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Central & Eastern European Strategy4th quarter 2012

CEE tops peripherals in reforms

Weaker economic performance visible

Some CEE currencies to lose ground

CIS corporate credit tightly priced

Stabilisation of CEE equity markets expected

2 4th quarter 2012

Content

Topical issue: In terms of reforms, CEE leads the Eurozone peripherals 3

Forecasts CEE incl. Austria 4

Asset allocation CEE incl. Austria 6

Special: Lessons from CEE – Eurozone must shrink in the periphery 10

Austria 12

CE: Poland 14

Hungary 16

Czech Republic 18

Slovenia 20

Slovakia 22

SEE: Bulgaria 23

Romania 24

Croatia 26

Serbia 28

Bosnia and Herzegovina 29

Albania 30

CIS: Belarus 31

Russia 32

Ukraine 34

Kazakhstan 36

Turkey 38

Sovereign Eurobonds 40

Corporate Eurobonds 42

Equity markets 44

Sectors 50

Equities - top picks 56

Equities - region overview 61

Sector weightings in comparison 65

Technical analysis 66

Acknowledgements 67

Central & Eastern European Strategy

Explanation:

e ... estimate

f ... forecast

p ... preliminary figures

n.v. ... no value

Abbreviations

Currencies and Countries

ALL Albanian lekBAM Bosnian markaBGN Bulgarian levBYR Belarusian roubelCZK Czech korunaEKK Estonian kroonHUF Hungarian forintHRK Croatian kunaLTL Lithuanian litasLVL Latvian latsPLN Polish zlotyRON Romanian leuRSD Serbian dinarRUB Russian roubleSIT Slovenian tolarSKK Slovak korunaTRY Turkish liraUAH Ukrainian hryvnia

Economic abbreviations

%-chg Percentage change (not in percentage points)avg averagebp basis pointsC/A Current AccountCPI Consumer Price IndexFCY Foreign CurrencyFDI Foreign Direct InvestmentsFX Foreign ExchangeFY Full yearGDP Gross Domestic ProductLCY Local Currencymmav month moving averagemom month on monthpp percentage pointsPPI Producer Price Indexqoq quarter on quarterT/B Trade BalanceULC Unit Labour Costsyoy year on yearytd year-to-date

Stock Exchange Indices

BELEX15 Serbian stock indexBET Romanian stock indexBUX Hungarian stock indexCROBEX10 Croatian stock indexPX Czech stock indexMICEX Russian stock indexSASX-10 Bosnian stock indexWIG 20 Polish stock index

Equity related

DY Dividend yieldEG Earnings growthLTG Long term (earnings) growthP/E Price earnings ratio

RS Recommendation suspendedUR Under Revision

Eurozone Austria, Belgium, Cyprus, Estonia, Finland, France,

Germany, Greece, Ireland, Italy, Luxembourg, Malta,

Netherlands, Portugal, Slovenia, Slovakia, Spain

CE Central European countries - Poland, Hungary, Czech

Republic, Slovakia, Slovenia

SEE South East European countries - Albania, Bosnia and

Herzegovina, Bulgaria, Croatia, Romania, Serbia

CIS European CIS (Commonwealth of Independent States)

countries - Russia, Ukraine, Belarus

CEE Central and Eastern Europe (CE + SEE + CIS)

34th quarter 2012

Topical issue

As the risks of Eurozone disintegration peaked in the summer of 2012, it became clear that investors were taking a fundamentally more differentiated approach to Eas-tern Europe. Whilst the euro slid to new lows for the year, most of the CEE currencies posted good performance. In contrast to the record-setting yield premiums seen in Spain and Italy, yield levels in some of the CEE countries essentially moved lower. There are good reasons for these developments. Because since 2009 most of the countries in Central and Eastern Europe have moved forward with massive adjust-ment programmes to adapt to the new financial and growth environment, whereas the southern Eurozone countries waited far too long. One point that deserves special attention is the sharp decline in domestic final demand, which has helped to radically reduce unsustainable current account deficits. This long-term improvement is also solidly supported by flexible labour markets and the still favourable cost structures compared to productivity. It is important to note that the credit crunch in the Eurozone has essentially not affected the CEE countries.Nonetheless, a trend towards weaker economic performance is also visible in Eas-tern Europe, due to the growth problems at the global level. In particular, the coun-tries in the Balkans, and Hungary, the Czech Republic and Slovenia have all been hit by recession. Russia, Poland, Slovakia and Turkey are doing better in terms of eco-nomic growth, but the rates of expansion are decelerating in these countries as well. For Austria, GDP growth is projected at just under 1% for both 2012 and 2013. In general, we expect to see increasing economic momentum as 2013 progresses.Impact on monetary policy and exchange rates

With the gradual onset of a recovery for the euro, some of the CEE currencies may lose ground until the end of 2012. Nevertheless, we only view this as a temporary interruption, as 2013 should be marked by rising exchange rates when the economy begins to build positive momentum again. Nevertheless, the central banks in the CEE countries will probably move quickly to ease monetary policy and most of them will thus also lower interest rates. One of the goals in this regard is also to support lending growth in CEE.Impact on the bond and equity markets

The approximation of CDS spreads for Poland, the Czech Republic and Slovakia to those of the core Eurozone countries reflects the diversification desires of interna-tional investors, which is also noticeable in the extremely low yield premiums com-pared to Germany. With the ECB’s intervention on the government bond markets, the strongest movements are now probably over. Consequently, we forecast mild increases in yields for Poland, Hungary, the Czech Republic and Russia. Turning to equities, we still expect to see some headwind from the economy, but the rising risk tolerance for equity investments in the established markets will also have a tangible impact in the CEE markets. Thus, the rebounds in equity prices seen during the late summer will probably be well supported and make some selective investments possible. With an eye to Austria, we project only slightly higher index levels for the ATX, and thus it is unlikely that the first quarter’s highs for 2012 will be exceeded.

Peter Brezinschek

In terms of reforms, CEE leads the Eurozone peripherals

Recommendations* – debt markets

LCY bonds

Buy TRY 10y T-bonds

Eurobonds

Buy Poland USD, Croatia EUR

Corporate bonds

Buy6.699% Bank of Moscow 03/2015

* horizon: end 4th quarter 2012; ** the indicated price is the last price as available at 6.30 a.m. (CET) on 18 September 2012Source: Raiffeisen RESEARCH

Recommendations* - stock markets

Indices

Hold

Sell

ATX, WIG 20, BUX, PX, MICEX, ISE National 100

CROBEX10, BET

Sectors

Overweight Consumer staples, Real Estate

Underweight Energy, Financials

Equities

Buy

RHI EUR 20.96 Target price: EUR 27.50Immofinanz EUR 2.83 Target price: EUR 3.50Eurocash PLN 39.35 Target price: PLN 48.00Cyfrowy PolsatPLN 14.52 Target price: PLN 16.80MagnitRUB 4,394 Target price: RUB 6,257

Real GDP index (2008=100)

* GIPS: Greece, Italy, Portugal, SpainSource: national sources, Eurostat, Raiffeisen RESEARCH

80

90

100

110

2006 2007 2008 2009 2010 2011 2012e2013f

CE SEE CIS

Eurozone GIPS*

n Growth prospects remain varied in CEE, but a weaker overall trend is expected in H2

n CEE well ahead of the Eurozone peripherals in terms of reforms to achieve stable, long-term equilibrium

n Possibility of some temporary corrections for CEE currencies until the end of the year

4 4th quarter 2012

Consumer prices (avg, % yoy)

Countries 2011 2012e 2013f 2014f

Poland 4.3 3.9 2.9 2.5Hungary 3.9 5.6 4.7 4.3Czech Rep. 1.9 3.4 2.5 2.0Slovakia 3.9 3.6 2.5 3.0Slovenia 1.8 2.5 2.2 2.0CE 3.6 3.9 3.0 2.7

Croatia 2.3 3.0 3.0 2.5Bulgaria 4.2 3.0 3.1 3.4Romania 5.8 3.2 4.2 3.3Serbia 11.3 6.5 8.0 5.5Bosnia a. H. 3.7 2.2 2.0 2.0Albania 3.5 2.3 2.5 3.0SEE 5.4 3.4 4.1 3.3

Russia 8.5 5.1 7.1 6.7Ukraine 8.0 1.7 6.5 8.0Belarus 53.2 60.0 20.0 17.5CIS 9.6 6.3 7.4 7.1CEE 7.4 5.3 5.7 5.4

Turkey 6.5 9.0 6.3 6.0Austria 3.6 2.5 2.3 2.1Eurozone 2.7 2.6 2.1 1.8

USA 3.2 2.1 2.0 2.0Source: Thomson Reuters, Raiffeisen RESEARCH

Current account balance (% of GDP)

Countries 2011 2012e 2013f 2014fPoland -4.3 -3.9 -4.3 -4.2Hungary 1.4 1.5 1.9 2.0Czech Rep. -2.9 -2.9 -3.0 -2.7Slovakia 0.1 2.6 3.5 3.8Slovenia -1.1 -0.6 -1.1 -1.0CE -2.6 -2.2 -2.3 -2.2Croatia -1.0 -1.6 -2.0 -2.2Bulgaria 0.3 -1.9 -2.7 -3.0Romania -4.2 -4.4 -4.0 -4.2Serbia -9.3 -13.0 -10.3 -10.3Bosnia a. H. -8.8 -6.9 -6.7 -7.0Albania -11.3 -10.8 -9.1 -9.2SEE -4.1 -4.9 -4.5 -4.7Russia 5.5 4.1 2.4 1.7Ukraine -6.2 -6.0 -5.8 -5.2Belarus -10.5 -5.6 -7.1 -9.5CIS 4.1 3.1 1.5 0.9CEE 1.2 0.8 -0.2 -0.5Turkey -10.0 -7.5 -7.0 -6.6Austria 1.9 2.1 2.0 1.7Eurozone 0.0 0.4 0.2 0.3USA -3.1 -3.0 -2.8 -3.1Source: Thomson Reuters, Raiffeisen RESEARCH

Forecasts

General budget balance (% of GDP)

Countries 2011 2012e 2013f 2014f

Poland -5.1 -3.4 -2.8 -1.6Hungary 4.3 -2.9 -3.5 -3.5Czech Rep. -3.1 -2.9 -2.9 -1.9Slovakia -4.8 -4.6 -2.8 -2.3Slovenia -6.4 -4.0 -3.5 -3.2CE -3.4 -3.4 -2.9 -2.0

Croatia -5.0 -4.3 -3.5 -3.3Bulgaria -2.1 -1.4 -2.0 -1.7Romania -5.2 -3.0 -3.0 -3.0Serbia -4.5 -6.6 -5.9 -5.0Bosnia a. H. -1.3 -2.0 -2.0 -1.0Albania -3.5 -3.5 -3.0 -3.0SEE -4.4 -3.4 -3.2 -3.0

Russia 0.8 -0.3 -1.0 -2.0Ukraine -4.3 -4.0 -2.5 -2.0Belarus 2.4 -0.5 -1.0 0.0CIS 0.4 -0.6 -1.1 -1.9CEE -1.2 -1.7 -1.9 -2.1

Turkey -1.4 -2.0 -2.0 -2.5Austria -2.6 -2.9 -2.4 -1.7Eurozone -4.1 -3.5 -3.2 -2.4

USA -8.7 -7.6 -3.8 -2.3Source: Thomson Reuters, Raiffeisen RESEARCH

Public debt (% of GDP)

Countries 2011 2012e 2013f 2014f




Turkey 39.1 36.2 35.0 35.0Austria 72.4 74.4 75.6 75.5Eurozone 87.2 91.8 92.6 93.0


Gross foreign debt (% of GDP)

Countries 2011 2012e 2013f 2014f




Turkey 42.6 42.7 41.7 43.0Austria n.v. n.v. n.v. n.v.Eurozone n.v. n.v. n.v. n.v.

USA n.v. n.v. n.v. n.v.Source: Thomson Reuters, Raiffeisen RESEARCH

Exchange rate EUR/LCY (avg)

Countries 2011 2012e 2013f 2014f

Poland 4.12 4.22 4.06 4.00Hungary 279.3 291.9 293.8 290.0Czech Rep. 24.6 24.9 23.8 23.0Slovakia euro euro euro euroSlovenia euro euro euro euro

Croatia 7.43 7.56 7.55 7.50Bulgaria 1.96 1.96 1.96 1.96Romania 4.24 4.50 4.60 4.50Serbia 102.0 114.5 117.1 116.0Bosnia a. H. 1.96 1.96 1.96 1.96Albania 140.3 139.7 138.5 138.3

Russia 40.9 40.2 42.1 42.8Ukraine 11.09 10.72 11.77 12.46Belarus 6900 11000 13100 15100

Turkey 2.34 2.35 2.30 2.25Austria euro euro euro euro


Ratings*

Countries S&P Moody's Fitch

Poland A- A2 A-Hungary BB+ Ba1 BB+Czech Rep. AA- A1 A+Slovakia A A2 A+Slovenia A Baa2 A-

Croatia BBB- Baa3 BBB-Bulgaria BBB Baa2 BBB-Romania BB+ Baa3 BBB-Serbia BB- not rated BB-Bosnia a. H. B B3 not ratedAlbania B+ B1 not rated

Russia BBB Baa1 BBBUkraine B+ B2 BBelarus B- B3 not rated

Turkey BB Ba1 BB+Austria AA+ Aaa AAA

USA AA+ Aaa AAA* for FCY, long-term debtSource: Bloomberg, Raiffeisen RESEARCH

Real GDP (% yoy)

Countries 2011 2012e Consensus 2013f Consensus 2014f ConsensusPoland 4.3 2.5 2.7 2.5 2.5 3.8 3.4Hungary 1.7 -1.0 -1.1 0.5 0.7 1.5 2.1Czech Rep. 1.7 -0.9 -0.7 0.5 1.1 1.8 2.3Slovakia 3.3 2.4 2.0 2.0 2.1 3.0 3.6Slovenia -0.2 -1.3 -0.9 1.0 0.8 1.5 1.7CE 3.1 1.1 1.2 1.7 1.8 2.9 2.9Croatia 0.0 -1.8 -1.2 1.0 0.8 2.0 1.8Bulgaria 1.7 1.5 0.8 1.5 2.0 3.5 3.1Romania 2.5 0.5 0.9 2.0 2.0 3.0 3.4Serbia 1.6 -1.0 0.0 1.0 1.5 2.0 n.v.Bosnia a. H. 1.3 -1.0 -0.1 1.0 1.4 2.5 n.v.Albania 3.1 2.0 1.5 3.0 2.9 4.0 n.v.SEE 1.8 0.1 0.4 1.6 1.7 2.8 n.v.Russia 4.3 3.7 3.7 3.9 3.7 4.0 4.1Ukraine 5.2 1.5 2.1 2.5 3.3 4.5 3.9Belarus 5.3 3.0 2.8 4.0 3.3 4.5 n.v.CIS 4.4 3.5 3.5 3.8 3.7 4.1 n.v.CEE 3.7 2.4 2.4 2.9 2.7 3.6 n.v.Turkey 8.5 3.0 2.8 4.0 4.3 4.5 4.7Austria 2.7 1.0 0.4 0.9 1.1 1.5 n.v.Eurozone 1.5 -0.5 -0.5 0.2 0.3 1.1 1.4USA 1.8 2.0 2.2 1.0 2.1 2.5 2.6

Source: wiiw, Raiffeisen RESEARCH

54th quarter 2012

Exchange rate forecast

Countries 17-Sep* Dec-12 Mar-13 Sep-13vs EUR

Poland 4.10 4.20 4.15 4.00Hungary 283.17 295.0 300.0 290.0Czech R. 24.54 24.2 24.0 23.6Croatia 7.40 7.60 7.55 7.55Romania 4.49 4.65 4.65 4.55Serbia 115.74 120.0 118.0 115.0Albania 139.01 140.3 139.5 138.5

vs USD

Russia 30.6 31.9 31.5 32.0Ukraine 8.12 8.80 8.80 9.00Belarus 8420 9200 9550 10250Turkey 1.80 1.75 1.75 1.75

EUR/USD 1.31 1.32 1.30 1.33Source: Bloomberg, Raiffeisen RESEARCH

2y LCY yield forecast

Countries 17-Sep* Dec-12 Mar-13 Sep-13

Poland 4.06 4.06 4.28 4.60Hungary 6.49 6.95 6.95 6.50Czech R. 0.44 0.50 0.50 1.00Croatia 4.00 3.95 3.90 3.70Romania 6.00 6.00 5.85 5.65Russia 6.54 6.60 6.70 6.80Turkey 7.11 7.10 7.00 6.70

Austria 0.10 0.30 0.30 0.45Eurozone 0.08 0.20 0.20 0.40USA 0.25 0.20 0.30 0.40

* 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Key interest rate forecast


Poland 4.75 4.25 4.00 4.00Hungary 6.75 6.50 6.50 6.00Czech R. 0.50 0.25 0.25 0.25Romania 5.25 5.25 5.25 5.25Russia 8.25 8.50 8.75 9.00Turkey 5.75 5.75 5.75 6.25

Eurozone 0.75 0.75 0.75 0.75USA 0.25 0.25 0.25 0.25


Forecasts

3m money market rate forecast



Eurozone 0.25 0.40 0.50 0.50USA 0.38 0.30 0.25 0.25

* 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH Source: Bloomberg, Raiffeisen RESEARCH











Yield structure

Bp-spread between 10y and 3m maturitySource: Bloomberg, Raiffeisen RESEARCH

020406080

100120140160180200

Pola

nd

Hun

gary

Cze

ch R

ep.

Rom

ania

Euro

zone

USA

LCY changes vs. EUR (% qoq)*

* 17-Sep in comparison to 02-Jul 2012Source: Bloomberg

CZK

PLN

RUB

HUF

RON

TRY

USD

-6 -4 -2 0 2 4 6

Expected yield change

Bp-change of gov. bond yield in next 3 monthsSource: Bloomberg, Raiffeisen RESEARCH

-20

-10

0

10

20

30

40

50

60

Pola

nd

Hun

gary

Cze

ch R

ep.

Rom

ania

Euro

zone

USA

Expected index performance

Source: Raiffeisen RESEARCH

-8%-6%-4%-2%0%2%4%6%8%

10%

ATX

WIG

20

BUX PX

MIC

EX BET

CRO

BEX1

0

ISE

Nat

. 100

Dec-12 Mar-13

Stock market indicators

Earnings growth

Price/ear-nings ratio

12e 13f 12e 13f

ATX 6.3% 12.6% 11.2 9.9WIG 20 -11.9% 1.2% 11.1 11.0BUX -15.1% 21.4% 9.6 7.9PX1 22.9% 9.1% 12.7 11.7MICEX2 -5.6% -1.4% 5.7 5.8BET 1.4% 10.4% 6.1 5.6CROBEX10 4.8% 0.7% 9.0 8.9ISE Nat.100 10.6% 13.2% 10.8 9.6

1 Czech Rep. (PX): excl. Erste Group and Vienna Insur-ance Group2 Russia (MICEX): excl. Inter RAO, Rusal, Sberbank Pref. and Surgutneftegaz Pref.Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

Stock market forecasts

Index estimates

17-Sep* Dec-12 Mar-13 Sep-13

ATX 2,198 2,250 2,300 2,420WIG 20 2,403 2,500 2,550 2,650BUX 18,952 19,500 19,800 20,500PX 970 1,000 1,025 1,075MICEX 1,530 1,600 1,650 1,700BET 4,975 4,700 5,000 5,300CROBEX10 940 880 940 1,000ISE Nat. 100 68,092 71,000 73,000 76,000

* 11:59 p.m. (CET)In local currencySource: Bloomberg, Raiffeisen RESEARCH

6 4th quarter 2012

Asset allocation - performance

Sum of last quarter*

RBI portfolio (in EUR) 11.92%Benchmark (in EUR) 11.92%RBI outperformance (in EUR) 0.01%by weighting of equities vs. bonds 0.02%

regional equity weightings -0.02%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.00%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

* 26 Jun 2012 – 17 Sep 2012EB...EurobondsSource: Raiffeisen RESEARCH

Compared to the benchmark, the CEE portfolio produced an almost identical performance in Q3 2012. The 3-pp overweighting of equities versus bonds gen-erated outperformance of 2bp in the first period. In the subsequent periods, this weighting was not maintained due to the uncertain global economic conditions.

In terms of bonds, during the first period the Czech Republic was overweight based on our positive currency assessment, and together with the underweight position on Hungary this led to outperformance of around 1bp. This, however, was offset by underperformance for our equity weightings, even though the un-derweighting of Croatia resulted in mild outperformance. Contrary to the expec-tations, there was no positive performance by Czech stocks and the development of Polish stocks was also surprisingly negative.

During the second period, the CEE portfolio once again moved almost 100% in line with the benchmark. First and foremost, the underperformance stemmed from an underweighting of Romania, which saw unexpectedly good develop-ment despite the political bumpiness there. In terms of equities, the overweighting of Czech stocks resulted in outperformance of 4bp. The positive view on Czech bonds generated outperformance of 2bp.

During the third period, the overweighting of the Czech Republic and the un-derweighting of Romania were maintained in the bond segment, which resulted in a slight underperformance of 1bp. Looking at the equities segment, this time Czech Republic was underweighted versus Croatia, ultimately leading to a neu-tral result.

Veronika Lammer

Market conditions remained difficult in CEE in the third quarter

Period 1: 25 Jun 2012 – 26 Jul 2012


regional equity weightings -0.03%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.01%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

EB...Eurobonds Source: Raiffeisen RESEARCH

Period 2: 26 Jul 2012 – 28 Aug 2012


regional equity weightings 0.01%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.00%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

EB...Eurobonds Source: Raiffeisen RESEARCH

Period 3: 28 Aug 2012 – 17 Sep 2012

RBI portfolio (in EUR) 2.83%Benchmark (in EUR) 2.83%RBI outperformance (in EUR) -0.01%by weighting of equities vs. bonds 0.00%

regional equity weightings 0.00%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.00%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

EB...Eurobonds Source: Thomson Reuters, Raiffeisen RESEARCH

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

96

100

104

108

112

116

120

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12

in p

erce

ntag

e po

ints

RBI-Portf. Outperformance (r.h.s.)

Performance 2012

Source: Thomson Reuters, Raiffeisen RESEARCH

n CEE portfolio’s performance almost identical to the benchmark portfolio

n Outperformance in the first period, thanks to the weighting of equities/bonds

n Successful positionings, especially in the Czech Republic

74th quarter 2012

Asset allocation - total portfolio

Prospects for the CEE markets brightened up even more recently, thanks to the forceful announcements of the ECB and the Fed. Mario Draghi’s plans for un-limited purchases of Italian and Spanish bonds have resulted in a significant reduction of the contagion risks in the Eurozone, and thus for CEE as well. The additional expansion of the liquidity by the central banks should also soften the negative impacts of weaker credit growth. The regulatory obstacles in terms of the minimum capital requirements which have been imposed since the outbreak of the crisis have substantially reduced banks’ scope for additional lending. Ulti-mately, the deflationary tendencies that this creates and the reduced growth are the main risks to the growth prospects of the entire region.

In terms of economic activity, however, worries remain. Leading economic indica-tors and industrial production are still trending lower, in particular in Germany, the key driver of economic growth. It remains to be seen whether a viable turna-round can be achieved in this trend.

Over the medium and long term, we still see good chances for the cyclical rally in the CEE region to continue. This should be beneficial for high-growth markets such as Poland, Russia, Ukraine and Turkey. We also still see considerable upside potential, thanks to the fundamental valuations. CEE equities in particular still look relatively cheap compared to their Western European peers. We believe that the outlook for bonds is slightly more negative compared to equity investments.Consequently, we overweight equities by 3 percentage points versus bonds in our CEE portfolio.

Veronika Lammer

Sentiment remains positive in CEE

Historical volatility & performance (in %)

Equities* Bonds

Volatility Performance Volatility Performance

Countries EUR LCY EUR LCY EUR LCY EUR LCY

Czech Republic 14.2 12.1 -3.8 -2.7 7.2 4.2 3.8 5.0

Hungary 25.8 19.4 13.1 3.1 12.2 4.5 20.6 9.9

Poland 24.0 17.1 9.4 4.5 10.8 2.8 9.9 5.0

Romania 21.5 19.6 3.6 6.9 6.2 0.6 -1.9 1.2

Russia 23.4 20.1 -1.6 -2.3 9.6 2.5 4.2 3.9

Turkey 17.2 17.0 24.6 15.3 8.5 2.6 17.0 8.2

Croatia 7.5 6.8 -13.1 -13.0 2.2 2.2 9.3 9.3

CEE 20.5 - 17.8 - 6.4 - 17.0 -* MSCI indices

Volatility in EUR; 3 months volatility annualised; ytd performance in EURLCY…local currencySource: Thomson Reuters, Raiffeisen RESEARCH

CEE portfolio weightings Q4 2012

LCY…local currencySource: Raiffeisen RESEARCH

Risk-return (in %)

In local currencySource: Thomson Reuters, Raiffeisen RESEARCH

n ECB intervention lowers risk of contagion in the Eurozone

n Positive trend projected for the stock market for the next quarter

n Residual risks to economic activity remain

Equities: 53% [+3.0 bp]

LCY-bonds: 37.6% [-2.4 bp]

EB USD: 4.7% [-0.3 bp]

EB EUR: 4.7% [-0.3 bp]

Russia

Poland

Czech Republic

Hungary

Dow Jones

DJ Euro-stoxx

CEE

Romania

4

6

8

10

12

14

16

18

15 20 25 30

His

toric

ytd

per

form

ance

in %

Historic 1y volatility in %

8 4th quarter 2012

Asset allocation - bonds

Overall, we see the outlook for the CEE bond market as somewhat sub-dued for the quarter ahead. Negative impacts on these markets could stem from the continued economic weak-ness in the Eurozone.For Turkish bonds, however, we ex-pect to see positive performance con-tributions for the quarter. The recently weaker performance in EUR is mainly due to the downward trend in TRY/EUR and USD/EUR. Nevertheless, there should be a positive turnaround in this trend for EUR investors, thanks to the unorthodox monetary policy of the Turkish central bank featuring more interest rate cuts and a stabilisa-tion of the exchange rate.By contrast, the outlook for the Hun-garian bond market remains nega-tive. We expect to see negative im-pacts on LCY bonds, both from interest rate and currency developments. Our projection for Czech bonds has also shifted to negative. Even though we expect mild appreciation of CZK/EUR, further interest rate cuts should negate this effect.Consequently, we underweight the Czech Republic and Hungary by one percentage point each, and over-weight Turkey by 2 percentage points.

