The government discussed raising gas tariffs by 12% in 2012, but splitting the hike into several stages, Vedomosti daily cited government sources. The new formula envisages a 5% hike of gas prices in Jan 2012, followed by another 9.5% hike in April after the presidential elections in March. This would result in 12% average annual increase of tariffs. Earlier plans were for 15% increase from the beginning of the year. Tariff hikes for the remaining monopolies, Russian Railways and power companies, will be similar to the expected inflation of 5-6% in 2012. The higher increase of gas tariffs aims to compensate the sharp increase of NDPI tax on Gazprom which should contribute to the budget RUR 122bn next year, while at the same time allow the monopoly to maintain planned investments. According to preliminary estimates, electricity prices will have to rise by 5-6% in 2012, given a 12% gas price hike. According to Deputy EconMin Klepach the tariff hikes will be neutral for the economy contributing 0.1pp to GDP growth.

Budget 2011 will be revised in September, Deputy FinMin Siluanov said on Wednesday. The adjustments will be in accordance with the updated macroeconomic forecast for 2011-2014 to be drafted by the EconMin in the near future. Siluanov stressed that despite the current budget surplus, there will be a deficit at the year-end, without giving further details. In H1 the budget surplus amounted to 2.9% of GDP, but is expected to rapidly decline in H2 due to the spike of public spending towards the end of the year on investment projects and pre-election expenditure. The FinMin currently expects 1.3% of GDP budget deficit in 2011 at an average oil price of USD 105 per barrel. Balanced budget is currently achievable at USD 120 per barrel oil price.

Russian authorities have made a final decision on the social security contribution rates for 2012 and will soon make it public, PM Putin announced on Tuesday. We remind that the government has mulled several different versions of the social security reform, sparked by President Medvedev. The principal agreement is to reduce the social security contributions rate to 30% from 34% at present for the majority of businesses but disagreements have emerged on the size of an additional rate to be placed on incomes exceeding the insurance threshold. The FinMin has argued for introducing a 10% additional rate which would compensate around 40% of revenue lost from the main rate cut. The EconMin and the presidential administration were more in support for a lower 5-6% additional rate.

Business confidence worsened in August compared to July, Rosstat's survey conducted among 4,500 companies shows. Confidence in the extraction industry was positive at 4% in August declining moderately from 6% in July probably as a result of the drop in crude oil prices on the back of expectations about lower future demand. Business confidence in the manufacturing sector turned negative at -1% in August from indifference in July. However, when accounted for seasonal factors, business sentiment in the manufacturing sector has deteriorated more visibly (to -4%) while confidence in extraction and utilities have remained largely unchanged. Expected demand for manufacturing output was also at the lowest level as compared to the other two sectors. Still, businesses remain cautiously positive about short-term prospects. The number of businesses expecting continued growth of output exceed the pessimists by 23%. However, that share has declined by 27% in July. The share of businesses that believe that the economic situation will improve over the next six months remained unchanged at 30%. Manufacturing companies consider the sluggish domestic demand as a main hurdle to further growth of production, along with high taxation, and lack of funding. The weight of economic uncertainty as a major problem for businesses has increased in August as compared to July.

The fall of capital markets could delay the partial privatisation of Sberbank, Vedomosti daily reported on Tuesday. According to the government's privatisation plan, the state should sell this year 7.6% of Sberbank on the capital market. The road show for the IPO placement was planned within days while the placement itself was due to be conducted in September, according to an earlier statement of deputy CBR governor Ulyukayev. However, the market slump in August has significantly reduced the market capitalization of the bank and pushed down expected privatisation revenue. Sberbank's capitalization has declined by 21.3% since July 30. Thus, 7.6% of Sberbank’s ordinary shares are now worth RUR 129bn compared to RUR 150-180bn expected revenue. Ulyukayev said to Vesti 24 that the deadline for the partial privatisation is 2013 and there are no strict requirements to make the sale this year. The lead managers of the placement are JP Morgan, Morgan Stanley, Goldman Sacks, Credit Suisse and Troika Dialog. Still, there is no cabinet position on the timing of the IPO but the issue will be discussed by Deputy PMs Kudrin and Shuvalov at the end of the month. The other two major privatization deals planned for this year, the sale of 25% of Sovcomflot and 75% of Russian railways’ cargo unit Freight One, still remain on track.

Russia’s GDP has increased by 4.2% y/y in July speeding up from 3.9% y/y growth in June, the EconMin reported. The higher growth came despite slowing industrial output expansion, decline of fixed capital investments and increase of unemployment, the report said. GDP grew by 0.4% m/m seasonally adjusted in July up from 0.2% m/m growth in June. The increase is mainly due to solid household consumption considering that industrial output slid by 0.2% m/m sa. However, we believe that growth could be slower than suggested by the EconMin preliminary estimates. The EconMin forecast 3.7% GDP growth in Q2, but the Rosstat estimate was significantly lower at 3.4%. The EconMin experts economic expansion to accelerate in H2 due to higher investor demand mainly from the state sector.

China Eximbank is going to provide loans to agricultural projects in Ukraine according to a memorandum signed with agriculture minister Mykola Prysyazhnyuk, the news agency UNIAN reported today quoting Prysyazhnyuk’s press service. He said Eximbank was ready to offer loans not only under government guarantees but also under guarantees from European or Ukrainian banks. A working group is scheduled to come up with a list of agricultural projects for China Eximbank in September, said Prysyazhnyuk. Meanwhile, the Chinese FIXAM company pledged investment of USD 150mn in the construction of an agricultural market in Ukraine’s southern Kherson Region, UNIAN reported yesterday quoting Kherson governor Mykola Kostyak. The Kherson authorities also expect FIXAM to invest into upgrading the Kherson heat and power plant so it should use biofuel.

The second wave of global crisis is a real threat, President Viktor Yanukovych has said, addressing the nation on the eve of Independence Day which is marked on Aug 24. He said the cabinet has been working on an anti-crisis package to avert financial instability and production slowdown. Yanukovych pledged that mistakes committed by the previous cabinet in 2008 would not be repeated. We recall that when Lehman Brothers collapsed in September 2008, the then government told the nation crisis would not affect Ukraine.

