Consumer prices remained flat over Aug 16-22 after declining by 0.1% the previous week, Rosstat weekly price figures, based on a smaller consumer basket, showed. Since the start of the mouth, prices have dropped by 0.1%. Declining food prices remained the main disinflationary driver. Moreover, fuel price growth slowed down further to 0.2% over the week from 0.5% over Aug 9-15 and 0.8% a fortnight ago and is likely to continue to decline given the renewed decline of world crude oil prices and government efforts to restrain fuel price increases. Only rents on state and municipal housing increased by 0.7% over the period which shored up overall price growth. Therefore, we maintain our forecast for strong decline of inflation in August benefitting from the high base in the food price segment. We are likely to see slight deflation in August of 0.1-0.2% which could push down the annual print to 8.2-8.4% in August from 9% y/y in July.

Bank credit recovered strongly in July and was up by 9.8% y/y after 6.1% in June, the NBK announced on Wednesday. This is the highest growth since late 2009 and it means that credit started to grow also in real terms. The main driver is lending to companies where the stock of loans increased by 11.5% y/y from 6.8% y/y in June. The breakdown indicates fastest credit expansion in transportation (+58.4% y/y) and industry (+30.8% y/y). Single-digit growth rates are seen in construction, while credit is still shrinking on annual basis in trade and communications. Lending to households is also on the rise as it was up by 5.5% y/y compared to 4.3% y/y in June. The currency structure is also improving and the share of forex-denominated loans is now down to 38.3% from a peak of about 52% reached right after the devaluation in 2009.

The NBK also said deposits were up by 16.1% y/y as a result of 31.9% y/y increase in KZT deposits, while forex deposits were down by 8.2% y/y. This confirms returning confidence in the local currency, though the financial market jitters in August and the associated short-lasting depreciation of the tenge may have refueled public fears.

The recovery of bank credit is welcome in our view and will support GDP growth, but it comes despite unresolved problems with loan quality. The share of NPLs in the loan portfolio of Kazakh banks continues to rise and it exceeded 33% in July. The authorities have been discussing a centralized scheme to deal with bad loans, but its implementation has been delayed.

The co-ruling Civic Platform (PO), the opposition parties Law and Justice (PiS) and Democratic Left Alliance (SLD) as well as the PO's partner the Polish People's Party (PSL) are all preparing for the Oct 9 parliamentary elections, including releasing outlines of their economic programs. What follows is a simple table summary, which will be expanded and detailed as the election moves closer.

Political parties' economic positions

PO PSL PiS SLD Deficit Balance in 2015 Gradual reduction Limit with spending cuts 1% deficit in 2016 KRUS, FUS Rich farmers out of KRUS No KRUS reform, FUS deficit ended No change Up disability contribution by 1pp, FUS reform Privatisation Contitution, but no energy sales No basic privatisation Continuation but no strategic firms Only sell firms with good outlook Local govts Limit indebtedness No central oversight Local govts should gain taxes No central oversight Health-care Local govts take over Local govts take over NFZ liquidated, financed from budget Local govts take over, taxes upped PIT No change No change No change 40% tax on rich VAT 23% Return to 22% 23% 19% goal Public wages No hikes (except for teachers) Indexed to inflation Cut staff, hike pay Hikes for best workers Pension indexation Indexed to CPI and wages Indexed in lump sums Indexed in lump sums Indexed in lump sums

Source: Rzeczpospolita

Poland's registered unemployment rate fell to 11.7% in July from 11.8% the previous month, the Central Statistical Office (CSO) said Wed. in a confirmation of the Labour Ministry's estimate. Despite the m/m decline, the jobless rate actually rose 0.2pp from 11.5% a year earlier. The number of unemployed fell to 1.86mn in July from 1.88mn the previous month but rose from 1.81mn the previous year. In good news, registrations fell to 198,500 from 242,400 a year earlier, but in a bad sign the number of those coming off jobless rolls fell to 218,600 from 273,500 a year earlier. Vacancies at labour offices sank to 63,100 in July from 90,400 the year before.

Overall, the unemployment rate's decline was very mild and in fact the data point to the potential for trouble. Fewer people are getting jobs than in July 2010, the total falling to 89,000 in July from 104,000 a year earlier. Anti-crisis measures that allowed for a 2-year temporary contract are also losing validity, meaning there could be some near-term pressure on the jobless rate, and perhaps this was experienced in July already. The Finance Ministry expects its year-end 10.9% target to be met, but this looks like a stretch.

Polish retail sales rose 8.2% y/y in July, slowing from 10.9% the previous month to come in below the 10.1% consensus expectation, according to non-seasonally adjusted data released Wed. by the Central Statistical Office. Retail sales rose 0.7% m/m, slowing slightly from 1.4% the previous month and coming in below 3.2% the previous year. In price-adjusted terms, retail sales rose a less bullish 4.2%, braking from 6.4% the previous month. Retail sales do remain relatively high, pointing to some strength among consumers. But amid worse economic prospects for H2 and bad sentiment, the second half of the year could prove difficult and the Monetary Policy Council will likely acknowledge this by taking a neutral bias and potentially even contemplating rate cuts.