Mario Annau

More subdued outlook for CEE bonds

Expected bond market performance

3m 6m 9m 12m


Czech Republic 2.1 -0.5 0.5 -2.9 1.3 -2.9 3.7 -1.5

Hungary -3.9 -0.3 -3.9 1.4 -0.4 3.4 2.9 5.0

Poland -1.2 0.7 -0.3 0.4 -0.1 0.6 4.4 1.3

Romania -3.3 -0.1 -1.1 2.1 2.1 4.3 5.8 6.9

Russia -2.5 1.5 3.1 4.6 3.1 7.0 3.1 8.4

Turkey 5.9 4.6 9.6 6.5 12.9 7.5 9.6 9.1

Croatia -3.0 -0.3 -0.3 1.7 1.8 3.2 3.1 5.2 Not annualised; 10y US treasury bond, LCY…local currencySource: Raiffeisen RESEARCH

0

2

4

6

8

10

12

Lith

uani

a (B

BB)

Pola

nd (A

-)

Hun

gary

(BB+

)

Bulg

aria

(BBB

)

Russ

ia (B

BB)

Cro

atia

(BBB

-)

Rom

ania

(BB+

)

Serb

ia (B

B-)

Turk

ey (B

B)

Ukr

aine

(B+)

EUR Segment USD Segment

Historical relative performance*

* to benchmark (BM), EMBIG EUR Europe, EMBIG USD Europe, in % yoySource: Thomson Reuters, Raiffeisen RESEARCH

0%

10%

20%

30%

40%

50%

Cze

ch R

epub

lic

Hun

gary

Pola

nd

Rom

ania

Russ

ia

Turk

ey

Cro

atia

EB U

SD

EB E

UR

Benchmark RBI

Portfolio weightings: bonds*

* Local currency (LCY) bonds; Share in percentage pointsSource: Raiffeisen RESEARCH

n Czech Republic: underweighted despite mild appreciation of CZK/EUR

n HUF depreciation anticipated, Hungary underweighted

n Bullish on Turkish bonds: more interest rate cuts are expectable

94th quarter 2012

Asset allocation - equities

General market outlook seems positive

n Overweight high beta markets: Russia and Poland

n Hungary: Good equity performance despite poor economic situation

n Czech Republic: expected underperformance due to defensive composition

Expected stock market performance (in %)

3m 6m 9m 12m


Poland 7.1 9.7 11.3 12.7 15.6 17.0 22.2 19.2

Hungary 3.9 8.3 5.3 11.5 12.2 16.9 15.2 17.9

Czech Republic 7.9 6.4 10.8 8.4 17.0 13.5 20.1 15.5

Russia -2.8 9.2 6.1 10.5 10.8 17.1 9.7 18.4

Romania 6.2 9.9 8.0 11.8 14.8 17.5 17.9 19.4

Croatia 4.1 6.9 5.8 7.9 12.5 14.1 13.8 16.1Not annualised, LCY…local currencySource: Raiffeisen RESEARCH

-10%

-5%

0%

5%

10%

15%

20%

Cro

atia

Pola

nd

Rom

ania

Hun

gary

Cze

ch R

epub

lic

Russ

ia

EUR Local currency

Historical relative performance*

* to CEESource: Thomson Reuters, Raiffeisen RESEARCH

0%

10%

20%

30%

40%

50%

Cze

ch R

epub

lic

Hun

gary

Pola

nd

Russ

ia

Cro

atia

Rom

ania

Benchmark RBI

Portfolio weightings: stocks*

* Share in percentage pointsSource: Raiffeisen RESEARCH

The improvement in the general out-look for risky asset classes supports a very offensive weighting in our CEE portfolio as well, as the markets in CEE should also profit from the overall up-ward trend on the equity markets. In the current phase, we strongly prefer cyclical indices with high betas. We favour the markets in Russia and Poland, thanks to the better eco-nomic outlook and the stronger cycli-cal weighting of these indices. The Hungarian market also still has con-siderable potential to catch up, even though the long-term economic outlook is rather gloomy. By contrast, we pro-ject relative underperformance on the Czech market, as this market has al-ready gone a long way. Furthermore, the defensive composition of the PX should hinder this market if a cyclical rally unfolds. The Romanian index will probably also continue its underper-formance. We thus overweight Russia, Poland and Hungary by one percent-age point each and underweight the Czech Republic and Romania by 1.5 percentage points each.

Mario Annau

10 4th quarter 2012

Special

The Eurozone is heading for a recession in H2 2012, driven by the Eurozone peripheral countries. The large Eurozone peripherals are also pushing down eco-nomic growth in the core Eurozone countries, according to high frequency eco-nomic and confidence indicators. Therefore, it is clear that CEE and the CE region in particular are facing cyclical headwinds. Policymakers in CEE are preparing for an adverse environment. The Russian central bank increased the RUB-trading range against the USD to have more flexibility, and central banks in CE are using their remaining monetary policy space. However, from a structural perspective things are not that bad in CE and SEE. Firstly, the banking sector performance in CEE remains solid compared to the Western Eurozone. The Eurozone banking sector is currently experiencing a large scale fragmentation (or “Balkanisation”) with significant cuts in cross-border financing. Secondly, compared to the Euro-zone peripherals, significant adjustments have been achieved in CE and SEE.For instance, in CE and SEE 70-100% of the required cumulative 2009-2013 cur-rent account adjustment (as % of GDP) took place in 2009-2011, while the corre-sponding figure in the Eurozone peripherals is less than 60%. Interestingly, Ireland is the only Eurozone peripheral country that shows current account rebalancing which comes close to the achievements in CE and SEE. The findings are more or less the same on the fiscal side, where around 60-80% of the cumulative 2010-2013 fiscal adjustment (deficit reduction in % of GDP) in CE and SEE took place in the years 2010-11, while the respective reading in the Eurozone Peripherals stands at 40%. The latter aspect is even more alarming as these countries suffer from a public debt sustainability problem, which cannot be said about CE and SEE. The above-mentioned adjustment in CE and SEE came at a cost: in terms of relative output loss (e.g. measured as drop in GDP growth 2008-2009 compared to pre-crisis years), the CE and SEE regions took a much stronger hit in the initial crisis years of 2008-2009 as compared to the Eurozone peripherals. For CE, this is especially true when the performance of Poland is screened out. Moreover, many CE and SEE countries with free-floating currencies experienced a tangible currency depreciation in 2008-2009, which is a missing element in the Eurozone peripherals. The external value of the EUR remains at a fairly strong level as it is also the currency of the core Eurozone countries and their debt markets (e.g. German Bunds). According to nominal effective exchange rate indices compiled by the BIS, free-floating currencies in CE and SEE lost around 10-20% in recent years, while the respective indices for the Eurozone peripherals are just some 5% lower than in 2008-2009. However, a free-floating currency alone is not enough to do the trick, and CE/SEE countries with fixed exchange rates (Bulgaria, Slova-kia) also achieved significant, front-loaded consolidation in terms of their public finances and/or external balances.There are at least three important lessons to be learned from the above trends in CE and SEE. Firstly, the economies of the Eurozone peripherals must shrink and reduce their domestic demand. A deep recession without much countercyclical policy action is the only way to shrink fairly high current account deficits, which

Lessons from CE & SEE: Eurozone must shrink in the periphery

BIS cross-border banking claims*

* Dec 2007=100; latest data point Q1 2012Source: BIS, Raiffeisen RESEARCH

Real GDP (% yoy)

Real GDP Index (2008=100)



405060708090

100110120130140

Dec.2007 Mar.2009 Jun.2010 Sep.2011CE+SEE SpainItaly PolandHungary

-6

-4

-2

0

2

4

6

8

2000 2003 2006 2009 2012e

CE SEE

GIPS* CE-4 (ex. PL)

70

75

80

85

90

95

100

105

110

115

2004 2007 2010 2013f

Germany GIPS*CE SEE

n A lot of adjustments in CE and SEE from 2009-2011, some upside in the SEE region in the year 2013/14

n Similar adjustments (e.g. current account balance or public finances) still outstanding in Eurozone periphery

n Adjustments in Slovakia & Bulgaria show that overall economic flexibility and not FX flexibility does matter!

114th quarter 2012

Special

Current account rebalancing

* GIPS: Greece, Italy, Portugal, Spain** CE-3: CZ, SK, HU (as not C/A deficit reduction pres-sure in PL)Source: national sources, Eurostat, Raiffeisen RESEARCH

Public debt adjustment


* GIPS: Greece, Italy, Portugal, Spain** CE-3: CZ, SK, HUSource: national sources, Eurostat, Raiffeisen RESEARCH


will also help to bring down the double deficits (i.e. external financing needs). Secondly, experience in CE and SEE shows that front-loaded, determined public and private sector adjustments are quickly rewarded by financial markets. For instance, CDS spreads for some former “default candidates” in CE and SEE de-creased substantially in recent years. Currently, several CE and SEE countries are priced close to the core Eurozone countries on financial markets. Thirdly, in terms of relative real exchange rate (REER) overvaluation, it is not only the overshooting of the pre-crisis years which has to be corrected. Countries suffering from weak international competitiveness must first gain a certain cost advantage (possibly beyond an equilibrium REER level) before exports can compensate for weak do-mestic demand.All in all, it seems that there is no other option than pro-cyclical public and private sector consolidation for the Eurozone peripherals, i.e. a period of pro-cyclical expansion must be corrected by pro-cyclical cuts. With the benefit of hindsight, one has to say that some Eurozone peripherals and CEE countries (and even some core Eurozone countries) pursued an overly loose fiscal policy during the very fa-vourable pre-crisis economic environment. Moreover, similar to some CE countries and many SEE countries (which profited from unseen banking sector integration by European standards), the Eurozone peripherals also suffered from a “risk mis-pricing” problem (i.e. an unsustainable Eurozone yield and country risk premium compression). In both cases, the latter resulted in pro-cyclical, credit-driven devel-opments which boosted domestic demand and wages beyond sustainable levels. This boost is unlikely to return in SEE and the Eurozone peripherals, and therefore the pre-crisis economic growth is unlikely to be reached in post-crisis times. How-ever, it is also clear that the ongoing deep recession in the Eurozone peripherals will only shrink the cyclical component of the current account deficits. The experi-ence from CE and SEE shows that more sustainable economic rebalancing re-quires a substantial shift of resources and employees from the non-tradable sector to the tradable sector, which is usually easier in a flexible business environment (e.g. such as in Slovakia or Bulgaria, not to mention the Baltic countries). There-fore, reducing the current acoount deficits and increasing price competitiveness on international markets are just the first step in a longer journey. This is especially true for the larger Western European economies with sizeable structural adjust-ment and competitive needs. Looking at the rebalancing experience in CEE, it is clear that small, open economies are in a much better position to achieve export-led external rebalancing. Therefore, it comes as no surprise that the few remaining “problem children” in the CE and or SEE region (e.g. Slovenia, Croatia, Serbia) are suffering from problems such as lack of real exchange rate adjustment, lack of international competitiveness, a relatively rigid business environment and a narrow export base.From a CE and SEE perspective, finding a sustainable solution to the structural weaknesses inside the Eurozone is very much in the self-interests of the region as a whole. It is an “obvious” statement that in the future the CEE region will grow faster than Western Europe. A growth differential of at least 2 percentage points between the average Eurozone and CEE GDP growth seems the most likely scenario for the years to come. However, it will matter a great deal whether this 2-percentage point growth differential comes on top of weaker or stronger perfor-mance in the Eurozone (i.e. GDP growth below 1% in the years to come or closer to 2% following the recession in 2013 and a potential cyclical recovery in 2014).

Gunter Deuber

40%

50%

60%

70%

80%

90%

100%

0

2

4

6

8

10

12

CE SEE GIPS* Ireland CE-3**Cumulative current account adjustment (2009-2013,percentage points)

% of current account rebalancing 2009-2013achieved in 2009-2011 (r.h.s.)

40%

50%

60%

70%

80%

90%

100%

0

1

2

3

4

5

6

CE SEE GIPS* CE-3**Cumulative budget balance adjustment (2010-2013,percentage points)% of fiscal adjustment 2010-2013 achieved in2010-2011 (r.h.s.)

0

20

40

60

80

100

120

2000 2003 2006 2009 2012e

CE SEEEurozone GIPS*Germany

12 4th quarter 2012

Austria

The Austrian economy is also paying the price for the dismal economic develop-ments in the currency union. Real GDP growth in Q2 2012 decelerated tangibly, falling from 0.5% qoq to just 0.1% qoq. Even though this result still leaves Aus-tria in significantly better shape than the Eurozone as a whole, the slowdown in Austrian growth was even stronger than what was seen in Germany for example (Q1: 0.5% qoq; Q2: 0.3% qoq). Foreign trade is the main factor behind the significant slowdown in economic activity. Although exports were able to rise by 0.4% qoq as in the previous quarter (despite the adverse conditions), the sharp rise in imports meant that net exports made a much lower overall growth contribution compared to the previous quarter. Furthermore, growth rates slowed down for gross fixed capital formation, whilst private consumption stagnated in Q2 as well.

Economic conditions are expected to deteriorate further during the third quarter of 2012. This is suggested by the leading indicators such as the purchasing managers’ index for manufacturing and the economic sentiment index of the European Commission, which continued to move lower in August. Although back in spring it appeared that the downward trend in leading indicators seen in the other EUR countries might not be quite so pronounced in Austria, over the last few months these two indicators have deteriorated noticeably. Against this backdrop, in Q3 we expect stagnation in real GDP growth compared to the previous quar-ter, but this should mark the low point in the cycle. Growth is then subsequently projected to return to positive, but not overly robust rates again, resulting in a forecast of 1.0% growth for 2012 as a whole and 0.9% for the following year, due to the base effect.

The outlook for private consumption has deteriorated somewhat recently. For instance, consumer confidence readings have dropped sharply since May. Con-

sumers also see their personal finan-cial situation in the coming months as being somewhat more critical again, albeit to a lesser degree than the overall economic development. By contrast, the propensity to purchase durable goods remains at high lev-els. This subdued outlook is also re-flected in retail sales data, which sank on a monthly basis in June and July. Naturally, the economic slowdown is also having an impact on the labour market as well. For example, the number of registered unemployed in recent months has increased signifi-cantly, accompanied by a decline in

Austria: Eurozone as a negative factor

Leading indicators point downwards

Perceived inflation is on the rise again

* European CommissionSource: Thomson Reuters, Markit, Raiffeisen RESEARCH

Source: Thomson Reuters, Statistics Austria, Raiffeisen RESEARCH

Key economic figures and forecasts

2011 2012e 2013f 2014f

Real GDP (% yoy) 2.7 1.0 0.9 1.5

Private consumption (% yoy) 0.7 0.4 1.2 1.2

Gross fixed capital formation (% yoy) 7.3 1.9 1.0 3.3

Nominal exports (% yoy) 11.0 4.0 4.7 7.2

Nominal imports (% yoy) 11.0 3.4 5.3 7.7

Trade balance (EUR bn) 10.0 11.2 10.8 10.7

Current account balance (EUR bn) 5.9 6.5 6.3 5.5

General budget balance (EUR bn)* -7.8 -9.0 -7.6 -5.5

General budget balance (% of GDP)* -2.6 -2.9 -2.4 -1.7

Unemployment rate (avg, %, EU definition) 4.1 4.4 4.3 4.1

Consumer prices (avg, % yoy) 3.6 2.5 2.3 2.1

Real wages (% yoy) -1.0 0.7 0.4 1.2

Unit labour costs (% yoy) 0.8 3.5 2.3 3.5* state, provinces, municipalities and social security authoritiesSource: Statistics Austria, Thomson Reuters, Raiffeisen RESEARCH

60

80

100

120

30

40

50

60

Oct-98 Jul-01 Apr-04 Jan-07 Oct-09 Jul-12

Purchasing Manager Index Manufacturing

Economic Sentiment Indicator* (r.h.s.)

-10

-5

0

5

10

Jan-09 Nov-09 Sep-10 Jul-11 May-12

Inflation (HICP, % yoy)

Inflation perception (goods of weekly use, % yoy)

n Economic prospects have deteriorated considerably

n Private consumers are now also more pessimistic

n Real wage growth should support private consumption however

n Exports are slowing, but not collapsing

134th quarter 2012

Austria

the number of job vacancies. By EU standards, however, Austria still has the lowest rate of unemployment (July: 4.5%). Furthermore, the level of over-all employment has stabilised at a high level, following an upward trend that lasted for roughly three years. This, and the anticipated growth in real wages this year, suggest that – despite the deterioration in consumer confidence – private consumption will pick up again following the stagna-tion in H1 2012.

In the manufacturing sector, the pros-pects for the future are also not very positive. For example, industrial con-fidence slipped considerably lower in June and July, but in August this downward slide came to a tentative end. While industrial production grew at an average rate of 0.3% mom in Q2, June was already marked by a sharp drop in month on month terms (-1.0%). Furthermore, the steep de-cline in the production component of the purchasing managers’ index for manufacturing and the still unsatis-factory readings for incoming orders point to weaker performance by the manufacturing sector in the months ahead. The situation in manufacturing will probably only improve tangibly again in the early part of next year, borne by a pick-up in investments and exports.

Contrary to our previous forecast, in-flationary dynamics are not expected to abate in the months to come. This is mostly the result of increased oil and food prices, which is already clearly visible when looking at prices of weekly purchases of an average con-sumer (August: 4.1% yoy; July: 2.8% yoy). As a consequence, we revised our inflation forecasts (HICP) upwards for this year to 2.5% yoy (previously: 2.3% yoy) and for next year to 2.3% yoy (previously: 2.0% yoy).

Matthias Reith

GDP: expenditure composition

Change (% yoy, in real terms) 2011 2012e 2013f 2014f

Private consumption 0.7 0.4 1.2 1.2

Public consumption 0.1 1.3 0.8 0.7

Gross fixed capital formation 7.3 1.9 1.0 3.3

Equipment 12.1 2.3 4.2 6.1

Construction 4.4 1.5 -1.8 0.8

Exports (broad definition) 7.2 1.4 2.4 5.0

Imports (broad definition) 7.2 0.9 2.9 5.5

Gross domestic product 2.7 1.0 0.9 1.5Source: Statistics Austria, Raiffeisen RESEARCH

GDP: value added by sector

Change (% yoy, in real terms) 2011 2012e 2013f 2014f

Agriculture & forestry 15.3 -10.0 0.0 1.5

Prod. of goods/mining 8.2 2.0 1.5 3.0

Energy/water supply 8.2 10.0 2.0 1.5

Construction 3.5 1.5 1.0 1.2

Wholesale and retail trade 1.3 0.5 1.2 2.0

Transportation 1.0 -3.0 0.0 0.5

Accom. & restaurant trade 1.3 1.0 1.0 1.0

Information and communication -0.9 -0.7 0.0 1.0

Credit and insurance 1.4 -2.0 1.0 2.0

Property & business services 2.6 1.0 1.3 1.5

Other economic services 2.2 2.7 1.5 2.0

Public sector -0.7 0.0 -0.1 -0.1

Healthcare, social services 1.4 1.5 0.6 1.0

Other services 0.0 0.5 0.5 0.8

Gross domestic product 2.7 1.0 0.9 1.5Source: Statistics Austria, Raiffeisen RESEARCH

Contributions* to real GDP growth (qoq)

*in percentage pointsSource: Thomson Reuters, Raiffeisen RESEARCH

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13

Private Consumption Public Consumption Investment Stocks External Trade Real GDP

Forecast

14 4th quarter 2012

-6

-4

-2

0

2

4

6

8

10

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)

Industrial output (% yoy)

Real GDP (% yoy)


Poland

Slowdown arrived – bond markets ahead of the curve

424446485052545658-10

-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f

General budget balance (% of GDP)Public debt (% of GDP, r.h.s.)

Budget balance and public debt


Forecast


2008 2009 2010 2011 2012e 2013f 2014f

Nominal GDP (EUR bn) 362.9 311.1 354.7 369.7 383.9 419.7 452.4

Real GDP (% yoy) 5.1 1.7 3.9 4.3 2.5 2.5 3.8

Industrial output (% yoy) 3.6 -4.5 9.0 7.7 2.9 3.5 9.0

Unemployment rate (avg, %) 9.8 11.0 12.1 12.4 12.8 13.5 12.8

Nominal industrial wages (% yoy) 10.3 4.4 3.3 5.0 3.8 3.5 4.5

Producer prices (avg, % yoy) 2.2 3.4 2.1 7.6 3.7 2.5 2.2

Consumer prices (avg, % yoy) 4.2 3.5 2.6 4.3 3.9 2.9 2.5

Consumer prices (eop, % yoy) 3.3 3.5 3.1 4.6 3.3 2.8 2.5

General budget balance (% of GDP) -3.7 -7.4 -7.8 -5.1 -3.4 -2.8 -1.6

Public debt (% of GDP) 47.1 50.9 54.8 56.3 56.1 53.8 50.0

Current account balance (% of GDP) -6.6 -3.9 -4.5 -4.3 -3.9 -4.3 -4.2

Official FX reserves (EUR bn) 44.1 55.2 70.0 75.7 82.0 87.0 91.0

Gross foreign debt (% of GDP) 48.0 62.7 65.9 67.4 69.8 67.9 66.3

EUR/PLN (avg) 3.51 4.33 3.99 4.12 4.22 4.06 4.00

USD/PLN (avg) 2.39 3.10 3.01 2.96 3.22 3.07 3.02


Forecast

Economic outlook

Poland’s Q2 GDP data were disappointing. Economic growth slowed to 2.4% yoy from 3.5% yoy in Q1, marking the lowest growth since Q3 2009. The down-side effects from the completion of infrastructure investments and projects related to EURO 2012 thus materialised earlier expected. Another disappointing ele-ment in Q2 was the result for private consumption, which slowed from 2.1% yoy in Q1 to 1.5% yoy in Q2. The total effect of weakening investment, low private consumption and further consolidation of public finances (public consumption fell by 0.1% yoy) caused domestic demand to decrease by 0.2% yoy in Q2. Overall economic growth in Q2 was generated by net exports and precisely by the fact that exports declined slowly, whilst import shrank by as much as 2% yoy. Given the recent data, we cut our 2012 and 2013 growth forecasts to 2.5% yoy each year. Nevertheless, the overall public sector balance sheet remains solid, public debt management remains based on realistic assumptions and we still expect the debt-to-GDP ratio to drop from its peak in 2011 in the years to come.At the September meeting, the Monetary Policy Council (MPC) left interest rates unchanged. The MPC drew particular attention to the increasing economic weak-ness, the labour market and the slowdown in lending to businesses and house-holds. This strongly indicates an easing bias. It should be noted, however, that the MPC also stressed the persistence of upside risks to inflation, particularly from elevated food prices on world markets. However, the MPC will most likely decide to cut interest rates as soon as in October. Still, elevated CPI readings from the summer months mean that an initial reduction of the base rate by more than 25bp is rather unlikely. If our expectations for a rate cut in October prove to be correct, further rate cuts (each time by 25bp) may take place one month later and in Janu-ary 2013. At the moment, we do not expect that the full cycle of interest rate cuts will turn out to be deeper than 75bp.

n Tangible economic slowdown underway as indicated by disappointing Q2 GDP data

n U-turn in monetary policy - mostly driven by external headwinds for the Polish economy

n Rate cut cycle unlikely to go beyond 75bp given that some inflationary pressure will stay with us

n Bond markets priced in rate cuts early and aggressively, some value for EUR-based investors at short-end

154th quarter 2012

3.53.84.04.34.54.85.05.35.5

0 1 2 3 4 5 6 7 8 9 10

Yields as of Sep-12Yield curve Sep-12Yield curve Jun-12Forecast Dec-12

2.52.72.93.13.33.53.73.94.14.34.54.7

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/PLN (eop) USD/PLN (eop)

Poland

Exchange rate development

Source: Bloomberg, Raiffeisen RESEARCH

PLN yield curve (%)


Forecast

Exchange rate forecasts

17-Sep1 Dec-12 Mar-13 Jun-13Sep-13

EUR/PLN 4.10 4.20 4.15 4.15 4.00

Cons. 4.16 4.14 4.14 4.12

USD/PLN 3.13 3.18 3.19 3.17 3.01

Cons. 3.40 3.38 3.34 3.30

1 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Interest rate forecasts

17-Sep1 Dec-12 Mar-13 Jun-13 Sep-13

Key rate 4.75 4.25 4.00 4.00 4.00

Consensus 4.50 4.25 4.25 4.25

1 month2 4.70 4.60 4.15 4.15 4.15

3 month2 4.75 4.70 4.30 4.30 4.30

Consensus 4.94 4.72 4.69 4.58

6 month2 4.76 3.13 2.87 2.87 2.87

12 month2 4.78 5.30 5.20 5.20 4.801 5:00 p.m. (CET) 2 Bid rateSource: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


2y T-bond2 4.06 4.06 4.28 4.46 4.60

Cons. 4.39 4.40 4.35 4.35

5y T-bond2 4.36 4.52 4.80 5.00 5.1510y T-bond2 4.96 5.00 5.30 5.47 5.59

Cons. 4.92 4.91 4.92 4.98

1 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH

Financial markets outlook

The zloty continues to trade in line with global risk perception, as shown by the EUR/PLN trading range of 4.40-4.00 since June 2012. Moreover, domestic fac-tors such as the still relatively high combined current account and fiscal deficit or the remaining risks from FCY lending (mirrored in the decision of NBP and SNB to sign a precautionary CHF/PLN swap agreement) are making Polish assets and the zloty vulnerable to moves in the global “risk-on/risk-off” mode. From a fundamental point of view, we see EUR/PLN slightly stronger than current levels from a 9-12 months perspective. Based on real effective exchange rate (REER) trends, the zloty shows a certain undervaluation. However, from a short-term perspective we see downside risks, mostly resulting from the volatility of specula-tive portfolio inflows in the bond and equity market. The latter may become more volatile, given that the best times for the Polish LCY bond market seem to be over.

After the MPC turned dovish, it is hard to expect significant weakness in the Polish LCY bond market in the next 1-2 months. From a short-term perspective, but most likely not throughout the coming quarter, the outlook for a rate-cutting cycle and decreasing inflation offers still some room to profit from decreasing yields. At least short-term yields could decrease by 20-30bp from current levels in the weeks to come. However, we do not see much more potential for decreas-ing yields – this holds especially true for the long-end – as the market priced in rate cuts very aggressively. Nevertheless, we see good support for Polish LCY bonds. International investors still like Polish LCY bonds and we do not expect this to change in the next 3-6 months. Moreover, additional demand for LCY government bonds may arise from local buyers (e.g. from banks due to lower loan demand). However, there are also unfavourable trends for investors in Polish bonds. As the Ministry of Finance announced that the 2012 budget deficit will be higher than assumed, we expect a higher-than-expected bond supply. Moreover, Polish bonds could be one of the first victims of large-scale Eurozone peripheral bond purchases by the ECB. Although such side effects would hurt Polish EUR-denominated FCY bonds much more, some spillover to the LCY market cannot be ruled out. Furthermore, it is possible that the credit story of Poland will suffer some dents (although we do not see negative rating pressure). In this regard, we are thinking about another round of noise concerning the debt ceiling issue in the Public Finance Act, as Poland remains close to the 55% of GDP debt limit accord-ing to domestic law (e.g. a draft amendment proposes to exclude pre-financing from the definition).

