Slow economic recovery in H2

Transcription

1 Central & Eastern European Strategy 3 rd quarter 213 Slow economic recovery in H2 All eyes on central bank liquidity plans Elevated yields make bonds attractive Strong FX movement on changing risk sentiment Liquidity and seasonality weigh on equities

2 Content Central & Eastern European Strategy Topical issue: Discussions about the US Fed s policy influence capital flows in CEE 3 s CEE incl. Austria 4 Asset allocation CEE incl. Austria 6 Focus on: Growth and monetary easing: in pursuit of a delicate balance 1 Austria 12 CE: Poland 14 Hungary 16 Czech Republic 18 Slovakia 2 Slovenia 21 SEE: Croatia 22 Romania 24 Bulgaria 26 Serbia 27 Bosnia and Herzegovina 28 Albania 29 Kosovo 3 CIS: Belarus 31 Russia 32 Ukraine 34 Turkey 36 Sovereign Eurobonds 38 Corporate Eurobonds 4 Equity markets 42 Sectors 48 Equities - top picks 54 Equities - region overview 59 Sector weightings in comparison 63 Technical analysis 64 Quantitative analysis 66 Acknowledgements 67 Explanation: e... estimate f... forecast p... preliminary figures n.v.... no value Abbreviations Currencies and Countries ALL Albanian lek BAM Bosnian marka BGN Bulgarian lev BYR Belarusian roubel CZK Czech koruna EKK Estonian kroon HUF Hungarian forint HRK Croatian kuna LTL Lithuanian litas LVL Latvian lats PLN Polish zloty RON Romanian leu RSD Serbian dinar RUB Russian rouble SIT Slovenian tolar SKK Slovak koruna TRY Turkish lira UAH Ukrainian hryvnia Economic abbreviations %-chg Percentage change (not in percentage points) avg average bp basis points C/A Current Account CPI Consumer Price Index FCY Foreign Currency FDI Foreign Direct Investments FX Foreign Exchange FY Full year GDP Gross Domestic Product LCY Local Currency mmav month moving average mom month on month O/N overnight rate pp percentage points PPI Producer Price Index qoq quarter on quarter T/B Trade Balance ULC Unit Labour Costs yoy year on year ytd year-to-date Stock Exchange Indices BELEX15 Serbian stock index BET Romanian stock index BUX Hungarian stock index CROBEX1 Croatian stock index PX Czech stock index MICEX Russian stock index SASX-1 Bosnian stock index WIG 2 Polish stock index Equity related DY Dividend yield EG Earnings growth LTG Long term (earnings) growth P/B Price book ratio P/E Price earnings ratio RS UR Euro area CE SEE CIS CEE Recommendation suspended Under Revision Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia, Spain Central European countries - Poland, Hungary, Czech Republic, Slovakia, Slovenia South East European countries - Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Romania, Serbia European CIS (Commonwealth of Independent States) countries - Russia, Ukraine, Belarus Central and Eastern Europe (CE + SEE + CIS) 2 3 rd quarter 213

3 Topical issue Discussions about the US Fed s policy influence capital flows in CEE 213 GDP growth weakest since the crisis in 29 Discussions about reining in the flood of liquidity will also affect CEE financial markets in Q3 Interest rate cuts should tend to end in H2, currencies may come under temporary pressure, negative trends on the equity markets The GDP readings for Q1 213 in Central and Eastern Europe (CEE) were quite mixed, but negative trends set the overall tone. While Romania and Hungary beat the expectations, disappointing results mainly were seen in the region s larger economies, such as Russia, Ukraine, Poland and the Czech Republic. In Austria, the flat result was in line with our estimates. The situation in CEE did not change much in the second quarter either. Most of the industrial production data for the spring indicate that activity is still in the process of bottoming out. Leading indicators, however, are pointing modestly higher, nourishing hopes of a tiny increase in GDP for H2. Nevertheless, moderate GDP growth rates will not return until 214. We have lowered our projections for some individual countries (in particular Russia and Ukraine), leaving the CEE region as a whole with a real GDP growth forecast of around 2.5%, which still falls significantly short of the potential growth rate. Austrian GDP may expand by up to 1.5% in 214, supported by net exports and private consumption. As inflation has also declined to new lows in most countries this year (with the exception of Russia and Romania), budget consolidation efforts are proceeding slowly. In Austria, the fact that the budget balances for 213 and 214 are estimated at less than 3% and 2% of GDP, respectively, is due exclusively to the above-average growth in revenues (in particular wage/income tax). The revenues side is also supported by the rate of inflation (1.9%), which continues to be stubbornly higher than inflation in the Euro area. Consequently, the reduction in payroll taxes which is necessary following the elections will have to be mainly financed by spending cuts, in order to maintain Austria s attractiveness as a business location. Impact on monetary policy and exchange rates The downward trend in interest rates across the CEE region including Turkey has been accompanied by a very expansive monetary policy by the ECB. The declines in inflation will allow for further cuts in interest rates until the end of the year, but these reductions will likely come to an end in the next six months, due to the global liquidity situation and rebounds in economic activity and inflation. Until the spring, declining interest rate differentials were still supported by short-term capital flows, but over the short run these flows of hot money are likely to turn around and thus generate pressure on CEE currencies. By year-end, however, we project somewhat better exchange rates versus the euro again. Impact on the bond and equity markets Whilst the declines in yields on most CEE government bonds reflect the positive side of the global liquidity supply, the equity markets are being hit more by negative sentiment on the Emerging Markets. Discussions about a change in the Fed s policy will have a detrimental impact on the CEE markets as well. Initially, the stock markets will thus suffer though a period of corrections, but conditions should then improve towards the end of the year in 213 as economic expectations begin to brighten up. For government bonds, the negative impact of international capital flows is balanced out against positive developments in domestic interest rates. Russian government and corporate bonds offer attractive potential for returns over a 3-12 month horizon. Peter Brezinschek CEE integrated in global sentiment* Sep-12 Dec-12 Mar-13 Jun-13 Hungary Russia Turkey * yields of 1y LCY T-bonds Source: Bloomberg Recommendations 1 - stock markets Indices Buy BIST Nat. 1 Hold ATX Sell Sectors BUX, WIG2, PX, MICEX, BET, CROBEX1 Overweight Consumer Staples, Pharmaceuticals Underweight Basic Materials, Energy Equities Buy RHI EUR Target price: EUR 32.5 Flughafen Wien EUR Target price: EUR 54. Netia PLN Target price: PLN 5. Komercni Banka CZK 3,49 2 Target price: PLN 4,4 Magnit RUB 9,14 2 Target price: RUB 14,944 Recommendations 1 debt markets LCY bonds Buy PLN, RON, RUB 1y T-bonds Eurobonds Poland EUR 4.5%/22 Buy Lithuania EUR 4.85%/18 Corporate bonds Sell Halyk Bank 7.25% due 217 Alrosa 8.875% due 22 Buy Gazprombank 6.25% due horizon: end 3rd quarter the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June 213 Source: Raiffeisen RESEARCH 3 rd quarter 213 3

4 s Real GDP (% yoy) Countries e Consensus 214f Consensus Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo n.v. 3. n.v. SEE Russia Ukraine Belarus CIS CEE Turkey Austria Germany Euro area Source: Thomson Reuters, Consensus Economics, Raiffeisen RESEARCH Current account balance (% of GDP) Countries e 214f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo SEE Russia Ukraine Belarus CIS CEE Turkey Austria Germany Euro area Gross foreign debt (% of GDP) Countries e 214f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo SEE Russia Ukraine Belarus CIS CEE Turkey Austria n.v. n.v. n.v. n.v. Germany n.v. n.v. n.v. n.v. Euro area n.v. n.v. n.v. n.v. General budget balance (% of GDP) Countries e 214f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo SEE Russia Ukraine Belarus CIS CEE Turkey Austria Germany Euro area Exchange rate EUR/LCY (avg) Countries e 214f Poland Hungary Czech Rep Slovakia euro euro euro euro Slovenia euro euro euro euro Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo euro euro euro euro Russia Ukraine Belarus Turkey Austria euro euro euro euro Germany euro euro euro euro USA Consumer prices (avg, % yoy) Countries e 214f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo SEE Russia Ukraine Belarus CIS CEE Turkey Austria Germany Euro area Public debt (% of GDP) Countries e 214f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo SEE Russia Ukraine Belarus CIS CEE Turkey Austria Germany Euro area Ratings 1 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- Ba1 BBB+ Croatia BB+ Ba1 BBB- Bulgaria BBB Baa2 BBB- Romania BB+ Baa3 BBB- Serbia BB- not rated BB- Bosnia a. H. B B3 not rated Albania B+ B1 not rated Kosovo not rated not rated not rated Russia BBB Baa1 BBB Ukraine B B3 B Belarus B- B3 not rated Turkey BB+ Baa3 BBB- Austria AA+ Aaa AAA Germany AAA Aaa AAA 1 for FCY, long-term debt 4 3 rd quarter 213

5 s Exchange rate forecast Countries 2-Jun 1 Sep-13 Dec-13 Jun-14 vs EUR Poland Hungary Czech R Croatia Romania Serbia Albania vs USD Russia Ukraine Belarus Turkey EUR/USD : p.m. (CET) 2y LCY yield forecast Countries 2-Jun 1 Sep-13 Dec-13 Jun-14 Poland Hungary Czech R Croatia Romania Russia Turkey Austria Germany USA : p.m. (CET) Expected yield change Poland Hungary Czech Rep. Romania Bp-change of gov. bond yield in next 3 months Stock market indicators Germany USA Earnings growth Price/earnings ratio 13e 14f 13e 14f ATX 18.9% 8.3% WIG % 4.1% BUX 4.4% 1.7% PX 1 2.7% 8.9% MICEX -.8% 4.1% BET 14.6% 1.9% CROBEX1 1.5% 5.6% BIST Nat % 6.4% Czech Rep. (PX): excl. Orco Property Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH Key interest rate forecast Countries 2-Jun 1 Sep-13 Dec-13 Jun-14 Poland Hungary Czech R Romania Russia Turkey Euro area USA : p.m. (CET) 2 25bp cut to 4.25% on 25 June 213 5y LCY yield forecast Countries 2-Jun 1 Sep-13 Dec-13 Jun-14 Poland Hungary Czech R Croatia Romania Russia Turkey Austria Germany USA : p.m. (CET) Yield structure Poland Hungary Czech Rep. Romania Bp-spread between 1y and 3m maturity Stock market forecasts Germany USA Index estimates 2-Jun 1 Sep-13 Dec-13 Jun-14 ATX 2,32 2,33 2,55 2,55 WIG 2 2,298 2,27 2,5 2,52 BUX 18,739 18,3 2,8 2,5 PX MICEX 1,297 1,26 1,45 1,45 BET 5,328 5,3 6, 6, CROBEX1 1,4 98 1,8 1,8 BIST Nat. 73,462 8, 85, 86, :59 p.m. (CET) In local currency 3m money market rate forecast Countries 2-Jun 1 Sep-13 Dec-13 Jun-14 Poland Hungary Czech R Croatia Romania Russia Turkey Euro area USA : p.m. (CET) 1y LCY yield forecast Countries 2-Jun 1 Sep-13 Dec-13 Jun-14 Poland Hungary Czech R Croatia Romania Russia Turkey Austria Germany USA : p.m. (CET) LCY changes vs. EUR (% qoq) 1 RUB TRY PLN RON USD CZK HUF Jun 213 in comparison to 1-Apr 213 Source: Bloomberg Expected index performance 2% 15% 1% 5% % -5% ATX WIG 2 BUX PX MICEX Sep-13 Dec-13 Source: Raiffeisen RESEARCH BET CROBEX1 BIST Nat. 1 3 rd quarter 213 5

6 Asset allocation - performance Tough times on the CEE equity and bond markets in Q2 213 Polish equity market confirms its catch-up potential Successful financing with Czech LCY bonds Benchmark performance matched Sum of last quarter 1 RBI portfolio (in EUR) -6.24% Benchmark (in EUR) -6.24% RBI outperformance (in EUR).% by weighting of equities vs. bonds.6% regional equity weightings -.3% weighting of EB vs. LCY bonds.% country weightings of LCY bonds -.4% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% 1 * 21 March June 213 EB...Eurobonds Period 1: 21 Mar Apr 213 RBI portfolio (in EUR) -1.26% Benchmark (in EUR) -1.32% RBI outperformance (in EUR).6% by weighting of equities vs. bonds.% regional equity weightings.6% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds Period 2: 23 Apr May 213 RBI portfolio (in EUR) 3.4% Benchmark (in EUR) 3.41% RBI outperformance (in EUR) -.1% by weighting of equities vs. bonds.6% regional equity weightings -.8% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds Period 3: 28 May Jun 213 RBI portfolio (in EUR) -8.17% Benchmark (in EUR) -8.12% RBI outperformance (in EUR) -.5% by weighting of equities vs. bonds.% regional equity weightings -.1% weighting of EB vs. LCY bonds.% country weightings of LCY bonds -.4% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds The second quarter was marked by difficult market conditions, which we weathered well with a sideways movement compared to the benchmark. The modest underperformance of 7bp from Q1 was thus conserved. For Q2 as a whole, our general stance on riskier investments remained neutral. In terms of equities, Poland was overweighted for almost the entire period, with the initial focus on the solid fundamentals compared to its peers. After this position was temporarily shifted to neutral in the second half of the second investment period, the positive reporting season results prompted us to return to overweighting. All in all, this resulted in outperformance of just about 2bp. Underweighting Czech stocks generated a neutral result over the quarter, with modest outperformance registered in the second period. In our view, Romanian shares were trading at an unjustified discount: the ensuing overweighting in the first period was rewarded with outperformance of just over 1bp, but it was not possible to hold this gain for long. The underweighting of Russia due to correlation with the slack oil price development was particularly successful in the first period. Within the LCY bond segment, financing from low-yielding Czech bonds was maintained in all the periods, generating outperformance of almost 5bp. The overweight positions on Russia, Turkey and Poland yielded underperformance, but these were partially offset from the second half of the second period by the successful overweight on Romania. Performance Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 RBI-Portfolio Outperformance (r.h.s.) Stefan Theußl in percentage points 6 3 rd quarter 213

7 Asset allocation - total portfolio Markets in CEE begin consolidation after a turbulent quarter Equity markets in CEE to move sideways over the short run, but have upside potential by year-end Economies in the CEE core countries should profit from the anticipated recovery in the Euro area Neutral weighting of equities versus bonds The complex picture seen in the recent past is well illustrated on the one hand by the stock market in Warsaw (Poland), which still looks attractive compared to its peers, and on the other hand by the battered stock market in Moscow (Russia). The performance of some of the most important indices in CEE lagged behind, due to dependence on the gradually unfolding recovery in the Euro area and the convoluted development of the commodity markets (in particular for oil). Since the start of the year, the risk-return profile has not really changed that much, and now investors will probably tend to prefer the developed markets and avoid more volatile ones for the time being. By the end of the year, however, the equity markets in the CEE region which have shown strong deficits in performance should be able to make up the lost ground again. That said, this development is predicated on a recovery in economic activity in the Euro area, which will function as a catalyst for investment in the CEE equity markets that feature quite attractive valuations. In terms of currencies and yields, there should not be any major moves throughout the CEE region in Q3. Yields on 1-year government bonds will mostly stagnate at interesting levels during the third quarter. With prospects of an interest rate cut here and there, we are expecting good conditions for bonds on the whole. Over a horizon to the end of the year, we see some of the equity markets in CEE as offering quite attractive potential for returns. The picture is marred somewhat by the high volatility in these markets and their vulnerability to weak phases in the developed markets in the third quarter, and from the current vantage point this means that an overweight position is not justified. In view of the relatively elevated uncertainty in the CEE markets, we would expect a higher premium on risky assets and consequently we leave these asset classes weighted equally. Within the bond portfolio, we also opt for a neutral position on LCY bonds and Eurobonds in the current environment. Stefan Theußl Risk-return (%) Historic ytd performance in % Historic 1y volatility in % In local currency CEE portfolio weightings Q3 213 LCY-bonds: 4% [ pp] Euro STOXX 5 CTX CEE EB USD: 5% [ pp] WIG 2 BET 1 EB EUR: 5% [ pp] HTX RTS- Index LCY local currency [-], [+] = Over-/underweight versus benchmark [] = no change Source: Raiffeisen RESEARCH Equities: 5% [ pp] Historical volatility & performance (%) Equities 1 Bonds Volatility Performance Volatility Performance Countries EUR LCY EUR LCY EUR LCY EUR LCY Czech Republic Hungary Poland Romania Russia Turkey Croatia CEE MSCI indices Volatility in EUR; 3 months volatility annualised; ytd performance in EUR LCY local currency 3 rd quarter 213 7

8 Asset allocation - bonds CEE asset allocation: Bonds CEE bonds still have some potentials CEE bonds have weathered the latest correction well Currencies mostly expected to move sideways Poland and Romania preferred over Czech Republic Portfolio weightings: bonds* Portfolio Benchmark Difference EB USD 1.% 1.%.% EB EUR 1.% 1.%.% LCY 8.% 8.%.% Czech Republic 17.% 2.% -3.% Hungary 2.% 2.%.% Poland 46.5% 45.% 1.5% Romania 5.% 5.%.% Russia 6.5% 5.% 1.5% Turkey 5.% 5.%.% Croatia.%.%.% * share in percentage points Source: Raiffeisen RESEARCH Historical relative performance* 4.% 3.% 2.% 1.%.% -1.% -2.% Czech Rep. Hungary Poland EUR Romania LCY Russia Turkey Croatia Compared to other EM regions, CEE bonds currently appear more attractive. The downward cycle in interest rate continues in some of the markets amidst sluggish growth and low inflation rates, whereas the first interest rate hikes have already occurred in some of the liquid EM bond markets outside of Europe and the low point in interest rates has been reached in almost all of the others. Within the portfolio, we overweight Poland and Romania, financing these positions by underweighting Czech government bonds. We thus opt for a defensive carry bet. Due to the generally higher volatility, we are neutral on Russia and Turkey, which are both also attractive carry markets. Poland is one of the most attractive CEE markets, thanks to the prospect of another rate cut and the currently weak level of the zloty, and therefore this market should continue to attract foreign capital. The Romanian leu should be able hold its current exchange rate to the euro. Even in an environment of mildly rising yields on German government bonds, the ample scope for lowering interest rates will be able to support Romanian debt securities. On the other hand, rising German yields will be rapidly reflected in Czech government bonds, and we only expect to see very gradual appreciation for the Czech koruna. We are neutral on all other positions, and the weighting of LCY bonds versus hard currency bonds also corresponds with the benchmark. Veronika Lammer * in percentage points, year to date, local currency bonds versus portfolio bond benchmark Expected bond market performance (in %) 3m 6m 9m 12m Countries EUR LCY EUR LCY EUR LCY EUR LCY Czech Republic Hungary Poland Romania Russia Turkey Croatia Not annualised; 1y treasury bond, LCY local currency Source: Raiffeisen RESEARCH 8 3 rd quarter 213

9 Asset allocation - equities Defensive allocation preferred for equities Weak performance for now on the CEE stock markets Positive conditions for Polish stocks Negative risk-return profile for Russian equities Attractive valuation for Romanian stocks The performance of the CEE market diverged from the trends on the developed markets: on the one hand, the large degree of volatility in Eastern European shares gave the impression that they lacked direction, and on the other hand doubts about the economic outlook prompted investors to pull out of risky assets. We do not expect this trend to turn around in the quarter to come, and thus we take positions with lower risk in the portfolio. The valuation of Romanian stocks is attractive, with a projected price-earnings ratio of 8.6; furthermore, they represent a way of diversifying thanks to their low correlation with the other markets in the portfolio. Additional expansive monetary policy measures in Poland should buttress the performance of the stock exchange in Warsaw, and we thus expect outperformance on that market. Based on these considerations, we overweight Polish and Romanian equities. By contrast, the Russian stock market has an extremely poor risk-return profile, and the faltering economic growth will probably also curb performance. Negative factors for the stock exchange in Prague include the falling earnings expectations for Czech companies and the formation of a new government. We consequently underweight Russian and Czech equities by one percentage point each. This stance serves to protect against risk factors from the Euro area peripheral countries and against possible external shocks. Stefan Memmer Portfolio weightings: stocks Portfolio Benchmark Difference Czech Republic 14.% 15.% -1.% Hungary 12.% 12.%.% Poland 26.% 25.% 1.% Russia 39.% 4.% -1.% Croatia 3.% 3.%.% Romania 6.% 5.% 1.% Source: Raiffeisen RESEARCH Historical relative performance* 2% 15% 1% 5% % -5% -1% Hungary Poland Croatia Romania EUR Local currency Czech Republic Russia *in percentage points, year to date, to MSCI CEE, since 21 March 213 Expected stock market performance (in %) 3m 6m 9m 12m Countries EUR LCY EUR LCY EUR LCY EUR LCY Poland Hungary Czech Republic Russia Romania Croatia Not annualised, LCY local currency Source: Raiffeisen RESEARCH 3 rd quarter 213 9