Food and related sales rose 1.4% m/m, though a better July 2010 meant the annualised rise slowed to 1.4% y/y from 3.1% the previous month. The increase does reflect higher prices. In real terms, food and related sales growth actually fell 3.4% y/y, wider than the 2.7% fall the month before. Food prices will remain high, helping keep the headline dynamic in positive territory. Non-specialised sales, which include those in hypermarkets, rose 8.8% m/m on the back of holiday-related buying. Annual growth is a stiff 25.8% y/y.

Vehicle sales sank 9.3% m/m in July, the usual summer decline worse than normal. The fall helped cut annual growth to just 1.6% y/y from 6.7% the previous month. Car registrations did drop in July by around 5% and the main car market pollster expects that the full-year decline could exceed 10%, meaning H2 is expected to be weak.

Fuel sales rose 2.0% m/m, with the annual rise at 11.7% y/y. This reflects price rises. In real terms, the annual rise is a much lower 1.5% y/y.

White goods, furniture and consumer electronic sales jumped 13.5% m/m in a sign of strength for an industry that expects a difficult 2011. The annual increase was a muted 6.4% y/y, up slightly from 5.3% but down from 27.2% a year earlier.

Retail sales

Item Jul-10 Jun-11 Jul-11 Jul-10 Jun-11 Jul-11 Jan-Jul-11   m/m m/m m/m y/y y/y y/y y/y Retail sales 3.2% 1.4% 0.7% 3.9% 10.9% 8.2% 12.0% Motor vehicles -4.8% 5.4% -9.3% 7.4% 6.7% 1.6% 7.6% Fuels 5.2% -0.1% 2.0% 10.7% 15.2% 11.7% 20.0% Food, drinks, tobacco 3.0% 1.8% 1.4% -0.8% 3.1% 1.4% 2.9% Non-specialised sales 10.4% 0.3% 8.8% 15.9% 27.5% 25.8% 29.4% Pharma, cosmetics -0.1% 1.0% -1.9% 19.5% 13.4% 11.2% 16.3% Clothing, footwear -0.6% -3.8% 3.1% 6.8% 12.9% 17.1% 16.9% White goods, electronics 12.4% -0.7% 13.5% 27.2% 5.3% 6.4% 7.0% Press, books 5.7% -3.1% 8.4% -15.3% -0.5% 1.9% 4.5% Other -0.4% 6.1% -7.9% -8.2% 19.5% 10.5% 15.9%

Source: CSO

The senior ruling Civic Platform's (PO) support rose 2pps to a leading 33% in an Aug 18-21 survey from TNS OBOP published in the daily Gazeta Wyborcza. The opposition Law and Justice (PiS) was next with 21%, down 1pp from the previous Aug 4-8 survey. The Democratic Left Alliance (SLD) rose 1pp to just 7% and the Polish People's Party (PSL) held at 5%, matching the election threshold. The number of undecideds totalled 26%, down from 28% in the previous poll.

Overall, Gazeta Wyborcza decided to present polling results without the undecideds distributed. Previously, it would distribute them proportionally, though this could have overstated the PO's result since elections show undecideds tend to more often back PiS or the SLD. Still, the PO's actual election result would likely be higher as at least some of the undecideds would plump for that party. And, at any rate, the poll still gives the PO a big lead, setting it up for re-election in the Oct 9 general elections.

TNS-OBOP polling results (%)

Oct-07 election Jul 7-11 Aug 4-8 Aug 18-21 Civic Platform (PO) 42% 32% 31% 33% Law and Justice (PiS) 32% 22% 22% 21% Democratic Left Alliance (SLD) na 10% 6% 7% Polish Peasants' Party (PSL) 9% 6% 5% 5% Palikot's group (RPP) na na 1% 1% Poland Is Most Important (PJN) na na 1% 1% Undecided na 23% 28% 26%

Source: TNS-OBOP (presented without undecideds distributed)

The S&P raised on Wednesday the Czech Republic's long-term foreign-currency rating by two notches from A to AA- with stable outlook. The agency also lifted the local-currency rating by two notches to AA from A+. In its comment the S&P explained the rating action follows a change in its methodology and assumptions for rating sovereign governments that places a greater weight on central governments' political and economic profile. Still, it also reflects the Czech Republic's "prudently managed and balanced economy," the agency added. The S&P listed the low level of foreign debt, and a deposit-funded banking sector with minimal lending in foreign currency along with the independent and very capable central bank as the main factors to support the rating upgrade. The agency pointed out at the favorable debt profile of the country as it its government debt is predominantly denominated in local currency and takes the form of fixed-rate securities. The agency expects the general government debt to pick up further to 45% of GDP in 2014, and decline thereafter. The S&P also lauded the fiscal austerity efforts, but warned a delayed implementation of structural reform agenda could lead to negative rating move. By contrast, upward pressure on the ratings could come from a decline in the Czech Republic's external financing requirements, the S&P said.

New World Resources (NWR), owner of the largest Czech hard coal mines, posted EUR 84mn profit in Q2, beating consensus expectation of EUR 77.8mn, according to the results which the company published today. The profit, however, decreased by 50% on the year, though Q2 2010 results were influenced by the EUR 82mn one-off income from the sale of one of its branches. The NWR said revenues reached EUR 455mn in Apr-Jun, up by strong 18% y/y, in line with market expectations. The firm said it paid an interim dividend of EUR 0.16 per share, compared to higher interim dividend of EUR 0.22 per share in H1 2010. NWR Executive Chairman Mike Salamon commented that the company is in line to achieve its overall sales and production targets for this year. Still, he admitted the NWR sees some downside risks to 2012 outlook due to the new financial turmoil and the expected slowdown in the regional market.

