Erste Group: FI & FX CEE Insights

8/14/2019 Erste Group: FI & FX CEE Insights

1/15

CEE Insights

Fixed Income and Foreign Exchange January 30, 2009

Czech Republic: We expect 50bp cut next week

Hungary: HUF 1,000bn reshuffle in tax systemrevealed

Poland:Central bank cut rates by 75bp

Romania: Talks between Romania and ECon financial package

Ukraine:Risks to public finance have increased


2/15

Erste Group Research - CEE InsightsFixed Income and Foreign Exchange January 30, 2009 Page 2

Overview

http://global.treasury.erstebank.com

Many CEE governments have had to take a deeper look at their budgets in recent

days and analyze the consequences of weaker economic growth on the revenue and

expenditure sides of their budgets. Hungary's PM came up with a tax overhaulproposal that would reduce the tax burden on the corporate sector (including

contributions) and increase some indirect taxes, as well as introduce a wealth tax.

The Romanian government approved the budget for 2009 with a deficit at 2% of GDP,

which seems to be reasonably restrictive (especially in the area of wages in the public

sector and pension increases), but which still has to be discussed with social

partners before submission to Parliament for final approval. It seems that Romania has

also received implicit backing from the EU/IMF on the financing side, as long as the

fiscal deficit is kept under control. Sticking to a fiscal consolidation plan opens the

door to further monetary easing in Hungary and Romania in the following months.

After this week's 75bp rate cut in Poland, the Czech national bank is also set to cut

interest rates. We expect a 50bp rate cut to 1.75% on Wednesday. Hungarian

industrial production for December, which is due on Friday, should have fallen byabout 15% y/y. Market sentiment was once more against CEE currencies this week.

The Hungarian forint lost 2% just today, approaching the level of 299 HUF/EUR, while

the Polish zloty came back to above 4.45 PLN/EUR today.

Market outlook

Juraj Kotian, [email protected], Erste Group

current - 1m 02/01/2009

EUR/CZK 27.69 0.8% -3.2% -3.0%

3Y (yield/bp) 2.91 9 0 -57 85 148 166

10Y (yield/bp) 4.43 32 27 27 117 121 121

5Y CDS 224 -10 39 39

EUR/HRK 7.394 0.8% -0.3% -0.6%

2Y (yield/bp) 8.01 32 -54 -56 644 681 683

9Y (yield/bp) 7.25 19 28 27 411 410 407

5Y CDS 414 -10 -26 -26

EUR/HUF 291.4 -2.2% -8.9% -8.9%

3Y (yield/bp) 9.95 56 39 40 789 771 773

10Y (yield/bp) 9.09 78 87 94 583 527 519

5Y CDS 415 -6 -34 -34

EUR/PLN 4.398 -0.5% -5.7% -5.7%

3Y (yield/bp) 4.99 10 -24 -24 294 338 341

10Y (yield/bp) 5.78 11 87 42 253 247 240

5Y CDS 265 -27 -14 -14

EUR/RON 4.249 2.2% -5.2% -5.2%

5Y CDS 650 -25 -50 -50

3Y (yield/bp) 3.45 26 -49 -46 139 209 203

11Y (yield/bp) 4.77 11 1 4 147 181 171

5Y CDS 170 -31 0 0

EUR/UAH 10.18 -0.5% 7.1% 7.2%

2Y (yield/bp) 40.0 800 1500 1500 3845 2275 2325

5Y CDS 3314 -151 234 234

Source: Reuters, Bloomberg (+ means strengthening / - means easing of the exchange rate)

Slovakia

Ukraine

Croatia

Hungary

Poland

Romania

Spreads vs. Eurolandytdm/mw/wCurrentInstrumentThursday's close

Czech Republic


3/15


To be included in the trading ideas mailing list, please, mail [email protected], subject: trading ideas

Trading Ideas

Closed positions# Recommendation opened closed P/L inc.carry

1 long: PLGB10y / 4m Euribor 16/09/2005 27/10/2005 -3.0%

2 short: CZGB15y / 6m PRIBID 16/09/2005 21/11/2005 6.0%

5 long: SKK/CZK 09/11/2005 20/01/2006 1.9%

3 short EUR/SKK 29/09/2005 07/02/2006 3.5%

4 EUR/PLN options 21/10/2005 28/07/2006 -2.7%

6 SKK/CZK long 23/03/2006 30/10/2006 2.2%

7 FRA 9*12 short 28/07/2006 08/11/2006 8bp

8 long HUGB 5y 13/10/2006 29/01/2006 5.7%

9 short CZGB/ long GDBR 09/01/2007 27/02/2007 1.8%

10 long CZK/EUR 27/02/2007 19/03/2007 2.3%

11 short CZGB/ long PLGB 07/03/2007 10/05/2007 5.5%

14 long SKKFRA 9x12, short EURFRA 9 16/07/2007 13/08/2007 30 bp

13 short EUR/CZK 07/06/2007 14/09/2007 3.0%15 short EUR/RON 23/10/2007 21/11/2007 -4.9%

12 short EUR/SKK 04/06/2007 04/12/2007 1.6%

16 long USD/CZK 29/11/2007 14/01/2008 -3.1%

17 long 3y HUGB / 3m Pribor 05/12/2007 08/02/2008 -6.8%

20 short EUR/SKK 22/01/2008 13/02/2008 2.9%

19 long USD/CZK 21/01/2008 18/02/2008 -3.6%

18 short EURRON 31/12/2008 28/02/2008 -0.6%

21 Short USD/RON 02/04/2008 10/04/2008 3.9%

22 Buy EURFRA, sell SKKFRA 04/04/2008 18/04/2008 26bp

23 Long EUR/CZK 29/04/2008 19/06/2008 -3.8%

24 short EUR/RON 05/08/2008 14/10/2008 -4.7%

25 short EUR/PLN 09/09/2008 21/10/2008 -3% (stop-loss)


4/15


Question of the Week

Question of the week

Where do you see the cap for the fiscal deficit in your country, in

light of the rising negative cyclical component of the deficit andproposed (if any) stimulus packages? Do you expect any

difficulties in financing it on local (international) markets?

