• Structural deficit ceilings were set at 1.75% of GDP in 2026, 1.25% of GDP in 2027, and 1% of GDP in 2028
• Numbers are only indicative, as projections and assumptions will likely change by the time the 2026 budget bill is ready
• There is also political risk, as the next government will have the final say on the 2026 budget

The government approved the medium-term fiscal framework for 2026-2028, according to a press release from the finance ministry. It is part of the budget preparation process, and it sets the maximum structural budget deficit targets, as well as respective spending ceilings for the next 3 years. The strategy will serve as the base for the preparation of the 2026 budget bill, whose framework needs to be ready by the end of June.

The structural deficit ceilings were set 1.75% of GDP in 2026, 1.25% of GDP in 2027, and 1% of GDP in 2028. As a result, the spending ceiling at the general government level (under ESA methodology) should be CZK 3,696bn in 2026, CZK 3,720bn in 2027, and CZK 3,818.1bn in 2028. At the state government level, which is the starting base for state budgets, the spending ceilings will be respectively CZK 2,438bn in 2026, CZK 2,469bn in 2027, and CZK 2,553bn in 2028.

We don't give that much weight to this document, mostly because it is still a very early phase of budget preparation, and a lot could change through GDP projections. Given the current level of uncertainty, we expect that at the end of June, nominal GDP projections will differ from this document. Furthermore, playing with GDP projections has been a known well to go around structural deficit ceilings, an issue that has been raised occasionally, so the current numbers should be seen mostly as indicative, and definitely not final. Still, this should give you some idea where the next budget is heading at. However, you should not forget that it will be effectively the next government to decide how the 2026 budget will look. The current government has already set a precedent by rewriting the 2022 budget bill completely, and we expect ANO will do something similar if it leads the next government.

• Only CZK 0.6bn flows were reported in March, CZK 11.4bn in January-March
• Total gross EU flows reached CZK 30bn in January-March, as per state budget data
• The absorption rate reached 13.6%, higher than the equivalent 12.3% in the 2014-2020 MFF

The absorption of EU structural funds reported only minor gains in March, as flows reached only CZK 0.6bn, according to figures from the regional development ministry. It puts gross flows at CZK 11.4bn in January-March, though as usual, we remind that these include only cohesion policy funding, with agricultural subsidies, RRF funding, and the rest reported separately. To provide some context for these, gross EU flows reached CZK 30bn in January-March, according to state budget data, which is the earliest source for general data on EU flows.

Data Download

There was also progress in approved payments to beneficiaries, which reached 20.4% of total allocations. It means that in the absence of any irregularities, and these are typically few in the Czech Republic, these will all translate to actual payments. There are currently 58.1% of all projects approved, which is a decent rate of progress.

The absorption of EU structural funds reached 13.6% of total allocations at end-March, better than the 12.3% absorption rate reported for the equivalent period of the 2014-2020 MFF. Absorption is currently the highest in the transport operational programme, at 26.7%, given the government's focus on road infrastructure projects. There was also strong progress in environmental projects, at 20.6% of total allocations, which is different from the previous MFF, when the ANO government focused on employment and transport.

• The purchase will cost CZK 3.6bn
• The effective stake will be 94%, as the government owns 70% in Dukovany's current owner, CEZ
• A final agreement with KHNP is due to be signed on May 7
• Czech firms to get 60% of construction works in the Dukovany plant expansion

The government will acquire an 80% in the Dukovany nuclear power plant from CEZ, according to a press release from the finance ministry. The operation will cost CZK 3.6bn, and the government will have an effective stake of 94%, as it already owns 70% in CEZ, the largest energy company in the country. The move is part of the financing plan for the expansion of the nuclear power plant, which envisages the construction of two new units, using KHNP, a Korean energy firm, as technology supplier. Given that the state will own almost completely the Dukovany nuclear power plant, it will be able to finance the construction through a government loan.

The financial details of the project have not been officially announced yet, but this will happen very shortly, as industry minister Lukas Vlcek confirmed that the final agreement with KHNP will be signed next Wednesday (May 7). Thus, we expect that all details will be revealed next week. Vlcek added that KHNP has agreed to outsource 60% of construction works to local businesses, and that 30% of the works will be signed when the agreement with the government is finalised. This is good news, as there were media speculations that KHNP may be seeking a lower share of subcontractors than originally negotiated with the Czech government.

Thus, it appears that the project will finally move forward, after a delay caused by legal challenges of the tender procedure. Westinghouse withdrew its complaint after it reached a settlement with KHNP, while EDF's appeal was turned down by the Czech competition authority. Regarding the financing plan, the European Commission has already given preliminary approval for state aid in the project, provided certain conditions are met. Thus far, it has been mentioned that the price could be about EUR 8bn per unit, though this is unconfirmed information.

• Next MPC meeting: May 27, 2025
• Current policy rate: 6.50%
• EmergingMarketWatch forecast: Hold
• Rationale: Governor Varga maintains guidance for prolonged period of policy rate hold

The monetary policy stance remained unchanged after the partial reshuffle of the MPC in March. Ex-finance minister Mihaly Varga had his first MPC meeting as the new NBH governor in March and Andrea Mager also replaced Guyla Pleschinger as an external MPC member from the parliament's quota during the month. The reshuffle did not bring major surprises as the MPC followed the prior policy guidelines and kept the policy rate on hold at 6.50% at the March and April meetings, making no changes to the overnight interest rate corridor either. The April meeting also did not introduce significant changes in the policy guidelines, in our opinion signalling policy continuity after the change on the NBH governor post. Specifically, the MPC reiterated the need for a cautious and patient approach to monetary policy because of prevailing inflationary risks and overall economic uncertainty. Monetary conditions needed to remain restrictive to counter risks related to the emerging trade conflict and geopolitical tensions, it added. The MPC also maintained its objective for keeping the real interest rate positive for the sake of supporting financial market stability and anchoring inflation expectations. The positive real interest rate policy was supported by a consensus in the MPC, according to the minutes from the March meeting.

Data Download

Data Download

The policy rate will be kept unchanged for a prolonged period of time, Varga explicitly said in the usual background discussion after both the March and April MPC meetings. This outlook practically repeated the signals provided by NBH deputy governor Barnabas Virag and Pleschinger, voiced after previous MPC meetings, strengthening our impression for policy continuity. We note that Pleschinger had commented in February that the MPC will have no room for monetary easing this year, while a rate hike was unthinkable. Varga commented on this statement that Pleschinger was no longer a member of the MPC, but we think he did indirectly confirm that rate hikes were not likely in the foreseeable future. Keeping the policy rate stable was the right option as long as it was positive in real terms, Varga said. We note that the NBH raised its inflation forecasts with the latest Inflation Report in March, but the real policy rate should be still positive at its current level throughout the monitored horizon.

Inflationary risks remained tilted to the upside even after the upward revision of the inflation forecasts, Varga indicated after the MPC meeting in April. He also said that financial market stability will remain an important consideration for monetary policy, in our opinion implying that the NBH will continue to seek to avoid significant depreciation of the forint exchange rate. The upside inflationary risks were also related to the US tariffs, which the NBH expected to result in lower growth and higher inflation in the country. The NBH supported the government's move to impose a margin cap on food products, Varga said, some downside from lower global oil prices was also expected in the short term. Some MPC members also highlighted the expected positive impact of the margin cap, according to the minutes from the March MPC meeting. In addition, the government has succeeded in forcing banks and telecoms to roll back their price increases, which should further support the inflation outlook. Given the temporary nature of these measures, we do not expect them to provide the MPC with much room for policy rate cuts, while we still believe that rate cuts could be possible in H2 in case the government measures result in moderating inflationary expectations, permanent decline in food inflation and in case the trade conflict does not bring significant upward pressure to the domestic price level.

Post-meeting MPC statement from April rate-setting meeting

Background presentation of NBH governor Varga after April rate-setting meeting

Minutes from March MPC rate meeting

Inflation Report - Q1/2025

MPC meeting calendar 2025

Question:

Would you know if the numbers quoted for the fiscal deficit are according to ESA methodology and, if not, what the equivalent ESA numbers would be?

The question was asked in relation to the following story: Govt confirms hike of general govt deficit forecast to 6.3% of GDP for 2025

Answer:

All of these deficit figures are general government ones, which is the ESA2010 accounts (I just read that ESA2025 ones will be launched in 2029, a few years off yet).

In general, I use "budget deficit" and "state budget deficit" for the domestic budget balances and "general government deficit/surplus" for the ESA ones. In Polish, they sometimes use "public sector deficit or surplus" for the ESA ones.

If you have any further questions, please don't hesitate to ask!

• Share of companies planning to hike wages falls to 33.5% in Q1 from 40.9% year before
• Companies expect deterioration

The share of companies planning in Q1 to increase wages in a quarterly perspective dropped to 33.5% from 40.9% the year before, coming in below the long-term median of 34.8%, the NBP said Wed. in the Quick Monitoring survey. The NBP noted that the reduction in the planned number of companies to hike wages in the near term was likely linked to the strong wage increase seen in Q4 2024 and the still significant increase of the minimum wage on Jan 1. The number of companies planning to give a big wage increase fell to 2.3% in Q1 from 2.6% in Q4. The number of companies planning to raise wages in the next 12 months fell to 62.5% from 71.1% the year before. Industry saw the biggest deterioration in wage hike plans, services and trade were less expected, and construction and transport were stable.

There was a slight increase in the average wage rise expected to be given, rising to 5.4% in Q1 from 5.2% in Q4. The long-term average is 5.9%.

In broader terms, companies did expect a deterioration in the economy in Q2 2025 except for investments, which are expected to stabilise. Still, economic stabilization would be noted, though producers of durable consumer goods would see improvement whereas producers of investment goods and consumer services deterioration, the NBP said. In Q1, both the share of companies forecasting price increases and the scale of planned increases decreased, the NBP noted. The most frequently indicated reasons for the forecasted price increase remained rising supply and labor costs, although their impact has slightly weakened compared with prior periods. On the other hand, the share of companies considering changes in demand and prices of subcontracting services as the reason for the forecast price increase increased, the NBP noted.

• Tusk writes on X that Poles and firms are waiting for lower rates

PM Donald Tusk called Wed. on NBP and MPC chair Adam Glapinski to lower interest rates, according to a post on X. "Inflation in April [is] significantly lower than forecast by experts! The fight against the high prices of the PiS-era is bearing fruit. It is high time, Mr. Glapinski, to lower interest rates. People and companies are waiting!" he wrote.

Overall, Tusk's intervention into the issue comes after the stats office flashed April CPI inflation slowing to 4.2% y/y in April from 4.9% in all of the Q1 months. Glapinski already swung sharply to the dovish camp in early April, when he trimmed off his hawkish feathers and took on a dovish guise. He even talked of the potential for a 50-bp cut depending on how the data to be released for March went. That data, including the April CPI flash, open the door to a 50-bp cut at the May 6-7 policy sitting. But the problem with Tusk stepping into the ring is that it could have the opposite effect to that intended since Glapinski is part of the Law and Justice (PiS)-tied camp that despises the PM. Though we don't think this will happen, if the MPC does cut by a lower-than-expected 25bps next week, the Tusk pressure could be one reason (alongside energy price uncertainty, fiscal policy looseness, and a still relatively good economic outlook).

• Domanski says deficit is high now mostly because of very high defense spending, accrual accounting
• Domanski says power prices won't rise in 2025 and might fall next year

Finance Minister Andrzej Domanski said Wed. that the higher-than-expected general government deficit of 6.3% of GDP (ESA2010) was so high mainly because Polish defense spending was a record 5% of GDP or so, according to an interview for state radio. Domanski noted that geopolitical reality and the need to buy new equipment for the military and modernize existing equipment mandated the high spending. He also noted that the deficit was high without leading to much higher debt because of the accrual-based accounting, which we note books military spending when it is shipped and not when contracted. Domanski also noted that the situation of public finances was "good" and that the ministry was sticking to the plan to reduce the deficit in the coming years.

Domanski did add that the budget situation meant there was no room to valorise the tax thresholds. He did continue to say that the plan to raise the standard tax deduction, as promised by the Civic Coalition (KO) in the 2023 election campaign, was actual, though he would not release details until he proposed a plan to PM Donald Tusk. He noted that tax returns were worth PLN 17bn for PIT, with today the last day for individuals to file their tax returns for 2024.

On energy prices, Domanski guaranteed that power prices would not rise this year. He noted that the tariff to go into effect later this year should not increase prices due to where electricity was trading on wholesale markets. He said this meant there would likely be no need to extend the anti-inflation measures. The wholesale trading levels also meant there was scope for power prices to fall in 2026, he said. On the stability of the grid, he noted that one main difference between Poland and Spain was that Poland had more interconnectors with other countries. In fact, he said that the EU should in general build more interconnectors, which would helps stabilise the power market and lead to lower prices.

Domanski also said that GDP growth would remain fast in the coming years even though the government trimmed its GDP growth forecast to 3.7% for 2025 from the previous 3.9%. He said that the growth rate of 3.5% expected for 2026 would also be fast.

On the Excessive Deficit Procedure (EDP), Domanski affirmed that the government would make use of the EU's so-called defense spending exit clause. But he clarified that this did not create extra room for spending, but rather allowed Poland to avoid negative consequences of being in the EDP. Today was the last day to apply for the exit clause, he noted.

Overall, Domanski's confirmation of the planned deficit reduction in 2026 is positive, but it remains to be seen how aggressive it will be. The deficit was originally going to go from 5.5% of GDP in 2025 to 4.5% of GDP in 2026. But the deficit actually came in at 6.6% of GDP in 2024, compared with the expectation of 5.7%, and so the 2025 deficit forecast was raised to the 6.3%. If the ministry sticks to the prior path, the deficit will be cut to 5.3% in 2026, but the ministry had planned to eliminate the excessive deficit in 2028 -- to get below 3% of GDP -- and a path like the one previously approved won't be fast enough. One imagines the ministry will likely extend the period to get back below 3%.