Composite economic sentiment indicator drops by 1.2pps to 89.6 in August, the Czech stats office said. The indicator was also by 2.9pps lower against August 2010. The business sentiment indicator fell by 0.9pp to 91.9. Sentiment indicator in trade was the only sub-component to show improvement in the month, but this failed to compensate for the falling sentiments in larger industry and services sectors. Construction sector sentiments were unchanged m/m but were by 5.1pps lower on the year. Meanwhile consumer sentiment indicator fell by 2.7pps m/m to 78.8 possibly over the reports of another slowdown in the main EU markets that is key for the pace of recovery of the Czech Republic and also the new fiscal austerity measures that the government will implement in 2011 to start with the preferential VAT rate hike. Moreover, the stats office said that the share of respondents expecting rises in unemployment increased markedly in August.

All in all the sentiment indicators imply that the expectations of economic slowdown in the second half of the year will meterialise and that it will not be confined to industry but will also reach out to the other sectors. Consumer confidence remains rather volatile and overall continues to pose a downside risk to domestic consumption, though this suggests it will remain disinflationary thus supporting a longer period of flat key monetary policy rate.

The price of 458 drug products is going to decline by 25% on average after the new bidding methodology was first applied this week, the National Health Fund (OEP) announced, cited by portfolio.hu. Rules of bidding changed from Jul 27, stimulating price competition between drug makers, as part of the structural reform package in the drug subsidies area. Among local drug producers Egis reduced its prices for three products by 5% but its larger peer Richter did not cut prices in line with its earlier communication, according to the data available on the OEP website.

Retail sales returned to negative territory decreasing by 0.5% y/y in June, compared to a 0.7% y/y increase in May, according to working day-adjusted data of the statistical office (KSH). On a seasonal and working-day adjusted basis, retail sales were also down by 0.5% m/m in June. Shrinking non-food item sales contributed to the overall decrease of the sector during the month. In particular, non-food sales dropped by 1.3% y/y while food sales growth picked up to a still sluggish 0.5% y/y. Falling non-food sales reflected weakening sales clothing, consumer durable goods as well as non-specialised stores. In our opinion, the data confirms central bank expectations that a sharp recovery of retail demand is unlikely to take place this year. A relatively weak labour market and more importantly, the high loan instalments for forex-indebted households, seem to fully offset the impact from the lowered tax burden and the repayment of the real yields on the private pension savings. The latter is relatively small and we think it is likely to be saved as one-off income in an uncertain environment. Consequently, we expect that the figures to be supportive of the current monetary policy stance and even of a rate easing although we do not believe that the slow retail dynamics is sufficient by itself to prompt a rate cut.

Fuel sales decreased by 1.6% y/y in June, while vehicle sales, which are registered outside the retail sales sector, also fell by 1.6 % y/y for the month.

Aggregate pre-tax profit of the banking sector amounted to HUF 91.1bn in Q2 and soared more than threefold y/y, according to data from the financial market watchdog (PSZAF). The pre-tax profit y/y improvement is due to shrinking provisioning which dropped by 32.5%. Net interest profit dropped by 8.9% y/y for the period, mainly due to the very low lending activity and a shrinking interest margin. According to the watchdog, the capital adequacy ratio (CAR) rose to 13.77% by end-Q2 from 12.56% a year earlier, which was mainly driven by slowing lending activity, rather than an increase in capital. The share of household loans overdue by more than 90 days has increased to 11.6% from 10.4% during the same period.

Bank lending continued to grow in June, according to the latest central bank monitoring report. Lending to companies speeded up to 8% y/y in June from 6.3% y/y in May. On average corporate lending has increased by 5% y/y in H1, indicative of the slow recovery of investment activity in the country. Household lending recovered more quickly, rising by 12% y/y in June, mainly driven by growth in mortgages. Mortgage lending was up by 15.8% y/y in July easing somewhat from 16.1% growth in Jan-May. Consumer lending was up only moderately (1.9% y/y in June) as favourable base effect abate. The upward trend in the cost of borrowing for non-financial corporation’s continued in June, in line with market interest rate movements, the report noted. Interest rates on real estate loans recorded the largest rise. By contrast, lending rates to households declined slightly, largely due to a drop in the cost of mortgage and consumer loans.

The government sees no problems with the achievement of the 5.0% y/y inflation target for end-2012, deputy PM Babacan said in an interview for the news channel CNN Turk. He played down demand-pull inflationary risks, adding that secondary effects of exchange rate movements on inflation are limited, which is in line with the central bank’s (CBT) evaluation. On the other hand, Babacan projected that producer inflation might worsen in the remaining months of the year but expected its repercussions on consumer inflation to be limited. He therefore expressed optimism that the end-year inflation would not much deviate from the official expectations.

Not surprisingly, Babacan reiterated confidence in the CBT policies, repeating the argument that increased risks for a global recession do not allow both governments and central banks to assume a wait-and-see approach. Recent interventions by the bank on forex market were also supported by the PM. Related to this, he acknowledged that the government will keep an eye on downward risks when preparing the mid-term economic program, which, in his words, will be probably submitted to the parliament at the end of September.