Marta Petka-Zagajewska, Gunter Deuber

16 4th quarter 2012

-20-16-12-8-404812

-10-8-6-4-20246

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)

Industrial output (% yoy, r.h.s.)

0

2

4

6

8

10

12

2008 2009 2010 2011 2012e 2013f 2014f

Unemployment rate (avg, %)Consumer prices (avg, % yoy)

Real GDP (% yoy)


Hungary

Sweeten markets, sour voters and next elections in sight?

Inflation outlook


Forecast

Forecast


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 0.9 -6.8 1.3 1.7 -1.0 0.5 1.5







General budget balance (% of GDP) -3.7 -4.6 -4.2 4.3 -2.9 -3.5 -3.5


Current account balance (% of GDP) -7.1 0.3 1.2 1.4 1.5 1.9 2.0



EUR/HUF (avg) 250.75 280.10 275.50 279.32 291.90 293.75 290.00

USD/HUF (avg) 170.48 200.91 207.69 200.69 223.21 222.12 218.87


Economic outlook

In H1 2012, Hungary’s GDP contracted by 1% yoy. Household demand declined slightly (-0.5%), while investments kept dropping strongly (-6% yoy), with the only improvement seen in net exports. On the production side, the construction industry is deep in the red (-10% yoy) and industry is stagnating, while most of the service sectors are contracting. The outlook is no different than in the past: none of the GDP components are seen to change the picture. We expect -1% GDP for 2012. In 2013, net exports are likely to strengthen as new auto industry capacities will start to be launched (Mercedes, Audi). On the other hand, the personal income tax cut plans may help to stabilise household demand. Overall, economic performance might be only marginally better than this year: we forecast 0.5% GDP growth.At the same time, inflation remains stubbornly high (averaging 5.6% in the Jan-July period), due to tax hikes and energy prices. As food prices are increasing and more consumption-related taxes are introduced (telecom usage tax, financial transaction tax, etc.), the inflation outlook is not favourable: the rate is expected to be close to 5% in 2013 after almost 6% this year.The government started its 2013 budget planning in the summer. Along with the continuation of structural reforms (the so-called Széll Kálmán Plan 2.0), there is a scheme to boost employment in low-wage jobs by making the tax burden lighter on these employees. This and some other measures would lead to an increase in the public budget deficit, and therefore there is a need to counterbalance them. As there is only 1.5 years left until the next elections, the government is not very keen to opt for unpopular measures, and would rather utilise unorthodox policies (such as the crisis taxes, hefty banking tax, etc. in the past). Nevertheless, if Hungary really wants to agree with the IMF on a new loan programme, such measures are not really available. Therefore, there is a difficult choice between sweetening the markets but souring the voters, or vice-versa. As the short-term political considera-

n Hungarian economy slips into recession in H1 2012

n High inflation to prevail in 2013 (food prices, new taxes)

n Government needs to fill budget gaps to keep the deficit low

n Political aspects override economic ones – an IMF deal is unlikely

174th quarter 2012

Hungary

150

200

250

300

350

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/HUF (eop) USD/HUF (eop)



6.0

6.5

7.0

7.5

8.0

8.5

0 1 2 3 4 5 6 7 8 9 10


HUF yield curve (%)


tions are likely to override the long-term economic aspects, more noise is expected for the rest of the year.

Financial market outlook

Thanks to the positive external market sentiment and the start of the IMF/EU ne-gotiations, the forint managed a strong quarter against the euro. While we had expected a more pronounced negative impact from the dismal economic figures, uncertainties regarding the 2013 budget and ongoing troubles regarding the IMF negotiations, investors seemed to have blinded out these circumstances. To us, the current level in EUR/HUF includes a lot of positive assumptions and hopes for the coming quarters, and in our mind this is at least partially unjustified. We therefore remain cautious and slightly negative on the further EUR/HUF development. In our view, the IMF negotiations will continue, but at a slow speed. An agreement is most likely not on the cards before early 2013, if at all. Our assumptions are that Hungary could delay the negotiations in the hopes that market sentiment will im-prove further in the coming months. Consequently, Hungary would profit via lower refinancing costs and would not have to rely on an IMF deal to lower its yields any more. Eventually this could even make an IMF agreement unnecessary in the eyes of Hungarian politicians. Apart from the IMF negotiations the newsflow from the Eurozone should also remain mixed in Q4 and volatility for the forint should continue to be high.In August, the Monetary Council started to lower interest rates for the first time since April 2010, despite consumer prices rising by 6.0% yoy in August. To us, this current environment with elevated consumer price inflation and continued un-certainty in the Eurozone does not justify the beginning of an interest rate cutting cycle just yet. On the other hand, the Monetary Council could take advantage of the improved international risk sentiment and cut interest rates by another 25bp by year-end 2012. Regardless of the high consumer prices and the fragile situa-tion, we have therefore included a 25-bp cut into our projections. In 2013, interest rates will probably be cut further, also depending on the successor of central bank governor Simor and the two deputy governors (their terms expire in March and July 2013). At the long end of the yield curve (the ten-year segment), yields dropped from 9% in early June to 7.5% end of July and have remained at these levels. We expect slightly rising yields at the long end of the yield curve until year-end 2012. For Q1 2013, the uncertainties could rise further with Governor Simor replacement and the possible political influence in relation to his successor.

Zoltan Török, Wolfgang Ernst

Forecast



EUR/HUF 283.17 295.0 300.0 295.0 290.0

Cons. 288 286 284 282

USD/HUF 215.86 223.5 230.8 225.2 218.0

Cons. 235 234 229 226




Key rate 6.75 6.50 6.50 6.25 6.00

Consensus 6.50 6.25 6.00 5.88

1 month2 6.80 6.60 6.60 6.30 6.10

3 month2 6.88 6.60 6.60 6.40 6.10

Consensus 6.89 6.63 6.39 6.28

6 month2 6.97 6.67 6.67 6.43 6.17


Yield forecasts


2y T-bond2 6.49 6.95 6.95 6.75 6.50

Cons. n.v. n.v. n.v. n.v.

5y T-bond2 6.71 7.40 7.60 7.30 7.2010y T-bond2 7.19 7.70 7.90 7.50 7.40

Cons. 7.54 7.31 7.16 7.08


18 4th quarter 2012

-15

-10

-5

0

5

10

15

-6

-4

-2

0

2

4

6

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


Czech Republic

0

10

20

30

40

50-10-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f


Real GDP (% yoy)


Recession – three negative quarters in a row



Forecast

Forecast


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 2.9 -4.7 2.7 1.7 -0.9 0.5 1.8

Industrial output (% yoy) 0.4 -13.4 10.1 6.9 -0.2 0.7 3.1



Producer prices (avg, % yoy) 4.5 -3.1 1.2 5.6 2.2 1.9 2.1








EUR/CZK (avg) 24.90 26.40 25.28 24.59 24.90 23.80 23.00

USD/CZK (avg) 16.93 18.94 19.06 17.67 19.04 18.00 17.36


n First signs of recovery in industrial output

n Government in crisis over tax bill

n Weaker economic recovery brings slower EUR/CZK appreciation

n Interest rate will reach a low at 0.25%

Economic outlook

The recession in the Czech economy continued in Q2 as GDP fell by 0.2% qoq and 1.0% yoy, following the decline of 0.6% qoq in Q1 (revision from -0.8% qoq). This was the consecutive third quarter with negative GDP development. The decline in Q2 was driven by the fall in household and government consumption, both of which declined by 1.1% qoq, as these components were dampened by the restrictive fiscal policy. Moreover, household consumption was affected by the “bad mood.” Investment was a positive surprise, however, as it posted growth of 8.4% qoq. Exports and imports decelerated. The data on Czech GDP in Q2 support our expectation of another 25-bp rate cut to 0.25%. The CNB should further support a weak Czech economy.As for the rest of 2012, we see a chance that the Czech economy may recover. We think this is the case, as a recovery is visible in industrial output and the situ-ation in the Eurozone should improve in connection with the ECB’s bond buying programme (OMT). On the other hand, the Czech PMI is still low and consumer demand remains depressed. The Czech economy should contract by 0.9% in 2012. In 2013, we forecast mild growth of 0.5%. Economic activity will likely be dampened by a VAT hike (both rates by 1 pp to 15% and 21%). Our forecast is subject to several risks. One upside risk is that the rates of VAT will not be raised to such an extent, and more importantly, one key downside risk that the situation in the Eurozone will escalate further, reducing demand for Czech exports.The weak Czech government is in a crisis as it was not able to pass a tax bill in parliament. The government will try to pass the bill in parliament once again and will attach a confidence vote to it this time. We think that such a strategy has a good chance of succeeding, and estimate an only 10% probability that the bill will be rejected and the government will collapse. However, we cannot exclude minor adjustments in the bill, e.g. adoption of a uniform VAT rate 17.5%.

194th quarter 2012

Czech Republic

14

16

18

20

22

24

26

28

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/CZK (eop) USD/CZK (eop)



0.00.51.01.52.02.53.03.5

0 1 2 3 4 5 6 7 8 9 10


CZK yield curve (%)



As global risk aversion declined by the end of the summer, the Czech currency reached our target at EUR/CZK 24.60 for September. From our point of view, Czech economic fundamentals remain relatively supportive for CZK. We expect further appreciation towards EUR/CZK 24.20 during the fourth quarter. How-ever, the key element of the forecast is the outlook for risk aversion. If fears sur-rounding Eurozone debt crisis increase again (and at some point they certainly will), CZK will probably depreciate as we last saw in May-June. But the timing of such events cannot really be predicted.Nevertheless, as we expect even weaker real economic performance next year than we have forecasted so far, we have slightly toned down our expectations of further CZK appreciation.Exchange rate developments will certainly influence monetary policy. At EUR/CZK 24.50, the Czech currency is almost 4% stronger than the CNB had ex-pected. Furthermore, Q2 GDP was weaker by 80bp (qoq) than expected by the CNB and inflation was also slightly lower in recent months. We therefore think that the CNB will cut its key 2-week repo rate by an additional 25bp to 0.25%. This has been already priced in by the money market. There is, however, a sig-nificant risk to this expectation that the central bank might wait for the result of the parliamentary battle over the tax bill (higher VAT rates). Recently, the CNB also mentioned the possibility of using unconventional measures such as a FX intervention. However, we think that the CNB would rather hesitate to use such controversial measure for the time being.By the beginning of July, Czech government bond yields declined as the market priced in further rate cuts and the miserable domestic economic outlook, and risk aversion declined. Czech government debt remained well supported and with the decline of the risk aversion the government bond yield spread over the German benchmark decreased. Domestic variables remained supportive. As the government secured most of its financing requirement for this year it can proceed with fine tuning for the rest of the year. We think that after all the decline the Czech economy and interest rates found the bottom. But will it bottom out any time soon? We think it will, but very slowly. As the economic growth expecta-tions remain very cautious it is not likely that holders of Czech government bonds (mostly banks) will start to sell these bonds.We think that the 10-year Czech government bond with a 100-bp yield spread over German Bunds is roughly fairly priced now, although we could imagine some further decrease in the spread. For the quarters to come we expect a slight increase in bond yields. Our bearish position would however be rather balanced out by our expectations of CZK appreciation.

Michal Brozka, Vaclav France

Forecast



Key rate 0.50 0.25 0.25 0.25 0.25

Consensus 0.38 0.50 0.50 0.50

1 month2 0.34 0.20 0.20 0.20 0.20

3 month2 0.51 0.45 0.45 0.45 0.45

Consensus 0.90 0.93 0.94 1.01

6 month2 0.69 0.66 0.67 0.67 0.71


Yield forecasts


2y T-bond2 0.44 0.50 0.50 0.70 1.00

Cons. 1.63 1.78 1.98 2.16

5y T-bond2 1.30 1.40 1.70 2.00 1.9010y T-bond2 2.46 2.50 2.90 3.00 2.90

Cons. 2.55 2.64 2.85 2.94




EUR/CZK 24.54 24.20 24.00 23.80 23.60

Cons. 25.10 25.00 24.90 24.50

USD/CZK 18.71 18.33 18.46 18.17 17.74

Cons. 20.50 20.40 20.10 19.70


20 4th quarter 2012

Slovenia

-4-202468101214-14

-12

-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

e

2013

f

2014

f

Current account (% of GDP)

Net FDI (% of GDP, r.h.s.)


Current account and FDI inflows


Forecast

-20

-15

-10

-5

0

5

10

-8

-6

-4

-2

0

2

4

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


At the crossroad


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 3.5 -7.7 1.4 -0.2 -1.3 1.0 1.5

Industrial output (% yoy) -1.6 -16.5 6.9 3.7 1.0 2.0 3.0











EUR/USD (avg)* 1.47 1.39 1.33 1.39 1.31 1.32 1.33

* Eurozone entry on 1 January 2007Source: Thomson Reuters, Raiffeisen RESEARCH

Forecast

Real GDP (% yoy)

n Disappointing Q2 GDP with slow recovery expected

n USD bond issuance planned for Q4 2012

n Rising probability to call on ESM for financial assistance

n Banking sector the tail risk for sovereign balance sheet

Economic outlook

After a positive surprise in Q1 GDP, reality struck back in Q2 with a hefty decline in GDP of 3.2% yoy. Gross capital formation dropped by 22% yoy in the second quarter, and domestic demand plunged 6.8% yoy in the same timeframe. As for the economic growth outlook, we project more weak GDP data for H2 2012 and only a slow recovery in 2013. Our assumption regarding the inability of the five-party government coalition to come up with far-reaching reform measures unfortunately proved to be correct. Expenditure cuts for the 2012 budget of roughly EUR 1 bn compared to the previously planned 2012 budget were intro-duced, but no additional progress was made (e.g. pension system). Even though austerity measures were introduced to lower the budget deficit from 6.4% of GDP in 2011, we estimate the budget deficit to still reach about 4.0% in 2012. Public debt levels have risen sharply from barely 22% of GDP in 2008 to almost 47.6% in 2011. The trend is continuing in 2012 with the 50% mark likely to be surpassed and if the planned special institution to take over bad loans from the banking sector is created public debt could increase additionally by up to 4% of GDP.Clearly time is running out for Slovenia to avoid having to resort to the EU (ESM) for financial assistance, given the economic downturn and the ongoing rise in non-performing loans in the troubled state-held banking sector.Slovenia relies heavily on the export sector and within this sector on exports to the Eurozone (roughly 72% of total exports go to the Eurozone). At the same time, Slovenia has a very low stock of foreign direct investments (just 33% of GDP) mirroring the fact that Slovenia was less open for foreign investments be-fore the crisis. This has clearly changed in the crisis, but investments now are hard to attract.

214th quarter 2012

Slovenia


In April, Slovenia postponed a planned EUR bond issuance due to the elevated yield levels. Ever since then the situation for Slovenia on the debt market has deteriorated further, making bond issuance overly expensive. Now the Slovenian finance ministry has indicated it would like to issue a USD bond (about USD 1.5 bn with a 10-year maturity). The hope is that a USD issue would attract a wider range of investors. Currently all of Slovenia’s sovereign debt is EUR denominated. According to Finance Minister Susteric, Slovenia needs approximately EUR 500 mn until year end 2012 to meet its capital requirements. We are not overly opti-mistic that Slovenia will be able to issue this USD bond at rates below 6-7%, at least not with a 10-year maturity. A shorter maturity, however, would lead to less demand. A T-bill auction on 11 September saw disappointing demand and only EUR 165 mn of planned EUR 250 mn was sold.

Currently, the Slovenian banking sector – which is considered as a tail risk for the sovereign balance sheet due to the high degree of national ownership and the supportive stance of the government towards the banking sector – is experi-encing more or less the same fate as other banking sectors in hard-hit Eurozone countries. Slovenia and some other Eurozone banking sectors (such as Spain or Ireland) are suffering from the fallout from a credit-driven boom-bust cycle (that also supported poor underwriting and risk management). Lending activity in Slovenia remains anaemic. Average lending growth in 2011 and H1 2012 was -2% yoy, with a downtrend in recent months, and lending growth is currently running at -5% yoy. Negative loan book growth adds to poor NPL ratio dynam-ics. Currently, 90-day overdue NPLs are at 12.8% in Slovenia, whilst corporate sector NPLs are at 18% (total arrears are at around 17%). NPL coverage by provisions remains fairly low (at around 55%), which adds to the outlook for additional capital needs at Slovenian banks. Moreover, Slovenia is also experi-encing deleveraging in cross-border banking claims, mainly driven by (Western) European banks. However, the picture here is not as bad as in the Eurozone peripherals (e.g. Spain, Italy). Since 2007 cross-border banking claims of West-ern European banks on Slovenia are down 14-15%, which is still better than in Hungary; not to mention Italy or Spain (where cross-border lending is down some 40% since December 2007). Although the banking sector in Slovenia remains in deep trouble, we would reiterate our call that we still think that the external funds possibly needed to stabilise the situation are relatively limited from a European perspective (but not a Slovenian perspective). By European standards, a banking sector support package for Slovenia (including a certain buffer) might be fairly small, i.e. in the range of EUR 1.5-2.5 bn (perhaps EUR 3 bn in a worst-case scenario). The fundamental adjustment needs in the Slovenian banking sector are somewhat lower than at the burdened Western European banks as the banking sector looks less outsized compared to the size of some Western European bank-ing sectors (such as Spain, Ireland, etc.). Given the small absolute size of the cur-rent downsides in the Slovenian banking sector, there are also no material risks for Western European banks. BIS claims of Western European banks that account for 90% of the overall USD 36 bn cross-border banking claims on Slovenia (Q1 2012 data) are just some 0.36% of their overall European exposure. Even for a banking sector like in Austria (which represents around 35% of all cross-border claims of European banks, around USD 13 bn) the total exposure is just 1% of the whole balance sheet of the Austrian banks.

Wolfgang Ernst, Gunter Deuber

0510152025303540455055-10

-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f


0

20

40

60

80

100

120

140

2008

2009

2010

2011

2012

e

2013

f

2014

f


Gross foreign debt (% of GDP)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2008 2009 2010 2011 2012e 2013f 2014f

Unemployment rate (avg, %)Consumer prices (avg, % yoy)


Public and external debt

Inflation outlook




Forecast

Forecast

Forecast

22 4th quarter 2012

-15

-10

-5

0

5

10

15

20

-6

-4

-2

0

2

4

6

8

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


0

10

20

30

40

50-10-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f


Real GDP (% yoy)




Forecast

Forecast

Cars will not be enough to keep growth


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 5.8 -4.9 4.2 3.3 2.4 2.0 3.0




Producer prices (avg, % yoy) 5.0 -2.5 -2.8 2.6 3.5 2.5 2.0





Current account balance (% of GDP) -6.0 -2.6 -2.5 0.1 2.6 3.5 3.8


EUR/SKK (avg)* 31.29 Eurozone membership at EUR/SKK 30.126

USD/SKK (avg)* 21.27 Eurozone membership at EUR/SKK 30.126

* Eurozone entry on 1 January 2009Source: Thomson Reuters, Raiffeisen RESEARCH

The previous “economic wonder” of a massive and growing foreign trade surplus had to be revised down. Due to a mistake at one significant statistical unit the anyway huge trade surplus of EUR 2.4 mn or 7.2% of GDP (in H1 2012) was overestimated by around 30%. Nevertheless, foreign trade developments remain favourable and the foreign trade surplus in Slovakia in H1 2012 stands at 5.0% of GDP. The automotive sector remains the sole driver of GDP growth, which production increasing by more than 50%. The rest of economy is stagnating and the result of other economic indicators is just a proof of this statement. Real wages are set to decrease for the second consecutive year. We expect nominal wage growth just slightly above 2%. It is no wonder that employment does not perform very good as well and a combination of these two factors stays constrains house-hold consumption. One can not expect a positive growth impulse from the public sector and capital formation too. Slowing exports due to the slowdown in the Eurozone will be a drag on GDP growth in H2 2012. We expect GDP growth of 2.4% yoy in 2012 and due to similar reasons and the fiscal consolidation we expect economic growth at 2% yoy in 2013. Inflationary pressure in Slovakia has beaten expectations and CPI average in-flation should reach 3.6% yoy. The high inflation is the flip side of real wage decreases as the main drivers of such high price growth dynamics are housing, food and fuel prices. Moreover, demand driven inflation is reviving irrespec-tive of the sluggish domestic labour market. The main factor behind the rise of demand driven inflation is the convergence of prices for services. Due to a high base we expect a slowing pace of inflation next year with CPI inflation at 2.5% yoy in 2013.

Juraj Valachy, Boris Fojtik

Slovakia

n Foreign trade developments remain favourable

n Automotive sector drives GDP growth, with car production up by more than 50% in 2012

n GDP growth to moderate on the back of ongoing fiscal consolidation and meagre domestic demand

n Uptick in demand-driven inflation as price level convergence continues

234th quarter 2012

13141516171819202122-5

-4-3-2-101234

2008

2009

2010

2011

2012

e

2013

f

2014

f


Real GDP (% yoy)




Forecast

Forecast

-25-20-15-10-505101520

-8-6-4-202468

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


Revival in domestic demand


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 6.2 -5.5 0.4 1.7 1.5 1.5 3.5







General budget balance (% of GDP) 2.9 -0.9 -4.0 -2.1 -1.4 -2.0 -1.7


Current account balance (% of GDP) -23.1 -8.9 -1.5 0.3 -1.9 -2.7 -3.0



EUR/BGN (avg) 1.96 1.96 1.96 1.96 1.96 1.96 1.96

USD/BGN (avg) 1.33 1.40 1.47 1.41 1.50 1.48 1.48

Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH

Bulgaria’s GDP advanced by 0.3% qoq in Q2 2012 and thus its annual-based growth rate accelerated slightly to 1.0%, from 0.9% in Q1. The largest contribu-tion to GDP growth was made by private consumption (6.2% yoy increase), as the compensation of employees continued rising (2.6% yoy nominal growth), and consumers’ expectations improved. Since H1 domestic demand developments were better than expected, and we have slightly raised our 2012 GDP forecast to 1.5%. Total consumption is envisaged to grow by 3.5% and investment by 6.5%, driven by public infrastructure projects and the absorption of EU funds. Despite the weak economic conditions in the Eurozone, Bulgaria’s exports also moved into positive territory in Q2 (5.1% yoy). With the outlook for good performance in exports of agricultural products and tourism in the summer months, net exports are expected to continue making a positive contribution to GDP growth for the whole year. In 2013, due to the relatively weak EU demand and the expected de-celeration in German growth in particular, Bulgaria’s GDP growth is forecast at 1.5% yoy, as well. The sustainability of public finances continued to stand out as one of Bulgaria’s strongest points. For the first seven months of the year, a budget surplus of BGN 200.3 mn (0.3% of forecast GDP) was reported, and despite the projected deficit for August the cumulative balance is expected to remain positive for the first two thirds of the year. Overall, fiscal performance has so far turned out to be more favourable than initially planned and better-than-forecast results seem to be a very probable outcome at the end of the year. Minor deficits are foreseen for 2013 and onwards. In July, the Bulgarian government issued EUR 950 mn in 5y Eurobonds, achieving a yield of 4.436%. Notwithstanding this, the public debt-to-GDP ratio remains one of the EU’s lowest, providing options to borrow additionally if circumstances require it.

Kaloyan Ganev

Bulgaria

n Domestic demand is expected to be the main engine of growth this year

n Bulgaria’s exports moved into positive territory in Q2 despite weak economic conditions in the Eurozone

n Public debt-to-GDP ratio remains one of the EU’s lowest

n In July 2012 the Bulgarian government approached the international markets issuing EUR 950 mn in 5y Eurobonds

24 4th quarter 2012

Romania

0

8

16

24

32

40-10-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f


Real GDP (% yoy)


Recovery in slow motion



Forecast

Forecast

-8-6-4-202468

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)



2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 7.3 -6.6 -1.6 2.5 0.5 2.0 3.0












EUR/RON (avg) 3.68 4.24 4.21 4.24 4.50 4.60 4.50

USD/RON (avg) 2.50 3.04 3.17 3.04 3.44 3.48 3.40


n Plunge in agricultural output very likely to result in a new GDP contraction in Q3 2012…

n …but underlying upward trend in activity to be preserved, with domestic demand as the main driver

n Politics remain a key risk factor, with parliamentary elections due in December as the next test

n Uncertainty and increasing inflation complicate central bank’s mission and raise risks for leu and bond yields

Economic outlook

Real GDP growth in Q2 2012 was driven by all domestic demand segments (public and private consumption, investments), whereas activity should have ex-panded in almost all sectors according to our estimates (services, construction, and even industry). In Q2, the economy showed the best performance in the last three quarters. Adverse weather conditions significantly impacted agricultural output and this is likely to result in a new contraction of real GDP in Q3. In this context, all eyes should be on GDP excluding agriculture – a better (and less volatile) indicator of economic activity – which we expect to maintain its positive trend in the coming quarters. However, we expect GDP growth to remain sub-dued. The upward trend in private consumption and gross fixed capital formation will not accelerate over the short term, given the low confidence among consum-ers and companies, scarce funding sources and almost no room for expansive public policies. Moreover, any increases would be partially covered from im-ports. Planned fiscal consolidation will limit growth in public spending in real terms. Fragile external demand is hampering exports which have ceased to be a driver of growth in the last three quarters. Recent data showed exports falling, a tendency which we foresee continuing in the near term.Political tensions returned to centre stage in the summer, as an attempt of the new USL ruling coalition between socialists (PSD) and liberals (PNL) to suspend Presi-dent Basescu failed. Relations between President Basescu and the USL alliance which has parliamentary and executive power will probably remain tense. While the USL is the clear favourite to win the parliamentary elections slated for Decem-ber 9, unexpected developments on the political scene cannot be completely ruled out. The economic policy plan of the USL is rife with uncertainty (a change in taxation was announced for 2013, but details have not been yet provided). Even negotiations with the IMF could become tougher in times of elections.

254th quarter 2012

Romania

2.52.72.93.13.33.53.73.94.14.34.54.7

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/RON (eop) USD/RON (eop)



4.5

5.0

5.5

6.0

6.5

7.0

7.5

0 1 2 3 4 5 6 7 8 9 10


.

RON yield curve (%)


Forecast


Rising political tensions in the context of an already fragile environment (low in-flows of foreign private capital) pushed the leu to record lows back in July. With the leu losing ground from one day to another, the perception that the central bank could be more flexible with regard to leu depreciation also supported RON losses. However, at the beginning of August when the leu’s losses increased (4% in one month) the central bank (BNR) unexpectedly changed its policy by tight-ening liquidity conditions on the money market. With support from the BNR, in August the leu almost fully recovered its losses from July. We expect the leu depre-ciation bias to persist in the following quarters. Non-resident players did not rush to bet aggressively on leu depreciation during the recent depreciation episode in July and they will probably refrain from pursuing such a strategy in the future, given the well-known position of the central bank to counteract such moves. But several other factors are expected to weigh on the leu in the following few quar-ters: low inflows of foreign private capital at a time when the country faces high external funding needs, the fragile external environment, and potential political tensions on the domestic front. While the central bank’s FX reserves are now at a comfortable level (EUR 31 bn), we think they are not designed to deal with strong political power struggles or persistently low inflows of foreign capital. The central bank should focus on managing the FX reserves mainly in order to repay the IMF loan (EUR 11 bn by end-2014).