In the meantime, FinMin Fedir Yaroshenko and energy minister Yury Boyko arrived in Washington today for talks with the IMF. Ukraine has not yet launched pension reform neither has it hiked domestic gas prices which are the two main IMF conditions which Ukraine should meet in order to secure two loan tranches totalling USD 3bn in September. An IMF mission is scheduled to arrive in Ukraine on Aug 29 to resume discussing the second review under the USD 16bn stand-by facility.

The banking system generated revenue of UAH 80.2bn (USD 10bn) in January-July, the NBU has reported. Compared to a year ago, revenue was up 2.4%, slowing from 4.1% y/y growth in H1 and 5.2% y/y January-May. Expenditures were down 3.2% y/y to UAH 84.2bn over the period, compared to 6.2% y/y decline in H1. The system posted a loss of UAH 4.0bn in January-July this year compared to UAH 8.6bn lost a year earlier, the NBU said. Thus in July losses rose 10-fold y/y to UAH 3bn. This was the fifth consecutive month when banks posted losses.

The NBU also reported today that the share of NPLs in the overall credit portfolio of banks declined by 0.5pps m/m to 10.4% in July. We recall that the share of NPLs as calculated by the NBU declined by 0.1pp in June, the same as in May so NPLs have started to steadily decline. NPLs declined also in absolute figures, to UAH 83.5bn from UAH 86.4bn a month earlier and UAH 84.9bn on Jan 1. Compared to July 2010, the share of NPLs this past July was down 1.1pps from 11.5%. The NBU also reported that the share of foreign capital in Ukrainian banks in July shrank by 0.9pps m/m to 38.0%. It has been declining steadily this year.

The tenge appreciated by 0.4% m/m in June in real terms, according to calculations of the central bank based on data for 34 main trading partners. The nominal rate was stable against the dollar in both June and July, so the appreciation came mostly from the higher domestic inflation. Preliminary figures for July indicate that real appreciation picked up speed, mainly due to the weaker euro internationally. In y/y comparison the tenge was down a real 7.8% in June, which combined with strong (around 7%) GDP growth suggests that there is potential for future appreciation. This is even more so considering the depreciation in August, caused by the global market jitters and uncertainty about the evolution of oil prices. This said, authorities are unlikely to allow any significant appreciation in the current environment and would rather continue to build up reserves.

The people's IPO will start in Q2 or Q3 2012 and the companies which are most prepared for the placement are KazTransOil (oil transportaton), KEGOC (power grid operator) and Air Astana (airliner), economy minister Kelimbetov said at a government meeting Tuesday. The second stage of the IPO will be held in 2013 and the companies likely to be offered are KazTransGas (gas transportation), KazMorTransFlot (marine fleet), Samruk-Energo (power generation). The third stage of the IPO will be held in 2014-2015 with companies including Temir Zholy (railway operator), Kaztemirtrans (railway cargo transportation). Kelimbetov said placement of shares in KazMunaiGas and Kazatomprom will be discussed only after 2015.

The government wants to offer minority stakes of attractive companies to local citizen and pension funds only, as a way to develop the local capital market. The IPO is also designed as a wealth transfer as it is expected that prices will be below market and buyers will be able to resell the shares at a profit at some point. The idea is that larger stakes of these companies will be sold to foreign buyers after the IPO, but this is likely to happen in the distant future beyond 2016. The absence of KazMunaiGas from this preliminary list of companies for the IPO is rather disappointing in our view. Earlier polls suggested that the company enjoyed by far the greatest interest of potential investors.

Most Czech banks plans to expand their local networks by the end of this year, CTK said referring to a poll made among the largest local banks. Ceska Sporitelna, which has the largest retail network in the country, said it will open six new outlets in 2011, modernize 50 outlets and move seven outlets to more lucrative location. Komercni banka said it would expand its network that now comprises 396 outlets by 4 outlets. The UniCredit is the most aggressively developing bank as it wants to open 23 new outlets by the end of the year. The fifth largest bank, Raiffeisenbank, plans to open around 40 new outlets this and next year. The Czech banks moved through the crisis rather intact namely due to their low exposure on toxic assets but also high deposit base which makes them less reliant on parent banks. The latest Q1 stress tests showed the banks are well capitalized and will need minimal capital injection even is a worst case development that assumes that the eurozone debt crisis will deepen and the economy will enter in new recession.

President Vaclav Klaus reiterated on Tuesday in Austria that eurozone entry is not an issue for the Czech Republic for now. He pointed out at the ongoing financial crisis in the eurozone and suggested the number of eurozone member countries should be reduced in order to resolve it. The position of euroskeptic Klaus is hardly surprising but it is also shared by the government and the central bank that made it clear they will not discuss a possible target date for switching to euro before the debt crisis in the eurozone is resolved and also not until the Czech Republic meets membership criteria, namely the one on the public finances deficit of 3%, which the country hopes to achieve by 2013. Such position makes the earliest possible entry in 2015-2016.

The smallest government ally VV considers the issue around senior education ministry official Ladislav Batora closed with the apology offered to TOP 09 by VV Education Minister Josef Dobes and the fact that he publicly distanced himself from the words of Batora, the VV main board said in a statement today. VV Vice President and Deputy PM Carolina Peake said the party believes that the coalition partners should not address the issue any more. However, the statement practically means that the VV refused to press Dobes to dismiss Batora in contrast to the request by the TOP 09, which might lead to new turbulence in the Czech government. Earlier VV accused TOP 09 of using the case as pretext to delay adoption of stricter taxation on gambling, as proposed by the VV.

Last week Batora called TOP 09 leader Karel Schwarzenberg "a lame old duck" and TOP 09 vowed to boycott cabinet meetings until Batora resigns or is dismissed. Earlier today TOP 09 said it will not jeopardize the existence of the coalition over the issue, still the statement was made before the VV's position was known. Meanwhile, PM Petr Necas said Batora's case could not be a reason to break up the government and urged both sides to avoid deepening the ongoing conflict.

Junior government partner TOP 09 assured it will not leave the ruling coalition. According to a resolution of TOP 09 main board today TOP 09 feels bound by the coalition agreement and certainly does not intend to leave the government. Earlier today TOP 09 leader Karel Schwarzenberg admitted this possibility but still the party management decided not to strain coalition relations further over the issue in view of the pressing fiscal reform agenda. Nevertheless, the party confirmed that it would send at the cabinet meetings only deputy ministers as long as long as Ladislav Batora, a controversial official at the education ministry keeps his job. Last week TOP 09 ministers walked out of the cabinet session demanding the dismissal of Batora after he publicly offended TOP 09 chairman and foreign minister Karel Schwarzenberg. However, Education Minister Josef Dobes refused to sack Batora, despite his numerous public scandals, his dubious past and close links with far right and extremist organisations.