The mid-term economic program is widely expected to put a special emphasis on measures against the current account deficit. Nevertheless, Babacan evaluated the current account outlook as better than at the beginning of H2 on account of recent global trends and slowdown of the domestic economy. He projected the CA deficit to be incrementally above USD 70bn at the end of the year, which is roughly in line with market expectations. We therefore believe that the authorities’ official assessment of the deficit is rather means to calm markets while the government is indeed concerned with its size and the unfavourable financing structure. Despite that, we are yet to hear explicit commitment from the government for a more ambitious fiscal tightening and there have been even some signals that part of the extraordinary revenues from the tax amnesty might be spent rather than saved.

Babacan also commented on the law amendment claimed to limit the autonomy of regulatory institutions by saying the amendment aims to fill a legal gap and those institutions will continue to function independently. Nevertheless, his wording suggested further transfer of authority from the Energy Market Regulatory Body (EPDK) to the Energy Ministry beside the price-setting function.

The Saving Deposit Insurance Fund (TMSF) has finalised its roadmap to curb the loan expansion in the economy, the daily Vatan informed. The Fund is reportedly planning to withdraw liquidity from the banking system via selective hikes in the deposit insurance premiums, collected from banks. According to the daily, the premium calculation method would be restructured to include criteria like credit growth rates, risk weighting and maturity structure of deposits. Accordingly, banks with higher credit growth rates and risk assessment along with maturity composition skewed to the short term will be charged with higher deposit insurance premiums. The TMSF is also believed to plan to include derivative transactions and cash credits into the scope of risk measuring.

The banking sector seems to oppose the alleged measure on the grounds that larger banks would be charged higher amounts of premiums, which would result in some competitive disadvantages. We expect the impact of the measure on credit growth to be limited as banks could actually pass on the higher costs to savers through lower deposit rates and given the low policy rate. In our view, the authorities have also realised the relatively low effectiveness of the policy mix to restrain credit growth in particular, judging by the persistent speculation for a possible upward revision of the 25% y/y end-year loan growth target.

A total of 94,249 new vehicles were registered for the first time in June, representing a 39.9 % y/y increase, Turkstat reported. Growth has been in a decreasing trend since the beginning of the year with slight upward movements in March and May. We expect the downward trend to continue in H2 on the grounds that automotive prices have increased, especially in August due to falling profits led by accelerating depreciation of the lira exchange rate since mid-July. On the other hand, recent policy rate cut by the central bank might result in a less-than-expected weakening of automotive sales in H2. Overall, the data does point to some slowdown of domestic demand in Q2 but, in our opinion, it is far from sufficient to allay concerns about the underlying demand pressures on inflation and the possible overheating. The registrations breakdown shows that retail demand likely slowed down the most while demand from businesses remained quite strong.

Passenger cars accounted for the largest 46.1% share of all new vehicle registrations during the month. Car registrations rose by a below-average 28.6% y/y in June, while the overall growth was boosted by sharp increases of bus, truck and tractor registrations. Renault was the leading car brand for the month with a 16.9% share, followed by Ford with 11.5% and Fiat with 11.2%. On a cumulative basis, the number of registered motor vehicles was up by 59.5% y/y in H1.

The Mineral Resources Agency might auction six exploration licences for oil and gas blocks in the Black Sea next year, head of the agency Alexandru Patruti said in an interview for Bloomberg. He explained that there was no interest from investors in the blocks yet so the auctions were delayed for next year. Patruti attributed the lack of interest to the large investment needs of drilling operations.

Romania has granted exploration licences for its offshore territory in the Black Sea to big international and local oil and gas companies, among which Petrom, Exxon Mobil, Petro Ventures Europe and Lukoil. The oil and gas reserves in the Black Sea are not estimated fully but the country has proven onshore gas reserves at 159bn c.m. and oil reserves at 72mn metric tons, after more than 100 years of exploitation.

The number of produced vehicles on the local market fell drastically by 35.8% y/y to 23,592 units in July, data of the association of automotive manufacturers and importers (APIA) showed. The slump was due to an output fall in the passenger cars segment of 38.6% y/y. Production of commercial vehicles still increased by 11.8% y/y over the month. This was most likely due to the slowdown of activity by the local producer Dacia at the beginning of the holiday season, but also due to high stocks of vehicles. In Jan-Jul, vehicle production decreased by 8.4% y/y also on the back of the negative dynamics in the passenger cars segment.

On the sales side, the figures look better with positive performance in July. This might signal some recovery of the internal market and should help clear up inventories, likely stimulating car production going forward. Total vehicles sales were up by 15.6% y/y in July with growth likely supported by some increase in consumer confidence, moderation of inflation and a slight pick-up of lending. We expect the car sales positive trend on the domestic market to continue in the short term, conditioned, however, on fuel prices not rising sharply again.

Vehicles exports fell by 21.0% y/y to 24,023 units in July. The number of exported commercial vehicle exports increased notably, but could not offset the negative effect from the lower passenger car exports due to their low share in the total.

