Sound fundamentals will pay off

Transcription

1 Central & Eastern European Strategy 1 st quarter 214 Sound fundamentals will pay off CE countries to lead CEE recovery Autonomous monetary policy in 214 Orderly tapering benign for spreads in Q1 CE Stock markets with catch up potential

2 Content Central & Eastern European Strategy Topical issue: Turbulent EM conditions have little impact on CEE 3 s CEE incl. Austria 4 Asset allocation CEE incl. Austria 6 Focus on: Multi-speed recovery in CEE 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.a.... 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 1 st quarter 214

3 Topical issue Multi-speed recovery in CEE Central Europe (CE) takes over from CIS as the growth leader Impact of US tapering on the CEE financial markets to be limited and temporary Exchange rates influenced by local interest rate policies and the ECB s relaxed monetary policy Compared to recent years, the economic situation has changed significantly. Whereas the CIS region had shown the strongest growth figures since the last upturn, since the summer of 213 the momentum in economic growth has been increasingly shifting to Central Europe. Two factors are playing a major role in this: on the one hand, countries with strong export ties to Germany are profiting from the economic performance of the Euro areas powerhouse. On the other hand, countries with low unit labour costs have made their industries competitive versus imports, and domestic investments should also broadly contribute to economic growth again. Furthermore, the less restrictive fiscal stance also allows for some mild additional growth. Net exports and private investment will also be the main economic motors in Austria in 214 as well. By contrast, prospects in Russia and Ukraine remain subdued. Even in 215 growth is not expected to return to its potential level there, because it has not been possible to modernise industry outside of the oil & gas business, to promote the production of high quality goods for consumers and to redirect capital outflows into domestic gross fixed-investments. Accordingly, growth in the CE centred around Poland will amount to around 2.3% in 214, coming in well higher than the CIS growth figure of 1.6%. For 215, we project growth to accelerate by one half a percentage point for both. Impact on monetary policy and exchange rates Due to the massive improvement in foreign trade since the financial crisis, accompanied by broadly balanced C/A balances, local central banks in CEE will probably continue to use their ability to shape interest rate policy autonomously in 214. In Romania and Hungary we still see some leeway for lower rates, whereas rates have otherwise mostly bottomed out (Poland, Czech Republic). Consequently, even US tapering will probably only have a temporary impact on the exchange rate parities of the CEE countries to the euro, if indeed it has any effect at all. As a result, this effect does not play a role in the quarterly forecasts for the first half of the year. Over a 12-month horizon, however, we do see potential for both the rouble and the hryvnia (UAH) to depreciate. We expect to see modest appreciation for PLN and CZK. Impact on the bond and equity markets With the exception of Russia and Turkey, yields on CEE government bonds are relatively low. As yields rise in the Euro areas during the course of 214, we expect a parallel development for CEE government bonds, with an increase of around 5-7bp compared to end-213. Keen international interest in CEE Eurobonds should continue in Q1. Thus, positive performance is likely, despite tighter spreads. Thereafter, however, there is some potential for setbacks. During the first half of the year, the disappointing stock market performance in Austria and CEE from 213 should be mostly overcome. We see moderate potential for these markets to catch up by 4 to 11% by mid-214, with the ATX, BUX and BET leading the way, and the MICEX, WIG3 and CROBEX trailing on the lower end of price performance. In terms of sectors, we take a cyclical stance. Peter Brezinschek Change PMI over the last 12m Latest Recommendations 1 - stock markets Indices Buy ATX, WIG 2, BUX, PX, BET Hold MICEX, BIST Nat. 1 Sell CROBEX1 Sectors Overweight Financials, Energy Underweight Telecommunication, Utilities Equities Buy Czech Rep. Max Min Turkey Poland Austria Mayr-Melnhof EUR 87.7 Target price: 1. UNIQA EUR 9.6 Target price: EUR 1.75 Alior PLN Target price: PLN 91. Ciech EUR 3. Target price: EUR 36. CTC Media USD Target price: USD 15. Recommendations 1 debt markets LCY bonds 3 HUF 2y T-bonds Buy TRY 5y T-bonds Eurobonds Euro area Hungary Hungary (EUR) Buy Romania (EUR) Ukraine (USD), speculative Corporate bonds Russia Gazprombank 6.5% due 215 Buy Halyk Bank 7.25% due horizon: end 1st quarter the indicated price is the last price as available at 6.3 a.m. (CET) on 2 December unhedged (performance in EUR) Source: Raiffeisen RESEARCH 1 st quarter 214 3