Based on revised growth forecasts, we now expect Slovakia's fiscal deficit at close

to 3% of GDP, even if no new major spending initiatives are carried out (the

government intends to find funds by reshuffling expenditure). However, the

government should have no problem raising extra funds, as in late 2008, people

brought money from under their pillows to banks ahead of euro adoption. This year,

demand at government auctions has been heavy, as banks sought to invest these

new deposits.

Michal Musak, Slovenska sporitelna

Although the 2009 budget draft is very ambitious in terms of cutting public spending,

postponing some wage hikes and suspending bonuses in the public sector, we see

the cap for the budget deficit at around 5% (2% is the government's target). The

main issue in 2009 is related to the budget revenues, which could come under

strong pressures amid weakening economic activity, while increasing them by 19-

20% in an extremely difficult year will be a daunting task, which we now see as

highly unlikely. The Romanian government has thus far only announced a stimulus

package (e.g. 7% of GDP for CAPEX - mainly infrastructure, export promotion, car

industry supporting measures, stimulating job creation, tax exemptions for

reinvested profit as of 2010, etc.), but it remains to be seen if it this is to be included

in the final 2009 budget (after it is approved by Parliament). The central bank's

support in financing the budget deficit in 2009 is very important, while Eurobonds

should be seen as a second option and only for smaller amounts. At the same time,

securing additional funding from an international financial institution to fund the

budget deficit could have positive effects on the FX rate, as well as on credibility,

and improve investor sentiment towards the Romanian market.

Lucian Anghel, Banka Commerciala Romania

As the decline of GDP in 2009 is likely to be below the planned -1% y/y in

Hungary, revenues worth around 1% of GDP could be missing from the budget.

This suggests that the cap for the fiscal deficit this year is 3.5-3.6% of GDP. The

case of Hungary is special, however. In exchange for IMF help and to restore market

confidence, decreasing the financing needs of the state and, consequently, the

financial vulnerability of the country, is a credibility question. Thus, we do not think

that the government will compensate for these losses; however, the explicit impactof the currently planned measures on the deficit is very uncertain. All in all, capital

markets would not tolerate a higher budget deficit than 3% of GDP, nor would the

IMF. Our base forecast, however, is that the 2.6% of GDP deficit goal will remain

untouched, as - by increasing its credibility - it should make it easier for the country

to shift from the current non-market-type financing (IMF loan) to market-type

financing, as soon as possible. Due to the IMF standby loan, we should not see

financing difficulties in the short run, but as this situation is artificial, there is still no

way for Hungary to significantly increase its financing needs.

Orsolya Nyeste, Erste Bank Hungary

There is no strict limit in the Czech Republic on the size of the deficit. The talk is

still that the Maastricht criterion of 3% of GDP should be respected, but we think itwill not be held sacred and, should the activity drop well below zero, it might easily


5/15


Question of the Week

be exceeded (especially if fiscal stimulus is implemented). Assuming zero growth of

2009 GDP, 3% would be roughly CZK 110bn, out of which CZK 80-90bn would be a

deficit, as it stands now (no fiscal stimulus included). Add the fiscal stimulus of,

say, CZK 50bn, and the Maastricht criterion would easily be exceeded. As for the

financing, the local bond market in the Czech Republic has fixed itself a bit since

the fall (evidenced for example in narrower bid-ask spreads) and demand isimproving. As for the foreign market (which is crucial for the upcoming Eurobond

issue), markets are open, but come at a price. For example, Poland priced the

recent 5Y euro-denominated issue at mid-swaps + 300 bps.

Martin Lobotka, Ceska sporitelna

The fiscal deficit for 2009 in Ukraine is projected at 3% of GDP, but we think that

this is unrealistic, given the recent low figures for budget income in January.

Currently, the government is unable to attract funds on the local market, although it

was able to refinance some of the guaranteed state debt using external financing.

We think that the budget will be reviewed soon, in order to reduce the widening gap

between expenditures and revenues.

Maryan Zablotskyy, Erste Bank Ukraine

We expect that the Croatian fiscal deficit will not meet the targeted goal of 0.9% of

GDP, given the overly optimistic planning assumptions. Hence, given the negative

cyclical component, we expect the fiscal deficit in the 2.5-3% region. A forecast

revision would depend on a budget rebalance, which would bring some changes on

both the revenues and expenditures sides and which would hopefully show a

willingness to sustain the deficit and ease possible pressure on the refinancing

side. Recent weeks have brought some speculation that a stimulus package could

be introduced to support the real economy. However, no details have been

presented to the public. Thus, the potential size of the package is rather hard to

estimate. Currently, the MoF is oriented to the domestic market and has thus far

been successful in meeting financing needs. However, in the mid run, capacity

limitations are likely to play a role. Therefore, the MoF announced that it would tryto arrange a bond issue on international markets, which - if successful - would

alleviate the pressure from the domestic market.