10 Focus on Growth and monetary easing: in pursuit of a delicate balance Due to the weaker economic activity, we further reduced the 213 growth projections for the overall CEE region Monetary authorities in CEE countries moved ahead with a series of interest rate cuts and eased liquidity conditions The risk of excessive monetary easing in the CEE region is cause for more concerns for the markets going forward Investors may decide to sell CEE markets short on the assumption that lower CEE interest rates are not attractive enough ESI CEE vs. Euro area (EA)* May-8 Aug-9 Nov-1 Feb-12 May-13 * ESI CEE - the median of CEE countries included in ESI Source: European Commission, Raiffeisen RESEARCH CEE growth revisions (%)* Q4 Q1 Q2 Q GDP 213 GDP 214 * Raiffeisen RESEARCH CEE growth revisions in quarterly retrospective, GDP volume weighted Source: National Statistics, Raiffeisen RESEARCH CEE inflation revisions (%)* EA CEE Q4 Q1 Q2 Q CPI 213 CPI 214 * Raiffeisen RESEARCH CPI inflation revisions in quarterly retrospective, GDP volume weighted Source: National Statistics, Raiffeisen RESEARCH Q1 213 saw economic growth deteriorate across the CEE region, with nearly all countries reporting weaker GDP results. This slowdown occurred precisely as we had predicted in our special publication Challenging growth outlook issued in December 212. The main problem was decelerating consumption and investment growth, due to the exhaustion of the resources which CEE countries had employed to prop up domestic consumption. The resulting deceleration also revealed the Achilles heel of CEE economies, namely their dependence on exports which account for the larger part of their national economies and weaker demand for their exports from the EU, due to the union s own economic problems. In the case of CIS, another problem was their higher reliance on cyclically-dependent commodity markets, which suffered from global market price volatility. Consequently, slower growth in household income and falling consumer confidence depressed spending and investment activity, prompting a deceleration of GDP growth. At the same time, many CEE governments found themselves unable to take fiscal stimulus measures as many of them did in 29. Fiscal loosening during the crisis years was later reversed with tightening policy while the fast growth in public debt, albeit from relatively modest levels in some cases, undercut government spending flexibility. As a result, CEE economies could not expect any tangible increases in state spending while the governments in Hungary, Romania and a few other countries had to continue with fiscal consolidation, despite the economic slowdown. The discussions about public debt sustainability and the EU fiscal crisis also spoke against fiscal complacency, removing the motivation for one-off spending. Consequently the policy emphasis shifted from fiscal measures to monetary toolkits. Due to the weaker economic activity, we further reduced the 213 growth projections for the overall CEE region by about.5% to 1.5% yoy average growth. The biggest reduction took place in the CIS region with a roughly 1% growth downgrade, while in CE the growth outlook remained relatively depressed. The projection for SEE growth rate was raised slightly to reflect the bottoming out of the recession in a few countries. Altogether, the CEE economic outlook will remain weak this year due to slower investment growth and the delayed recovery in the Euro area, which is suppressing domestic demand and export activity. On a positive note, the CEE inflation outlook remained mostly benign during H1, while slowing economic activity emboldened the central banks to deliver a fair amount of monetary easing starting from Q1. Accordingly, monetary authorities in most CEE countries moved ahead with a series of interest rate cuts and eased liquidity conditions to help ailing their national economies gain some ground. The rate-cutting cycle was especially pronounced in countries where the central banks had previously taken a more conservative policy approach. So far this year the Polish and Hungarian central banks have made bold moves, lowering the key interest rates by a cumulative 15bp and 125bp, respectively, and in Turkey interest rates were reduced by 1bp. Moreover, the easing bias strengthened in Q2, since the Q1 growth results revealed further deceleration in economic growth which increased the risk of recession. Subsequently, the odds turned in favour of more rate cuts in a number of CEE markets and even in markets such as Poland where rate-cutting 1 3 rd quarter 213

11 Special cycle was supposed to come to an end the monetary authorities look more likely to deliver additional rate cuts. Although the easing cycle itself appears justified, the magnitude of the rate cuts and policy loosening are cause for more concerns for the markets going forward. We feel particularly anxious about global market onset and are worried that some countries might abuse monetary tools in their pursuit of more growth. First and foremost, the outlook for global interest rates will be changing to reflect the latest statement by the US Fed, which calls for the start of gradual withdrawal of quantitative easing in the United States. We already saw a knee-jerk reaction from the market, pushing up US Treasury yields by 5bp and triggering reciprocal widening for CEE bond yields. Consequently, the risk of excessive monetary easing in the CEE region will become more pronounced, while tail risks from the US Treasury yields for CEE can increase substantially. Disproportionate reduction of interest rates in the absence of growth can dampen the attractiveness of holding CEE assets and local currency debt. As a result, investors may decide to sell CEE markets short on the assumption that lower CEE interest rates are not attractive enough for them to hold the particular market risk. The resulting increase in sovereign risk will push up local currency yields and could potentially lead to more local currency selling which might trigger spill-over selling in CDS and Eurobond markets of respective countries. With this in mind, despite the fact that there are legitimate reasons for monetary easing in CEE, we remain concerned about disproportionate easing which could potentially have some counter-productive consequences. Furthermore, overly aggressive monetary easing alone may still be unable to guarantee a sustainable boost to economic growth. Unfortunately, many CEE economies are small in size and have limited capacity to grow their domestic markets, which could absorb more domestic supplies. At the same time, the high proportion of exports in the GDP of many CEE countries underscores their strong dependence on external demand for exports from the EU leading economies such as Germany. Even larger markets such as Russia are dependent on highly cyclical commodity markets and this increases their vulnerability to changes in global economic cycle. Since the odds for Euro area economic recovery are not overly bright this year, we are concerned that excessively low interest rates may fail to boost domestic output in a sustainable manner since many CEE producers will find not enough external demand for their products while low interest rates might lead to increased debt leverage and encourage more import consumption, triggering the accumulation of new trade deficits. Although this situation is not our scenario for CEE, we have to point out this risk going forward as we continue to monitor monetary policy response of the central banks in the region. Last but not least, measuring the level of interest rates vs. the 213 economic growth forecast adjusted for inflation, we find fewer cases where the economic slowdown warrants more rate cuts. In Serbia, relatively high inflation and the still large twin deficits are factors working against lax policy whereas the latest rate cut was perceived negatively by investors. By contrast, monetary easing in Poland is merited by the very low inflation readings accompanied by a marked slowdown throughout the real economy. For Hungary we see higher refinancing risk going forward as investors will sell Hungarian assets when interest rates become too low to justify holding HUF risk exposure. Judging from a pure economic perspective, we find very few cases where interest rates are prohibitive for growth while the majority of CEE fall into neutral territory suggesting that current interest rates are adequate for the time being. In Turkey we believe interest rates are too low and policy tightening might be required in future. Gintaras Shlizhyus Public debt impediment Public debt, % GDP (213e) HU excessive debt SI HR SK RS PL CZ UA RO moderate debt BG RU BY low debt Public debt growth, % GDP (28-213e) * public debt growth is cumulative debt increase in % GDP from 28 to 213e, 213e - estimate Source: National Statistics, Raiffeisen RESEARCH Real key rate vs. inflation 213 (%)* * real key rate - key rate end-of-period 213 deflated by 214 inflation forecast Source: National Statistics, Raiffeisen RESEARCH GDP growth deflated by interest rate (%) GDP 213 deflated * 6 4 PL HU CZ HR BG RO RS AL RU TR Inflation, 213 Real key rate, 213 TR tightening may be required neutral BG 2 RO RS RU CZ PL AL easing possible HR HU Projected key rate change, 213 * real GDP growth 213 plus average inflation minus key interest rate eop, Key interest rate net increase , + = increase Source: National Statistics, Raiffeisen RESEARCH 3 rd quarter

12 Austria Economic outlook fosters cautious optimism Real GDP growth (qoq) stagnated in Q1 Economy should have started to expand slightly in Q2 Exports of services support external trade Fuel prices dampen inflation Merely cautious recovery likely PMI Manufacturing Economic Sentiment Indicator* * European Commission Source: Thomson Reuters, Markit, Raiffeisen RESEARCH Services support exports Q1 Q1 Q1 Q Goods exports* *real, seasonally adjusted, Q1 2= Q1 8 Q1 1 Q1 12 Service exports* Following the small decline in real GDP in Q4 212 (-.1% qoq), Austria s economy stagnated during the first three months of 213, in line with our expectations. Activity was negatively influenced by construction and equipment investment, whilst public consumption made a positive contribution to growth. External trade also supported economic growth in Q1, with exports of services once again developing more dynamically than exports of goods. Although the stagnation in Q1 should mark the low point in economic activity, the recovery in the quarters ahead is only expected to be moderate. Accordingly, real GDP is estimated to have grown slightly in Q2 213, marking the first expansion since Q Yet the sluggish development of key leading indicators suggests that the pace of the recovery will be slow. As in other core Euro area countries, these indicators were weak in Austria in the spring and have only recently started to point to improvement again. The EU Commission s economic sentiment indicator deteriorated sharply in March and April and was only able to bounce back mildly in May again. The slump in the manufacturing PMI lasted somewhat longer, but the intensity of the decline was also smaller for this indicator. At the same time, one thing these two indicators have in common is that neither has returned to the long-term average. For 213 as a whole, we project that real GDP will grow at a rate of.5%, with growth in the Austrian economy then probably accelerating to 1.5% in real terms in the following year (214). In the industrial sector, sentiment (industrial confidence) deteriorated again recently. Companies assessment of overall orders and orders from abroad is far lower than the long-term average. Against this background, the disappointing development of industrial production (excl. construction) in Q1 came as little surprise (-.8% qoq). Furthermore, after an increase early in the year, capacity utilisation started to fall again recently, and thus investments going above and be- Key economic figures and forecasts e 214f Real GDP (% yoy) Private consumption (% yoy) Gross fixed capital formation (% yoy) Nominal exports (% yoy) Nominal imports (% yoy) Trade balance (EUR bn) Current account balance (EUR bn) General budget balance (EUR bn)* General budget balance (% of GDP)* Unemployment rate (avg, %, EU definition) Consumer prices (avg, % yoy) Real wages (% yoy) Unit labour costs (% yoy) * state, provinces, municipalities and social security authorities Source: Statistics Austria, Thomson Reuters, Raiffeisen RESEARCH 12 3 rd quarter 213

13 Austria yond the mere renewal of production stock will probably only pick up momentum later, despite the cheap financing conditions. By contrast, the volume of exports (goods) has remained roughly steady for some time, despite the difficult economic conditions in the Euro area, which after all absorbs 52% of Austrian merchandise exports. Due to the simultaneous mild decline in imports of goods, the Austrian trade deficit declined. Looking ahead to the rest of the year, however, the pace of activity in the industrial sector as a whole and in foreign trade is expected to accelerate. In the field of exports, it has been observed that the development of services exports has been considerably stronger than goods exports since mid-211. In 212, exports of goods accounted for around 71% of total nominal exports, and in periods of upturn or downturn the dynamics of goods exports are also known to be higher than that of services exports; consequently, goods exports are a key driving force in economic activity. Since Q3 211, however, the growth rates registered for exports have mostly been driven by services exports, while exports of goods have not supported export growth. In light of the tangible increases in wages and falling inflation, the outlook for private consumption is not bad. Even though consumer confidence has been rather disappointing lately, the above conditions are grounds for some optimism. For example, negotiated wages increased by 2.4% in an annual comparison in May, with workers reporting an above-average increase (+3.4%) and public employees registering a below-average gain (+.3%). Headline inflation (HICP) should continue to fall in the months ahead, coming in at 1.9% for the year as a whole. This trend is likely to continue in 214 (214e HICP: 1.8%). Whereas rising food prices boost perceived inflation, lower fuel prices act in the opposite direction. On balance, the factors mentioned above result in an increase in real wages, which should support private consumption. The same is also true for the development of employment, as 213 should be characterised by a very small increase in overall employment. Consequently, the sharp increase in unemployment (in absolute terms) that has been seen for some time now is a result of the steady increase in the labour force. Matthias Reith GDP: value added by sector Change (% yoy, in real terms) e 214f Agriculture & forestry Prod. of goods/mining Energy/water supply Construction Wholesale and retail trade Transportation Accom. & restaurant trade Information and communication Credit and insurance Property & business services Other economic services Public sector Healthcare, social services Other services Gross domestic product Source: Statistics Austria, Raiffeisen RESEARCH GDP: expenditure composition Change (% yoy, in real terms) e 214f Private consumption Public consumption Gross fixed capital formation Equipment Construction Exports (broad definition) Imports (broad definition) Gross domestic product Source: Statistics Austria, Raiffeisen RESEARCH Contributions 1 to real GDP growth (qoq) Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Private Consumption Public Consumption Investment Stocks External Trade Real GDP 1 in percentage points 3 rd quarter

14 Poland Waiting for the first signs of an economic rebound Polish economy bottomed out in Q1, Q1 growth rate one of the weakest in history Finalisation of interest rates cuts, MPC remains committed to positive real rates Near-term upside risks for EUR/PLN due to global markets repricing End of one-way bets on the local currency bond market Real GDP (% yoy) Real GDP (% yoy) 213e Industrial output (% yoy) Budget balance and public debt e 214f 214f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Economic outlook In Q1, the Polish economy continued to slow down, delivering only.5% growth one of the weakest results in the country s history. Once again, growth was generated entirely by net exports, while internal demand saw a decline of.9% yoy. Although the Q1 result was a bit weaker than our forecasts, we stand by our scenario, according to which the Polish economy hit bottom in the first quarter. A stronger rate of growth should be driven on the one hand by the statistical effects of the low base, and on the other by the more favourable internal and external conditions. Better internal conditions mainly refer to the significantly lower inflation, which helps to generate positive real wage growth, even without any significant improvement on the labour market. In our opinion, this should be enough to deliver 1% growth rates in private consumption and ensure that negative outcomes will not be repeated. Externally, the signs of stabilisation in some European economies and positive perspectives for Germany, raise the prospects for some rebound in exports. This tendency would support a positive contribution from net exports, which so far has mainly been supported by the severe declines in imports rates and not by strong export results. The scenario of a modest economic rebound (to a 1.5% GDP growth rate in Q4 213, and 2.5% growth in 214) reduces the need for further monetary loosening. Although GDP growth will remain below its potential rate until as long as 215, inflation also seems to be nearing its low now, and there may be some modest upward tendency in the coming quarters. As the MPC is still very committed to keeping real interest rates positive, an upward trend in inflation is a strong signal to put an end to the loosening cycle. The MPC itself also noted that the space for further cuts is already very limited. Consequently, the most probable scenario seems to be a completion of the rate-cutting cycle in July at 2.5% and then a relatively long period with a wait-and-see stance, the length of which Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/PLN (avg) USD/PLN (avg) rd quarter 213

15 Poland will mostly depend on how fast both European and Polish economies return to their potentials. Financial market outlook In the first few months of 213 local factors were negative for PLN, such as weak economic conditions and interest rate cuts, but these continued to be outweighed by inflow of capital to the Polish sovereign bond market. The stable increase in foreign investors share of this market, however, also became a risk factor for the zloty due to possible profit-taking. Such a situation occurred in May as speculation about a cutback in QE3 by the Fed drove yields on Emerging Markets higher. As a result of the outflow of capital from the bond market, EUR/PLN broke out of the 1-month range between and increased nearly to 4.3. The move was then hampered by the intervention of the central bank, which once again showed its reluctance to tolerate excessive PLN weakening despite the positive impact of such on the trade balance. As the Fed comes closer to limiting its bond purchases programme and the economic outlook for Euro area (and thus also for peripheral bonds) improves, we see chances that more yield increases will occur on the Polish bond market. Accordingly, the zloty may come again under pressure in the months to come, posing the risk of a temporary spike in the EUR/PLN exchange rate to above 4.3 or even towards 4.4. Such a move, however, should be limited in time and scope given that the initial source of those changes is an improvement in the situation in Euro area and this should also later positively influence the economic situation in Poland. The medium-term outlook for the zloty thus remains positive in our view and should be also supported by an end to the monetary easing cycle. On the sovereign bond market, after a period of excessive interest rate cut expectations, domestic factors seem now to be correctly priced with market interest rate levels suggesting one more cut by the MPC in July (in line with our forecast). In our opinion, the only threat from local factors stems from a deterioration in the fiscal situation in Poland as the government will probably need to revise its budget assumptions for this year and as Poland was not allowed to exit the Excess Deficit Procedure in 213. Fiscal risk as well as the risk of yield increases on benchmark markets will, in our view, be the major factors able to drive Polish bond yields higher in the quarters ahead. Despite that, the Polish bond market should remain attractive to many foreign investors (especially ones with a more long-term investment perspective), because of the limited scope for rises in yields. Moreover, the possibility of NBP interventions to support PLN should hamper an outflow from the bond market. Nevertheless, the days of Poland s safe-haven status driven by inflows to this market now seem to be over. Marta Petka-Zagajewska, Dorota Strauch Exchange rate development Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec EUR/PLN (eop) PLN yield curve (%) Yields as of Jun-13 Yield curve Jun-13 Yield curve Mar-13 Sep-13 Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13Mar-14 Jun-14 EUR/ PLN Cons USD/ PLN Cons : p.m. (CET) Interest rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Key rate Consensus Yield forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 2y T-bond Cons month month Consensus month month y T-bond y T-bond Cons : p.m. (CET) 2 Ask yield 1 5: p.m. (CET) 2 Bid rate 3 rd quarter

16 Hungary Tax hikes limit growth outlook Quarterly GDP growth was +.7% in Q1 213, driven by agriculture and construction Manufacturing industry buoyed by new auto industry capacities Household and corporate deleveraging continues Tight fiscal policy and continuous tax hikes are unhelpful for growth Real GDP (% yoy) Real GDP (% yoy) 213e 214f Industrial output (% yoy, r.h.s.) Public and external debt e Public debt (% of GDP) Gross foreign debt (% of GDP) 214f Economic overview The real economy is emerging from the deep slump experienced last year. In Q1 213, GDP grew by.7% on a quarterly basis, but was still.9% below the Q1 212 level. Agriculture and the construction industry were the main contributors to quarterly growth. After the severe drought last year, there is a good chance that agriculture will continue to be a positive contributor for the entire year. Construction industry statistics are rather promising, featuring over 6% growth in the January-April period propelled mostly by public projects and the very poor base data. Looking ahead, new auto industry capacities and the recently easing trend of electronics industry misery should also turn the manufacturing industry into a positive contributor to growth. GDP is projected to increase in 213, but only by.5% given the numerous factors playing against growth. Households and companies are still in the process of deleveraging, and no turnaround is seen any time soon (i.e. not before 215). This limits consumers spending power and deters investment. While the government s shrewd policies (i.e. curbing inflation with an administered utility price cut) result in real income growth for the population, only a very modest rise in household consumption is expected. The central bank s Lending for Growth programme is a good initiative to ease the refinancing burden for the SME sector, but may be insufficient to kick-start investments. Fiscal policy stimulus is otherwise rather constrained by the obligation to keep the deficit low. This has enabled Hungary to exit the Excessive Deficit Procedure, but is unhelpful for economic growth. Apparently, the government is still looking for some sweeteners ahead of the April 214 elections: additional tax hikes are designed to make some room for pet projects such as the wage hike programme for teachers. But on the other hand the ever-increasing tax burden is damaging economic activity. Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/HUF (avg) USD/HUF (avg) rd quarter 213

17 Hungary 213 GDP growth can be even higher than our.5% forecast if the malaise in the electronics industry comes to an end and if agriculture surprises on the upside. For 214, we expect 1.5% growth helped mostly by a revival in the Euro area. If this suffers further delays, then the performance of the Hungarian economy might not improve. Financial market outlook Moving on a volatile appreciation trend, EUR/HUF traded in a range of 33 and 287 in Q To a large extent, the moves were due to external events, such as a possible reduction of the Fed s asset purchase programme, which undercut risk sentiment, but the rate was also driven to a lesser extent by internal events such as the better-than-expected Q1 GDP data. For Q3, we expect an overall sideways movement for EUR/HUF at about 295, but continue to expect volatility with a trading range of between 285 and 35. Internal events that are expected to move the forint in Q3 will mainly be the continuation of the interest rate reduction cycle as well as political events ahead of the 214 election year. Stronger volatility, however, should mainly occur in the case of external market shocks in our view. Taking a medium-term perspective, we see a rising chance of (moderate) HUF depreciation against EUR. First and foremost, this is due to the assumption that central banks (especially in the USA) will start reducing the enormous liquidity on the market, which will cause a deterioration in risk sentiment, but it is also due to the continuous interest rate reductions in Hungary which could turn out to be too aggressive, depending on the cuts in the coming months. Regarding the rate-cutting cycle, we expect a continuation of the cuts towards 4% in Q3 with only one more 25bp rate cut. Even though inflation is benign, in our view the Monetary Council will start reducing the speed of interest rate cuts. In our opinion, the reason for a more cautious stance lies in the already low risk premium for HGBs, along with possibly rising pressure on EUR/HUF as well as a renewed rise in risk perception. Nevertheless, the risk is skewed towards stronger cuts. If the Monetary Council, decides to continue interest rate cuts at a fast pace, we would expect some stronger pressure on EUR/HUF as a consequence. Originally, yields on the long-end started the quarter with a strong decline from 6.5% to 5% in the 1-year segment in mid-may. But we saw this strong move as overdone, and yields shot back up towards 6.5% again as the US Fed indicated a reduction of its bond purchase programme, before normalising between 5.5-6%. We project yields to remain in the range of % for the third quarter, even though shortterm breakouts towards 6.5% are possible in the case of relevant external events. Zoltan Török, Wolfgang Ernst Exchange rate development Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 EUR/HUF (eop) HUF yield curve (%) Yields as of Jun-13 Yield curve Jun-13 Yield curve Mar-13 Sep-13 Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 EUR/ HUF Cons USD/ HUF Cons : p.m. (CET) Interest rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Key rate Consensus Yield forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 2y T-bond Cons. n.v. n.v. n.v. n.v. 1 month month Consensus month month y T-bond y T-bond Cons : p.m. (CET) 2 Ask yield 1 5: p.m. (CET) 2 Bid rate 3 25bp cut to 4.25% on 25 June rd quarter