4 s Real GDP (% yoy) Countries e 214f Consensus 215f Consensus Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia n.a. Bosnia a. H n.a. Albania n.a. Kosovo n.a. 4. n.a. SEE Russia Ukraine Belarus n.a. CIS CEE Turkey Austria Germany Euro area Source: Thomson Reuters, Bloomberg, Consensus Economics, Bloomberg, Raiffeisen RESEARCH Current account balance (% of GDP) Countries e 214f 215f 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 General budget balance (% of GDP) Countries e 214f 215f Poland Hungary Czech Rep Slovakia Slovenia CE Croatia Bulgaria Romania Serbia Bosnia a. H Albania Kosovo SEE Russia Ukraine Belarus.5... CIS CEE Turkey Austria Germany Euro area Consumer prices (avg, % yoy) Countries e 214f 215f 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 215f 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 215f 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. Exchange rate EUR/LCY (avg) Countries e 214f 215f 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 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 BB+ Bulgaria BBB Baa2 BBB- Romania BB+ Baa3 BBB- Serbia BB- B1 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- Caa1 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 1 st quarter 214

5 s Exchange rate forecast Countries 19-Dec 1 Mar-14 Jun-14 Dec-14 vs EUR Poland Hungary Czech Rep Croatia Romania Serbia Albania vs USD Russia Ukraine Belarus 9,485 1,3 1,8 12,1 Turkey EUR/USD : p.m. (CET) 2y LCY yield forecast Countries 19-Dec 1 Mar-14 Jun-14 Dec-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 1y gov. bond yield in next 3 months Stock market indicators Germany USA Earnings growth Price/earnings ratio 13e 14f 13e 14f ATX.6% 26.1% WIG % 2.5% BUX -19.4% 18.1% PX % 31.2% MICEX 3.4% -.6% BET 28.% 15.2% CROBEX1-2.% 2.9% BIST Nat % 8.4% Czech Rep. (PX): excl. Orco Property Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH Key interest rate forecast Countries 19-Dec 1 Mar-14 Jun-14 Dec-14 Poland Hungary Czech R Romania Russia Turkey Euro area USA : p.m. (CET) 5y LCY yield forecast Countries 19-Dec 1 Mar-14 Jun-14 Dec-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 19-Dec 1 Mar-14 Jun-14 Dec-14 ATX 2,485 2,63 2,7 2,8 WIG 2 2,378 2,49 2,52 2,58 BUX 18,631 19,8 2,2 2,6 PX 975 1,4 1,6 1,8 MICEX 1,498 1,53 1,58 1,6 BET 6,372 6,85 7,1 7,2 CROBEX1 1,4 98 1,4 1,7 BIST Nat. 1 69,1 71, 75, 78, 1 11:59 p.m. (CET) In local currency 3m money market rate forecast Countries 19-Dec 1 Mar-14 Jun-14 Dec-14 Poland Hungary Czech R Croatia Romania Russia Turkey Euro area USA : p.m. (CET) 1y LCY yield forecast Countries 19-Dec 1 Mar-14 Jun-14 Dec-14 Poland Hungary Czech R Croatia Romania Russia Turkey Austria Germany USA : p.m. (CET) LCY changes vs. EUR (% qoq) 1 CZK TRY RUB RON HUF USD 1 19-Dec 213 in comparison to 3-Sep 213 Source: Bloomberg PLN Expected index performance 14% 12% 1% 8% 6% 4% 2% % -2% -4% ATX WIG 2 BUX Mar-14 PX Source: Raiffeisen RESEARCH MICEX BET Jun-14 CROBEX1 BIST Nat. 1 1 st quarter 214 5

