Macro thoughts
It’s been a calm summer thus far, relatively speaking, despite an uneasy and uncertain political backdrop. The latter is likely to stay so indefinitely, we think, which should start taking a toll on the economy and markets, come late this year/early next.
Economic activity has generally held up during the first half, the growing disgruntlement from the business community notwithstanding, but the outlook, most likely, is sort of stagflationary: growth should weaken further during the second half, ending the year at around 2-2.5%, while inflation should remain relatively elevated, finishing the year around 30% before getting stuck at low-to-mid 20%’s, we surmise.
Disinflation has been playing out slower than hoped for, but the CBRT has nevertheless started the easing cycle by a deeper-than-envisaged 300 bps cut. The road ahead will be bumpy for the CBRT, we think, as lower returns on TL assets combine with volatile politics, sticky inflation and growing concerns over the political sustainability of the Bank’s disinflation “strategy”.
The cash deficit of the central government, while still too elevated for comfort, eased to some 4.7% of GDP at end-Q2, we estimate, down from 5.2% at end-Q1, as a narrower primary deficit more than offset the rise in interest expenditures. We continue to work with the cash deficit ending the year at well over 4% of GDP, slightly higher than the accrual deficit.
In the year through May, the current account deficit stood at $21 billion, and likely edged up tangibly further in June. But we forecast the deficits to turn into surpluses come July, with the current account ending the year at around a $20 billion deficit, or 1.3% of GDP, implying a modest surplus in the second half of the year. External financing numbers are challenging for next year as a wider current account deficit forecast combines with relatively high short-term external debt, but should be manageable, barring complete chaos in the political arena.
We do not see a change in ratings in the near-term in this, what we have to once again boringly dub, “muddle through” scenario, unless we deviate favorably from this scenario, say to one where political risks become contained, inflation falls materially and reserve build-up accelerates.
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