IMF Regional Report

The IMF's regional report noted that the recoveries in India, China and Australia are proceeding at such a pace that the output gaps are beginning to close. As we have often highlighted, central and Eastern Europe are significant laggards. This is underscored today by Russia's central bank 50 bp cut in its key refi rate to 9.5%. It is the eighth rate cut since late April. Whereas officials in some Asian countries want to tighten lending activity, Russia seeks to boost lending activity. Russia's economy contracted 10.9% in Q2. The government forecasts a 6.8% contraction here in H2 09. Russia is the only BRIC still cutting rates. Inflation remains stubbornly high, though easing. The CPI year-over-year pace peaked in the middle of last year near 15%, but was still near 14% in Q2. It stood at 10.7% in September and the Oct reading is due out next week amid expectations of a 10.2% rate. Turning away from Russia, Hungary is seen as the next big candidate in the region to cut interest rates. The key two-week deposit rate stands at 7% and the central bank meets against on 23 November and 21 December. The market looks for a 50 bp rate cut before year-end, though we recognize the risk in the direction of more aggressive action rather than less. Separately, in a report issued today warning that widening public deficits and debt levels is undermining the outlook for the region. It now expects the region to contract 6.1% compared to a 4.6% decline anticipated in a report 4 months ago. More supportive global environment, Fitch says will help lift growth next year to 2.6% from its prior forecast of 1.5%. However, the budget deficits are expected average 4.6% of GDP (down from 5.9% this year). This means that deficits will expand faster than the economy, meaning that government debt ratios will continue to rise. Fitch estimates that the average debt to GDP will rise to 36% by the end of next year from 23% at the end of 2007.