Vehicle market indicators

June July Jan-Jul, y/y   units %, y/y units %, y/y %, m/m units %, y/y Production               Passenger cars 35,158 7.8 21,293 -38.6 -39.4 185,580 -9.2 Commercial vehicles 2,980 -3.6 2,299 11.8 -22.9 15,691 3.3 Exports               Passenger cars 26,230 -3.7 21,688 -23.8 -17.3 181,042 -8.7 Commercial vehicles 2,431 -16.9 2,335 21.8 -3.9 13,481 5.1 Sales               Passenger cars 10,341 -25.6 9,016 14.4 -12.8 52,249 -14.7 Commercial vehicles 1,308 8.5 1,346 37.1 2.9 8,343 26.0

Source: The Association of Automotive Manufacturers and Importers (APIA )

The value of outstanding domestic loans increased by 2.6% y/y as of end-July and its growth picked up from 1.2% y/y for the previous month, data by the central bank showed. On a m/m basis, domestic credit was down by 0.6%. We see the low base from the previous year as the main factor behind the improved loan dynamics in July so we expect the upward trend to be maintained in the following months. Otherwise, lending activity appears to remain relatively weak with no fundamental recovery in sight. Adjusted for inflation, domestic credit fell by 2.2% y/y at the end of the month, slowing down from 6.2% y/y at end-June.

Annual growth in July came only from the private sector, where lending grew at a rising pace of 4.5% y/y. Meanwhile, the public bank credit contracted by 31.9% y/y in nominal terms to RON 7.9bn. The expansion of private sector lending was mostly on account of the corporate segment with corporate loans up by 8.8% y/y while household loans entered positive territory and rose by 0.7% y/y.

Generally, we are not overly optimistic about the improvement in the bank lending data since we attribute it mainly to the base effect. As we noted, some further pick-up of lending growth might be expected, especially in the corporate segment. Retail lending might rebound as well as improved economic activity boosts consumer confidence but likely at a much lower pace due to still falling incomes and higher credit risk.

The broad monetary aggregate M3 increased by nominal 6.3% y/y in July to RON 204.4bn at the end of the month, according to preliminary figures published by the central bank. A low base mostly backed the relatively strong rise, but the dynamics, in our opinion, also suggested some underlying improvement as well. M3 grew by 1.4% y/y in real terms at end-July, entering positive territory after six consecutive months of decline. It is also the highest growth pace since the implementation of the austerity measures from July last year. Note that the growth rates for broad money published by the central bank somewhat diverge from our calculations, which might be due to unpublished revisions of the historical data.

Narrow money supply M1 moved up by 3.1% y/y in nominal terms and decreased by 1.7% y/y in real terms at end-July. The real-terms decline, however, significantly moderated from 7.9% y/y for the previous month, partially stemming from the CPI moderation in July. The nominal increase of the M1 monetary aggregate was triggered by currency in circulation growth – 5.8% y/y.

Overall, the money supply data gives some signs of a recovery in economic activity. Nevertheless, we have to reiterate that the improvement comes mainly from the low base, linked with the implementation of the austerity package in Jul 2010.

The net loss of domestic entrepreneurs reached HRK 1.7bn in 2010, which compares with a net profit of HRK 2.4bn in 2009, according to data released by the financial watchdog FINA. Local companies’ profits have been contracting since the outbreak of the economic crisis in 2008, but in aggregate terms they managed to evade annual loss until 2010. The worse performance came on the back of the small and medium-sized companies, which posted cumulative losses for the year, while the large companies sector managed to increase its profit on an annual basis.

Data breakdown shows the medium-sized companies were adversely affected by the economic crisis in 2010 as they posted a net loss of HRK 4bn, plummeting from a net profit of HRK 573mn in 2009. The small companies also performed poor as their net loss reached HRK 2.4bn, down from a net profit of HRK 687mn in the previous year. Only the large corporate sector managed to improve its performance over the year as its net profit tripled to HRK 4.8bn in 2010. The better results came on the back of 39.5% y/y growth of gross profit, while the loss of the sector increased by only 1.7% y/y. Large companies also reduced their workforce by 4.3% y/y to 287,341 employees at the end of the year. On the other hand, medium-sized companies cut their employees by 5.9% to 157,147 people, while their cumulative loss doubled last year. Gross profit growth was much lower at only 10.9% y/y. Small companies also implemented job cuts, though smaller in comparison with medium and big-sized companies, as the number of employees was reduced by only 0.6% to 415,320 people. The cumulative gross profit of the sector rose by 1.1% y/y to HRK 10.6bn, while the cumulative loss increased by larger 33.7% y/y to HRK 13.1bn.

Overall, the poor performance of domestic companies is not surprising given the two consecutive years of recession. Croatian economy is projected to grow by only 1% this year, which makes us pessimistic about the financial results of the local companies in 2011 as well. The rising arrears of the real sector also come as evidence of the struggle of the domestic economy to recover.

The Finance Ministry will place EUR 700mn Eurobond in late September or early October, EconMin Nebojsa Ciric said at a press conference. The demand for the bond and the yield will likely depend on the country’s fiscal performance and the progress in the talks with the IMF over a precautionary agreement, Ciric added. The government expects to clinch the agreement with the Fund by early October, though the fiscal deficit still remains as an outstanding issue in the negotiations. The fiscal gap must not exceed 4.1% of GDP, which is looking more and more unlikely given the recently adopted law on fiscal decentralisation, which would deprive the central government of RSD 40bn revenues.

The need to tap bond markets above the planned borrowing for the year arose after the privatisation of Telekom Srbija failed in June. The cabinet expected EUR 1.4bn revenues from the sale of a majority stake, which would have been used to cover current expenditures and outstanding debt. Earlier this month, PM Mirko Cvetkovic also spoke openly about concluding a stand-by arrangement with the IMF, part of which could be used to cover the budget gap.