Alen Kovac, Erste Bank Croatia


6/15


Major Markets

Today, the CPI estimate for January fell well short of expectations, thus leaving

more room for further interest rate cuts in the Eurozone. The growth of producer

price indices in December should have declined, removing the upward pressure from

consumer prices. On Wednesday, December retail sales are expected to have

declined, due to the worsening of economic conditions. Although disinflation should

support private consumption, the uncertainty over the impact from the recession on

the labor markets is hindering the propensity to buy. On Thursday, we expect the

ECB to keep interest rates stable at 2.0%, as they have already accounted for the

speedy disinflation until June. It is more likely that the March meeting will bring

further rate cuts to reduce the core rate to 1.5%, as more economic data and

sentiment indicators become available and potentially indicate a further weakening

of inflation pressure.

In contrast, the Fed is following a more aggressive policy. After interest rates cuts

to zero and different purchasing programs to stimulate the economy and creditmarkets, they indicated this week that they are prepared to buy long-term Treasury

securities if such transactions would be effective in improving conditions in private

credit markets. It seems that officials are close to executing such a plan, which

could bear inflation risks in the mid term. In the week ahead, two important releases

are due. On Monday, the ISM is expected to have bottomed out in January, while on

Friday the week will close with the labor market report.

Gudrun Egger, [email protected], Erste Group

Rainer Singer, [email protected], Erste Group

Major markets

Eurozone: ECB may

pause on further

rate cutting next

week

US: Weak ISM data

and labor marketreport ahead

Forecasts

EUL USA EUL Fwd USA Fwd EUL USA EUR/USD Fwd

Spot 2.00 0 - 0,25 2.09 1.18 3.30 2.83 1.285

Mar-09 1.50 0 - 0,25 2.30 2.28 1.00 1.87 3.20 2.50 1.40 1.285

Jun-09 1.50 0 - 0,25 2.20 2.30 0.80 2.17 3.40 2.80 1.45 1.284

Sep-09 1.50 0 - 0,25 2.10 2.28 0.80 2.30 3.70 3.30 1.50 1.284

Dec-09 1.50 0 - 0,25 2.00 2.00 0.90 1.84 4.00 3.80 1.50 1.284

Intervention Rate 3m Money Market Rate 10y Govt. Yield FX


7/15


CEE Markets

Czech Republic

During this past week, the Ministry of Finance confirmed that there will be a

Eurobond emission this year (as part of the Euro Medium TermNote program), but

declined to elaborate on the size or timing. From the currency point of view, nowwould be a good time to do it (and thus take advantage of the weak exchange rate).

However, in light of the market conditions, it does not seem an opportune moment

at present. Even though the markets are open, this comes at a price. Poland issued

5Y 1bn Eurobonds last week at mid-swaps +3pp. The Czech price could be

something similar.

As for next week, the Czech National Bank is to hold its first rate setting meeting of

2009. Regarding the rates, we expect a 50bp cut (weakening economy vs.

weakening CZK) and a comment indicating that the weakness of the currency is a

much stronger anti-inflationary risk than seen previously (last week, CNB board

member Tomsik confirmed that the weakness of the CZK limits drastic cuts, which

is essentially our view). The CNB will also publish (for the first time) the EURCZK

trajectory implicit in its forecast. This is a positive step towards complete

transparency, as one will then be able to compare the actual levels of CZK with

those assumed in the prognosis and thus say whether they constitute an anti-

inflationary or pro-inflationary risk. A bigger cut could send the koruna lower, while

dovish comments could push the currency in the other direction.

Martin Lobotka, [email protected]

Hungary

At the extraordinary meeting of Parliament held on Thursday, Prime Minister

Gyurcsany announced some proposals for reshuffling about HUF 1,000bn in the taxsystem to boost economic growth. Possible changes should refer to the personal

income tax system and employers' social contributions. The 4% extra taxation on

companies and private individuals (solidarity tax), which was introduced as an

element of the 2006-07 fiscal adjustment package, should be abandoned. In order to

compensate for the revenue losses, the PM proposed a "modest" rise in the VAT,

elimination of some tax allowances and introduction of wealth taxes. As for the

expenditure side of the budget, apart from making the system of family allowance

need-based, no other explicit measures have been mentioned. Gyurcsany also said

that a reduction of expenditures amounting to around 1% of GDP per year could be

possible. The announcements did not really come as a surprise, as the

government's intentions to carry out such changes in the tax system, which would

increase excise and wealth taxes and mitigates taxes on labor, have been known

for some weeks now. Nevertheless, this could be the first step in the right direction,

as the current tax system does not really help solve one of the most important

problems in Hungary, which basically is independent of the current economic crisis

- the very low rate of labor participation and high number of economically inactive

people. (The employment ratio is around just 57%, well below the EU average of

around 65%). The PM has not mentioned so far how the above changes would affect

the 2.6% of GDP deficit target for 2009. Rumors have it that the government would

like to keep it untouched, which could be seen as positive (no extra financing needs

in the current difficult market environment). The second important thing is whether

these reshuffles solve the problem of the earlier mentioned revenue losses of HUF

200-250bn stemming from the bigger drop in the economy (presently, the

government predicts a 2.5-3% y/y decline in GDP growth). And last but not least,

the timing of the measures is an uncertain factor as well, especially taking intoconsideration that, except for VAT, changes in the tax and contributions system

Eurobond timing

and amount not

revealed

We expect 50bp cut

next week

HUF 1,000bn

reshuffle in taxsystem revealed


8/15


CEE Markets

during the year could cause technical difficulties. More details on the changes are

expected to be announced on February 16.