On power, the situation is only partly clear. The government has passed into law that the change in power tariffs won't come for Jul 1, like originally planned, but on Oct 1, when the current power price cap of PLN 500/MWh expires. This was done to help companies factor in lower wholesale power prices into their motions and, the government hopes, lead to flat prices or even reductions. Domanski's comments suggest that even if the tariff doesn't come down to PLN 500/MW from the current PLN 623, the government will make sure the price doesn't rise. However, there is still some uncertainty about the capacity fee, which is still legally due to return on Jul 1. That, NBP head Adam Glapinski has estimated, will up prices by 8%, and that would seem to go against Domanski's comments. Deputy Climate Minister Milosz Motyka, who not long ago said the capacity fee return won't happen, also spoke to state radio on Wed. but didn't mention the issue. It looks like the capacity fee might hit in Q3, but then be overpowered by the potential for falling prices in Q4 or Q1 2026.

• Fuel index fell 8.3% y/y in April, GUS said in flash released Wed.
• Reflex sees price stability in early days of May

Polish petrol and diesel prices fell 0.3-0.5% w/w in the final week of April, which set the stage for the fuel index to fall by 8.3% y/y in the month, according to data from Reflex released Wed. and a flash estimate published earlier in the day by Statistics Poland (GUS). The Euro95 unleaded price fell 0.3% w/w to PLN 5.86 per litre on Apr 30 from PLN 5.88 on Apr 24. Reflex released the data early because of the May 1 public holiday that will see most take May 2 off as well (May 3 is also a public holiday). The diesel price fell 0.5% w/w to PLN 5.91 a litre on Apr 30 from PLN 5.94 on Apr 24. To note, the LPG price fell 0.7% w/w to PLN 3.02 a litre from PLN 3.04 the week before.

We forecast that the passenger fuel index fell 8.2% y/y in April, which proved close to the flash estimate decline of 8.3% released earlier on Wed. by GUS. The late month data is always difficult to factor in since GUS's window for collecting data ends on the 26th of each month. The decline of the fuel index in CPI inflation in April cut headline inflation by 0.5pp, compared with a 0.3pp reduction in March, according to our estimates.

Going forward, Reflex commented that petrol and diesel prices, which it noted are the lowest since late 2022, will likely stabilise in early May.

Overall, fuel prices are set to continue cutting CPI inflation after lowering inflation by some 0.5pp in April. That will likely help the Monetary Policy Council cut interest rates and help bring about a bigger 50-bp cut rather than a 25-bp move that might be favoured by the more cautious on the council.

Data Download

Data Download

• DepFinMin says borrowing coverage rose to 62% at end-April from 56% at end-March
• DepFinMin says FinMin's cash balances are about PLN 170bn
• FinMin says it will offer PLN 16bn-32bn in three T-bond auctions in May

Poland's Finance Ministry boosted coverage of its PLN 553.0bn in gross financing needs to 62% at end-April from 56% at end-March, according to comments made Wed. by Deputy Finance Minister Jurand Drop. Such a coverage ratio would put borrowing at about PLN 343bn at end-April, up from 309bn at end-March.

Drop also said that the Finance Ministry had some PLN 170bn of cash in its accounts at end-April. That total is well down from PLN 195.9bn at end-March.

Separately, the Finance Ministry said that it would hold three Treasury bond auctions in May, offering some PLN 16bn-32bn of bonds. It will offer PLN 5bn-10bn on May 14, PLN 6bn-12bn on May 22, and PLN 5bn-10bn on May 28. The ministry will likewise offer PLN 3bn-6bn of 41-week Treasury bills on May 9.

Overall, if the FinMin sells the maximum in each of its four bond and bill auctions in May, this will lift borrowing coverage to 69% at end-May. For a comparison, the FinMin covered 65% of its then financing goal at end-April 2024 and 70% at end-May 2024. The FinMin is thus pretty close to the prior-year financing rates despite the fact that borrowing total was lifted to PLN 553.0bn from the initial PLN 449.0bn in 2024 (some of this is covered by the fact cash used to pre-finance rose some PLN 50bn this year to PLN 137bn from PLN 87bn).

• Inflation reading of 4.2% y/y comes in below 4.3% consensus
• CPI rises 0.4% m/m, up from 0.2% in Mar to match consensus
• Food/drinks inflation slows to 5.3% y/y in Apr on high VAT-related base
• Energy price growth eases to 13.0% y/y from 13.3% y/y in Mar
• Fuel price decline widens sharply to 8.3% y/y in month on falling global oil prices and USD
• Core inflation is to slow to 3.3-3.4% y/y, we estimate
• Inflation print should secure 50-bp cut at May 7 sitting

Polish CPI inflation slowed sharply to 4.2% y/y in April from 4.9% in March, matching the consensus and hitting the lowest level since June 2024, according to a flash estimate published Wed. by Statistics Poland (GUS). In one-month terms, CPI rose 0.4% m/m, quickening from 0.2% in March but matching the consensus. Food inflation slowed for the first time in some time as a high prior-year base when the VAT returned to 5% brought to bear. Energy inflation slowed too while the fuel price fall widened. Core inflation eased further.

Data Download

Food and non-alcoholic drink prices rose a sharp 0.8% m/m in April, well up from 0.3% in March, but that was well down from 2.1% the year before. The annual rose slowed to 5.3% y/y from 6.7% in March, hitting the slowest level since December. On Apr 1, 2024, the anti-inflation measure that put a zero percent VAT rate on most food expired and prices rose, though the increase was limited by a discount price war. This likely does mean the base will be relatively high in the coming few months and that will help cap headline inflation. We calculate that food and drinks exerted a 1.4pps contribution to annual CPI in April, down from 1.7pps in March.

Energy prices fell 0.4% m/m, helping the annual print ease slightly to 13.0% y/y from 13.3% the month before. The big change was still that the natural gas distribution charge rose in January while gas, heating, and electricity all continue to be boosted by the early July phasing out of the anti-inflation shield. This also delivers a high base that will fall out of calculations in July, though it does appear that the capacity fee on power is returning since there has been no news on its lack of late. That will boost power prices by 8%, adding some 0.3-0.4pp to inflation, though this will rather limit the disinflation to be seen in the month. We estimate energy helped boost annual inflation by 1.4pps in April, just down from 1.5pps in March.

Passenger fuel prices fell a sharp 1.7% m/m in April, compared with a 2.0% fall the month before and a 2.1% rise the year before in what is also a high base. The annual decline widened sharply to 8.3% y/y in April from the 4.7% fall seen the month before. The negative contribution of fuel to annual headline CPI rose to -0.5pp from -0.3pp in March.

Food/drinks, energy, and fuel contributed -0.6pp of the inflation slowdown in April while the full slowdown was 0.7pp. That does suggest that the other components saw more disinflation on net. Some areas likely had to slow more since March did see a big excise hike on tobacco products that is likely to continue feeding into inflation as stocks built up as consumers pulled-forward spending are used up.

In the end, our core inflation forecast is for a decline to 3.3-3.4% y/y in April from 3.6% in March.

Overall, the various Monetary Policy Council members have singled out the flash CPI inflation release as important for the next policy decision on May 6-7 and we believe the 4.2% y/y pace cements the expectation for a 50-bp cut. There would be little sense in NBP and MPC chair Adam Glapinski talking about a decisive 50-bp cut at his April presser and then not delivering when the data and inflation pace come in on the dovish side, especially with the market looking for 50bps as well. A 25-bp cut would be read as hawkish. Still, this MPC does like to surprise and one can't rule out it will do so on either side of the expectation with a 25-bp cut perhaps resting on fiscal worries and the fact the government has not yet put into law a change of legislation impacting energy prices. Though the government's recent legislative changes increase the chance power prices will fall in Q4, this is not in law and it is theoretically still possible that power prices might rise.

Will the MPC go bigger than 50bps, this would be a big surprise, but with many expecting 75bps in easing by the end of the July sitting, it would merely bring forward the cuts and likely give the MPC time until after the August break to chart out its next move. In the end, we would rather believe in a 50-bp cut in May and 25bps in July before a wait until moving again in September or Q4.

• Next MPC meeting: Jun 19, 2025
• Current policy rate: 46.0%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC will aim to counter reserve depletion, manage inflation risks, also funding costs already exceed policy rate

We anticipate that the CBT will maintain the policy rate at 46% during the June meeting. This forecast, however, is critically dependent upon the trajectory of the political environment subsequent to the detention of IMM mayor Ekrem Imamoglu. Recent governmental measures targeting the IMM, including the apprehension of 50 individuals, among them municipal executives, suggest, in our opinion, an effective revocation of the IMM's operational independence. Overall, in our view, the current climate reflects an escalating campaign of pressure and intimidation targeting opposition affiliates, highlighted by judicial proceedings that have extended to the families of Imamoglu, mainly his brother-in-law. Consequently, the potential appointment of a trustee to the Istanbul municipality emerges as a plausible next development, which could further destabilise markets, we caution.

Data Download

These political considerations gain significance in light of our assessment that the CBT's predominant motivation is the reversal of substantial FX reserve depletion. Following the political events surrounding Imamoglu, the reserve erosion reached an estimated USD 55bn, market talks indicated. Simultaneously, a renewed trend towards dollarization among domestic investors became evident. Amidst the political turbulence, resident FX deposits experienced a notable increase of 9.4%, translating to USD 17bn, interrupting a phase of relative stability observed in Aug-Feb, according to CBT data. This resurgence in dollarization presents a critical risk indicator, substantiating our projection that the CBT will opt to hold interest rates steady to forestall a more rapid decline in reserves.

Further supporting the expectation of a rate hold is the observation that the CBT is currently surpassing the benchmark policy rate of 49% and providing funding to lenders at rates close to upper corridor of 49%, according to market talks. This, in our view, states a condition serving the dual objectives of anchoring inflationary expectations and bolstering the TRY's stability by enhancing its attractiveness for carry trade strategies. However, considering that an average 5.5pps increase in the effective policy rate following political turmoil failed to stem reserve losses, it indicates the CBT likely should have minimal scope to ease monetary policy.

Additionally, the CBT anticipates an elevated m/m inflation reading for April. This expectation stems from the depreciation of the currency basket following the detention of Imamoglu, compounded by the economic impact of severe frost damage estimated in the billions of USD, which will sooner or later reflect the already problematic food inflation in Turkey. Notwithstanding CBT Governor Karahan's projection of the exchange rate pass-through stabilising near 35%, our analysis remains less sanguine. A higher pass-through coefficient cannot be ruled out, given historical data following 2023 Turkish presidential elections, where a roughly 30% surge in the USD/TRY precipitated a 25% cumulative price increase over four months. In this context, we assess that the CBT acknowledges the imperative of sustaining a tight monetary policy framework to keep the lira steady, and to do so, a tight monetary policy is a must.

Nevertheless, we note the adverse repercussions of this stance on the real economy are intensifying. Effective commercial lending rates, currently oscillating near 70%, may precipitate constraints on working capital and capital expenditure financing, a development disproportionately impacting SMEs, which constitute the backbone of national employment, in our view. As financial conditions continue to intensify, we caution that the probability of a supply-side economic contraction accompanied by diminishing employment levels increases markedly - a concern substantiated from the preceding two months' data. This trajectory portends the emergence of a cycle characterised by economic deceleration, attenuated fiscal revenue collection and elevated sovereign risk premia, we assess.

Summary of April rate-setting meeting

MPC rate decision in April

Quarterly Inflation Report for Q1

Monetary policy strategy for 2025

• Back-loaded issuance peaks in July, aligns with debt service schedules
• Total debt service hits TRY 874.0bn, led by June interest payments

The Ministry of Finance planned a gross borrowing target of TRY 803.7bn under its May-July three-month rolling financing programme. Planned issuance for May-Jul saw a marginal 1.6% upward revision relative to prior programme projections. Borrowing volumes were structured in a back-loaded profile, peaking in July, followed by June and May, aligning with anticipated debt service maturity schedules. The majority of gross issuance will comprise of domestic auction placements, supplemented minimally by debt allocations to public institutions. Primary auction calendars include four sessions in May, seven in June, and six in July.

Total debt service obligations for May-July were projected at TRY 874.0bn. Elevated servicing costs in June stemmed from concentrated domestic interest payments, whereas May and July reflect heavier principal repayments. External debt servicing was estimated at TRY 140.6bn, representing 16.1% of the period's total.

The Treasury earmarked USD 11bn in external bond issuances for 2025, with one transaction totalling USD 2.5bn already executed to date.

• Slowing service inflation and limited lira depreciation ease price pressures
• Recent policy actions reinforce monetary transmission and economic stability

Domestic demand remained above initial forecasts in Q1 and reduced its disinflationary impact, CBT governor Fatih Karahan emphasised during CBT's 93rd Ordinary General Assembly Meeting in Ankara. In this context, he underlined the CBT's commitment to closely monitor demand dynamics and implement necessary measures should adverse demand conditions threaten to disrupt the disinflation trajectory.

Service inflation exhibited a notable deceleration in February and March, following a marginal uptick in January, according to Karahan. The limited depreciation of the lira reduced the inflationary pressures coming from this channel, according to the governor. Additionally, the governor highlighted swift policy interventions in March and April to address developments in domestic and international financial markets, reinforcing monetary transmission mechanisms to stabilise economic conditions.

Karahan reiterated the bank's resolve to maintain a tight monetary policy stance until sustained disinflation and price stability were achieved. Liquidity conditions will remain under vigilant oversight, with all monetary policy tools deployed proactively to manage risks, he underlined. The CBT stood ready to further tighten policy should inflation exhibit persistent deterioration, emphasising price stability as a prerequisite for sustainable economic growth, he indicated.

• Government lifts overall grants by 25% to 1.875mn per Istanbul residence
• Commercial property subsidy also rises by 20% to TRY1mn

The government elevated housing renovation grants for Istanbul residents regarding urban transformation and earthquake resilience initiatives from TRY 700,000 to TRY 875,000, while raising associated credit limits to the same amount, President Erdogan announced during his address at his party's parliamentary group meeting. Relocation assistance was also increased from TRY 100,000 to 125,000, bringing the total support package for residential transformations in Istanbul to TRY 1.875mn per household, up from 1.5mn. Commercial property renovation subsidies similarly saw a rise, climbing from TRY 800,000 to TRY 1mn. At this time, no further details were provided regarding the budgetary impact.