The government expects FDI inflows to reach EUR 3bn in 2011, down from its previous projection of EUR 4bn, EconMin Nebojsa Ciric said at a roundtable discussion. FIAT’s EUR 1bn investment in its factory in Zastava will be the main part of FDI inflows this year, while investment by companies in the automotive sector will also contribute to the overall growth of foreign investment. In addition, the acquisition of the Delta Maxi food chain by Belgian Delhaize group, worth EUR 932.5mn, will also be included in the FDI figures. The government’s FDI forecast was reduced mainly due to the failed privatisation of Telekom Srbija, out of which the cabinet expected EUR 1.4bn revenues.

FDI inflows reached EUR 566.1mn in H1, higher by 34.9% y/y, according to the latest data of the NBS. Still, the transaction on the acquisition of Delta has not yet been accounted for and will likely appear in the balance of payments figures in July. The government will rely mostly on investment to boost employment in Serbia and the economic recovery as well, Ciric said. Serbia’s economy is expected to expand by 3% this year, after growing by only 1% in 2010, while the LFS unemployment rate reached 22.2% in April, up by 3pps since the previous survey in October 2010.

Czech power utility CEZ has lost its legal battle against RS government over failed project for construction of new unit at Gacko thermal power plant, Nezavisne Novine daily reported Wednesday. The Paris-based International Court of Arbitration ruled on July 7 that the government was not a side in the deal and therefore could not be sued, according to the ruling obtained by the media. Thus CEZ had to pay EUR 100,000 in legal fees to the RS. However, the legal procedure on CEZ's complaint against the ERS and Gacko thermal plant will continue and ruling over the case could be expected in mid-2013, Nezavisne Novine says.

The Czech power utility took RS power utility ERS and Gacko thermal power plant to the court in 2009 seeking EUR 60mn compensation over lost benefits due to failed EUR 1.4bn project for construction of a second unit of Gacko thermal power plant. CEZ has blamed RS government for failure to timely arrange property registration and land expropriation issues and other shortcomings.

BiH could apply for EU membership by the end of the year if the country meets two of the Bloc's key requirements, chairman of the parliamentary committee on EU integration, Halid Genjac, said. In his words this could happen provided that BiH parliament passes laws on state aid and population census. He deplored continuing political deadlock and stalled reform process that impede the country's EU progress. Genjac expects that this will be noted in the Commission's upcoming report. Ten months after the October general elections BiH still lacks a central-level government.

About 30% of respondents would like to see Harmony Centre leaders Ushakov or Urbanovich as the country's next PM, according to the latest poll by TNS Latvia. The incumbent Dombrovskis comes next with 19% support, followed by the ZZS candidate and Ventspils mayor Lembergs (18%). The candidate of the Reform Party of Zatlers is at the bottom of the list with 6% approval.

The poll confirms the strong position of the pro-Russian Harmony Centre ahead of the Sept 17 elections. Yet, there is still significant uncertainty as the party is unlikely to win more than 50% of the votes and it is a problematic coalition partner for any of the other, Latvian, parties. We would regard as a market-friendly outcome strong election results for Unity of PM Dombrovskis and for the Reform Party of Zatlers, which are likely to form a ruling coalition if they win enough seats. Yet, latest polls show rather disappointing results for Zatlers' party, despite the high personal approval for the ex-president.

The government stands ready to raise the capital of airBaltic, Latvia's airline operator which is at the brink of bankruptcy, it emerged after a government meeting on Tuesday. Ye, this can happen only after a change of management and amendments to the company's statute which would give the state more influence in the management of the company. An audit is being carried out and it should be completed in the next two weeks and indicate the best course of action. airBaltic is controlled by its manager Bertold Flick, but the state maintains that the management is to blame for losses in the last two years and it should be replaced. The company needs an estimated capital injection of EUR 63mn.

Georgia's merchandise trade gap widened to USD 416.5mn in July from USD 269.8mn deficit in Jul-2010, Geostat said in its monthly release Wednesday. The outcome was also higher than USD 381.2mn gap in June. Thus, the ytd balance posted USD 2.4bn deficit, considerably higher than USD 1.8bn seen in the corresponding period last year. The figure equals 17.8% of projected annual GDP, according to our calculations.

The monthly result reflected tangible slowdown for exports, which rose only 3.9% y/y to USD 149.2mn, down from 59.4% y/y jump in the prior month. Though the deceleration was partly on base effects, exports fell to their lowest level in six months. Weaker performance was seen in all key export commodities, particularly for motor cars and vehicles, which rose by 40.1% y/y, plummeting from 195% y/y jump previously. Monthly figures for fertilizers and copper ore exports were also on the decline. However, exports of the top export item, iron and steel, improved in July, rising by 17.5% y/y, up from 4.7% y/y previously.

Thus, in Jan-Jul exports slowed their expansion by 6.6pps m/m to 37.2% y/y, reaching USD 1.2bn. The outcome was on the back of easing growth across the board, most notably for vehicles, precious stones and metals, and copper ores and scrap. Beverages, wines and spirits however performed slightly better, increasing by 25% y/y, up from 24.4% y/y rise previously.