Investors’ low appetite for buying debt securities and the decision of central bank to tighten liquidity conditions on the money market resulted in an increase in government bond yields during the summer months. The move occurred despite the ability of the Finance Ministry to substantially reduce debt issuance by using its liquidity buffer to redeem maturing debt and to fund the budget deficit. Local investors (banks, pension funds) have low incentives to sell their portfolio even in bad times, while non-residents’ holdings declined further (to 6.0% of total stock in July). These factors suggest that large, sharp upward moves in local yields are unlikely. However, moderate upward pressure on yields is likely to persist (and some increases may even materialise), given the high demand for funds stem-ming from the Finance Ministry (high rollover requirements as close to 40% of existing debt securities have maturity less than one year plus budget deficit fund-ing). Increasing inflation is also a source of risks for bond prices.

Nicolae Covrig, Stephan Csaba Imre



Key rate 5.25 5.25 5.25 5.25 5.25

Consensus 5.25 5.25 5.13 5.38

1 month2 5.08 5.00 4.90 4.80 4.70

3 month2 5.22 5.15 5.05 4.90 4.75

Consensus 5.43 5.37 5.30 5.20

6 month2 5.35 5.00 4.85 4.75 4.60


Yield forecasts


2y T-bond2 6.00 6.00 5.85 5.75 5.65


5y T-bond2 6.31 6.50 6.40 6.30 6.2010y T-bond2 6.45 6.70 6.60 6.50 6.35





EUR/RON 4.49 4.65 4.65 4.60 4.55

Cons. 4.49 4.45 4.43 4.45

USD/RON 3.43 3.52 3.58 3.51 3.42

Cons. 3.67 3.63 3.57 3.57


26 4th quarter 2012

-10

-8

-6

-4

-2

0

2

4

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


0

2

4

6

8

10-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

e

2013

f

2014

f



Real GDP (% yoy)


Economic outlook

Despite the fact that the economy is heading into its fourth year of recession, which is evident from the GDP decline in H1 as well as the unfavourable eco-nomic data in Q3, Fitch Ratings kept the long-term foreign currency credit rating at BBB-, recognising the positive effects of fiscal consolidation. However, consoli-dation has mostly affected the revenues side with improved tax collection and higher VAT. Hence, we remain cautious in our forecasts for the budget deficit this year (planned at 3.8% of GDP) as there are risks of failure to meet the required budget expenditure cuts and of a slowdown in revenue collection dynamics. Fur-thermore, as growth prospects remain grim the tax base for 2013 will be lower. For this year we expect the Croatian economy to contract by 1.8% with negative contributions from all components, while a gradual recovery is projected starting from 2013. Higher costs of living and stagnating wages have eroded the stand-ard of living and brought down household consumption to roughly 2008 levels. As for industrial production, this will be the fourth year of decline. The ongoing necessary restructuring of the most important industries (shipbuilding, chemical industry), low competitiveness and the weak external environment will limit re-covery in industrial production even in 2013. The expected rise in imports is predominantly driven by rising energy and food prices. At the same time, exports are limited by low competitiveness and poor structure. Good results in tourism help to alleviate negative developments and to improve current account balance. The investments upon which the government is relying for the recovery are not being realised according to plan. A rebound in investments depends on inflows of foreign capital, i.e. a global recovery. We expect that the inflow of foreign capital will improve upon EU accession (scheduled for 1 July 2013), when fund-ing from structural and cohesion funds will also become available. In H2 2013,

Lower yields are looking for better fundamentals



Forecast

Forecast


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 2.1 -6.9 -1.4 0.0 -1.8 1.0 2.0

Industrial output (% yoy) 1.2 -9.2 -1.4 -1.2 -5.5 -1.5 1.4


Nominal industrial wages (% yoy) 6.2 1.4 -0.5 1.0 0.2 0.5 1.3









EUR/HRK (avg) 7.22 7.34 7.29 7.43 7.56 7.55 7.50

USD/HRK (avg) 4.91 5.26 5.49 5.34 5.78 5.71 5.66


n 2012 will be the fourth year of recession of Croatia

n Risks of failure to meet the required budget expenditure cuts

n Fitch Ratings kept the long-term foreign currency credit rating at BBB-

n Kuna found support in the new local sovereign bond issuance

Croatia

274th quarter 2012

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/HRK (eop) USD/HRK (eop)

012345678

0 1 2 3 4 5 6 7 8 9 10Yields as of Sep-12Yield curve Sep-12Yield curve Jun-12Forecast Dec-12

Croatia



HRK yield curve (%)


Forecast



Key rate 6.25 6.00 6.00 5.90 5.90

Consensus 6.75 6.75 6.63 6.63

1 month2 2.50 3.00 2.80 2.50 2.30

3 month2 3.13 3.55 3.20 2.80 2.70

Consensus 2.85 3.75 3.75 3.25

6 month2 3.39 3.95 3.50 3.10 2.90


Yield forecasts


2y T-bond2 4.00 3.95 3.90 3.80 3.70


5y T-bond2 4.55 5.85 5.90 5.70 5.6010y T-bond2 5.35 6.10 6.00 5.90 5.80





EUR/HRK 7.40 7.60 7.55 7.50 7.55

Cons. 7.53 7.50 7.49 7.53

USD/HRK 5.64 5.76 5.81 5.73 5.68

Cons. 6.16 6.12 6.04 6.04


the total EU funds approved for Croatia amount to EUR 687.5 mn representing a great challenge for state and local authorities as well as for companies.


In addition to foreign currency inflows from tourism during the summer months, the kuna found support in the new local sovereign bond issuance. The appre-ciation pressures on HRK are not fundamentally justified, but more defined by movements on the money market i.e. lack of HRK liquidity, higher volume of EUR-linked T-bills issued and the occasional inflows of foreign currency due to public enterprise borrowing. The shallowness of the domestic market and the lack of transparency in the public sector are sufficient for occasional surprises in the local FX market.Money market movements and the EUR/HRK exchange rate will be closely linked throughout the Q4 2012. A kuna liquidity shortage could certainly support EUR/HRK at slightly lower levels. Nevertheless, from the beginning of Q4 HRK liquid-ity is expected to return and demand for foreign currency in particular by the corporate sector should be more pronounced (primarily due to the repayment of liabilities and worsening of the trade balance). The EUR/HRK rate in 2013 primarily depends on inflows of foreign capital, especially to the public sector. Deteriorating trends in foreign trade, repayment of debts in foreign currency and still present risk aversion in 2013 would be the main factors pointing to a higher EUR/HRK exchange rate. Therefore, if capital inflows are lacking, the CNB is bound to use more restrictive instruments, which should result in a noticeable reduction of kuna liquidity.Yields on short-term government instruments remain at extremely low levels due to the diminished credit activity and the scarcity of attractive investment opportuni-ties. We expect the MoF to continue renewing the existing T-bill issues, maintain-ing stable yields that are supported mostly by domestic investors and the fact that this year the budget is performing well due to improved tax collection.The next obligations arising from issued bonds are due in July 2013 (HRK 4 bn) and the next Eurobond is maturing in 2014 (EUR 500 mn). The required yields on long-term government debt should remain stable, provided there are no new disturbances in the euro-area market. The scarcity of domestic long-term securities will provide support for domestic issues in the coming months. The latest confir-mation of the credit rating and EU convergence might be additional incentives to increase prices and lower yields of long-term Croatian securities. Continuation of positive trends will surely depend on the following: further fiscal adjustment and structural reforms (labour market, health, social and pension system), along with improvement in the investment climate and the global environment.

Zrinka Zivkovic-Matijevic

28 4th quarter 2012

-22-20-18-16-14-12-10-8-6-4-20

2008

2009

2010

2011

2012

e

2013

f

2014

f

General budget balance (% of GDP)Current account balance (% of GDP)

Real GDP (% yoy)


Budget and current account balance


Forecast

Forecast

-14-12-10-8-6-4-2024

-5-4-3-2-101234

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


It’s the government’s turn to do the right reforms


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 3.8 -3.5 1.0 1.6 -1.0 1.0 2.0












EUR/RSD (avg) 81.48 93.94 102.95 101.97 114.45 117.12 116.00

USD/RSD (avg) 55.40 67.38 77.61 73.26 87.52 88.56 87.55


Lower agricultural output (as a result of the drought) and delays in investments in anticipation of new government policies prompted a GDP revision to -1% yoy in 2012, though some positive momentum might come from FIAT exports. Despite the recession, inflation picked up again due to the pass-through of dinar weakening and the drought (food accounts for 38% of the CPI basket) and will undoubtedly exceed the targeted range for 2012 (4% +/-1.5%). While a restric-tive monetary policy remained in place under the new NBS governor, EUR/RSD stabilisation seems to be preferred, rather than easing in inflation. The new NBS management was rewarded with EUR/RSD stabilisation, supported by the third mandatory reserve requirement change and a key rate hike along with improved risk appetite for short-term dinar T-bills (despite S&P’s downgrade of Serbia to BB-). Still, we reckon this development might be only temporary, given the weak current account which we project to exceed 10.1% by the end of 2012. The stretched budget and growing public debt prompted the government to deliver a new set of fiscal measures, although much of the proposed adjustments target the revenue side (Corporate Income Tax increase to 12% from 10%, excises, Value Added Tax to 20% from 18%, etc.) rather than expenditure cuts. Despite all the measures, the budget deficit-to-GDP ratio is likely to reach 6.6% followed by public debt/GDP surging to 58%, both in 2012. As the government struggles to tackle the debt financing, a new Eurobond and different budget support ar-rangements (World Bank, Russia etc.) are being mulled, while a new IMF deal is the most looked-for by the government. After the deal freeze in early 2012, the IMF came once just for a fact-finding visit. A new deal does not seem likely this year, even though it is sought by the government, but an agreement could come in 2013 after more comprehensive fiscal adjustments measures have been prepared.

Ljiljana Grubic

Serbia

n Recession might be unavoidable in 2012

n Inflation picked up again due to the pass-through of dinar weakening and the drought

n S&P lowered the long-term sovereign credit ratings to “BB-“, Fitch Ratings cut outlook to negative

n New IMF deal likely in 2013 when more fiscal adjustments measures are evident

294th quarter 2012

012345678-16

-14-12-10-8-6-4-20

2008

2009

2010

2011

2012

e

2013

f

2014

f



Real GDP (% yoy)




Forecast

Forecast

-4

-2

0

2

4

6

8

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)



2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 5.7 -2.9 0.7 1.3 -1.0 1.0 2.5





Consumer prices (avg, % yoy) 7.4 -0.4 2.1 3.7 2.2 2.0 2.0







EUR/BAM (avg) 1.96 1.96 1.96 1.96 1.96 1.96 1.96

USD/BAM (avg) 1.33 1.40 1.47 1.41 1.50 1.48 1.48


In line with expectations, negative economic developments dominated the scene in H1 2012, as the B&H economy was hampered by the unfavourable environ-ment on one side and internal weakness mirrored in constant political crisis on the other. Moreover, the outlook remains gloomy for B&H in Q3 2012, with negative readings in all the key economic indicators, foreshadowing a contrac-tion of real GDP in 2012. The external side of the economy – which drove the economic recovery in last two years – is still on a downward path, with exports of goods declining by 4.3% yoy and industrial production tumbling by 6.5% in the period Jan-Jul 2012. Furthermore, the labour market figures were also in line with the subdued atmosphere as the unemployment rate soared to 27.9%, while at the same time the inflation rate (+2.1% yoy) is still outpacing growth in net wages (+1.5% yoy). The lending activity of the banking sector also tracked the downward path of the economy in general, as growth in total loans gradually slowed from +5.6% yoy in January 2012 to +4.3% in July 2012.Taking into account all available macroeconomic indicators and the high vul-nerability of the B&H economy to negative Eurozone developments, we do not anticipate an economic revival by the end of 2012. Considering all of the above, we expect to see annual stagnation or negative performance in all major GDP categories including in particular private consumption (0.0% yoy), gross fixed capital formation (-5% yoy), industrial production (-1% yoy) and export of goods and services (-2% yoy). We also expect to see additional cuts in public spending, required within the framework of the renewed IMF Stand-by Agreement which will probably be approved by the end of September 2012. All in all, our baseline scenario for 2012 has been revised down, with estimated negative real GDP of 1% yoy, given the downward revision of the Eurozone’s economic outlook and downside risks stemming from internal vulnerabilities.

Ivona Kristic

New recession just around the corner

Bosnia and Herzegovina

n Recovery of the economy was mostly export driven

n Recession just around the corner

n Additional cuts in public spending …

n … required within the framework of the renewed IMF Stand-by Agreement

30 4th quarter 2012

456789101112-16

-14-12-10-8-6-4-20

2008

2009

2010

2011

2012

e

2013

f

2014

f



Real GDP (% yoy)




Forecast

0

2

4

6

8

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


Albania in the EU’s backyard


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 7.8 3.3 3.9 3.1 2.0 3.0 4.0

Industrial output (% yoy) 4.5 1.0 2.0 3.0 3.0 3.0 3.0











EUR/ALL (avg) 122.8 132.1 137.8 140.3 139.7 138.5 138.3

USD/ALL (avg) 83.5 94.7 103.9 100.8 106.8 104.7 104.4


The Albanian economy posted a contraction of 0.2% in Q1 2012, due to the elevated uncertainty in the external environment and weak domestic demand which dragged down private investments and consumption. Albania’s pre-crisis growth factors were mainly emigrants’ remittances and increased domestic de-mand and a slump in these factors might lead to a deteriorating GDP growth of 2% yoy for 2012. Over the medium term, however, this structure is expected to change, with external demand expected to become the driving sector as ear-lier investments in transport and energy infrastructure have started to kick in, which should support a gradual acceleration of the GDP growth to 4% over the medium term. Emigrants’ remittances are expected to fade over the long term due to the crisis in the source countries. Over the short term, however, there have been increased levels of remittances to the Albanian banking system as a consequence of the deteriorating situation in the Euro-peripheral countries. The economic crisis in the main trading partners such as Greece and Italy has had a moderately negative impact on the export sector and the economy overall. Trade with Greece and Italy is being gradually replaced with other countries such as Turkey, Spain and Switzerland. Monetary policy has been prudent, keeping low inflation rates within the target of 2-4% and playing a supportive role in boosting the domestic demand. The political situation in Albania has been tense since the disputed general elections of 2009. This in turn has disrupted the government’s ability to implement much-needed reforms for the country’s EU integration. Since the end of the parliament boycott by the main opposition party (SP) in late 2011, however, considerable progress has been made as some quite necessary legisla-tive amendments requiring 3/5 of the votes were approved. EU candidate status is likely to be granted in October 2012, but this might be conditioned with the quality of the general election process to be held in June 2013.

Joan Canaj

Albania

n Economic growth well below potential

n Sluggish domestic demand due to low remittances and severe economic crises in main trading partner countries

n Key interest rate at the historical low level of 4.0%

n EU candidate status likely to be granted in October 2012

Forecast

314th quarter 2012

Dark clouds gathering on the horizon

Belarus

-3

-1

1

3

5

7

9

11

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


0

2

4

6

8

10

12

14-16-14-12-10-8-6-4-20

2008

2009

2010

2011

2012

e

2013

f

2014

fCurrent account (% of GDP)


Real GDP (% yoy)

Source: Statistical Committee of the RB, Raiffeisen RESEARCH

Current account and FCI inflows

Source: Statistical Committee of the RB, Raiffeisen RESEARCH

Forecast

Fore

cast


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 10.2 0.2 7.6 5.3 3.0 4.0 4.5







General budget balance (% of GDP) 1.4 -0.7 -2.6 2.4 -0.5 -1.0 0.0





EUR/BYR (avg) 3,142 3,894 3,951 6,900 11,000 13,100 15,100

USD/BYR (avg) 2,136 2,793 2,979 4,975 8,400 9,900 11,400


Belarus emerged remarkably well from its messy balance of payment and cur-rency crisis last year. The development was based on tightened monetary and fiscal policies, reinstated energy subsidies and financial support from Russia, and an export boom in oil products. As a result, in H1 2012 headline GDP growth was moderately positive at 2.8% yoy, albeit uneven, with investment contracting by almost 20% yoy. The current account deficit disappeared, the currency was stable and inflation slowed down to “only” 1.6% per month.However, some of the positive factors might be of only temporary nature. First, wages are rising far too fast ahead of the 23 September 2012 parliamentary elections, given the objective to increase wages to USD 500 by the end of 2012. Thus, from Q4 2011 to July USD equivalent average wages have increased by 45% to USD 470. This looks dangerously similar to the excessive wage in-creases of H2 2010, immediately ahead of the previous crisis. (On the other hand, monetary policy seems to be on track). Secondly, given the picture of rather muted global growth prospects the oil product export boom may show signs of exhaustion. Also, manufacturing exports will suffer from any weakness in Russian economic growth. Third, the end of a profitable but dubious oil product re-exporting scheme (mislabelling oil products as chemical dissolvents) directly worsens the current account balance beginning from Q3 2012. Finally, given the stalled privatisation process, new frictions with Russia cannot be ruled out, possibly resulting in a temporary delay of financial support.Going forward, Belarus will use a combination of new external debt, privatisa-tion and drawdown of FX reserves to fund upcoming large debt redemptions beginning in 2013. Depreciation pressure on BYR is likely to rise beginning from late 2012/early 2013 due to the tough debt redemption schedule, C/A deterio-ration and administrative price adjustments. The central bank may even allow for some depreciation in Q4 2012 after September’s elections.

Andreas Schwabe

n Tight policies, export boom and Russian support enabled economic stabilisation

n Excessive wage increases and the end to a profitable oil products export scheme point to renewed external imbalances

n New external debt, privatisation and the use of FX reserves will fund upcoming large debt redemptions beginning in 2013

n FX depreciation pressures likely to rise from late 2012/early 2013; maybe even after September parliamentary elections

32 4th quarter 2012

Russia

-202468101214-2

0

2

4

6

8

2008

2009

2010

2011

2012

e

2013

f

2014

f



Real GDP (% yoy)




Forecast

-10-8-6-4-202468

10

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)



2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 5.2 -7.9 4.3 4.3 3.7 3.9 4.0



Average gross wages (% yoy) 27.8 10.7 13.1 9.4 10.0 11.0 10.0




General budget balance (% of GDP) 4.9 -6.3 -4.1 0.8 -0.3 -1.0 -2.0


Current account balance (% of GDP) 6.2 4.0 6.1 5.5 4.1 2.4 1.7



EUR/RUB (avg) 36.55 44.26 40.29 40.88 40.24 42.12 42.85

USD/RUB (avg) 24.85 31.75 30.37 29.40 30.72 31.91 32.22


Economic outlook

The Russian economy performed quite well in H1 2012, with GDP growth of 4.5% compared to the projected rate of 3.7% for the whole year. We anticipate that growth in H2 2012 GDP will be driven by robust household consumption growth, whereas state-led investment activity has already started to decelerate, reflecting finalisation of the APEC-2012 project. However, our projection of slower GDP growth mainly rests on weaker external demand, while internal de-mand remains strong and is turning out to be less sensitive to worsening global environment. Industrial production, which is lagging behind investment activity, is one of the possible weak points. In addition, a severe drought this summer in Russia will add to our previous inflation forecast by no less than 0.5%, result-ing in an at least 7% rise in the CPI in 2012. Along with stronger depreciation expectations which could discourage household consumption, higher inflation is thus one of the main threats for the rest of the year. However, given that oil prices have recovered to levels above USD 110/bbl, the fiscal position seems secure, with a small budget deficit covered mainly by internal and external bor-rowings. The favourable commodities conditions mean that it is not necessary to cut investment expenditures and/or initiate pro-inflationary spending from the reserve fund. The Russian government is planning austerity measures, including defence spending cuts and freezing optional spending. A budget rule has been introduced, which prevents fiscal policy easing and prescribes a more accurate procedure for rebuilding the Reserve Fund. The new cabinet of ministers seems to be more business-oriented and experienced. Government policies are now more focused on achieving an effective dialog with business society and improving the investment climate. Authorities tend to increase the transparency of their policies and to react accordingly to the challenging environment.

Slower economic growth sensitive to fiscal risks

n GDP mainly driven by consumer activity, slowdown ahead due to slack internal demand

n Inflation to rise from record lows due to one-off drought effect

n Monetary policy tightening required, despite weakening economy and RUB liquidity shortage

n Fiscal risks lower following introduction of budget rule and austerity measures

Forecast

334th quarter 2012

4

5

6

7

8

9

0 1 2 3 4 5 6 7 8 9 10


.

2527293133353739414345

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/RUB (eop) USD/RUB (eop)



RUB yield curve (%)



In July-August 2012, the rouble hit a 2-month high after pronounced deprecia-tion in May-June 2012. In our view, this improvement can be attributed entirely to increasing global risk appetite. We link the stronger interest in risky assets to the renewed uptrend in oil prices (USD 110/bbl after drop to around USD 95/bbl in May-June 2012), the rising stock market indices, including the local MICEX index, whereas macro data from the major world economies, especially the USA and China, remain mixed. The wider bi-currency floating band (7 roubles, RUB 31.65-38.65, since July 25) leads to more pronounced RUB appreciation. Given the improving export dynamics along with slower capital flight, which is reflected in almost zero foreign currency sales by the Central Bank of Russia (the CBR), we cannot rule out further moderate appreciation. However, in the coming months the probability of RUB strengthening will be mostly an issue of capital flows, while the current account surplus is expected to decline. Over a longer horizon and taking into account strong internal demand for investments goods, which are mainly imported, as well as rising inflationary pressure, the prospects for the trade balance are not so positive. At the same time, capital flight could resume due to higher repayments of foreign currency-denominated debt at the end of the year. Against a backdrop of continuing drought, inflationary pressure from the view of the CBR will increase in coming months. It appears, with a moderate increase in core inflation too, the CBR decided to take a precautionary step by rising interest rates by 25bp already in September. Furthermore, despite some deterioration in key real macro indicators, in our opinion, the inflationary risks will prevail for the CBR in the near term. As a result, we believe that the CBR will continue to tighten monetary reign so we expect at least one rate hike until the end of 2012 and more rate hikes in H1 2013. What remains to be seen is how the regulator will deal with tightening rouble liquidity in the banking system which in our view can lead to sharp deceleration of credit conditions and negatively impact economic growth in 2013. The rebound in the oil price and the stronger rouble – together with looming infrastructure liberalisation – supported buying sentiment on the OFZ market and moved yields back to the lows seen at the beginning of the year. On average, yields on OFZ during the June-July rally came down by 25-50bp, whereas corporates lagged behind due to spread widening. A further reduction in yield on RUB bonds is limited by the high money market rates (e.g. o/n repo rates fluctuating near 6.0% p.a.) due to the large negative net liquidity positions of the banking system. The budget surplus and capital flight will probably remain the two main factors draining liquidity from the banking system. However, the lib-eralisation of RUB bond market is expected to bring substantially more foreign in-vestor funds which will help to sustain a positive momentum in OFZ bond market.

Maria Pomelnikova

Russia



Key rate 8.25 8.50 8.75 9.00 9.00

Consensus 8.13 8.00 8.00 7.88

1 month2 6.43 6.60 6.90 7.25 7.50

3 month2 7.16 7.10 7.20 7.40 7.60

Consensus n.v. n.v. n.v. n.v.

6 month2 7.37 7.35 7.45 7.65 7.75

1 5:00 p.m. (CET) 2 Bid rateSource: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


2y T-bond2 6.54 6.60 6.70 6.70 6.80


5y T-bond2 7.48 7.50 7.30 7.20 6.8010y T-bond2 7.85 7.70 7.50 7.40 7.50





EUR/RUB 40.17 42.12 41.00 41.96 42.50

Cons. 39.30 39.40 40.40 41.00

USD/RUB 30.61 31.91 31.54 32.03 31.95

Cons. 32.20 32.20 32.60 32.90

RUB basket 34.91 36.50 35.80 36.50 36.701 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Forecast

34 4th quarter 2012

-25-20-15-10-505

1015

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


0

2

4

6

8

10

12

14-14

-12

-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

e

2013

f

2014

f



Real GDP (% yoy)

Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH

Rocky times ahead


Source: National Bank of Ukraine, Raiffeisen RESEARCH

Forecast

Forecast


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 2.3 -14.8 4.2 5.2 1.5 2.5 4.5












EUR/UAH (avg) 7.73 11.17 10.54 11.09 10.72 11.77 12.46

USD/UAH (avg) 5.26 8.01 7.95 7.97 8.20 8.90 9.40


Economic outlook

Growth performance remains subdued despite GDP growth acceleration to 3% yoy in Q1 2012 amidst robust domestic demand, fed by the pre-election spend-ing binge, EURO-2012 preparation activities and an early harvesting season. The weak external environment and the drop in agricultural output (20% lower harvest volume this year) will undermine growth dynamics in the second half of the year. We expect GDP growth of 1.5% in 2012 with only a slight improve-ment (2.5% yoy) next year as global economic turbulence will continue to weigh on Ukraine’s growth outlook. Inflation figures still paint a very positive picture with a zero inflation rate (in yoy terms) as of end-August. However, inflationary pressures are likely to re-emerge in the coming months due to rising food price, the relaxation of administrative price controls and utility tariff hikes after the elec-tions. According to our projections, the inflation rate will accelerate to 5% by end-2012 and further to 9% by end next year. Robust revenue performance and improved access to financing helped to alleviate the budget problems this year. However the loss-making state-owned gas monopoly remains the major point of concern. We expect the general government deficit to shrink slightly this year to 4% of GDP, keeping the public-debt-to-GDP ratio stable at 36-37%.The political campaigns for parliamentary elections, scheduled for October 28, are gradually heating up. Despite widespread public disappointment in the Presi-dent and his party, we expect the Party of Regions to retain control over the Par-liament due to the frictions within the opposition forces, the specifics of the elec-toral system and the (inevitable) vote-rigging. Hence, the upcoming elections are not likely to bring any notable changes in the domestic political landscape and international relations. The imprisonment of opposition leaders, curbing of civil freedoms and the extension of media censorship will still be the main stumbling blocks on the road to European integration. On the other side, no breakthrough

n Tangible growth slowdown amid weak external environment and tight monetary policy

n Parliamentary elections in October are not likely to bring significant changes to the political landscape

n Mounting external imbalances point to the high probability of exchange rate realignment

n Persistent pressure on the currency keeps interest rate and yield levels elevated, despite zero inflation environment

Ukraine

354th quarter 2012

in the relations with Russia is expected, unless Ukrainian officials give in to the demands to join the Customs Union.