Emphasising nationwide earthquake preparedness efforts, President Erdogan highlighted ongoing projects to reinforce critical infrastructure and housing across all 81 provinces. Over the past 23 years, the Housing Development Administration (TOKI) delivered 1.5mn residential units and facilitated the construction of 3.7mn urban transformation and social housing projects, the President said. An additional 1mn housing units are currently undergoing renovation, he added. In Istanbul, infrastructure enhancements against included upgraded roads, highways, and bridges to bolster emergency response capabilities, Erdogan noted.

• Deposit banks slow lending; participation, development banks accelerate credit expansion
• Corporate loans edge up, household borrowing cools amid weaker card demand
• Housing loans continue rising, tracking vigorous property market activity
• M2 gains on exchange rate activity, M3 via interest, we assess

Domestic private sector credit growth decelerated marginally to 36.9% y/y by end-March from 37.1% y/y in February, extending its downward trend observed since Feb 2024, according to CBT data. This moderation was principally attributable to a slowdown in deposit bank lending, which slowed to 36.1% y/y. In contrast, participation banks and investment and development banks exhibited accelerated y/y growth in private sector credit disbursement.

Deposit banks' credit to non-financial corporations saw a marginal uptick to 35.4% y/y, while participation banks and investment and development banks recorded stronger corporate lending growth of 41.3% y/y and 42.1% y/y.

Data Download

Data Download

Household credit lost momentum, easing to 37.1% y/y growth in March, reflecting sustained deceleration mainly attributable to deposit banks. Retail credit growth at deposit banks moderated to 35.0% y/y, primarily due to cooling individual credit card lending alongside subdued growth in automobile and general-purpose loans. Housing loans emerged as an outlier, despite accelerating marginally to 23.1% y/y, significantly surpassing 2024 averages and aligning with robust housing market activity. Participation and development banks mirrored these sectoral trends.

M1 growth rebounded to 32.4% y/y in March from 29.4% y/y in the preceding month, while M2 and M3 expanded by 38.7% y/y and 44.1% y/y. Despite remaining below 2024 averages, the sequential acceleration across monetary aggregates underscores a notable shift, in our view. We interpret M2's rise as currency depreciation-driven following the political developments over the month, whereas M3's expansion reflects accrued interest returns. Overall, we expect the CBT's recently implemented restrictive policy framework to amplify short-term pressures on credit allocation mechanisms, curtailing operational flexibility across financial channels.

• Caputo's threat triggered by news of Stellantis considering 3.5% raise for its vehicles

Economy Minister Luis Caputo threatened automakers by saying the government will use its "tools" to defend consumers if they raise prices, according to a post on X. A reliable auto industry reporter said Stellantis was in the process of passing a 3.5% raise for all its vehicles starting in May. Caputo quoted the post and commented that if the news were true, it would mark a change in the relationship of confidence that the government and the auto industry were able to build. He closed by saying that if confidence breaks, the government will use its tools to defend consumers.

Overall, this is a concerning message given Argentina's long negative history with price control and price repression. However, we don't expect Caputo to retaliate with irrational policies if Stellantis or a different automaker were to raise prices. It could be argued that the minister is merely relying on verbal interventions to do what he can in limiting the inflation pass through of the exit from a fixed exchange rate. There is a broader concern about Caputo possibly deviating too much from optimal policymaking due to him placing too much emphasis on short-term disinflation (and not enough on the resolution of other macro imbalances), but these comments don't really influence our view of his policy approach.

• Formal job creation comes in below the consensus expectation of 200,000
• Agriculture and commerce record job losses in March

The number of net formal jobs created rose by 71,576 in March, coming in significantly below the expected 200,000 net increase, according to data released Wed. by the Labor Ministry. Despite the decline, this marks the third consecutive month of positive net job creation after a decline in December. Job creation in March also fell from the 244,845 positions created a year earlier. In Jan-Mar, 1.6mn formal jobs were created.

Three out of the five sectors tracked posted job creation in March, down from five in February. The services sector led the increase, creating 52,459 job posts, followed by construction, which created 21,946 posts, and industry, which created 13,131 jobs. Meanwhile, agriculture (-5,644) and commerce (-10,310) recorded job losses.

Overall, formal job creation lost momentum in March after outperforming expectations in February, and chalked up the weakest March print since 2020. Labor Minister Luiz Marinho attributed the slowdown to seasonal factors, particularly the timing of Carnival, which was celebrated in March this year rather than in February, as in 2024. Despite the slowdown in job creation growth, which may suggest that the labor market has started to feel the effects of monetary tightening, the data still supports the Copom's vision that economic activity remains dynamic. The still-robust labor market reinforces expectations that the Copom will raise the Selic rate by 50bps at its May 7 meeting, bringing it to 14.75% -- the highest level since 2006.

• Haddad says govt will strengthen fiscal framework if necessary
• Haddad says govt will refund those harmed by social security corruption scheme, but it is not yet clear how

Finance Minister Fernando Haddad said Wed. that the government could implement new measures to strengthen the fiscal framework if necessary, but did not indicate which. Haddad also mentioned that the government will refund those harmed by a social security corruption scheme uncovered by the federal police, although the source of the funds is not yet clear. The scheme unauthorizedly deducted amounts from associates' pension funds, totaling around BRL 6bn (though this amount has not yet been confirmed).

Overall, the government forecasts that the pace of growth in mandatory expenditures will significantly reduce the space for discretionary spending in the coming years as the latter's growth is limited by the fiscal framework, according to the 2026 Budget Guidelines. In this scenario, it is clear that the government will need additional fiscal measures to support its accounts. The main question, however, is which measures will be taken -- whether they will come from the expenditure or the revenue side. We recall that the government has preferred raising revenues rather than cutting expenditures. It also raised expectations for a fiscal package to reduce expenditures in late 2024, but it was considered insufficient and damaged the government's fiscal credibility. In our view, there is little hope for effective long-term fiscal measures in the next couple of years, but a significant fiscal reform will be needed in 2027 regardless of who the next president is.

• Lending growth slows to 9.9% y/y in Mar from a revised 11.0% in Feb
• Both public and private lending growth slow y/y in Mar
• Lending rises 0.6% m/m in Mar from a revised 0.2% in Feb

Total lending by the financial sector rose by 9.9% y/y in March, slowing from a revised 11.0% in February, according to data released Wed. by the BCB. This marks the 87th consecutive yearly increase in lending growth, but the fourth straight slowdown. On a m/m basis, lending grew by 0.6% m/m in March, compared with a revised 0.2% increase in February and a 0.4% decline in January. In real terms, lending rose by 4.6% y/y, down from a revised 6.2% the month before.

Data Download

Public-sector lending grew by 15.6% y/y in March, slowing from 22.7% in February. In the breakdown, federal government lending accelerated to 31.1% y/y in March from a revised 29.1% the month before, while states and municipalities lending growth slowed to 12.5% from a revised 21.4% the previous month. On a m/m basis, in turn, public lending fell 5.6% m/m vs. a revised 0.3% decline the month before, marking the second consecutive drop after four consecutive monthly rises.

Private lending rose by 9.7% y/y in March, slowing from a revised 10.6% in February. In the breakdown, corporate lending growth slowed to 6.5% y/y and individual lending slowed slightly to 11.5%. In m/m terms, private lending grew by 0.9% m/m in March, marking the second consecutive increase after a revised 0.8% decline in January.

Overall, lending growth decelerated in March but continues to rise despite tighter monetary policy. The BCB noted that the average lending interest rate rose by 0.9pp m/m and 3.1pps y/y, reaching 31.3% annually. The BCB did not clarify the impact of the new payroll-deductible credit line introduced by the government, which came into effect on Mar 21, but noted that payroll-deductible loan issuance for private sector workers grew by 32.8% m/m in March. The government estimates this credit line reached BRL 8.0bn in its first month. We believe this data will play an important role in the Copom's assessment of whether the Selic hike expected in May will mark the end of the monetary tightening cycle that began in September 2024 or if an additional hike in June could be necessary.

• Unemployment rate rises from 6.8% in Feb in fourth consecutive increase
• Employment rises 2.3% y/y in Mar, slowing from revised 2.4% in Feb
• Average wage rises 9.2% y/y to BRL 3,410, accelerating from 8.6% in Feb

Brazil's unemployment rate rose to 7.0% in the rolling quarter ended in February, rising from 6.8% for each of the previous three months, but falling from 7.9% a year earlier, according to data released Wed. by the stats office IBGE. The increase came in line with expectations and marked the fourth consecutive rise in unemployment as economic activity is slowing under a restrictive monetary policy. Despite the increase, this is the lowest Q1 unemployment rate since 2012. The total workforce declined to 102.5mn in March from 102.6mn the month before, marking the fourth consecutive drop.

Data Download

Employment rose by 2.3% y/y in March, slowing from a revised 2.4% increase the month before, but marking the 47th consecutive yearly increase. Five of the ten segments monitored recorded y/y increases, two groups fell, and the others were unchanged. On a m/m basis, employment fell 0.2% m/m, following a 0.3% decline in February to mark the fourth consecutive monthly drop.

The average real wage rose by 9.2% y/y to BRL 3,410 in March, accelerating from 8.6% in February to reach the highest mark since the data series began in 2012.

Overall, the rise in the unemployment rate in the rolling quarter ended in March is in line with expectations as the monetary tightening cycle started by the Copom in September 2024 is weighing on economic activity and is expected to do so throughout 2025, although more markedly in H2. According to the IBGE, the increase in unemployment was driven more by a rise in the number of people seeking work than by job losses. The labor market thus remains robust and real wages continue to grow, which is likely to support the Copom delivering the expected 50-bp Selic hike at its next policy sitting on May 7, bringing the key rate to 14.75%.

• Gross public debt stock falls to 75.9% of GDP at end-Mar from revised 76.1% at end-Feb, but rises from 75.1% of GDP a year earlier
• Monthly decline driven by variation in nominal GDP, net debt redemption, and FX appreciation while higher nominal interest rates push debt upward

Brazil's gross public debt stock fell to 75.9% of GDP at end-March from a revised 76.1% of GDP at end-February, staying at BRL 9.1tn, though it rose from 75.1% of GDP a year earlier, according to data released Wed. by the BCB. This reversed the rise seen in February that had halted a three-month streak of declines. The BCB attributed the monthly improvement to variation in nominal GDP, net debt redemption, and FX appreciation, which were enough to offset the upward pressure from higher nominal interest rates.

Data Download

Overall, the debt-to-GDP ratio declined in March following a brief increase the month before. However, nominal interest rates continue to pressure public debt as the Copom maintains its tightening cycle to combat inflation. According to April's Prisma Fiscal Report, analysts polled by the Finance Ministry forecast gross public debt to rise to 80.5% of GDP by end-2025, up from 76.1% at end-2024.

• Primary surplus rises to BRL 3.6bn in Mar from BRL 1.2bn the year before but swings from BRL 18.9bn deficit in Feb
• Print comes in better than consensus expectation for BRL 1.8bn surplus
• In Jan-Mar, public sector primary surplus rose to BRL 88.7bn from BRL 54.6bn a year earlier

Brazil's public-sector primary surplus rose to BRL 3.6bn in March from BRL 1.2bn the year before, but swung from a BRL 18.9bn deficit in February, according to data released Wed. by the BCB. The print came in much better than the consensus expectation for a BRL 1.8bn surplus. The central-government primary deficit was BRL 2.3bn, which was well below the BRL 28.5bn deficit the previous month and below the BRL 1.9bn deficit seen the year before. Regional governments posted a BRL 6.5bn surplus in March, compared with BRL 9.2bn the month before, while public entities registered a BRL 0.6bn deficit, compared with a BRL 0.3bn surplus in March. In Jan-Mar, the primary surplus rose to BRL 88.7bn (3.0% of GDP) from BRL 54.6bn (2.0% of GDP) the year before.

Data Download

The total deficit, which includes the primary balance and nominal interest, widened to BRL 71.6bn in March from BRL 68.9bn a year earlier. The worsening was due to a wider deficit in regional governments' accounts, which grew to BRL 5.1bn from BRL 1.7bn the year before. Meanwhile, both the central government and public enterprises saw a narrower total deficit in March. In Jan-Mar, the total deficit narrowed to 105.1bn (3.5% of GDP) from BRL 154.6bn (5.6% of GDP) a year earlier.

Overall, the public-sector primary balance came in significantly better than expected in March, swinging from a deficit the previous month as the central government deficit narrowed, offsetting the lower surpluses from regional governments and the deficit in public enterprises. On the central government's primary result, the BCB reported a BRL 2.3bn deficit in March, compared to the BRL 1.1bn surplus recorded by the Treasury for the month and published Tues. It's important to note that the two institutions use different methodologies to calculate the primary balance. The BCB employs the below-the-line method while the Treasury uses the above-the-line method, which explains the discrepancy. Despite the methodological differences, both BCB and Treasury data point to the best Q1 primary result in three years, reinforcing our expectation that the government will likely meet its zero-deficit target with a +/- 0.25% of GDP margin this year.

• MPC meeting: May 7, 2025
• Current policy rate: 14.25%
• EmergingMarketWatch forecast: 50-bp hike (to 14.75%)

The BCB's Monetary Policy Committee (Copom) members have adopted more dovish rhetoric in recent weeks, indicating that the committee is likely to maintain its guidance for another Selic rate hike at the next policy sitting on May 7, but at a slower pace than we previously thought. We now expect a 50-bp hike at the meeting, bringing the rate to 14.75%, and not the 75bps we initially expected. Expectations of a global economic slowdown due to Donald Trump's trade policies favor a smaller hike, while the scenario of persistently unanchored inflation expectations, resilient economic activity, a robust labor market, and inflation above the target pressure for a continuation of the monetary tightening cycle.

BCB Monetary Policy Director Nilton David said that early signs of a moderation in economic growth suggest that the restrictive monetary policy is working, although inflation is expected to remain above the 4.50% upper limit of the +/- 1.50-pp fluctuation band around the 3.00% target through Q3 2025. BCB Economic Policy Director Diogo Guillen reinforced the need for the Copom to remain cautious and flexible in its upcoming decision due to international uncertainty, while also stating that the moderation in economic momentum is important in bringing inflation back to target, although signals remain mixed across sectors.