The forint exchange rate consolidated somewhat this week, but started to weaken

massively on Thursday and reached another record low, due to increased risk

aversion. Intensifying global recession fears and the stronger USD and JPY hurtemerging currencies, and the forint was no exception. The planned tax changes

have not had significant impacts on the markets so far. Trading is expected to

remain driven by the gloomy sentiment, which does not suggest any recovery in the

short run. As for the macro statistics, industrial output figures will be due next

Friday. The expected double-digit drop in the y/y performance will not help to

improve the overall sentiment on the markets.

Orsolya.Nyeste, [email protected]

Poland

The central bank introduced another interest rate cut. We expected a cut of 50bp,

given the still weakening zloty and the toll it might take on the Polish plan to enter

ERM II in the first half of 2009. However, the decision of the MPC to cut by 75bp,

thus pushing the key rate to 4.25%, demonstrates that the central bankers are

currently more concerned about the overall economic slowdown than about the euro

plan. Therefore, we expect even more cuts to come; as the council has decided it is

more important to stimulate the economy at this point, it makes sense to do it

quickly. The zloty reacted to the rate cut by depreciating. This week, it has been

stuck near 4.40 per euro. We do not see any reasons for significant appreciation

anytime soon. Like other currencies in the region, the zloty is under pressure,

resulting mainly from increased risk aversion.

New data on GDP growth was released. The growth slowed down rapidly in thefourth quarter of 2008, to 2.8%, compared to 4.8% in the third quarter. The annual

growth slowed to 4.8% in 2008, compared to 6.7% in 2007. Total domestic demand

growth dropped from 8.6% to 4.8%. Gross capital formation rose by just 7.9%m

which is less than half of the 17.6% seen in 2007. One good piece of news came

regarding individual consumption growth, which reached a nine-year high of 5.4%. In

2009, the positive effect of increasing real wages and cuts in taxes on private

consumption will, however, likely be offset by the consequences of the overall

economic outlook, rising unemployment and hindered access to loans.

Despite all of the bad news confirming the ever-deepening economic slowdown,

Poland (being a relatively closed economy) remains one of the few countries with

the potential to avoid a recession in 2009. The EBRD released new estimates forgrowth rates in the region this week. For Poland, the expected growth is 1.5%,

which is the second highest in the region of Central Europe and the Baltic states.

PM Tusk said this week that the government's worst-case scenario assumes growth

of 1.7%. This would still be the slowest growth rate since 2002.

Jana Krajcov, [email protected]

Romania

The next monetary policy meeting on February 4 will put three options in front of the

central bank. The most efficient measure to improve the liquidity of the money

market and support leu lending is a cut in the minimum reserve requirements for the

national currency. Another option is a 25bp cut in the key rate to 10%, which should

be read more like a signal and a call for urgent strong fiscal and income policies.

Forint weakened

further

Central bank cut

rates by 75bp

GDP growth slowedrapidly in 4Q08

Poland one of few

countries that could

avoid recession thisyear

Central bank could

begin monetary

policy easing cycle


9/15


CEE Markets

The third option is a joint cut in the key rate and minimum reserves for the leu, a

clear indication that the central bank is concerned with the economic downturn. We

attach a low probability to an aggressive monetary policy easing, given that

inflationary pressures are still present (due to lagging effects of the consistent

excess demand from 2008) and the risks of leu depreciation for financial stability

(FX-denominated retail loans account for 59% of total retail loans) and the inflationrate. The results of the latest business survey conducted by the central bank show

a further deterioration of the outlook for the real economy. The restraint of productive

capacities in operation will lead to payroll cuts, as reflected by the balance of

answers staying deep in negative territory in both industry and construction. The

investment decline should weigh on the central bank's monetary policy decision,

considering that the Romanian economy has not yet reached critical mass in terms

of competitive technology and better performance of exports in the long run is

strongly linked to an improved supply of high-tech industrial products.

The December figures confirmed our forecasts regarding a considerably lower

growth rate in loans to private sector. Higher costs for external funding and the

central bank's amendments limiting the credit risk associated with FX loans tohouseholds led to a 53.6% y/y increase in retail FX loans at the end of 2008, as

compared to a hefty rate of 134.4% in 2007. Leu-denominated retail loans advanced

by 22% in 2008 (from 45.4% one year ago), as the spread between the key rate and

money market rates widened at the end of last year, putting more pressure on

domestic funding. A further slowdown is in the pipeline, especially in the FX

segment, as the labor market is weakening rapidly and consumers' irrational

exuberance from the past has been replaced by a more prudent approach. Monetary

policy easing might help leu lending and the central bank seems determined to offer

it a significant competitive advantage over FX lending.

Romania started talks with the European Commission on a package to finance its

budget deficit, as an alternative to more expensive and limited private external

funding, in the aftermath of the global crisis and recent rating downgrades (to belowthe investment grade category). The European financial aid under discussion stays

at EUR 6-7bn and represents Romania's first option now, before an agreement with

the IMF. However, this EC loan might be part of a joint plan together with the IMF,

due to European concerns over Romania's ability to tighten its fiscal and income

policies and control the budget deficit. IMF representatives also visited Romania this

week, but said that financial support was not on their agenda. The latest EC

economic forecast considers a budget deficit of 7.5% of GDP for 2009, compared to

a very optimistic government target of 2% of GDP.

Romania's coalition government approved an austere budget for 2009 aimed at

reducing the budget deficit to 2% and limiting the fallout of the global crisis on the

local economy. Before submitting the budget to Parliament, it will be debated andpresented to the social partners. 20% of the budget (the equivalent of EUR 10bn)

will be earmarked for investments. Public sector wages and pensions will increase

by 5% in 2009, all bonuses will be cut, while extra time in the public sector will not

be paid, but compensated for with time off. The car industry will be helped through

higher financial rewards received by customers deciding to replace 10-year-old cars

with new ones and the extended number of new cars involved in this program. The

government is also considering raising taxes on luxury goods and gambling and

hiking social insurance contributions by 3.3% in the near term. Although supportive,

these decisions should produce visible effects in terms of lower and more stable

monthly budget deficits before they result in improved sentiment from external

markets regarding the Romanian economy. This might be the first step in the right

direction, after an ambiguous mix of macroeconomic policies in the past, with a

strong monetary policy but loose fiscal and income policies.

