Question:

What are the main themes for 2025 you see for Czech Republic? Could you provide a commentary on your expectations for each?

The question was asked in relation to the following story: ANO wins regional elections, setting up return to government in 2025

Answer:

We would say the main topics in the Czech Republic in 2025 would be the general election, manufacturing downturn, and inflation. Here is a short overview for each:

1) General election - undoubtedly the key topic this year, as it will likely change the course of the country for some time. We expect that ANO, the leading opposition party, will return to power after a 4-year hiatus. Furthermore, we feel that ANO will likely win more convincingly than polling currently shows, as there is a built-up resentment towards the four-party ruling coalition. The government has been doing dismally in the communication race, doing plenty of blunders on its own, all of them exploited by ANO. The impression that PM Petr Fiala has been giving lately is being increasingly out of touch, and we expect this will become a cornerstone of ANO's campaign.

The government hasn't had much luck, as it needed to deal with the consequences of the Covid-19 pandemic at the beginning of its term. Furthermore, the energy crisis from 2022 hit the country hard, and the Czech Republic witnessed the biggest decline in real wages all over Europe, as they fell by 9% in 2022 and by 2.4% in 2023. The government's fiscal policy has been towards consolidation, something that people have not been taking well. Moreover, the government passed a pension reform that will raise the retirement age by 2 years to 67, which is as unpopular.

Meanwhile, ANO has been playing heavily on a populist message and exploiting the government's blunders. Thus, we expect that ANO will be able to establish a majority in the next parliament, possibly even on its own. The current ruling coalition is increasingly devoid of potential allies, after the Pirates, an urban liberal party, left the government at the end of September. The general mood is that this government needs to end, and we expect it to be reflected in the election results.

With ANO in power, we expect a far looser fiscal policy, though not as far as to breach EDP rules. However, it is highly likely to have some elements of the pension reform rolled back, as ANO has already pledged to return the retirement age to 65 years. There will be a major change in foreign relations, as the Czech Republic will likely become far less friendly to Ukraine, and far more accommodating to Russia and China. While we don't believe an ANO-led government will ever consider leaving the EU or NATO, it will be pushing for a quick peace in Ukraine, and it will be hostile to EU-wide policies like the Green Deal, for example.

2) Manufacturing downturn - we expect more of what we have been seeing in 2024, namely poor external demand and slow recovery. We believe Germany's economic troubles are the product of structural, rather than cyclical issues. While the economic cycle will likely enter an upheaval phase, we don't believe it will change the underlying picture, which means Czech manufacturers will need to seek long-term adjustment. It will mean a slow recovery and low profit margins, and likely some more shedding of work force. We don't believe we are in for massive redundancies, though, as skilled labour shortages are still acute. Furthermore, it appears that Czech automotive manufacturers have been doing fine, especially Skoda Auto, which has been the best performing division in Volkswagen Group in 2024, by a huge margin. Yet, even Skoda will need to reduce agency staff and leave vacant positions unfilled, as demand is unlikely to recover quickly.

Moreover, the imminent US trade tariffs will impact European manufacturing even more. While the Czech Republic is not that heavily exposed to the US, Germany is, and Czech manufacturers depend a lot on German demand, so there will be some second-round impact.

3) Inflation - the fight against inflation will likely continue for another year, mostly because of the service sector. Unlike manufacturing, services should have a brighter future, as sentiment has been improving. On a less positive note, it means that wage pressure will remain strong there, and it will be likely carried forward to customers, implying service price growth will remain solid. As service prices are the primary component of core inflation, it means it will likely remain elevated, above the 2% inflation target. While the CNB targets headline inflation, CNB board members have been paying more attention to core inflation recently, so we don't expect much of a monetary easing in 2025. My projections are that the policy rate will fall by a cumulative 50bps in H1 2025, with a possible final 25bp cut in Q4 2025, provided inflation is under control.

Risks remain on the upside, as food prices are expected to exert upward pressure at least in H1 2025. Service prices will be fuelled by solid wage growth, as well as rising property prices, reflected through the imputed rentals segment. Moreover, the national currency will remain a bit weak in early 2025, exposing the country to external shocks.

Question:

I was wondering whether there is any info on when the payments for these two Embraers will be / were made. Have you seen anything on this in the press?

