by expectedly strong investment activity, and increasingly better corporate governance in medium-term • With double the inflation this year restricting potential for real credit growth, sluggish economy and lower C/A deficit, we do not expect monetary policy to sharpen any further in the near term Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 9

  10. BUDGET BALANCE AND FOREIGN DEBT (% OFGDP) 0 65 60 -1 55 -2 50 -3 45 -4 40 -5 35 -6 30 2004 2005 2006 2007E 2008F 2009F Source: CNB, HAAB Research BUDGET BALANCE PUBLIC DEBT BUDGET AND C/A GAPS (% OF GDP) vs. GDP GROWTH (%) 10 7,0 9 6,0 8 5,0 7 6 4,0 5 3,0 4 3 2,0 2 1,0 1 0 0,0 2004 2005 2006E 2007F 2008F 2009F FISCAL DEFICIT CAD Source: CNB, MinFin, HAAB research GDP Budget • Fiscal deficit cut from 3.0% of GDP in 2006 to 2.3% of GDP in 2007 at odds with an increase of the share of public spending in GDP, where the deficit does not include: • The 1.2% of GDP repayment of debt to pensioners, suggesting a 3.5% of GDP fiscal deficit • Arrears in health and construction sectors and a still unknown amount of state subsidies. • Narrowing deficit and as much as HRK7.4bn in earnings T-HT IPO significantly reduced state borrowing needs → reduction of Croatia’s public debt to an estimated 48.7% of GDP (a 1pp of GDP reduction) • Fiscal deficit at 2.8% of GDP in 2008  Risks: political will and capacity for reform, wage policy, other anti-inflation policies in budget, post-election promises • If MinFin plan (2.3% of GDP gap in 2008) is not realized → zero deficit in 2011, based on optimistic average GDP growth of 6.5% (2pp above potential) in question Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 10

  11. EQUITY PURCHASES BY INVESTMENT FUNDS (HRKbn) 9.0 6,000 5,500 8.0 5,000 7.0 4,500 6.0 4,000 5.0 3,500 4.0 3,000 3.0 2,500 2.0 2,000 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Source: HANFA, ZSE, HAAB Research Domestic equity purchase Crobex Equity market • After a 63.6% Crobex gain in 2007 (in EUR) against 20% gain in the MSCI Total Return Index for Emerging Markets, trend reversed at the start of 2008 → Crobex is sinking below its 200-day movable average • The 2008 estimated 27.5x PER for Crobex is still considerably higher than the Emerging Europe’s 11.5x • The valuation gap is to some extent justified by Crobex’ estimated 14.5% average EPS growth in 2008 • We see growth potential in defensives like T-HT (with a dividend yield of 9.0%), construction sector, distribution and logistics, as well as in transport (shipping sector) • Expected equity market recovery in 2H08 to be supported by long-term investors, who will want to ensure reasonable annual yields Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 11

  12. Participants • Markus Ferstl, Chairman of the Management Board • Krešimir Starčević, Management Board Member • Sönke J. Siemßen, Head of Global Fixed Income Research, Bayern LB • Hrvoje Stojić, Head of Economic Research Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 12

  13. Thank you! Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.08.2014 | 13

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