PM Petr Necas warned today the issue of Batora's departure cannot be a reason to question the existence of government and should not serve as a pretext for leaving the coalition. He urged coalition partners to find solution. He recalled Batora was appointed in the education ministry a year ago and that TOP 09 did not have reservations at the time. Still, TOP 09 deputy chairman Miroslav Kalosuek said the ball is now in the hands of the VV that should provee it does not tolerate extremism. The VV main board is due to discuss the issue today, but it is expected to decide for dismissal of Batora so that to avoid another government crisis this year.

The government is about to take over the debt of counties which would be managed by the State Debt Management Agency (AKK), according to unconfirmed local and market sources, the hvg.hu news portal reported. The government has not come to a final decision about a full or a partial debt takeover yet. Total debt of the counties is estimated at HUF 120-160bn, of which more than HUF 100bn is denominated in EUR and CHF. A potential assumption of the debt would be likely aimed to alleviate the burden from the strong CHF exchange rate on the counties. There are 20 counties in Hungary and they are a larger regional unit than the municipalities, which earlier asked for rescheduling of their forex-denominated bonds. The measure should not have an impact on the general government debt under the ESA95 definition since it consolidates the central government debt and the debts of the regional units.

The Monetary Policy Council (MPC) left the base rate unchanged at 6.0% at today's rate-setting meeting, the central bank (NBH) announced. NBH governor Andras Simor elaborated that this was the single proposal on the agenda and was supported unanimously. The decision was taken on the back of the MPC members’ view that headline inflation should converge to the official 3% y/y mid-term target by the end of 2012 with monetary policy being unchanged for a protracted period of time. Simor pointed out that there are no signs for a revival of domestic demand and this will continue to act as an anchor of prices. Overall, the MPC acknowledged the increased risks for slowdown of growth, admitting that latest economic data was weaker than expected and pointing to evidence for slowing external demand, which has been the main growth factor. On the other hand, however, it pointed out that this might be offset by the ongoing large investment projects in the car industry. We therefore think that the MPC statement does not indicate a shift of its stance towards possible monetary easing in the future as expected by markets. Consequently, we expect the central bank to keep the policy rate unchanged in the short term unless the eurozone debt crisis deepens significantly. The MPC did point out that the debt crisis, along with domestic inflation developments, will be the main determinants of the monetary policy stance going forward. Otherwise, Simor stressed that the latest headline inflation figures were in line with the NBH expectations and noted that the deterioration of global investor sentiment has also contributed to keeping the base rate flat.

The next rate-setting meeting of the MPC is due on Sep 20 and the rate decision should incorporate the new inflation and growth forecasts from the updated quarterly Inflation Report. The report itself will be presented on Sep 22.

The MPC decided to maintain the mid-term inflation target at 3% y/y, completing its regular review of the target, the central bank (NBH) announced. It underlined that price stability was the primary objective of the central bank and pointed that the 3% target was appropriate in this regard. Specifically, this rate of inflation was considered to be sufficiently low to keep economic losses from higher prices at a minimum, to reduce the risk of deflation and to take into account the possible statistical errors in the inflation calculation. In addition, the MPC took into account Hungary's future entry in the eurozone, pointing out that nominal convergence was crucial for ensuring smooth adoption of the euro. To this effect, the inflation target was also set with a view to align inflationary expectations with the eurozone inflation target. Consequently, the MPC stressed that a lowering of the inflation target could be considered in the medium term, possibly referring to the 2% eurozone inflation target. It noted that the target could be revised in three years at the latest or at the date of Hungary joining the ERM II.

As we reported earlier, there were speculations that the inflation target could be actually revised up due to pressure from the government for more accommodative monetary policies. Consequently, the final MPC decisions is positive news as otherwise the central bank credibility for managing inflation would have been, in our opinion, significantly compromised.

Majority state-owned airline carrier Malev’s shareholder meeting has approved today a HUF 18.5bn capital increase to compensate the company’s negative share capital. The state asset management company (MNV) will provide a contribution in kind of HUF 9.98bn to Malev, which will include the conversion of a HUF 2bn loan from the state and the conversion of Malev’s other payables and related interest towards MNV to capital. In addition, Malev will receive HUF 8.52bn immediate cash support from the government through the MNV in line with an earlier government decision.

The State Debt Management Agency (AKK) placed HUF 35bn of government three-month T-bills at a primary auction reducing its original offer by HUF 5bn due to weak demand, the agency informed. Investors submitted HUF 84bn of bids for a coverage ratio against supply of 2.1x, which falls short of the HUF 100-180bn worth of bids at previous auctions. The average yield stood at 5.67% and still declined by 3bps from both the secondary market benchmark rate and the average yield from the previous auction a week earlier. The MPC is expected to leave the base interest rate unchanged at today’s meeting but the rising expectations for a rate cut likely led to weaker demand at the auction.

The economy ministry has reportedly turned down the proposal of the agricultural ministry from this spring to lower VAT on food either this year or next, the daily Nepszabadsag reported. According to the agricultural ministry’s calculations, lowering the VAT on all food items from the current 18-25% rates to 5% would mean a HUF 240bn revenue loss for the budget. The economy ministry, however, has advised against it due to the tight budget situation. The original VAT rate cut proposal called for a reduction in three stages – first for poultry and pork products to compensate these sectors for high feed prices, second for bread and mild products currently taxed at the preferential 18% rate, and third for egg and cooking oil products.

The Russian state monopoly Russian Railways is considering buying a controlling stake in the Slovak state-run railway freight company Zeleznicna Spolocnost Cargo Slovakia (ZSSK), Russian Railways Vice President Salman Babayev told journalists on Tuesday. Babayev explained that Russian Railways could finance the purchase of ZSSK through borrowing, if the privatization of 75% minus two share of its cargo unit Freight One slated for Sept 2011 is postponed, due to changes in Russian Railway's board of directors. The Slovak Transport Ministry is looking for consultants for finding strategic partner in the state-run railway freight company. The future strategic partner is to acquire a minimum of 66% in Cargo by June 2012.