18 Czech Republic Cyclical turnaround in the economy Q1 213 GDP data disappointed only at first sight We expect a cyclical economic recovery Political uncertainty after resignation of PM Necas Bond yields increased due to Emerging Market sell-off Real GDP (% yoy) Real GDP (% yoy) 213e 214f Industrial output (% yoy, r.h.s.) Budget balance and public debt e 214f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Economic outlook The Czech economy shrank by 1.1% qoq and 2.2% yoy in Q1, making for six consecutive quarters with negative GDP growth. At first sight, this could be seen as a disappointment: the detailed structure, however, revealed that the only component of aggregate demand which fell on a quarterly basis was inventory investment, as total investment fell by 1.% qoq, but fixed investment grew by.4% qoq. All other components grew on a quarterly basis, especially personal consumption which added 1.6% qoq, despite the VAT hike. We interpret this development as a cyclical turnaround in the Czech economy. In light of the steep fall in Czech GDP in Q1 and the.7% contraction projected for the Euro area, we revised our GDP growth forecast down to -.7%. However, the bottom of the economic cycle has already been reached, and GDP growth should be faster than in the Euro area in the remaining quarters, thanks mainly to a rebound in investments. The other sign of recovery is that the Czech PMI index climbed above 5 points into expansionary territory. Retail sales and industrial output still recorded monthly decreases in Q2, but the trend remains upward, at least in the case of industrial production. Consumer inflation fell to 1.3% in yoy terms in May, confirming the lack of any inflationary pressure. Prime Minister Petr Necas resigned over an aide scandal in mid-june and President Milos Zeman called on former Finance Minister and economist Jiri Rusnok to be interim Prime Minister. However, the political uncertainty prevails since the appointed new PM Rusnok is likely to have trouble winning a vote of confidence in Parliament. As a result, the political uncertainty is expected to prevail over summer. Elections might be held between September 213 (if the Parliament dissolves itself in mid-july) and the regular elections planned for May 214. In the short-term the political instability should only have marginal impact on the economy and the market. But in the medium to long-term the frequent government changes are postponing highly Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/CZK (avg) USD/CZK (avg) rd quarter 213

19 Czech Republic needed structural reforms (incl. pension system, ineffective health care, declining quality of education, relatively high labor costs etc.) and thus are reducing the growth potential of the Czech economy. Regardless of the time of elections we have to calculate with a relaxation of fiscal policy in our forecast and we do so. Especially the Social Democrats that lead the polls and are likely to win (early or regular) elections have a less restrictive fiscal policy in their program. Financial market outlook As we expected, the dataflow in the Czech economy was rather negative in the first half of 213. Consequently, the forecast of the Czech National Bank implied a slightly weaker domestic currency. The CZK exchange rate, however, had anticipated such a development and at the end of H1 213 EUR/CZK was roughly at the same level as at the end of Q The CNB now sees EUR/ CZK at 25.5 at end-213. As we think that the economy has started a slow cyclical recovery, we are slightly more optimistic on CZK. Nonetheless, stronger appreciation will still be hindered by the CNB s verbal interventions. Although we expect a cyclical recovery and faster GDP grow in 214, the economy will still operate below its potential output. The economy will not generate inflationary pressures and short-term interest rates will stay at current levels. We expect that the CNB will start increasing the key interest rate in H If the economic situation worsens again, the CNB will most probably use verbal or even direct FX intervention as a policy tool. Posing negative nominal interest rates by the CNB seems rather unlikely. In Q2 213, Czech government bond yields increased due to a sell-off in the Emerging Markets. Our bond yield forecast was correct, but the reason behind the recent rise in bond yields was speculation about the exit strategy of the US Fed. Looking ahead, such an environment might also lead to higher volatility on the Czech government bond market. In terms of domestic determinants of government bond prices, the position of the Czech government remains favourable. Both the gross and net financing requirement will probably decrease further in 213. Moreover, it seems that budget development might be better than expected in H Inflation expectations remain tame. Domestic demand for the Czech government bonds will probably stay solid. In the 1-year segment, we expect a fair spread over German Bunds of around 5bp. All in all, for Q3 213 we do not expect that Czech government bond yields will move significantly higher from the current levels. On the other hand, we still expect that the trend of Czech government bond yields will head higher, as we assume the economic recovery will continue and fiscal policy will probably turn out to be slightly expansionary in the years to come. Michal Brozka, Vaclav France Exchange rate development Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 EUR/CZK (eop) CZK yield curve (%) Yields as of Jun-13 Yield curve Jun-13 Yield curve Mar-13 Sep-13 Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 EUR/ CZK Cons USD/ CZK Cons : p.m. (CET) Interest rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Key rate Consensus Yield forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 2y T-bond Cons month month month month y T-bond y T-bond Cons : p.m. (CET) 2 Ask yield 1 5: p.m. (CET) 2 Bid rate 3 rd quarter

20 Slovakia Slovakia s industry keeps the economy in the black Domestic economy continues to stagnate, export activity remains the key driver Investment activity reaches lowest point since 26 Labour market development in line with weak macro fundamentals Government must present new measures to maintain the deficit target in 214 Real GDP (% yoy) Budget balance and public debt e 213e 214f Real GDP (% yoy) Industrial output (% yoy, r.h.s.) 214f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) GDP growth slowed to.6% in Q The detailed data merely confirmed that GDP growth is solely driven by export production. Household and government consumption fell by.9% and.6% yoy, respectively. Investment activity continues to decrease owing to uncertainty, but also due to the bad weather in Q We project a rebound in economic activity in H2 213 and further acceleration in 214. There are some signs of an upcoming recovery in the recent data releases from various EU countries, and April retail sales in Slovakia also rose in annual terms. However, the recovery will be too slow to generate new jobs, and unemployment is bound to increase slightly in 213. In 214, GDP growth of 2% could marginally ease the tensions on the labour market. Furthermore, nominal wage growth will only cover inflation. The Slovak government reiterated its aim to achieve a 3% GDP deficit in 213, despite the less favourable developments in the economy. We consider the 213 budget deficit target to be realistic since actual tax revenues (for the first 5 months of 213) seem to be in line with the budget projections. Based on the latest Ministry of Finance macro forecast (from June 213), the rough estimate of shortfalls in tax revenues and social contributions is EUR 43 mn (.7% of GDP) in 214. In addition, a gap of EUR 566 mn was already identified due to less favourable tax collection in February. However, the sum of these two numbers represents an upper estimate of the potential revenue shortfalls in 213 and 214. Therefore, we keep our forecasts for a budget deficit below 3% of GDP in 213 and 214. Juraj Valachy Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Gross foreign debt (% of GDP) EUR/SKK (avg) Euro area membership at EUR/SKK Euro area entry on 1 January rd quarter 213

21 Slovenia Slovenia Fighting the storm Q1 213 GDP proved to be very disappointing Supplementary budget passed as deficit increased significantly Privatisation plans on the agenda Market hiccups are putting considerable pressure on Slovenian yields Q1 GDP proved to be even worse than projected, with a decline of 4.8% yoy and.7% qoq. The composition was equally disappointing, with only the export sector contributing positively to GDP. The worst components were domestic consumption and gross capital formation. All the data point to ongoing deterioration in the economic situation and no quick end to the recession. We therefore lowered our 213 real GDP forecast to -2.5%, with only a very slow recovery possible in H The weak GDP data took a toll on the budget deficit as well. The original deficit target already had to be revised back in April and a supplementary budget was passed. This should increase the budget deficit towards 5.5% of GDP for 213. Additionally, the VAT rate was raised and further austerity measures were introduced. Apart from the implementation of a bad bank that started its work in June, the privatisation of 15 state-owned enterprises is on the agenda. But once again privatisations could turn out to be a political component that makes it difficult to assess how fast and to what extent they will be put through. In addition, it will be difficult to find buyers that are willing to invest in Slovenia at the current phase. Politicians are meanwhile still trying to avoid asking for external financial help from the EU or the IMF. Yields skyrocketed in Slovenia after the situation in Cyprus escalated. As the reaction was overdone, in our estimation, yields then normalised at around 4.5% again. But the market hiccup in June due to external events once again caused a significant rise in yields. This clearly shows how vulnerable the situation for Slovenia is seen by investors. We reiterate, however, that we do not see Slovenia on the brink of a financial collapse or even some form of sovereign bond default. Therefore, we would regard phases of excessive weakening on the bond market (e.g. yields in the 5-year EUR segment of above 5.5%) as buying opportunities. Wolfgang Ernst Real GDP (% yoy) e 214f Real GDP (% yoy) Industrial output (% yoy, r.h.s.) Public and external debt e 214f Public debt (% of GDP) Gross foreign debt (% of GDP) Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/USD (avg) Euro area entry on 1 January 27 3 rd quarter

22 Croatia In the waiting room for economic recovery, even in the EU Struggle with recession continues Unsustainable dynamics in public debt growth Kuna stability above all Appearance of low-cost financing opens up new risks Real GDP (% yoy) e 214f Real GDP (% yoy) Industrial output (% yoy) Current account and FDI inflows e 214f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) Key economic figures and forecasts Economic outlook One half a decade on a downward trend has exhausted the economy, with household consumption and investments accounting for the largest negative contribution. Contrary to the overly optimistic government projection (+.7% yoy GDP growth) our expectations, as well as economic indicators, point to further economic decline. In H2 213, we expect to see a mild recovery thanks to a good tourist season, stabilisation in the European markets and the realisation of some long-announced public investments. As the labour market will continue to be weak even through 214, marked with extremely low employment and activity rates as well as a decrease in real income, household consumption will not be a factor capable of powering the expected modest economic growth next year. The recovery should be primarily based on net exports and on investment. Improvement has been seen in the form of lower external vulnerability as foreign debt stagnates and for the first time ever the C/A reached a surplus in 212. However, this rebalancing mostly reflects the deep and prolonged recession and cannot be considered as sustainable structural rebalancing. A return of goods export to the pre-crisis levels even with the strong decline of shipbuilding, points to small but indicative changes in the structure of goods exports. Therefore, improving competitiveness, reducing administrative hurdles and creating a friendly business environment remain some of the most important challenges. Furthermore, structural reforms in the public sector and, closely related to that, changes in the structure of budget expenditures are still preconditions for achieving sustainable growth. The challenge is to embark on a credible consolidation path whilst safeguarding growth-enhancing expenditures and leaving sufficient room for co-financing with EU funds. Together with delays in much-needed reforms that will cause expenditures to rise, the budget deficit in 213 will be higher than government has planned and as a consequence public debt will continue to rise reaching without guarantees to 6% of GDP e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/HRK (avg) USD/HRK (avg) rd quarter 213

23 Croatia Financial market outlook During the second half of May, a lull on the FX market was replaced by appreciation pressures on HRK. Apart from the usual seasonal trends due to FCY inflows from tourism. HRK found some support in investors repositioning before the planned July EUR-linked bond issue and in stronger bank lending activity, stemming from direct government borrowing (large part for rehabilitation of debts in the health system). The summer months are usually booked for seasonal strengthening of the kuna against the euro, so we would not rule out a decline in EUR/HRK, even as far as below As soon as these factors vanish, EUR/ HRK movements should return to the old upward trend that is supported by a lower inflows of foreign capital, more stringent regulatory requirements (regarding banking provisions for NPLs) and the usual increase of demand for euro towards the end of the year. Higher volatility should not be expected, and the CNB will surely remain consistent in its policy of maintaining a stable exchange rate. The extremely low short-term interest rates as well as the sovereign yields that we witnessed in the previous period can be attributed entirely to market conditions and not to any improvement in fundamentals for the Croatian economy. The upcoming bond issuance together with the seasonal cash outflow from banks due to tourism might cause only a temporary increase in short-term interest rates. After that, it is realistic to expect a return to the old path of the cheap short-term borrowing amid the huge HRK excess liquidity. The review of the yield changes and risk premiums highlight Croatia s increased vulnerability to global developments. This can largely be ascribed to the below investment grade rating and very weak fundamentals, i.e. poor chances of an economic recovery and the significant deterioration in fiscal policy credibility. Therefore, in the case of any increase in global uncertainness such as fears about the Fed moving to scale back QE or insecurity about the outcome of the debt crisis in the European periphery the Croatian sovereign would come under pressure. This is especially important considering the possibility of the shortfall of 213 budget plan, refinancing needs in 214 and the fact that the so called EU halo effect on the financial markets has waned in recent years. Next year will be slightly more demanding as regards bond repayments and accompanying coupons since the maturity of the Eurobond in April of 214 (EUR 5 mn) is closely followed by the local euro issue, worth EUR 65 mn, in June. Therefore, the government will remain active in 214, both in the domestic and the foreign market, while the existing loans to the government from commercial banks and short-term debt resulting from issued T-bills will probably be renewed using the same instruments. Zrinka Zivkovic-Matijevic Exchange rate development Jun-11 Dec-11Jun-12 Dec-12Jun-13 Dec EUR/HRK (eop) HRK yield curve (%) Yields as of Jun-13 Yield curve Jun-13 Yield curve Mar-13 Sep-13 Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 EUR/ HRK Cons USD/ HRK Cons : p.m. (CET) Interest rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Key rate Consensus Yield forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 2y T-bond Cons. n.v. n.v. n.v. n.v. 1 month month month month y T-bond y T-bond Cons. n.v. n.v. n.v. n.v. 1 5: p.m. (CET) 2 Ask yield 1 5: p.m. (CET) 2 Bid rate 3 rd quarter

24 Romania Slow growth in a challenging environment Good performance for exports and industry in spite of fragile external environment Economic activity remains on an upward trend and recovery pace might slightly accelerate in H2 NBR expected to reduce key rate on the back of low underlying inflationary pressures, weak domestic demand Global portfolio rebalancing to shape monetary policy easing process, dynamics of bond prices and leu Real GDP (% yoy) Budget and current account balance Real GDP (% yoy) e Industrial output (% yoy) 213e 214f 214f General budget balance (% of GDP) Current account balance (% of GDP) Key economic figures and forecasts Economic outlook Activity remained on an upward trend in Q1 213, and GDP growth (+.7% qoq, 2.2% yoy) even beat market consensus. According to our in-house estimates, real GDP excluding agriculture may have expanded by.6% qoq in the same timeframe. Surprisingly, despite the fragile external demand, (net) exports were the main driver of economic growth. Domestic demand remained slack, as expected. We anticipate the upward trend to continue in Q2 and real GDP to inch up by as much as.5% qoq. Our call is supported by recent trends in industry and a surge in exports in April, as the favourable developments from Q1 seem to be repeating. At the same time, both consumption and investment appear to have remained sluggish in Q2. We stick to our assessment that the pace of economic recovery might accelerate slightly in H2, on the back of improving activity in Europe, increasing absorption of EU funds and a more expansive monetary policy stance. Available data suggest faster growth in real GDP excluding agriculture compared to our expectations (1.3%), which also implies that real GDP might overshoot our forecast of 2% for this year (assuming a normal agricultural harvest). With favourable performance from exports and slow dynamics in imports (reflecting weak domestic demand), the low levels recorded in Q1 for both the foreign trade deficit in goods (3.5% of GDP) and the current account deficit (.6% of GDP) have not been seen in the last 13 years. This implies lower external funding needs, but net inflows of foreign capital (FDIs, credits) to the private sector (companies, banks) are also very scarce. Public budget execution for Jan-Apr shows weaker-than-planned performance in public revenues, meaning that the government should tighten control over public spending to avoid fiscal slippages. We expect that the government will struggle to keep the budget deficit below 3% of GDP in ESA-95 terms, while slightly missing the cash budget deficit target (2.2% of GDP). The European Commission just released Romania from the Excessive Deficit Procedure e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/RON (avg) USD/RON (avg) rd quarter 213

25 Romania Financial market outlook In the past, the local FX market and bond market has proven to be quite resilient to developments on external markets. However, the situation has changed since local T-bonds were included by JP Morgan and Barclays in their EM local debt indexes and in light of the fact that the share of non-residents now exceeds 2% of total RON outstanding government securities. Hence, prices of RON T-bonds and the RON exchange rate have become more sensitive to changes in investor sentiment on external markets and much more prone to volatile moves. We believe the central bank has maintained its capacity to act in order to avoid large swings in the exchange rate (as it is a net creditor in market operations for the banking sector and has a good control over liquidity conditions in the market, while FX reserves are quite high), but we look for it to be more flexible with regards to exchange rate dynamics. Otherwise, acting aggressively to smooth exchange rate dynamics whatever the source and size of shocks would induce too much volatility in interest rates and yields, which might be costly. We see recent developments induced by global factors in the local market (appreciation for RON and bond prices in April followed by depreciation in May-June) as a facet of such structural changes. We maintain our positive view on RON T-bonds and the leu exchange rate in medium term (next few quarters), but expect increasing volatility to overshadow this trend. On the domestic side, there are several factors which might support local assets. The level of yields is still attractive in a global context, and there is room for central bank to cut the key interest rate (up to 1bp to 4.25%) in the quarters ahead, due to lower inflation and weak domestic demand. We believe part of such a move has already been incorporated in market prices. The government can afford to restrain borrowings in adverse conditions, given that the public debt redemption profile is comfortable and it has a good liquidity buffer (covering 4-6 months of net funding needs). FX reserves are comfortable, allowing the NBR to cover external funding needs if necessary. Moreover, economic growth might surprise on the positive side and we expect the government to avoid major slippages. Altogether, this might result in growing tolerance of foreign investors to the supposedly prolonged negotiations on a new IMF deal or even on a failure to conclude such agreement in the foreseeable future. At the same time, potential portfolio rebalancing by investors at the global level (in the context of QE3 winding down) is seen as the main source of volatility for local bond prices and the RON exchange rate. Provided there are not any sustained increases in risk aversion for Emerging Market assets, we believe sideways moves from our baseline scenario can offer favourable entry points for investors. Also, our baseline assumes that the USL political alliance will survive in the quarters to come. Nicolae Covrig Exchange rate development Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 EUR/RON (eop) RON yield curve (%) Yields as of Jun-13 Yield curve Jun-13 Yield curve Mar-13 Sep-13 Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 EUR/ RON Cons USD/ RON Cons : p.m. (CET) Interest rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Key rate Consensus Yield forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 2y T-bond Cons. n.v. n.v. n.v. n.v. 1 month month month month y T-bond y T-bond Cons. n.v. n.v. n.v. n.v. 1 5: p.m. (CET) 2 Ask yield 1 5: p.m. (CET) 2 Bid rate 3 rd quarter

26 Bulgaria Auspicious start to the year GDP growth at.8% yoy in Q1, slightly above expectations External sector performing well, but still vulnerable to external shocks Domestic demand to be the main source of growth for the whole year Enhancing political stability and promoting growth are needed from the new government Real GDP (% yoy) Budget balance and public debt Real GDP (% yoy) e 213e 214f Industrial output (% yoy, r.h.s.) 214f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Key economic figures and forecasts In Q1, economic growth was slightly better than expected, with a rate of.8% on an annual basis, compared to the.5% forecast for FY 213. Despite the still unfavourable external economic conditions, exports expanded dynamically (11.3% yoy), with this component as the main driving force behind economic growth in Q1. As a result, the trade balance although it remained in negative territory improved by 5% yoy, leading to a relatively small C/A deficit of 1% of GDP. However, the recession in the Euro area continues to weigh on the Bulgarian export sector, and a deceleration in export growth and even negative rates can be expected in the coming quarters. Meanwhile, further improvement of the C/A balance is expected in the summer months, due to seasonal income from tourism, which will lead to a balance of -.7% of GDP for the whole year. In line with our expectations, consumption made a positive contribution to GDP growth. It picked up by.4% yoy in Q1, mainly due to public consumption. Similar dynamics and an improvement in household consumption can be expected in the months ahead. Investment showed an unexpectedly large decrease in Q1, driven by negative changes in inventories. According to preliminary data, net FDI inflow in this period was weak, and implementation of public infrastructure projects decelerated. However, until the end of the year FDI inflow is expected to exceed EUR 1 bn and gross capital formation should rise by around 2%. General elections were held in May. The majority of the votes (about 1/3) were won by the previous ruling party in the previous government, GERB, but a coalition government by the Bulgarian Socialist Party and Movement for Rights and Freedoms was formed, led by Prime Minister Mr. Oresharski (former Minister of Finance, 25-29). The priorities of public policy are unlikely to change significantly, while efforts to improve expectations, enhance political stability, and stimulate growth must be made. A budget deficit of around 2% is forecast for FY 213. Hristiana Vidinova e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/BGN (avg) USD/BGN (avg) Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH 26 3 rd quarter 213