Financial markets outlook

On the FX market, the pressure on the de-facto currency peg to the US dollar con-tinued over the summer. Devaluation expectations are still high as many market participants assume the political incentive to maintain the peg will diminish after the October elections. Economic fundamentals are deteriorating as well: export performance almost stagnated, while strong wage increases and surging energy prices led to high import growth, resulting in a further widening of the current account deficit to USD 6.7 bn for the year to date (70% higher than in the same period of 2011). We have adjusted our estimation of the current account deficit for 2012 upwards to 6% of GDP and – given the muted outlook for exports – as-sume the elevated deficit will persist in the coming two years as well. Fortunately, capital inflows were still sufficient to cover the current account deficit. This can be attributed to FDI inflows of USD 3 bn, the placement of a USD 2 bn sovereign Eurobond and robust inflows of debt capital to the private sector. On the other hand, internal capital flight in the form of cash outflows from the banking sector continued, and the banking system is still in the process of external deleverag-ing. We stick to our moderately negative outlook for UAH, expecting 10-20% depreciation within the next 2-3 years. In our view, the peg is not sustainable in the long run (and maybe not even in the medium run). One – arguable risky – strategy would be the introduction of some exchange rate flexibility after the elec-tions, to pursue a controlled and limited depreciation. As this endeavour could easily backfire and result in a sharper than desired depreciation, the Ukrainian authorities are very tempted to continue defending the peg. However, in such a case the currency peg will continue to be highly vulnerable to external shocks – only postponing and likely aggravating future FX adjustment.Domestic government bond yields remain elevated (i.e. higher than 20%), de-spite the low inflation environment. At the same time, the government has been able to finance itself on the local debt market by issuing FX domestic bonds (tap-ping banks’ excess FX liquidity), FX-linked papers and 5-7 year UAH bonds at a non-market yield of 14%. The latter transactions have been apparently facilitated by the central bank, effectively resulting in debt monetisation of a part of the budget deficit.

Dmytro Sologub, Andreas Schwabe

7.5

8.5

9.5

10.5

11.5

12.5

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/UAH (eop) USD/UAH (eop)

14

17

20

23

26

29

0 1 2 3 4 5

Yields as of Sep-12

Yield curve Sep-12

Yield curve Jun-12

.

Exchange rate forecast


UAH yield curve


Forecast

Ukraine



Key rate 7.50 n.v. n.v. n.v. n.v.

Consensus 7.38 7.50 7.63 7.63

1 month2 25.50 n.v. n.v. n.v. n.v.

3 month2 24.25 n.v. n.v. n.v. n.v.

1 5:00 p.m. (CET) 2 Bid rateSource: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


1y T-bill2 19.52 20.00 20.00 15.00 15.00

2y T-bond2 21.43 21.00 21.00 17.00 17.005y T-bond2 19.02 n.v. n.v. n.v. n.v.




EUR/UAH 10.65 11.6 11.4 11.5 12.0

Cons. 10.4 10.9 11.1 11.2

USD/UAH 8.12 8.8 8.8 8.8 9.0

Cons. 8.5 8.9 9.0 9.0


36 4th quarter 2012

8

10

12

14

16

-2-10123456

2008

2009

2010

2011

2012

e

2013

f

2014

f




State spending will partly mitigate the risk of economic slowdown


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 3.3 1.2 7.3 7.5 6.0 6.0 6.5

Industrial output (% yoy) 2.6 2.7 9.6 3.5 2.0 3.0 3.5






General budget balance (% of GDP) 4.0 -1.4 1.4 5.5 4.5 2.5 3.0


Current account balance (% of GDP) 4.7 -3.6 1.6 7.6 5.7 2.8 1.9



EUR/KZT (avg) 176.94 205.80 195.43 204.06 190.11 193.31 189.80

USD/KZT (avg) 120.30 147.62 147.33 146.62 148.77 147.00 146.00


Economic outlook

After growing in excess of 7% during 2010-2011, the Kazakhstan’s economy is finally entering a period of slowdown due to faltering demand in partner economies, especially in Russia. Industrial output in H1 posted a marginal 1.3% (yoy) increase. Similarly to Russia, fixed capital investment growth is decelerat-ing while consumer sector is becoming the main engine for economic expansion, propelled by high credit and income growth. H1 GDP grew just 5.6% (yoy) compared to the 7.1% growth in the same period of a year ago. Nevertheless, fairly high oil prices and increasing state investment should help Kazakhstan to escape a more pronounced deceleration of real sector. In particular Kazakh government plans to boost state spending on innovative economic projects and inject cash into manufacturing. Furthermore, relatively high oil prices should prop up the Kazakh economy, as the energy sector makes up nearly 30% of its GDP. Consequently, we expect only a mild slippage of the growth rate with Kazakh GDP stabilising around 6% this and next years. We also expect state spending to increase in absolute terms and household demand to remain relatively strong in coming year. Meanwhile, inflation is likely to stay well below the targeted range of the central bank in 2012, but will pick up in 2013 signalling an end to mon-etary easing in Q2 2013. So far we expect monetary policy to remain relatively accommodative until the end of Q1 2013. The general budget surplus will shrink in 2013 due to increasing government spending, but will recover in 2014 on the back of stronger economic growth.

The Kazakh political situation remains fairly stable after the re-election of presi-dent Nazarbaev for the next five-year term back in April 2011. The pro-presi-dential party retains nearly absolute control of both houses of parliament. The government is pushing for diversification of the Kazakh economy. In 2011, the Kazakh government adopted a state-sponsored investment programme which

Real GDP (% yoy)


-2

0

2

4

6

8

10

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


Forecast

Forecast

Kazakhstan

n State investment and household consumption to support economic growth

n Low inflation to allow for a longer period of monetary easing bias

n Tenge stability will be preserved through monetary means and FX interventions

n Tenge outlook won’t be immune to global market volatility and oil price risk

374th quarter 2012



100.0

120.0

140.0

160.0

180.0

200.0

220.0

240.0

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/KZT (eop) USD/KZT (eop)

Index spreads

Source: JP Morgan, Raiffeisen RESEARCH

400

500

600

700

800

900

1000

200

250

300

350

400

450

500

Feb-12 Mar-12 May-12 Jun-12 Aug-12

CEMBI Broad EMBIGEMBIG KZ CEMBI KZ (r.h.s.)

Forecast

aims to boost the industrial sector and inject new investments not only in tra-ditional mining, but also in the manufacturing sector. The Kazakh sovereign is rated BBB, with a positive outlook from Fitch and BBB+ stable by S&P. The ratings reflect strong fiscal position and better economic performance.

FX market

Despite the small easing in FX regime in 2011, the central bank remains com-mitted to a tightly managed tenge – US dollar peg. The recent tenge weakness prompted the bank to step up FX interventions in support of local currency. Mean-while, the benign inflation outlook allowed the bank to cut its main interest rate by cumulative 200bp through 2011 reducing it to a record low 5.5%. Although sticky food inflation might prompt inflation to increase next year, the bank is likely to continue with the approach of balancing between growth and price stability. Consequently, we expect the regulator to maintain easing bias into Q2 2013 unless the tenge comes under more heavy pressure from external market crisis. KZT is likely to be kept around 147-151 vs. the US dollar with the central bank stepping up interventions when-and-if the tenge climbs above 151.

Gintaras Shlizhyus

Corporate bonds

Kazakhstan remains the second-largest corporate Eurobond market in the CIS – after Russia – with almost USD 21 bn worth of Eurobonds outstanding. The share of quasi-sovereign issuers in the total amount increased over the last quarter to 53%, thanks to the successful placement of KTZ. The state railway issued a very tightly priced paper worth USD 800 mn in July with a record-long 30y tenor. Al-though there are no issues in the pipeline, we believe that strong quasi-sovereign credits from the region have good access to the market, as things stand. The JP Morgan CEMBI KZ Index returned 6.4% from the beginning of Q2, underper-forming its CIS peers. Kazakh quasi-sovereign names (EMBIG KZ Index) returned 8.6% and outperformed their IG-rated corporate peers from the broader EM remit. The latter index is offering 3.7% in yield terms and has reached all-time lows, while CEMBI KZ, mainly represented by single B-rated papers, still needs to tighten some 50bp to reach the minimums of September 2010.

We still think that the non-financial quasi-sovereign issuers we track in Kazakh-stan offer anything but compelling valuation, which is supported by the lack of sovereign paper and EMBIG Index eligibility of these credits. There have gener-ally been no further updates on the potential privatisation of state-owned firms, which could lead to the expulsion of these names from the index. Looking across the board, we believe that the only issue of Kazatomprom looks richly priced and we reduce our position in 6.32% Kazatomprom 2015 (three-month horizon). On the other hand, KazMunayGas due in 2013 appears to be an attractive and safe Hold-to-maturity (HTM) investment. On the banking side, the contribution of Samruk-Kazyna in BTA’s restructuring remains crucial, yet highly uncertain. While we expect details to be announced by year-end we see limited spill-over risk in the market, as things stand. We regard Halyk as the most solid banking credit and feel that the two 2013s offer good yields for HTM investors, while we keep our buy recommendation on 7¼ Halyk Bank 2017 in place.

Martin Kutny, Alexander Sklemin

Kazakhstan

Selected corporate bonds

Name Ticker Coupon (%)

Yield (%)

Matu-rity

Halyk Bank HSBKKZ 7.25 5.45 May-17

Bank Center-Credit

CCBNKZ 8.625 4.59 Jan-14

KazMunay-Gas

KZOKZ 9.125 3.25 Jul-18

Kazatomprom KZAPKZ 6.25 2.05 May-15Source: Bloomberg, Raiffeisen RESEARCH



EUR/KZT 196.43 196.7 192.4 196.5 195.5

Cons. 184.2 184.1 184.0 183.8

USD/KZT 149.75 149.0 148.0 150.0 147.0

Cons. 149.3 149.4 149.6 149.7


38 4th quarter 2012

Turkey

05101520253035404550-10

-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f


-12-9-6-30369

1215

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


Economic outlook

In H1 2012, the rebalancing between external and internal demand turned out to be stronger than expected. The freshly published GDP data for Q2 2012 reveal that exports contributed 4.6 pp to the overall figure (2.9% yoy follow-ing 3.3% yoy in Q1), while household consumption contracted by 0.5% yoy. This was the first time since Q3 2009 that households contributed negatively to economic growth (-0.3 pp), which was mainly due to moderate lending and inflationary pressure. The main surprise, however, came from investments (1/4 of GDP), which collapsed by 7.4% yoy (-2.1 pp) in the same period. Overall, the good news in Q2 was surging exports (19.8% yoy) in conjunction with the continued, albeit slowing decrease in imports (-3.6% yoy). Looking ahead, we continue to see only moderate growth in Q3 2012, but expect the economy to ramp up in the following quarters on the back of more relaxed domestic financial conditions and a gradual improvement in external conditions. Our real GDP growth forecast for 2012 remains at 3.0%. The major risks for Q4 2012 seem balanced to us, with remaining uncertainties surrounding the EMU crisis affect-ing the pace of economic recovery in the core markets on the negative side, and the increasing support from global and local central banks on the positive side. In summary, with the Turkish central bank’s (TCMB) recent easing of monetary policy (MP) the rebalancing should have peaked and the growth structure should start changing in favour of domestic demand. This weakening support from the non-energy component in conjunction with that from oil prices should, in turn, put a brake on the gradual narrowing of Turkey’s current account deficit (CAD). Against this backdrop, the CAD, which dropped considerably to around 8% of GDP in July from 10% at the beginning of the year, should end 2012 at around 7.5% of estimated GDP (and fall slightly in 2013). Still, these levels are high, and so Turkey’s major challenge is still to generate growth without hurting the downward trends in the CAD and inflation.

Forecast

Forecast


2008 2009 2010 2011 2012e 2013f 2014f


Real GDP (% yoy) 0.7 -4.8 9.2 8.5 3.0 4.0 4.5












EUR/TRY (avg) 1.92 2.17 2.00 2.34 2.35 2.30 2.25

USD/TRY (avg) 1.31 1.55 1.51 1.68 1.80 1.74 1.70

Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH

n Stronger-than-expected rebalancing – mainly thanks to strong exports – may have already peaked

n Current account deficit outlook is still the major obstacle to an investment grade rating

n Macro picture allows for nominal loosening of monetary reigns without exposing TRY stability to unmanageable risks

n Given the expectations of heightened volatility in Q4, some additional spread narrowing likely


Real GDP (% yoy)



Rebalancing already peaked, but is it enough?

394th quarter 2012


CPI inflation in August came in higher than expected, at 0.6% mom and 8.9% yoy. As we have highlighted repeatedly, the market underestimated the risks from resurgent food and energy prices, which began to pass through to local prices. Nevertheless, the yearly inflation figure continued on its downward path – falling from 9.1% yoy in July, albeit at a slower pace. Since last year’s administered and commodity price increases as well as the heavy FX pass-through are expected to be one-off effects and to fade in Q4 2012 (strong base effects, especially in October), a revival in demand-driven inflation should only slightly hinder disinfla-tionary dynamics in the period ahead. On balance, our year-end CPI projection remains unchanged at 6.5% yoy, which is above the TCMB’s recently lowered forecast of 6.2%, mainly due to our anticipation of higher food and energy prices.In line with easing inflationary pressures, in Q3 2012 market participants began to price in MP easing on the local stage. This was certainly encouraged by the growing confidence in the success of the TCMB’s unorthodox MP mix that accom-panied market players’ opinion formation through a front-loaded communication strategy. Central bank members repeatedly prepared markets for the narrowing of the overnight (o/n) interest rate corridor, which finally came at the last MP meeting on Sept. 18. In fact, the Turkish monetary authorities cut the upper end by 150bp, bringing the corridor to 5%-10%. In addition to the improved macro picture outlined above, the tailwinds from global central bank support – likely to sustain the appetite for the lira markets and, in turn, stabilising the Turkish lira around current levels – should allow for another 50-100bp cut in the next few months. Given that the TCMB’s hybrid policy rate via which it provides liquidity to the system has already declined by close to 350bp over the past couple of months to below 6.5%, the narrowing of the corridor should have only a techni-cal character. At the same time, the upper band of the corridor acts as an index for commercial banks in determining their interest rates on loans, and hence loan growth will be facilitated through this and help to revive domestic demand (in line with our macro baseline scenario). However, stronger inflows to lira markets will likely lead to a further decline in short-term rates, while we also see some room for additional spread tightening on the LCY bond market. Overall, the most de-cisive bond market drivers remain the implications for capital inflows and USD/TRY, which will continue to dominate the MP mix.

Stephan Csaba Imre

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

EUR/TRY (eop) USD/TRY (eop)



456789

101112

0 1 2 3 4 5 6 7 8 9 10


.


TRY yield curve (%)

Turkey

Forecast



Key rate 5.75 5.75 5.75 5.75 6.25

Consensus 5.75 5.88 5.88 6.13

1 month2 5.90 5.90 6.00 6.10 6.40

3 month2 6.25 6.20 6.20 6.30 6.70

Consensus 7.90 7.80 7.70 7.60

6 month2 7.07 7.00 7.00 7.10 7.30

12 month2 7.40 7.40 7.40 7.50 7.501 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


2y T-bond2 7.11 7.10 7.00 7.00 6.70

Cons. 7.35 7.63 7.77 8.75

5y T-bond2 7.74 7.60 7.70 7.80 7.9010y T-bond2 8.27 8.00 8.00 8.20 8.30





EUR/TRY 2.36 2.31 2.28 2.23 2.33

Cons. 2.22 2.19 2.19 2.20

USD/TRY 1.80 1.75 1.75 1.70 1.75

Cons. 1.81 1.79 1.77 1.76


40 4th quarter 2012

Sovereign Eurobonds

Market comment

The CEE Eurobond market strengthened in Q3, delivering a stellar upside com-pared to the smallish gains recorded for Q2. General market sentiment markedly improved throughout Q3 as the worst fears about the Eurozone crisis failed to materialise while new stabilisation measures boosted investor sentiment. Mean-while, CEE markets received fresh inflows from funds willing to diversify into non-Euro markets. Furthermore, risk re-pricing also occurred within the CEE mar-ket as falling volatility and stabilising sovereign ratings lured investors into the higher yielding debt of the Ukraine and Hungarian markets. Indeed, prior to that Ukraine’s non-payment risk was blown out of all proportion, while positive IMF news catapulted Hungarian bond prices. As a result, both Ukraine and Hungary topped the list of Q3 performers with their Eurobonds returning about 10% in price gains in the US dollar segment and some 7% to 9% in the EUR segment. Croatia turned into another good performer last quarter since its fiscal consolida-tion success was duly noted by the rating agency Fitch which upgraded its rating outlook on Croatia from negative to stable.

Despite a decline in the offering of new sovereign Eurobonds in comparison to Q2, altogether CEE sovereigns managed to place nearly USD 10 bn worth of Eurobonds including EUR issues in Q3. Moreover, the CEE & MEA governments remained by far the largest issuers of sovereign paper with nearly USD 49 bn in new placements for the year to date, which ranked the region Number One in terms of sovereign issuance. The Ukrainian government became a single biggest issuer in CEE accounting for 39% of overall sovereign placements with Poland and Turkey taking second and third place, respectively. However, the most in-teresting placement perhaps was from Bulgaria which tapped the Euro segment with 950 mn worth of bonds. Bulgarian paper remains in limited supply since the country is not a frequent issuer and this year it returned to the market after a long pause. Speaking of issuance plans, in recent days Ukraine tapped the market by reopening the 2017 bond to place an additional USD 600 mn. Countries such as Hungary, Croatia and perhaps still Poland might also use stronger market confidence for placing new bonds. We do not exclude the possibility of Lithu-ania and Latvia returning to the primary market as well. Accordingly, we expect pretty busy issuance calendar in Q4 this year, but even more placements might be scheduled for Q1 of 2013.

Market outlook

Since spreads on most CEE sovereign Eurobonds have experienced substantial tightening, prospects for future gains will be limited. Actually, we find all CEE sov-ereigns having negative z-scores in excess of minus 1 which signals relative bond overpricing. Nevertheless, drawing final conclusions is not so easy since coun-tries’ risk re-pricing continues while diminishing volatility can technically boost their z-scores. Consequently, we base our conclusions on fundamental analysis taking into account the liquidity position of the government, fiscal policy, current

Q3 rally removes much of the upside

EMBIG USD returns*

USD segment

Return (%) Spread (bp)

last Q yoy actual

Composite 6.33 16.12 286

Europe (CEE) 7.79 14.40 238

Hungary (BB+) 11.94 13.19 358

Turkey (BB) 11.80 9.48 646

Ukraine (B+) 7.32 16.12 205

Poland (A-) 6.68 10.82 457

Russia (BBB) 6.55 12.57 194

Bulgaria (BBB) 4.94 13.52 129

Serbia (BB) 4.68 6.79 126Other segments

Asia 5.16 12.97 179

Africa 5.46 13.96 266

Latin America 6.07 19.53 346* 17-Sep 5:00 p.m. (CET) sorted by last Q performanceNet return not annualised in %, S&P rating in bracketsSource: JP Morgan, S&P, Raiffeisen RESEARCH

EMBIG EUR returns*

EUR segment

Return (%) Spread (bp)

last Q yoy actual

Composite 4.63 12.97 214

Europe (CEE) 4.86 13.24 214

Hungary (BB+) 9.67 5.59 740

Poland (A-) 7.01 8.31 497

Turkey (BB) 5.35 14.06 301

Croatia (BBB-) 4.86 12.85 238

Lithuania (BBB) 4.16 16.10 134

Ukraine (B+) 4.15 9.39 208

Romania (BB+) 3.90 9.92 357

Other segments

Asia 0.81 3.50 55

Africa 2.13 7.08 140

Latin America 3.90 13.56 211* 17-Sep 5:00 p.m. (CET) sorted by last Q performanceNet return not annualised in %, S&P rating in bracketsSource: JP Morgan, S&P, Raiffeisen RESEARCH

n Impressive CEE Eurobond market performance in Q3

n New sovereign issuance to gain speed in coming months

n Market rally has diminished potential risk-reward possibilities for CEE market

n We rate the broader market neutral and expect fundamentals to play a bigger role in risk assessment

414th quarter 2012

EMBIG forecast and performance

Spread Range Spread Range Spread Range

Dur. 17-Sep* Dec-12 min. max. Perf. (%) Mar-13 min. max. Perf. (%) Jun-13 min. max. Perf. (%)

Poland (A-) EUR 5.9 134 140 116 164 -1.34 130 106 154 -0.75 102 78 126 -0.85USD 5.6 129 145 116 174 -0.36 130 101 159 -0.63 99 69 128 -0.01

Lithuania (BBB) EUR 3.4 208 230 198 262 -1.34 212 180 244 -0.73 180 148 211 -0.64Hungary (BB+) EUR 3.7 497 510 453 567 -1.11 487 430 544 -0.25 447 390 504 0.13Russia (BBB) USD 6.2 194 220 184 256 -1.01 199 164 235 -0.98 165 130 201 -0.11Croatia (BBB-) EUR 3.0 301 300 262 338 -0.48 287 249 326 -0.11 255 216 293 -0.03Romania (BB+) EUR 3.3 357 375 342 408 -1.19 358 325 391 -0.61 325 292 358 -0.52

USD 7.2 388 410 377 443 -0.90 392 358 425 -0.30 359 326 392 0.63Serbia (BB-) USD 5.7 457 470 438 502 -0.20 455 423 487 -0.48 423 391 455 0.19Turkey (BB) EUR 4.4 238 245 217 273 -1.05 233 205 261 -0.54 204 176 232 -0.54

USD 8.0 205 230 193 267 -1.25 209 173 246 -0.41 175 138 212 0.73Ukraine (B+) EUR 2.6 740 800 734 866 -1.98 758 691 824 -0.90 711 644 777 -0.45

USD 3.8 646 700 635 765 -1.71 660 595 726 -0.95 614 549 679 0.06

* closing prices 5:00 p.m. (CET); Performance as cumulative return of gross prices up to forecast horizonSource: JP Morgan, S&P, Raiffeisen RESEARCH

0

20

40

60

80

100

120

140

2007

2008

2009

2010

2011

2012

*

Sov Agency Corp FIG

EM sovereign eurobond issue, USD bn

* 2012 year-to-date; Source: Bloomberg, Raiffeisen RESEARCH

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

-50

0

50

100

150

200

250

300

350

BG (B

BB)

HR

(BBB

-)

HU

(BB+

)

KZ (B

BB)

PL (A

-)

RU (B

BB)

RS (B

B-)

TR (B

B)

UA

(B+)

spread-rating bp, avg z-score (r.h.scale)

CEE valuation scorecard (EMBIG USD)*

* z-score below minus 1 = expensive and above plus 1 = cheap; spread-rating = average different between issuer spread and rating weighted spread; Source: Thomson Reuters, Raiffeisen RESEARCH

100

200

300

400

500

Sep-11 Dec-11 Mar-12 Jun-12 Sep-12

EMBIG EUR Europe

EMBIG USD Europe

EMBIG EUR Spread (bp), EUR vs. USD

Source: JPMorgan, Raiffeisen RESEARCH

account balance and the strength of economic growth. We also believe that risk re-pricing occurs in part because of market over-reaction to specific problems in the past. Therefore, the outlook for the Eurozone economy, and the USA and China, will play an important role in shaping the outlook on CEE. Speaking of which, we believe in the ability of Eurozone to avoid a major Euro crisis, which should positively influence market risk perception and curtail the flight to quality which usually comes at the expense of selling riskier assets. What we see as negative is the weaker economic growth outlook for the Eurozone which will affect many CEE economies with a higher share of EU trade. Incidentally, CIS economies will be better insulated from the Eurozone economic slowdown, but their dependence on commodity markets, especially in Russia, leaves them sus-ceptible to commodity price shocks.

Market strategy

As for market strategy, we rate the overall CEE Eurobond market ”neutral”, find-ing it more difficult to outperform in this segment without any strong fundamental improvements materialising in the first place. In our opinion, the broad rating out-look on CEE will remain stable since fewer downgrades are likely. At the country level, we believe that Russia’s ample fiscal saving and good growth should allow the government to avert possible negative impact from the global markets while Ukraine’s chronic liquidity problems might become an issue again in a worst-case scenario. However, Russia’s Eurobonds are tightly priced and offer almost no upside while Ukraine’s bonds experienced a stellar rally while fundamentals remain weak for the most part. Accordingly, we have a neutral weight recom-mendation for both countries. Meanwhile, we see more risk in South-Eastern Europe and especially in Romania, where political problems are compounded by still high fiscal and trade imbalances, and in Serbia where the government’s fiscal position has worsened amidst bleak growth perspectives. At the same time, we see the Polish and Czech markets as remaining stable thanks to well aligned macro policies and the strong competitiveness of their economies. Still, we prefer Polish USD bonds for the sake of longer duration and better liquidity. In Croatia, the government’s fiscal success story and better prospects for the country’s rating outlook allow us to recommend Croatian Eurobonds. In Hungary, the weird posi-tion of the government vis-!-vis the IMF requirements worsens the prospects for a new IMF deal, which would be crucial for buy rating.

Gintaras Shlizhyus

Sovereign Eurobonds

42 4th quarter 2012

Corporate Eurobonds

0% 3% 6% 9%

MidEast

Asia

LatAm

EM corporates

Kazakhstan

Emerging Europe

Russia

Ukraine

EM corporates: Q3 2012 returns


As weak US data and concerns over economic performance in China took the back stage in Q3 2012, EM credit markets were primarily driven by expecta-tions of additional monetary stimulus from the FED and the ECB. In particular, the reduction of tail risk in Europe seems to be driving sentiment at the moment as the market rallied strongly following the verbal interventions of Mr. Draghi and the announcement of details of the OMT programme by the ECB.

In the quarter-to-date, the global corporate bond index returned 4.7% for a spread compression of 70bp, pushing the year-to-date total return to a very high 11.8%. Emerging Europe seems to be the biggest beneficiary of the recent rally with a QTD return of 6.9%, coming in substantially above Asia (4.1%), Latin America (4.6%) and the Middle East (3.7%). The three CIS markets recorded fairly similar total returns, but in spreads terms Ukraine outperformed Kazakh-stan, which did better than Russia.

In terms of supply, July became the strongest month in the history of the asset class as EM corporates raised USD 30.9 bn from the Eurobond market. August was very dull due to the usual seasonality, but supply has accelerated into autumn and is currently running well above the year-to-date weekly average of USD 4.9 bn. With the exception of Kazakhstan Temir Zholy benchmark, issuance came solely from Russian companies, which contributed almost 20% to the global issuance volumes in Q3 2012, well above this cycle’s average. A large portion of this supply came from liquidity-hungry, state-owned banks and we expect them to continue tapping the Eurobond market for funding for the rest of the year as local liquidity conditions are projected to remain tense. Currently, a number of companies are conducting investor meetings with a view to issuing bonds. These include Alfa Bank, which is looking to print a LT2 USD-denominated benchmark, and Novolipetsk Steel, Russia’s only investment-grade rated steel producer, which may debut with a USD-benchmark offering. Gazprombank is planning to print a Euroclearable RUB-denominated paper. Russian Helicopters, a new name to Eurobond investors, may consider issuing a bond at the end of this or beginning of next year. Borrowers from neighbouring Central Europe seem to be active too, as MOL from Hungary and BRE Bank and PKO BP from Poland all announced plans to issue new paper.