Capital outflows from open-end mutual funds have slowed down last week, but are still sizable, the Slovak Association of Asset Management Companies announced. The group suffered outflows of almost EUR 160mn in the second week of August. In the week ending August 19 the outflows have declined to EUR 34.6mn. Money market funds posted an outflow of EUR 24.2mn. Bond funds had negative flows of EUR 7.3mn, equity funds EUR 5.9mn and mixed funds EUR 4.2mn, the association said. Special real estate funds, on the contrary, saw capital inflow of EUR 18.8mn. The outflow of capital was triggered by the downturn on financial markets following the S&P downgrade of theUS credit rating on Aug 5.

The Slovak government will not rush to set the date for the parliamentary vote on the extended EFSF, PM Radicova commented after a coalition meeting on the issue. Radicova said that Slovakia will wait to see how the ratification process goes in the other Eurozone countries, before voting on the new fund. Her words suggest that the approval of the extended bailout fund could be hard to achieve within the coalition and talks could drag on. Coalition member SaS has staunchly opposed both the expansion of the fund size as well as the increase of its power. The new fund should have an effective lending capacity of EUR 440bn and should be allowed to buy sovereign bonds directly in the secondary market, as well as recapitalize banks in an emergency. SDKU member and financed minister Ivan Miklos heightened rhetoric today in an attempt to win approval for the fund, implying that Slovak failure to support the new financial stability mechanism could result in the collapse of the Eurozone. The Slovak coalition government has 79 votes in the 150 seat parliament, 22 of which belong to SaS.

The autonomy of independent regulators is challenged by the government, the daily Cumhuriyet claimed. The daily referred to a change in the law on the organisation and functions of the EU ministry, published in the Official Gazette on Aug 17. It includes provisions, stipulating that the minister is authorised to audit all operations and transactions of supreme boards, including the Banking Regulation and Supervision Agency (BDDK), the Capital Markets Board (SPK) and the Energy Market Regulatory Body (EPDK). The law is interpreted as granting the related ministries the right of administrative supervision of these institutions and arguably violates the Constitution. In this context, deputy chairman of the opposition CHP party Akif Hamzacebi announced that his party will appeal the law amendment to the Constitutional Court. On the other hand, Energy Minister Taner Yildiz explained that the amendment aims to enhance coordination among institutions regarding the audit mechanism. Otherwise, the EPDK will continue to be independent in taking decisions, he added.

The changes seem to follow earlier statements by deputy PM Ali Babacan, who had argued that the power of independent market regulators should be re-thought in order to separate the technical and the political aspects of market supervision. In addition, the EPDK was recently stripped from its price-setting functions, which were transferred to the Energy Ministry. We think that these reports seem to infringe on the principles of the market economy and do suggest an ongoing centralisation of power by the government with likely negative implications for the country’s potential to attract FDIs and to continue its EU accession bid.

The economic coordination committee, which met yesterday, decided to finalise legal arrangements on the new employment package and action plan for improving investment conditions by the end of September, the Treasury informed. Commenting on the meeting, Development Minister Cevdet Yilmaz said the employment package will include active employment programmes, aiming to improve labour qualifications as well as reducing labour costs. He acknowledged that, challenged by the continuous increase in the labour participation rate due to healthy population growth, the government could not rely solely on economic growth to sustain the downward trend in unemployment. The unemployment rate recently recovered to its pre-crisis level and stood at 9.4% in May as job creation was more than sufficient to counter an increased labour supply. Although it benefits from seasonal factors, we expect the decreasing trend of unemployment to continue on account of still strong capacity utilisation in the industry unless a possible worsening in the global economic outlook has considerable contagion effects on the local economy.

With respect to investment incentives, Yilmaz stated the new mechanism will be in accordance with measures to ease the current account deficit. To the same end, as we reported earlier, the government has initiated efforts to transform free trade zones into free economic zones, which will encompass logistics and tourism in addition to currently promoted trade and industrial activities.

In a related statement, Industry Minister Nihat Ergun said that the employment package has been elaborated together with the changes in the investment incentives mechanism and informed that the two issues will be submitted to the parliament before the end of the year.

The MPC kept the policy one-week repo rate on hold at 5.75% at its rate-setting meeting today, the central bank (CBT) announced. It explained that downward risks on the domestic economy from recent global developments were balanced with the monetary loosening decisions taken in the interim August meeting. Today’s decision by the CBT is in line with market expectations as the bank was anticipated to assume a wait-and-see approach while evaluating the risks for further deterioration of the global economic outlook.

The CBT anticipates headline inflation to stay temporarily above its projection from the July Inflation Report as well as the upward trend in core inflation to continue for a while due to the deprecation of the lira exchange rate. Nevertheless, the bank expressed that the situation did not pose a risk for the achievement of the end-year inflation target as the secondary effects of price developments will be limited considering the slowdown in economic activity. We, however, still think that the CBT might intervene in support of the lira through further cuts in reserve requirement ratios on forex deposits in order to restrain imported inflation and to reduce the pressure on the forex reserves.

The MPC also insisted that domestic demand along with loan growth has embarked on a slowing trend as of Q2. Based on this, it reaffirmed expectations for a considerable adjustment of the trade imbalance in the remaining period of the year, taking also into account the recent sharp depreciation of the lira exchange rate. We, however, still remain sceptical about a significant reduction in the CA deficit before the year-end on the grounds that latest data shows export growth slowing down due to weakening external demand and imports seem to benefit from still buoyant domestic demand.

The bank reiterated its usual dovish statement that it will monitor the global economic developments and will use all policy tools on the expansionary side if the outlook deteriorates further and the slowdown of the domestic economy deepens. Our interpretation of the rate decision is therefore that the chances are for further monetary easing in the short term and the timing of further actions to this effect largely depending on external demand dynamics.

Yapi Kredi Bank announced it had borrowed a USD 410mn securitisation loan from international markets. The loan comprises of two tranches, dinominated in EUR and USD, worth respectively EUR 130mn and USD 225mn. Maturity of the loan is set at five years with a grace period of two years, while the interest rate has not been made public. The securitisation involved diversified payment rights and WestLB, Wells Fargo, SMBC Securities and Standard Chartered were the lead managers for the deal. The bank informed that the proceeds from the loan will be used to support investors in financing renewable energy projects as well as SMEs operating in the agricultural sector.