6 Asset allocation - performance Mild recovery in the equity segment Q4 213 sees outperformance compared to the benchmark Overweight on Romanian stock market rewarded with outperformance Successful underweighting of Czech LCY bonds Sum of last quarter 1 RBI portfolio (in EUR).31% Benchmark (in EUR).17% RBI outperformance (in EUR).14% by weighting of equities vs. bonds -.1% regional equity weightings.1% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.5% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% 1 17 Sep Dec 213 EB...Eurobonds Period 1: 17 Sep Oct 213 RBI portfolio (in EUR) 2.86% Benchmark (in EUR) 2.78% RBI outperformance (in EUR).8% by weighting of equities vs. bonds.4% regional equity weightings.2% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.1% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds Period 2: 28 Oct Nov 213 RBI portfolio (in EUR) -1.77% Benchmark (in EUR) -1.87% RBI outperformance (in EUR).1% by weighting of equities vs. bonds.% regional equity weightings.7% weighting of EB vs. LCY bonds.% country weightings of LCY bonds.3% country weightings of EB EUR.% country weightings of EB USD.% joint effects / duration.% EB...Eurobonds Period 3: 26 Nov Dec 213 RBI portfolio (in EUR) -.78% Benchmark (in EUR) -.74% RBI outperformance (in EUR) -.5% by weighting of equities vs. bonds -.5% regional equity weightings.1% 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 Despite extremely difficult market conditions in the first three quarters, outperformance of 6bp versus the benchmark was recorded for the year to date in 213. In Q4 213, the portfolio mainly profited from the overweighting of the Romanian equity market and the underweighting of Czech bonds. With this positioning, the underperformance from H1 which was carried over into Q3 was more than offset. Considering Q4 only, the portfolio achieved outperformance of 14bp. Overweighting of equities in the first and third period resulted in an outperformance of 4bp in the first period only. After these positions were closed in the second period, it was not quite possible to benefit from the rebound in the equity segment. Within the equity segment, Romania was overweighted for the entire quarter, resulting in outperformance of 8bp versus the benchmark. During the first two investment periods, this bet was financed exclusively from the underweight on Russia, and in the third investment period the financing was divided up between Russia (persistently sluggish economic recovery) and Hungary (political risk).with the underweighting of the Russian equity market it was possible to achieve outperformance of just over 3bp, whilst the Hungarian underweighting yielded a slightly negative result (-1bp). On the whole, the individual positioning in the equity segment generated a result of 1bp versus the benchmark. Positionings in the bond segment also provided additional support for the portfolio s outperformance. Within the LCY bond segment, the overweighting of Poland and Romania produced outperformance of almost 1bp. During the first two periods, this positioning was financed by the underweight on the Czech Republic and in the third period by underweights on Russia and Hungary. All in all, the individual weightings in the bond segment resulted in outperformance of just about 5bp compared to the benchmark. This positive result was mainly driven by currency developments, due to the underweighting of Czech bonds (4bp). Stefan Theußl Performance Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 RBI-Portfolio Outperformance (r.h.s.) in percentage points 6 1 st quarter 214

7 Asset allocation - total portfolio Good conditions for CEE equities CEE should profit from the Euro area recovery Equity investments interesting due to the attractive valuations Government bonds still attractive, but have limited potential From a portfolio perspective, performance during H2 was especially good in the equity segment, but there is still high volatility compared to the developed markets. We expect to see further improvement in the risk-return profile for CEE, which should help improve the attractiveness of equity investments in the region further. The following factors suggest this: 1) Supported by the brightening sentiment in the Euro area, the CEE countries should also gain momentum and once again show positive performance in economic terms. As the recovery progresses in the Euro area, which is our baseline scenario, conditions for CEE equity investments should improve tangibly at the beginning of the year. 2) CEE countries feature attractive stock market valuations. Taking a medium-term perspective, the performance expectations should improve, thanks to the attractive entry levels which we currently see in many countries. Nevertheless, setbacks cannot be ruled out, possibly triggered by developments such as a lack of stimulus in the Euro area, political risks (Russia/Ukraine, Hungary, Czech Republic) or negative surprises in the course of the normalisation of the US monetary policy. Furthermore, stagnating oil prices could be a problem for markets correlating with commodity prices, such as Russia. In terms of bonds, more price gains are looking less likely, as rate-cutting cycles come to an end and some of the first hikes are now being seen (Turkey). Relative to the euro, the currencies are projected to remain stable next quarter, but the start of tapering by the US Fed may lead to higher volatility. Compared to the developed markets, the level of yields is very attractive however. Consequently, we propose the following medium-term positioning in the CEE portfolio. The equity segment is modestly overweighted by 3 pp. Along with the corresponding underweighting of the bond segment, we still take a neutral positioning between LCY bonds and Eurobonds within this segment. Stefan Theußl Risk-return (%) Historic 3 month performance in % -12 In local currency CEE portfolio weightings Q1 214 EB USD: 4.7% [-.3 pp] LCY-bonds: 37.6% [-2.4 pp] 8 Dow BET 1 Jones CTX 4 Euro RTS- STOXX WIG Index CROBEX X -8 CEE HTX Historic 1y volatility in % EB EUR: 4.7% [-.3 pp] Equities: 53% [+3 pp] LCY local currency [-], [+] = Over-/underweight versus benchmark [] = no change Source: Raiffeisen RESEARCH 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 1 st quarter 214 7