BCB Governor Gabriel Galípolo, meanwhile, confirmed that the guidance for another Selic hike remained valid but struck a softer tone regarding inflation. Despite the inflation outlook remaining challenging, Galípolo noted that inflation expectations beyond 2025 are less de-anchored and that the expected exchange rate depreciation driven by the international scenario did not materialize. It is also worth noting that inflation expectations for 2025 have been revised downward in the Focus Report, although they remain significantly above target (5.55% in the most recent report).

Looking at the inflation risk balance presented by the Copom in its latest minutes, movements in the external scenario have reinforced the materialization of a downside risk while reducing the likelihood of an upside risk. On the downside, the Copom pointed to the possibility of a less inflationary scenario for emerging markets due to global trade disruptions and tighter financial conditions -- a scenario that seems increasingly likely to materialize. On the upside, the Copod has highlighted the risk of inflationary pressure from external and domestic factors, such as persistent FX depreciation. However, expectations that Trump's policies would cause BRL depreciation have not materialized (the BRL has appreciated against the dollar in recent months), which reduced the pressure from this upside risk and supports a milder Selic hike.

Overall, recent remarks from Copom members have led us to revise our expectation to a 50-bp hike at the May 7 policy meeting, which will bring the Selic to 14.75%, which will still be the highest rate since 2006. Despite the more dovish tone, we believe the chances of the Copom leaving the Selic unchanged are low, not only due to Galípolo's statements, but also because of the still-present inflationary pressure. The expected hike at the upcoming meeting will mark the sixth consecutive increase in the tightening cycle that began in September 2024, which has already raised the rate by 375bps. However, the cycle now appears to be nearing its end, with a possibility that the next hike will be the last. That said, we do not completely rule out a final increase at the following policy sitting on Jun 17-18, although that will likely depend on further data on economic activity, particularly the impact of the government's new payroll loan program and external influences, and inflation in the coming months.

• Posts MXN 106.5bn primary surplus during the month, MXN 189.8bn in Q1
• Revenues jump 23.0% y/y in March, on the back of tax revenues growing 33.5% y/y
• Income tax revenues jump 47.0% y/y, VAT revenues grow 22.4% y/y
• Expenditures grow 21.3% y/y, current spending jumps 37.4% y/y

The public sector's deficit declined m/m to MXN 24.6bn in March, posting a MXN 138.9bn deficit in Q1, per data published by the Treasury on Wednesday. This is a solid improvement m/m, in line with a strong swing of the primary balance, from a MXN 19.5bn deficit in February to a MXN 106.5bn surplus in March.

Data Download

Public revenues rose by 23.0% y/y in March, in a swift acceleration m/m. The improvement comes on the back of non-oil revenues, with tax revenues up by 33.5% y/y. This comes on the remarkable dynamism of income tax revenues, up by 47.0% y/y, and VAT revenues up by 22.4% y/y.

Public spending rose too, by 21.3% y/y, in a swift m/m rebound from two-digit declines in January and February. The increase came on the back of current and non-programmable spending, with capital spending declining 34.6% y/y. This divergent dynamism had the weight of capital spending over programmed spending decline by 14.3pps m/m, to 12.8%. Importantly, part of the m/m swing is explained by financial costs, which had declined sharply in February but rose by 17.9% y/y in March.

Overall, the fiscal position improved in March, with a strong primary surplus. This is explained in large by a robust hike of tax revenues, which comes as a surprise amid weakening growth. Indeed, robust revenues cannot be assured in the coming months, anticipating a swift deceleration as the economy enters a recession later in the year. On the other hand, part of the strong primary surplus comes on the back of weaker capital spending, a disappointing development that may not hold in coming months, considering flagship projects announced by President Claudia Sheinbaum.

• Still posts robust growth, up 13.5% y/y
• Housing and corporate lending slow too
• Further deceleration is likely in April amid an adverse calendar effect linked to Easter

Lending by commercial banks slowed in March, with consumer lending slowing by 0.6pps m/m, per data published on Wednesday by the CB. This deceleration seems linked to a weaker business climate, amid reigning uncertainty and slowing economic growth, and defies robust private demand fundamentals and a falling Monetary Policy Rate (MPR). Indeed, further deceleration might come in April, in our view, pressured down by the same uncertainty and an adverse calendar, considering Easter took place in April but in March of last year.

Data Download

Commercial banks' housing and corporate lending slowed too, by 0.2pps and by less than a tenth of a percentage point, respectively.

Overall, it remains to be seen how transitory this lending deceleration is. However, it comes as a grim development that weakens mid-term growth expectations, in our view, considering it anticipates a deterioration of private demand fundamentals, along with a weaker capacity to invest and to acquire housing. This suggests a vicious cycle is fueled, with uncertainty, weaker growth and poor expectations hurting lending which, in turns, weakens private demand and overall growth fundamentals.

• Next MPC meeting: May 15
• Current policy rate: 9.00%
• EmergingMarketWatch forecast: 50bps cut

CPI inflation accelerated in April H1 to 3.96%; however, we do not expect this disappointing development to prevent the CB from cutting its Monetary Policy Rate (MPR) by 50bps in May, bringing down the policy rate to 8.50%. The latest inflationary print was disappointing to us, showing upward pressure in the core component, both from goods and services, in what should give some central bankers some pause before further rapid monetary easing. However, their dovish stance and the fact economic growth weakened since late 2024 tells us this next rate cut is in the books, barring unexpected financial turbulence in the context of tariff threats, something that seems less likely now than a month ago.

Data Download

INEGI's preliminary data show GDP grew in Q1, barely avoiding a technical recession. The print is positive in the sense that it shows better-than-expected performance; however, it highlights weaknesses that are set to linger through 2025. Indeed, industrial activity declined for the third quarter in a row, while the services sector stagnated, only avoiding a technical recession thanks to a strong improvement by the agricultural sector.

But, besides these macro developments, and the seeming stability in tariffs gained in the past few weeks, April came with few relevant news on the monetary policy front, in our view. This might be linked to Easter, in part, with news cooling for a couple of weeks. Thus, it makes sense to see more comments from central bankers in the coming weeks; still, we do not expect any comments to bring questions about how the Monetary Policy Council (MPC) will vote in May, insisting a 50bps cut is all but a given at this time.

We insist the CB is likely to cut its policy rate by 100bps in Q2, considering the dovish tone held since last year, stable CPI inflation, a weakening growth outlook, currency strength and financial stability despite tariff uncertainty. We see conditions for constant 25bps cuts in H2, which would bring down the policy rate as low as 7.00% by year-end, well below market consensus.

Data Download

We remind the CB said new 50bps cuts could lay ahead at the time it slashed its Monetary Policy Rate (MPR) by 50bps to 9.00% in March. Moreover, the latest minute shows at least two board members say there are conditions for similar cuts ahead, suggesting they see at least two more 50bps cuts in the horizon. The most important detail to watch in the May policy announcement is whether the board insists there is room for further 50bps cuts.

We expect the CB will continue to say it sees the need to keep the policy rate in restrictive territory, despite its fast easing, as it said in its latest minute. On this, two board members said in the March sitting that there is a 200bps gap between the ex-ante policy rate and the upper end of the neutral band. Thus, it makes sense that the policy rate could end the year as low as 7.00% even if mid-term inflation expectations fail to decline and even if the CB still targets restrictive territory.

Overall, we are confident the CB will cut its policy rate by 50bps in May and by 50bps more in June, considering a dovish board, stable inflation and slowing growth. We expect the CB will be cutting its MPR during the rest of the year. Indeed, there is much uncertainty about the MPR's 2025-end position, given risks of regional protectionism and lingering inflationary pressures; still, we anticipate the policy rate will close the year at 7.25-7.00%. 2026 easing may not be continuous and might depend on the decline of mid-term expectations or the board willingness to agree to a more neutral stance of the CB's policy rate, something that might come if economic growth expectations continue to weaken.

• Industrial sector contracts, services stagnate
• Weaknesses are evident, even though technical recession is avoided

The economy grew 0.2% q/q in Q1, per the seasonally adjusted preliminary estimate published by the stats office INEGI on Wednesday. This is a bit better than expected. Enough to keep the economy out of a technical recession, despite many analysts assuming a recession was unavoidable only weeks ago. Indeed, we were among the many believing a technical recession was in the books; however, the February economic activity print, with better-than-expected performance, anticipated the economy would not be falling into a recession just yet.

Despite avoiding a recession, the economy's weaknesses are evident, in our view. The industrial sector contracted for the third quarter in a row, this time by 0.3% q/q sa. And the outlook is grim, with Q2 performance surely hindered by US tariffs and linked uncertainty. In turn, the services sector slowed, stagnating in Q1, after constant growth since Q4 2021. This deceleration anticipates a deceleration of private demand in early 2025, a disappointing but unsurprising development in a context of reigning uncertainty.

INEGI's preliminary estimate is that GDP grew 0.6% y/y in Q4, winning ground slightly but posting the second-weakest print since the pandemic.

Overall, the 2025 economic outlook remains adverse. However, the expectation of modest but positive performance in Q1 should be enough to hold 2025 GDP growth forecasts above water, in our view, not sliding into negative territory. Indeed, US protectionism may end up determining the overall performance, considering there might be surprises ahead. However, under current conditions, we expect a severe deceleration, amid reigning uncertainty, weakening investment and falling public spending, while growth remains positive on the back of resilient private demand, which continues to be well based on strong fundamentals, including strong employment and recovering real wages.

• Egypt to add 18k new hotel rooms in 2025 to meet rising demand
• Tourism sector is resilient to regional security crisis, remains major FX earner

The number of tourists who visited Egypt rose by strong 25% y/y to 3.9mn people in Q1, according to tourism minister Sherif Fathy. We think the sharp increase reflects a weaker base as tourism arrivals probably fell sharply during Q1 2024 in the aftermath of the Gaza war. The sector, however, rebounded quickly and has in general remained resilient to the regional security crisis, with tourism arrivals rising by 5.4% to a record high of 15.7mn in 2024, according to government officials. BoP data suggests the tourism sector generated USD 16bn revenue. The sector, which is a major provider of jobs and foreign revenues and generates directly about 5% of GDP, was shored up by the weaker pound, new tourism initiatives, and the improved security in Egypt.

The number of tourists is projected to rise by another 8% by the end of 2025, tourism minister Fathy said, adding Egypt will add 18,000 new hotel rooms this year to meet rising demand. Egypt aims to double its tourist count to 30mn by 2030 and raise annual tourism revenues to USD 24bn.

Egypt targets USD 145bn in exports by 2030: El-Khatib (Zawya)

Egypt signs USD 334mn agreement to establish 2 recycling-based fiber plants (Zawya)

Egypt: SCZone pens USD 25mn contract with India's Willow Ferro to build metal plant in Sinai (Zawya)

Egypt reaffirms commitment to Sudan peace, boosts African ties in high-level talks (Ahram)

Egypt Secures Over 644,000 Tons of Local Wheat as Strategic Commodity Reserves Strengthen (Egypt Today)

EUR 10mn EU Contribution Fuels Egypt-Greece Power Link as Egypt Advances USD 20bn Renewable Export Plans (Egypt Today)

EGAS Signs MoU with ExxonMobil [to apply new production-sharing model in Mediterranean] (Egypt Business)

• Next MPC meeting: May 22, 2025
• Current policy rate: 25.50%
• EmergingMarketWatch forecast: 24.0-25.5%

After slashing interest rates for the first time since late 2020, the MPC is likely to continue with monetary easing on May 22. Currently, we expect a 100-150bps rate cut following the 225bps rate cut implemented on Apr 17, as consumer inflation is expected to remain near 13% y/y on the back of favourable base effects. Despite the projected rate cut, real interest rates will remain fairly high during Q2, which leaves room for further cuts during the year. Meanwhile, capital outflows triggered by the US tariffs appear to have largely stopped and Egypt has emerged from the sell-off largely unscathed. Further, the collapse of oil prices is positive for Egypt and suggests the petrol price hike that is expected in the last quarter of 2025 could be milder.

Data Download

Headline inflation is expected to decrease further in 2025 driven by the cumulative impact of monetary policy tightening and the favourable base effect. This downward trajectory is expected to continue during 2026, albeit at a slower pace given the expected drag effect from the fiscal measures aimed at tightening the fiscal stance. As such, underlying inflation is expected to converge to its historical average over the medium term, suggesting an improvement in inflation expectations. As expected, the pound has depreciated as a result of the capital outflows, and while news titles reported that the official FX rate had weakened to an all-time low, the actual depreciation was not that dramatic. In fact, the pound has regained some lost strength in the last days of April, closing at USD/EGP 50.79 on Wednesday (Apr 30) compared to 50.59 on Apr 4. Further, we think that by allowing the pound to depreciate, the CBE is sending a positive signal that it is committed to a flexible FX rate. On the domestic front, the MPC said it expects a further improvement in GDP growth during Q1 2025, supported by non-oil manufacturing, tourism, and trade as economic activity gradual picks up. The disruptions in the Suez Canal have persisted, which together with supply line-disruptions, keep economic growth below potential. The MPC said that GDP growth should reach its full potential by mid-2026.

Data Download

The MPC has decided to extend the inflation target horizons to Q4 2026 and Q4 2028 at 7% (+/- 2.0pps) and 5% (+/- 2.0pps) on average, respectively, in line with CBE's gradual advance towards implementing a fully-fledged inflation targeting regime. Consumer inflation has been on a downward trend since it peaked at 37.9% y/y in September 2024, interrupted by fuel and electricity price hikes during 2024. Prior to the US tariffs shocks, analysts projected that the MPC would deliver a cumulative rate cut of between 700bps and 1,000bps this year.

Monetary Policy Committee Statement

Monetary Policy Review

Monetary Policy Committee Meeting Schedule

Question:

Do you have a link to where you got the data for the Gross external debt payments (USD mn)

The question was asked in relation to the following story: Gross external debt rises 2% q/q to USD 155bn as of end-Sep, equals 40.8% of GDP

Answer:

You can find the total debt service in the same document as the Gross External Debt figures, on page 97-98.