Yapi Kredi, majority owned by the local conglomerate Koc Holding, is the fifth largest bank in Turkey and the fourth among private banks in terms of total assets, which reached TRY 99mn as of end-H1, according to the bank’s financial statement. Within the DFR program, the bank has taken loans worth around USD 2.7bn since 2003, the daily Sabah reported.

The gross external debt amounted to EUR 26.3bn at the end of June and rose by 0.2% m/m, the Bulgarian National Bank (BNB) reported. Its increase was due entirely to higher private foreign debt, which was up by 0.4% m/m. The banking sector in particular registered higher external liabilities at the end of the month, stemming almost entirely from attracting new deposits from non-residents. This represents a partial reversal of the trend from earlier months for the banks to export capital abroad and, in our opinion, might signal improved lending opportunities in the country. We think that the figures are not conclusive for such a reversal at this stage but we still positively evaluate the net deposit inflows in the banking system in June. External debt of the real sector was down by 0.4% m/m as of end-June due to net repayment of outstanding loans and bonds of the sector. The public sector also reduced its foreign debt by 0.9% m/m to EUR 4.2bn at the end of the month but, in our opinion, this likely reflected mainly exchange rate revaluations.

The maturity structure of the debt shifted slightly to a higher share of the short-term debt due to the deposit inflow in the banking sector. Short-term external debt represented 30.0% of the total at the end of June and its share rose by 0.5pps m/m.

Money supply, measured by the broad M3 category, was up by 9.4% y/y in July and its growth accelerated for the fifth consecutive month, the Bulgarian National Bank (BNB) informed. Growth was driven by both narrow money, which rose by 5.2% y/y, and a higher increase of deposits. Given the recent easing of inflation, the figures might suggest some pick-up of economic activity although other preliminary indicators do not entirely support such a conclusion. Higher money supply was financed through an increase of the net foreign assets of the economy as well as a slight recovery of the domestic credit. The latter rose by 4.4% y/y on account of higher growth of lending to the private sector. Specifically, loans to non-financial companies showed an improving dynamics, up by 2.5% y/y in July. We think that this might signal some increased investments in the real sector, possibly stimulated by the consistent strong export growth in the past months. Retail lending, however, remained subdued and shrank by 0.5% y/y for the month after a 0.6% y/y fall in June. Overdrafts and consumer credits were down by 10.9% y/y and 1.0% y/y respectively in July while housing loans increased at a steady rate of 2.5% y/y. Weak lending to households likely reflects demand rather than supply constraints as the export stimulus appears to have been used to boost company’s profits with no pass-through to higher wages or employment. As a result, household confidence does not seem to have recovered so we do not expect marked recovery in retail lending in the short term. Naturally, this also means, in our view, that household spending is unlikely to make a significant contribution to economic growth in Q3 or even Q4.

The finance ministry initiated a draft bill with a few changes to the current fiscal code, mostly including measures to boost budget revenues. Proposed changes included the elimination of some tax exemptions and the prolongation of some increased tax rates, applied last year as part of the cabinet’s measures to control the deficit. In particular, the higher tax for persons owning more than one property is to remain in place for the next year as well. Revenues from independent activities would not be exempt any longer from social contribution payments in case the beneficiary also has a labour contract. Another change refers to non-residents’ income obtained in Romania, which would no longer be tax-exempt for three years, but just for one.

The cabinet has to find new ways to narrow the budget deficit to 4.4% of GDP this year from 6.5% in 2010, because it committed not to implement any more austerity measures. In our view, the proposed changes, apart from eliminating the social contribution exemption, would have no impact on the 2011 budget even if implemented with immediate effect. Nevertheless, these plans seem to underline the government’s commitment for fiscal consolidation and are therefore likely to support investor confidence in the country.

Gold extraction at the Rosia Montana mine should start, President Traian Basescu declared in a TV interview. In addition, he said that the government will open two other gold mines through two state-owned mining companies, because the country needs more gold for the central bank reserves. Romania has further 50 tons and 54 tons of gold underground deposits to explore and extract from these mines in the next period, Basescu said without giving any other details. He expressed hope that the gold reserve of the NBR will increase to 200 tons from the current 103 tons, as the precious metal has proved the most safe and profitable investment during the recent crisis.

Exploration at the Rosia Montana gold mine in western Romania is currently in private hands, owned by the Canadian Gabriel Resources in a joint venture with the Romanian Government. The Rosia Montana Project contains resources of about 414 tons of gold and 1,250 tons of silver. The project has been stopped until now due to aggressive protests by environmental NGOs and activists trying to protect the cultural value of the region and the environment.

Podravska banka issued EUR 10mn hybrid bond with a maturity of seven years on the domestic market, according to an official press release. The bond will be used to increase the bank's capital, which will allow it to boost lending in Croatia. The bond has fixed coupon rate of 7%, which is payable semi-annually. The local holding Agrokor is the largest single investor, which bought 10% of the bond issue.

Podravska banka is one of the smaller banks on the domestic market with a market share of 0.7%. The bank’s assets totaled HRK 2.8bn at end-June, while it also posted HRK 11.9mn profit in H1, which was higher by 59.6% y/y.

The Finance Ministry placed HRK 336.9mn short-term securities at its regular auction today, according to an official press release. The placement consisted of HRK 304mn one-year bonds, which were sold at a yield of 3.2%, which is 50bps higher than the yield, achieved at the previous bond placement on Aug 2. The Finance Ministry also placed EUR 4.4mn one-year notes at a yield of 2.9%, which is 40bps higher compared to the previous issue on Aug 2.

The outstanding stock of 3-month bills is currently HRK 340mn, while the stock of 6-month bills is HRK 1.46bn. The largest part of HRK 14.3bn short-term debt is in one-year securities, which amount to HRK 12.5bn. The outstanding stock of one-year EUR-denominated bills reached EUR 668.8mn.

The Finance Ministry reduced considerably its regular auctions after it placed HRK 6bn long-term securities on Jul 21 to take advantage of the favourable market conditions. The placement then consisted of HRK 1.5bn five-year bond with a coupon of 5.75% and of EUR 600mn 11-year bond with a coupon of 6.5%. The cabinet announced the two bonds ensured sufficient financing for the budget gap in 2011 and the government will not borrow further from local and foreign debt markets. We recall that the cabinet raised more than HRK 13bn this year through the placement of two Eurobonds -- a USD 1.5bn on the US market in March and EUR 750mn on the European market in June.