8 Asset allocation bonds Relatively subdued performance expectations for CEE bonds Turkey: risks from tapering Higher exchange rate volatility from interest rate cuts in Hungary Romania versus Czech Republic: an attractive carry bet Portfolio weightings: bonds* Portfolio Benchmark Difference EB USD 1.% 1.%.% EB EUR 1.% 1.%.% LCY 8.% 8.%.% Czech Republic 19.% 2.% -1.% Hungary 2.% 2.%.% Poland 45.% 45.%.% Romania 7.% 5.% 2.% Russia 5.% 5.%.% Turkey 4.% 5.% -1.% Croatia.%.%.% * share in percentage points Source: Raiffeisen RESEARCH In most CEE regions, the rate-cutting cycle is already very advanced, and consequently we see limited price potential for bonds. It is also possible that the US Fed s announcement that it will reduce purchases of US bonds in 214 could trigger currency volatility in some CEE countries, meaning that there is at least a short-term risk to the performance of CEE bonds. This will probably hit Turkey in particular, as the last round of discussions about tapering already triggered portfolio reallocations and capital outflows from Turkish bonds. In light of this elevated sensitivity to tapering, we expect underperformance from this position, which why we have underweighted it by 1pp. Historical relative performance* 4% 2% % -2% -4% -6% -8% -1% Czech Rep. Hungary Poland EUR Romania Russia Local currency Turkey * since 3 months, local currency bonds versus portfolio bond benchmark Croatia In the Czech Republic no further rate cuts are expected, but the central bank is trying to avoid deflation by intervening on the currency market. Accordingly, no strong declines were possible in yields in this market and furthermore a tight correlation has developed with German yields, which will probably rise due to the more restrictive monetary policy being pursued by the US Fed. It looks very likely that the Romanian central bank will support the economy with further rate cuts, but this should not lead to any major declines in yields, as the performance by the instruments has already been very good. Accordingly, we take advantage of the yield difference between Romanian and Czech bonds for a carry trade, overweighting the former by 2pp and underweighting the latter by 1pp. While we do expect further rate cuts in Hungary, this move will probably widen the degree of fluctuations versus the euro. These two effects on the performance of Hungarian bonds should neutralise each other and thus we take no weighting action on these securities. Stefan Memmer Expected bond market performance (%) 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 1 st quarter 214

9 Asset allocation equities CEE equities as potential outperformers Czech Republic, Hungary and Romania are favoured Modest oil price and economic doldrums weigh on Russian shares Polish shares: pension reform as a relevant factor For the most part, Eastern European indices were able to match the strong performance of the Western markets in the past quarter. On the one hand, this was due to gradually improving economic activity in the CEE region, and on the other hand, these markets are increasingly decoupling from international factors. While QE3 tapering will cause some jitters on the markets over the short term, the fundamentally positive outlook should be supportive for prices over the longer run. In Romania in particular the attractive valuations, solid earnings growth and expected further rate cuts suggest that these equities will continue to outperform over the long term. Although the 11.7 P/E ratio of the Czech index is relatively modest, the securities in the index are an attractive alternative to other investments such as bonds, thanks to their high dividend yields. In economic terms, Hungary should finally come out of the trough in 214, resulting in better conditions for equities over the long term. Rate cuts by the Hungarian central bank should also facilitate price increases. Accordingly, we overweight these countries by 1pp each in our equity portfolio. For Russia, however, we expect to see more weak growth next year, especially since no major price gains are anticipated with the oil price at its current level. As a result, there are no real driving factors for a strong performance by Russian equities, and furthermore this position has a poor risk-return profile in our portfolio. Turning to Poland, at a P/E ratio of 13.4 Polish stocks are not looking very attractive and with implementation of the pension reform there is a risk of major reallocations into bonds. Accordingly, we see Russian and Polish equities as underperformers and underweight these securities by 1pp each. Stefan Memmer Portfolio weightings: stocks Portfolio Benchmark Difference Czech Republic 16.% 15.% 1.% Hungary 13.% 12.% 1.% Poland 24.% 25.% -1.% Russia 39.% 4.% -1.% Croatia 2.% 3.% -1.% Romania 6.% 5.% 1.% Source: Raiffeisen RESEARCH Historical relative performance* 1% 5% % -5% -1% Czech Rep. Hungary EUR Poland * to MSCI CEE, since 3 months Romania Local currency Russia Croatia Expected stock market performance (%) 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 1 st quarter 214 9