You can find the said document here (Monthly Statistical Bulletin 335), and the report itself here.

CBEX resumes operations despite SEC ban, N1.2tn EFCC probe (Punch)

Customs intercept N921m contrabands at Apapa ports (Punch)

Terrorism: APC chieftain urges FG to accept Russian military support (Punch)

Reps order oil firm to pay $4m debt within five days (Punch)

Lokpobiri: NNPC, Caverton, Stenabulk JV Will Ensure In-Country Revenue Retention (ThisDay)

Edun: FG On Verge Of Finalising N1.5tn Highway Concessioning Initiative (ThisDay)

Naira holds steady at N1,602/$1 in official market (Nairametrics)

FIRS seeks court's dismissal of Binance's application to vacate ex-parte order amid $79.5 billion tax lawsuit (Nairametrics)

• Political parties continue to politicise the issue
• National census has been delayed since 2021 owing to the pandemic
• Government likely to undertake delimitation exercise following the census

The Cabinet Committee on Political Affairs (CCPA) has approved the inclusion of caste enumeration in the upcoming national census, Information and Broadcasting Minister Ashwini Vaishnaw announced today. The decision aims to ensure a transparent process that addresses growing political and social demands for accurate data on caste demographics.

Vaishnaw criticised the opposition INDIA bloc for politicising the issue, stating that previous attempts by some states to conduct caste surveys lacked transparency and created societal doubts. He argued that only a centrally coordinated census can produce reliable and consistent data, citing constitutional provisions that place the responsibility of census with the central government.

The minister differentiated between a census and a survey, highlighting that a census involves collecting data from every individual, whereas a survey relies on samples. The official inclusion of caste data in the census, he said, will help maintain social cohesion and eliminate the need for politically motivated state-level surveys.

The national census, originally scheduled for 2021, has been delayed due to the Covid-19 pandemic. The upcoming exercise is expected to resume this year, marking the first census since 2011. Its results will also feed into the scheduled 2026 delimitation exercise, which may lead to a realignment of parliamentary constituencies based on population data.

Political parties, particularly the Congress and its allies, have long advocated for a caste census to better inform OBC reservation policies. These currently rely on data from the 1931 census, the last official count that recorded caste demographics at the national level. Meanwhile, regional political parties have opposed the centre's plans of delimitation exercise, as they are concerned that it would reduce the number of seats in parliament for them.

• Government appoints former RAW chief to National Security Advisory Board
• Modi grants Indian armed forces full operational freedom
• Pakistan seeks UN intervention

Prime Minister Narendra Modi is chairing a series of high-level meetings today in response to escalating tensions with Pakistan following the recent terror attack in Pahalgam, which left 26 civilians dead. The day began with a session of the Cabinet Committee on Security (CCS), attended by Home Minister Amit Shah, External Affairs Minister S. Jaishankar, Finance Minister Nirmala Sitharaman, Defence Minister Rajnath Singh, and National Security Advisor Ajit Doval.

The Prime Minister is also expected to convene meetings of the Cabinet Committee on Political Affairs (CCPA) with key leaders including BJP president J.P. Nadda, followed by the Cabinet Committee on Economic Affairs, and will conclude with a full cabinet meeting later in the day. Additionally, the Centre has restructured the National Security Advisory Board (NSAB) and appointed former RAW chief Alok Joshi as its new head. The seven-member panel includes retired officials from the armed forces, Indian Foreign Service (IFS) and Indian Police Service (IPS).

Tensions continue to rise along the Line of Control, with the Pakistan Army engaging in firing across multiple sectors in Jammu and Kashmir for the sixth consecutive night. Indian security forces have responded with measured and proportionate retaliation, according to officials. Pakistan's Information Minister Attaullah Tarar has publicly claimed that India may launch a military strike within the next 24 to 36 hours, citing "reliable intelligence." The claim comes amid a diplomatic standoff, with India accusing Pakistani elements of orchestrating the Pahalgam attack. Amid mounting domestic calls for retaliation, Prime Minister Modi has granted the Indian armed forces full operational freedom.

Meanwhile, military sources indicate that the Pakistan Navy has moved key vessels, including frigates and submarines, into strategic harbour positions to deter any Indian military movement. Simultaneously, the Pakistan Air Force has scaled back flying operations by over 50%, limiting activity to essential missions to avoid airspace confusion or misidentification.

Amid speculation that India may launch retaliatory military action within days, Pakistan Prime Minister Shehbaz Sharif on April 29 contacted United Nations Secretary-General Antonio Guterres, urging urgent intervention.

• FinMin blames depreciation on global uncertainty after US tariff hikes
• Govt targets USD/IDR 16,000, but rupiah is already well below that

The weakening rupiah does not reflect Indonesia's economic fundamentals, FinMin Sri Mulyani Indrawati said at a press conference. She blamed the rupiah's depreciation on the global uncertainty following the US tariffs. In addition, the Fed's more cautious stance also contributed to the rupiah's weakening as the Fed was previously expected to cut rates more aggressively.

The rupiah has depreciated by about 3% YTD, but it has been a consistent downward trend since early Oct 2024, coinciding with the US presidential election. It even breached the USD/IDR psychological threshold of USD/IDR 17,000 shortly, before retreating back into the USD/IDR 16,500-16,900 range.

We remind that the government targets an interest rate of about USD/IDR 16,000 according to the 2025 budget bill, while the rupiah's depreciation is also likely to weigh on the BI's monetary easing agenda.

In a first, ISI chief made national security adviser (Dawn)

Pakistan's media faces existential threat: Freedom Network (Dawn)

Imran unlikely to get any relief from IHC this year (Dawn)

UN launches heatwave contingency plan as temperatures soar (Dawn)

Aurangzeb confident Pakistan can withstand impact of US tariffs (Dawn)

Govt slashes petrol, high-speed diesel prices by Rs2 (Dawn)

US steps in to ease tension amid India's unabated sabre-rattling (Express Tribune)

Message to India: Any attack won't go unpunished (Express Tribune)

FBR misses target by Rs833b (Express Tribune)

Afghan repatriation via Torkham continues (Express Tribune)

China stands by Pakistan in all circumstances: consul general (The News)

India yet to disclose evidence regarding Pakistan's role: Bloomberg (The News)

Tax relief to salaried class subject to IMF nod: FBR (The News)

T-bills see net $167.3m foreign outflows on lower rates, global uncertainty amid tariff war (The News)

• Next policy meeting: May 5, 2025
• Current policy rate: 12.0%
• Last decision: Hold (March 10, 2025)
• Our forecast: Cut by 50bps
• Rationale: Benign external sector outlook coupled with a sharp moderation in inflation

We expect the State Bank of Pakistan (SBP) to cut its key rate on May 5 as concerns around external sector outlook eases amid strong remittances while headline inflation remains low. However, the size of the cut is likely to be smaller at 50bps due to persistent underlying price pressure. Last month, the central bank kept the policy rate unchanged at 12.0%, pausing its aggressive easing cycle that saw a cumulative 1,000bps reduction over six consecutive meetings since June 2024.

Although real interest rates are adequately positive on a forward-looking basis, inflationary risks arising from fading base effect and anticipated energy tariff adjustment would warrant a cautious stance. Additionally, the central bank has committed to the IMF that it would maintain a tight policy stance to keep inflation contained and re-anchor expectations.

The upcoming rate decision comes days ahead of a critical IMF executive board meeting to discuss staff-level agreement on first loan review of its ongoing Extended Fund Facility and a new climate-related loan. The board is expected to approve the initial deals, allowing for an immediate disbursement of USD 1bn under the EFF and first instalment under the Resilience and Sustainability Facility. These funds would further strengthen the country's external position.

Inflation environment

CPI inflation eased to a multidecade low of 0.7% y/y in March on account of a drop in food, fuel and electricity prices. The headline figure appears to have bottomed out, with the SBP expecting inflation to quicken in the last few months of FY25 as the impact of the favourable base effect gradually wanes. The FinMin too projects inflation to pick up to 1.5%-2.0% y/y in April and further to 3%-4% y/y in May. Having said that, lower global oil prices, major relief in electricity tariff, a stable exchange rate, adequate food supply and sufficient wheat stock, and tight fiscal policy would keep inflationary pressures in check in near- to medium-term.

Earlier this month, the IMF forecast inflation in Pakistan to decelerate notably to 5.1% in FY25 (revised from 9.5%) from 23.4% in FY24, before accelerating to 7.7% in the next fiscal year. This outlook is more optimistic that the SBP's, which maintains a projection of 5.5-7.5% for FY25. Inflation averaged 5.4% in the first three quarters (July-March) of FY25.

Meanwhile, core inflation remains elevated, with non-food non-energy inflation in rural areas sustaining double-digit growth at 10.2% y/y in March while in urban it soared to a four-month high of 8.2%. The stickiness in core inflation along with potential adjustment to electricity and gas tariffs, additional taxes in FY26 budget, and rising external uncertainties pose upsides risk to the outlook.

Data Download

External sector

After previously highlighting rising imports and weak financial inflows as emerging risks to external sector stability, the SBP revised its outlook earlier this month, citing strong prospects for remittance, which hit an all-time high of USD 4.1bn in March. The robust inflows led the current account to post a record USD 1.2bn surplus during the month.

The SBP raised its projection for remittances in the ongoing fiscal year to USD 38bn, up from the previous estimate of USD 36bn. As a result, the current account is on track to post its first annual surplus in FY25 in over two decades, also supported by lower commodity prices and continued momentum in exports.

The improved liquidity in the interbank forex market owing to favourable current account balance is expected to enable the SBP to continue mopping up U.S. dollars to build up its external buffers and meet its external debt obligations. Moreover, anticipated financial inflows, including IMF disbursements, are expected to bolster the SBP's foreign exchange reserves, which stood at a seven-month low of USD 10.2bn as of April 18. Earlier this month, SBP Governor Jameel Ahmad noted that forex reserves are now projected to reach USD 14bn by end-June, up from the previously forecasted USD 13bn.

Data Download

GDP growth

According to SBP, Pakistan's GDP growth is likely to pick up in the second half (Jan-Jun) of FY25, supported by easing financial conditions and lower global energy prices. The latest data on high-frequency indicators suggest that momentum in economic activity is gaining traction, it said in its biannual report titled 'The State of Pakistan's Economy', referring to robust sales of automobiles, cement and fuel as well as uptrend in exports of high value-added textiles in recent months. While growth in industrial and services sectors are expected to strengthen, the agriculture sector is seen remaining subdued due to lower crop output.

Overall, the central bank maintained its growth forecast in the range of 2.5-3.5% in FY25. Risks to the outlook are tilted to the downside, including from additional fiscal consolidation and below-expected wheat harvest. Last week, the IMF and World Bank projected growth in the ongoing fiscal year at 2.6% and 2.7%, respectively. The economy expanded 1.5% y/y in the first half (Jul-Dec), compared with 2.1% y/y in the same period last year.

Data Download

Conclusion

Overall, the sharp moderation in inflation coupled with easing pressure on external accounts will provide the SBP enough confidence to deliver a small rate cut next week to support growth. We see room for the policy rate to be reduced to 10.0% by the end of this year.

Useful Links

Previous policy rate decisions

SBP's The State of Pakistan's Economy' report

• Exports rise by 5.9% y/y; imports increase by 11.9% y/y
• Exports of electronic products edge up y/y
• The Philippines had a USD 502.4mn surplus from its bilateral trade with the US in March
• Trade deficit widens by 12.8% y/y in Q1

The merchandise trade deficit widened by 23.1% y/y to USD 4.1bn in March, the statistics office said. Exports rose by 5.9% y/y to USD 6.6bn in March, after increasing by 4.8% y/y in February. Imports climbed 11.9% y/y to USD 10.7bn, after rising by 1.9% y/y in February.

The foreign trade deficit widened by 12.8% y/y to USD 12.7bn in Q1, as exports increased by 5.7% y/y and imports climbed 8.4% y/y.

Data Download

Exports of electronic products rose by 0.9% y/y to USD 3.6bn and accounted for 55.2% of total exports in March. Exports rose y/y in seven of the top 10 commodity groups. The biggest positive contributions came from the exports of other manufactured goods (up 39.5% y/y); coconut oil (up 78.6% y/y); and other mineral products (up 28.2% y/y). The biggest negative contribution came from exports of cathodes and sections of cathodes, of refined copper. This item is outside the top 10 commodity groups and its exports plunged by 99.6% y/y.

With regard to imports, electronic products were again the single largest commodity group, amounting to USD 2.5bn or 23.5% of the March total. Imports of electronic products rose by 24.8% y/y. Imports increased y/y in eight of the top 10 commodity groups. The largest positive contributions came from the imports of electronic products; industrial machinery and equipment (up 32.9%); and animal and vegetable oils and fats (outside the top 10 commodity groups, up 2.5 times). The largest negative contribution came from the imports of mineral fuels, lubricants and related materials (down 23.1%).

While the imports of mineral fuels, lubricants and related materials dropped significantly in March, there was positive double-digit y/y growth across the remaining major types of goods, including capital goods (up 12.2%); raw materials and intermediate goods (up 22.4%); and consumer goods (up 25.8%).

The US bought USD 1.1bn of Philippine exports in March, followed by Hong Kong (USD 1.0bn), Japan (USD 960.5mn) and China (USD 762.8mn). China supplied USD 3.1bn of the country's imports, followed by Indonesia (USD 888.3mn), Japan (USD 834.4mn), and South Korea (USD 728.9mn). Asia-Pacific Economic Cooperation (APEC) member countries bought 83.1% of Philippine exports in March and supplied 85.5% of the country's imports. The Philippines had a USD 502.4mn surplus from its bilateral trade with the US in March.

All in all, the external goods trade data for March can be considered positive, in our view. Exports rose y/y for the third consecutive month. The robust y/y growth of the imports of all major import categories except for mineral fuels, lubricants and related materials can be seen as another strength. On the other hand, exports of electronic products increased y/y only slightly.