27 Serbia Signs of economic recovery on the horizon Second wave of fiscal consolidation measures underway Public sector reforms are the key priority Monetary policy easing definitely on the cards as CPI drops Renewed rumours about early parliamentary elections depending on the EU decision In light of the still-subdued credit supply, the nice GDP growth (Q1 213 flash estimate: +1.9% yoy) and industry growth have been driven by a rebound in exports, but may be due to base effect as well. Exports of FIAT vehicles spearheaded the growth in exports, followed by chemicals, electrical machinery and oil exports, and along with a recovery in agriculture, exports will be the key economy triggers in 213 (+1% yoy). Upbeat export sentiment along with abundant remittance flows helped to halve the C/A gap, meaning that the government will likely be able to smoothly finance the C/A gap this year. The early signs of an economic recovery, a stable EUR/RSD and falling inflation (Jan-May 213: 2% ytd) also prompted the NBS to kick off a monetary policy easing cycle after one and a half years with a restrictive course. We reckon this framework will remain throughout 213 supported by inflation falling to a single-digit level although it will stay above the targeted range (4%, +/-1.5%). Robust EUR/RSD appreciation in early 213 turned into temporary depreciation, due to the government s failure to sign new deal with IMF, the rapid widening in the budget gap and talks on less liquidity from the Fed. While brisk NBS FX interventions and announcements of anti-crisis measures stabilised EUR/RSD and supported some mild strengthening, there is still downside risk in Q3 213 given the signalled changes in the Fed s monetary policy course. The disappointing budget data for the first four months of 213 prompted the government to pass austerity measures that will result in the budget gap-to-gdp ratio increasing to a maximum of 4.7% (from the initial target of 3.5%) and also include investment incentives to boost growth. Apart from taking some measures (such as public sector wage and pension growth of only.5%) that could be judged as almost being in line with the IMF suggestion (although in a bit softer form), given the deterioration in living standards, the government decided focus on ending the restructuring process of the 175 public companies. Ljiljana Grubic Key economic figures and forecasts Real GDP (% yoy) Real GDP (% yoy) Industrial output (% yoy, r.h.s.) Budget balance and public debt e 213e 214f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) 214f e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/RSD (avg) USD/RSD (avg) rd quarter

28 Bosnia and Herzegovina Falling short of expectations Overall economic outlook still far from a sustainable recovery, despite some rebounds early in the year Downgrade of Euro area GDP forecast led to lower real GDP forecast for B&H Downward revision of real GDP forecast for B&H to +.2% yoy Risks that 213 could be even another recession year for B&H Real GDP (% yoy) Real GDP (% yoy) Industrial output (% yoy) Current account and FDI inflows e 213e 214f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) 214f Key economic figures and forecasts Although the B&H economy saw a respectable expansion in the real sector in early 213, as exports of goods increased by 12.5% and industrial production reported an impressive gain of 7.7% yoy in the first 4 months of 213, the overall economic outlook is still far from a sustainable recovery. Moreover, we had projected these purely statistical base-effect rebounds and already taken them into account in our full-year GDP estimate for 213. The better data outcomes were strongly expected and mostly resulted from the extremely poor dynamics of the past year, which was characterised by severe hydro-meteorological conditions resulting in a slump in industrial production and exports, while in H2 213 we expect serious deceleration of these dynamics. Therefore, the B&H economy will struggle to find its way out of recession in 213 despite the positive developments early in the year. To be precise, after it was confirmed that the Euro area economy reported a stronger-than-expected decline in Q1 213, resulting in a downward revision of the overall GDP projections for the Euro area, we also cut our estimated GDP growth rate for the B&H economy to.2% in real terms. It is evident that household consumption will keep contracting (-.5% yoy), hampered by the ongoing rise in unemployment (new record of 28.1% is expected in 213) and sluggish growth in net wages (+1.9% yoy). At the same time, the strict IMF conditions under the SBA will result in government consumption declining by.3% yoy. Gross fixed capital formation will also not be able to emerge from the negative territory with -2% yoy growth rate, slightly better than in last year due to a stronger impulse in infrastructure investments in Corridor Vc. Exports and imports of goods and services will also reflect negative growth rates of 4.4% and 1.8% yoy, respectively, mostly as a result of the expected slump in H2. Accordingly, as the Euro area economy struggles with the financial crisis we believe that 213 could even bring yet another year of recession for B&H but we would wait for Q2 data before undertaking any further downward revision of our forecast. Ivona Zametica e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/BAM (avg) USD/BAM (avg) rd quarter 213

29 Albania General elections: the aftermath Apparently a convincing win for the opposition in the general elections on 23 June Weak economic growth for 213 External sector remains the main growth driver Expansionary monetary policy and prudent measures aim to stimulate domestic demand Based on the results of general elections of 23 June, it appears that the Albanians decided in favour of political rotation. The left-wing coalition led by former Tirana mayor, Mr. Rama of the Socialist Party, most probably won the elections. Strengthened by the alliance with the Socialist Movement for Integration (LSI), which less than three months ago was part of the existing government, the left-wing coalition looks like they will have the numbers for a strong government. The priorities of the coalition are the introduction of the progressive tax, instead of the current flat tax, which would support an increase in domestic demand, thus revitalising the overall economy. Fighting corruption and reforming the judiciary system would also boost non-residents confidence when it comes to investing in the country. In order to tackle unemployment, the massive introduction of vocational training will be in focus. No significant changes are expected in foreign policy, as EU integration is a common objective. Fair and free elections are the remaining condition for granting Albania EU Candidacy Status. The elections have impacted the economic recovery negatively so far, as most local and foreign investors are in wait-and-see mode. Growth in consumption and private investments has slowed down, but the economy is supported mostly by external and public sector demand. Economic growth in 213 is expected to be almost at the same level of the previous year, with some slight acceleration in H2, reflected in more investments as the political situation become clear. External demand is it expected to be the driving sector, reflecting major investments in transport and energy infrastructure. Fiscal stimulus is expected to have a moderate impact on growth, as there is a need to keep tight control over the high level of public debt. The domestic economy may benefit if the TAP project (Trans Adriatic Pipeline) turns out to be the winner. Monetary policy will play a supportive role in the economy, as the lack of inflationary pressures allows a relaxed policy to be maintained over the medium term. Joan Canaj Real GDP (% yoy) Current account and FDI inflows Real GDP (% yoy) 213e 213e Industrial output (% yoy) 214f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) 214f Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/ALL (avg) USD/ALL (avg) rd quarter

30 Kosovo A few lights at the end of the tunnel Consumption still the main growth driver Successful privatisation of telecom and power distributor Plunge in foreign direct investments expected to reverse Agricultural initiatives to reduce trade deficit Real GDP (% yoy) e 214f Real GDP (% yoy) Budget balance and public debt e 214f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) GDP growth in 212 was disappointing with a 3% increase, driven mainly by public expenditures and private consumption. However, exports and capital formation have ebbed lower compared to previous periods. No change in this trend was seen in Q1 of this year. Private consumption lost some of its drive, but is still perceived as consistent and stable, nurtured amongst other things by slightly higher remittances. Capital formation suffered significantly as foreign direct investments halved in size, due to the uncertain economic climate in the Euro area, from which Kosovo receives most of its foreign direct investment. Half of exports consists of metal ores, and thus exports correlate strongly with global commodity prices. Demand for commodities decreased considerably last year and has only slowly shown signs of recovery in the last quarter. On the other hand, government consumption and investments have not come to a halt, but are continuing at the same speed, mostly focused on infrastructure projects, such as the continuation of the highway to Albania and Serbia. This component will continue to strongly support temporary economic growth with the start of the new highway to Macedonia. Government revenues derive mainly from import taxes and this spring s sales of the state-owned telecom and electricity distributor. Next up is the mining giant Trepça, but this sale is tied to positive development of relations with Serbia, due to the proximity of the location to the border. The balance of payments is characterised by a deficit on the current account, as a result of the high trade deficit, and is financed through the positive capital and financial account, which is driven by remittances. Last year, the capital account suffered from the drop in foreign direct investments, and an increase in remittances only partially slowed the fall. However, this year we believe that both the position of the trade balance and the capital account will improve, also considering the announced subsidies for the agricultural sector. Inflation has remained below 3% throughout the year and will stay near this threshold. Fisnik Latifi Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Unemployment rate (avg, %) Producer prices (avg, % yoy) n.v Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/USD (avg)* * EUR official currency in Kosovo 3 3 rd quarter 213

31 Belarus New days old problems Russian and European slowdown hits exports; weak growth despite domestic stimulus Household consumption and investment supportive as the driving economic forces Large C/A deficit and substantial foreign debt redemptions are a major concern for 213 and beyond Stable currency in H1 213, but BYR depreciation may return as early as H2 213 In Jan-May 213, GDP growth plummeted to 1.1% yoy from a 3.5% yoy increase in Q1, owing to a slump in industrial output (-3.5% yoy) and considerable contraction of 2% yoy in exports, due to weak demand in the major export markets of Russia and the EU. On the other hand, household consumption and investment still recorded strong results and thus remain the main drivers of GDP growth. We anticipate some improvement in growth dynamics in H2 and thus see GDP growth in 213 at 2% much lower than the official forecast of 8.5%. Inflation was below 1% per month in Apr-May, allowing the National Bank to reduce the key rate from 3% to 23.5%, in line with the 13-15% year-end target. The trade balance deteriorated substantially to a small surplus of USD.3 bn in Jan-Apr 213 vs. a surplus of USD 2.4 bn in Jan-Apr a year ago. The C/A deficit remains a major concern: early this year it continued to widen and reached USD 2.4 bn in Q This was mainly triggered by sizeable payments to foreign direct investors, which were however reinvested in the country in the main. Despite our expectations of a continuation of the previous year s depreciation trend, the Belarusian rouble has held steady in H1 213, thanks in part to the strong inflows of BYR deposits. The level of FX reserves also remains stable at slightly above USD 8 bn, mostly due to significant support from domestic FX borrowings and EurAsEC funding. So far, the authorities have postponed the placement of a sovereign Eurobond on account of deteriorating access to international bond markets. We expect a further increase in depreciation pressures on BYR in H2 213 (more than 1% weakening possible by year-end), stemming from the peak in external debt redemptions and the weak foreign economic position of the country, which is additionally burdened by excessively high consumption and import demand. We take a similar position as the IMF and see wage growth restraint, maintenance of exchange rate flexibility and limitation of excessive FX lending growth as the tools to master the challenges facing the economy this year. Mariya Keda, Andreas Schwabe Key economic figures and forecasts Real GDP (% yoy) Real GDP (% yoy) 213e Industrial output (% yoy) Current account and FCI inflows e 214f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) 214f Source: Statistical Committee of the RB, Raiffeisen RESEARCH e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/BYR (avg) 3,142 3,894 3,951 6,9 1,7 12, 13,4 USD/BYR (avg) 2,136 2,793 2,979 4,975 8,337 9,2 1,3 3 rd quarter

32 Russia Limited scope to fight slowdown Economic growth losing pace, GDP growth to drop below 3% yoy in 213 With limited fiscal stimulus, monetary solutions are very likely Rouble entered a weaker phase on domestic and external factors, volatility to continue in H2 OFZ on its way to higher yields Real GDP (% yoy) Budget and current account balance e Real GDP (% yoy) Industrial output (% yoy) 213e General budget balance (% of GDP) Current account balance (% of GDP) 214f 214f Economic outlook Recent statistical data point to an ongoing slowdown in Russian economic growth. In Q1, investment in capital formation dropped for first time since 29, industrial production continued to stagnate and consumption also saw weaker performance. Q2 data should have brought better results, taking into account the fading impact of the high base effect from Q1, but things did not work out that way. In April, investment declined again, but at the same pace as in recent months, while consumption growth remains stable, but is somewhat weaker compared to Q Taking into consideration that the worse performance of investments might already reflect less public spending, we do not see much room for investment dynamics to improve in near future. As for consumption, against a backdrop of lower growth rates in nominal and real wages as well as the start of slight deceleration in retail lending, we expect retail sales to expand at a moderate pace. We revise down our forecast for GDP in 213: we now expect a more significant deceleration of GDP, i.e. from 3.4% growth in 212 to only 2% growth in 213 (vs. 3% in the previous forecast). The revision is based on the concern that slack in the economy is already low and that without a leap forward in investment activity there are structural restrictions to further growth. Earlier we had no significant evidence to prove this hypothesis, but the disappointing results at the beginning of Q2 increased the probability of slower economic growth. Deterioration in the key macro indicators fostered an in-depth discussion of the need to stimulate economic growth via key interest rate cuts by the CBR. With the introduction of the fiscal rule (extra budget expenditures may not exceed planned revenues by more than 1% of GDP) and Minfin s adherence to medium-term fiscal consolidation goals, there is not much room for fiscal stimuli, so in our view monetary stimuli will be preferred despite their limited potential impact on the Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Average gross wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/RUB (avg) USD/RUB (avg) Basket/RUB (avg) rd quarter 213

33 Russia economy. We expect CPI to drop from the current high of 7.4% back closer to the upper boundary of the CBR s target by the end of the year, which in our view allows for cuts in key rates in the near future (at least by 5bp in July-September). Financial market outlook After a tranquil period for the rouble exchange rate at the beginning of this year, the second quarter became much bumpier. In Q1, the rouble traded at less than 35 to the dual currency basket (55% USD and 45% EUR) on average, but then in Q2 the currency depreciated to around 36. The first hit came in early April, when the oil price usually a major driver of the rouble rate lost about USD 1 and briefly touched USD 1/bbl. The second hit in June was essentially unconnected to oil prices: it was triggered by global repricing of EM assets, but amplified by concerns that the Russian authorities may use a weaker rouble as a remedy for the ailing economy. However, so far the rouble remains inside the currency corridor of 7 roubles (31.65 to 38.65). The closer the exchange rate gets to the corridor border, the more the central bank will intervene. However, interventions will not change the direction, but only slow down the dynamics. With oil prices expected to remain significantly above USD 1/bbl in H2, we see the rouble fundamentally well supported. We stand by our view of a moderate depreciation trend for RUB and see the current weak levels as potential entry points for bold investors. At the same time, we must note that RUB risks in H2 are clearly biased towards a weaker rouble. As we expected, due to the negative sentiment (expectations of QE tapering) on the global market in the second half of Q2, OFZs were under selling pressure that pushed yields on 1-year bonds significantly up (+1bp to levels seen at the beginning of Q2). Besides external market sentiment, the correction for OFZ was triggered by higher-than-expected CPI (which reached 7.4%, a record high in the post-crisis era), which left the CBR unable to cut o/n REPO rates. We would point out that foreign investors were active buyers of OFZ in the first half of Q2, expecting the CBR to ease credit policy in Q2 which has not happened. In Q3, we expect global markets to remain volatile as the QE roll-back issue is unlikely to fade away. Another source of risk may be concerns about the US debt ceiling, which were postponed from May to October-November due to technical factors. As of end-q2, OFZs have been hit hard by the liquidity squeeze discussion surpassing the 8% mark in yields. This shows that OFZs are very sensitive to negative external market sentiment, furthermore higher-than-expected CPI is influencing negatively from domestic factors. Assuming our base case, i.e. that sentiment remains subdued in Q3, government bonds will trade in the range of , which makes 1y OFZs attractive for EUR and USD based investors. Maria Pomelnikova, Denis Poryvay Exchange rate development Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec USD/RUB (eop) Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13Mar-14 Jun-14 EUR/ RUB Cons USD/ RUB Cons RUB basket : p.m. (CET) RUB yield curve (%) Yields as of Jun-13 Yield curve Jun-13 Yield curve Mar-13 Sep-13 Interest rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Key rate Consensus Yield forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 2y T-bond Cons. n.v. n.v. n.v. n.v. 1 month month month : p.m. (CET) 2 Bid rate 5y T-bond y T-bond Cons. n.v. n.v. n.v. n.v. 1 5: p.m. (CET) 2 Ask yield 3 rd quarter

34 Ukraine Living on the edge Muddling through continues, but might become increasingly difficult amidst global risk repricing With no reforms in sight, a deal with Russia is likely to soon emerge as the main backstop scenario Economy in recession for three quarters, but growth may return in H2 213 UAH forecast revised to stable, backed by a strong intent to keep peg until 215 presidential elections Real GDP (% yoy) Real GDP (% yoy) 213e 214f Industrial output (% yoy) Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH Budget balance and public debt e 214f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Source: National Bank of Ukraine, Raiffeisen RESEARCH Economic outlook GDP fell by 1.1% yoy in Q1 213 amidst a weak global environment and tight domestic policies aimed at sustaining the fragile currency peg. At the same time, the decline was not as dramatic as in Q4 212 (-2.5% yoy), and a.6% qoq increase (seasonally adjusted) was registered. So the Ukrainian economy may have already passed through the trough and modest acceleration is possible in H2. However, with the external environment not likely to turn supportive in the near term and the potential for large-scale domestic economic stimulus constrained by tight public finances and exchange rate peg fragility, we expect GDP to grow 1% at most this year, followed by only slight improvement to 1.5% in 214. The inflation figures remain extremely low (-.4% yoy as of end-may) thanks to stable food prices and frozen administrative tariffs. With a relatively good harvest expected this year and no imminent adjustments in utility tariffs (for political reasons), we see (official) inflation remaining extremely low in 213 (2-3% yoy), while resurgence in food prices (but still stable tariffs) will boost inflation to 5-6% next year. On the policy front, the authorities are sticking to their muddling through approach, facilitated by improved access to global debt markets and fading depreciation expectations. As a result, we now no longer expect any sensible economic reforms to occur before the next presidential elections in early 215. However, given the large external refinancing needs, persistently high C/A deficit and weak reserve position, we strongly believe that the muddling through approach will not survive the next 18 months and will eventually have to be replaced by the backstop option. In our view, the closer it comes to the elections, the lower the chances of an IMF programme. Thus, the agreement with Russia looks like the most realistic scenario in our view, given the authorities strong Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/UAH (avg) USD/UAH (avg) rd quarter 213

35 Ukraine determination to keep the economic and political situation stable until the end of the current political cycle. Financial market outlook Encouraged by improved access to global debt markets and fading depreciation expectations, the authorities continued to peg the hryvnia to the US dollar in H Ukraine has benefited vastly from the low interest rate environment across the globe, which prompted yield-hungry investors to jump into high-risk credits. The sovereign has raised USD 2.25 bn via Eurobond issuances so far in 213, while Ukrainian corporates tapped the market with issuance of USD 4 bn. In addition, the Ministry of Finance raised nearly USD 2.4 bn of FX in the local debt market, mostly tapping the excess FX liquidity of state-owned banks. As a result, the authorities smoothly serviced the USD 2.5 bn in sovereign external debt redemptions due in Jan-Apr, and the NBU s gross FX reserves stabilised. At the same time, fundamentals did not show much improvement. First, after surging to 8.5% of GDP in 212, the current account deficit in Q1 213 shrank only slightly, falling by 15% in comparison to the same period of 212. The country s FX reserve position is still extremely fragile covering less than 3 months of imports and nearly 4% of short-term external debt (by residual maturity). Nevertheless, as said, the incumbent administration looks more and more determined to keep UAH stable until the presidential elections in 215. Apparently, the political doctrine of a stable exchange rate still outweighs the clear economic rationales for introducing a more flexible exchange rate regime. Hence, in our baseline scenario we now see UAH roughly stable vs. USD (with fluctuations not exceeding 2-3%) for yet another two years. However, the success of these policies mainly depends on Ukraine s access to external borrowing, which should not be taken for granted. Ukraine remains one of the weakest credits in the EM universe and thus is hit particularly hard by risk repricing for example due to the reversal in monetary regimes in DM countries, as seen in early June. Thus, it might happen that muddling through will no longer work at some stage in the next two years (more likely in the course of 214 than in 213). In this case, a step-up in administrative pressures (i.e. new restrictions on imports and FX market operations) looks highly possible, but will not likely be sufficient for a prolonged period. The key assumption behind our forecast is that, given the high political stakes, the authorities will do their best to keep the currency stable until the end of the election campaign. Apart from the negative impact on growth performance and external accounts, a policy of this kind implies high tail risks going forward. In particular, even if the peg is sustained for the next two years, the subsequent adjustment could turn out to be extremely painful, reviving memories of the 28 crash and the economic collapse in Belarus in 211. Dmytro Sologub, Andreas Schwabe Exchange rate development Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec USD/UAH (eop) Inflation outlook e Unemployment rate (avg, %) Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 EUR/ UAH Cons USD/ UAH Cons : p.m. (CET) Consumer prices (avg, % yoy) Current account and FDI inflows 214f Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH e 214f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) Source: National Bank of Ukraine, Raiffeisen RESEARCH 3 rd quarter