As for imports, these maintained a steady growth rate, increasing by 36.8% y/y to USD 565.7mn, following 37.3% y/y rise in June. The result reflected higher mineral fuel imports, which rose by 32.6% y/y from 28.9% y/y rise previously. Growth acceleration was seen also for machinery and appliances, and vehicle imports. In Jan-Jul, imports increased by 35.9% y/y to USD 3.6bn, indicative of rising domestic demand. The outcome owed mainly to higher vehicles and machinery imports, but also considerable demand for hydrocarbons.

Georgia's top export partners in the Jan-Jul were Azerbaijan (15.9% share), Kazakhstan (11.4%) and Turkey (11.1%). On the import side, the bulk came from Turkey (18.5%), followed by Ukraine (11.4%) and Azerbaijan (9.2%).

Petrobras announced that the production of oil and gas (in Brazil and abroad) reached 2.567mn barrels of oil equivalent per day (boe/d). On annual basis, the production exhibited stability while on monthly basis it registered a decrease of 2.8% m/m. Considering only the operations in Brazil, the production of oil and gas in July fell by 3.5% m/m to 2.325mn boe/d. The production of oil decreased by 3.8% m/m to 1.968mn boe/d. According to the company, this decrease in production was motivated by the maintenance program observed in some of the oil platforms in the Marlim, Albacora Leste and Cabiunas fields. In the production of gas reached 56.7mn cubic meters per day in July, an increase of 8% y/y over July 2010.

According to the BCB, domestic credit decelerated slightly (in real terms) in July. Lending by the financial sector totaled BRL 1.854tn, which represents an increase of 1.0% m/m (real terms) (versus 1.4% m/m in June) and an expansion of 12.1% y/y (versus 12.4% y/y in the previous month). In Jan-Jul, credit accumulated an increase of 4.5% y/y. Despite this slowdown, as percentage of the GDP, credit continued growing. It rose to 47.3% of GDP from 47.1% of GDP at the end of June.

The deceleration observed in this indicator was caused almost exclusively by the slower growth in private lending. In real terms, non-earmarked operations totaled BRL 1.2tn, increasing by 0.6% m/m (the slowest pace since February 2011) and by 10.2% y/y (the slowest growth rate since over Jan 2011). In this category, the sharpest slowdown was observed in corporate lending (totaled BRL 600.96bn in July), whose growth rate fell to 0.37% m/m from 1.77% m/m in the previous month (+3.9% y/y in Jan-Jul 2011). Like observed in the previous month, the fall in the credit operations related to working capital and guaranteed accounts had a great influence over the performance in this category. In turn, consumer loans (totaled BRL 606.5bn in July) also posted a more modest growth (in real terms) on monthly basis - +0.77% m/m versus 1.11% m/m in June. It can be highlighted the reduction observed in personal credit and vehicle acquisition.

In regards to public sector lending, earmarked operations totaled BRL 646.8bn, which represents a real growth of 1.7% m/m (versus 1.24% m/m in June) and 15.7% y/y (versus 16.0% y/y in the previous month). On monthly basis, the BNDES exhibited acceleration in the lending growth rate to 1.5% m/m from 0.8% m/m, although on annual basis it had registered a deceleration (in real terms) to 9.7% y/y from 10.8% y/y. Housing loans continued to show a hefty increase in growth (+37.7% y/y in real terms) although it registered a more modest pace of expansion than in June (38.7% y/y in real terms).

With respect to credit conditions, the average interest rate rose slightly to 39.7% in July. The same dynamics was observed in average loan term and default rate, which increased to 486 days and 5.2%, respectively.

Broadly, as it was observed in June, the deceleration in lending is concentrated mostly in private lending, and according to a recent BCB’s survey should continue to show a downward trend in the upcoming months. On the other hand, public lending remains growing at relatively robust pace, offsetting (in part) the effects related to tighter monetary policy and macro prudential measures.

Indicators of credit performance

May-11 Jun-11 Jul-11 Credit (% GDP) 46.9 47.1 47.3 Average interest rate (%) 40.0 39.5 39.7 Spread (pps) 27.9 27.3 27.4 Average term (days) - total 477 482 486 Average term (days) - corporate 389 394 400 Average term (days) - households 571 575 578 Non-performing loans (%) - total 5.1 5.1 5.2 Non-performing loans (%) - corporate 3.8 3.8 3.8 Non-performing loans (%) - households 6.4 6.4 6.6

Source: BCB

Companhia Siderurugica Nacional (CSN), the second largest steel-maker company in Brazil, announced on Wednesday that will offer BRL 1.15 bn in non-convertible debentures with maturity of eight years. The issue will be restricted to a limited number of investors. According to the company statement, the funds will be used to finance working capital and other activities.

According to the local press, less than 1 month after the Rousseff administration released its new industrial policy, businessmen are already requesting the reduction of the tax rate of 1.5% on gross sales, created to substitute employers' payroll contributions. The industry representatives of footwear, furniture and textile argued that the formula announced on Aug 2 did not represent a real tax relief and in some cases the effect was the opposite. Some studies of the textile industry suggest that a tax relief on all sectors will only be achieved with a tax rate around 0.8-1.0%. The president of the Federation of Industries of Sao Paulo (FIESP), Paulo Skaf, declared that with a tax rate at 1.5% the sectors related to furniture and accessories did not have any fiscal benefit, while footwear had only a small gain. The businessmen presented their complaint to the Minister of Development, Industry and Foreign Trade, Fernando Pimentel, who in turn promised to discuss the issue with Finance Minister Guido Mantega.