The question was asked in relation to the following story: Armed forces to purchase two Embraer military transport planes for CZK 11.3bn

Answer:

The contract envisages a CZK 8bn payment in 2024, while the rest is due at a later date, not specified in the official announcement. Since the numbers quoted are all excluding VAT, we assume it applies to the initial payment as well, which means the actual cash payment was CZK 9.68bn (the Czech general VAT rate is 21%). Regarding the remaining payments, we expect it may be on delivery of the second plane (planned in 2027 or 2028), as they say the initial payment was made so that they get the first one in 2025.

You can find the note in a Q&A document here, the information about the initial payment is in the last sentence on page 2.

Question:

What are the main themes for 2025 you see for Poland? Could you provide a commentary on your expectations for each?

The question was asked in relation to the following story: Small voting differences to decide election, opposition has chance

Answer:

I think the main themes for Poland in 2025 are monetary policy, the presidential election, fiscal and economic policy, and security. I will now give a rundown of each:

1) Monetary policy

The MPC has kept rates on hold since a 25-bp cut in October 2023 (which followed the shock 75-bp cut in Sep-23) and throughout falling inflation in 2024. It is fair to say the MPC is unpredictable. One might remember that it started its rate tightening cycle way back in October 2021 with a shocking 40-bp hike even though no one had expected they would move. Then in September 2023, it slashed by 75bps even though no one had expected the move. These surprises are worth mentioning because in the current situation it seems very possible another surprise will be at home. NBP head Glapinski doesn't seem to have a clear grasp of what to do, and he has gone from not seeing a cut in 2025 to hoping for one in March 2025 to again not seeing a cut in 2025. Other MPC members do talk of cutting in March or in Q2 or in July or in H2 2025.

The problem we have with Glapinski's hawkish rhetoric is that it looks exaggerated. Glapinski's main fear is that the ending of the anti-inflation shield for power prices will boost inflation first in July (by 0.4pp due to a change in the power charge) and then in October (when current law says the shield will end). But the government will have every incentive to limit power price rises due to a difficult political situation that means there is no real time to allow inflation to rise and to recover later. Further, wholesale power prices won't likely be too high and so tariffs are likely to come down and towards the frozen power price. And, to add, it is debatable whether the MPC should put so much weight on an exogenous factor when all forecasts show inflation will fall towards the target in 2026.

The March inflation and GDP projection updates have been flagged by council members as key for some time and will indeed be so since the policy horizon will be extended to 2027 then. Glapinski himself says that rates can be cut when inflation no longer rises and when forecasts show a near certainty the target will be hit in the policy horizon. This could make for tricky timing, but would suggest at least by late Q3, the conditions for a cut should be there. If the MPC actually wants to see inflation come down, then it could wait till the September meeting (which would be in keeping with the beginning timeframe of the last two monetary policy cycle changes).

But we have been eyeing July as the meeting for the change. The fate of power prices should be decided by the government by mid-June or so. The CPI and GDP projections will be updated in July. That means for that sitting, the MPC should know if inflation will rise further or has peaked and should have firm forecasts in the period running to end-2027. Thus, if the government limits any potential rise of power prices in Q4 2025, we believe the council will cut in July. If inflation will rise in Q4, then perhaps the council waits till late Q3 or Q4 to cut.

2) Presidential election

The presidential election is the key to the political question in 2025 and beyond. The election dates should be announced around Jan 15. The first round is to be held on a Sunday in May and the runoff two weeks later. The latest talk is that the first round will likely be held on May 11 or May 18 (putting the runoff on May 25 or Jun 1). No candidate is expected to win the 50% plus one vote to win outright and so a runoff will almost certainly be needed.

The senior ruling Civic Coalition (KO) of PM Donald Tusk is running Warsaw mayor Rafal Trzaskowski as its candidate. Trzaskowski narrowly lost the 2020 presidential election to the incumbent Andrzej Duda (PiS). The candidate backed by Law and Justice (PiS) is Karol Nawrocki, who is the head of the National Remembrance Institute (IPN). He is technically not part of PiS, but this looks to be a play to say he is "independent." In fact, Trzaskowski, who does have a local government movement of sorts, also says he is "independent," as does Sejm Speaker Szymon Holownia, who is running for the Polska 2050 party he founded and who placed a strong third in 2020 (that placement kicked off his political career).