36 Turkey Vulnerabilities in the spotlight While socio-political tensions should only have a limited impact on Turkey s medium-term outlook the major risk stems from the likely winding down of US monetary accommodation and its implications for capital flows Most of the significant spread tightening reversed due to QE3 wind-down risks, general EM weaknesses and political risks Tight liquidity conditions to maintain pressure on the short-end of the curve, limiting further TRY depreciation risks Real GDP (% yoy) e Real GDP (% yoy) Industrial output (% yoy) 213e 214f Budget and current account balance 214f General budget balance (% of GDP) Current account balance (% of GDP) Economic outlook After roughly one decade of discounting political risks, market participants currently care all the more. The fluid environment, however, does not allow any premature conclusions to be drawn from the nationwide socio-political tensions yet. From a market perspective, eventually, the damage to Turkey s medium-term outlook should be limited. While tourism may have already suffered, business and market confidence will be undermined only if the heightened political uncertainty lingers for an extended period of time (not our baseline). With FDI likely to remain subdued in 213, portfolio inflows and short-term borrowing (both very sensitive to shifts in global sentiment as we have recently seen) are still the main sources of external financing (and of concern). At the same time, financing needs declined thanks to the significant narrowing of the C/A deficit in 212, albeit this occurred with an even more pronounced deceleration in real GDP growth. We would like to stress that the major risk for both the lira markets and the domestic economy stems from the likely winding down of monetary accommodation in the USA and its implications for capital flows. Another argument for revising down our forecasts for the Turkish economy would be the recent clouding of the EMU growth outlook, but the better-than-expected Q1 213 GDP data prompt us to stick to our assumptions on the Turkish real economy: Following a weak reading for Q4 212 (1.4% yoy), economic activity in Q1 213 came in considerably better than the 2.2% yoy consensus call. GDP expanded by 1.6% qoq after flat growth in the Oct-Dec 212 period, leading to 3.% yoy growth in real terms. The major driver was private consumption, while net exports contributed nothing, after six consecutive quarters as the main contributor. With regards to Q2, credit growth above 2% yoy in April and May as well industrial production data for April mark a good start to Q2. This supports our assumption of accelerating GDP growth in the course of this year. Key economic figures and forecasts e 214f Nominal GDP (EUR bn) Real GDP (% yoy) Industrial output (% yoy) Unemployment rate (avg, %) Nominal industrial wages (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) General budget balance (% of GDP) Public debt (% of GDP) Current account balance (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/TRY (avg) USD/TRY (avg) Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH 36 3 rd quarter 213

37 Turkey Financial market outlook Since the announcement by the ECB of its OMT facility back in September, ongoing capital inflows boosted the lira and asset prices, with interest rates and risk premia declining to record lows. The adverse balance of recent events, however, has reversed most of the significant spread tightening, while the deterioration of market sentiment vis-à-vis Turkey already started in early May, when the long-expected correction across Emerging Market assets set in. The earlier-than-expected announcement of the Fed s QE exit plans at the end of May, however, was the main trigger for the acceleration of capital outflows from Turkey (around USD 8 bn in the course of May). The local political unrest which erupted on 31 May just made things worse, pushing USD/TRY higher and leading bond yields rise considerably. Share prices have plunged as well, while CDS spreads have widened. After the TCMB delivered another rate cut with the tailwind of Japanese QE in early April to stem TRY appreciation (!), the recent upward trend in US Treasury yields ultimately resulted in a change in the TCMB s monetary policy stance. In the context of its flexible monetary policy framework, liquidity was tightened significantly in early June, pushing funding costs back to the upper end of the 3.5%-6.5% o/n interest rate corridor and reducing the amounts provided via the 1-week repo auction at 4.5% (policy rate). In addition, the TCMB conducted announced intraday foreign exchange selling auctions with the first series of USD selling auctions on 11 June proving adequate to reverse some of the recent FX losses. However, TRY markets came under severe pressure again following confirmation of a likely end to QE3 on 19 June. While we are now much more cautious on Turkish markets, we expect that the TCMB will continue to maintain financial stability given its proven track record and its approximately USD 15 bn in FX reserves. Overall, the increase in core yield volatility is the main near-term driver of Turkish credit. Generally, we expect periods of temporary stabilisation and renewed market stress to spell each other in the short run. In any case, we would like to see where the current repricing of Turkish risk will land before any recommendation to enter the local debt market. The reasons are as follows: we expect the currency-supportive liquidity tightening set-up to prevail in the near future, which does not bode well for bond prices. Whilst they do not figure in our baseline scenario, rate hikes i.e. the widening of the o/n interest corridor (i.e. via an increase in the upper boundary) cannot be ruled out completely if Turkey has to adjust its rates to a stronger-than-expected rise in US Treasury yields or the country-specific risk premium. In the longer term, however, we expect Turkish markets to calm down, offering favourable entry opportunities. We still believe that Turkey s intact medium-term outlook (growth advantage vs. DM) in conjunction with its full investment grade status will redirect significant portfolio flows to the lira markets. Stephan Imre Interest rate forecasts Yield forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Key rate Consensus Exchange rate development Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 USD/TRY (eop) TRY yield curve (%) Yields as of Jun-13 Yield curve Jun-13 Yield curve Mar-13 Sep-13 Exchange rate forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 EUR/ TRY Cons USD/ TRY Cons : p.m. (CET) 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 2y T-bond Cons month month month month : p.m. (CET) 2 Bid rate 5y T-bond y T-bond Cons : p.m. (CET) 2 Ask yield 3 rd quarter

38 Sovereign Eurobonds Chasing US Treasuries Outlook for CEE Eurobonds deteriorates due to rising US Treasury yields In primary markets pricing conditions may deteriorate in Q3, so overall placement activity might suffer CEE region appears less ready to withstand negative pressures from global risk re-pricing We recommend defensive positioning by reducing portfolio duration and increasing holdings of higher rated sovereigns EMBIG USD performance* Index Change (%) Spread (bp) 2-Jun 1 qoq YTD 2-Jun 1 qoq PL (A-) LT (BBB) BG (BBB) RU (BBB) TR* (BBB-) HR (BB+) RO (BB+) HU (BB) RS (BB-) UA (B) BY (B-) Europe* Africa Asia Mid East Latam Global Inv.grade BB B closing prices 5: p.m. (CET) * TR - Turkey Fitch rating, Europe - CEE, qoq - quarter-onquarter, YTD - year-to-date Source: Thomson-Reuters, Raiffeisen RESEARCH Market comment The outlook for CEE Eurobonds has deteriorated markedly, due to rising US Treasury yields. The main catalyst for the market turnaround was Fed chairman Bernanke s testimony in May in which he stated that the stronger economic outlook for USA economy might prompt the Fed to start scaling back Quantitative Easing (QE) as early as this year. UST 1y yields reacted accordingly, widening by some 5bp whereas the aggregate yield for CEE Eurobonds derived from the EMBIG USD index surged by 65bp. The resulting move corresponded to a 28-bp spread widening for the EMBIG Europe on a net basis adjusted for the duration mismatch. We note that the rating outlook for CEE has changed to negative due to multiple sovereign rating and outlook downgrades in the last six months. Primary market Primary market activity fell nearly twice as much in Q2 as in Q1. Cumulative gross issuance by CEE sovereigns has amounted to USD 22.5 bn since the start of 213, with about 67% of all placements occurring in Q1. However, the cumulative volume of primary market placements was only 1% lower compared to the same period of one year ago. Still, we are waiting for Russia s sovereign jumbo issue in July which, if carried out, will boost Q2 issuance to near Q1 levels. Going forward, Russia and Serbia have already announced their plans to issue new bonds in near future, and we expect more placements from Turkey, Poland, Romania, Ukraine and, possibly, from a few other CEE countries. Nevertheless, much will depend on market pricing conditions, which may deteriorate in Q3 and thus overall placement activity may suffer as well. CDS spreads (bp)* Jun-11 Dec-11 Jun-12 Dec-12 CEE 5Y CDS DE 5Y CDS (r.h.scale) * CEE - average CDS spread for the region Source: Bloomberg Market outlook The worsening outlook for the US Treasury market (UST) will reciprocally generate an increase in yields in Emerging Markets which have enjoyed fairly tight spreads since mid-212. In the recent past, the market has been heavily overweight in EM risk and especially in local currency EM risk. Thus, CEE Eurobond spreads took full advantage of the earlier conducive monetary conditions in the Western hemisphere. As a result, the UST tail risks for CEE market have grown since the start of 213 leaving regional debt susceptible to a possible sell-off even assuming no change in fundamentals and/or ratings. Meanwhile, many CEE countries took the advantage of lower spreads for granted while their fundamentals remained little changed and, in some cases, even deteriorated during the last year. Consequently, today the CEE region appears less ready to withstand negative pressures from global risk re-pricing. We feel especially concerned about slow economic growth putting additional pressure on government finances, thus lessening the impetus for more fiscal discipline in some CEE states. Although the absolute debt levels of many CEE countries look sustainable on paper, the speed of accumulation of new public liabilities in the recent past appeared unsustainable in many CEE. This situation prompted sizable increases in public debt in a number of countries, although many started from pretty low levels 38 3 rd quarter 213

39 Sovereign Eurobonds and remain compliant with the Maastricht maximum public debt criteria of 6% of GDP. Another risk we see is excessive monetary easing in CEE which increases the risk of sell-off in local currency debt and could trigger a selling spill-over on Eurobond markets of weaker CEE countries. This holds especially true for Hungary and Ukraine which have a higher share of foreign liabilities in total debt, while the Hungarian spread tightened noticeably vs. its CEE peers and also vs. a higher-rated Poland. Accordingly, attempts to bolster domestic growth through overly aggressive rate cuts and slackening the fiscal reins may be a risky strategy which could backfire in the form of worsening rating and higher spreads. Market strategy We recommend defensive positioning in CEE Eurobonds through a combination of reducing portfolio duration and increasing the share of higher-rated sovereign bonds. The CEE rating will come under pressure from negative outlooks for the sovereigns in Slovenia, Croatia, Serbia and Ukraine and stabilisation is expected only in Q We recommend cutting positions in riskier Hungary and Croatia, where the situation points to fundamental weaknesses and governments not doing enough in terms of economic and structural reforms. We also see a higher risk for Russia despite its strong debt metrics. Russia s problem will be the sluggish economy and the risk of a lower oil price, contributing to the deepening of non-oil budget deficit while the government has been too slow in implementing the much-needed structural changes. As a result, Russia might take a bigger beating from the weaker UST market and stagnant oil prices, putting more pressure on its fiscal policy and rating outlook. At the same time, we feel more confident about Poland and Lithuania where debt payment risks are relatively low and the governments are committed to austerity reforms. However, their yields are relatively low too, and so we recommend holding rather than buying more of their bonds. On the other hand, risks will increase for Ukraine which has low foreign currency liquidity while the country runs unsustainable twin deficits. Similarly, Serbia will be exposed to liquidity risks while its spread warrants a sell recommendation as the government still should deliver the planned fiscal consolidation in full, if it wants to win back investor confidence. Gintaras Shlizhyus Benchmark Eurobond forecast and performance CEE EMBIG vs. UST 1y yields (%)* Spread Range Spread Range Spread Range Rating Dur. 2-Jun 1 Sep-13 min. max. Perf. (%) Dec-13 min. max. Perf. (%) Mar-14 min. max. Perf. (%) PL 3% due 23 USD A PL 4.5% due 22 EUR A LT 6.625% due 22 USD BBB LT 4.85% due 18 EUR BBB BG 4.25% due 17 EUR BBB RU 4.5% due 22 USD BBB TR 3.25% due 23 USD* BBB TR 5.125% due 2 EUR* BBB HR 5.5% due 23 USD BB HR 6.5% due 15 EUR BB RO 4.375% due 23 USD BB RO 4.875% due 19 EUR BB HU 5.375% due 23 USD BB HU 3.875% due 2 EUR BB RS 7.25% due 21 USD BB UA 7.5% due 23 USD B BY 8.95% due 18 USD B closing prices 5: p.m. (CET); * Perf. as cumulative return of gross prices up to forecast horizon, countries sorted by S&P rating, Turkey - Fitch rating Source: Bloomberg, S&P, Fitch, Raiffeisen RESEARCH Jun-12 Oct-12 Feb-13 Jun-13 EMBIG USD UST 1Y (r.h.scale) * JPM EMBI Global index family Source: Thomson-Reuters, Bloomberg CEE sovereign issuance 213 (USD bn)* SK SI HU TR UA HR RO RS PL * cumulative issuance 213, Eurobonds only Source: Bloomberg, Bond Radar LT rd quarter

40 Corporate Eurobonds CIS corporate credit: gone with the yield Russia performed on a par with global EM; Ukraine and Kazakhstan underperformed in the Fed-related sell-off Primary market had dried up by the end of Q2, but April was a record month for issuance We think that primary market activity will continue at a moderate pace in H2 We have taken a defensive position but see room for tighter spreads as US Treasury (UST) yields gradually increase 213 YTD returns CEMBI UA CEMBI MIDEAST CEMBI ASIA CEMBI KZ CEMBI RU CEMBI CEMBI LATIN EMBIG KZ -1%-8% -6% -4% -2% % 2% Source: JP Morgan, Raiffeisen RESEARCH Russia: sovereign/corporate spread* Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Spread CEMBI BROAD RU vs. EMBIG RU (r.h.s.) CEMBI BROAD RU EMBIG RU *in bp Source: JP Morgan, Raiffeisen RESEARCH EM corporate issuance (%) 1% 75% 5% 25% % 27 Asia CEE LatAm YTD CIS MidEast & Africa Source: Bond Radar, Raiffeisen RESEARCH In the absence of major developments in the Euro area crisis after the short-lived April rally, which drove credit valuations to even tighter levels, the eyes of the market turned to the US for the next pricing impetus. Concerns that the Fed may soon begin reining in its bond purchases were reflected in generally higher yields in May. US Treasury yields have picked up by 75-8bp in the 7-1Y maturity buckets since 1 May, a factor which was fully incorporated into the rising yields of CIS credits. The resulting market softening has wiped out the positive total returns recorded by USD-denominated CIS corporate Eurobonds in Q1. That said, on a YTD basis, all EM corporate markets have slipped into the red with the exception of Ukraine, which managed a minor positive total return of about.7%, although we think this will quickly evaporate. In the quarter to date, Russia returned -4% ahead of Ukraine (-4.8%) and Kazakhstan high-yield (HY) with -5.7%. Kazakh IG papers have generally been in better shape in Q2 (-5.2% QTD). We believe this is due to their lower volatility and their underperformance in Q1 213, as on a YTD basis this segment recorded the weakest return of -8% (against -4% by the global EM corporate index). This was more in line with the sovereign EM segment, which underperformed corporates with a return of -8.7% YTD. In addition to rising yields on the back of cheaper US Treasuries, we saw a notable spread decompression. High-beta names led the pack, with Ukrainian spreads 193bp wider QTD followed by Kazakhstan (+129bp) and Russia (+58bp). The Russian spread widening was largely on par with those of LatAm (+64bp) and the broader EM market (+48bp). In April of this year we saw record-high issuance activity in the asset class EM corporates raised over USD 5 bn from the Eurobond market in a single month, exceeding the USD 47 bn recorded in January 213 and well above the USD 39 bn posted in September 212. Although the borrowing spree continued into May, activity dropped off as expected in mid-may, while in June total global EM corporate issuance has plunged to USD 1.5 bn. Nevertheless, thanks to the very strong first five months of this year, total issuance reached USD 22 bn, exceeding the full-year volumes for all the preceding full years, with the exception of the record issuance of over USD 32 bn in FY 212. This year, as investors have turned to lower-quality credits in search of higher yields, the quality of primary market issues has deteriorated accordingly. That said, last year about 71% of issuance was attributable to IG credits, while this year their contribution declined to 55% of the total. Activity on the CIS credit primary market was lively, in step with the rest of the EM segment YTD issuance from the region is over USD 4 bn and has almost exceeded the full-year issuance of USD 44 bn in 212. The CIS s contribution to global EM issuance has remained elevated at 2.3% in the year to date, compared to 13.8% last year. Russian issuers have accounted for the lion s share of CIS issuance in the current quarter. They have printed about USD 31 bn in various currencies so far this year, with issuance almost equally split between Q1 and Q2. This was thanks to the record-high issuance of USD 4 3 rd quarter 213

41 Corporate Eurobonds 13 bn in April, which almost matched the USD 15 bn issued during the lively final quarter of 212. We think that primary market activity will continue in H2 213, as issuers adjust their expectations to the new reality of higher yields and the market settles down. However, we generally expect new issuance to be less opportunistic, with volumes probably slipping back to the levels seen in H In the IG segment, the possibility of an issue from the Russian sovereign is one to watch, as we think that some quasi-sovereign and IG-rated Russian issuers might prefer to delay their issuance until the sovereign tests the market. That said, media reports indicate that the big Russian banks Gazprombank, Russian Agricultural Bank and Sberbank are planning Eurobond issues, while we still have Rosneft on our list of possible issuers. As expected, Gazprom is considering a further placement, having announced a GBP-denominated bond for July, and could add a EUR tranche to that issue. All in all, we think that despite the softer market, this year CIS credits have a good chance of surpassing the record issuance of 27, which we estimate at about USD 46 bn. EM corporate issuance USD bn YTD CIS CEE ex. CIS LatAm MENA Asia Source: Bond Radar, Raiffeisen RESEARCH In general we prefer to be more defensively positioned, with a stronger focus on shorter durations and higher quality names in light of investors flight from emerging market assets. Consequently, we are sticking to our buy calls on CCBNKZ 8 5/8% due 214 and GPBRU 6.25% due 214, and suggest avoiding Halyk until we have more visibility on the BTA acquisition case. We are also withholding our buy ratings on Gazprom and Sberbank, as well as staying away from Ukrainian credits which do not offer much of a spread pick-up against the sovereign. Over the past quarter, we have moved some of our buy ratings to neutral (such as the VTB senior curve, and MOL s USD paper in the broader CEE remit). Nevertheless, we are retaining our overweight ratings on the longer papers of selected CIS credits (such as Credit Bank of Moscow, Evraz, VimpelCom and VTB Sub.). We have also recently added ALROSA s 22 paper to our list of speculative bets, as the paper failed to shine against the market in the recent correction and in our view looks relatively attractive against its peers. Apart from the more compelling valuation, the paper offers a positive credit case (gas asset sale) and we believe it might become an option for the market once the current uncertainty dies down. Rating drift in Russia ,8 1,44-6 1,8 Dec-6 Jul-8 Feb-1 Aug-11 Mar-13 # upgrades - # downgrades JP Morgan RUBI (in bp, r.h.s.*) * reverse order Source: Bloomberg, JP Morgan, Raiffeisen RESEARCH We believe that the recent market correction should allow investors to put some more promising CIS credits in their baskets. However, continued tight valuations and the negative newsflow regarding the Fed s bond purchase programme may result in persistently high volatility in the summer. On the other hand, as we believe that primary market activity could abate in H2 213, investors may turn their attention back to the secondary market. And with UST yields rising further, we generally see more room for spread compression on CIS credits in the longer run. The global EM index and Russian corporates are currently trading 12bp and 175bp off this cycle s lows of April 211. Until recently, before the rise in UST yields, such significant spread tightening looked unlikely, considering the low Treasury yield environment. Even now, the yield on UST 1y paper is slightly below 2.4%, while in April 211 it stood at about 3.6%, which implies a difference in yield of some 12bp. We think that once the market recovers from the latest shock, and provided that the global market newsflow is generally favourable, we could see credit spreads compressing to at least partially offset potential UST yield increases. Martin Kutny, Alexander Sklemin Selected CIS Eurobonds Issuer ISIN Maturity Yield in % Alfa Bank XS /25/ Alrosa XS /3/ Evraz XS /27/ Gazprom XS /6/ Halyk Bank XS /3/ KazMunay- XS /9/ Gaz VimpelCom XS /2/ rd quarter

42 Equity market/austria Worries about liquidity withdrawal cast a shadow over the ATX Handsome earnings growth Flat trend anticipated until end-september Outlook for less liquidity weighs on the mood Value matrix* Domestic business activity 2 (3) Exports OECD - excl. Eastern Europe 2 (3) Eastern Europe 2 (3) Asia 2 (3) Company earnings 2 (2) Key sectors 2 (2) Valuation - P/E-ratio 2 (2) Interest rates / yields 2 (1) Exchange rates 2 (2) Foreign equity markets 2 (1) European liquidity 3 (1) Technical outlook 4 (3) 1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally. * expected trend for the next 3 to 6 months Source: Raiffeisen RESEARCH, Raiffeisen Centrobank Relative P/E 213e ATX Valuation premium of ATX sector Valuation discount of ATX sector 8% 6% 4% 2% % -2% -4% -6% Market Energy Materials Euro Stoxx Small Industrials On balance, the performance of the Austrian equity market was disappointing in the period under review. In contrast to most European stock markets, the ATX has not been able to book any gains since the start of the year. To a great degree, the reason for this was that the strongly-weighted domestic financials posted weak performance. In general, another problem for the Austrian stock market was the sharp drop in trading volumes. First and foremost, however, sentiment on the market was clouded by worries about the US Fed pulling back on liquidity. Economic performance in Austria has also been subdued. Although the economy bottomed out in the first quarter, one should be prepared for growth to remain sluggish. While the situation will improve overall in H2, the leading indicators in particular are not pointing to any spectacular expansion. For the year as a whole, we project that economic output will expand at a rate of.5%. Economic performance in the Eastern European economies also remains restrained. Broadly speaking, Poland and Russia are the countries supporting growth in the region, whereas Croatia, Slovakia and the Czech Republic are in recession. Consequently, the CEE region is expected to post a low growth rate of around 1.5% for 213. Euro Stoxx Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Bloomberg Financials Utilities The results of Austrian companies posted in the last reporting season were also not very dynamic. Most of the firms released quarterly results, which were in line with expectations. One positive exception in this regard was the Austrian steel producer voestalpine. The biggest disappointment was perhaps Andritz, which has advanced to become a index heavyweight. The group reported a massive slump in profits, on the heels of severe cost overruns at a major project. Similar to our last publication, the companies in the ATX published cautious outlooks. In general, visibility remains low, and this explains the cautious short-term approach being taken by customers. Sector structure ATX Sector Company Weight Financials CA Immobilien, conwert, Erste Group, Immofinanz, Raiffeisen Bank International, Vienna Insurance Group 41.3% Industrials Andritz, Oesterreichische Post, Strabag, Wienerberger, Zumtobel 15.4% Energy OMV, Schoeller-Bleckmann 18.3% Basic materials Mayr-Melnhof, Lenzing, RHI, voestalpine 17.6% Telecom Telekom Austria 3.6% Utilities EVN, Verbund 3.8% Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Vienna Stock Exchange 42 3 rd quarter 213