While the new debt supply promises to be strong going into autumn, the Q3 rally seems to have exhausted a large portion of the upside potential on the secondary market both in the CIS region and globally. Both the global index and the Russian market have recently breached this year’s spread lows and currently trade only 80-120bp off this cycle’s lows recorded in April 2011. In yield terms, the market has reached all-time lows. It is important to note that the latter fact is attributable solely to the performance of the investment-grade (over 74% of the index’ market cap) and BB-rated component. The B-rated credits have outperformed the market in the Q3 rally, but their lacklustre H1 performance remains a drag on the year-

CIS corporates: Market needs a break after a strong rally

0% 3% 6% 9%

Asia IG

LatAm IG

Global IG

Asia HY

Europe IG

LatAm HY

Global HY

Global BB-rated

Global B-rated

Europe HY

Q3 2012 returns by rating brackets


n Exceptionally strong rally in Q3 fuelled by looser monetary policy in developed markets

n CIS credits outperform their EM peers, look fairly priced on relative basis

n Primary market activity is expected to be strong and may offer speculative investment opportunities

n We are sceptical about the market performance in the long run, but stay invested as long as the good sentiment persists

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Spread CEMBI BROAD RU vs. EMBIGRU (r.h.s., in bp)Spread CEMBI BROAD RU (in bp)

Spread EMBIG RU (in bp)Source: JP Morgan, Raiffeisen RESEARCH

Russia: sovereign/corporate spread

434th quarter 2012

to-date results. In the CIS region, the BB-rated credits tightened by 158bp qoq and outperformed the investment grade segment (-107bp) in line with their global peers. However, the B-rated segment finished the quarter in the middle of the ranking table as tightening in the heavyweight Russian market (-108bp) was less pronounced than in Kazakhstan (-160bp) and Ukraine (-238bp).

One of the reasons for the outperformance of IG and BB-rated credits may have been the reallocation of capital within the global fixed income asset class, as funds pulled out of European periphery were partly invested in high-quality EM debt. Although the recent actions of the ECB have obviously reduced the tail risk in Europe, a quick economic recovery in the region’s periphery leading to a rapid increase in risk-free rates and withdrawal of capital from the EM ap-pears rather unlikely to us as the European issues are structural in nature and their resolution will probably require a substantial amount of time. A more likely scenario for the next months seems to be an environment of slow global growth and abundant liquidity, which so far has been positive for EM corporate credit outside of the B rating category. Despite the rich absolute valuations as argued above, EM corporates continue to trade at a premium to their similar-rated US peers. For example, in the high grade space this premium totals roughly 90bp (the average rating of IG EM corporate is between A and A+). As such, we think that conditions for the continuation of a liquidity-driven rally in investment-grade and BB-rated EM credit remain in place.

For the purposes of this publication, we assessed the relative valuation of the CIS corporate Eurobond market comparing such easily observable risk measures as average rating and realised beta with the current spread levels. An important takeaway from this analysis is that all three CIS markets exhibit above-average market beta for their level of rating. Particularly in Russia this is a good explana-tion why the country’s best credits usually trade at a premium to their similar-rated EM peers. At the time of writing, our model showed that all three CIS markets compensated investors fairly both for the market and the credit risks.

The rich valuation makes us sceptical with regards to market performance over the long run. We continue to see a number of risks which may escalate and sour the market sentiment (fiscal cliff, uncertainties with regards to the implementation of the ECB’s OMT programme). However, we see little sense to play against the central banks in the near term and thus expect the CIS corporates to perform positively within the next few months, supported by the favourable global senti-ment. Among the investment-grade credits, we like Lukoil and Sberbank, while Kazmunaigaz appears to be tightly priced. In the BB-space, we like Alfa Bank, Nomos Bank and VimpelCom. We expect the former to become a full-fledged investment-grade credit, which should push its bond spreads closer to those of the Russian state-owned banks. In case of Nomos, the market may be overlooking that its merger with FC Otkritiye may produce an entity with higher creditworthi-ness than currently expected. We note though that both Alfa and Nomos trades lack obvious catalysts. Among the single-B credits we like KKB 8% due 2015 as we believe that its price will be supported by buybacks in H2 2012. We remain sceptical on Ukrainian banks. Although the Q3 rally went against our sell recom-mendation, we think that it was driven only by the good market sentiment, while we failed to observe any fundamental improvements on the issuer level or in the country’s economy.

Gleb Shpilevoy

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R² = 0.7975

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Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12Russia: 2-5y CDS curve steepness* (in bp)Gazprom: 2-5y CDS curve steepness* (in bp)

* 5d moving averageSource: Bloomberg, Raiffeisen RESEARCH

Only long-term credit risks?

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Source: Bond Radar, Raiffeisen RESEARCH

EM corporate issuance (USD bn)

Selected CIS Eurobonds

Issuer ISIN Maturity Yield in %

Alfa Bank XS0544362972 09/25/2017 5.8

Alrosa XS0205828477 11/17/2014 3.3

Bank of Moscow

XS0494095754 03/11/2015 3.8

DTEK USN2800PAA5904/28/2015 8.6

Kazatom-prom

XS0510820011 05/20/2015 2.0

KKB XS0234488236 11/03/2015 10.0Source: Bloomberg

Corporate Eurobonds

44 4th quarter 2012

Value matrix*

Domestic business activity 3 (3)

Exports OECD - excl. Eastern Europe

4 (4)

Eastern Europe 4 (4)

Asia 3 (2)

Company earnings 2 (2)

Key sectors 2 (2)

Valuation - P/E-ratio 2 (2)

Interest rates / yields 1 (1)

Exchange rates 2 (2)

Foreign equity markets 2 (2)

European liquidity 1 (1)

Technical outlook 2 (3)1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally.* expected trend for the next 3 to 6 monthsSource: Raiffeisen RESEARCH, Raiffeisen Centrobank

Equity market/Austria

Sector structure ATX

Sector Company Weight

Financials CA Immobilien, conwert, Erste Group, Immofinanz, Raiffeisen Bank International, Vienna Insurance Group 39.5%

Industrials Andritz, Oesterreichische Post, Strabag, Wienerberger, Zumtobel 18.5%

Energy OMV, Schoeller-Bleckmann 16.3%

Basic materials Mayr-Melnhof, Lenzing, RHI, voestalpine 15.8%

Telecom Telekom Austria 5.2%

Utilities EVN, Verbund 4.6%Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Vienna Stock Exchange

Even though the Austrian stock market has registered a hefty increase since the beginning of the year, it has essentially been stuck on a sideways path since early March. Nevertheless, a tangible improvement in sentiment has also been seen on the Vienna stock exchange as hopes arose that the ECB would move ahead with intervention on the government bond markets. Consequently, during the period under review this was the strongest factor driving the significant price gains, which however were based on extremely low turnover figures. As in the rest of Europe in general, economic conditions remain difficult in Austria as well. Nonetheless, Austria’s economy is still in better shape on the whole than many other Eurozone economies. While the last quarterly growth reading of +0.1% was not exactly stunning, the original +0.3% figure for Q1 growth was revised up to +0.5%. The second half of 2012 should be marked by mild GDP expansion, although growth will likely stagnate in Q3. We thus project growth of around 1% for 2012, supported by private consumption and less by exports and investments. This stands in contrast to a projected contraction of 0.5% for the Eurozone as a whole. Looking to 2013, we forecast that the Austrian economy will grow at a rate of 0.9%. Naturally, the slack economic conditions in the Euro-

ECB intervention calms the markets

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Relative P/E 2012e ATX

Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Bloomberg

zone are also impacting the countries in Eastern Europe. Countries such as the Czech Republic, Hungary, Slove-nia and Croatia will also suffer from declines in economic activity in 2012. In our estimation, the CEE region as a whole will manage growth of 2.4%, which is only marginally lower than our last forecast. As in the past, the key factor in this regard is still the CIS region, which is projected to grow at a rate of 3.5%. Obviously, the subdued economic dy-namics also have ramifications for the corporate sector. In line with this, the latest Austrian reporting season was a mixed bag, even though the majority

n Announcement of massive ECB intervention on the sovereign debt markets lowers risk aversion for the ATX as well

n Austria’s economy is weathering the persistently difficult economic conditions much better than many other Eurozone

countries

n Relatively attractive corporate valuations are currently playing a backseat role

454th quarter 2012

of companies was able to meet the expectations. The worries about a very disap-pointing reporting season – fuelled by the very weak growth conditions – proved to be off target, as was also the case at the broader European level as well. Turning to the individual companies, the best positive surprises were delivered by RHI, Vienna Insurance Group and EVN. By contrast, the performance of Ver-bund, Mayr-Melnhof and Immofinanz were slightly weaker than anticipated. In part, the results featured significant declines in year-on-year terms. For instance, EBITDA at voestalpine and Palfinger dropped by 19% and 6%, respectively. On the whole, companies’ guidances were dominated by a cautious approach or deteriorated. This was the case with Verbund, Erste Group, OMV, Telekom Aus-tria and Strabag.All in all, we still expect to see rising earnings in 2012. Compared to 2011, ag-gregate earnings growth should amount to around 6.3%. This leaves the compa-nies represented in the ATX roughly on par with their peers from the DAX index. For 2013, our forecasts point to a roughly 12.3% increase in earnings.Although valuations did not play such a prominent role in the period under re-view, one cannot of course ignore them. At the moment, the P/E ratio based on 2012 earnings is at 11.2 and thus does not look too expensive. In this regard, it is also interesting to take a look at the relative attractiveness. For example, if one examines cyclically adjusted P/E ratios, it is clear that the ATX is trading at a significant discount to the DAX. In 2007, by contrast, the ATX was still trading at a massive premium. At the current level of 0.9, the P/B ratio of the ATX is still near its low and in our view there is room for it to go higher, but it is not realistic for this indicator to return to its 10-year average of 1.5 again due to numerous factors (including higher capital requirements for banks, lower levels of external financing for companies, etc.).In the months ahead, the main driver for the Austrian equity market will not re-ally be valuations, but rather the course of the European sovereign debt crisis. The basic framework from the past, however, has changed somewhat thanks to the intervention of the ECB and the launch of a government bond purchase programme. Accordingly, we project that risk aversion will decline in the coming months, after having risen sharply mainly in response to the sovereign debt crisis. At the same time, European political decision-makers have still not been able to fully restore confidence in the equity markets yet. Consequently, we only expect to see slightly higher index levels for the ATX during the period ahead.

Johannes Mattner

Fair value of ATX* - September 2013

Bond yields (10y)

EY-BY** 2.00% 2.50% 3.00%

8.75% 2,057 1,965 1,8828.50% 2,106 2,010 1,9238.25% 2,157 2,057 1,9658.00% 2,211 2,106 2,0107.75% 2,268 2,157 2,0577.50% 2,327 2,211 2,1067.25% 2,390 2,268 2,1577.00% 2,457 2,327 2,2116.75% 2,527 2,390 2,2686.50% 2,601 2,457 2,3276.25% 2,680 2,527 2,3906.00% 2,764 2,601 2,4575.75% 2,853 2,680 2,5275.50% 2,948 2,764 2,601

* based on the expected earnings for 2012/2013 (i.e. 221.1 index points)** earnings yield less bond yieldSource: Raiffeisen RESEARCH, Raiffeisen Centrobank

Valuation and forecasts

17-Sep* Dec-12 Mar-12 Jun-13 Sep-13

12-months forward earnings 221.2 202.6 208.7 214.8 221.1

Bond yield forecast 2.35 2.20 2.20 2.45 2.45

Earnings yield less bond yield (EY-BY) 7.71 6.75 6.75 6.75 6.75

ATX-forecast based on EY-BY 2263 2331 2335 2403

ATX-forecast 2,198.0 2,250 2,300 2,350 2,420

Expected price change 2.4% 4.6% 6.9% 10.1%

Range 1950-2350 2000-2450 2100-2500 2150-2600

P/E based on 12-month forward earnings 9.9 11.1 11.0 10.9 10.9* 11:59 p.m. (CET); Source: Raiffeisen RESEARCH, Raiffeisen Centrobank

Earnings yield* less bond yield

* earnings yield = E/P; based on 12-month forward earningsSource: Thomson Reuters, Raiffeisen RESEARCH, Raif-feisen Centrobank

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46 4th quarter 2012

Equity market/CEE

The EU debt crisis still has not been overcome, as a result of which international investors have gotten stuck in cycles of “risk-on/risk-off”. There now at least ap-pears to be a reduction of the systemic risks involved, as the ECB recently opened the door for significant intervention in the sovereign debt markets with the inten-tion of keeping interest costs at low levels and since the German constitutional court in Karlsruhe gave a green light for Germany’s participation in the European Stability Mechanism (ESM), subject to certain conditions. The resulting decline in risk aversion seems to also partially be having an impact on the CEE stock mar-kets: for example, for the established stock exchanges in the region (Hungary, Poland, Czech Republic, Russia and Turkey), there has at least been a degree of stabilisation at the higher price levels that had been reached. In general, the relatively low valuations in the region as a whole should have a supportive effect, even though local topics are tending to play a subordinated role. Over the short term, we are still tending to be cautious about the uncertainties in relation to the debt crisis (cf. Greece), and thus we also prefer a defensive sector allocation.

Turning to the Russian MICEX index, global developments and risk sentiment play a particularly key role due to the weak domestic investor base. As oil&gas com-panies account for around 56% of the index, the oil price is another key factor: for Q4 2012, we project an average price of USD 112, implying no further in-creases from the current level. Even though the market valuation looks very attrac-tive (2013f P/E ratio: 5.8), one must not forget that there is no positive support from earnings performance (2013f aggregate earnings growth: -1.4%). There is, however, a structural change occurring on the Russian equity market: The government’s efforts to have state-affiliated companies distributing much higher dividends appears to be paying off handsomely (cf. Rosneft and Gazprom). This development is spreading to private companies as well (e.g. Lukoil) and signifi-cantly boosting the dividend yield for the MICEX (2012e: 3.1%). Over the short run, however, the MICEX will not be able to decouple in a positive sense from our global expectations. HOLD.

Stabilisation in the wake of the ECB decisions?

Value matrix stock markets

PL HU CZ RU RO HR TR

Politics 2 (2) 3 (2) 3 (2) 2 (2) 3 (3) 2 (2) 2 (2)

Interest rate trends 1 (2) 2 (3) 1 (1) 3 (2) 2 (2) 2 (2) 3 (3)

Earnings outlook 3 (4) 2 (4) 2 (1) 4 (3) 2 (2) 3 (3) 2 (1)

Key sectors 3 (2) 2 (3) 2 (3) 2 (1) 3 (2) 2 (3) 1 (1)

Valuation (P/E) 2 (2) 1 (2) 2 (2) 1 (1) 1 (1) 2 (2) 2 (2)

Liquidity 1 (1) 3 (3) 3 (3) 1 (1) 3 (3) 4 (4) 1 (1)

Technicals 2 (3) 2 (3) 4 (3) 2 (4) 4 (3) 3 (2) 3 (2)1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally. Assessment refers to a 3-month period. Source: Raiffeisen RESEARCH

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CROBEX BETISE National 100

SEE indices in comparison

In local currencySource: Bloomberg, Raiffeisen RESEARCH

n Equity investments facilitated by fading international risk aversion

n Local factors eclipsed by the sovereign debt crisis

n High liquidity available for equity investments

n Historically speaking, valuations of CEE stock markets look relatively attractive

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BUX WIG20 PX

In local currencySource: Thomson Reuters, Raiffeisen RESEARCH

Region‘s core indices

474th quarter 2012

In the current environment the Polish economy is looking relatively robust, despite recent signs of economic deceleration: we only forecast GDP growth of 2.5% for both 2012 and 2013. Moreover, we project that the Polish central bank will cut interest rates by a total of 75bp, in light of the decline in economic growth dynamics and the mild easing in inflationary pressure which we predict. The forecast for a decline of 11.9% in aggregate earnings of the companies repre-sented in the WIG20 index reflects the impact of the current EU-wide economic slowdown, and looking ahead to 2013 we project a stabilisation with earnings growth of +1.2%. By historical standards, the forecast aggregate P/E ratio of 11.0 for 2013 also still looks relatively attractive. Over the short term, we remain cautious about the existing uncertainties (Greece, for example!). HOLD.

As an exception, the relatively good Q3 performance of the Czech PX index was also supported by local factors (good reporting season, for instance for CEZ and Komercni Banka). During Q4, the Czech economy should also return to expan-sion again, with the fragile upward trend also expected to continue in 2013 (+0.5% GDP growth). While this is certainly nothing to write home about, at least there is no inflationary pressure, which means that more rate cuts are possible (to 0.25%) and non-resident investors are also happy about CZK, which we see as having appreciation potential over the longer run. Above and beyond this, more risk-averse investors are well served by the PX, as they can benefit from the very

Indices in performance comparison

17-Sep* 2003 2004 2005 2006 2007 2008 2009 2010 2011

ATX 16.2% 34.4% 57.4% 50.8% 21.7% 1.1% -61.2% 42.5% 16.4% -34.9%

BUX 11.7% 20.3% 57.2% 41.0% 19.5% 5.6% -53.3% 73.4% 0.5% -20.4%

WIG 20 12.1% 33.9% 24.6% 35.4% 23.7% 5.2% -48.2% 33.5% 14.9% -21.9%

PX 6.5% 43.1% 56.6% 42.7% 7.9% 14.2% -52.7% 30.2% 9.6% -25.6%

MICEX 9.1% 61.4% 6.6% 84.3% 67.5% 11.5% -67.2% 121.1% 23.2% -16.9%

BET 14.7% 30.9% 101.0% 50.9% 22.2% 22.1% -70.5% 61.7% 12.3% -17.7%

CROBEX -1.4% 1.1% 32.1% 26.4% 62.2% 63.2% -67.1% 16.4% 5.3% -17.6%

ISE National 100 32.8% n.a. n.a. n.a. -1.7% 42.0% -51.6% 96.6% 24.9% -22.3%

CECE Composite Index 19.6% 14.2% 57.1% 44.7% 14.7% 10.5% -53.7% 40.5% 15.7% -29.1%

DAX 25.5% 37.1% 7.3% 27.1% 22.0% 22.3% -40.4% 23.8% 16.1% -14.7%

Euro Stoxx 50 11.5% 15.7% 6.9% 21.3% 15.1% 6.8% -44.4% 21.1% -5.8% -17.1%

S&P 500 16.2% 26.4% 9.0% 3.0% 13.6% 3.5% -38.5% 23.5% 12.8% 0.0%

MSCI World 12.5% 22.8% 9.5% 13.7% 13.5% 2.8% -40.1% 22.8% 7.8% -7.6%In local currency* 11:59 p.m. (CET)Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH

Stock market indicators

Long-term growth Earnings growth Price/earnings ratio Dividend yield

2011 2012e 2013f 2011 2012e 2013f 12e

ATX 5.9% 8.2% 6.3% 12.6% 11.9 11.2 9.9 3.6%

WIG 20 5.5% 29.2% -11.9% 1.2% 8.8 11.1 11.0 4.9%

BUX 6.2% 8.7% -15.1% 21.4% 7.3 9.6 7.9 4.2%

PX* 5.6% -27.4% 22.9% 9.1% 16.7 12.7 11.7 6.4%

MICEX** 6.5% 42.2% -5.6% -1.4% 5.3 5.7 5.8 3.1%

BET 7.4% 44.0% 1.4% 10.4% 5.5 6.1 5.6 4.7%

CROBEX10 4.2% -0.1% 4.8% 0.7% 9.5 9.0 8.9 5.9%

ISE National 100 12.5% -6.1% 10.6% 13.2% 8.4 10.8 9.6 2.2%* Czech Rep. (PX): excl. Erste Group and Vienna Insurance Group** Russia (MICEX): excl. Inter RAO, Rusal, Sberbank Pref. and Surgutneftegaz Pref.Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

Expected index performance

Source: Raiffeisen RESEARCH

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Equity market/CEE

48 4th quarter 2012

Equity market/CEE

high dividend yield (2012e: 6.4%). To a certain degree, this backs up the slightly higher valuation of this market (P/E 2013f: 11.7) compared to other countries, but this valuation is also justified by the solid earnings growth of 9.1%. HOLD.

Spurred on by the recent good performance on the international bourses, the Hungarian BUX stock index was also able to forge ahead strongly into positive territory. But this was hardly due to any improvement in economic conditions, in particular as we now forecast a stronger GDP contraction of 1.0% in 2012 and still only expect a mild improvement of +0.5% in 2013. Additionally, the decline in anticipated aggregate earnings for 2012 is now expected to amount to 15.1%, with a corresponding base-effect impact on the forecasted 21.4% earnings growth projected for 2013. Clearly, the relatively attractive valuation (P/E 2013f: 7.9) will also provide some support. So far, there has not been much reaction on the stock market to the Hungarian government’s rejection of the IMF conditions. We still think that the negotiations will be very difficult, but see the performance of the local stock market as being relatively decoupled from this factor and mainly driven by external developments. HOLD.

The Istanbul stock exchange has been a real exception. Unimpressed by the sovereign debt crisis, the leading index ISE National 100 has posted of a gain of 33% since the beginning of the year. The gains were borne by a broad cross-section of the 100 names in the index, with the financial sector making the biggest contribution (index weighting of 44%). Banks alone (36% of the index weighting) posted gains of 48% for this year, profiting from massive de-mand for credit. The volume of credit is projected to increased by 20% to 25% this year. Macro-economic conditions could hardly be better for Turkish equities. Despite rapid economic growth in Turkey in the previous years, we still expect real growth rates of 3.0% and 4.0% for 2012 and 2013, respectively. Turkey is profiting from its large, robust domestic market and a relatively closed economy, which manifests itself in a lower degree of dependence on foreign markets. This continues to result in very promising earnings prospects: on an aggregate basis, for the companies in the ISE National 100 we project earnings growth of 10.6% for 2012 and 13.2% for 2013. Thanks to the favourable overall conditions, we believe that the stock exchange in Istanbul will hold up better in the next three months than the other Emerging Europe markets even though it also needs to take a breather. HOLD.

Index estimates

17-Sep* Dec-12 Mar-13 Jun-13 Sep-13 Recommendation

ATX 2198 2250 2300 2350 2420 HOLD

Performance 2.4% 4.6% 6.9% 10.1% since 1/1/12

Range 1950-2350 2000-2450 2100-2500 2150-2600 16.2%WIG 20 2403 2500 2550 2600 2650 HOLD


Range 2200-2600 2300-2650 2350-2700 2400-2750 12.1%BUX 18952 19500 19800 20000 20500 HOLD


Range 16500-21000 17500-21000 18000-21500 18500-22000 11.7%PX 970 1000 1025 1050 1075 HOLD


Range 850-1150 850-1150 900-1200 900-1200 6.5%

In local currency* 11:59 p.m. (CET)Source: Thomson Reuters, Raiffeisen RESEARCH

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* Czech Rep. (PX): excl. Erste Group and Vienna Insurance Group** Russia (MICEX): excl. Inter RAO, Rusal, Sberbank Pref. and Surgutneftegaz Pref.Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

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* Czech Rep. (PX): excl. Erste Group and Vienna Insurance Group** Russia (MICEX): excl. Inter RAO, Rusal, Sberbank Pref. and Surgutneftegaz Pref.Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

494th quarter 2012

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Rom

ania

Cro

atia

Hun

gary

59

7.8

Market capitalisation overview

* Russian data based on MICEX/RTSIn EUR bn; end of August 2012Source: FESE, FEAS, WFE, Raiffeisen RESEARCH

Avg. daily turnover in EUR mn

* Russia: 2011 MICEX; 2012 MICEX/RTSSource: FESE, FEAS, WFE, Raiffeisen RESEARCH

Index estimates

17-Sep* Dec-12 Mar-13 Jun-13 Sep-13 Recommendation

MICEX 1530 1600 1650 1675 1700 HOLD


Range 1300-1800 1350-1850 1400-1900 1500-2000 9.1%BET 4975 4700 5000 5200 5300 SELL

Performance -5.5% 0.5% 4.5% 6.5% since 1/1/12

Range 4300-5400 4500-5500 4800-5600 5000-5800 14.7%CROBEX10 940 880 940 970 1000 SELL

Performance -6.4% 3.2% 6.4% since 1/1/12

Range 820-1020 850-1040 900-1050 950-1100 -3.7%ISE Nat. 100 68092 71000 73000 74000 76000 HOLD


Range 62000-75000 65000-77000 68000-78000 70000-80000 32.8%

In local currency* 11:59 p.m. (CET)Source: Thomson Reuters, Raiffeisen RESEARCH

With a performance of 15% ytd the Bucharest index BET, stands out among the other stock markets in South-Eastern Europe. This primarily stems from the im-proved risk assessment of Romania, which is also reflected in the rating outlooks. Reform efforts have been lauded by the IMF, the European Commission and the World Bank, and the probable conclusion of a new Stand-By Agreement (SBA) with the IMF may turn on the afterburners for the Romanian stock market. Nev-ertheless, due to the risk aversion in relation to the debt crisis, investors remain reticent and the volume of trading on the exchange in Bucharest is still low. With an average daily turnover of EUR 6.9 mn, the level is roughly one-quarter lower than the figure from the previous year. Over the medium term, several IPOs of state-owned companies should attract more attention to this market. In Q4, how-ever, the general elections look like a risk factor, and consequently we project sub-average performance for the Bucharest exchange, also in light of the gloomy economic prospects. SELL.

With a loss of 1.4% since the beginning of the year, the Croatian CROBEX10

index is one of the losers, most of which have been found in the Balkans this year. Prospects for companies are not exactly splendid, considering the chronic growth problems in Croatia (2012e GDP: -1.8%). Consequently, the small gain in cor-porate earnings, which we estimate at 4.8% (2012e) on an aggregate basis for the names in the CROBEX10 index, will likely be downgraded even further. The latest change in the rating outlook by the Fitch rating agency (from negative to stable) was not really able to improve investors’ mood. This year, average daily trading volumes are down by around 38% compared to the previous year. Al-though some long-term growth effects will likely be generated by the country’s EU accession in July 2013, perhaps breathing some more life into developments on the Zagreb exchange. In view of the higher risk aversion stemming from the debt crisis and the subdued attitude of international investors in less liquid markets, we forecast a negative performance for the CROBEX10 in the quarter ahead. SELL.

Andreas Schiller, Aaron Alber

Equity market/CEE

50 4th quarter 2012

ECB measures no game-changer for CEE banks

Erste

OTP

PKO

BZ WBK

GNB

Pekao

BRE

Millen-niumBRD

TLV

Komer-cni

KMBAIK00

01

01

02

02

03

1% 11% 21%

P/B

2012

e

RoE 2012e

Source: Raiffeisen Centrobank estimates

Regression P/BV - RoE 2012e

-150

-100

-50

0

50

100

150

200

250

PKO

Peka

oBR

EBZ

WBK

GN

BM

illen

ium

TLV

BRD

OTP KB

Erst

eN

KBM

AIK

Kom

erci

jaln

a

2011 2012e 2013e* vs. 2011=100Source: Raiffeisen Centrobank

Adjusted earnings expectations*

Pricing-in European and US monetary actions and satisfying the growing ap-petite for high-beta plays, financial stocks are expected to come back to trading on fundamentals soon. In our view, it would be exaggerated to expect local CEE markets to completely mirror the recent monetary measures as our macro team still expects a muted loan growth outlook and an only modestly better exchange rate outlook of local currencies for the time being. Given that the measures are no major game-changer, no large earnings re-rating should be expected - particu-larly for Polish and Czech stocks.

