The central government budget posted deficit of CZK 5bn during the first two months of the year, the finance ministry said. This is slightly better than the CZK 6.7bn deficit in the same period of last year, but the improvement is a result of the strong performance in January, while in February alone the deficit was CZK 15bn, up from CZK 12bn last year. This year the annual budget deficit is projected at CZK 70.8bn, which was supposed to mean fiscal tightening after the budgeted CZK 91.3bn in 2007, but the actual deficit last year came in at just CZK 66.4bn.

Bond issuance in Q2 is projected at CZK 46bn, according to the issuance calendar published by the finance ministry on Monday. A total of seven auctions will be held with volumes of CZK 6-7bn each and maturities between 3 and 15 years. The volume is similar to the planned CZK 47bn in Q1, but demand has been rather low so far, as a result of which the ministry has been buying papers also for its own accounts, thus reducing effective borrowing. The schedule provides also for four T-bill auctions during the quarter for a total of CZK 12bn.

As expected the regional branch of CSSD voted to oust the former CSSD MP Snitily from the party. Snitily was earlier expelled from the parliamentary group because he backed President Klaus in last month’s elections, violating the party decision to support Svejnar. CSSD also urged Snitily top resign from parliament, which he refused to do. Now there are already three independent former CSSD MPs, but it is unclear how Snitily is going to vote in the future. He had said he remained a social-democrat despite the expulsion, which may mean he would not support the ruling majority like his two other colleagueas.

The PMI index improved further to 56.5 points in February from 56.1 in January, ABN Amro and NTC Research announced in their regular monthly release. This is also the highest level seen since August last year, despite the global concerns and the rapid appreciation of the currency. The improvement is driven mostly by the output and new order components, especially domestic orders, while growth in foreign orders slows down slightly. The indices measuring growth in input and output prices declined somewhat in February, but they remain well above 50, indicating significant price growth. Input price growth remains significantly faster than that of output prices, indicating narrowing profit margins.

Overall, the PMI predicts continued strong growth in manufacturing, which is more optimistic than the mild slowdown in industrial confidence according to the stat office survey. Yet, both surveys point to rather resilient industry in the face of deteriorating external demand, strong crown and a tight labour market.

Manufacturing PMI

Dec-07 Jan-08 Feb-08 Output 56.9 57.8 59.6 New Orders 56.7 58.4 58.0 Export orders 52.6 55.1 54.5 Backlog 49.9 50.3 52.6 Quantity of Purchases 55.1 56.9 58.7 PMI input prices 63.3 67.2 65.7 PMI output prices 55.2 59.3 57.2 Delivery Times 44.9 43.4 44.6 Stocks of Purchases 50.3 51.0 52.5 Finished Goods 49.1 49.5 51.9 Employment 52.1 52.7 53.0 PMI Index 55.0 56.1 56.5

Source: NTC Research, ABN Amro

The major Czech gas supplier RWE Transgas announced that it would increase gas prices by an average of 3.1% from the start of April. This follows an increase of 7.4% from the start of this year. Company representatives said the hike was due to higher international energy prices, but the growth was curbed by the strong crown recently. The other major player on the market, E.ON, said it will maintain its prices unchanged for the time being. E.ON hikes retail gas prices by an average of 7.5% in January.

PM Topolanek will most probably ask this week President Klaus to re-appoint the KDU-CSL leader to the post of deputy PM, it emerged from a statement of the PM. This follows the definitive clearance of Cunek by the prosecution, but it has the potential to destabilize the coalition because of opposition by the third partner, the Greens. The major opponent to Cunek's return is foreign minister Scwarzenberg, who had said he would resign if Cunek is back. The party leader Bursik had said the party would not remain in the coalition at any cost, although did not directly threaten to leave. In turn, Cunek said he was little interested about the opinion of the Greens as they should respect his innocence, proved by the prosecution. Cunek has been entangled in a number of scandals and although the prosecution did not find enough evidence to bring official charges, public support for him is down to record lows. Yet, the coalition agreement provides for the right of KDU-CSL to propose a deputy PM and so far they have stood behind their leader.

Although there is potential for political rhetoric, we do not think the coalition is seriously threatened. None of the parties would benefit from early elections that are likely to follow a government crisis.