43 Equity market/austria Despite the lukewarm economic situation, companies should be able to boost their earnings significantly in 213. At the same time, we have had to lower our estimates for aggregate earnings growth in recent months and now project a figure of around 18.9%. Nonetheless, there continues to be a substantial discrepancy compared to the DAX or the Euro STOXX 5 companies for example, as these firms will not be able to come close to this growth rate, which also holds true for their counterparts in Eastern Europe. The valuation of the Austrian market looks relatively moderate. The estimated P/E for 213 is at 11. and has thus hardly changed since our last publication. There continues to be a major valuation discount compared to the German equity market, taking into account the cyclically adjusted P/E. Based on this indicator, the steady undervaluation amounted to almost 3%. Just as we did not believe that the premium observed in 26 and 27 was justified in retrospect, we do not see the current discount as being appropriate. Although we continue to rate the valuation of the Austrian stock market as moderate, as noted above, we are still convinced that equities are relatively more attractive than the government bond segment. Even just the aggregate dividend yield of 3.4% is well higher than the returns on risk-free Austrian or German government bonds. Fair value of ATX 1 - June 214 Bond yields (1y) EY-BY 2 2.% 2.5% 3.% 8.25% 2,231 2,127 2,33 8.% 2,287 2,178 2, % 2,346 2,231 2, % 2,47 2,287 2, % 2,472 2,346 2,231 7.% 2,541 2,47 2, % 2,614 2,472 2, % 2,691 2,541 2, % 2,772 2,614 2,472 6.% 2,859 2,691 2, % 2,951 2,772 2, % 3,49 2,859 2, % 3,154 2,951 2,772 5.% 3,267 3,49 2,859 1 based on the expected earnings for 213/214 (i.e. 228,7 index points) 2 earnings yield less bond yield Source: Raiffeisen RESEARCH, Raiffeisen Centrobank Whilst the sovereign debt crisis and its ramifications have faded more and more during the past weeks, the subject of (central bank) liquidity is also playing a dominant role on the Austrian equity market at the moment. Essentially, we believe that over the summer investors will have to get comfortable with the idea of a less expansive monetary policy by the US Fed and get used to this kind of talk. As the equity market profited from the abundant liquidity both this year and last year, we do not think that moves to curb liquidity will be greeted warmly by the markets. With this in mind, it seems highly likely that market participants will act with caution, prompting us to expect a flat trend for the ATX until end-september. Johannes Mattner Earnings yield* less bond yield *Earnings yield = E/P; based on 12-month forward earnings, Raiffeisen Centrobank Valuation and forecasts 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun months forward earnings Bond yield forecast Earnings yield less bond yield (EY-BY) ATX-forecast based on EY-BY ATX-forecast 2,32.3 2,33 2,55 2,62 2,55 Expected price change.4% 9.9% 12.9% 9.9% Range P/E based on 12-month forward earnings :59 p.m. (CET); Source: Raiffeisen RESEARCH, Raiffeisen Centrobank 3 rd quarter

44 Equity market/cee Anticipated reduction in abundant liquidity weighs on equities High level of liquidity will likely be reduced Demand for equities expected to be lower on seasonal reasons Historically speaking, CEE stock market valuations look relatively attractive Local factors coming to the fore Region s core indices BUX WIG2 PX In local currency The CEE stock markets posted mixed performance in Q2 213: whilst the CE core countries Hungary and Poland recorded strong gains in share prices, markets in Southeastern Europe, Russia and in Turkey in particular were dragged down by volatile moves. In Turkey, the protests played a key role in the evolution of the local stock market, but on the other hand they also triggered profits for the Polish stock market as risk-averse investors moved to reallocate their capital. With regard to the immediate outlook, we presume that the positive impact from improving leading indicators (USA) will be balanced out by the downsizing of the Fed s bond purchase programme (reduction of liquidity), which we expect. Furthermore, the pace of the economic rebound in Europe is sluggish at best and will thus offer little support for equities, in addition to the partial recovery, which has already taken place, and in light of the seasonally weaker demand for stocks. We thus tend to prefer a defensive sector positioning. SEE indices in comparison CROBEX1 BET BIST Nat. 1 In local currency During the second quarter, the Russian MICEX took a severe beating, due to both local and international factors. For the next few months, we foresee difficult times for this market as well. Looking at the local aspects, the downward trend in economic activity (estimated 213e GDP growth is now a mere 2%) and the prospects for a more restrictive fiscal stance are negative factors. Key sectors (e.g. energy, utilities) are still subjected to strong regulatory pressure and in the months to come, we do not believe there will be much impact from good news in these areas. Market turnover has been falling since the beginning of the year (-4% yoy) and no improvement can be expected during the summer months. Furthermore, 213e aggregate earnings growth for the index is now set to stagnate. The only thing preventing a stronger fall in stock prices should be the rise in oil prices, which we are projecting for the second half of the year. As Russia lacks a strong domestic investor base (e.g. pension funds are essentially not active on the equity market due to legal regulations, albeit improvements are expected in this regard from 214), global trends have a strong impact. For international investors (a key group in Russia), one negative factor in this respect is the scaling back of liquidity by the Fed, which we expect. The MICEX already reacted to initial speculation on this subject with sharp price losses. Sell. Value matrix stock markets PL HU CZ RU RO HR TR Politics 2 (2) 4 (4) 3 (2) 2 (2) 2 (2) 2 (2) 4 (2) Interest rate trends 2 (2) 1 (2) 1 (1) 1 (2) 1 (2) 2 (2) 2 (2) Earnings outlook 4 (4) 2 (2) 2 (2) 3 (3) 1 (1) 2 (3) 2 (2) Key sectors 3 (3) 2 (2) 3 (3) 3 (3) 3 (2) 2 (3) 2 (2) Valuation (P/E) 2 (2) 2 (2) 2 (2) 1 (1) 1 (1) 2 (2) 2 (2) Liquidity 1 (1) 3 (3) 3 (3) 2 (2) 3 (3) 4 (4) 1 (1) Technicals 3 (4) 3 (2) 2 (3) 2 (3) 3 (2) 4 (4) 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 44 3 rd quarter 213

45 Equity market/cee The Polish WIG 2 stock market index was able to bounce back somewhat following an initial period of weak performance in the second quarter, but is still in negative territory for the year to date. The market gleaned some support from the protests in Turkey, as risk-averse investors stepped up their reallocation of capital. Fundamentally speaking, the situation has not changed much: the projected economic growth of 1.2% for 213e still reflects a negative performance for the year as a whole. The low point probably came in Q1, and a significant improvement is expected to occur in the second half of the year. Projected earnings for 213 are also very negative for the index, at -19.8%, resulting a merely moderate P/E of Although these aspects should already be priced in, at the moment we see no factors that could trigger an upward move in share prices. Sell. The Czech PX suffered a sizeable decline during the second quarter, but was not alone in this regard. In light of the worse-than-expected economic figures for Q1, we had to downgrade our GDP forecast for 213e from -.2% to -.7%. While there should be a rebound in the second half of the year, in conjunction with Euro area developments, the Czech stock market will be facing some headwinds over the summer. For example, compared to the end of the first quarter, the 213e estimated aggregated earnings growth rate for the PX index has declined steeply (presently at just +2.7%, down from double-digit levels at end-q1), and the 213e dividend yield has also dropped due to lower expected dividend Expected index performance 2% 15% 1% 5% % -5% ATX WIG 2 BUX PX MICEX BET CROBEX1 Sep-13 Jun-14 Source: Raiffeisen RESEARCH BIST Nat. 1 Indices in performance comparison Jun 1 ATX 57.4% 5.8% 21.7% 1.1% -61.2% 42.5% 16.4% -34.9% 26.9% -3.4% BUX 57.2% 41.% 19.5% 5.6% -53.3% 73.4%.5% -2.4% 7.1% 3.1% WIG % 35.4% 23.7% 5.2% -48.2% 33.5% 14.9% -21.9% 2.4% -11.% PX 56.6% 42.7% 7.9% 14.2% -52.7% 3.2% 9.6% -25.6% 14.% -13.5% MICEX 6.6% 84.3% 67.5% 11.5% -67.2% 121.1% 23.2% -16.9% 5.2% -12.1% BET 11.% 5.9% 22.2% 22.1% -7.5% 61.7% 12.3% -17.7% 18.7% 3.5% CROBEX 32.1% 26.4% 62.2% 63.2% -67.1% 16.4% 5.3% -17.6%.% 2.5% BIST Nat % 59.3% -1.7% 42.% -51.6% 96.6% 24.9% -22.3% 52.6% -6.1% CECE Composite Index 57.1% 44.7% 14.7% 1.5% -53.7% 4.5% 15.7% -29.1% 25.7% -15.7% DAX 7.3% 27.1% 22.% 22.3% -4.4% 23.8% 16.1% -14.7% 29.1% 4.2% Euro Stoxx 5 6.9% 21.3% 15.1% 6.8% -44.4% 21.1% -5.8% -17.1% 13.8% -1.9% S&P 5 9.% 3.% 13.6% 3.5% -38.5% 23.5% 12.8%.% 13.4% 11.4% MSCI World 9.5% 13.7% 13.5% 2.8% -4.1% 22.8% 7.8% -7.6% 13.1% 8.9% In local currency 1 11:59 p.m. (CET) Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH Stock market indicators Long-term growth Earnings growth Price/earnings ratio Dividend yield e 214f e 214f 213e ATX 5.6% 14.7% 18.9% 8.3% % WIG 2 4.1% -5.2% -19.8% 4.1% % BUX 5.3% -16.3% 4.4% 1.7% % PX* 5.5% -5.7% 2.7% 8.9% % MICEX 5.1% -12.6% -.8% 4.1% % BET 6.8% -12.8% 14.6% 1.9% % CROBEX1 4.2% 46.7% 1.5% 5.6% % BIST Nat % 19.% 9.7% 6.4% % 1 Czech Rep. (PX): excl. Orco Property Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH 3 rd quarter

46 Equity market/cee P/E ratios in comparison Austria Poland Hungary Czech Rep.* Russia Romania Croatia Turkey e 214f * Czech Rep. (PX): excl. Orco Property Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH Earnings growth 5% 3% 1% -1% -3% Austria Poland Hungary Czech Rep.* Russia Romania Croatia e 214f Turkey * Czech Rep. (PX): excl. Orco Property Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH payouts from 5.5% to 4.8%. As long as the current political wobbles in the Czech Republic remain limited, they should not have any major impact on the stock market. Nevertheless, we remain cautious, as there are still some uncertainties at the international level in Q3. Sell. During Q2 213, the Hungarian BUX stock market index moved in unison with international developments and booked more gains. We revised our 213e GDP forecast upwards to.5% as it appears the economic situation is slowly improving and more cuts in interest rates may be in the pipeline. Nevertheless, this could be undermined by the challenging overall conditions for the corporate sector: for instance, Economics Minister Varga recently announced a string of new tax hikes (e.g. electronic financial transaction tax from.2% to.3%, tax on cash transactions from.3% to.6%, a 5% increase in the telecoms tax, a 33% increase in mining royalty tax), set to enter into effect from August 213. In this light, it comes as no surprise that projected earnings growth has now slipped from roughly 9% to just 4.4%. While the valuation still looks relatively attractive, with a 213e P/E of 9.1, we do not expect much support for the local stock market due to the tax burdens. Sell. The Turkish BIST National 1 leading index hit a new all-time high in mid-may, before the conflicts between demonstrators protesting against the government and the Turkish police caused a massive slump on the stock exchange in Istanbul. So far the index lost around 22% compared to its high, and it does not look like the situation is going to de-escalate. While these developments will likely have a mildly negative impact on tourism, the business climate and thus the medium-term economic outlook will probably only suffer, if the conflict grows much worse. This is not, however, our baseline scenario. We assume that the demonstrations will gradually taper off in the coming weeks and that the government can handle the pressure. As the situation calms down, the BIST National 1 should be able to quickly recoup its losses and foster hopes of new highs. Regardless of the political protests, the economic conditions in Turkey (dynamic economic development, successful soft landing) are still in place for this. Valuations are now more attractive again, and we see this as a very interesting opportunity to take up positions in this booming market. Buy. Index estimates 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Recommendation ATX HOLD Performance.4% 9.9% 12.9% 9.9% since 1/1/12 Range % WIG SELL Performance -1.2% 8.8% 15.3% 9.7% since 1/1/12 Range % BUX SELL Performance -2.3% 11.% 14.7% 9.4% since 1/1/12 Range % PX SELL Performance -2.% 9.1% 14.1% 9.1% since 1/1/12 Range % In local currency 1 11:59 p.m. (CET) 46 3 rd quarter 213

47 Equity market/cee Even though the Romanian BET has had a quiet period in the last three months with some minor losses, it remains in positive territory for the year to date, with a gain of 3.5%. All in all, the economic conditions are quite favourable for the stock market in Bucharest. In terms of economic growth, we project a gain of 2% this year (up from the previous forecast of 1.5%) and by year-end the key interest rate should be cut by a total of 75bp to 4.5%. We thus also see good support for corporate earnings, as we forecast growth of 14.6% (213e) and 1.9% (214f) at the index level. This also results in an extremely attractive valuation, with a P/E of 6.1 (213e) and 5.5 (214f). As part of the renewal of the Stand- By Agreement (SBA) with the IMF (which should happen in the autumn), we also expect to see stronger inflows of capital from international investors again. They will probably also be interested in the numerous upcoming listings on the stock market, which the government has committed to. In line with the global soft patch for equities, however, the leading index in Bucharest will probably register a mildly negative performance. Sell. Market capitalisation overview Russia* Turkey Poland Austria Czech Rep. Romania Croatia * Russian data based on MICEX/RTS In EUR bn; end of May 213 Source: FESE, WFE, BSE, ZSE, Raiffeisen RESEARCH Hungary Having advanced into the role of a top performer in Q1, the Croatian CROBEX1 index plunged back again in Q2. We see two main fundamental aspects for the development of the Croatian equity market going forward. First, the stock market is suffering from the chronically weak growth, as the economy has been stuck in recession for five years now. Prospects for this year (213e GDP: -.5%) also don t look very rosy. Accordingly, we tend to see a preponderance of downside risks for the earnings growth of the CROBEX1 companies (213e: +1.5%). Second, Croatia s accession of the EU on July 1 certainly opens up new opportunities for the stock market in Zagreb. An improvement in the risk perception of Croatia together with acceleration of the convergence process will probably bear fruit over the long term in the form of increased inflows of capital from abroad. Looking at the quarter to come, however, these (positive) factors will still play a secondary role, and thus we expect to see the negative trends continue. Sell. Avg. daily turnover (EUR mn) ,3 bn,77 bn Russia 1,3 bn 1,37 bn Turkey Poland Austria Hungary Czech Rep. Romania Croatia 212 End of May 213 Source: FESE, WFE, BSE, ZSE, Raiffeisen RESEARCH Andreas Schiller, Richard Malzer Index estimates 2-Jun 1 Sep-13 Dec-13 Mar-14 Jun-14 Recommendation MICEX SELL Performance -2.9% 11.8% 15.7% 11.8% since 1/1/12 Range % BET SELL Performance -.5% 12.6% 16.4% 12.6% since 1/1/12 Range % CROBEX SELL Performance -2.3% 7.6% 12.6% 7.6% since 1/1/12 Range % BIST Nat BUY Performance 8.9% 15.7% 22.5% 17.1% since 1/1/12 Range % In local currency 1 11:59 p.m. (CET) 3 rd quarter

48 Financials Buy into laggards after NIM pressure will have taken its toll Despite expected macro recovery, regulatory risks looming Further margin pressure in Q2 13, stabilisation likely in H2 13 Our sector picks: PKO, Komercni and GNB Net interest margins 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% PKO PEO BRE BZW GNB MIL KB BRD TLV Erste OTP AIK KMB e Source: Company data, Raiffeisen Centrobank estimates P/B - RoE 213e regression P/B 213e 2.5 BZW 2. PKO PEO 1.5 BRE MIL KB 1. BRD GNB EBS TLV.5 RBI OTP KMB. AIK 1% 6% 11% 16% RoE 213e Source: Raiffeisen Centrobank estimates Sector comparison One of the central topics/risks for the banking industry in a CEE context is net interest margin management in the lower interest rate environment. While the good news is that falling money market rates are expected to bottom-out during H2 13, the bad news is that the loan re-pricing impact on banks P&L accounts might burden the quarters ahead as well. On top of that, Polish banks, while awaiting the macro recovery, could be faced with the potential introduction of a long-discussed banking tax (also rumoured to be imposed in the CZ, depending on the composition of the next government) and trading-wise with the looming local pension fund reforms, while EU FTT initiatives could get more substance ahead of elections in DE and AT. These are all risk factors which we would say are not yet factored-in. In our recently published sector report we slightly hiked our TPs to account for a further drop of CoE driven by lower risk-free rates. Our top-picks are PKO and KB after they underperformed their peers in the last 6m as the market has priced-in visible margin pressure. We like PKO and GNB on their ability to outperform sector earnings in the mid-term, assuming a gradual leverage from the cost of risk, while for Komercni Banka an attractive dividend yield protects from the downside. On top of that, we see the recent Nordea takeover positive for PKO, adding roughly ~PLN 2.5 to our TP of PLN After the recent slump in the share price following the capital increase announcement and the change in guidance we see Erste again in buy territory. While the recent increase in yields has a negative impact on the cost of capital, rising reinvestment yields should again provide a tailwind for net NIM of deposit-rich banks like Erste. OTP remains a hold due to uncertainty with regard to possible further unfriendly political/regulatory measures against local banks after the recent FTT hikes, while positive macro signals are already factored-in. In the near future we might see some takeover activity (Erste and OTP as potential buyers) or, on the other side, Bank Millennium as a likely mid-term M&A target. Stefan Maxian, Jovan Sikimic Company Recommendation Target price P/E adjusted P/BV DY 213e 214f 213e 214f 213e 214f Erste Group* Buy EUR % 2.7% Komercni Banka Buy CZK 4, % 6.% OTP Hold HUF 5, % 3.6% PKO BP Buy PLN % 3.9% BZ WBK Hold PLN % 3.4% Getin Noble Bank Buy PLN %.% Bank Pekao SA Hold PLN % 5.4% BRE Bank Reduce PLN % 3.5% Bank Millennium Hold PLN % 2.1% BRD-GSG Hold RON % 4.2% Banca Transilvania Hold RON % 2.3% Komercijalna Reduce RSD 1, %.4% Aik Banka Hold RSD 1, %.% RBI NC NC % 4.6% NC = not covered; * changed on 26 June Source: Raiffeisen Centrobank estimates 48 3 rd quarter 213

49 Utilities All eyes on Germany Failure to restore CO 2 market pulls electricity prices down to EUR 38/MWh Will the reform of the energy turnaround in Germany bring a solution? Buy recommendations: Enea, CEZ The stocks in our coverage universe trailed behind the overall market, with the exception of a few Polish utilities, even though Western European electricity and gas utilities showed an upward trend. The culprits were the continuing weak energy price development and a negative political environment both regarding regulations in Russia and on the European electricity market. Investors are still focused on the negative electricity price trend and its impact on earnings in future years, so that neither a positive reporting season across the board in Poland where especially small companies surprised the market nor higher earnings outlooks were able to produce a lasting positive mood. Moreover, politics both on the national and European levels does not appear to be willing to fix the market model, which is malfunctioning because of high subsidies for eco-electricity, or take measures against the overhang of CO 2 certificates. Sector continues to underperform* 15% 1% 5% % -5% -1% -15% -2% -25% PGNiG PGE DJ Eurostoxx Utilities Eurostoxx5 ENEA Translecetrica Enel OGK-5 Verbund Tauron RusHydro InterRAO E.On Russia CEZ EVN Transgaz RusHydro * in Q2 Source: Bloomberg At the beginning of July, a limited number of certificates could be taken from the market in a second attempt, but the volume will probably be insufficient to provide a sustainable boost to the prices of CO 2 certificates and electricity. In addition, a new course could be set regarding the subsidisation of eco-electricity after the parliamentary elections in Germany, and the new EU Commission and a newly elected European Parliament will lay out a new energy strategy only in 214. As a result, both companies and investors are lying in wait. CO 2 : dead cat rebound is not enough The dividend yields of utilities companies are still above average: Verbund plans to pay a one-off dividend of EUR 1 for 213e, CEZ is traded with a yield of >7% and also regarding Polish utilities the Polish state is showing appetite for higher revenues in spite of investment programmes. We still have buy ratings on some Russian utilities, Enea and CEZ. Sector comparison Teresa Schinwald 7 5 Mar-13 Apr-13 May-13 Power (EUR/MWh) Oil (EUR/bbl) CO2 Source: Bloomberg 7 5 Company Recommendation Target price P/E EV/EBITDA DY 213e 214f 213e 214f 213e 214f CEZ Buy CZK % 8.2% Enea Buy UR % 2.5% Enel OGK-5 Buy RUB % 5.5% E.On Russia Buy RUB % 5.8% EVN Hold EUR % 4.4% Federal Grid Company Hold RUB % 2.% InterRAO Hold RUB % 2.9% PGE Hold PLN % 4.6% PGNiG Reduce PLN % 3.% RusHydro Buy RUB % 5.4% Tauron UR PLN % 3.4% Transelectrica Hold RON % 5.8% Transgaz Hold UR % 8.9% Verbund Hold EUR % 3.9% UR = under revision Source: Raiffeisen Centrobank estimates 3 rd quarter