• Foreign reserves up by 22.3% y/y at end-Mar, mainly due to double-digit increase in monetary gold and other assets
• Foreign reserves accounted for 26.2% of its projected GDP in 2025

Albania's foreign reserves fell by 1.2% m/m to EUR 6.8bn at end-Mar, the Bank of Albania (BoA) reported. The reserves represented 26.2% of its projected GDP for 2025. Their decline was fuelled by a 2.4% m/m decrease in the reserve position in the IMF and a 1.8% m/m decrease in other assets, which could be due to the central bank using foreign currency for interventions in the domestic market to stabilise the exchange rate, or it could relate to changes in the BoA's investment portfolio, in our opinion. The m/m decrease in the IMF reserve position could reflect Albania drawing down on its reserve position at the IMF for various reasons, such as managing balance of payments or funding specific projects. SDRs went up by 7.1% m/m and monetary gold went up by 3.5%.

In annual terms, the foreign reserves rose by 22.3% y/y, mainly driven by a 52.0% y/y increase in monetary gold and the 21.9% y/y increase in other assets. The substantial y/y increase in monetary gold contributed to the overall reserve growth. Its increase could be related to BoA new purchases of gold as a safe-haven asset to diversify its reserves or valuation effects due to an increase in the price of gold over the past year. The smaller m/m increase suggests a more consistent, longer-term trend in gold holdings or value. The significant y/y increase in other assets category likely points to accumulation over the past year, possibly from remittances, tourism revenue, or foreign direct investment, in our view. The IMF reserve position went down by 0.1% y/y, while SDRs went up by 8.0% y/y. The y/y stability in the IMF reserve position suggests that the monthly shift might be short-term management rather than a fundamental shift.

• Armenia severed diplomatic ties with Hungary in 2012

The Armenian embassy in Budapest, Hungary, is set to open within the next one to two months, as announced by Armenian Foreign Minister Ararat Mirzoyan during a government meeting yesterday

Minister Mirzoyan noted that Armenia has already established an embassy in Cyprus.

Regarding Armenian-Hungarian relations, it's noteworthy that Armenia severed diplomatic ties with Hungary in 2012 following Hungary's extradition of Azerbaijani officer Ramil Safarov, who had been sentenced to life for the murder of Armenian officer Gurgen Margaryan, and was later pardoned in Azerbaijan.

However, on December 1, 2022, the foreign ministers of both nations reached an agreement to restore full diplomatic relations. Following a long hiatus of 11 years, in May 2023, non-resident ambassadors were appointed: Hungary's Ambassador to Armenia (based in Tbilisi, Georgia) and Armenia's Ambassador to Hungary (also concurrently serving in Georgia).

In May 2024, Armenia and Hungary confirmed plans to open resident embassies in one another's capitals

• Credit-to-GDP ratio amounted to 75.3% as of 4Q24

The Central Bank of Armenia has decided to maintain the countercyclical capital buffer at 1.75%. This decision was made following an assessment of the macro-financial landscape and trends within the credit market. In the latest quarter, there has been a notable uptick in the financial cycle index, attributed to increased lending activity across various sectors.

By the end of Q4 2024, the credit-to-GDP ratio rose by approximately 3.3 percentage points, reaching around 75.3%, nearly aligning with its long-term trend. The credit/GDP gap was recorded at about -0.1 percentage points, indicating a minor deviation from the long-term average. Moreover, the annualized growth rate of total credit has remained stable compared to the previous quarter.

The end of the income tax refund program in Yerevan and the increasing saturation of demand in the real estate sector suggest a possible downturn in market activity. On the other hand, consumer lending has continued to see growth. Key contributors to the high growth rates of consumer loans over the past two years include rising incomes and the urgent need for loans.

This growth may also be viewed as a correction following the previous years of declining or moderate growth in consumer lending. Additionally, there's a noticeable demand for financing to acquire durable goods for new apartments, driven by the heightened activity in the real estate market.

• Issues of social support for refugees have become increasingly important in domestic political life

At a meeting held on Wednesday, the Armenian government announced an extension of social support for individuals forcibly displaced from Nagorno-Karabakh, adding two more months to their assistance. The decision reflects the need to provide support to displaced individuals who were not originally included in the selected groups. This extension will last for two months, during which the implementation of a separate social support program for people in need will also be postponed.

Starting April 1, 2025, the designated beneficiaries will include those displaced from Nagorno-Karabakh who have a disability classified as group I or II, individuals with a profound or severe functional limitation, seniors aged 63 and older, recipients of benefits or pensions due to the loss of a breadwinner, students in general education, primary vocational, or secondary vocational institutions who are 18 years or older, and children under the age of 18.

On April 10 of this year, the Armenian Government greenlit a new initiative aimed at offering urgent financial aid to families who have been forcibly displaced from Nagorno-Karabakh. This program is set to cost AMD 1.8bn drams on a monthly basis. Under this initiative, qualifying families will receive monthly cash assistance from April 2025 through December 2025.

To be eligible, families must have a monthly income of less than AMD 55000 per family member. The monthly assistance will be structured as follows: AMD 40000 for the first family member who was displaced, and AMD 10000 for each additional member thereafter.

Earlier in the month, the government said that the so-called "40+10" program will be terminated to be replaced with a new less generous payout scheme.

• Alliance treaty was signed in Tashkent last Aug

The Senate of the Oliy Majlis of Uzbekistan has approved the law on ratification of the Treaty on Allied Relations between Uzbekistan and Azerbaijan.

The law on the treaty, signed in Tashkent on August 23, 2024, was approved today during the sixth plenary session.

The document was signed by the Presidents of the two nations during the first session of the Supreme Interstate Council of Uzbekistan and Azerbaijan. The treaty enshrines a new stage in bilateral relations aimed at strengthening the sovereignty, territorial integrity and sustainable development of both countries.

Under the treaty, the sides pledge not to participate in alliances and blocs directed against each other, as well as to refrain from actions that could harm the strategic partnership and allied relations. The treaty creates additional opportunities for the implementation of joint projects in the spheres of logistics, energy, industry, education, and tourism, as well as for the expansion of interregional cooperation.

• Trend likely to be preserved given inflation acceleration

Retail sales (excluding trade with fuel) fell by 3.6% y/y wda in March, easing from a 6.4% y/y decrease the month before, according to figures of BiH statistics office. The improvement was seen in both food and non-food sales. Food sales increased by 2.5% y/y in March, recovering to growth after two months of decline. Non-food sales decreased by 6.5% y/y, easing from 8.0% y/y decline in February.

Data Download

Retail sales decreased by 4.8% y/y in Q1. The trend will likely be preserved given that inflationary pressures have increased since the beginning of the year as a result of wage growth and higher food and electricity prices.

• Profit growth supported by faster increase in net interest, fee and commissions income, decline in impairment costs
• High lending activity and persistent fee hikes to continue boosting bank profits in the next months, in our view
• Total assets of the banking sector rise by 12.0% y/y to BGN 197.6bn at end-March

The net profit of the banking sector rose by 8.7% y/y to BGN 889.4mn in Jan-Mar, according to the Bulgarian National Bank (BNB) data. This was the first increase of the bank profit since the beginning of the year, on the back of rising income from interests and fees, as well as from declining impairment costs. We note that impairment costs have been consistently on the rise with high double-digit growth between Feb 2024 and Feb 2025, and a high base effect is already entering into force, which will likely keep the impairment costs' change contained in the next months. We note that the central bank implemented several measures in 2024 in an effort to curb lending, as well as urged banks to secure buffers against the accumulating risks from the accelerating lending. Still, crediting activity remains buoyant due to the low interest rates and will continue supporting the growth of the bank profit in the short- and medium-term, in our view. The share of non-performing loans remained low at 4.34% of the total loans in March, according to EMW calculations.

Data Download

Net interest income rose by faster 1.5% y/y and the net fee and commission income growth accelerated to 12.4% y/y, supported by strong lending and the persistent fee increases, in our view. Impairment costs contracted by 6.4% y/y to BGN 126.1mn in Q1, probably due to the starting high base effect, in our opinion. In March alone, bank profit soared by 79.7% y/y to BGN 600.7mn.

The total assets of the banking sector rose by further speeding pace of 12.0% y/y to BGN 197.6bn at end-March. They represented 91.8% of GDP for 2025. Lending growth speeded to 13.9% y/y, while banks' cash holdings rose by easing 2.1% y/y.

• Resurging optimism in industry drives headline business climate index upward in April
• Business sentiment in construction and services deteriorates m/m

The business climate index edged up by 1.1pts m/m in April, improving from the 0.5pts m/m decrease in March, according to the latest statistical office (NSI) survey. Stronger optimism in the industry was the engine for the improvement, while sentiment in construction and services worsened m/m. The government's decision to approve an extension of the state electricity subsidies for the business sector, alongside low interest rates on corporate borrowing and some mild economic recovery trends are likely to stay supportive of the business climate in the next months. However, the downside risks continue to be very significant, stemming from the elevated electricity prices on the domestic market, still weak foreign demand and concerns with U.S. tariffs, in our view. The uncertain economic environment, alongside labour force shortages, continued to be the main obstacle for all sectors, according to the survey.

Data Download

Business sentiment in the industry rose by 4.8pts m/m in April, as companies reported optimism about their current business condition and the condition in the next six months. They were also positive about their current activity, although they reported more unfavourable expectations about the received orders and expected output in the next three months. Respondents expected sales prices in the next three months to stay overall unchanged.

The business climate in the construction sector fell by 2.5pts m/m in April, reflecting worsening estimates about the companies' current business condition and the business condition in the next six months. Companies were also more pessimistic about their expected activity in the next three months. Still, they noted the share of customers with overdue payments declined m/m. Most of the managers in the sector expected no significant change in sales prices in the next three months.

Business climate index in retail trade stood unchanged m/m in April. On the upside, retailers reported stronger expectations for orders to suppliers and expected sales in the next three months, as well as more favourable assessment of their current business condition. Conversely, they were less optimistic about the expected business condition in the next six months and reported lower volume of sales in the past three months than previously assessed.

Sentiment in the services sector worsened by 1.7pts m/m, in April, due to the managers' deteriorating assessments of the current business condition and current demand. Their expectations for the demand and employment in the next three months also declined. Nevertheless, they remained optimistic about their business condition in the next six months.

• Worsening on back of forward-looking expectations sub-indicator
• Sentiments to remain overall downbeat over uncertainty ahead, government scaling down significantly energy support packages, real estate tax introduction, robust food prices growth
• Potential improvement in sentiments to be backed by generous socially-sensitive budget, eighth energy aid package

The consumer confidence index inched down by 0.1pt m/m in April, according to the latest HNB data processed by the Ipsos pollster. The monthly worsening was solely on the back of the forward-looking consumer expectations index that fell by 0.9pts m/m as meanwhile the backward-looking consumer sentiment index increased by 3.3pts m/m.

Data Download

The biggest monthly improvement was reported for consumers' assessment of the economic development in the past year and their current plans for major purchases at present. At the same time, consumers' expectations for the economic development in the next twelve months worsened, which is surprising in view of the rather upbeat and improved forecasts of IFIs, central bank, the government. Consumers' assessment of their own financial standing in the past year improved, but their expectations for their financial situation worsened in April - the latter is surprising in view of the approved quite socially-sensitive budget for this year as well, as well as the approval of the eighth energy aid package. Also, the more downbeat plans for major purchases in the next year prevented the improvement of the headline print in the month.

We may still see worsening of the forward-looking sentiments in the next months given the real estate tax introduction aimed to tackle with speculative trading with real estate and increase housing affordability, especially for young people, as well as scaling down the energy support package in line with the latest developments and calls by IFIs and the EC. The government's decision to raise salaries of state officials by the incredibly-high about 70% may also continue to have a negative impact on consumer sentiments in the next months, we think. The introduction of tightened lending criteria for consumer and housing loans as of July may also affect consumer sentiments in the next months.

• Giorgi Bachiashvili was accused of misappropriating the cryptocurrency of Bidzina Ivanishvili, the founder of the Georgian Dream
  

Tbilisi City Court, in a verdict issued today, ordered Giorgi Bachiashvili to pay 9000 bitcoins to Bidzina Ivanishvili - the total value of these bitcoins is currently USD 861mn.

As Bidzina Ivanishvili's lawyer Teimuraz Tsikvadze stated, the court fully satisfied their request. According to him, if Giorgi Bachiashvili does not find the aforementioned bitcoins, then Bachiashvili's personal property will be sold based on the price of bitcoin during the decision-making process.

On March 10, the City Court sentenced Giorgi Bachiashvili to 11 years in prison in the same case.

Bachiashvili left Georgia on March 2. According to the investigative agency's statement, they have already applied for an international circular to declare him wanted.

The aforementioned act was punishable by 9 to 12 years of imprisonment, but Judge Giorgi Gelashvili imposed an 11-year sentence.

As a reminder, Giorgi Bachiashvili was accused of misappropriating the cryptocurrency of Bidzina Ivanishvili, the founder of the Georgian Dream. According to the prosecutor's office, the case concerns an action taken in 2017. In particular, according to the investigation, Giorgi Bachiashvili transferred only USD 536900 to the investor in exchange for the full profit from the investment, and illegally appropriated the remaining 8253.13 bitcoins belonging to the investor, the value of which at the time of its appropriation was USD 39215820. On July 6 last year, the former head of the co-investment fund was granted bail in the amount of GEL 2.5mn as a preventive measure. In addition, he was prohibited from leaving the country until the investigation of the case is completed. Bachiashvili pleads not guilty to the charges brought against him.

• Primary healthcare reform to focus on early prevention of diseases
• The plan involves investing approximately GEL 120mn in this sector over the next 4-5 years

The government is launching a primary healthcare reform in cooperation with international partners, according to Mikheil Sarjveladze, Minister of Health. He added that aprimary healthcare reform has been planned and will be implemented over a fairly long period of time, several years. The goal is to introducea change in funding models and implement a results-oriented system, through which every specific institution will have its own target indicators.

Sarjveladze argued that it is important to note that this is a very ambitious plan, which envisages not only an increase in funding, but also an addition to the range of free examinations for citizens. This will result in the detection of diseases at an early stage and more correct diagnosis of patients.According to him, both an increase in salariesfor institutions, doctors,and nurses, as well as new servicesfor citizensare envisaged, which will significantly increase their healthcare standards and quality.