Deputy Finance Minister Elzbieta Suchocka-Roguska expects the state budget to post between a deficit of PLN 0.1bn and a surplus of PLN 0.1bn at end-Feb., according to comments cited being given on Mon. The ministry's plan for the year shows the deficit at PLN 1.3bn at end-Feb., so was some improvement since it was created. Suchocka-Roguska said this was due to lower payments to the Social Insurance Fund (FUS). In Jan., the budget showed a surplus of PLN 4.4bn. After Feb. 2007, the budget posted a deficit of PLN 3.0bn. The 2008 budget deficit target is PLN 27.1bn, with the ministry guiding expectations down to PLN 24bn as long as GDP growth is close to the 5.5% assumption. Overall, there are no big threats expected for this year's budget execution, though it is not expected to see such a shortfall as in 2007 (PLN -17bn deficit vs. original PLN -30bn target), especially as the growth forecast faces downside risks.

Budget execution plan

Income Spending Deficit         - monthly cumulative % TOTAL 281.9 309.0 -27.1 -27.1 - Jan. 22.6 18.2 4.4 4.4 - Feb. 20.5 26.3 -5.8 -1.3 4.9% Mar. 19.5 24.2 -4.7 -6.0 22.3% Q1 62.6 68.6 -6.0 - - Apr. 27.2 28.1 -0.9 -6.9 25.6% May 19.5 25.0 -5.5 -12.4 45.9% Jun. 21.0 24.0 -3.0 -15.4 57.0% Q2 67.7 77.1 -9.4 - - Jul. 23.1 25.6 -2.5 -18.0 66.3% Aug. 25.3 22.9 2.4 -15.6 57.4% Sep. 24.0 25.1 -1.2 -16.7 61.7% Q3 72.4 73.6 -1.3 - - Oct. 25.0 30.3 -5.3 -22.0 81.2% Nov. 27.4 28.0 -0.6 -22.6 83.5% Dec. 26.9 31.4 -4.5 -27.1 100.0% Q4 79.2 89.6 -10.4 - -

Source: FinMin

The Civic Platform (PO) continued to hold a wide lead on other political parties, taking 46% in a Feb. 22-24 survey done by GfK Polonia and partly published Mon. late afternoon. That is down 2 pp in 2 weeks. However, Jaroslaw Kaczynski's Law and Justice (PiS) sank by 10 pp to just 16%. That is the lowest result in at least 3 years and is half that received by the party in the Oct. 21 elections. PiS continues to beset by internal bickering and its once vaunted PR machine has become a bit of a laughingstock. One recent attempt to hit the PO by comparing its electoral promises to the world of the Matrix was a mess that included a poorly done photo-shop job with PM Donald Tusk as Neo (not the worst comparison for many of the young that make of the PO's electorate and which J. Kaczynski would love to have). Jaroslaw continues to be the main face of the party and though a loyal elderly crowd likes him, most do not. The PO, however, continues to be buoyed by the desire for change and if it does not begin producing some of this, there could be a backlash and some of the conservative PO voters could give Jaroslaw a chance, particularly since the left remains a mess.

GfK polling results (%)

Oct. 21 Election Jan. 11-13 Jan. 25-27 Feb. 8-10 Feb. 22-24 Civic Platform (PO) 41.5% 46% 43% 48% 46% Law and Justice (PiS) 32.1% 20% 25% 26% 16% Leftists and Democrats (LiD) 13.2% 5% 5% 6% na Polish Peasants' Party (PSL) 8.9% 3% 6% 5% na

Source: GfK

NBP Governor and MPC chair Slawomir Skrzypek harshly criticised Mon. some council members for giving too detailed comments that include the potential size of rate moves and said he was considering getting the NBP to start forecasting an interest rate path from 2010. "I very much don't like the way some MPC members communicate and present their own views of the future interest rate path," he said, referring specifically to Halina Wasilewska-Trenkner's Fri. comments that 1 to 3 more hikes were needed. "I'm considering whether to institute a future interest rate path, of course with consideration of the market. . . This requires a lot of work and in around 2 years it might be able to start being published."

Skrzypek also affirmed his comments last week that CPI inflation could return to the NBP's 2.5% target at end-2009 or beginning-2010, even though the bank's Feb. inflation projection didn't show it coming into the top of the +/-1 pp range until end-2010. He said that inflation would be high this year due to regulated, fuel and food prices. He acknowledged that natural gas prices were an uncertainty and that these could push inflation upward.

Overall, Skrzypek's inflation comments can be ignored as a reflection of his generally dovish view, though he might actually have backed some hikes due to a desire not to be pigeonholed or to be accused of being against the majority (he used to criticise Balcerowicz for being against the majority). But his implicit criticism of Wasilewska-Trenkner and other members that give potential rate targets (such as Dariusz Filar or Marian Noga) could cause a lot of trouble. The council already faces disputes over organisational changes put in place by Skrzypek last year. Though things seem to have settled into an uneasy truce, the criticism might trigger a renewed eruption of conflict. The fact Skrzypek alone presented the idea of getting the NBP to make possible rate forecasts could also lead to disputes as it does not appear the rest of the MPC knew about it.

