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CEE Overview

CEE Overview . Attila Mizsér, Head of Corporate Treasury Sales Budapest, 18.05.2012. Topics. GDP growth in CEE Industrial production Capital flows on bond markets Corporate sector and lending activity Appendix: Data of individual countries.

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CEE Overview

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  1. CEE Overview Attila Mizsér, Head of Corporate Treasury Sales Budapest, 18.05.2012.

  2. Topics • GDP growth in CEE • Industrial production • Capital flows on bond markets • Corporate sector and lending activity • Appendix: Data of individual countries

  3. CEE: Regional growth to move in line with global trends (1) Economic activity in Central and Eastern Europe will move in line with the developed world. But we cannot look on CEE as a uniform region any longer. Instead there is large differentiaion across countries, with some having already seen GDP recover to its pre-crisis peak but others lagging considerably. We forecast GDP growth in 2011, 2012 and 2013 at 4.7%, 3.3% and 3.9% respectively. Source: CEE national statistics offices, UniCredit Research

  4. CEE: Regional growth to move in line with global trends (2) Our forecast does not incorporate a shock to the region along the lines of the Russia default in 1998 or the global crisis of 2008 but does incorporate a longer period of sub-trend growth than we have seen at any stage over the past 15 years. Source: National statistical agencies, UniCredit Research

  5. CEE: Some hold up better than others Czech suffers some, Hungary less, Poland, Turkey and Russia resilient. Source: National statistical agencies, UniCredit Research

  6. CEE: Industry has held up relatively well Even into Q4, industrial production in the region has performed better than expected, leaving scope for upside surprise to Q4 GDP data and some positive carryover into Q1 this year. That said December was weaker than October and November, though Poland and Turkey continued to post gains. Source: National statistical agencies, UniCredit Research

  7. Uptick in forward-looking business sentiment althoughshort-term indicators point to a still differentiated picture • Business confidence ticked up recently across the board but due to weaker externaldemand industry growth in the region looks set to be a small negative in 1Q 2012 • Important elements of differentiation remain in place with short-term indicatorspointing to a still fragile growth particularly in SEE SOURCE: UniCredit CEE Strategic Analysis, EU Commission

  8. After a strong recovery in 2010 and a robust dynamic last year, cyclical sectors are generally losing strength in 2012 (1) Including Bulgaria, Czech R., Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia; IP index weighted by nominal GDP SOURCE: UniCredit CEE Strategic Analysis, Eurostat

  9. Capital flows remains supportive of the CEE region EM fixed income benchmarks had one of the strongest starts of the year gaining by close to 9% YTD. Moreover the EMBI excess return over UST has reached a level last seen in 2009. History suggests that this positive return will likely attract more inflows into EM bond funds which in turn should support asset prices. We think the global environment remains supportive for ongoing bond and equity inflows in the coming quarter. The CEEMEA region will continue to benefit significantly from this backdrop as the region remains underweight in EM fund allocations even after increasing allocation YTD. At the end of February the average weight of the region was 27% versus the long term average weight of the CEEMEA region at 35% (see chart). This implies that the region can continue to disproportionally benefit from inflows into bond and equity funds. 9

  10. Bond issuance is already well ahead of plan in several countries EEMEA sovereigns issued USD23.5bn bonds YTD versus USD42.5bn in the whole of 2011. In terms of individual countries we believe there are several countries practically finished their 2012 Eurobond issuance plans. We do not expect Russia and Czech Republic to issue any more Eurobonds in 2012 while Romania and Lithuania might come with one more issue in 3Q/4Q. Other countries also made significant progress. Turkey completed about 60%, Poland and Latvia completed about 50% of our estimations for sovereign borrowing in 2012. There were three countries from the CEEMEA region which did not tap the Eurobond markets YTD, namely Croatia, Hungary and Ukraine. 10