50 Industrials Mixed picture Solid balance sheets and high order backlog still in favour Earnings quality, however, makes the key difference Our mid-term sector pick continues to be Lenzing Eurostat industrial production Euro area 9% 14% 6% 7% 3% % % -7% -3% -14% -6% -21% -9% -28% VDMA order intake Germany growth* Industrial production EA growt* (r.h.s.) * yoy EA Euro area Source: VDMA, Eurostat Q1 13 results showed quite a mixed picture across our Austrian industrial coverage universe apart from still satisfactory demand, holding up capacity utilization rates, pricing levels driving overall earnings quality proofed to be a watershed for most companies. The biggest surprise to the downside clearly came from Andritz, issuing a profit warning for FY 13e on the back of substantial cost overruns related to the execution of a pulp mill project in South America. Apart from financial impacts provisions in the mid-double digit million euros range markets especially frowned upon Andritz s obvious slip-up in cost management/project execution for this prestigious EUR 75 mn pulp mill order. The cost overruns further underline the ongoing extremely tough pricing environment, somewhat also leaving a question mark on the potential earnings quality of the pulp mill greenfield projects currently being tendered. Though share price drop below the current EUR 4 levels seems a bit excessive, we would nonetheless recommend to wait for Q2 13 results (August 7) to avoid the potential downside of further provisioning ahead. Lenzing fundamental drivers f 23f Demand of fiber kg per capita Word population growth bn (r.h.s.) Source: UN, USDA, ICAC, CIFRS Despite an unchanged difficult pricing environment for Lenzing due to a recent increase in Chinese viscose production on the back of cheaper Q4 12 dissolving pulp prices we saw recent profitability levels slightly above expectations as Lenzing s ongoing cost savings program showed first positive results. For Q2 13 the company reckons with a qoq flat average fiber price but an operating profitability slightly above Q1 13 levels, as the cost side will most likely benefit from the full ramp-up of chemical pulp at the Czech pulp mill Paskov, pushing vertical pulp integration levels clearly above the 5%. We confirm our 12-month price target of EUR 75., however, in the short run we can not fully rule out further pressure on cotton and subsequently viscose pricing, bearing in mind that China s cotton reserve now secures around 1% of domestic consumption for the upcoming season, which could lead to a substantial slowdown of the past hefty cotton imports. Bernhard Selinger Sector comparison Company Recommendation Target price P/E EV/EBITDA DY 213e 214f 213e 214f 213e 214f Andritz Reduce EUR % 3.8% Palfinger Hold EUR % 2.9% Rosenbauer Hold EUR % 2.4% Lenzing Buy EUR % 3.6% Polytec Buy EUR % 7.5% Semperit Hold EUR % 3.5% Mayr-Melnhof Hold EUR % 2.8% Source: Raiffeisen Centrobank estimates 5 3 rd quarter 213

51 Consumer Poland Consumer slowdown and adverse weather don t hinder the rally Despite a weak first quarter Polish consumer shares have delivered a strong performance YTD Consumer indicators seem to have stabilised, but the outlook is far from rosy International expansion adds momentum to growth stories of the covered companies With the exception of AmRest Polish consumer companies have performed very strongly YTD. LPP tops the performance list with a rally of 51.7%, followed by Eurocash, whose share price grew by 19.%, versus a drop of 11.% of the blue-chip WIG2 index and drop of 3.4% by the wider market. The performance of the shares contrasts with the rather disappointing set of results in Q1 13, impacted by the long winter and overall consumption weakness. LPP proved to be the notable exception, which, despite a negative yoy trend, proved the resilience of its profitability and beat net profit expectations, while others underperformed consensus expectations. CCC s results were worst in history, highlighting the exposure of the company s financial results to the uncontrollable impact of adverse weather (long winter). AmRest s margins suffered from the double whammy of a weak market and high opening costs of new restaurants. Eurocash was affected by challenges in margin management in the acquired part of the business (Tradis), as well as retail sales weakness due to the prolonged winter, and the shares initially suffered a significant drop, only to rebound later. Consumer shares outperform Dec-12 Feb-13 Apr-13 AmRest CCC LPP Eurocash Cinema City WIG Source: Bloomberg The outlook appears to have stabilised somewhat for Polish consumers. Private consumption seems to have bottomed out in Q4 12 (-.2% yoy), and the reading for Q1 13 was flat on a yoy basis following three quarters of continuously declining growth. Consumer confidence, however, remains low and retail sales fell by -.2% on a yoy basis in April 213. The strong share performance can be to some extent explained by growth momentum from international expansion plans. With the exception of Eurocash, which is still domestically-focused (for the moment), Polish-listed consumer companies have long been in an international expansion mode which has now been further stepped up. LPP is on track to grow its floor space in Russia by over 5% in 213. In the case of CCC we observe increased international ambitions as well. The company plans to open test locations in four new markets this year (Austria, Slovenia, Croatia and Turkey), and has fixed its sights on further expansion in Western Europe in the near future. AmRest has been focusing on expanding its Italian eatery brand in emerging markets and growing the KFC brand in Russia, but the company remains the single declining share on a YTD-basis in our Polish consumer coverage universe. As a result, we consider AmRest shares undervalued at the moment and see an upside driven by expansion potential in relatively higher-margin areas. Jakub Krawczyk Challenging consumer environment 2% -1 15% -2 1% -3 5% -4 % -5-5% Jan-1 Jan-11 Jan-12 Jan-13 Consumer confidence Retail sales yoy (r.h.s.) Source: GUS Sector comparison Company Recommendation Target price P/E EV/EBITDA EV/S 213e 214f 213e 214f 213e 214f AmRest Buy PLN CCC Reduce PLN Cinema City Sell PLN Eurocash Hold PLN LPP Buy UR UR = under revision Source: Raiffeisen Centrobank estimates 3 rd quarter

52 Oil & Gas Neutral on upstream, bearish on downstream Oil prices supported by OPEC s supply management and geopolitical tensions in Middle East Refining margins pressured by weak fuel consumption We favour independent players Novatek and LUKoil in the CIS and OMV Petrom in CEE World total oil demand growth* 1, Africa Asia Europe CIS Latin America f * mn barrels per day Source: IEA Oil Market Report May 213 Middle East North America Over the last two months the price of crude oil (Brent) has been range-bound, trading between USD 1 and USD 15 per barrel. While the market continues to expect a moderate demand growth in 213 mainly driven by emerging economies, the recent crude price rebound has been driven, in our opinion, by (i) the active crude supply management by Saudi Arabia, which at the last OPEC meeting reiterated its intention to actively manage the supply in order to keep the market balanced and (ii) increasing uncertainties regarding Syria, which could endanger the supply from the Middle East region. Looking forward, we continue to forecast Brent oil at above USD 11/bbl, since we believe that the demand should stay moderately strong, while the risk of oversupply from US-based producers is manageable as long as OPEC stays ready to cut its output further, if needed. Motor fuel consumption in Poland* 2% 1% In the downstream segment the bet is on petrochemicals this year. Refining margins, especially in Europe, remain under pressure with motor fuel consumption showing no sign of recovery in CEE and SEE. At the same time, petrochemical margins have recovered to healthy levels, partially supported by lower prices of feedstock (i.e. naphtha). With no change of macro trends expected for the CEE economies, we maintain our cautious view for the refining sector in 213. We reckon that the integrated downstream players with petchem exposure are in a better position than pure refiners. % -1% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Gasoline Total motor fuels * yoy chg Source: Orlen Group Diesel While we continue to favour the upstream players, we are currently neutral on the sector. We believe that (i) OMV (hold) has priced-in most of the positive developments and would have to provide a strong positive news-flow in order to justify a further share price increase, (ii) MOL (hold) continues to be battered by domestic macro developments, (iii) PKN (hold) and Lotos (sell) are struggling with falling domestic demand and (iv) Russian oils continue to be heavily dependent on domestic politics and are less driven by fundamental factors. Oleg Galbur Sector comparison Recommendation Target price P/E EV/EBITDA P/CE Company 213e 214f 213e 214f 213e 214f OMV Hold EUR OMV Petrom Buy UR MOL Hold HUF PKN Hold PLN Lotos Sell PLN Gazprom Hold RUB Novatek Buy RUB LUKoil Buy RUB Rosneft Hold RUB Tatneft Reduce RUB UR = under revision Source: Raiffeisen Centrobank estimates 52 3 rd quarter 213

53 Pharma CIS markets remain the major growth driver Russian pharma market expected to grow dynamically with a CAGR of more than 1% until 221 by Cegedim Price pressure likely to continue in Western and Central Europe due to restrictive regulations Krka and Egis run a straight generics business model, Gedeon Richter mixed with proprietary pharma products In our view, the main differentiator for the development of sales and operating margins of the core business of the generic pharma industry in CEE in the short to mid-term remains the exposure to the Eastern European markets, particularly Russia. According to French healthcare research institution Cegedim, the Russian pharmaceutical market is expected to grow with a compounded annual growth rate of almost 13% from USD 25 bn in 212 to USD 75 bn in 221 vastly related to the extension of the public reimbursement system across all 82 regions of the Russian Federation until the end of the decade by defining and creating an Essential Drug Lists (EDL), which is forecast to turn Russia into one of the biggest pharmaceutical markets in the world through increased penetration. Due to the forecast massive increase in demand, prices are expected to remain rather stable. In contrast, prices are heavily under pressure in Western Europe despite partially rather low generic penetration compared to CEE (e.g. Italy: 7% in 212 vs. Poland s 8%) due to public tender procedures, which increase price competitiveness. Finally, in most CEE countries besides the CIS growth prospects remain muted due to restrictive price regulations (particularly in Hungary, Poland and Romania) and limited unit sales growth potential. Another differentiator of the CEE generic pharma companies is the R&D focus. While Krka and Egis develop new products only along the patent expiry flow, Gedeon Richter partially develops proprietary products (e.g. Cariprazine, Esmya), which on the one hand provides a higher-margin upside potential but also increases the risk (development as well as marketing risks). Based on these two criteria we have valued Egis and Krka with a buy recommendation due to a significant exposure in CIS markets of 33% and 37%, respectively, in 212 and comparatively low R&D expenses of 9%, whereas we have rated Gedeon Richter with a hold recommendation despite the highest exposure in the CIS (41%) due to higher R&D expenses (14%) related to the development of new products (whose success has yet to be proven, though). CIS sales (%) 45% 4% 35% 3% 25% 2% 15% 1% 5% % Krka Egis Gedeon Richter Source: Company data % % 38.2% Sales, operating margin 212 1,5 1, % % % Krka Egis Gedeon Richter Sales (EUR) Operating profit Margin (%) Source: Company data Daniel Damaska Sector comparison Company Recommendation Target price P/E EV/EBITDA DY 213e 214f 213e 214f 213e 214f Egis Buy HUF 24, % 1.2% Gedeon Richter Hold HUF 37, % 1.9% Krka Buy EUR % 2.8% Source: Raiffeisen Centrobank estimates 3 rd quarter

54 Equities top picks RHI: Further earnings growth in 213 Recommendation: Buy Current share price: EUR / Target price: EUR 32.5 Market capitalisation: EUR 1,15 mn RHI J J A S O N D J F M A M J RHI ATX - AUSTRIAN TRADED INDEX Source. Thomson Reuters Income statement & balance sheet (IFRS) in EUR mn e 214f 215f Income Statement Consolidated sales 1,836 1,849 1,951 2,36 EBITDA EBIT EBT Net profit b.m Net profit a.m Balance sheet Total assets 1,85 1,966 2,11 2,34 Shareholders' equity Goodwill NIBD Source: RHI, Raiffeisen Centrobank estimates Key ratios in EUR e 214f 215f EPS P/E Operating CF per share Price cash flow Book value per share Price book value Dividend yield 3.% 2.9% 3.2% 3.4% ROE 24.7% 27.7% 2.4% 19.1% ROCE 12.5% 14.6% 12.3% 12.9% EV/EBITDA Source: RHI, Raiffeisen Centrobank estimates 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June 213 The investment case remains based on the expansion of the production presence in growth markets such as BRIC countries and the US, although in the current year the higher backward integration and cost savings will be the earnings drivers. After having already implemented some cost-cutting measures last year, the announced closure of the Duisburg plant will further improve RHI s fixed cost base. Moreover after having overcome the ramp-up problems at the raw material plant in Norway, the company s increasing self-supply should be earnings accretive as of Q2. RHI s magnesite self-sufficiency thus accounts for ca. 8%, a level which the management strives to maintain going forward. RHI continues to pursue several growth projects, aimed at expanding its non-european business. Recent management comments suggest that the expansion in the US has replaced Brazil as the foremost priority (although strategic options like a co-operation with a local player are still being examined), also as the year-long Chapter 11 proceedings have been finally concluded in Q2. A decision concerning a brownfield or greenfield plant is to be made in autumn. Also, a decision regarding a brownfield plant in Russia should be taken by year-end. The investment needs were quantified at around EUR 5 mn per plant. The 213 guidance calls for stable revenues and a further improvement of the EBIT margin vs Q1 represented a strong start into the business year. Sales fell 3%, but EBIT rose 47% to EUR 49 mn which implies an 11.6% margin. Although ca. EUR 3 mn were derived from the disposal of land, RHI s underlying performance both in the Steel (strong mix) and in the Industrial segment (strong cement and non-ferrous business) was impressive. We highlight that RHI s full-year earnings will be inflated in the magnitude of roughly EUR 55 mn (to be booked in Q2) as a result of a EUR 77 mn positive impact from the finalisation of the Chapter 11 proceedings in the US and a EUR 22 mn burden related to the closure of the plant in Duisburg. Markus Remis 54 3 rd quarter 213

55 Equities top picks Flughafen Wien: Delivering cost savings Recommendation: Buy Current share price: : EUR / Target price: EUR 54. Market capitalisation: EUR 929 mn Our buy recommendation for the share of Flughafen Wien, the operator of Vienna International Airport, is based above all on the visible positive effects of cost-cutting measures. In addition, the slightly disappointing passenger figures of late should embark on an upward trend in the months to come. The current valuation is attractive, in our view, at a P/B ratio of 1.1x and EV/EBITDA of 6.2x in comparison to the peer group (1.7x and 8.8x, respectively). The new terminal Check-In 3 was put into operation in June last year. The business figures of H2 12 showed that the opening of the new terminal did not entail any perceptible increase in overall operating costs of the airport, which remained constant yoy. This surprising development was confirmed by the group s Q1 13 results. We expect the positive effects from cost-cutting measures to persist in the quarters to come, prompting an increase of our earnings estimates. As for the business year 213e, Flughafen Wien anticipates sales of more than EUR 625 mn, EBITDA in excess of EUR 23 mn and net profit of at least EUR 65 mn. Our estimates are slightly above the company guidance. Moreover, we would like to mention the reduction of net debt, which also beat expectations: the group scaled back its net debt position by roughly another EUR 3 mn to slightly below EUR 7 mn in Q1 13. Passenger traffic so far disappointed with a decline of 2.2% in the period January-May 213. However, we reckon that this trend should improve in the coming months due to the following factors: 1. Austrian Airlines (market share of about 5%) cut capacities as of July 212, so that a positive base effect will be felt in summer, 2. Niki (some 9% market share) started to offer additional destinations in its flight schedule for the summer period this year and 3. Turkish Airlines (2% market share) registered almost a doubling of passenger figures. Bernd Maurer Flughafen Wien J J A S O N D J F M A M J FLUGHAFEN WIEN ATX - AUSTRIAN TRADED INDEX Source. Thomson Reuters Income statement & balance sheet (IFRS) in EUR mn e 214f 215f Income Statement Consolidated sales EBITDA EBIT EBT Net profit b.m Net profit a.m Balance sheet Total assets 2,62 2,25 1,987 1,948 Shareholders' equity , Goodwill NIBD Source: Flughafen Wien, Raiffeisen Centrobank estimates Key ratios in EUR e 214f 215f EPS P/E Operating CF per share Price cash flow Book value per share Price book value Dividend yield 2.4% 2.5% 2.7% 2.8% ROE 8.7% 7.8% 7.8% 8.1% ROCE 5.5% 5.5% 5.7% 6.2% EV/EBITDA Source: Flughafen Wien, Raiffeisen Centrobank estimates 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June rd quarter

56 Equities top picks Netia: Looking for growth areas, awaiting a strategic buyer Recommendation: Buy Current share price: PLN / Target price: PLN 5. Market capitalisation: EUR 354 mn Netia J J A S O N D J F M A M J NETIA WARSAW GENERAL INDEX 2 Source. Thomson Reuters We confirm our TP of PLN 5 and our buy recommendation owing to an attractive valuation coupled with Netia s flexible move towards the growth areas of pay-tv and advanced solutions for the business clients. We currently see Netia largely as a takeover target story due to its low multiple valuation, strong presence in the business segment, its fibre infrastructure and given a number of potentially interested entities. Firstly, we believe that Deutsche Telekom, the owner of one of the top-three mobile operators in Poland, may expand into the business segment and combine the mobile and fixed line offer, which has been recently confirmed by its interest in GTS operator. Secondly, private equity funds may be called upon by the cash generation of Netia and its relative attractiveness compared to expensive cable-tv operators. And finally, we would not be surprised if a cable-tv operator decided to buy Netia in order to strengthen its presence in the corporate segment. Income statement & balance sheet (IFRS) in PLN mn e 214f 215f Income Statement Consolidated sales 2,121 1,97 1,789 1,736 EBITDA EBIT EBT Net profit b.m Net profit a.m Balance sheet Total assets 3,233 2,987 2,752 2,574 Shareholders' equity 2,296 2,178 2,72 1,991 Goodwill NIBD Source: Netia, Raiffeisen Centrobank estimates Key ratios in PLN e 214f 215f EPS P/E neg Operating CF per share Price cash flow Book value per share Price book value Dividend yield.% 9.6% 9.6% 9.6% ROE -3.7% 1.1% 1.9% 3.2% ROCE -.8% 1.8% 2.5% 3.5% EV/EBITDA Source: Netia, Raiffeisen Centrobank estimates 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June 213 The recent transactions in Europe (acquisition of Virgin Media by Liberty in the UK and Kabel Deutschland by Vodafone in Germany) indicate that capital links between cable operators and telecom services providers are possible, while fixed line networks may represent a complementary service for mobile telephony players. We believe that market consolidation should support the share price of Netia - the rumoured valuation of GTS Central Europe, a medium-sized telecom operator to be potentially acquired by Deutsche Telekom, would imply an EV/ EBITDA multiple of 6x, much above current Netia s valuation of 3.6x. Netia plans to distribute at least PLN.42 per share to shareholders in form of a dividend or buyback (if a net loss resulting from impairments is incurred). translating into a yield of over 9%. Our model implies that Netia could easily afford such payments and, at the same time, may gradually reduce its debt. We also see the company as capable to raise new financing provided that an acquisition opportunity arises. Dominik Niszcz 56 3 rd quarter 213

57 Equities top picks Komercni Banka: Still at dividend play supported by excess capital Recommendation: Buy Current share price: CZK 3,49 / Target price: CZK 4,4 Market capitalisation: EUR 5,115 mn Looking for bottom-line growth Komercni Banka is not the right stock to hold as ongoing erosion of NIM should cause a double-digit drop of the bottom line in 213e, despite strong cost control and good credit quality even in a recessionary environment. Consensus has already digested a -12% net profit development in 213 and a strong rebound is also not expected by the market. However, the recent rise in government bond yields should again provide tailwind for depositrich banks like KB (loan/deposits 81%) due to rising reinvestment yields. Therefore margin pressure on deposits could come to an end until year-end. Looking at a core tier 1 ratio exceeding 16.% (including retained earnings), the bank still looks overcapitalised. This is also true looking at Basel III regulations as the expected Basel III impact was reduced from around 12bp to 5bp due the revised regulation on SME lending and the risk weighting of insurance holdings. The limited recognition of equity provided by minority shareholders on group level under Basel III, however, still incentivises higher dividend payments/ share buybacks. Assuming a 5bp negative Basel III effect on the CT1 ratio and a potential target CT1 ratio of Income Statement 11% we assume an excess capital of currently CZK 37 per share. Given the recent weakness in the share price digesting the NIM pressure in H1 and accounting for the positive effect of lower discount yields we have recently upgraded our recommendation from hold to buy. An assumed dividend yield of 5.7% still looks attractive in relation to the current 1y CZK treasury yield of 2.2% and the significant excess capital provides the opportunity for a bonus dividend as was already observed in 21. The main risk currently might be the introduction of a bank tax, which could come on the agenda after the next elections. Stefan Maxian Key ratios in CZK e 214f 215f EPS adj P/E Book value per share Price book value Price tang. book value DPS Dividend yield 5.7% 5.7% 6.% 6.3% ROE adj. 14.8% 12.1% 12.4% 12.3% Loan/deposits 81.% 8.8% 83.% 84.7% Tier 1 ratio 14.7% 15.1% 15.6% 16.% Source: Komercni Banka, Raiffeisen Centrobank estimates Komercni Banka 4,3 4,2 4,1 4, 3,9 3,8 3,7 3,6 3,5 3,4 3,3 J J A S O N D J F M A M J KOMERCNI BANKA PRAGUE SE PX Source. Thomson Reuters Income statement & balance sheet (IFRS) in CZK mn e 214f 215f Net interest income 21,947 2,851 21,829 22,786 Risk provisions -1,871-2,178-2,58-2,248 Net commission income 7,18 6,98 7,72 7,273 Net trading result 3,597 2,85 2,9 2,9 Pre-tax profit 16,938 14,987 15,939 16,57 Net profit after minorities 13,951 11,982 12,743 13,197 Balance sheet Customer loans 469,1 486,67 512, ,96 Customer deposits 579,67 62,23 617, ,718 Shareholders equity 97,88 99,83 14,991 11,257 Total assets 786,835 89,6 835,61 858,628 Source: Komercni Banka, Raiffeisen Centrobank estimates 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June rd quarter