Monetary Policy Council member Halina Wasilewska-Trenkner, a hawk, said that the Finance Ministry's forecast of CPI inflation at 4.3% y/y in Feb. confirms the view of the latest inflation projection and the need for further rate hikes, she told Thomson Financial on Monday. She said this also confirms her view that at least 1-3 hikes would be needed, though she would not yet given any direct comments about whether one was needed at the Mar. 26 sitting. On inflation potentially peaking in Feb. she said the following: "It is hard to say whether inflation in February will be the peak. There are concerns over the price of gas. Monetary policy will aim to ease second round effects on inflation." It is increasingly looking like Mar. will see another quarter-point hike -- potentially the third this year -- if the monthly data to be released in the next few weeks shows a continuation of current trends. The FinMin's inflation forecast is generally fairly accurate (granting that it erred to the low side by 0.3 pp in Jan.) and a 4.6% rate would confirm the inflation trend and set up council members to hike in Mar.

Deputy Finance Minister Katarzyna Zajdel-Kurowska said that the ministry's Feb. CPI inflation forecast of 4.6% y/y, if reached, would mark the peak if the regulated natural-gas hike hit a maximum of 10%, according to cited comments. However, a 10% price hike seems unlikely these days, as the gas monopoly PGNiG has asked for 30%. Though the regulator URE's chief said Mon. that 30% would not be agreed to, most money is on a hike of 15-20%. Zajdel-Kurowska admitted that if the rise was more than 10%, the peak would occur later. Besides gas, the deputy minister said the coming re-weighting of the inflation basket was a main uncertainty. The Central Statistical Office (CSO) releases inflation data on Mar. 13.

Zajdel-Kurowska said that the expected acceleration of inflation from 4.3% in Jan. to 4.6% in Feb. was based on the expectation of 2.0% m/m growth of energy prices. All electricity companies were given the right to hike prices by an average 11.6% in Feb., though some moved in Jan. as the situation was complicated by regulatory confusion. She said food prices likely rose by only 0.2% m/m.

The deputy minister added that the updated convergence report would give an average HICP inflation forecast of 3.5% for 2008, 2.9% for 2009 and 2.4% for 2010. In the convergence report for 2007 done by the previous government, the inflation path was shown as 2.4% for 2008 and 2.5% for 2009 and 2010.

Poland's Finance Ministry could delay its Eurobond issue beyond Q1 due to tumultuous global financial markets, Deputy Finance Minister Katarzyna Zajdel-Kurowska said on Mon. The deputy minister said the unfavourable conditions meant the issue -- which she said last week would be worth at least EUR 1bn -- could be delayed till later. She added that the issue was not needed for current financing needs and that some other form of funding could be considered, including a private placement or a tapping of the NBP. Such funds would be aimed at financing scheduled Paris Club payments (usually at end-Mar.). The Paris Club debt, she said, would be paid off in its entirety by end-Q1 2009. Paris Club debt was worth EUR 2.9bn at end-Dec.

The head of the energy regulator URE said that he will not agree to the roughly 30% natural gas tariff requested by state-controlled natural gas monopoly PGNiG, according to comments made to the daily Dziennik. URE chief Mariusz Swora said that a 30% hike was "unacceptable" though he would not give guidance as to what level of hike he would agree to. The daily said unofficial info suggested it would be 15-20%. The URE has until Mar. 17 to approve a higher tariff if gas prices are to rise from Apr. 1. It is likely the URE will do so since the later the agreement the higher the final hike. Procedural problems meant the URE could not rule on tariffs for the beginning of the year despite the fact PGNiG wanted to raise prices. If the URE agrees to a 15% hike (fairly likely), then the boost would be 0.2-0.3 pp. And if it's 20% (which can't be ruled out), the impact would be as much as 0.4-0.5 pp. We doubt it will be above 20% and, as indicated above, it will not be 30%.

Poland's Feb. manufacturing PMI index rose relatively sharply to a 6-month high, though input and output prices also showed strong inflationary pressure, according to the ABN AMRO Poland PMI released Mon. by NTC Research. The PMI indicator rose to 53.1 in Feb. from 51.9 in Jan. This is above the 52.9 average of 2007 and points to continued strong expansion in the month. On the back of real economy data that pointed to a good start to Q1, this would seem to confirm that the economy remains in good shape. Along with signs of growing price pressure, this would seem to set the Monetary Policy Council up to be inclined to raise interest rates in Mar.