Eugen Sinca [email protected]

Further slowdown of

loans to private sector

Talks between

Romania and EC on

financial package

Government approved

2009 budget


10/15


CEE Markets

Ukraine

One of the conditions of the IMF's USD 16.4bn loan was the development of a program

for the recapitalization of the banking system. Half of the loans issued by banks were in

foreign currency. As the local currency devalued by 60% and is under pressure to fallfurther, banks will need capital injections to keep their capital ratios at 10% of assets.

Capital injections are projected to come from foreign banks to their affiliates and from

the government. In the 2009 state budget, UAH 44bn (4% of GDP) is planned to be

used in bank recapitalization programs. Banks that account for 60% of total banking

system assets were ordered to pass special audits. The auditing was intended to

determine the banks' sustainability in the economic downturn. The NBU reported that

most of the foreign banks agreed to increase the capital of their affiliates in Ukraine. In

January, Ukraine received USD 711mn in capital inflows, the majority of which were

investments from foreign banks in their subsidiaries. External debt amortization

amounted to USD 1,536mn. Banks are still reluctant to lend, as outstanding loans

decreased by 1.9% m/m. Next week, the NBU will publish a list of banks that will need

capital injections and pass it to the government. The auditing and recapitalization

program is one of the IMF's conditions that Ukraine has more or less successfully dealt

with. However, big problems remain, as large amounts of refinancing were issued by the

NBU. Banking system debt to the NBU stands at UAH 61bn (6.6% of banking system

assets), UAH 23bn of which was loaned to state-owned banks. The toughest times for

the banking system are still ahead; the trouble should peak in 1H09.

As of January 26, 2009, state budget income totaled UAH 4.23bn, which is 44.5% of

January's planned income. The temporary monthly plan for budget income foresaw UAH

9.51bn in January, UAH 12.21bn in February and UAH 14.47bn in May 2009. The actual

income for these months in 2008 was UAH 12.21bn, UAH 14.17bn and UAH 12.12bn,

respectively. The 2009 state budget is projected with similar nominal income and

expenditure terms as those in the 2008 budget. Thus, it is unlikely that the current

income figures will remain the same during the whole year, as the majority of budgetincome consists of taxes on consumption, like custom duties and VAT. The low current

income is probably a "black-out period", as trade companies and importers readjust

their purchasing plans. Yet it is obvious that it will be almost impossible for the

government to meet the planned expenditure figures, especially with the planned 3% of

GDP deficit. The government is actively seeking additional refinancing from the NBU,

which has caused a conflict between the two sides. The government already received

UAH 31.5bn (3% of GDP) from the NBU (UAH 23bn via refinancing of state banks and

UAH 8.5bn via the purchase of treasury bills by the NBU). Such moves are in violation of

agreements with the IMF, which targeted an average 10% increase in monetary base

aggregates in 2009. In December 2008, average monetary base aggregates increased

by 8% m/m.

The 2009 state budget does not sufficiently cover the risks for Naftogaz, which may

experience additional problems after the signing of a new gas deal with Gazprom.

Ukrautodor, the state road construction company, managed to negotiate purchase

refinancing of its remaining debt to Morgan Stanley from Credit Suisse at 6M Libor

+8%. There is a significant risk for the public finance sector stemming from the debts of

Naftogaz, Ukrautodor and state-owned banks, which are not fully covered in the budget.

The government's tendency to opt for refinancing and increases in the monetary base,

the low budget income and the problems with state companies may put some quasi-

public sectors in technical default, despite Ukraine has one of the lowest public debt to

GDP ratios in the CEE region. The IMF mission is currently in Ukraine to discuss the

next part of the loan of SDR 1.25bn, which was planned to be issued on February 15.

The government will have a hard task reassuring the IMF of its commitment to the

conditions of the loan while explaining its conflict with the NBU and the receivedrefinancing. Maryan Zablotskyy, [email protected]

Bank auditing

coming to end of

first phase

Risks to public

finance have

increased


11/15


Forecasts

Capital markets forecasts

Long-term forecasts

CZK Forward HRK Forward HUF Forward PLN Forward RON Forward UAH Forward

Spot 27.9 7.39 298.2 4.43 4.23 10.12

Mar-09 28.0 7.45 7.45 270.0 301.1 4.60 4.36 4.32 13.30

Jun-09 27.4 27.9 7.50 7.50 265.0 305.4 4.50 4.45 4.31 4.46 13.05 15.05

Sept-09 26.7 27.9 7.55 7.55 260.0 309.3 4.25 4.46 4.36 4.59 12.75 16.60

Dec-09 24.7 27.9 7.60 7.60 260.0 312.0 3.87 4.48 4.30 4.73 12.00 17.63

Exchange Rate vs EUR

CZ HR HU PL RO UA CZ Fwd HU Fwd PL Fwd RO Fwd UA Fwd

Spot 2.25 6.00 9.50 4.25 10.00 12.00 2.71 9.47 4.88 15.23 32.00 -

Mar-09 1.75 6.00 8.50 4.00 9.50 16.00 2.27 8.40 9.16 4.35 13.50 10.34 28.00 -

Jun-09 1.75 6.00 7.50 3.50 9.00 14.00 1.99 2.30 7.40 8.53 3.69 3.91 11.75 8.67 22.00 -