The Minister add that all of this will be implemented over the next few years, including the inclusion of rural doctors andoutpatient clinicsin this program from 2028. This plan involves investing approximately GEL 120mn in this sector over the next 4-5 years. There is a possibility that many serious diseases or their complicated forms will be prevented, which will directlyreducehealthcare expenditures.

One of the main roles of primary care is that, through close communication with the patient, some diseases can be prevented.

• Governor says European People's Party call a political game

The European People's Party (EPP)has adopted a resolution on Georgia.The EPP calls on all EU member states to impose sanctions against Georgian Dream founder Bidzina Ivanishvili and his family members and freeze their assets in the EU.

In addition, the EPP calls on the European Council to take appropriate measures to disconnect Ivanishvili's Cartu Bank from the SWIFT and Visa/MasterCard networks.

In response, the NBG Governor Turnava argued that SWIFT is mentioned in the context of political pressure and this harms SWIFT itself. She also expressed hope that sane political forces in Europe and the USA should not be interested in discrediting their traditional payment systems and reducing trust in them.

• Measures refer primarily to unsecured consumer lending
• Lending to households has been slowing over the past 12 months to 23.7% y/y in March

The financial market watchdog published Wednesday a proposal to tighten prudential bank lending regulations in order to reduce household lending and prevent excessive indebtedness among households. The measures mainly refer to unsecured consumer lending, as well as loans extended to households for business purposes. More specifically, the proposal increases risk weights for unsecured consumer loans over three years to 350%, excludes mandatory pension contributions and personal income tax from the official income of borrowers, tightens restrictions on borrowers with delayed payments or unsuccessful loan restructuring.

Latest data show that household loans were up by 23.7% y/y in March. The growth rate has been gradually slowing from over 30% in early 2024, as a result of previously approved macroprudential measures to curb household lending. As a result, bank lending to households was not mentioned as a significant inflation risk in the latest NBK key rate decision

• VAT rate goes up to 16% from 12% effective 2026
• Personal income tax goes up to 15% from 10% for highest earning individuals
• EconMin sees additional revenues of KZT 4-5tn due to the changes

The lower house of parliament approved in second reading Wednesday the new tax code. The bill was supported by 76 out of 88 MPs as eight MPs voted against and four abstained. The changes take effect from the start of 2026. The main points of the reform are an increase of the VAT rate to 16% from 12% and the VAT registration threshold to KZT 40mn from KZT 15mn. Medicines and medical services will be subject to a reduced VAT rate of 5% in 2026 and 10% from 2027. The bill also exempts from VAT some socially important staple foods and domestically published books.

The bill also introduces progressive personal income tax by adding a 15% rate for people earning above KZT 33mn per year, in addition to the current flat 10% rate. The reform also includes an increase to excise and luxury taxes, as well as dividends and income from government securities. The tax reform also includes measures to simplify the tax system, reduce tax benefits.

Earlier, the EconMin estimated that budget revenues will rise by KZT 4-5tn as a result of the reform. Of that, KZT 2.8tn is expected from extra VAT payments, KZT 1tn from the tax administration, and KZT 1.3tn from the reduction of tax benefits.

• Project to span over multiple industries, still in early stage

China's industrial conglomerate Xinfa and the Kazakh investment promotion agency Kazakh Invest held talks on building a USD 15bn industrial park in the Pavlodar region, Kazakh Invest announced on Tuesday. The project involves mining and processing of various commodities including coal, aluminum, copper, limestone, fluorite. According to the press release, the Chinese investor has already completed a preliminary assessment and is ready to move ahead with the project. This includes a detailed technical and economic assessment, selecting the sites for the industrial facilities and signing of an investment agreement. The project is part of the government's efforts to increase the share of processed goods in Kazakh exports, which is now dominated by raw materials (about 2/3 of total).

• Decline mainly related to deteriorating performance of manufacturing, utility sectors
• Sharp decline in basic metal production, lower food output affect manufacturing sector in Q1
• Industry to remain adversely affected by closure of Pljevlja TPP, weak external demand

The industrial production swung into 4.2% y/y decline in Q1 after growing by 15.3% y/y in the previous quarter, according to the latest data from Monstat. Manufacturing sector output rose by much slower 1.9% y/y in Q1 compared to robust 30.5% y/y growth in Q4 2024. The sector's performance worsened mainly on the back of the basic metal industry, where production declined by much sharper 71.7% y/y in the quarter after falling by 21.9% y/y in Q4 2024. We note that the basic metal sector remains adversely affected by the halt in primary aluminium output at the aluminium smelter KAP. Food production also dropped by 4.9% y/y in Q1 after increasing by 19.5% y/y in the previous quarter. The annual drop in machinery and equipment output deepened in the quarter deepened compared to Q4 and the annual growth in production of pharmaceuticals in Q1 eased compared to the previous quarter. On the other hand, the strong annual increases in furniture and fabricated metal production helped keep manufacturing sector output in the positive territory in Q1.

Data Download

The industrial performance in Q1 was also adversely affected by worsening performance of the utilities sector, where production dropped by sharper 13.4% y/y in the quarter compared to the 1.5% y/y drop in Q4 2024. The coal-fired 225 MW Pljevlja thermal power plant (TPP) went offline on Mar 31 with the start of the EUR 70mn ecological revamp, which will further affect output in the sector until year-end. Most of the electricity in Montenegro is produced by hydropower plants (HPPs), whose performance depends on external factors, such as the amount of rainfall. The state utility EPCG recently commented that the unprecedent drought in the beginning of last year had prompted it to suspend the operation of its hydropower plants, although the hydrological situation has somewhat improved since the start of this year. On the other hand, mining sector output increased by 11.2% y/y in Q1 and the growth rate accelerated slightly from 11.0% y/y in Q4 last year. Mining sector output improved in Q1 on the back of the improving performance of the metal ore and the coal and lignite mining industries compared to the last three months of 2024.

Looking at the other sector breakdown, the industrial output drop in Q1 came on the back of falling production of intermediate, capital and energy goods. Production of intermediate goods dropped by 5.0% y/y in Q1 after increasing by 10.8% y/y in the previous quarter and was the main reason behind the overall output decline in the first three months of this year. On the other hand, production of durable goods more than doubled on annual basis in the quarter after declining by sharp 35.0% y/y in Q4 2024. Montenegro's industrial output this year will certainly remain affected by the closure of the Pljevlja TPP until December. The industrial performance has also been negatively affected by the suspension of operations at KAP, where primary aluminium production was brought to a complete halt in May 2023 after 52 years of operations. Demand in Montenegro's trade partners in the EU is also being adversely affected by unfavourable economic growth prospects due to the continuing geopolitical uncertainties and the effects from the US tariff policies, which may further affect the automotive sector.

• Foreign tourists drop by 2.0% y/y in March, first annual decline since last August
• Foreign tourist arrivals remain by 7.6% lower compared to pre-pandemic March 2019
• EC expects tourist receipts to remain the main export driver in the coming period

The number of foreign tourist arrivals to Montenegro in collective accommodations (hotels, camping sites, tourist resorts, vacation facilities, boarding houses and motels) increased by 5.6% y/y in Q1, according to the latest data from Monstat released on Wednesday. However, in March alone, the number of foreign tourist arrivals in collective accommodations declined by 2.0% y/y after increasing by 4.8% y/y in the previous month and the annual drop was the first since last August. Some 45,395 foreign visitors stayed in collective accommodations in March and their number was lower by 7.6% compared to the pre-coronavirus (COVID-19) pandemic March 2019. Thus, foreign tourist arrivals in collective accommodations were down by 2.6% in Q1 compared to the pre-pandemic period. The number of domestic tourists rose by stronger 12.9% y/y in March after growing by 10.4% y/y in the previous month and was up by 35.1% compared to March 2019.

Total arrivals thus increased by 6.2% y/y in Q1, but the number of overnight stays declined by 3.5% y/y in the period. Most of the foreign visitors in March came from China (including Hong Kong), Serbia and Germany. Chinese tourists accounted for 12.3% of all foreign tourist arrivals in March and Serbian tourists accounted for 11.8% of the total. The European Commission (EC) expects tourist receipts to remain the main export driver in the coming period. However, the lack of staff, the grey economy and the number of active construction sites remain some of the problems that the tourism sector continues to face. The IMF has commented that improving the infrastructure, improving tourism conditions in the northern region and making fuller use of Montenegro's competitive advantages will help further diversify the country's tourism offer. We note that the tourism sector accounts for around 20-25% of Montenegro's GDP.

• Slower increase mainly related to slower nominal wage growth in March
• Wage growth supported by minimum wage hike beginning with October 2024 wages
• Public sector, manufacturing sector wages increase at slower annual rate in March

The real net (CPI-deflated) wage growth eased for a third consecutive month to 18.5% y/y in March from 18.7% y/y in the previous month, according to our calculations based on data from the stats office Monstat. Still, wage growth has remained robust since the government raised the minimum wage from EUR 450 to EUR 600 for employees who have completed high school and to EUR 800 for those with a university degree, beginning with the October 2024 salaries. The nominal wage rose by slower 21.6% y/y in March and the average gross wage was up by slower 15.8% y/y in the month. The annual growth of the average gross wage in real terms thus eased to 12.8% y/y in March from 13.3% y/y in the previous month.

Data Download

Looking across sectors, the growth in public sector wages eased to 5.9% y/y in March from 8.7% y/y in the previous month and was the slowest among the major sectors. The slower growth in manufacturing and electricity sector wages also contributed to the slower real net wage growth in March. On the other hand, wages in the hospitality sector increased the sharpest among the major sectors by 29.4% y/y in March and their growth accelerated from 23.5% y/y in the previous month. Upward pressure on the wage growth in March also came from wages in the financial, real estate and construction sectors, which increased at a stronger annual rate in the month compared to February. Overall, wages in most major categories, except for public sector wages, increased in the double digits on annual basis in March.

The net average wage in March stood at EUR 1,003, above the EUR 825 net average wage from March 2024. The highest net average wage in February was recorded in the financial sector (EUR 1,675) and the real estate sector (EUR 1,543). Under the Europe Now-2 programme, employee contributions to the Pension and Disability Insurance Fund (PIO) were reduced to 10% from 15% and the 5.5% employer contributions to the fund were abolished, which has led to the stronger annual increase in the net wages compared to the gross wages. The CPI inflation eased slightly to 2.6% y/y in March from 2.6% y/y in the previous two months, which suggests that the consumer price growth continues to eat part of the nominal wage gains. The IMF has warned that the government's wage-boosting policies could raise unemployment, lower competitiveness, incur budget revenue losses, exert inflationary pressures and increase the share of the informal economy.

• Quarterly increase related to issuance of state securities on domestic market
• Total public debt accounts for 57.7% of GDP at end-Q1, down from 61.9% of GDP at end-2024
• Total public debt expected to gradually drop over the medium term to below 60% of GDP

The general government debt climbed by 0.4% q/q to EUR 8.33bn at end-Q1 2025 and accounted for 50.1% of the projected GDP, according to the latest data from the Finance Ministry released on Wednesday (Apr 30). The quarterly increase at end-Q1 was slower compared to the 8.3% q/q general government debt growth at end-Q4 2024, which was related to the EUR 500mn loan from Hungary, obtained by the government last October. The general government's external debt declined by 1.6% q/q to EUR 4.54bn at end-Q1 after increasing by 11.2% q/q to EUR 4.62bn at end-Q4. The general government's domestic debt rose by 2.8% q/q to EUR 3.78bn at end-Q1, which was the reason for the general government debt growth at the end of the quarter. Domestic obligations increased in Q1 on the back of the issuance of domestic securities. Obligations related to domestic securities rose by 2.8% q/q to EUR 3.75bn at end-Q1 and accounted for 99% of the domestic general government debt. External obligations accounted for 54.6% of the total general government debt, while domestic obligations accounted for 45.4% of the total at end-Q1.

Government guarantees on state enterprises were down by 5.3% q/q at EUR 1.20bn at end-Q1. Overall, the total public debt and guarantees fell by 0.4% q/q to EUR 9.58bn (57.7% of projected GDP) at end-Q1. We note that the total public debt-to-GDP ratio was down from 61.9% of GDP at end-2024, partly due to the optimistic 3.7% GDP growth forecast for this year. The nominal value of the total public debt and guarantees was down by only EUR 35.5mn compared to end-2024. According to the government's fiscal strategy for 2025-2029, the total public debt was set to exceed 60% of GDP by end-2024 but is projected to gradually decline to below 60% of GDP over the medium term. Finance Minister Gordana Dimitrievska-Kocoska has commented that the government will gradually reduce the budget deficit as a percentage of GDP over the medium term through various fiscal consolidation measures to moderate the level of its indebtedness. However, S&P recently said that the government will face difficulties in aligning its fiscal policy with the EU sustainability targets in the near term.

• Decline in non-fuel sales offset by slowing annual growth in retail fuel sales in March
• Private consumption remains adversely affected by elevated prices, geopolitical uncertainties

Retail sales (in real terms) remained unchanged on an annual basis in March after growing by 1.2% y/y in the previous month, according to the latest data from the stats office released on Wednesday. Retail sales have remained largely volatile in the past six months, fluctuating between increases and declines. The decline in non-fuel retail sales in March was offset by growing retail fuel sales. Non-fuel retail sales dropped by 0.5% y/y in the month after growing by 0.9% y/y in February. The decline came entirely on the back of non-food, non-fuel sales, which dropped by a sharper 2.3% y/y in March after falling by 0.8% y/y in the month before. Non-food, non-fuel retail sales dropped at their sharpest annual rate in March since last June. Food, beverage, and tobacco sales remained in the positive territory in March, although their growth eased to 1.3% y/y in the month from 2.6% y/y in February.

Data Download

The growth in fuel retail sales also eased to 0.4% y/y in March from 1.1% y/y in the month before. Still, retail fuel sales have remained in positive territory for an eighth consecutive month, which helped offset the decline in non-fuel retail sales. Wholesale trade (in nominal terms), excluding vehicles and motorcycles, swung into a 3.4% y/y decline in March after growing by 4.5% y/y in the previous month. The government raised the minimum wage in the country by 11.5% to MKD 22,500 beginning with the March 2024 wages, which has supported private consumption in the past several months. On the other hand, downward pressure on private consumption remains from the elevated consumer prices, the uncertainties related to the war in Ukraine and tight monetary policy.