Polish central bank data shows positive net profit growth of 5% yoy in July, which moderately improved from June (+3% yoy, but down vs. +11% recorded in March), apparently due to high construction impairments in Q2. We keep our forecast of +1% yoy aggregated income growth for PL banks as we see core rev-enues continuing their downward trend and fewer positive triggers from risk and operating costs. Investors should watch out for a possible takeover of Alior Bank with likely spill-over effects on MIL and BRE. Polish banks trade at 1.5x 2012 BV (+50% over the sector average). We feel fine with our “hold” call highlighting MIL and GNB as sentiment front-runners (recently both recovered to 1.0x BV). With markets in ”risk-on“ mode we still see potential in bank stocks trading with a discount to their tangible book values like Erste (tang. BVPS EUR 21.4) and OTP (tang. BVPS HUF 4,400), but do not expect significant fundamental triggers for 4Q given the current disagreement of the Hungarian government with the IMF and the quite demanding consensus forecasts for Erste Group for 2013. We continue to favour TLV over BRD (high consensus expectations) and remind that Slovenian NKBM is approaching the EBA CT1 deadline as of year-end 2012.

Stefan Maxian, Jovan Sikimic

Financials

n Growing appetite for high-beta plays

n We keep Polish banks on “hold”

n Erste and OTP with some upside to tangible BV

Sector comparison

Company Recommendation Target price PER adjusted P/BV DY

2012e 2013f 2012e 2013f 2012e 2013f

Erste Group UR UR 13.2 10.0 0.7 0.7 2.1% 2.3%

Komercni Banka Hold CZK 3,950 11.0 10.7 1.6 1.6 6.1% 6.1%

OTP Hold HUF 4,200 9.2 7.0 0.8 0.7 3.2% 4.7%

PKO BP Hold PLN 37.00 12.2 11.1 1.9 1.7 3.7% 4.1%

BZ WBK Hold PLN 234.0 13.6 12.3 2.1 1.9 3.6% 4.1%

Getin Noble Bank Hold PLN 1.88 12.7 7.6 0.9 0.8 0.0% 0.0%

Bank Pekao SA Hold PLN 170.2 14.8 13.6 1.9 1.8 5.1% 5.5%

BRE Bank Hold PLN 326.0 11.0 10.7 1.4 1.3 0.0% 0.0%

Bank Millennium Reduce PLN 3.65 10.7 10.6 1.0 0.9 0.0% 2.4%

BRD-GSG Reduce RON 7.79 34.0 8.5 0.9 0.9 0.8% 4.4%

Banca Transilvania Buy RON 1.38 8.6 7.1 0.8 0.7 0.0% 0.0%

NKBM Reduce UR neg. 5.9 0.1 0.1 0.0% 0.0%

Komercijalna Hold UR 5.2 4.6 0.3 0.3 0.4% 0.4%

Aik Banka Buy RSD 2,000 5.3 4.1 0.3 0.3 0.0% 0.0%UR = under revisionSource: Raiffeisen Centrobank estimates

514th quarter 2012

Soaring refining margins not supported fundamentally

Sector comparison

Company Recommendation Target price PER EV/EBITDA EV/S

2012e 2013f 2012e 2013f 2012e 2013f

OMV Buy EUR 33.50 6.5 6.2 2.9 2.6 0.4 0.4OMV Petrom Buy RON 0.52 5.2 4.4 2.8 2.4 0.9 0.8MOL Buy HUF 20,600 16.3 10.7 5.9 5.3 0.6 0.6PKN Sell PLN 32.00 11.8 11.5 5.8 5.4 0.2 0.2Gazprom Buy RUB 197.0 3.3 3.4 2.3 2.3 0.9 0.8LUKoil Hold RUB 1,870 5.4 5.9 3.5 3.6 0.5 0.5Rosneft Buy RUB 258.0 7.6 8.0 4.7 4.8 1.0 0.9Tatneft Hold RUB 183.0 6.8 7.2 5.1 5.4 0.9 0.9Source: Raiffeisen Centrobank estimates

Oil companies, and notably pure-play refiners, have continued to enjoy a benign environment throughout Q3. The crude price has bounced back from the June lows, supported by the improved global risk appetite and speculations about fur-ther quantitative easing. We expect it to hover around USD 110/bbl in Q4. Due to continuous tensions in the Middle East and surprisingly robust oil demand, we do not see significant risks for the oil price to fall below the USD 100/bbl mark in Q4, which should be positive for the upstream players. In spite of a rebounding oil price and the market’s expectation for motor fuel demand to weaken, in Q3 gasoline crack spreads recorded levels not seen since 2008. While the strong refining environment observed in Q2 could be explained by the peak of refining activity, lower crude prices, the start of the driving season and a stronger USD, we struggle to identify fundamentals that would support the robustness of motor fuel crack spreads in the longer term. We think that rising oil prices and softening motor fuel demand have been overshadowed by a temporary tightening of sup-ply as a result of hurricane Isaac, which forced the refiners in the Gulf of Mexico to shut their operations, and the accident at Venezuela’s largest refinery. With the oil majors’ decision to divest part of their refining assets and lack of information on Petroplus, we think that a larger part of European refining assets has ended in private hands, which explains the lower transparency on the refining utiliza-tion rate in Europe. Still, it is hard to believe that the Q3 level of motor fuel crack spreads is sustainable as long as estimated permanent refinery capacity closures are below new capacity additions.

We expect the oil sector to post strong Q3 results, supported by robust oil prices and a strong refining environment. The pure-play refiners (e.g. PKN) should sur-prise more, as they have taken full advantage of the “golden-age” level of re-fining margins. We continue to favour upstream players, though, since (i) we believe that the market is overpricing the positive momentum for the European refiners, (ii) we expect the refining margins to come under pressure in Q4 12 and Q1 13 due to high oil prices and soft demand, and (iii) we are concerned about petrochemical margins, which have reversed their upward trend in Q3 as a result of weakening global (and notably Chinese) demand. Our top picks re-main OMV and OMV Petrom, which besides their significant upstream exposure should benefit from the expected gradual gas market deregulation in Romania.

Oleg Galbur

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1Q 09 2Q 10 3Q 11 4Q 12e

OECD Non-OECD World

*mnboepdSource: International Energy Agency

World Total Oil Demand growth*

4

5

6

7

8

9

10

4

9

14

19

24

Mar-10 Oct-10 May-11 Dec-11 Jul-12

Crack spreads (Brent, West. Europe)Outage (global, rhs)

*mnboepdSource: Bloomberg

Refining outage vs Crack Spreads*

Oil & Gas

n Strong results expected in Q3 due to oil price rebound and robust refining environment

n Crude price to stay high. Refining margins to come under pressure in Q4

n OMV and Petrom are our top picks, supported by the gas price deregulation story in Romania

52 4th quarter 2012

Sector comparison

Company Recommendation Target price PER EV/EBITDA DY

2012e 2013f 2012e 2013f 2012e 2013f

CEZ Hold CZK 830.0 9.0 10.0 5.5 5.9 6.6% 6.0%

Enea Buy UR 9.3 11.5 3.0 4.3 3.2% 2.6%

Enel OGK-5 Hold RUB 1.84 8.5 7.4 6.4 5.6 0.0% 2.0%

E.On Russia Buy RUB 3.11 9.9 10.1 5.5 5.4 2.5% 3.5%

EVN Buy EUR 11.50 9.6 9.9 3.2 3.0 3.7% 3.8%

Federal Grid Company Hold RUB 0.25 13.4 12.7 5.3 5.5 0.7% 0.8%

PGE Buy PLN 24.00 8.7 9.2 3.9 4.1 5.8% 5.4%

PGNiG Hold PLN 4.40 12.0 7.7 7.2 4.9 4.2% 6.5%

Tauron Hold UR 7.9 12.3 3.9 5.1 3.8% 3.2%

Verbund Buy EUR 19.00 16.4 15.0 7.4 7.3 3.2% 3.2%UR = under revision Source: Raiffeisen Centrobank estimates

Equity markets were strong and left utilities trailing somewhat behind throughout Q3. Only Russian utilities performed stronger over the entire period. The under-performance of Central European stocks was on one hand due to persistently weak electricity prices, which continued to hover below EUR 50/MWh, and on the other hand attributable to the generally defensive and - as regards 2013 - even slightly negative expected results trends.

The reporting season was a very mixed bag, as well. Both Verbund and PGNiG disappointed on high gas prices, whereas some CEE electricity utilities presented results that were considerably better than expected, in particular fuelled by strong earnings from the regulated business. In this regard, intelligent adaptation to changing supply conditions proved advantageous as a lot of electricity was pro-cured cheaply on short-term markets.

The political scene is almost unchanged for utilities companies: more and more subsidised renewable energy plants are crowding out conventional power plants, affecting electricity prices and end-customers. Since there are several elections upcoming in Europe, the situation will hardly change anytime soon. Also, we are not too optimistic regarding a reduction in the number of existing CO2 cer-tificates. As a result, special company-specific topics are increasingly coming to the fore, such as planned disposals of assets and shareholdings of CEZ and Verbund, which should gain momentum in H2 2012. In Poland the role of the state will continue to be crucial for the utilities, especially in light of uncertainties on the gas market.

We initiated coverage of three Russian utilities in the past quarter: E.On Russia, a subsidiary of Germany’s E.ON, is our favourite due to its profitability. During a period of market weakness, we also upgraded the two Austrian utilities to “buy”. All told, we forecast a below-average sector performance in the next months and believe that only political decisions – albeit unlikely – might brighten up the situation.

Teresa Schinwald

In the grip of political paralysis

-10%

-5%

0%

5%

10%

15%

20%

25%

Fed.

Grid

Com

p.E.

On

Russ

ia

Enel

OG

K-5

Euro

stoxx

50Ta

uron

DJ E

uros

toxx

Util

ities

EVN

ENEA

CEZ

PGE

Tran

sgaz

Tran

slece

trica

PGN

iGVe

rbun

d

Source: Bloomberg, *total return

Utilities underperformed (qtd)*

70

90

110

130

70

90

110

130

Jul-12 Aug-12 Sep-12Power (EUR/MWh)Oil (EUR/bbl)CO2 (EUR/t)

Prices not impressed by oil and CO2

Utilities

n Electricity prices unchanged, political decisions still long in coming

n Renewed focus on disposals of shareholdings

n “Buy” recommendations: E.On Russia, EVN, PGE, Verbund

Source: Bloomberg

534th quarter 2012

CEE incumbents published results that were rather weak and sometimes below market expectations in Q2 12. The top line performance ranged from -7.3% yoy (T-Hrvatski Telekom (T-HT)) to 1.3% yoy (Magyar Telekom (MT)) while growth rates in adjusted EBITDA were between -8.9% yoy at Magyar Telekom and -4.2% yoy at Telekom Austria (TA) in Q2 12. We should also note that MT’s core rev-enues were actually down -2.9% yoy (-1.4% yoy in Q112) and the growing top line was caused by increasing low-margin IT and energy trading revenues. In general, fixed line revenues are still negatively influenced by continuing fixed-to-mobile substitution and declining trends of fixed line users. Internet revenues remained flat except at T-HT, whose internet revenues grew by 3.0% yoy. CEE mobile revenues remained under pressure because the decline in voice revenues (MTR cuts) was not offset by data revenue growth. Sales of smart phones were picking up and represented up to 82% (MT) of handset sales in the post-paid seg-ment. Smart phone penetration stood between 17.4% (TPSA) and 23.5% (MT) in the CE3 countries in Q2 12. The financial results of Russian telecom operators were generally strong, particularly in terms of profits, as all the listed operators exceeded market estimates on the OIBDA margin level. However, we expect weaker financials for the operators in Q3-4 12, which may put some pressure on the share prices. In our view, the sector might be positively influenced by a potential easing of FTTH regulation, which was indicated at the Digital Agenda Assembly at the end of June.

Our preferable picks among our Central European universe are TA due to M&A fantasy and T-HT due to its attractive valuation and appealing dividend yield. In Russia we prefer Rostelecom, which trade with a discount to their Russian and international peers and exhibit more positive drivers in the short term, including the ongoing reorganization and the LSE listing.

Jindrich Svatek

M&A activity and share buybacks

-10.0% -5.0% 0.0% 5.0%

TO2CR

T-HT

MT

TPSA

TA

adj. EBITDA Sales

*Q2 12, yoySource: Company data, Raiffeisen Centrobank

Sales and EBITDA growth rates*

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

46.0%

48.0%

TO2CR THT TPSA MT TAadj EBITDA margin 2Q 11adj EBITDA margin 2Q 12

Source: Company data, Raiffeisen Centrobank

EBITDA margin comparison

Sector comparison


2012e 2013f 2012e 2013f 2012e 2013f

Telekom Austria Buy EUR 8.50 21.4 16.7 5.0 5.0 5.8% 5.8%Hrvatski Telekom Buy HRK 260.0 8.8 8.6 3.3 3.3 11.1% 11.1%Magyar Telekom Hold HUF 488.0 10.1 8.7 4.4 4.2 11.7% 11.7%Telefonica CR Hold CZK 428.0 14.8 14.2 5.7 5.8 10.4% 9.1%TPSA Hold PLN 16.90 19.7 19.3 5.4 5.3 8.9% 8.9%Netia Hold PLN 6.70 68.9 19.6 4.7 3.9 0.0% 4.1%MTS Hold USD 19.50 14.0 12.4 5.1 4.8 4.3% 4.8%VimpelCom Ltd Hold USD 9.10 19.0 15.9 5.1 5.2 6.8% 6.8%Rostelecom Buy RUB 142.7 8.4 8.4 3.8 3.7 2.7% 2.7%Source: Raiffeisen Centrobank estimates

Telecommunication

n Preferable stocks: Telekom Austria, T-HT, Rostelecom

n Q2 12 results were rather weak in the EU, strong in Russia

n EU regulation to support faster FTTH rollout?

54 4th quarter 2012

Sector comparison


2012e 2013e 2012e 2013e 2012e 2013e

Andritz Hold EUR 45.00 20.5 18.0 8.7 6.8 2.5% 2.9%Palfinger Hold EUR 19.50 15.1 13.9 8.6 8.0 2.2% 2.4%Rosenbauer Buy EUR 50.00 10.6 8.7 6.2 5.6 2.9% 2.9%Lenzing Buy EUR 95.00 9.7 9.3 5.4 5.5 2.9% 2.9%Polytec Buy EUR 10.00 5.6 5.3 1.9 1.6 6.2% 7.1%Semperit Buy UR 11.8 10.5 5.2 4.5 5.0% 5.5%Mayr-Melnhof Buy EUR 87.00 13.0 11.8 4.9 4.3 2.8% 2.9%

UR = under revisionSource: Raiffeisen Centrobank estimates

Industrials: Is the tide turning?

-30%

-20%

-10%

0%

10%

20%

-100%

-50%

0%

50%

100%

06 07 08 09 10 11 12

VDMA order intake Germany growth yoy

Industrial production Eurozone growth yoy(r.h. scale)

Source: VDMA, Eurostat

Industrial production Eurozone

-

2.5

5.0

7.5

10.0

-

5.0

10.0

15.0

20.0

1950 1965 1980 1995 2010 2025E

Demand of fiber kg per capita

Word population growth bn

Source: UN, USDA, ICAC, CIFRS

Lenzing fundamental drivers

Despite a strong Q2 12 earnings season for most industrials within our universe, we nonetheless noticed some companies increasingly getting cautious on their mid-term outlook or guidance in the wake of an ever growing macro uncertainty given manifold unresolved political and structural issues. In this respect we most prominently highlight Lenzing and Polytec.

Lenzing Q2 12 figures were meeting expectations with average fiber prices surprisingly flat to previous quarter’s levels despite the hefty drop cotton prices took during April and May falling from levels around USD 1.00/pound to cur-rent levels around USD 0.85/pound. As the company could not rule out lower cotton prices, showing an unusually long time lag, to weigh on viscose pricing in Q3/4Q, the FY 12 guidance was reduced to the lower end of the previous range. As we also previously had a rather cautious view on average FY 12 cot-ton prices we feel quite comfortable with our current set of FY 12 estimates, thus confirming our mid-term investment case and “Buy” recommendation.

Similarly Polytec downwards adjusted its FY 12e guidance to the lower end of the previous range to sales around EUR 480 mn at an EBIT margin around 6%, citing growing uncertainty and lower order visibility from the major German OEMs VW, BMW and Daimler accounting for roughly 50% of the FY 12 budget. Though the highly cyclical automotive industry especially suffers from the pre-vailing uncertain macro outlook, we nonetheless stay quite bullish on the stock, owing to German OEMs seeing ongoing strong demand from BRIC countries (contrary to other European car manufacturers e.g. Fiat or Peugeot) as well as the stock’s almost ridiculously low valuation at around 2.9x LTM EV/EBITDA multiple.Semperit confirmed its mid-term growth targets as the company reported Q2 fig-ures last month. Revenues are expected to grow at a double-digit rate on average from 2010 up to 2015 and the average EBIT margin is expected at around 10%. However, concerning the current business year 2012 the management turned more cautious. Customer demand is volatile and the current economic uncertain-ties make it difficult to forecast the remainder of the year. The non-cyclical divi-sion Sempermed which produces rubber gloves for mainly the medical industry recovered from some one-offs in Q1 and showed a 7% increase in sold volumes for examination gloves for H1 yoy.

Bernhard Selinger

Industrials

n Growing mid-term uncertainty

n Solid balance sheet and high order backlog still key

n Our sector top-pick: Lenzing

554th quarter 2012

Sector comparison


2012e 2013f 2012e 2013f 2012e 2013f

Atrium Buy UR 17.9 16.8 12.8 12.2 4.2% 4.2%

conwert Hold EUR 10.00 32.7 32.7 20.7 21.2 2.2% 2.2%

Immofinanz Buy EUR 3.50 9.0 8.1 13.7 12.7 7.1% 7.1%

CA Immobilien Hold EUR 8.70 17.2 15.8 16.9 16.1 3.5% 3.5%

S IMMO Hold EUR 4.80 20.4 18.7 19.4 18.4 2.2% 2.2%

Warimpex Hold UR neg. neg. 20.3 15.3 0.0% 0.0%

Globe Trade Centre Hold UR 13.6 5.3 10.9 7.5 0.0% 0.0%

Echo Investment Hold UR 19.5 10.4 23.4 26.9 0.0% 0.0%

Polnord Buy PLN 19.90 4.1 5.5 7.6 10.8 0.0% 0.0% UR=under revisionSource: Raiffeisen Centrobank estimates

Real estate

Market and corporate trends have barely changed

2.8

8.5

4.7 4.21.7 1.0

5.5

19.3

8.96.4

4.01.3

-49.0%-56.1%

-47.3%-34.8%-57.0%

-22.1%

-70%

-45%

-20%

5%

30%

55%

80%

105%

130%

-10

-5

0

5

10

15

20

Imm

ofin

anz

CA

Imm

o

S Im

mo

Atri

um

GTC

Echo

Share price (EUR) NAV reported (EUR)Trading discount

*with CEE/SEE exposure Source: Companies, Bloomberg

Valuation of property stocks*

4.0

6.0

8.0

10.0

12.0

14.0

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

Vienna PragueBudapest WarsawBucharest Moscow

Source: CBRE, Raiffeisen Centrobank

CEE prime office yields (%)

n Contraction of real estate investment activity in CEE due to pure prime focus and lack of available financing

n Stable yield development across the region with Warsaw and Prague moving towards European core

n Unchanged preference for Immofinanz and Atrium in CEE property universe

Investor interest and equity remains focussed on European core markets such as the UK, Germany, France and the Nordics but Poland and Czech Republic continue their move towards the European core in terms of transparency and quality. That notwithstanding, commercial investment volumes in CEE continue their downward trend compared to the prior year. CBRE research recorded a transaction volume of EUR 2.1 bn during the first half of 2012, which equals a 60% decline compared to H1 11. Investor activity in the region continues to be focussed on Poland and Russia (more than 80% of CEE total). Restrictive bank lending remains the major deal-breaker. Capital keeps flowing into safe havens in terms of asset quality and location for the time being, prime assets are attracting most attention and competi-tion for the best assets is fierce. A high level of economic uncertainty and a lack of core product leaves the South-Eastern European and Hungarian real estate markets illiquid which weighs on the valuation of companies exposed to these markets.

Prime yields remained stable across most CEE markets in H1 12. Occupiers’ demand for new leases and the expansion of existing space remain strong in Warsaw based on the stable and positive development of the Polish economy. In response to the demand upswing the amount of modern office space under construction has increased (currently more than 20% of existing stock, several speculative developments) which could exert pressure on rental and vacancy lev-els in the Polish capital. Market conditions have stabilized in most other markets, strongly supported by virtually no new developments coming to market.

We continue to favour Immofinanz and Atrium in the CEE property sector. Both companies show positive operational trends translating into increasing cash flows and a solid dividend covered by recurring earnings with a corresponding lower dependency on property trading. A stronger balance sheet and sound financing distinguishes them from other market players such as CA Immo, GTC and Warimpex and puts both companies in a better position to benefit from any market opportunities as they arise.

Christoph Thurnberger

56 4th quarter 2012

Equities – top picks

* the indicated price is the last price as available at 6.30 a.m. (CET) on 18 September 2012

n Recommendation: Buy

n Current share price: EUR 20.96* / Target price: EUR 27.50

n Market capitalisation: EUR 834 mn

We appreciate the company’s strategy of expanding the production presence in growth markets (BRIC, US) as well as its increasing self-supply with raw materials. Additionally the management has implemented measures to streamline the asset and cost base. Against the backdrop of these three strategic pillars, RHI should deliver decent earnings growth thus approaching double-digit EBIT margin ter-ritory. RHI has a well-filled pipeline comprising organic and external growth projects. In Brazil the first overseas plant is being constructed and should start op-erations in H2 13. RHI also intends to build a new plant in Russia and to expand the local footprint in the US, where the group is mulling plans for a brownfield plant. All these plants are dedicated to the steel industry. At the site in Dalian (China) a fourth tunnel kiln was put into operation recently. Moreover the man-agement is vocal concerning M&A ambitions in India (evaluating several options) and has signed a non-binding MoU for the acquisition of the Serbian company

Magnohrom. The latter is aimed at further increasing the backward inte-gration. Having acquired companies in Norway and Ireland in 2011, RHI’s magnesite self-sufficiency will rise to 80% from 40% by year-end.

The management guides for a slight top line growth in 2012 which, due to the higher backward integration and cost savings, should be accom-panied by an improvement of the EBIT margin. Our EBIT estimate of EUR 161.5 mn (+7% yoy) is based on 3% higher revenues and implies a 30 bps margin increase to 8.9%. The performance in Q2 added further credibility to the company’s full-year targets. Revenue growth of 9% to EUR 476 mn was strong fuelled by new quarterly record sales in the Steel divi-sion. The top lines of the Industrial and Raw Materials segments grew in the double-digit magnitude. Group EBIT reached EUR 44.1 mn (+10% yoy) but was burdened by a restructuring charge of EUR 4.6 mn. Thus, the clean operating margin rose by 100 bps to 10.2% resulting in a clean OP of EUR 48.7mn.

Markus Remis

Key ratios

2011 2012e 2013f 2014f

EPS (EUR) 3.05 3.04 3.09 3.36

PER 4.9 6.9 6.8 6.2

Operating CF per share (EUR) 3.12 4.07 4.19 4.68

Price cash flow 4.8 5.2 5.0 4.5

Book value per share (EUR) 11.01 13.30 15.64 18.20

Price book value 1.4 1.6 1.3 1.2

Dividend yield 5.0% 3.6% 3.8% 4.1%

ROE 32.0% 25.0% 21.4% 19.9%

ROCE 16.8% 13.8% 12.7% 12.7%

EV/EBITDA 4.7 5.6 5.2 4.5

Source: RHI, Raiffeisen Centrobank estimates

RHI: Project pipeline and cost savings to drive earnings growth

Income statement & balance sheet (IFRS)

in EUR mn 2011 2012e 2013f 2014f

Income Statement

Consolidated sales 1,759 1,813 1,874 1,970

EBITDA 204 220 241 262

EBIT 151 161 175 191

EBT 126 141 146 163

Net profit b.m. 122 121 123 134

Net profit a.m. 122 121 123 134

Balance sheet

Total assets 1,690 1,827 1,932 1,970

Shareholders' equity 438 529 623 725

Goodwill 17 17 17 17

NIBD 362 405 418 333

Source: RHI, Raiffeisen Centrobank estimates

S O N D J F M A M J J A S 12

13

14

15

16

17

18

19

20

21

22

RHI ATX - AUSTRIAN TRADED INDEX - PRICE INDEX

Source: Thomson Reuters

RHI

574th quarter 2012

We confirm our “buy” rating on Immofinanz and increase our TP from EUR 3.30 to EUR 3.50. Given current market conditions, market sentiment for property developers with CEE/SEE exposure should remain subdued as revenues from developments are more volatile due to construction and letting risks. That notwith-standing, Immofinanz has reduced the ratio of assets under development to total property assets (around 10%) and substantially increased its recurring earnings profile. We expect the group to make good progress in profitability over the next twelve months with higher visibility of sustainability. Furthermore, a sharp increase in net operating income (NOI) will strengthen the group’s recurring earnings profile. We forecast Immofinanz’s cash flow from core operating busi-ness (FFO, RCB definition) at around EUR 290 mn in FY 12/13 (+27% yoy) and well above EUR 300 mn in 2013/14. Management will propose a dividend of EUR 0.15 at the AGM in October 2012 (currently 5.6% dividend yield, ex-day October 8, 2013) and plans to increase the payout to EUR 0.20 in FY 12/13, which translates into a dividend yield of 7.4%. The dividend commitment plus higher earnings quality of the underlying cash flow increases the at-tractiveness of the stock (the payouts are structured as a capital repayment, hence free of withholding tax).

Immofinanz should be a strong benefi-ciary in an improving market environ-ment. In addition, a major portfolio restructuring might become a catalyst in the mid-term. Management gave rise to the promising idea that an Aus-trian-German property company with a residential focus could be formed and taken public. This strategic move is a promising idea as it would solve the dilemma of a heterogeneous asset base with limited synergy potential. Investors interested in the residential part of the company (approx. 30% of property assets) assumedly do not match the profile of investors seeking CEE/SEE. The newly formed company might trigger a revaluation which should substantially limited Immofi-nanz’s structural NAV discount and consequently re-rate the Immofinanz share.