Sept-09 1.75 6.00 7.00 3.25 8.50 14.00 1.85 1.83 7.00 8.01 3.38 3.42 10.75 7.47 16.00 -

Dec-09 2.00 6.00 7.00 3.25 8.50 14.00 2.15 2.44 7.00 7.97 3.34 2.54 10.00 6.12 14.00 -

3M Money Market RateIntervention Rate

5y Govt. Yield 2y Govt. Yield

CZ HR HU PL SK RO UA

Spot 4.43 7.25 9.30 5.78 4.71 12.6 40.0

Mar-09 4.15 7.50 8.00 5.15 4.50 12.0 30.0

Jun-09 3.90 7.50 7.40 5.10 4.40 11.6 22.0

Sept-09 3.85 7.00 7.10 5.25 4.50 10.5 17.0

Dec-09 3.86 7.00 7.00 5.30 4.60 9.7 15.0

10y Govt. Yield

Real GDP growth (%) 2007 2008f 2009f 2010f CPI (%), eoy 2007 2008f 2009f 2010f

Czech Republic 6.0 4.1 1.3 2.3 Czech Republic 4.9 4.6 2.5 2.2

Croatia 5.6 3.4 1.7 3.0 Croatia 5.8 5.2 3.3 3.5

Hungary 1.1 0.9 -2.7 1.2 Hungary 7.4 3.5 3.0 3.0

Poland 6.7 5.2 2.8 4.4 Poland 4.0 3.8 2.8 2.2

Romania 6.0 7.6 4.0 5.4 Romania 6.6 6.3 5.4 4.4

Serbia 7.5 6.5 3.5 4.0 Serbia 10.1 9.4 7.0 5.4

Slovakia 10.4 7.0 4.2 4.5 Slovakia 3.4 5.0 3.9 3.9

Ukraine 7.6 2.0 -5.0 3.0 Ukraine 16.6 22.3 22.0 9.0

CEE8 weighted average 6.3 4.6 1.2 3.6 CEE8 weighted average 6.8 7.1 6.0 3.8

Unemployment (%) 2007 2008f 2009f 2010f 3M rates (average, %) 2007 2008f 2009f 2010f

Czech Republic 6.6 5.5 6.4 7.2 Czech Republic 3.1 3.9 2.4 2.8

Croatia 9.7 8.8 10.0 10.0 Croatia 5.6 6.9 7.5 6.5

Hungary 7.7 7.9 8.7 8.3 Hungary 7.7 8.9 8.2 6.5

Poland 11.4 9.1 10.3 9.5 Poland 4.6 6.3 5.3 4.3Romania 4.1 4.3 5.0 4.8 Romania 7.8 13.0 12.8 10.0

Serbia 18.1 15.4 17.0 16.0 Serbia 11.3 15.6 16.0 13.5

Slovakia 8.4 7.6 7.9 7.6 Slovakia 4.3 4.2 2.7 2.7

Ukraine 6.9 6.5 9.5 7.1 Ukraine 9.6 14.8 17.0 12.0

CEE8 weighted average 8.7 7.6 8.8 8.2 CEE8 weighted average 6.0 8.5 8.0 6.4

C/A (%GDP) 2007 2008f 2009f 2010f Budget Balance (%GDP) 2007 2008f 2009f 2010f

Czech Republic -2.5 -1.9 -2.2 -1.9 Czech Republic -1.9 -1.9 -2.3 -2.1

Croatia -8.6 -10.6 -10.8 -10.6 Croatia -1.6 -1.6 -2.0 -2.0

Hungary -6.4 -7.6 -6.4 -5.7 Hungary -5.0 -3.3 -2.6 -2.4

Poland -4.7 -5.0 -5.0 -4.7 Poland -2.0 -2.2 -2.3 -2.0

Romania -13.7 -13.6 -12.0 -9.8 Romania -2.3 -3.2 -4.0 -3.3

Serbia -13.2 -17.8 -17.1 -17.0 Serbia -1.9 -2.0 -1.5 -1.5

Slovakia -5.3 -5.4 -4.9 -4.6 Slovakia -2.0 -2.2 -2.4 -2.5

Ukraine -4.2 -6.7 -5.0 -4.0 Ukraine -1.1 -1.2 -3.0 -1.5CEE8 weighted average -6.1 -6.8 -6.3 -5.6 CEE8 weighted average -2.2 -2.2 -2.6 -2.2


12/15


Diaries

Looking ahead

Auction diary

Country Auction-date Pay-date Maturity Cupon Offer Forecast

Czech Republic No auction scheduled

Hungary 3-Feb 11-Feb 2009-May-13 - HUF 40bn

5-Feb 11-Feb 2010-Jan-13 - HUF 40bn

Poland No auction scheduled

Romania 2-Feb 4-Feb 6M - RON 1500 million 11%

Slovakia 2-Feb 4-Feb 2017-Apr-04 4.2% - 4.3%

Ukraine No auction scheduled

Country Date Release/event/figures Our expectation Consensus*

Czech Republic 05-Feb Rate-setting meeting, % 1.75 2.25

Croatia 5-Feb Retail trade -3.5% y/yHungary 6-Feb December Industrial output -15% y/y -

Poland No data releases scheduled

Romania 3-Feb IPPI - y/y December 9.8% -

4-Feb Central bank board meeting - key rate 10.0% 10.00%

Slovakia No data releases scheduled

Ukraine No data releases scheduled

*Sources: Bloomberg, Reuters


13/15


Appendix Charts

Source: Bloomberg

Exchange rates and interest rates (52 weeks)

0

50

100

150

200

250

300

350

Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.011.0

12.0

13.0

14.0

HUF/EUR

HUF/USD

3m interbank rate, r.s.

