Macro and Politics

* We expect the Monetary Policy Committee (MPC) to deliver a 200bps rate cut at today’s rate-setting meeting, in line with the market consensus. We believe that stronger-than-expected growth figures, which failed to validate the CBT’s output gap trajectory, coupled with the recent rise in domestic political risks, suggest that the likelihood of a more cautious approach to rate cuts by the CBT has increased. Accordingly, we have revised our September rate cut expectation to 200bps, down from the previously projected 300bps. We continue to anticipate further cuts at each of the remaining three meetings of the year, which would bring the policy rate down to around 37% by year-end. That said, political news flow and its potential implications will remain under close scrutiny. Should politically driven risks materialize, a shift in the current monetary policy stance cannot be ruled out. At this stage, however, we do not deem recent developments to be of such magnitude.

* The CBT will release weekly foreign portfolio flows, money & banking statistics, and international reserves for the period of August 29 – September 5 @ 14:30 local time. Based on our calculations using the CBT’s analytical balance sheet, we estimate that during the week of August 29 – September 5, net international reserves dropped by USD2.2bn to USD71.3bn, while gross FX reserves climbed further by USD1.9bn to a new record USD180.4bn. We anticipate that today’s official reserve data will likely reflect a similar rise in line with our estimates. To recall the previous week’s data: During the week of 22 – 29 August, foreign investors were net sellers of USD140mn in the equity market, while recording net purchases of USD763.3mn in the bond market (excluding repo transactions). Consequently, the foreigners’ share in total bond stock increased from 6.5% to 6.7%. In the same period, residents’ FX deposits slumped drastically by USD4.2bn (excluding gold accounts and adjusted for the EUR/USD parity effect), while their total FX deposits (including gold, price adjusted) slid by USD4bn during the week of 22 – 29 August. The CBT’s gross FX reserves increased by USD2bn to USD178.5bn and net international reserves rose by USD1.9bn to USD73.6bn, while net reserves excluding swaps climbed by USD2.1bn to USD56.7bn.

* The sequential (the seasonally and calendar adjusted monthly figure) industrial production (IP) decreased by 1.8% m/m in July, while the calendar adjusted IP increased by 5% y/y. A closer look at the monthly dynamics reveals that other transport equipment sector – which surged by 28.3% in June – registered a 7.5% decline in July and the correction in this segment, which also encompasses defense industry products, weighed significantly on the monthly contraction in industrial output. In addition, the ongoing weakness in non-durable consumer goods (down 3.4% m/m in July) and the sharp 18.8% fall in the high-technology component – characterized by its inherent volatility – were key drivers of the monthly decline. On an annual basis, the 5% increase was largely underpinned by a 5.5% rise in the manufacturing index and a 5.8% expansion in the electricity, gas, steam, and air-conditioning supply index. Broadly speaking, the divergence across sectors remains intact: the construction and defense-related industries continue to outperform, while high-tech activity remains volatile. Accordingly, the July figures once again underscore that the annual increase is not broad-based across sectors. Consistent with leading indicators, we expect the underlying trend in real sector activity to remain subdued.