  11. Banks’ willingness to give sufficient financing improved over 2011 in the context of still low demand Scale ranging from 1 (worst) to 5 (best) Scale ranging from 0 (no obstable) to 4 (severe obstacle) • Companies’ perception about banks’ willingness to provide sufficient financing improved in2011, after the initial decline in 2010… • … however, the majority of companies reported tightening of credit conditions in 2011 with costof credit and collateral requirements as major obstacles to the availability of credit • Demand-side factors are also playing a role with 44% of companies having reported ‘no need’among major reasons not to apply for a loan vs 25% of ‘self-financing’ and 15% ‘cost of credit’ (1) Survey conducted over 12,000 companies per year in 16 CEE countries (2) Survey conducted in Mar/Apr 2012 on 25 companies in 9 CEE countries SOURCE: UniCredit CEE Strategic Analysis

  12. Lending to the corporate sector is holding up well but a divergingperformance is likely to persist SOURCE: ECB, UniCredit CEE Strategic Analysis

  13. Business environment significantly improved over the past years butregulation, judicial system, tax and political factors are still reportedas important obstacles to doing business in CEE Scale ranging from 0 (no obstacle) to 4 (severe obstacle) (1) Survey conducted in Mar/Apr 2012 on 25 companies in 9 CEE countries (2) Licensing, permits, customs and trade regulations courts, corruption and crime SOURCE: UniCredit CEE Strategic Analysis, World Bank

  14. Appendix: Data of individual countries • Bulgaria • Czech Republic • Hungary • Latvia • Lithuania • Poland • Romania • Croatia • Kazakhstan • Russia • Serbia • Turkey • Ukraine

  15. Bulgaria (Baa2 stable/BBB stable/BBB- positive) Outlook: At 1.7% real GDP growth for 2011 came in somewhat weaker than expected, on the back of downward revisions to private consumption and investments in particular. In response, we now estimate 2012 GDP growth at 1.2% which is 0.3%pp lower than our mid-December forecast. We think Bulgaria will remain a relative underperformer in the CEE region, due to the continuing process of deleveraging in the banking and non-financial corporate sector on top of still uncompleted labor and housing market rebalancing. The growth outlook is further darkened by weak investments and persistent cash hoarding, as households remain worried about their jobs. Key Events/Dates • 11 May – Number of employees under labor contracts for 1Q12 • 15 May – Flash estimates for 1Q12 real swda GDP growth • 2Q – privatization of minority stakes of the government in electricity distributors CEZ and E.ON

  16. Czech Republic (A1 stable / AA- stable / A+ positive) Outlook: The economy formally registered a recession over H2-11, albeit modest. Leading indicators point to some scope for improvement in exports from here. From the domestic side, we will closely watch a likely peak in CPI that should, with some delay, ease the drag on real consumer purchasing power. The CNB is set to stay on hold with its monetary policy but will need to consider an increase in its assumed CPI trajectory. This will likely remove the repo rate cut option from their baseline scenario for the remainder of 2012. Key Events/Dates • CNB Board meetings – 29Mar, 3 May • Government deficit notification - April • Manufacturing PMI – 2 Apr, 2May, 1 Jun

  17. Hungary (Ba1 negative/BB+ negative/BB+ negative) Outlook: The EC has proposed to suspend EUR 495.2mn of EU’s Cohesion Fund’s allocations to Hungary from 2013 onward unless proper actions are taken in the meantime. The government is in haste to present something convincing on its side but officials expect delays. As markets were confident in an IMF deal and already priced in the ECs proposal Hungary’s borrowing costs dropped steadily and the forint recovered from its historical depths over the past one month. The standstill in negotiations increases the risk of another forint crisis. The real economy performed better than expected in the 4Q with GDP growing by 1.7% yoy, though growth prospects did not improve over the past quarter. Monetary tightening should come on the agenda only as a last resort in a severe market shock. Key Events/Dates • 24 April 2012 – NBH MPC meeting • Aprils 2012 – NBH – Report on Financial Stability • 29 May 2012 – NBH MPC meeting • 26 June 2012 – NBH MPC meeting • 28 June 2012 – NBH – Report on Inflation 17