Hungary

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

PLN/EUR

PLN/USD


Poland

0

5

10

15

20

25

30


0.00

0.50

1.00

1.50

2.00

2.50

3.003.50

4.00

4.50

5.00

CZK/EUR

CZK/USD


Czech Republic

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

RON/EUR

RON/USD


Romania

4.0

5.0

6.0

7.0

8.0

9.010.0

11.0

12.0

13.0

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

2

7

12

17

22UAH/EUR

UAH/USD


Ukraine

0

1

2

3

4

5

6

7

8

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

HRK/EUR

HRK/USD

Croatia


14/15


Appendix Forwards

Benchmarks

Published by Erste Group Bank AG, Neutorgasse 17, 1010 Vienna, Austria.

Phone +43 (0)5 0100 - ext.

Erste Group Homepage: www.erstegroup.com On Bloomberg please type: ERBK .

This research report was prepared by Erste Group Bank AG (Erste Group) or its affiliate named herein. The information herein has been obtained

from, and any opinions herein are based upon, sources believed reliable, but we do not represent that it is accurate or complete and it should not be

relied upon as such. All opinions, forecasts and estimates herein reflect our judgement on the date of this report and are subject to change withoutnotice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time,

Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may have a position in the securities referred to herein orhold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in

transactions in any of these securities. Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may from time to

time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Further information on thesecurities referred to herein may be obtained from Erste Group upon request. Past performance is not necessarily indicative for future results andtransactions in securities, options or futures can be considered risky. Not all transaction are suitable for every investor. Investors should consult

their advisor, to make sure that the planned investment fits into t heir needs and preferences and that the involved risks are fully understood. Thisdocument may not be reproduced, distributed or published without the prior consent of Erste Group. Erste Group Bank AG confirms that it has

approved any investment advertisements contained in this material. Erste Group Bank AG is regulated by the Financial Services Authority for the

conduct of investment business in the UK.

Please refer to www.erstegroup.com for the current list of specific disclosures and the breakdown of Erste Groups investment

recommendations.

Poland Slovakia

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

3m 1yr 3yr 5yr 10yr

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Spread to Euroland, r.s. Yields

0.0

1.0

2.0

3.0

4.0

5.0

6.0

3m 1yr 3yr 5yr 11yr

0.0

0.5

1.0

1.5

2.0

2.5


Czech Republic Hungary

0

0.5

1

1.5

2

2.5

3

3.5

44.5

5

3m 1yr 3yr 5yr 10yr

0

0.2

0.4

0.6

0.8

1

1.2

1.4


8.6

8.8

9.0

9.2

9.4

9.6

9.8

10.0

10.2

3m 1yr 3yr 5yr 10yr

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0



15/15


Contacts

Group Research

Sales Retail & SparkassenHead: Manfred Neuwirth +43 (0)5 0100 - 84250Equity Retail SalesHead: Kurt Gerhold +43 (0)5 0100 - 84232Domestic Sales Fixed IncomeHead: Thomas Schaufler +43 (0)5 0100 - 84225Treasury Domestic SalesHead: Gottfried Huscava +43 (0)5 0100 - 84130Corporate Desk

Head: Leopold Sokolicek +43 (0)5 0100 - 84601Alexandra Blach +43 (0)5 0100 - 84141Roman Friesacher +43 (0)5 0100 - 84143

Helmut Kirchner +43 (0)5 0100 - 84144Christian Skopek +43 (0)5 0100 - 84146Markus Pistracher +43 (0)5 0100 - 84100Fixed Income Institutional DeskHead: Thomas Almen +43 (0)5 0100 - 84323Martina Fux +43 (0)5 0100 - 84113Michael Konczer +43 (0)5 0100 - 84121Ingo Lusch +43 (0)5 0100 - 84111

Lukas Linsbichler +43 (0)5 0100 - 84345Karin Rauscher +43 (0)5 0100 - 84112Michael Schmotz +43 (0)5 0100 - 84114

Treasury - Erste Bank Vienna

Head of Sales Equities & DerivativesMichal Rizek +44 207 623 - 4154Brigitte Zeitlberger-Schmid +43 (0)5 0100 - 83123Equity Sales Vienna XETRA & CEEHind Al Jassani +43 (0)5 0100 - 83111Werner Fuerst +43 (0)5 0100 - 83121Josef Kerekes +43 (0)5 0100 - 83125

Cormac Lyden +43 (0)5 0100 - 83127Stefan Raidl +43 (0)5 0100 - 83113Simone Rentschler +43 (0)5 0100 - 83124Sales DerivativesChristian Luig +43 (0)5 0100 - 83181Manuel Kessler +43 (0)5 0100 - 83182Sabine Kircher +43 (0)5 0100 - 83161Christian Klikovich +43 (0)5 0100 - 83162Armin Pfingstl +43 (0)5 0100 - 83171Roman Rafeiner +43 (0)5 0100 - 83172Equity Sales, LondonDieter Benesch +44 207 623 - 4154Tatyana Dachyshyn +44 207 623 - 4154Jarek Dudko, CFA +44 207 623 - 4154Federica Gessi-Castelli +44 207 623 - 4154Declan Wooloughan +44 207 623 - 4154Sales, Croatia