Christoph Thurnberger

Key ratios

2011/12 2012/13e 2013/14e 2014/15e

EPS (EUR) 0.27 0.31 0.35 0.35

PER 9.8 9.0 8.1 8.1

Operating CF per share (EUR) 0.17 0.24 0.21 0.23

Price cash flow 15.5 11.8 13.3 12.3

Book value per share (EUR) 5.08 5.25 5.40 5.55


Dividend yield 5.6% 7.1% 7.1% 7.1%

ROE 5.2% 6.1% 6.6% 6.4%

ROCE 4.4% 5.1% 5.4% 5.3%

EV/EBITDA 16.5 13.7 12.7 12.5

Source: Immofinanz, Raiffeisen Centrobank estimates

Immofinanz: Restructuring done, profitability boost to come?


in EUR mn 2011/12 2012/13e 2013/14e 2014/15e

Income Statement

Consolidated sales 781 854 897 908

EBITDA 449 543 574 572

EBIT 729 595 639 652

EBT 319 358 403 410

Net profit b.m. 271 326 363 362

Net profit a.m. 272 326 363 362

Balance sheet

Total assets 12,247 12,356 12,256 12,224

Shareholders' equity 5,264 5,434 5,590 5,745

Goodwill 244 244 244 244

NIBD 4,439 4,590 4,409 4,314

Source: Immofinanz, Raiffeisen Centrobank estimates


S O N D J F M A M J J A S 1.80

2.00

2.20

2.40

2.60

2.80

3.00

IMMOFINANZATX - AUSTRIAN TRADED INDEX - PRICE INDEX


Immofinanz


n Current share price: EUR 2.83* / Target price: EUR 3.50

n Market capitalisation: EUR 2,932 mn


58 4th quarter 2012




n Current share price: PLN 39.35* / Target price: PLN 48.00

n Market capitalisation: EUR 1.313 mn

Poland’s leader in branded FMCG wholesale has delivered solid Q2 results bolstered by the acquired Tradis business and the strong performance in cash & carry (+8.4% yoy lfl). We believe that Eurocash has adopted the right ap-proach by centring around the Polish customers’ affinity for convenience and frequent purchases of fresh produce and favourite FMCG brands. The company activates the existing traditional sales channel and plugs it into a modern distri-bution network, by supplying independent and small stores with competitively priced branded goods as well as cheaper own brands, and empowering them to compete with discounters.

As the economic slowdown in Poland takes hold and customers tighten belts we expect competition to further intensify as all store formats are “chasing the same buck” and we see some players ultimately exiting the market (large hypermarkets are currently most under pressure). Eurocash operates a resilient business model

that is suited to squeeze out further ef-ficiencies through economies of scale, has boosted its bargaining power vs. suppliers due to the Tradis acquisition (synergies have not been fully real-ized yet), and we think it will be able to gain further share in the fragmented market from ailing competitors who lack the same clout and scale.

On September 17 the company an-nounced a minority in-kind investment (25%) into Poland’s second chemical/cosmetics player, with an option to in-crease the stake to full ownership, a move which will allow to build a pres-ence and expertise in a sector which complements its FMCG offering. After Luis Amaral’s sale of 7% of the shares aimed at bolstering liquidity (the com-pany is now a potential candidate for WIG20 inclusion and its weight will rise in the MSCI index), signs of a continuing growth pattern in the Q2 results and entry into chemicals/cos-metics we see room for further upside for Eurocash, which we consider the best-positioned liquid consumer play. We rate the share with a “buy” rec-ommendation and our target price is PLN 48.00.

Jakub Krawczyk

Key ratios

2011 2012e 2013f 2014f

EPS (PLN) 0,98 1,69 2,27 2,70

PER 29,1 23,2 17,3 14,6

Operating CF per share (PLN) 2,11 2,20 3,60 5,56

Price cash flow 13,5 17,8 10,9 7,1

Book value per share (PLN) 4,01 4,96 6,80 8,97

Price book value 7,1 7,9 5,8 4,4

Dividend yield 0,6% 1,1% 1,4% 1,4%

ROE 26,7% 37,8% 38,7% 34,3%

ROCE 12,0% 15,2% 19,7% 23,3%

EV/EBITDA 19,4 12,9 10,6 9,1

Source: Eurocash, Raiffeisen Centrobank estimates

Eurocash: Playing on market share gain in tougher times


in PLN mn 2011 2012e 2013f 2014f

Income Statement

Consolidated sales 9.981 17.956 19.751 21.430

EBITDA 266 505 583 619

EBIT 193 377 464 504

EBT 151 286 384 457

Net profit b.m. 134 232 311 370

Net profit a.m. 134 232 311 370

Balance sheet

Total assets 4.607 5.771 5.719 5.663

Shareholders' equity 548 678 929 1.226

Goodwill 1.224 1.224 1.224 1.224

NIBD 1.268 1.159 826 248

Source: Eurocash, Raiffeisen Centrobank estimates

S O N D J F M A M J J A S 20

25

30

35

40

45

50

EUROCASHWARSAW GENERAL INDEX 20 - PRICE INDEX


Eurocash

594th quarter 2012

Key ratios

2011 2012e 2013e 2014e

EPS (PLN) 0.46 1.38 1.27 1.42

PER 29.4 10.5 11.4 10.2

Operating CF per share (PLN) 1.00 1.48 1.68 1.83

Price cash flow 13.6 9.8 8.6 7.9

Book value per share (PLN) 5.44 6.82 8.09 9.09


Dividend yield 0.0% 0.0% 2.9% 6.5%

ROE 13.8% 22.5% 17.1% 16.5%

ROCE 12.3% 13.9% 12.0% 12.4%

EV/EBITDA 9.7 7.7 7.1 6.5

Source: Cyfrowy Polsat, Raiffeisen Centrobank estimates

We stick to our “buy” recommendation on Cyfrowy Polsat as we were impressed by the company’s ability to cut costs in its retail subscription-based business in H1 12. We believe that despite market saturation the company will keep its revenues growing thanks to relative cheapness of its pay-TV packages and potential client losses in the newly merged Cyfra+/n entity. Cost pressure will certainly ease considering that there will only be 2 major sat-TV providers left on the market. Moreover, mobile internet client additions will accelerate in the second half of the year as the cooperation with Polkomtel intensifies, while IPLA, the market leader in internet video, should secure growth of revenues in the long term. Sales in the core pay-TV business will be supported by increasing ARPU (by approx. 4% yoy) driven by upgrades to more expensive packages, new high-end clients (also from competing satellite TV platforms, where ARPU is 50% higher) and other ad-ditional services. TV Polsat continues to outperform TVN in terms of revenues and margins. Moreo-ver, the recent agreement with the third-largest cable-TV provider Vectra will additionally strengthen its posi-tion. We do not expect that the adver-tising market will fall again in 2013 and would rather expect a stabilisa-tion or a small single-digit growth given the already low base in 2012. TV Polsat is flexible in terms of cost adjustments and in our opinion may invest in extra programming if there is a TV ad market recovery, which would provide an additional upside to our current forecast. Deleveraging after the TV Polsat ac-quisition should improve the net figure thanks to stable cash flow from the DTH business leading to lower debt and, as a result, lower interest costs. Expansion into growth businesses cou-pled with a comparatively low valua-tion of below 12x on P/E ratio offers an attractive exposure to the Polish consumer. Cyfrowy Polsat remains a relatively safe investment given that over 60% of EBITDA is delivered by the non-cyclical subscription-based business, while advertising is respon-sible for the remaining share of profits.

Dominik Niszcz

Cyfrowy Polsat: Defending the leadership position


in PLN mn 2011 2012e 2013e 2014e

Income Statement

Consolidated sales 2,365.9 2,793.9 2,900.7 3,004.5

EBITDA 735.2 938.7 950.2 983.6

EBIT 560.3 717.3 720.2 753.3

EBT 192.1 581.4 547.7 610.3

Net profit b.m. 160.1 479.7 443.6 494.4

Net profit a.m. 160.1 479.7 443.6 494.4

Balance sheet

Total assets 5,348.5 5,679.0 5,830.7 5,900.5

Shareholders' equity 1,896.0 2,375.7 2,819.3 3,167.3

Goodwill 2,412.3 2,508.3 2,508.3 2,508.3

NIBD 2,451.4 2,166.7 1,715.1 1,358.4

Source: Cyfrowy Polsat, Raiffeisen Centrobank estimates


S O N D J F M A M J J A S 12.00

12.50

13.00

13.50

14.00

14.50

15.00

15.50

16.00

CYFROWY POLSATWARSAW GENERAL INDEX 20 - PRICE INDEX


Cyfrowy Polsat



n Current share price: PLN 14.52* / Target price: PLN 16.80

n Market capitalisation: EUR 1.234 mn

60 4th quarter 2012


Magnit’s growth profile is outstanding: we expect approximately 30% net income CAGR in 2012-2015e vs. up to 16% for EM peers (according to Bloomberg con-sensus). However, the retailer’s local shares (quoted in RUB) are now traded with more than 12% discount to EM peers on the basis of P/E 2013e. Also, Magnit’s local shares are now traded with a 24% discount to its GDR vs. 9% average dis-count in 2011. The discount to the GDR price reflects a fully executed 25% limit on the number of shares which can be placed abroad, set by Russian Law which is expected to be cancelled although the final decision is still pending. All in all, we see the company’s local shares as more attractive for investors than its GDRs.

We like the company’s aggressive organic growth strategy, which should enable it to double its selling space, adding more than 2 mn sqm by 2015-2016. We expect Magnit to generate a 27% top line CAGR 2012-2015e, which should be transformed into 29% EBITDA CAGR 2012-2015e. The retailer demonstrates a wise leverage policy, targeting a Net Debt/EBITDA ratio of below 2, which

is one of the best ratios among Rus-sian food retailers. At the same time, Magnit is focusing on further improve-ments to operating efficiency and sees its sustainable EBITDA margin at over 8% in the long run, although we use a more cautious scenario in our valu-ation model. The company plans to achieve profit margin improvements and cost savings by enhancing its product mix, shifting to direct import contracts, raising private label sales and increasing distribution through its own logistics system. In addition, Magnit’s ongoing expansion into the hypermarket segment is expected to improve its EBITDA margin going for-ward thanks to economies of scale. The company’s next investment trigger should be the release of its Q3 2012 operating results (due out on October 10, 2012), which will give the mar-ket an update on the company’s LFL sales dynamics. Until then, we expect the market to continue to take into ac-count the company’s strong Q2 12 financial results and the upward revi-sion of its guidance.

Natalya Kolupaeva

Key ratios

2011 2012e 2013f 2014f

EPS (USD) 0.94 1.20 1.51 1.99

PER 22.6 30.1 23.9 18.2

Operating CF per share (USD) 2.14 2.04 2.78 3.61

Price cash flow 9.9 17.8 13.0 10.0

Book value per share (USD) 5.17 6.13 7.34 8.92


Dividend yield 1.2% 0.9% 1.1% 1.4%

ROE 20.1% 21.3% 22.5% 24.5%

ROCE 14.9% 15.0% 15.2% 16.6%

EV/EBITDA 11.9 15.0 11.9 9.3

Source: Magnit Raiffeisen Centrobank estimates

Magnit: Aggressive growth with a focus on efficiency


in USD mn 2011 2012e 2013f 2014f

Income Statement

Consolidated sales 11,423 14,347 18,724 24,565

EBITDA 928 1,286 1,673 2,139

EBIT 657 922 1,158 1,491

EBT 561 761 958 1,262

Net profit b.m. 419 568 715 942

Net profit a.m. 419 568 715 942

Balance sheet

Total assets 5,447 6,825 8,475 9,938

Shareholders' equity 2,441 2,897 3,466 4,215

Goodwill 0 0 0 0

NIBD 1,077 2,153 2,739 2,754

Source: Magnit Raiffeisen Centrobank estimates

S O N D J F M A M J J A S 24002600

280030003200

340036003800

400042004400

4600

MAGNITRUSSIAN MICEX INDEX - PRICE INDEX


Magnit


n Current share price: RUB 4,394* / Target price: RUB 6,257

n Market capitalisation: EUR 13,042 mn


614th quarter 2012

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a.1.

4%2.

8%Re

com

men

datio

n ca

tegories

: B -

Buy

H

- H

old

R

- Red

uce

S -

Sel

l R

S -

Reco

mm

endatio

n su

spen

ded

U

R - U

nder

rev

iew

N

R - N

ot ra

ted

Risk

cate

gories

: h

- hig

h

m -

med

ium

l -

low

* the

ind

icate

d p

rice

is

the

last

price

as

ava

ilable

at 6.3

0 a

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(CET

) on

18 S

epte

mber

20

12

; ** e

stim

ate

s un

der

rev

iew

, °

cons

ensu

s es

timate

s (B

loom

ber

g)

Sour

ce: Ra

iffei

sen

Cen

trobank

Equities – region overview

62 4th quarter 2012


Targ

et

MC

ap

.Fr

ee

P

/E P

/BE

V/E

BIT

DA

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ide

nd

yie

ld

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ceEU

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fIN

DU

STR

IALS

And

ritz

ATEU

R46

.04

Hm

01.0

6.12

45.0

04,

788

70%

20.5

18.0

5.3

4.6

8.7

6.8

2.5%

2.9%

Flug

hafe

n W

ien

ATEU

R36

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24.0

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37.0

076

250

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90.

96.

56.

13.

0%3.

2%O

este

rrei

chis

che

Post

ATEU

R27

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29.0

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857

47%

12.8

12.9

2.5

2.4

5.5

5.6

6.5%

6.7%

Palfi

nger

ATEU

R17

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31.

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ATEU

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25.

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mpe

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EUR

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rapl

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ian

(com

pani

es)

11.9

11.7

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1.5

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AS

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PLN

30.6

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11RS

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8.0

0.5

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HU

HU

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17.0

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812

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10.7

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OM

V AT

EUR

27.9

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MV

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PLPL

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24.0

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pect

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RORO

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Rosn

eft

RURU

B21

2B

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7.6

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SBO

ATEU

R78

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73.

310

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21.

9%2.

2%Ta

tnef

tRU

RUB

211

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02.0

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11,4

428%

6.8

7.2

1.1

1.0

5.1

5.4

3.2%

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petro

l°C

ZC

ZK17

1.1

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17.0

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265

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n (c

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isH

UH

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6.9

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0.7

2.8

2.7

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Ged

eon

Rich

ter

HU

HU

F38

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27.0

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562.

854

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41.

38.

97.

31.

3%1.

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terc

ell

ATEU

R1.

93H

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kaSI

EUR

47.0

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1261

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1,66

5.0

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9.9

9.7

1.3

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5.3

4.9

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Mea

n (c

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)10

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21.

15.

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edia

n (c

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71.

31.

25.

85.

11.

3%1.

6%Re

com

men

datio

n ca

tegories

: B -

Buy

H

- H

old

R

- Red

uce

S -

Sel

l R

S -

Reco

mm

endatio

n su

spen

ded

U

R - U

nder

rev

iew

N

R - N

ot ra

ted

Risk

cate

gories

: h

- hig

h

m -

med

ium

l -

low

* the

ind

icate

d p

rice

is

the

last

price

as

ava

ilable

at 6.3

0 a

.m.

(CET

) on

18

Sep

tem

ber

20

12

; ** e

stim

ate

s un

der

rev

iew

, °

cons

ensu

s es

timate

s (B

loom

ber

g)

Sour

ce: Ra

iffei

sen

Cen

trobank

634th quarter 2012

Targ

et

MC

ap

.Fr

ee

P

/E P

/BE

V/E

BIT

DA

Div

ide

nd

yie

ld

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CH

NO

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Y

ams

ATC

HF

97.5

0B

m27

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1298

.00

1,01

975

%12

.910

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62.

19.

27.

71.

9%2.

4%A

ssec

o Po

land

PLPL

N45

.71

Hm

15.0

6.12

50.7

086

567

%10

.49.

70.

70.

76.

15.

54.

5%4.

9%AT

&S

ATEU

R8.

23B

m05

.09.

129.

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251

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60.

60.

64.

03.

13.

9%4.

7%Er

icss

on N

ikol

a Te

slaH

RH

RK1,

138

Hm

05.0

9.12

1,23

920

541

%9.

713

.41.

92.

26.

67.

413

.2%

13.2

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psch

Tra

fficC

omAT

EUR

49.2

5H

l13

.09.

1257

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640

38%

39.3

18.2

2.6

2.4

12.5

9.0

1.8%

3.6%

Mea

n (c

ompa

nies

)16

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71.

67.

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edia

n (c

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)10

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16.

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7%TE

LEC

OM

MU

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ON

Hrv

atsk

i Tel

ekom

HR

HRK

199

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03.0

5.12

260

2,20

538

%8.

88.

61.

51.

53.

33.

311

.1%

11.1

%M

agya

r Te

leko

mH

UH

UF

429

Hm

12.0

6.12

488

1,57

841

%10

.18.

70.

90.

94.

44.

211

.7%

11.7

%M

TSRU

USD

18.4

8H

h17

.08.

1219

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14,0

7949

%14

.012

.44.

84.

15.

14.

84.

3%4.

8%N

etia

PLPL

N6.

20H

m27

.08.

126.

7056

955

%68

.919

.60.

90.

94.

73.

90.

0%4.

1%Ro

stel

ecom

RURU

B13

2B

h25

.07.

1214

39,

686

47%

8.4

8.4

1.3

1.2

3.8

3.7

2.7%

2.7%

Tele

foni

ca C

RC

ZC

ZK38

4.0

Hm

21.0

3.12

428.

05,

043

31%

14.8

14.2

1.9

2.0

5.7

5.8

10.4

%9.

1%Te

leko

m A

ustri

aAT

EUR

6.53

Bm

20.0

8.12

8.50

2,89

349

%21

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33.

15.

05.

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8%5.

8%TP

SAPL

PLN

16.8

3H

m21

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71.

85.

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9%8.

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mpe

lCom

Ltd

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31.

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15.

26.

8%6.

8%M

ean

(com

pani

es)

20.6

13.8

2.0

1.9

4.7

4.6

6.9%

7.2%

Med

ian

(com

pani

es)

14.8

14.2

1.5

1.5

5.0

4.8

6.8%

6.8%

UTI

LITI

ES

CEZ

CZ

CZK

732.

0H

m19

.09.

1283

015

,935

30%

9.0

10.0

1.6

1.5

5.5

5.9

6.6%

6.0%

E.O

n Ru

ssia

RURU

B2.

82B

h02

.07.

123.

114,

428

18%

9.9

10.1

1.4

1.3

5.5

5.4

2.5%

3.5%

Enea

PLPL

N16

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Bh

23.0

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UR

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029

%9.

311

.50.

70.

63.

04.

33.

2%2.

6%En

el O

GK-

5RU

RUB

1.97

Hh

02.0

7.12

1.84

1,73

29%

8.5

7.4

0.9

0.8

6.4

5.6

0.0%

2.0%

EVN

ATEU

R11

.01

Bl

13.0

7.12

11.5

01,

970

16%

9.6

9.9

0.7

0.7

3.2

3.0

3.7%

3.8%

Fede

ral G

rid C

ompa

nyRU

RUB

0.24

1H

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120.

257,

566

20%

13.4

12.7

0.3

0.3

5.3

5.5

0.7%

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PGE

PLPL

N18

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Bm

28.0

3.12

24.0

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439

38%

8.7

9.2

0.8

0.8

3.9

4.1

5.8%

5.4%

PGN

iGPL

PLN

4.03

Hm

04.0

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4.40

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70.

90.

97.

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uron

PLPL

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159

54%

7.9

12.3

0.5

0.5

3.9

5.1

3.8%

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Tran

sele

ctric

aRO

RON

12.6

5U

Rm

24.0

7.12

UR

206

28%

25.0

11.4

0.4

0.4

4.6

4.3

2.9%

4.5%

Tran

sgaz

RORO

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0.60

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02.0

2.12

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67.

70.

80.

84.

54.

411

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Verb

und

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R17

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04.0

9.12

19.0

05,

915

16%

16.4

15.0

1.3

1.2

7.4

7.3

3.2%

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Mea

n (c

ompa

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)11

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90.

85.

05.

04.

0%4.

1%M

edia

n (c

ompa

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510

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80.

84.

95.

03.

5%3.

6%C

ON

STR

UC

TIO

N &

MA

TER

IALS

Bene

ATEU

R1.

21H

m19

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121.

4029

56%

19.3

16.8

0.8

0.8

3.8

3.6

0.0%

0.0%

Budi

mex

PLPL

N50

.20

Hm

26.0

7.12

UR

313

35%

8.5

9.9

5.9

4.7

2.9

5.3

5.9%

8.5%

Mos

tost

al W

arsz

awa

PLPL

N12

.90

Bm

09.0

3.12

30.0

063

24%

13.1

6.3

0.6

0.5

1.2

0.6

1.9%

4.0%

PBG

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50.

00.

04.

63.

20.

0%0.

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limex

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tost

alPL

PLN

0.54

UR

h30

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12U

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75%

6.0

3.1

0.2

0.2

3.5

2.5

3.4%

6.4%

STRA

BAG

SE

ATEU

R18

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Hm

03.0

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18.0

01,

922

14%

24.8

15.9

0.7

0.6

4.0

3.4

1.6%

2.2%

Wie

nerb

erge

rAT

EUR

6.25

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23.0

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7.30

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98%

127.

616

3.4

0.4

0.4

7.3

5.8

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9.52

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06.0

9.12

9.50

410

65%

16.8

11.6

1.1

1.0

5.7

5.0

2.6%

3.7%

Mea

n (c

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21.

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edia

n (c

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nies

)15

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60.

63.

93.

51.

9%2.

9%Re

com

men

datio

n ca

tegories

: B -

Buy

H

- H

old

R

- Red

uce

S -

Sel

l R

S -

Reco

mm

endatio

n su

spen

ded

U

R - U

nder

rev

iew

N

R - N

ot ra

ted

Risk

cate

gories

: h

- hig

h

m -

med

ium

l -

low

* the

ind

icate

d p

rice

is

the

last

price

as

ava

ilable

at 6.3

0 a

.m.

(CET

) on

18 S

epte

mber

20

12

; ** e

stim

ate

s un

der

rev

iew

, °

cons

ensu

s es

timate

s (B

loom

ber

g)

Sour

ce: Ra

iffei

sen

Cen

trobank


64 4th quarter 2012


Targ

et

MC

ap

.Fr

ee

P

/E P

/BE

V/E

BIT

DA

Div

ide

nd

yie

ld

FXP

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kfr

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ceEU

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fR

EA

L ES

TATE

Atri

umAT

EUR

4.02

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12.0

3.12

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1,50

650

%17

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.80.

60.

612

.812

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2%4.

2%C

A Im

mob

ilien

ATEU

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50H

m05

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40.

416

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5%co

nwer

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9.19

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60.

620

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vest

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4.20

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16.0

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19.5

10.4

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23.4

26.9

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rade

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trePL

PLN

7.20

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654th quarter 2012

Energy15.7%

Materials15.5%

Tele-communi-cations6.9%Utilities

13.3%

Banks34.8%

Food Beverage & Tobacco

1.7%

Insurance9.5%

Media0.7%

Real Estate0.7%

Software & Services1.2%

Sector weightings Poland, WIG 20

Dom. market cap.: EUR 117.2 bn (Source: FESE; 31/08/2012)


Energy4.8%

Materials6.1%

Telecommunications24.2%

Utilities27.8%

Banks29.1%

Food Beverage & Tobacco

4.2%

Consumer Durables0.8%

Hotels, Restaurants, Leisure0.9%

Media1.5%

Retailing0.3%

Real Estate0.1%

Software & Services0.1%

Sector weightings Czech Republic, PX*

*excl. Erste Group and Vienna Insurance GroupSource: Thomson Reuters, Raiffeisen RESEARCH

Sector weightings Hungary, BUX Sector weightings Russia, MICEX

Sector weightings Romania, BET Sector weightings Turkey, ISE 100

Sector weightings in comparison


Energy32.8%

Materials0.4%


Banks30.5%

Pharma & Biotechnology

22.8%

Insurance0.6%

Diversified Financials0.3%

Software & Services 0,02%

Commercial Services0.1%


Energy55.9%

Materials14.9%


Utilities5.1%

Banks17.3%

Food & Drug Retailing2.0%

Transportation0.4%

Dom. market cap.: EUR 597.8 bn (Source: MICEX; 31/08/2012)

Source: Thomson Reuters, Raiffeisen RESEARCH Source: Thomson Reuters, Raiffeisen RESEARCH

Energy27.4%

Utilities4.4%

Information Technology1.3%

Financials42.5%

Health Care3.1%

Investment funds21.3%

Dom. market cap.: EUR 18.3 bn (Source: FEAS; 31/08/2012)

Energy 3.0%

Materials 6.5%


Utilities 0.8%

Financials43.5%

Industrials 15.3%

Consumer discretionary 8.1%

Consumer staples 9.1%

Health Care 0.4%Technology Hardware

0.3%Hotels, Restaurants,

Leisure 0.2%


Source: Bloomberg, Raiffeisen RESEARCH Source: Bloomberg, Raiffeisen RESEARCH


66 4th quarter 2012

Stock markets: Ready to break out?

ATX


MICEX


WIG 20


Last 2,164.11 Position: neutral

The FRL that dates back to 2007 had been broken within the recent quarter. This would indicate the establishment of a bottom, buy 2,300 -> 2,595. Though, up to now a pullback is not off odds due to strong resistances close to 2,260, sell 1,825 -> 1,720.

RIC: ATX, 15:57, 18.09.2012 CET

Last 1,520Buy 1,540 Target: 1,580 – 1,650

It succeeded to cross through the long term FRL, moreover, 1,230 is a recog-nizable support that helped to estab-lish a huge Double Bottom. Therefore, an increase to the RRL (blue) of the bullish trend channel is expectable. Stop 1,410 -> 1,330.

RIC:.MCX , 16:08, 18.09.2012 CET

Last 16,901Last 2,397 Position: neutral

The breakout from the Wedge does not provide us a bullish confirmation yet, instead, for now a setback to the FSL (green) seems to be likely. Conse-quently, a rebound through the high at 2,435 -> 2,550 – 2,660 could follow. RIC: .BUX, 16:29, 18.09.2012 CET

Stefan Memmer

Technical analysis

674th quarter 2012

Cut-off for data: 17 September 2012

This report was completed on 21 September 2012

Acknowledgements:

Editor: Raiffeisen RESEARCH GmbHA-1030 Vienna, Am Stadtpark 9, Telephone: +43 1 717 07-0, Telefax +43 1 717 07-1848Published by: Raiffeisen RESEARCH GmbH, 1030 Vienna, Am Stadtpark 9. Published and manufacured in ViennaPrinted by: Holzer Druck, 1100 Wien, Buchengasse 79Cover photo: wjarek/panthermediaDesign: Kathrin Rauchlatner, Birgit Bachhofner

Company: Disclosure:

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Company ResearchStefan Maxian (Head)

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68 4th quarter 2012

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