The average net salary fell by 0.5% y/y in real terms in June, after 0.3% y/y growth in May, preliminary figures released by the state statistical bureau showed. The real net wage posted positive annual growth only in April and May this year, after previously declining for four months in a row. In nominal terms, the average net wage growth slowed by 1.4pps m/m to 1.5% y/y, thus falling behind CPI inflation, which decelerated by 0.5pps to 2% y/y in June. In monthly terms, the net wage increased by 1.3% to HRK 5,498 (EUR 742). The gross wage also rose by 1.7% m/m to HRK 7,907 (EUR 1,068), which brought its annual growth to 1.8% y/y. In real terms, the gross wage fell by 0.1% y/y.

Although the real wage growth and the declining registered unemployment in the last two months signaled the beginning of the recovery of the labour market, the process will be very volatile due to the weak economic growth prospects. The private sector has still to recover of two consecutive years of recession and is unlikely to provide a significant boost to employment and real wage growth in the second half of the year. The high external exposure and the rising arrears of the real sector will also put a limit on the real wage growth, while the only possible stimulus could come from the public sector as the government could turn to populist measures ahead of the upcoming elections. Still, the cabinet has pledged to follow conservative income policy to sustain the credibility of its fiscal policies.

The registered unemployment rate eased to 16.8% y/y in July, down by 0.1pp m/m, preliminary figures released by the state statistical bureau showed. The unemployment rate fell for a fifth month in a row and has decreased by 2pps since the beginning of the year. Still, it remains 0.4pp higher compared with July 2010. The unemployment rate in July slightly missed our forecast, which predicted it would remain flat at 16.9%, which means that the labour force has increased during the month.

The unemployment rate dynamics contrasted with the growth of the number of registered unemployed in July, which rose by 1.7% y/y, but remained almost flat on the month. However, this is consistent with the rising seasonal employment during the summer months, which also explains the growth of the labour force. This trend is likely to persist in the next several months, which would have a positive impact on the labour market.

We expect the unemployment rate to decline further in August, supported mostly by higher seasonal employment in the tourism sector in light of the strong tourist season. The decline could sustain by the end of the year, provided that public measures to boost employment produce results in Q3. The upcoming general elections in December will also serve as a stimulus to the government to accelerate measures aimed at improving the labour market in an attempt to brush up the ruling coalition's image ahead of the elections. On the negative side, we still do not expect the private sector to generate new jobs by the end of the year due to the weak economic growth and the weak competitiveness of the domestic industry. In addition, the public sector's impact on new job creation will also be limited in light of the rising need for a fiscal consolidation.

The Serbian government needs to achieve progress in the bilateral EU-brokered talks with Kosovo in order to be granted an EU candidate status, German Chancellor Angela Merkel said at a press conference after a meeting with President Boris Tadic on Tuesday. This is part of the requirement for good relations with neighbouring countries, Merkel added. The EU will also look for institutional reforms in Serbia before deciding on the candidate status, Merkel said. The government also needs to achieve progress in the joint work with EULEX and to abolish the dual structures in Northern Kosovo, the German Chancellor said.

Tadic confirmed that Serbia has already fulfilled all the requirements for candidate status and that the country will continue to solve conflicts in the region through dialogue. He insisted that Serbia should be granted a starting date for the accession talks, since if it is delayed, this could cause a revision of the EU aspirations of the country. Serbia hopes to receive and EU candidate status by the end of this year and start membership negotiations in 2012.

The pension reform has been postponed until 2012 and it will be carried out by the next government, according to a press release of the cabinet. The agreement was concluded at the meeting between Deputy PM Jovan Krkobabic and the IMF mission in Serbia. So far, the Fund only insists that the government tightens the regulations of the Pension and Disability system (PIO) and that the cabinet implements a consistent and efficient fiscal policy.

The government will also introduce short-term improvements, mainly aimed at boosting employment in the country, which would increase the pension system’s revenues. The cabinet will also provide incentives for retired people to return to work in order to reduce the number of recipients of pensions and disability aid. The government is still reluctant to raise the minimum retirement age and the minimum length of service.

The German state lender KfW will help Serbia establish its own development bank, according to a press release of the cabinet. The agreement was struck during the visit of German Chancellor Angela Merkel in Belgrade today. The Serbian Development Bank will be founded by the end of the year and it will replace the currently existing development fund and the export credit and insurance agency (AOFI). The newly established institution will not be subject to government regulations on commercial banks.

The EC will give a negative assessment of BiH progress in its upcoming annual report, head of BiH European Integration Directorate, Nevenka Savic, said. She reiterated that political disagreements are the biggest hurdle in the country's EU integration process. BiH signed a Stabilisation and Association Agreement with the Bloc in 2008 but made virtually no progress ever since. The integration process has been stalled over protracted government formation at state level. Earlier this month acting Head of the EU Delegation to BiH, Renzo Daviddi, warned that BiH could lose EUR 96mn because BiH authorities have failed to agree on projects that would be funded under IPA pre-accession programme for 2011.

Construction of Banja Luka - Doboj motorway will start next spring and the project should be completed by July 1 2014, Nezavisne Novine daily reported. Representatives of China Road and Bridge Corporation (CRBC) and motorway company Autoputevi RS signed a preliminary agreement on the project on Tuesday in Banja Luka. The Chinese Export Bank is expected to approve a loan that will cover 85% of the project funding. The remainder will be provided by the RS government. The 72km-highway is expected to cost some EUR 400mn.

Pressure is building up for the resignation of defence minister Mart Laar after comments he made for the Estonian student association. Laar said "I guarantee that those who attack the Estonian state will be shot down", which provoked a negative reaction by the public and the opposition. Laar refused to consider a resignation, saying that the statement was taken out of context. PM Ansip also defended the minister and leader of the junior coalition partner IRL, saying that Laar's words should not be taken literally. At the same time, he noted that the statement can be seen from different angles and cabinet membrs should have this in mind and weigh their words carefully at all times. Former PM Laar is among the most influential politicians in the country and the development of the scandal is worth watching, though we do not think it will affect significantly public opinion and relations within the ruling coalition.