Zeljka Kajkut (Equity) +38 5 6237 - 2811Damir Eror (Equity) +38 5 6237 - 2813

Sales, Czech RepublicMichal Brezna (Equity) +420 2 24995 - 523Ondrej Cech (Fixed income) +420 2 24995 - 577Michal Rizek +420 2 24995 - 537Jiri Smehlik (Equity) +420 2 24995 - 510Pavel Zdichynec (Fixed income) +420 2 24995 - 590

Sales, HungaryGregor Glatzer (Equity) +36 1 235 - 5144Krisztin Kandik (Equity) +36 1 235 - 5140Istvan Kovacs (Fixed income) +36 1 235 - 5846

Sales, PolandHead: Andrzej Tabor +48 2 23306 - 203Pawel Czuprynski (Equity) +48 2 23306 - 212

Lukasz Mitan (Equity) +48 2 23306 - 213Jacek Krysinski (Equity) +48 2 23306 - 218

Sales, SlovakiaHead: Dusan Svitek +42 1 24862 - 5620Rado Stopiak (Derivatives) +42 1 24862 - 5601Andrea Slesarova (Client sales) +42 1 24862 - 5627

Institutional Sales

Head of Group ResearchFriedrich Mostbck, CEFA +43 (0)5 0100 - 11902CEE Equity ResearchCo-Head: Gnther Artner, CFA +43 (0)5 0100 - 11523Co-Head:Henning Ekuchen +43 (0)5 0100 - 19634Gnter Hohberger (Banks) +43 (0)5 0100 - 17354Franz Hrl, CFA (Steel, Construction) +43 (0)5 0100 - 18506

Gernot Jany, CFA (Banks, Real Estate) +43 (0)5 0100 - 11903Daniel Lion (IT) +43 (0)5 0100 - 17420Martina Valenta, MBA (Transp., Paper) +43 (0)5 0100 - 11913Christoph Schultes, CIIA (Ins., Util.) +43 (0)5 0100 - 16314Vera Sutedja, CFA (Telecom) +43 (0)5 0100 - 11905Thomas Unger (Telecom) +43 (0)5 0100 - 17344Vladimira Urbankova (Pharma) +43 (0)5 0100 - 17343Gerald Walek, CFA (Machinery) +43 (0)5 0100 - 16360International EquitiesHans Engel (Market strategist) +43 (0)5 0100 - 19835Ronald Stferle (Asia) +43 (0)5 0100 - 11723Stephan Lingnau (Europe) +43 (0)5 0100 - 16574Macro/Fixed Income ResearchHead: Gudrun Egger (Euroland) +43 (0)5 0100 - 11909Alihan Karadagoglu (Corporates) +43 (0)5 0100 - 19633Rainer Singer (US) +43 (0)5 0100 - 11185Elena Statelov, CIIA (Corporates) +43 (0)5 0100 - 19641

Mildred Hager (SW, Japan) +43 (0)5 0100 - 17331Macro/Fixed Income Research CEECo-Head CEE: Juraj Kotian (Macro/FI) +43 (0)5 0100 - 17357Co-Head CEE: Rainer Singer (Macro/FI) +43 (0)5 0100 - 11185Editor Research CEEBrett Aarons +420 2 33005 - 904

Research, Croatia/SerbiaHead:Mladen Dodig +38 1 112200 - 866Damir Cukman (Equity) +38 5 6237 - 2820Iva Cerovsky (Fixed Income) +38 5 6237 - 1716Alen Kovac (Fixed income) +38 5 6237 - 1383Davor Spoljar (Equity) +38 5 6237 - 2825

Research, Czech RepublicHead: David Navratil (Fixed income) +420 2 24995 - 439Petr Bartek (Real estate) +420 2 24995 - 227Jana Krajcova (Fixed income) +420 2 24995 - 232

Radim Kramule (Media) +420 2 24995 - 213Martin Lobotka (Fixed income) +420 2 24995 - 192Lubos Mokras (Fixed income) +420 2 24995 - 456Jakub Zidon (Oil and Gas) +420 2 24995 - 340

Research, HungaryHead: Jzsef Mir (Equity) +36 1 235 - 5131Bernadett Papp (Equity) +36 1 235 - 5135Gergely Gabler (Equity) +36 1 235 - 5133Orsolya Nyeste (Fixed income) +36 1 373 - 2830

Research, PolandHead: Artur Iwanski (Equity) +48 2 23306 - 253Marek Czachor (Equity) +48 2 23306 - 254Marcelina Hawryluk (Equity) +48 2 23306 - 255Magda Jagodzinska (Equity) +48 2 23306 - 250Tomasz Kasowicz (Equity) +48 2 23306 - 251Piotr Lopaciuk (Equity) +48 2 23306 - 252Wiktor Tymochowicz (Equity) +48 2 23306 - 253

Research, RomaniaHead: Lucian Claudiu Anghel +40 2 1312 - 6773Mihai Caruntu (Equity) +40 2 1311 - 2754Dumitru Dulgheru (Fixed income) +40 2 1312 6773 - 1028

Cristian Mladin (Fixed income) +40 2 1312 6773 - 1028Loredana Oancea (Equity) +40 2 1311 - 2754Eugen Sinca (Fixed income) +40 2 1312 6773 - 1028Raluca Ungureanu (Equity) +40 2 1311 - 2754

Research, SlovakiaHead: Juraj Barta (Fixed income) +42 1 24862 - 4166

Michal Musak (Fixed income) +42 1 24862 - 4512Maria Valachyova (Fixed income) +42 1 24862 - 4185

Research, UkraineViktor Stefanyshyn (Equity) +38 044 593 - 1784Svitlana Bazilevich (Equity) +38 044 593 - 9286Maryan Zablotskyy (Fixed income) +38 044 593 - 9188

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