The output indicator rose to the highest level since Sept. 2007 on the back of domestic strength. New orders rose by the highest since July 2007. New export orders, however, fell for the fifth month in a row with exporters pointing to zloty strength and the global slowdown as the main problems.

Input price pressure again jumped sharply, with the indicator spiking to the highest since Jul. 2006. Energy, utilities, transport and raw materials were all blamed. The output price indicator held at the same level as in Jan., but that means the indicator remains at a 43-month high. Clearly, the PMI price indicators reflect the growing press pressure in the economy as a whole.

Of the other indicators, companies continued to plan to add employment, though at a slower pace than in Jan. Stocks of finished goods contracted as new output grew. Backlogs of work also rose.

NTC compiles the PMI on the basis of responses from execs in 300 industrial companies regarding questionnaires. A reading of above 50 indicates an overall increase and below 50 an overall decrease. All data are seasonally adjusted. The PMI basket is as follows: new orders - 0.3, output - 0.25, employment - 0.2, suppliers' delivery times - 0.15, stocks of items purchased - 0.1 with delivery times' indicator inverted.

PMI

Dec-07 Jan-08 Feb-08 Comment PMI Index 50.8 51.9 53.1 6Mo high, points to solid Q1 Output 50.2 52.5 54.1 Fastest since Sep-07 New Orders 52.4 53.6 55.7 Highest since Jul-07, domestic based New export orders 47.9 47.8 48.0 5th straight fall, though less than in Jan. Backlogs of work 48.7 49.9 52.2 Rise in outstanding business Quantity of purchases 50.2 49.2 53.7 Fastest since Sep-07 Input prices 54.2 60.3 65.4 Big increase, fastest since Jul-06 Output prices 52.4 58.1 58.1 Unchanged, but at 43Mo high Delivery times 50.8 50.1 49.1 Slight contraction Stocks of purchases 48.7 48.2 49.1 3rd straight fall Stocks of finished goods 46.2 46.4 45.8 Quick contraction of stocks Employment 51.3 52.0 51.4 5th straight rise, but less than in Jan.

Source: NTC Research

The Polish Finance Ministry's official forecast for Feb. CPI inflation is 4.6% y/y, up 0.3 pp from a preliminary 4.3% in Jan, according to a statement. The ministry expects one-month price growth of 0.5% m/m. CPI data will be released on Mar. 13 along with the updated basket for 2008 and a revised Jan. figure. If the release confirms the FinMin's forecast, CPI inflation will be at the highest level since Aug. 2004 and will be well above the NBP's 2.5% +/- 1 pp target. The Feb. data should take into account more broadly regulated price hikes in electricity and continue to see some fallout from other hikes from the beginning of the year. Global food prices have also remained high and fuel should contribute around 0.7 pp as well. However, a print of 4.6% will not take into account coming regulated natural gas price hikes, which the regulator is now deciding. Thus, CPI inflation could rise further. The monetary policy impact will depend fully on whether actual CPI surprises to the upside or not. A big upside surprise would definitely clear the way to another interest-rate hike in Mar. On the other hand, the latest updated projection and recent council comments have suggested the council could be ready to hike anyway, with only a lower-than-expected set of economic data possibly delaying a hike to Apr.

The Government Debt Management Agency (AKK) announced on Monday (March 3) that it will cut back the amount of bonds offered at auctions by 25-30% in Q2, and increase the sale of T-bills by the same rate. AKK also mentioned a possibility to carry out a foreign bond issuance earlier than the planned end of Q2. The announced changes are as response to a sharp increase in yields on the secondary market on Friday (February 29) and Monday (March 3).

The manufacturing PMI fell by around 6 points m/m in February to 50.6, according to data of the Hungarian association MLBKT. The February 2008 value is the lowest one in the past six months. Also, it is lower than the one recorded in the corresponding month a year ago. The sub indices moved mostly downwards in February compared to one month earlier.

S&P said Mon. it revised the outlook on Slovakia's debt rating to 'positive' from 'stable' to reflect its expectation that the country will be able to adopt the euro as planned in 2009, according to a statement. The rating agency also raised its transfer and convertibility assessment to 'AA+' from 'AA'. Slovakia's 'A/A-1' rating was affirmed. "The Slovak government has reaffirmed its commitment to the established target of euro-zone accession by 2009 and the required fiscal consolidation by executing a relatively constrained 2007 budget," S&P analyst Eileen Zhang said. The agency expected the general government deficit to be 2.4% of GDP in 2007 with further gradual declines to come in coming years. S&P said rating upside existed if fiscal consolidation continued after Slovakia adopts the euro. It called for social insurance and labour market reforms to help real convergence. Downside risk was pegged to any reversal of previously conducted structural reforms, an expansionary fiscal stance or a postponement of euro adoption.