All polls show that the election will boil down to Trzaskowski (KO de facto) vs. Nawrocki (PiS de facto). Trzaskowski is the front-runner, but we think it is going to be a lot harder to win than many might assume. The economy and inflation will be big questions. If inflation does push up, the KO candidate could be vulnerable. The ruling coalition of the KO, Third Way (Polska 2050 + PSL), and New Left is unruly and has a hard time meeting all of its campaign promises (also because PiS left public finances in such bad shape). That has sapped enthusiasm. PiS's populist promises also sound better when it is not in power since it can promise anything without really having to make good on it. I see a tight election. The very polarized political situation also probably does create the chance that a third candidate could help sway the result if he or she can capitalize on the dissatisfaction with the current KO vs PiS political reality that has dominated Polish politics for nearly 25 years.

In policy terms, the election is key. If the ruling coalition wants to implement its policy as planned, it needs to remove the president's veto. This includes changes to the judiciary to ensure Poland is in line with EU rule of law norms. If Nawrocki wins, then PiS will be revived after its somewhat surprising autumn 2023 general election loss. There have even been reports that the ruling coalition could seek early general elections in autumn 2025 if Nawrocki wins, though I would doubt this (if Nawrocki wins, PiS would have all the momentum and could only do better so this scenario doesn't make sense).

3) Fiscal and economic policy

The presidential election will shape the political scene and have a big impact on policy. Poland is in the EU's Excessive Deficit Procedure (EDP) and thus must cut its general government deficit, which is forecast at 5.7% of GDP in 2024 and 5.5% in 2025. The key year will be 2026, when the deficit is to be cut to 4.5% of GDP (according to government's official budget and structural plan), but the deficit is to be cut to 3.7% of GDP in 2027 and then 2.9% in 2028. The problem with these forecasts is that 2027 is an election year and 2028 will see a new government in office. Now, there is some uncertainty since the EU's new fiscal architecture is to mean the targets are binding, but this hasn't been tested yet and I'm sure there must be scope for a new government to change the fiscal targets. In the end, with the fiscal contraction so backloaded, one should have a healthy scepticism this will be done in the timeline now set.

In terms of economy policy, the question remains how the government will keep the economy growing quickly, especially with the Trump clouds hanging over the EU economy. Windfall flows of EU funds are to help growth in 2025, but forecasts have been lowered of late (though the government still sees 3.9% growth next year).

4. Security

Poland holds the EU's rotating presidency in H1 2025 and is set to foreground security. This will mostly involve keeping support for Ukraine and fending off a growing Russian threat, including via hybrid attacks. Poland has seen sabotage attempts and so the war is technically being brought to Poland. There is huge uncertainty here as to how long Ukraine can fend off Russian attacks, including in a scenario in which Trump takes over. It is very difficult to get any clarity, but if Ukraine somehow falls, this could trigger a wave of refugees into a Poland that is no longer so welcoming and create a much bigger security nightmare for Poland, demanding even more military spending.

Well, those are the main themes I would say. If you have any further questions or want any further clarification, please let me know.

Question: Do you know the expected date for the budget?

The question was asked in relation to the following story: Main themes for 2025

Answer: Nothing was announced so far. The new finance minister said that he will not publish the budget plan until he has a clear view on the 2024 deficit. The finance ministry just released the November execution data, but it probably has most of information for December. This new finance minister is from the Democratic Union of Hungarians in Romania (UDMR) and this organization proved to have more rigorous politicians. Hence, we don't think we will see the budget plan in the following couple of weeks.

Question:

Could the following be wrong "The government increased various taxes by 43.9% in line with the revaluation rate, which is the legal reference rate of the 12-month moving average of domestic industrial PPI inflation in October"? PPI was not that level, its CPI.

The question was asked in relation to the following story: Taxes rise 43.9% on par with revaluation rate

Answer:

The information we provided is correct. In our story, we mentioned the 12-month moving averages of producer prices index, not the monthly data. The relevant figures are available here. The cell K-246 indicates the relevant percentage.

Question:

Is there any place where I can find all the EconMin (initial) monthly growth estimates going back to the beginning of Russia's full-scaled invasion, or at least late 2022?

Answer:

Try our website https://emergingmarketwatch.com/browser. Enter EconMin and GDP to see everything we had on this in 2022-2024.

You can also try the timeline on the original source - the EconMin's website - but it may take time to load: https://www.kmu.gov.ua/en/timeline?&type=posts&tag=Economy

The question was asked in relation to the following story: GDP growth slows further to 0.9% y/y in November, EconMin estimates

Question:

What's driving the increase in loans and deposits that subtract from net FX reserves?