• Utility sector output swings into growth, manufacturing sector output growth improves
• Manufacturing sector output improves on stronger output of chemicals, electrical equipment
• Industrial performance has been adversely affected by weak demand in the EU

Industrial output swung to a 5.2% y/y growth in March after falling by 0.8% y/y in the previous month, according to the latest data from the stats office released on Wednesday. The industrial performance remains volatile without showing any signs of improvement, although the latest annual increase was the strongest since October 2023. The increase came partly on the back of the manufacturing sector, where output improved by a stronger 4.8% y/y in March, compared to 1.7% y/y growth in the previous month. We note that production in the chemicals sector increased by a sharp 54.8% y/y in the month, after declining by 13.5% y/y in February. Electrical equipment output also increased by a stronger 15.1% y/y in March, after growing by a marginal 0.3% y/y in the previous month. On the other hand, the machinery and equipment industry remained a major drag on the manufacturing sector performance in March as production there fell by a sharper 27.0% y/y in the month after declining by 14.2% y/y in February. Apparel output also swung into an annual decline in March after improving in February.

Data Download

Utility sector production also improved by 12.9% y/y in March, after declining on an annual basis for two consecutive months. We note that the annual increase in utility sector output in March was the strongest since October 2023. Some 72% of North Macedonia's electricity is produced by the three 233 MW units of the REK Bitola thermal power plant (TPP) in the south of the country. Utility sector production has been in the negative territory in all months since December 2023, except for last December and this March. On the other hand, mining sector output remained in the negative territory for a ninth consecutive month in March, although the annual decline eased for a third month in a row to 1.5% in the month from 4.4% y/y in February. The drop eased entirely on the back of slower annual declines in production in the coal and lignite and the metal ore mining industries. On the other hand, output in the non-coal and non-metal ore mining sectors swung into a 9.7% y/y decline in March after improving by 5.3% y/y in February.

Looking at the main industrial groups, the industrial performance improved in March on the back of the intermediate goods, whose production increased by more than twice as sharp 24.3% y/y in the month compared to 11.7% y/y drop in February. Output of energy goods also swung into 13.8% y/y growth in March after declining by 8.3% y/y in the previous month, reflecting the improving utility sector performance. On the other hand, production of durable and non-durable consumer goods declined on an annual basis in March after improving in February to exert some downward pressure on the main index. Production of capital goods remained in the negative territory for a fifth consecutive month in March. We note that the weak external demand, especially in North Macedonia's main trade partners in the EU, has adversely affected the country's industry and exports. The IMF recently said that weak external demand will continue to exert downward pressure on the economic growth this year due to structural shifts in the European automotive sector.

• Amount is bigger than last year's May, but smaller than in April 2025
• Treasury raised above target in Q1, slightly below plan in April
• Demand for govt papers remained rather strong

The Treasury plans to issue government bonds and T-bills for raising RON 6.06bn from the local market in May, according to a finance ministry order. The amount is smaller than the monthly borrowing target set in April, but bigger than the one approved in May 2024 (RON 5.9bn). However, the Treasury borrowed more than planned in January, February and March, while the April target was only slightly missed. The planned issues this month should raise RON 5.4bn in regular bids, and RON 660mn in non-competitive ones in the following days of each bond auction. Two placements are for a 7-month T-bill on May 15 aiming to raise RON 500mn and for 1-year maturity on May 8, aiming to raise RON 500mn too.

The Treasury raised around RON 7.5bn in January, after announcing RON 5.77bn intentions, almost RON 11bn in February, more than RON 8.0bn announced plan, RON 11.2bn in March, above RON 8.2bn indicative, and RON 7.5bn in April, just a bit below RON 7.7bn plan. Demand for government papers was solid, sometimes higher than in December 2024, but weakened somewhat in February. However, market liquidity remained sufficient to sustain the Treasury's heavy borrowing, especially since borrowing costs were generally on a downward trend in March and April. The authority will probably try to borrow above the indicative when liquidity is comfortable enough, as imbalanced public finances trigger high risks of liquidity fluctuations. The Treasury raised RON 48.7bn through local bonds (including retail), EUR 5.6bn and USD 1.25bn through foreign bonds so far, so 35% of borrowing needs are covered, according to our calculation.

The finance ministry plans to borrow RON 145-150bn from the local market and EUR 16-17bn from foreign markets in 2025. Borrowing should cover approximately RON 232bn gross financing needs, consisting of RON 135bn budget deficit (7% of GDP) and RON 97bn maturing debt. Local borrowing will consist in bond and T-bill issuances, retail bond sales and private placements in RON or foreign currency. In addition, the Treasury mulls issuing green bonds on the local market for raising EUR 3-3.5bn in 2025. Borrowing in foreign markets will be made through Eurobond issues for raising EUR 12-13bn (including green bonds and Samurai bonds), EUR 3bn loans from the EU's recovery and resilience facility and approximately EUR 1bn loans from IFIs.

Treasury's head Stefan Nanu said that another Eurobond might take place after the May 4 presidential elections and after new fiscal measures are adopted. He noted though that the authorities also plan to use other financing options like private placements and off-market borrowing to ease pressure on yields and will thus reduce the supply of Eurobonds. The official also said that the finance ministry was benefiting from the increased demand for retail bonds as an additional source of financing and could increase the plan to sell the instrument to RON 60bn this year, from about RON 45bn currently.

• Lower oil prices are the primary reason, reducing oil&gas revenues of the federal budget
• Non-oil & gas revenues to increase, supported by unchanged growth forecast and higher inflation
• State spending will also increase despite more challenging external environment

The 2025 federal budget deficit is projected to reach RUB 3.79tn, or 1.7% of GDP, instead of 0.5%, according to the latest estimate by the FinMin, updated in line with the new economic forecast of the EconMin. The proposed changes to budget 2025 were approved at a government meeting on Wednesday and should be voted by parliament soon.

The higher deficit comes primarily from a lower oil price assumption (USD 56 for Urals in 2025 down from USD 69.7), which sheds RUB 2.6tn from oil&gas revenues. A stronger ruble also contributes to lower oil revenues, though to a lesser extent. The GDP growth forecast has remained at 2.5% while inflation is now expected to be higher, which has supported non-oil & gas revenues. The latter are up by RUB 0.8tn, compared to the current budget 2025, which offsets about a third of the expected decline in oil revenues. As a result, federal budget revenues are projected to decline by RUB 1.8tn, which explains about 70% of the deficit increase. The remaining is due to further increase in spending, despite the more challenging external conditions. There are no details about where the additional spending will be directed, but there is little doubt that defense spending remains a priority. The government also said that another budget amendment will be prepared in autumn, which paves the way for further deficit increase. The higher deficit is likely to be financed from a combination of additional domestic borrowing and reduction/reversal of the earlier planned accumulation of funds in the National Wealth Fund.

The budget revision comes after insistence that in 2025 the government will return to fiscal prudence and the fiscal rule, while the CBR repeatedly said its monetary policy stance counts on the government meeting the parameters in budget 2025. Now we expect the CBR to raise this issue and it can potentially delay the start of monetary easing.

• Domestic consumption remains high
• Unemployment falls to historic low 2.3% again
• GDP growth decelerated in Q1

Retail sales rose by 2.2% y/y in March, matching the pace seen in February, according to Rosstat's monthly real sector report published Wednesday evening. Food sales increased by 3.4% y/y the same as a month earlier, while non-food sales grew by 2.3% y/y, accelerating from 1.0% y/y in February, despite ongoing declines in car sales. Over Q1, retail sales rose by 3.2% y/y, down from 5.5% y/y in Q4 2024. Still, the current growth rate remains above market expectations and likely exceeds the economy's sustainable capacity. The Russian economy continues to show risks of renewed inflation pressure.

Data Download

The unemployment rate returned to a historic low of 2.3%, while labor demand resumed growth. Real wages rose by 3.2% y/y in February. As we noted earlier, the slowdown in wage growth is largely due to a shift in annual bonuses from Q1 to December. However, if labor supply shortages persist, wage growth may resume and result in further inflationary pressure.

On the supply side, agricultural output rose by 1.6% y/y in March. Construction output increased by 2.6% y/y after surging by 11.9% y/y in February, driven by industrial and infrastructure projects. Transportation output declined by 0.3% y/y. Industrial production, as we previously reported, rose by 0.8% y/y. Overall, supply-side activity improved slightly compared to February, but consumption-side dynamics were weakening. Based on this data, the EconMin estimates GDP growth at 1.4% y/y in March and 1.7% y/y in Q1, which is clear deceleration from 4.5% y/y in Q4 2024, something many experts expected and some were even warning of overcooling.

• Annual inflation decelerates to 10.34% y/y
• Despite modest inflation in April, CBR is unlikely to cut key rate sooner

The CPI increased by 0.11% during Apr 22 - 28, slightly faster than the 0.09% w/w in the previous week, according to Rosstat's weekly inflation bulletin released on Wednesday evening. Annual inflation inched down to 10.34% y/y, according to the EconMin estimates. Inflation has remained weak through April, but we do not expect any monetary easing coming soon. The CBR made it clear at its MPC meeting on Apr 25 that it sees pro-inflationary risks as rising and prefers to keep the policy rate unchanged for a longer period. Food prices increased at a slower 0.18% w/w pace as fruit and vegetable prices shifted from growth to being flat, which is quite an unexpected outcome as signals of a weak harvest and frosts persisted. Thus, we attribute the flattening to increased imports supported by a strong ruble. Non-food goods excluding fuel were flat (gasoline and diesel appreciated modestly by 0.1% and 0.2% respectively), though last week they were depreciating on cars and electronics discounts. Services prices increased by 0.16% due to tourist services seasonal increase.

The next reporting period will be longer due to the holidays in May, and there have already been reports of rising food prices ahead of the long weekend. However, this effect is expected to be short-lived and of little interest to the CBR. Still, it may delay the release of clear data for April-May, which the CBR has repeatedly emphasized as crucial for its policy decisions.

• Demand is stronger for long-term bonds amid dovish signals from CBR

The FinMin borrowed RUB 81.0bn at the OFZ auctions today after attracting a more moderate RUB 56.8bn at the previous auction day on Apr 23, according to FinMin's reports (1&2). The Ministry sold fixed-rate bonds in both auctions. At the first auction, it offered mid-term bonds maturing in 2031. Demand was rather weak, and with RUB 39.0bn total bids received, the ministry placed bonds for RUB 26.8bn. At the second auction, the ministry offered long-term bonds maturing in 2036. Demand was considerably higher and the FinMin collected RUB 133.9bn worth of bids and placed bonds for RUB 54.2bn at 16.13% average yield. The yield strongly increased compared to 14.85% at the previous auction of these bonds held on March 19. With today's placement, the total amount borrowed ytd increased to RUB 1.64tn, and the total amount borrowed in Q2 rose to RUB 290bn. The FinMin plans to borrow RUB 4.78tn this year, of which RUB 1.3tn in Q2.

• Move is seen as providing security for the May 9 parade and motivating the US to organize presidential dialogue

Russia's state nuclear corporation Rosatom is ready to discuss a potential US presence at the Zaporizhzhia nuclear plant as part of a broader political settlement on Ukraine if it is a political decision by the Russian leadership, the company's head Likhachev said today, as reported by Interfax. Earlier this week, Foreign Minister Lavrov stated that Moscow had not received any proposals from Washington regarding the future of the plant, which is currently operated by Rosatom and monitored by IAEA personnel. We recall that while the US peace plan has not been officially presented, leaked outlines reported by international media suggest creating a neutral zone around the plant and transferring operational oversight to the United States.

Thus, Russia's recent statements appear to reflect a strategy of appeasement diplomacy and an attempt to project the image of a constructive negotiating partner. However, there remains strong doubt over whether these signals will be backed by meaningful compromise if concrete negotiations begin. At this stage, Moscow's messaging seems aimed at gaining time and maintaining stability ahead of the high-profile Victory Day Parade on May 9, which has an exceptional symbolic importance for Putin, with leaders from 20 countries, including China, confirming attendance after years of subdued celebrations. Additionally, this week's comments have raised speculation that Moscow may be seeking to prompt a US initiative toward arranging direct communication between the Presidents.

• This compares to loss of RUB 0.63tn in 2023
• Earlier, the head company declared net loss for 2024

Gazprom reported group consolidated net profit of RUB 1.22tn under IFRS for 2024, a sharp reversal from RUB 0.63tn loss in 2023, according to its official financial statement. The result comes as a surprise, given that the parent company earlier this year posted deterioration and net loss, which was clearly explained with the loss of the profitable EU gas market and resulted in a record large-scale optimization program. The Group's total revenue rose by 25%, reaching RUB 10.7tn, which is the second-highest annual result in the company's history.

In a press release, Gazprom highlighted a traditionally strong Q4 due to seasonal demand, with increased gas exports to China hitting the maximum contractual level. Favorable pricing trends also supported financial performance, it says. Additionally, net profit benefited from reduction in negative foreign exchange differences on currency liabilities and a rise in interest income from placements, which helped offset growing interest expenses. The company stressed that each of Gazprom's business segments contributed to revenue growth, although no segment-specific figures were disclosed.

The key question now is whether dividends are to be paid. Gazprom's Board of Directors is set to review dividend recommendations in May, ahead of the Annual General Meeting in June. While FinMin Siluanov noted in December that the 2025 federal budget does not anticipate dividend income from Gazprom, a positive board decision could provide a notable windfall revenue, potentially the second unexpected revenue boost for the state budget in a week, following VTB Bank's surprise dividend announcement after a three-year pause earlier this week. With the state holding 50.23% shares in Gazprom, it stands to receive over half of any distributed dividends. According to the company's dividend policy, at least 50% of net profit must be allocated for payouts. This raises the likelihood that the government may increasingly lean on dividends from state-owned companies as a tool to support the budget amid ongoing financial uncertainty.