Preliminary figures reported by INEGI show that the trade balance recorded a negative result of USD 1.2bn in the seventh month of the year. This deficit is 14.5% larger than the recorded figure a year ago. Moreover, it shows the first deficit of the year, and the largest recorded since July 2009. Analysts had said to expect the trade balance to yield deficits during the second half of the year, as the domestic market recovers. Although domestic demand has produced ambiguous results, some indicators do suggest of a positive trend that should yield positive results during the coming months. With July's result, the trade balance during the first seven months of the year recorded a surplus of USD 2.2bn. In that sense, if July's result were to repeat, the year's trade balance would show a deficit by September. Although this is unlikely, the fact is that the trade balance is likely to end the year showing a deficit.

In the seventh month of the year, exports added up to USD 27.9bn, according to preliminary figures reported by INEGI. In this month, 83.8% of all exports were non-oil, showing a slight increase since June's result. In July, exports grew by 19.4% y/y, showing a deceleration of 2.2pps m/m. As in previous months, export growth was led by the oil component, where exports grew by 32.2% y/y in July. As it has been said before, the international context has driven oil prices upwards, causing oil exports to seem to increase despite little changes of volume. This condition may continue during the coming months; however, the deceleration of the global economy, positive weather conditions or peace prospects in the Middle East, could drive prices downwards, hurting Mexico's trade balance and fiscal strength.

Imports grew by 19.2% y/y in July to USD 29.0bn. As seen in the export component, the increase in imports has been led by oil, whose imports grew rapidly, by 46.3% y/y. Noticeably, the imports of consumer imports have grown the most, by 30.7% y/y in July, making the case for a stronger domestic market. On the other hand, the growth rate of consumer imports shows a drastic deceleration of 9.2pps since June's results. Moreover, consumer imports in July were only 1.7% higher than the average of the first seven months of the year. Imports are likely to continue growing rapidly during the coming months, as domestic demand grows because of a seasonal effect.

External trade, preliminary

Jul Jan-Jul USD bn %, y/y USD bn %, y/y Exports 27.9 19.4 199.1 21.0 Oil 4.5 32.2 32.4 42.5 Non-oil 23.3 17.2 166.7 17.5 o/w: manufacturing 22.5 16.8 158.0 17.1           Imports 29.0 19.2 197.0 19.1 Oil 3.8 46.3 24.7 45.1 Non-oil 25.2 15.9 172.2 16.2           Consumer 4.1 30.7 28.4 27.2 Intermediate 21.9 16.6 149.2 17.7 Capital 3.0 23.9 19.4 19.5           Balance -1.2 14.4 2.2 n.m. Non-oil -1.9 -2.7 -5.5 -16.6 Oil 0.7 -12.1 7.7 25.9

Source: INEGI

During the first fortnight of August, inflation reached 0.09%, showing a deceleration of 0.07pps y/y, according to figures reported by INEGI. Moreover, the result shows a deceleration in comparison to the first fortnight of July, when inflation reached 0.32%. This positive result was caused by a decrease of non-core inflation since August of 2010, led by falling prices in the agricultural sector. The core component showed an increase of 0.09%, equal to the increase in the same period a year ago. Positive inflationary results observed during the second quarter of the year, and so far during the third one have allowed the central bank to maintain a lax monetary policy. In fact, some analysts have started to forecast that Banxico won’t alter its benchmark monetary policy until 2013 (a year later than originally expected), in the face of the deceleration of the US economy and of the low inflationary pressure observed. Chances are that, because of the deceleration of the economy’s recovery, inflationary pressure will be lower than originally forecasted. Nevertheless, inflation should accelerate in the coming months as part of a seasonal effect. All in all, inflation should end the year in line with Banxico’s goal, below 4.0%.

The non-core component showed a relevant deceleration of 0.31pps y/y, to an increase of 0.08% in the first half of August. As stated, the agricultural sector led this deceleration, with prices falling 0.12% in the mentioned period (from an increase of 0.41% observed a year ago). This result contrasts with the rapid increase of some agricultural prices. Although inflation has remained low during the last few years in comparison to historical standards, some agricultural products have seen rapid price growth, harming some of the poorest Mexicans purchasing power. As in any country, most of the poorest Mexicans spend most of their income in food. Because of this, growing agriculture prices increase the high income inequality existent in Mexico. Because of a seasonal effect, some food price increase during the last months of the year is possible, driving inflation upwards, and hurting many sectors of society.

INPC inflation, first half of August, %

2011 2010 TOTAL 0.09 0.16 Core 0.09 0.09 Goods 0.04 0.08 Services 0.12 0.01 Non-core 0.08 0.39 Agricultural -0.12 0.41 Energy and government administered 0.19 0.38

Source: INEGI

The effects of the current crisis in some European countries and the United States will be felt in Colombia in 2012, but GDP growth will remain close to 5%, reported a study of Citibank. The entity reports that the situation around the world wouldn’t transform into a recession, and it is a crisis that will slow down economy growth. Munir Jalil, head economist of the entity, said that the Colombian economy will remain attractive to investors, expecting that the appreciation trend of the peso will continue for the next two years, to end 2011 at USD/COP 1,840. Furthermore, the entity expects that the central bank will end this year with a benchmark rate at 5%, hiking it in Q4. It is important to note that a worsening in the United States will impact more the country than a worsening in Europe, as far as the US is the main trade partner of Colombia.