  18. Latvia (Baa3 positive/BB+ positive/BBB - stable) Outlook: In terms of GDP, Latvia has played catch up with its Baltic peers in 2011, in line our forecast. Though not at its current pace, we believe that both the domestic and external components of growth will continue to show sustainable gains in 2012. A good signal in 1Q2012 came from the (alleged) completion of the external borrowing programme when Govt placed USD 1bn Eurobonds. We however do not rule out possibility of further borrowings in 2012, approximately of the same size. Another good signal came from the results of the referendum on the status of Russia as a state language when majority rejected this proposal. Though the decision will ultimately prove political, Latvia continues to aim for EMU entry in 2014. Key Events/Dates • 10 May/8 Jun – 1Q GDP (prelim/final) • 4 Jun – 1Q Current Account • 23 May – 1Q Unemployment

  19. Lithuania (Baa1 stable/BBB stable/BBB stable) Outlook: Despite external winds, Lithuania posted strong result in 2011, in line with our expectations, successfully resolving banking sector issues (Snoras case). Confirmation of positive investors' sentiment may be found in the results of 2022 USD 1.5bn Eurobond placement in February. Going further into 2012 we expect the growth to moderate to a more sustainable rate, supported mostly by internal demand. The macroeconomic forecast in the budget, approved by Parliament in late December, implies GDP 2.5% yoy to bring the budget deficit to 3.0% of GDP. We see scope for outperformance on this front while being encouraged by the government's willingness to adjust the budget over the course of Q4 to compensate for a weaker growth outlook. Key Events/Dates • 23 Apr., 21 May, 21 Jun – Industrial production • 18-22 Jun – 1Q Current Account • 30 Apr / 30 May – 1Q GDP (prelim/final)

  20. Poland (A2 stable/A- stable/A- stable) Outlook: GDP grew by 4.3% in 2011. Main drivers of growth were individual consumption and gross fixed capital formation. Economic growth is likely to lower in 2012 mainly due to a slowdown in domestic demand. The Ministry of Finance estimates that general government deficit amounted in 2011 to 5.7% of GDP. The government aims to reduce the deficit below 3% of GDP this year. Inflation in 2011 totaled 4.3% and the National Bank of Poland estimates that inflation is likely to decline to about 3.7% in 2012. Falling inflation, weak macroeconomic outlook and appreciation of the PLN will prompt MPC to cut rates – we look for a 25 bps cut in November. Key Events/Dates • MPC rate decisions 4 Apr, 9May, 6Jun • Negotiations and project of pensions system reform • Introduction of tax on mineral exploitation 20

  21. Romania (Baa3 stable/BB+ stable/BBB- stable) Outlook: Expected GDP growth for 2012 has been downgraded to 1.4% on the back of a negative base effect from agriculture, weaker foreign demand and a more feeble fiscal impulse. The risks are skewed to the downside. The budget deficit target of 1.9% - 2.1% of GDP (cash) is likely to be missed because of pre-electoral spending (our forecast is 2.5% of GDP). We expect deficit financing to improve in 2012 in terms of cost (for RON resources) and availability (for FX resources). The main concern for the Romanian economy in 2012 will be external financing for the private sector. Banking sector risks are manageable, total foreign liabilities being covered 140% by the FX reserves of the central bank. Key Events/Dates • 10 April, 11 May, 11 June – Industrial production • Late April – early May 2012 – IMF evaluation • 2 May 2012 – NBR rate decision • 15 May 2012 – Q1 2012 GDP (flash estimate) • 6 June 2012 – Q1 2012 GDP and structure • 27 June 2012 – NBR rate decision 21

  22. Croatia (Baa3 stable/BBB- negative/BBB - negative) Outlook: The weaker global outlook in 1H12 combined with the expected fiscal tightening post-elections is likely to push the economy back into recession in 2012. The main focus in the near-term will be the economic policy initiatives the new government announces given Croatia’s sovereign credit rating is on the bottom investment grade rung with two of three agencies maintaining a negative outlook