The outstanding stock of bank loans was down by 6.1% y/y in July after contraction of 5.3% y/y in June, the central bank said on Tuesday. The deterioration was mainly on account of loans to companies, which fell by 9.7% y/y, worsening from 7.8% decline in June. Loans to households were down a more moderate 2.7% y/y. Estonia has posted a remarkable economic recovery in the last quarters, especially having in mind the contraction in bank credit. As a result, the stock of bank loans has fallen to about 91% of the GDP compared to 116% in 2009. At the same time, savings have increased and deposits were up by 5.5% y/y in July.

Loan quality has continued to improve, albeit gradually. The share of overdue loans fell to 10.3% of the loan portfolio in July from 10.4% in June. Loans overdue more than 60 days represent 5.9% of the loan portfolio, which appears a rather good result, having in mind the severity of the recession and the spike in unemployment during the crisis.

According to the press, the executive secretary of the Ministry of Finance, Nelson Barbosa, declared on Tuesday that the ministry still expects a GDP growth around 4.0-4.5% in 2011, which is slightly more optimistic than the latest market forecast. Barbosa said that the ministry of finance is not so pessimistic about the evolution of economic growth in the second quarter of 2011. He admitted that the government is expecting some deceleration in Q3 2011, given that the economy expanded at a very fast pace in Q1 2011. In addition, Barbosa also declared that the deceleration observed in the IBC-Br was already expected by the government and that the ministry of finance will wait until the release of the GDP figures for the second quarter to revise its economic growth forecast (if necessary). He also reiterated that the government is forecasting an economic growth of approximately 4-5% in 2012.

According to the CNI, the manufacturing sector posted another negative result in July. The indicator of actual versus usual capacity utilization fell to 45.2 points, which represents the eighth consecutive month of decrease. The average level of capacity utilization in the industrial sector reached 75%. Another indicator that exhibited a negative performance in that month was inventory level. The index rose to 53.9 points in July from 53 points in the previous months showing that the manufacturing sector accelerated the rate at which is accumulating inventories. Performance in inventories reinforces the negative perspectives for the industrial production given that suggests further deceleration in the sector. In turn, the indicator of production evolution remained stable at 50.4 points.

Despite the unfavorable evolution in those indicators, the businessmen continue relatively confident in regards to the domestic demand, employment and purchase of raw materials for the next six months. The index related to demand observed a slight fall to 61.3 points in July from 61.9 points in the previous month. The index of purchase of raw material decreased to 57.6 points (from 58.2 points), while the employment index dropped to 53.2 points from 54.2 points. Exports are the only item that the businessmen are pessimistic about the future evolution (index below 50 points). In July, it reached 49.1 points.

In line with market expectations, the deficit in the current count totaled USD 3.5bn in July, according to the latest figures of the BCB. This result was USD 1.1bn below the deficit observed in July 2010. With this performance, the CA accumulated a negative result of USD 28.9bn (2.1% of GDP) in Jan-Jul, versus a deficit of USD 28.4bn (2.4% of GDP) in Jan-Jul 2010. Considering the 12-month rolling period, the current account accumulated a deficit of USD 47.9bn (2.1% of GDP).

The trade balance reached a surplus of USD 3.1bn (the highest for a July month in the last three years), boosted by the commodity exports and based on the latest preliminary data August, the trade balance is heading for another good performance in this month (until the 3rd week of August, the trade balance accumulated a surplus of USD 2.3bn).

In turn, the services account posted a negative result of USD 3.5bn in that month (USD 21.4bn in Jan-Jul 2011) versus USD 2.8 in July 2010 (USD 16.3bn in Jan-Jul 2010). Like observed in the previous months, this deterioration can be credited mainly to the evolution observed in the travel account (deficit of USD 1.7bn in July and USD 8.5bn in 2011) transportation (deficit of USD 757mn in July and USD 4.2bn in 2011) and leasing of equipment (deficit of USD 1.4bn in July and USD 9.2bn in 2011). Combined, these three accounts were responsible for an increase in the deficit of approximately USD 6bn in the services account in Jan-Jul, compared to the deficit observed in the first seven months of 2010. Net remittances registered a deficit of USD 3.4bn in July, remaining almost unchanged compared to the volume observed in July 2010. In Jan-Jul, this account accumulated a negative result of USD 25.4bn.

The deficit in the CA account was more than offset by the expressive influx in the financial account that totaled USD 10bn (+USD 4.8bn over Jul 2010). Net FDI reached a positive result of USD 6.2bn in that month, almost twice the volume observed in Jul 2010. In Jan-Jul, it accumulated a net inflow of USD 48.98bn, which represents an increase of USD 12.1bn over the total influx observed in the whole year of 2010. Thus, the current account deficit has been completely financed with non-debt inflows, being mostly the result of growing domestic demand.

Portfolio investment rebounded strongly in July, reaching a surplus of USD 4.8bn versus a slight deficit of USD 0.1bn in the previous month. In the first seven months of 2011, this account exhibits a surplus of USD 18.8bn, significantly below the level observed in Jan-Jul 2010 (USD 28.3bn). With the positive result observed in the financial account, the balance of payment registered a surplus of USD 7.4bn, while international reserves increased by USD 10.4bn to USD 346.1bn in July.

Overall, it can be argued that there were not observed significant changes in the dynamics of the balance of payments. The trade balance continues to benefit from the hike in commodity prices and by the still strong foreign demand, especially from China. On the other hand, the deficit in the services and income account reflects the appreciation of the real as well as the economic growth. In addition, the confidence of the foreign investors remains high in the Brazilian economy, as the financing of the deficit in CA account is being easily covered for the expressive influx of foreign capital. Even with the deterioration of the global economy, Brazil still remains very attractive. In that sense, it is not expected that Brazil will have any problem to finance its CA deficit, estimated to reach USD 58bn in 2011.