58 Equities top picks Magnit: On the growth path Recommendation: Buy Current share price: RUB 6,936 1 / Target price: RUB 9,14 Market capitalisation: EUR 14,944 mn Magnit 8, 7,5 7, 6,5 6, 5,5 5, 4,5 4, 3,5 3, J J A S O N D J F M A M J MAGNIT RUSSIAN MICEX INDEX Source. Thomson Reuters We confirm our Buy recommendation for Magnit local share, based on both fundamental and technical reasons. Magnit is the largest food retailer in Russia in terms of both selling space and sales. The company has the broadest geographical presence in Russia s regions among its rivals and sticks to its ambitious plans for further retail chain growth. The retailer s market share is estimated at about 5% and we expect it to double by 217. Magnit local share is now traded with about 15% discount to EV/EBITDA 214f for its EM peers with a comparable growth profile. We expect Magnit to generate a 27% top line CAGR e, which should be transformed into a 23% EBITDA CAGR e. Magnit s wise leverage policy with a Net Debt/EBITDA ratio of below 1.5x provides for financial stability and also creates potential access to capital to further expand investments. The retailer s expanding business provides for the economy of scale, while the vertical integration of the supply chain Income statement & balance sheet (IFRS) gives the retailer strong competitive in RUB mn Income Statement Consolidated sales ,43 213e 18, f 23, f 29,541 advantage and more effective cost control, supporting profit margins. EBITDA EBIT EBT Net profit b.m. Net profit a.m. Balance sheet Total assets Shareholders' equity Goodwill NIBD Source: Magnit, Raiffeisen Centrobank estimates Key ratios in RUB 1,53 1,167 1, ,261 3,267 1, ,86 1,296 1, ,586 3,95 2,18 213e 2,329 1,679 1,488 1,146 1,146 1,257 4,859 2, f 2,854 2,79 1,894 1,458 1,458 11,72 6,16 1, f In addition to fundamental reasons, we see that Magnit s local share is attractive as it is now traded with about 2% discount to its GDR, which we expect to narrow due to: (1) local market infrastructure enhancement via the launch of T+2 settlement in H2 13, (2) expected Euroclearing of Russian equities by 214, (3) possible cancellation of the 25% limit on the number of shares which can be placed abroad, set by Law (Magnit now has fully executed GDR quota). EPS Natalya Kolupaeva P/E Operating CF per share Price cash flow Book value per share Price book value Dividend yield.9%.9% 1.2% 1.5% ROE 28.3% 23.9% 26.% 26.8% ROCE 19.3% 17.3% 19.2% 21.% EV/EBITDA Source: Magnit, Raiffeisen Centrobank estimates 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June rd quarter 213

59 Equities region overview Target MCap. Free P/E P/B EV/EBITDA Dividend yield FX Price 1 Rec. Risk from price EUR mn float (%) 213e 214f 213e 214f 213e 214f 213e 214f BASIC MATERIALS AMAG AT EUR H m 7/5/ % % 2.8% Acron RU RUB 1,257 B h 27/3/13 2,325 1,177 16% % 5.6% Bogdanka PL PLN 115. UR h 27/2/13 UR 97 61% % 8.4% Ciech PL PLN B m 11/12/ % % 1.5% Evraz RU GBp 11.3 H h 21/2/13 UR 1,899 22% % 3.1% Grupa Azoty PL PLN 76. H m 22/5/ ,748 46% % 3.4% JSW PL PLN 77. UR m 2/3/13 UR 2,96 43% % 2.3% Kety PL PLN H m 25/4/ % % 3.8% KGHM PL PLN H m 27/3/ ,5 68% % 4.% Lenzing AT EUR 56.3 B m 8/5/ ,488 27% % 3.6% Mayr-Melnhof AT EUR 81. H m 15/5/ ,619 41% % 2.8% Mechel RU USD 2.71 H h 21/2/13 UR % % 3.1% MMK RU USD 2.84 B h 21/2/ ,841 13% % 1.7% New World Resources CZ CZK 2.4 R m 12/2/13 UR 21 36% neg. neg %.% NLMK RU USD H h 23/5/ ,712 14% % 3.1% Petropavlovsk RU GBp 13.1 B h 29/3/ % % 6.4% PhosAgro RU USD 12.6 B h 3/4/ ,556 11% % 6.2% Polymetal International RU GBp 541. B h 25/4/ ,421 5% % 3.7% RHI AT EUR B m 16/5/ ,15 57% % 3.2% Severstal RU USD 6.6 B h 16/5/ ,179 21% % 3.2% Synthos PL PLN 4.71 H m 3/4/ ,445 38% % 8.% voestalpine AT EUR H m 1/6/ ,788 62% % 4.1% Mean (companies) % 3.8% Median (companies) % 3.3% FINANCIALS Aik Banka RS RSD 1,3 H h 1/6/13 1, % n.a. n.a..%.% Banca Transilvania RO RON 1.21 H h 1/6/ % n.a. n.a..% 2.3% Bank Millennium PL PLN 5.5 H m 1/6/ ,547 35% n.a. n.a. 1.6% 2.1% Bank Pekao SA PL PLN H m 1/6/ ,329 41% n.a. n.a. 4.9% 5.4% BRD-GSG RO RON 7.7 H h 1/6/ ,185 4% n.a. n.a. 1.1% 4.2% BRE Bank PL PLN 381. R m 1/6/ ,718 3% n.a. n.a. 3.2% 3.5% BZ WBK PL PLN H m 1/6/ ,478 7% n.a. n.a. 2.6% 3.4% Erste Group*** AT EUR H m 1/6/ ,99 58% n.a. n.a. 2.3% 2.7% Getin Noble Bank PL PLN 1.9 B h 1/6/ ,167 38% n.a. n.a..%.% Komercijalna RS RSD 1,18 R h 1/6/13 1,2 178 % n.a. n.a..4%.4% Komercni Banka CZ CZK 3,49. B m 1/6/13 4,4. 5,115 4% n.a. n.a. 5.7% 6.% NKBM** SI EUR.51 RS m 25/6/12 RS 2 49% n.a. n.a..%.% OTP HU HUF 4,621 H h 1/6/13 5,1 4,276 68% n.a. n.a. 3.1% 3.6% PKO BP PL PLN 34.8 B m 1/6/ ,877 49% n.a. n.a. 3.4% 3.9% Raiffeisen Bank Intl. AT EUR 24. NR m NR NR 3,712 37% n.a. n.a. 4.2% 4.6% PZU PL PLN 412. H m 2/5/ ,249 35% n.a. n.a. 7.5% 7.5% UNIQA AT EUR 1.3 NR m NR NR 2,26 5% n.a. n.a. 2.8% 3.2% Vienna Insurance Group AT EUR H h 15/5/ ,718 3% n.a. n.a. 3.4% 3.5% Mean (companies) n.a. n.a. 2.6% 3.1% Median (companies) n.a. n.a. 2.7% 3.4% Recommendation categories: B - Buy H - Hold R - Reduce S - Sell RS - Recommendation suspended UR - Under review NR - Not rated Risk categories: h - high m - medium l - low 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June 213; ** estimates under review, consensus estimates (Bloomberg); *** changed on 26 June Source: Raiffeisen Centrobank 3 rd quarter

60 Equities region overview Target MCap. Free P/E P/B EV/EBITDA Dividend yield FX Price 1 Rec. Risk from price EUR mn float (%) 213e 214f 213e 214f 213e 214f 213e 214f INDUSTRIALS Andritz AT EUR 39.7 R m 2/5/ ,56 7% % 3.8% Flughafen Wien AT EUR B m 23/5/ % % 2.7% Oesterreichische Post AT EUR 3.95 H m 21/5/ ,91 47% % 6.1% Palfinger AT EUR H m 25/2/ % % 2.9% Polytec AT EUR 6. B h 11/2/ % % 7.5% Rosenbauer AT EUR 51. H m 24/5/ % % 2.4% Semperit AT EUR H m 27/3/ % % 3.5% Teraplast** RO RON.17 RS h 4/1/13 RS 11 46% %.% Mean (companies) % 3.6% Median (companies) % 3.2% OIL & GAS Gazprom RU RUB 18 H h 13/3/ ,23 43% % 8.% Lotos PL PLN S m 15/5/ ,123 47% %.% LUKoil RU RUB 1,865 B h 13/3/13 2,555 36,652 58% % 5.6% MOL HU HUF 16,7 H m 18/6/13 19,2 4,99 33% % 2.4% Novatek RU RUB 326 B h 13/3/ ,871 28% % 3.4% OMV AT EUR H m 27/5/ ,785 44% % 3.5% OMV Petrom RO RON.427 B m 13/3/13 UR 5,335 7% % 8.5% PKN PL PLN 47.5 H m 6/5/ ,71 62% % 3.8% Rosneft RU RUB 221 H h 13/3/ , 15% % 2.9% SBO AT EUR H m 23/5/ ,2 69% % 2.5% Tatneft RU RUB 183 R m 13/3/ ,197 8% % 4.3% Mean (companies) % 4.1% Median (companies) % 3.5% HEALTHCARE Biofarm** RO RON.25 RS h 31/8/12 RS 6 42% % 4.6% Egis HU HUF 21,1 B m 22/3/13 24, % % 1.2% Gedeon Richter HU HUF 34,49 H m 11/3/13 37,4 2, % % 1.9% Krka SI EUR 51.2 B l 3/1/ , % % 2.8% Mean (companies) % 2.6% Median (companies) % 2.3% TECHNOLOGY ams AT CHF 73. H h 1/6/ % % 2.4% Asseco Poland PL PLN 42.2 H m 1/5/ % % 6.% AT&S AT EUR 6.5 H m 3/6/ % % 2.6% Ericsson Nikola Tesla HR HRK 1,332 R m 13/3/13 1, % % 1.5% Kapsch TrafficCom AT EUR B l 5/3/ % % 2.6% Mean (companies) % 4.8% Median (companies) % 2.6% Recommendation categories: B - Buy H - Hold R - Reduce S - Sell RS - Recommendation suspended UR - Under review NR - Not rated Risk categories: h - high m - medium l - low 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June 213, ** estimates under review, consensus estimates (Bloomberg) Source: Raiffeisen Centrobank 6 3 rd quarter 213

61 Equities region overview Target MCap. Free P/E P/B EV/EBITDA Dividend yield FX Price 1 Rec. Risk from price EUR mn float (%) 213e 214f 213e 214f 213e 214f 213e 214f TELECOMMUNICATION Hrvatski Telekom* HR HRK 173 UR m 5/12/12 UR 1,889 38% % 12.2% Magyar Telekom* HU HUF 33 UR m 12/6/12 UR 1,151 41% % 15.2% MegaFon RU USD 3.12 H h 7/2/ ,114 15% % 5.7% MTS RU USD H h 25/2/ ,364 49% % 6.9% Netia PL PLN 4.38 B m 27/5/ % % 9.6% Rostelecom RU RUB 93 B h 25/3/ ,32 4% % 5.8% Telefonica CR CZ CZK 265. UR m 27/3/ ,246 31% % 11.3% Telekom Austria AT EUR 4.98 H m 13/5/ ,27 49% % 1.% TPSA* PL PLN 8.12 UR m 19/1/12 UR 2,471 5% % 12.3% VimpelCom Ltd RU USD 9.99 B h 15/2/ ,188 9% % 8.% Mean (companies) % 8.8% Median (companies) % 8.8% UTILITIES CEZ CZ CZK B m 27/3/ ,668 3% % 8.2% E.On Russia RU RUB B h 1/4/ ,412 18% % 5.8% Enea PL PLN B m 18/1/13 UR 1,446 29% % 2.5% Enel OGK-5 RU RUB 1.35 B h 1/4/ ,67 9% % 5.5% EVN AT EUR 9.86 H l 6/6/ ,762 16% % 4.4% Federal Grid Company RU RUB.12 H h 22/11/ ,999 2% % 2.% InterRAO RU RUB.12 H h 12/2/ ,44 18% % 2.9% PGE PL PLN 17.6 H m 7/3/ ,63 38% % 4.6% PGNiG PL PLN 6.6 R m 28/3/ ,29 27% % 3.% RusHydro RU RUB.479 B h 12/2/ ,74 3% % 5.4% Tauron PL PLN 3.9 UR m 2/4/ ,585 54% % 3.4% Transelectrica RO RON 13. H m 3/4/ % % 5.8% Transgaz* RO RON H m 2/2/12 UR % % 8.9% Verbund AT EUR H m 28/3/ ,354 16% % 3.9% Mean (companies) % 4.7% Median (companies) % 4.5% CONSTRUCTION & MATERIALS Budimex PL PLN 93.2 H m 3/4/ % % 2.4% Mostostal Warszawa PL PLN 4.99 H h 12/3/13 UR 23 28% %.% PBG PL PLN 5.42 RS h 9/3/12 RS 18 41% %.% Polimex-Mostostal PL PLN.4 UR h 3/3/12 UR 48 75% %.% STRABAG SE AT EUR H m 29/5/ ,675 13% % 3.1% Wienerberger AT EUR 9.58 H m 14/5/ ,12 98% neg % 1.6% Zumtobel AT EUR 8.39 H m 29/4/ % % 4.8% Mean (companies) % 1.7% Median (companies) % 1.6% Recommendation categories: B - Buy H - Hold R - Reduce S - Sell RS - Recommendation suspended UR - Under review NR - Not rated Risk categories: h - high m - medium l - low 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June 213, ** estimates under review, consensus estimates (Bloomberg) Source: Raiffeisen Centrobank 3 rd quarter

62 Equities region overview Target MCap. Free P/E P/B EV/EBITDA Dividend yield FX Price 1 Rec. Risk from price EUR mn float (%) 213e 214f 213e 214f 213e 214f 213e 214f REAL ESTATE Atrium AT EUR 4.12 RS m 2/4/13 RS 1,544 46% % 4.8% CA Immobilien AT EUR 9.15 RS m 28/3/13 RS 84 82% % 4.2% conwert AT EUR 7.73 RS m 9/4/13 RS 64 73% % 2.5% Echo Investment PL PLN 7.18 H h 15/2/ % %.% Globe Trade Centre PL PLN 8.75 RS m 3/4/13 RS % neg. neg %.% Immofinanz AT EUR 3.3 RS m 2/4/13 RS 3,134 91% % 6.6% Polnord PL PLN 8.75 UR h 7/3/13 UR 52 58% neg. neg %.% S IMMO AT EUR 4.65 RS h 3/4/13 RS 317 8% % 2.1% Warimpex AT EUR 1.27 RS h 2/4/13 RS 69 45% neg. neg %.% Mean (companies) % 2.3% Median (companies) % 2.1% CONSUMER, CYCLICAL Agora PL PLN 8.55 B m 6/6/ % % 5.8% AmRest PL PLN 84. B h 27/3/ % %.% CCC PL PLN 85.3 R m 29/5/ % % 2.% Cinema City PL PLN 29.7 S h 29/1/ % %.% CTC Media RU USD 11.7 H h 27/2/ ,419 37% % 7.6% Cyfrowy Polsat PL PLN 19.7 B m 11/6/ ,591 48% % 5.1% Gorenje** SI EUR 4.11 RS h 21/11/11 RS 65 54% %.% LPP PL PLN 6,91 B m 6/3/13 UR 2,849 48% % 1.8% M.video RU RUB 246 B h 26/3/ ,2 31% % 3.4% TVN PL PLN H m 11/6/ % % 2.7% Wolford AT EUR 2. H m 27/3/ % % 1.% Mean (companies) % 2.7% Median (companies) % 2.% CONSUMER, NON-CYCLICAL Adris HR HRK UR h 18/12/12 UR % % 2.5% AGRANA AT EUR H m 28/3/ ,586 25% % 3.3% DIXY Group RU RUB 445 B h 31/5/ ,283 33% %.% Eurocash PL PLN 52. H m 12/3/ ,649 51% % 1.1% Magnit RU USD 53.3 H h 31/5/ ,26 54% % 1.2% OKey RU USD 11.4 R h 31/5/ ,318 14% % 2.3% Podravka HR HRK 228 H h 27/2/ % % 2.9% Viro HR HRK 61 R h 19/2/ % % 2.3% X5 RU USD H h 31/5/ ,654 32% %.% Mean (companies) % 1.7% Median (companies) % 2.3% Recommendation categories: B - Buy H - Hold R - Reduce S - Sell RS - Recommendation suspended UR - Under review NR - Not rated Risk categories: h - high m - medium l - low 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 June 213; ** estimates under review, consensus estimates (Bloomberg) Source: Raiffeisen Centrobank 62 3 rd quarter 213

63 Equities region overview Sector weightings in comparison Sector weightings Poland, WIG 2 Dom. market cap.: EUR 132,6 bn (Source: FESE; 31-May-13) Sector weightings Czech Republic, PX 1 Dom. market cap.: EUR 24 bn (Source: FESE; 31-May-13) Insurance 14.% Consumer staples 3.92% Real Estate 1.23% Media.% Banks 32.83% Software & Services 1.91% Energy 18.68% Materials 14.15% Telecommunications 3.19% Utilities 1.9% Media.96% Hotels, Restaurants, Leisure 1.88% Consumer Durables 1.6% Food Beverage & Tobacco 2.7% Insurance 19.83% Retailing.16% Energy.7% Banks 38.71% Materials 3.6% Telecommunications 11.14% Utilities 19.88% 1 excl. Orco Property Sector weightings Hungary, BUX Dom. market cap.: EUR 15,7 bn (Source: FESE; 31-May-13) Software & Services.13% Commercial Services (incl. Hotels, Restaurants).88% Pharma & Biotechnology 24.78% Financials 32.9% Energy 31.65% Capital Goods.2% Materials.22% Telecommunications 1.5% Sector weightings Russia, MICEX Dom. market cap.: EUR 545,4 bn (Source: WFE; 31-May-13) Financials 19.1% Utilities 2.78% Transportation.33% Retailing 6.53% Consumer Durables.18% Telecommunications 8.37% Materials 12.65% Pharma & Biotechnology.6% Automobiles.14% Energy 49.21% Capital Goods.2% Sector weightings Romania, BET Sector weightings Turkey, ISE 1 Dom. market cap.: EUR 23,3 bn (Source: BSE; 31-May-13) Dom. market cap.: EUR 244,6 bn (Source: FESE; 31-May-13) Health Care 4.1% Investment funds 22.27% Financials 41.59% Energy 26.36% Utilities 4.3% Information Technology 1.39% Pharma & Biotechnology.23% Consumer staples 12.37% umer discretionary 5.58% Industrials 14.99% Technology Hardware.15% Financials (Banks incl. Insurance) 49.69% Hotels, Restaurants, Leisure.26% Energy 3.91% Materials 5.54% Telecommunications 6.55% Utilities.73% 3 rd quarter

64 Technical analysis CEE is a typical lifo = last in, first out ATX ATX Last: 2,32. Our buy-limit 2,555 had only been tested, then it expectedly hit 2,367. Now the obvious Head-/Shoulder pattern indicates a drop towards at least 2,2. In case the rising-support line there would not hold firm, a further decline towards 2,5, 1,93 and even 1,9 could get triggered. Position: short -> 2,2 1,9 Stop 2,3 Price as of 2 June 213, 5:17 p.m. CET BELEX 15 BELEX 15 Last: The buy-limit at 582 had only been exceeded by six points before the expected slump towards the range 5 47 hit in. Currently a rebound back into the gap at 54 is to be expected, a more conservative buy-signal would be triggered on crossing beyond 512 indicating the rebound s prolongation towards 53. On the other hand a bearish confirmation at 465 -> 42 cannot be ruled out by now. Buy 498 -> Stop 48 Price as of 2 June 213, 5:45 p.m. CET BUX BUX Last: 18,739 Still the BUX has not broken free from the Symmetrical Triangle s boundaries, a pattern per se to be rated as neutral. This pattern is located right in below of the major resistance, e.g. 2,. The just recently - at 19,3 - triggered bearish signal has indicated a setback to in below the rising-support line at 17,46. Thus the path towards 15,8 would be all cleared. Sell 17,46 -> 15,8 13,71 Buy 2,8 -> 21,63 Price as of 2 June 213, 6:5 p.m. CET Robert Schittler 64 3 rd quarter 213