  23. Kazakhstan (Baa2 stable/BBB+ stable/BBB positive) Outlook: Real GDP grew by an impressive 7.5% yoy in 2011, supported by consumption. However, growth slowed to 3.8% yoy in January 2012, according to the short-term economic indicator compiled by the StatAgency. Investment outlays fell 3.3% yoy in real terms in January after a meager increase of 2.4% in 2011. Inflation eased to 5.9% yoy in January from a peak of 9.0% in August 2011. The central bank cut its 1W-refinancing rate from 7.5% to 7.0% as of 14 February 2012 as a response. We expect further monetary easing and measures to address the banks’ bad debt problems later this year along with an acceleration of the industrialization program with the help of funding from the Oil Fund. We nevertheless cut our 2012 real GDP forecast to 5.5% from 6.8% previously because of the early 2012 weakness brought about by delays in oil investment. Key Events/Dates • Review of the central bank’s inflation forecast, policy in April • Final concepts for distressed asset fund, BTA, peoples IPO to be published in 1H2011

  24. Russia (Baa1 stable/BBB stable/BBB stable) Outlook: Russia’s economic development in 2012 would be contained by high results of 2011 at 4.3% yoy real GDP growth, exchange rate volatility and stagnating external demand. However, our expectations of growth at 3.9% yoy are very bullish not only on the basis of new government and reforms promised, but also on the basis of continuing development in domestic demand. Although current inflation dynamics is within CBR’s target of 5%-6%, in 2H12 it is likely to leave the range for acceleration in food prices and regulated tariffs. High oil prices support positive trade balance and temporary RUB appreciation, but large negative capital flows trend is still prevailing, and RUB risks remain high. Key Events/Dates • 7th of May – inauguration of the President of the Russian Federation • May – official appointment of the new government • 18-22 of each month – Monthly indicators • Last Fri of each month – CBR rate decision 24

  25. Serbia (not rated / BB stable/BB- stable) Outlook: We expect GDP growth to slow to 1% in 2012 as the international environment impacts export growth and domestic demand remains weak. 1H12 should see continued monetary easing as inflation moderates. The delay in Serbia’s bid for EU candidate country status to March 2012 is also a blow for the government ahead of elections by May 2012. While we see banks increasing long-term exposure to Serbia, heading into 2012 the outlook for the financing of the current account deficit has deteriorated.

  26. Turkey (Ba2 positive/ BB positive/BB+ stable) Outlook: Turkey’s 4Q11 GDP growth is set to be ca. 5.5% carrying the 2011 GDP growth to 8.5%. We have recently revised our 2012 GDP growth estimation to 4.8% from 2.8% on the back of better than expected fixed investment growth for 2012 amidst better external financing prospects. Turkey’s problematic external imbalance will remain as so following a limited recovery at its CAD from at 10% of GDP at YE 2011 to ca. 8.0%-8.5% of its GDP this year. Turkey's double-digit CPI inflation is to ease back to single digits by mid-2Q12; though the base year factors will keep headline inflation volatile until 4Q12 when we expect it to slide down to 7.3%. Fiscal side is not the main worry with the budget deficit to GDP ratio to float at around 2.0% of GDP by end 2012. Though with a still very high external deficit and funding mostly dependent on short-term flows, upgrade to investments grade from rating agencies is unlikely. Key Events/Dates • 2Q12: New incentive scheme and labor law to be announced • 18 Apr; 29 May; 21 Jun- MPC meetings • 2 Apr: 4Q11 GDP data to be released 26

  27. Ukraine (B2 negative / B+ stable / B stable) Outlook: Ukraine continues to adopt the 'fingers crossed' strategy as FX reserves dwindle but at a rate which does not force them towards international support immediately (avg of USD1bn per month over past 6 months, USD0.5bn per month over past 3 months). Economic activity is suffering from a decline in steel prices, lower agricultural exports and negative new credit extension. The C/A deficit stood at almost 6% of GDP last year – while FDI reached almost 5.0% of GDP, rollover ratios on bank external debt stood at only 0.11 in January. Meanwhile President Yanukovych is turning increasing populist ahead of October elections while government revenue growth is easing and its cash pile stands at approx 10% of the full year deficit. While the authorities are clearly in need of hard currency, they prefer to wait for market access than draw off IMF or Russian funds. Key Events/Dates • 29-30 Apr: Q1 preliminary GDP • 5-10 of each month: FX reserve data • Oct 28th: Parliamentary elections

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