Balance of payments

Jul Jan-Jul 12-month rolling   USD bn % y/y USD bn % y/y Current account -3.5 -23.8 -28.9 1.8 -47.9 Goods 3.1 133.4 16.1 74.5 27.1 Exports 22.3 25.9 140.6 31.5 235.6 Imports -19.1 17.1 -124.5 27.5 -208.5 Services and income -6.9 11.9 -46.8 18.9 -77.8 Current transfers 0.2 15.9 1.7 2.4 2.8             Capital account 0.1 -4.0 0.8 20.6 1.3             Financial account 10.6 81.4 77.0 59.4 127.2 Direct investment 6.3 98.5 49.0 668.2 79.5 Portfolio investments 4.8 -11.6 18.8 -33.3 53.6 Financial derivatives 0.0 n.m. 0.0 n.m. -0.1 Other investment -0.5 -82.2 9.2 -33.0 -5.8             Errors and omissions 0.2 n.m. 1.5 n.m. 0.3             OVERALL BALANCE 7.4 n.m. 50.3 n.m. 80.9

Source: BCB

Finance Minister Guido Mantega declared on Monday that the government will use the process of fiscal adjustment to strengthen the Brazilian economy in face of the global economic crisis. Also he stated that this more “defensive” fiscal policy will allow the BCB to establish a more active monetary policy. Mantega reinforced the disposition of the government to meet the primary fiscal surplus in 2011-2013. According o the minister, the idea is to cut discretionary spending and increase investment in infrastructure to help reduce future inflationary pressure. Mantega also considered that inflation is slowing down and that it will be around 0.3-0.4% m/m in the next months.

With fiscal uncertainties hovering over Europe and in a smaller degree over the US, Mantega’s words are certainly welcome. The problem is that for next year the government has already huge fiscal obligations that potentially may put a stress on the fiscal situation. In that sense, any more pronounced fiscal adjustment, if it happens, should occur in the medium-long term.

Car theft grew 13% y/y in the 12 months up to this year’s July, according to figures reported by the Mexican Association of Insurance Institutions (AMIS). In that period, 83,477 units have been stolen, 52% of which were taken in only three places: Mexico State, Nuevo Leon and Mexico City. The AMIS mentioned that, although most violent robberies took place in the northern states, the increase seen in Veracruz seems remarkable. Currently, 52% of the cars stolen are robbed with violence. Nevertheless, this rate goes as high as 70%, in Sinaloa. The violent context in some regions of the country has come with an increase of different crimes, car theft being one of them. In some regions, where violence has grown the most, local police have few chances of representing a real threat for the criminal organizations, a reason why the army and the navy have been deployed. Insurance institutions had previously warned about a rapid increase in car thievery, as a result of the so called war on drugs. Many suggest that this relation comes from the fact that the cartels and other criminal groups require vehicles in order to commit crimes and often steal them for it. In the period mentioned, 36% of the stolen vehicles were recovered, reflecting the high level of impunity in Mexico.

According to figures reported by the National Commission of Banks and Values (CNBV), total lending by limited-purpose finance companies (Sofoles) fell drastically in June, by 11.3% y/y. After this fall, their total credit portfolio added up to MXN 54.5bn. This decrease represents a negative result for the economy. It’s important to keep in mind that Sofoles lend to specific sectors, particularly to the housing sector. In that sense, an increase of total lending could help the domestic market to show signs of improvement. Although consumer credit seems to have started its recovery lately, increasing credit towards the housing sector and SMEs could help to boost domestic demand and should accelerate the labor market’s recovery. The CNBV’s figures show that the delinquency rate remained high in the sixth month of the year, at 12.99%. Finally, the commission’s records show that Sofoles had a negative result of MXN 0.1bn in the second quarter, in the face of a negative context.

According to AON Hewitt, wages will grow by 4.51% on average during this year, with an inflation of 3.55%. Besides this increase, the consulting company expects a 1.0% increase in employment benefits. This increase should cause an increase in domestic demand as real wages grow. Moreover, if the national currency continues to show strength against the US dollar, domestic demand should be pushed upwards even further. However, this result hasn’t been seen so far. Since the crisis, domestic demand has remained stagnant, yielding ambiguous results. Although many analysts expect to see a strong recovery of the domestic market during the second semester of this year, no robust improvement has been recorded yet. According to the same company, wages will grow faster in 2012, by 4.68%, while inflation should end the year at 3.94%. Since 2009, wages have failed to recover, helping to maintain a low level of inflation but holding the domestic market stagnant. An eventual recovery of average wages should help to strengthen the middle class, and therefore, the domestic market. On the other hand, the high unemployment level pressures against higher wages. In fact, in many sectors, where employment is often temporal, wages are likely to remain unchanged at best.

According to some analysts, Mexico captured more than USD 10bn as FDI during the first half of the year. This forecast shows a decrease in comparison to 2010, as during the first half of last year, USD 12. 8bn entered the economy as FDI. On the other hand, this result would be in line with their expectation to end the year, capturing some USD 20bn. It’s important to keep in mind that in the last poll realized by Banxico among experts, analysts said to believe that Mexico would receive USD 19.8bn during the year as FDI. Although this result would be positive, it remains far below record levels observed a decade ago. In 2001, Mexico captured USD 29.9bn as FDI. The Economy Secretary, Bruno Ferrari, said that the FDI captured during the first semester of the year was led by the automotive sector and would keep on giving positive news before the year-end. Greater FDI entering the economy should help to create jobs at a time of high unemployment (by historical standards) and may help the domestic market to return to its tracks after a long period of stagnation.

The government will invest COP 128bn (USD 72.3mn) in a plan to develop SMEs in the country, announced the commerce, industry and tourism minister, Sergio Diaz Granados. The development plan is focused on competitiveness and productivity, and to strengthen internal commerce opportunities of SMEs. The minister is holding meetings in different regions of the country with companies of different sizes, but mostly SMEs, to promote the plan and the benefits that the government offers for companies. Additionally, the government is looking to boost the idea of purchasing Colombian products, including raw materials, to develop the national industry, instead of relying on imports. It is to note that in a latest poll, SMEs showed an increase in confidence of their business and the economy, and highlighted the will of looking for new markets, like Asia.

The hotel occupancy in June presented a growth of 4% m/m and moving from an occupancy of 47.22% in June 2010 to 51.11% in June 2011, according to the DANE. Moreover, in H1 the hotel sector posted occupancy of 50.01%, better than the 48.35% reported last year. Additionally, the sector presented an increment in its incomes of 12.5% y/y in June and 5.2% y/y in H1, helped by the beginning of the vacation season. The peso's appreciation is one of the factors that helped the increase of tourists in the country, who have reached 642,000 in May. The regions that present the greatest influx of tourist were San Andres Island, the Caribbean coast and the coffee zone, thus the increase in hotel occupancy was mostly in these zones. It is expected that the U-20 World Cup held in the country contributed to the tourist and hotels sector, and a preliminary announcement said that the country received more than 70,000 visitors during the tournament.