Slovakia's state budget posted a surplus of SKK 1.6bn in Jan.-Feb., according to Finance Ministry data released on Monday. That marked shrinkage from SKK 13.0bn in Jan., but was much better than the SKK 8.5bn deficit recorded a year earlier. The budget continues to benefit from strong economic growth and some regulated tax increase, notably, increases in the excise on tobacco tax. Spending, meanwhile, remains constrained, and current expenditure was still down y/y. The deficit target for the year is SKK 32.0bn.

Total revenues rose by some 12% y/y to SKK 51.5bn in Jan.-Feb. Tax revenue rose by 18% y/y to SKK 43.4bn. Indirect tax income increased by 23% y/y to SKK 37.4bn, with excise tax receipts up a strong 61% y/y to SKK 13.8bn. The massive excise gain was in large part due to higher revenues from the excise on tobacco, which was up by 276% y/y to SKK 7.1bn. Total grants and transfers fell by 26% y/y to SKK 4.5bn. This was entirely due to a 24% y/y fall in transfers from the EU, with these totalling SKK 4.48bn.

Expenditure continued to be restrained. Total spending fell by 8% y/y to SKK 50.0bn. Current expenditure decreased by 5% y/y to SKK 48.2bn. As opposed to transfers from the EU, transfers to the EU were up strongly. The gain here was 35% y/y to SKK 4.6bn. Capital expenditure amounted to SKK 1.9bn, with strong seasonality meaning such spending is done at the end of the year.

State budget execution (SKK bn)

Budget law Jan. Jan.-Feb. Execution   2008 2008 2008 2008 DEFICIT -31,981.3 13,033.4 1,554.9 -4.9% INCOME 348,251.7 35,003.7 51,538.2 14.8%    Tax revenue 270,976.0 33,163.1 43,361.0 16.0%    Indirect 202,799.0 29,703.1 37,447.0 18.5%    VAT 142,026.0 19,189.4 23,598.9 16.6%    Excise 60,770.0 10,510.0 13,833.6 22.8%    Corporate taxes 58,455.0 3,089.1 5,957.4 10.2%    Personal taxes 3,131.0 -621.4 -1,588.5 -50.7%    Non-tax revenue 22,326.5 1,806.9 3,646.0 16.3%    Grants and transfers 54,949.3 33.6 4,531.2 8.2%       From EU 35,984.7 0.2 4,482.2 12.5% SPENDING 380,233.0 21,970.3 49,983.3 13.1% Current expenditure 340,424.9 22,057.6 48,160.3 14.1%    Current transfers 197,547.4 15,857.7 32,320.3 16.4%    Transfers to EU 18,727.0 4,614.5 4,614.5 24.6% Capital expenditure 39,808.1 106.5 1,916.2 4.8%

Source: FinMin

President Ivan Gasparovic continued to enjoy a big lead in opinion polls for presidential elections due next spring, according to a Feb. 18-24 survey done by the MVK agency. Gasparovic received 52%, or enough to win outright (50% needed). Slovak Democratic and Christian Union (SDKU) deputy leader Iveta Radicova was second with 26%, SNS leader Jan Slota was third with 7%, HZDS leader Vladimir Meciar was fourth with 6%, and political analyst Martin Butora rounded out the top five by taking 5%. Some 14% were undecided. Clearly, Gasparovic remains on the inside track to be re-elected, though these are obviously still early days and much could happen in the next year.

Gazprom announced today that it reduced gas supply to Ukraine by 30mn cubic meters per day. This is a consequence of the lack of agreement with Ukrainian authorities over the repayment of old debts. Later today Naftogaz Ukraine announced that it would be using gas reserves in underground storage to secure normal supply to Ukrainian customers. According to the company the final consumers of Ukraine and Europe should not be concerned about deliveries. According to the speaker of Naftogaz several hours will be needed for the gas transportation system of Ukraine to start working under the new conditions.

The government ordered the State Tax Administration to extend the payment period for Naftogaz? VAT and corporate profit tax payments due for the period Oct 2007 – Mar 2008, says the government’s decree signed on Feb 27. The regulation concerns not only Naftogaz, but all its subsidiaries (Ukrtransgaz, Gaz Ukraine, Ukrgazvydobuvania), and is motivated by uncertainty around volumes and prices of gas imports at the end of 2007 – beginning of 2008. The payment period will be extended till the end of 2008.

We remind that earlier the government allowed Naftogaz to reduce its debts to UkrGaz-Energo for gas imported in Nov-Dec