Morgan Stanley - CEEMEA 2014 Outlook: Is it Going to Get Worse?

After some years of relative calm, political risk has come alive again: The most visible and surprising events took place in Turkey recently, and we think that the risks are not going to dissipate throughout the year, with two key elections and significant uncertainties with numerous scenarios at hand. In CEE, we see the potential for political risk with elections in Hungary (parliamentary) and in Romania (presidential).

Elsewhere, we think that South Africa’s political risks are moderate – although one cannot rule out the prospect of renewed labour and social unrest. The stepping in by Russia to provide external support to Ukraine has significantly reduced near-term risks, but the underlying problems have not been resolved and could resurface – although probably not until after the 2015 presidential elections.; We have made the most significant growth revision in Turkey by downgrading our 2014 GDP forecast by a full percentage point to 2.9%Y.

This is significantly below the trend growth rate and, while it will help to improve the external deficit somewhat, we doubt that a narrower current account deficit will be sufficient to allay investor concerns at this juncture. In Russia, we expect a moderate investment-led recovery, with growth rising to 2.6%Y from last year’s weak 1.5%Y. In CEE, we have upgraded our forecasts slightly across the region and we see healthier, more balanced growth across domestic demand and net exports.

South Africa looks set to tread the path towards better rebalancing, but it is too early to assume that this will be a smooth transition.; On the policy front, we have made the largest policy rate call change in Turkey recently and we now expect a 200bp hike in the overnight rate to address the worsening inflation outlook, currency weakness and the credibility gap at hand. In Russia, we continue to expect a 50bp cut in 2H14, while we believe that in South Africa the SARB will keep a steady hand until next year. In CEE, we are nearly at the end of the easing cycle in Hungary and in Romania, and we continue to pencil in rate hikes in Poland in 2H14.