The question was asked in relation to the following story: Net FX reserves confirmed at negative USD 7.3bn in October

Answer:

The increase in the BCRA's liabilities labeled as "loans and deposits" had three main drivers:

1) Private sector deposits held at the BCRA rise due to the capital repatriation / tax amnesty program.

2) Government deposits rise because the Treasury is buying to cover future debt payments.

3) The BCRA's obligations falling within one year also rise due to the schedule of repayment on its Bopreal bonds, which had three series issued early in 2024.

Question:

Do you have a link to the data on how much they drawdown from the Public Fund annually? And also the link for the BoK lending data?

The question was asked in relation to the following story: Government borrowed cumulatively KRW 173tn from BOK in 2024

Answer:

Unfortunately, I have never seen anything officially-released about the Public Fund usage. My source are articles in local media which mainly cite opposition lawmakers who have conducted analysis on finance ministry data. For instance, this article citing an analysis of DP lawmaker, and this article citing a report by the National Assembly budget office, and this article from 2023. Overall, not a lot is written about the Public Fund usage and I assume that data is pretty difficult to obtain.

As for the lending from the BOK, I have taken the table directly from this Yonhap news article, which again refers to data provided by a Democratic Party lawmaker. The Bank of Korea only published end-of-month balances of borrowing to the government, as you can see here. However, the latest official data is for October and such data does not capture borrowing that has been repaid within the month. So all headlines from yesterday were based on the data released by the Democratic Party.

Question:

What is the rate of FX pass-through to inflation in Korea? (i.e. what does a 10% sell off in the won do?). Presumably, as the FX pressures came in Dec it's not seen in the data yet?

The question was asked in relation to the following story: CPI inflation picks up to 1.9% y/y in December

Answer:

The FX pass-through rate in Korea changes in time and it usually increases when the won depreciates sharply. I am using as source this BOK blog post from May 2024 available in Korean only: https://www.bok.or.kr/portal/bbs/B0000347/view.do?nttId=10084398&menuNo=201106

Considering that the USD/KRW rate is now above 1,400 per dollar, the FX pass-trough rate is probably around 10%, i.e. for each 1% increase in the won/dollar rate, headline CPI inflation rises by 0.1pps.

I think that some impact of the weakening currency was already felt in December because the currency has been depreciating heavily starting from Trump's election in November and BOK's back-to-back rate cuts in October and November. Obviously, the bigger impact will be felt from January onward due to the martial law chaos and Fed's hawkish shift in December.

Question:

Can you share link for source of the credit card data?

The question was asked in relation to the following story: Consumer sentiment falls sharply by 12.3pts m/m in December on martial law shock

Answer:

Source of the data is Kostat Nowcast, but it is only available in Korean - https://data.kostat.go.kr/nowcast/main.do?initId=1

Please see the attached file for data on weekly credit card usage, which I have extracted from the site. Credit card usage fell by 26.3% in the week ending Dec 6, but it then recovered and grew by 16% w/w in the following week. As it can be seen from the series, the credit card usage is very volatile and is affected by factors such as public holidays, interest rate decisions and other major events.

Question:

if a supplementary budget was to be announced, what would be the expected funding source? Would it be further bond issuance?

The question was asked in relation to the following story: FinMin says growth in 2025 likely to fall below 2%

Answer:

I think it is still too early to speculate whether a supplementary budget will be approved this year, by which government will be drafted, and what will be its size. However, the prospects for approval of supplementary budget have improved under acting President Choi Sang-Mok, the FinMin, who has pledged to stabilize state affairs. Meanwhile, the two main parties remain effectively in a state of war and they are likely preparing to enter election campaign in case the Constitutional Court upholds Yoon's impeachment. The opposition DP wants to raise the tax burden on the rich and increase social spending, including through basic income, while the conservative ruling PPP is a strong proponent of fiscal soundness and tax cuts. It should be noted that the National Assembly, which is controlled by the opposition, cannot increase budget spending without the consent of the government.

If FinMin Choi and the opposition manage to reach an agreement while he is still acting President (in early 2025), I think the source of funding for new spending will be definitely debt issuance as the FinMin will likely oppose any tax hikes while the economy is slowing down.

If the President is impeached by the Constitutional Court and there are new elections in mid-2025 which are then won by the DP candidate (as pollsters predict), I think the DP will definitely loosen fiscal policy considerably with a supplementary budget in H2 2025, which will be funded mainly by debt issuance and only partially by tax hikes.

If there are no elections and Yoon returns to office, I think the odds of a supplementary budget will decline sharply as the political crisis will reignite.