10 Focus on Multi-speed recovery in CEE Central Europe (CE) takes over from CIS as the growth leader Impact of US tapering on the CEE financial markets to be limited and temporary Exchange rates influenced by local interest rate policies and the ECB s relaxed monetary policy CEE GDP growth outlook improving* * annual real GDP growth rate; weighting by nominal EUR GDP Source: Raiffeisen RESEARCH Russia drags outlook below cons.* CE * GDP growth forecast for 214 by Raiffeisen RESEARCH and Consenus Source: Raiffeisen RESEARCH, Consensus Economics Change of LCY value to EUR (%) Source: Bloomberg SEE CIS Raiffeisen RESEARCH Poland Hungary US Dollar Czech Rep. Russia Turkey CE SEE CIS CEE Euro area e 214f LCY depreciation CEE Germany Euro area Consensus -2%-16%-12% -8% -4% % 4% Change 3 months Change YTD Central Europe (CE) passed through the economic through in Q1 213 and has recovered since then. In CE, the rebound was mostly driven by the heavyweight Poland, which export-led growth reached 1.9% in Q3. South-Eastern Europe (SEE) was even earlier in the cycle and the dynamics have improved since late 212. Exports also drove the outstanding performance of the Romanian economy. By contrast, Russia and Ukraine lost steam over the same period, with Ukraine in recession for over a year and Russia stagnating at 1.2% in Q3. The impulse for CE and SEE came largely from the outside as Euro area growth picked up from Q2. This has, however, been no remedy for Russia and Ukraine which suffered both, mainly externally (2nd year of oil price stagnation / weak metallurgy). Our positive, above consensus outlook for Euro area growth (1.5% vs. consensus of 1.%) is expected to provide the region with substantial tailwinds on the export side. Secondly, growth will also become broader based as domestic demand is seen to strengthen a topic in particular for Poland, but also the Czech Republic, Hungary and Romania. Since our last report in autumn, we have also become more confident about the short-term growth prospects for some selected countries. Thus we have upgraded the 214 growth forecasts for Poland to 2.9%, the Czech Republic and Romania -- both to 2.3%. However, overall CEE growth is expected to remain lacklustre coming in below 2% in 214 (after 1.1% in 213), as we have downgraded our outlook for Russia by another.3pp to 1.7%. On a final note, several inherited vulnerabilities stay with us in 214: Slovenia has still to cope with its distressed banking sector, while Croatia, Serbia and Belarus face substantial external and/or public finance weaknesses, which also pose substantial downside risks to our economic baseline scenario. The announced bailout of Ukraine by Russia buys time until the Presidential elections 215, but does not solve the underlying problems. In the financial markets space, the past months were characterised by concerns surrounding the potential adverse effects of Fed tapering and its timing respectively. After Bernanke sent the tapering signal back in May, EM saw a setback across the board. However, regarding the magnitude in terms of local FX market moves there were striking differences between the CEE region witnessing only limited depreciation pressure and other EM in Asia or Latin America. Memories of the Asian currency crisis were triggered, given that a number of EMFX remained under severe depreciation pressure despite a series of measures by local central banks (e.g. India, Brazil and Turkey) which failed to bring depreciation trends to a halt. While these countries have become overbought due to the excessive (hot) capital inflows until May 213 and built up massive current account deficits, CEE financial markets saw only limited capital inflows in the pre-tapering period and adjusted their external imbalances in recent years. Finally, the CEE region ex CIS is not as dependent as other EM on USD investors. 1 1 st quarter 214

11 Special In fact, the initial reaction to the announcement that tapering will start in January 214 support our earlier expectations that CEE has already priced in most of it. However, since the path of tapering cannot be foreseen (likely to come to an end in late-214, but data and event driven!), those markets that suffered the most during 213 should remain the most sensitive to the withdrawal of global USD liquidity. To a limited extent, the more liquid and sentiment-driven currencies could feel some temporary pressures (PLN, CZK and HUF), but most at risk are TRY and RUB. As was the case during the sell-off periods in 213, the rather illiquid SEE currencies, in contrast, should experience the least effect. Furthermore, possible adverse effects on CEE FX should be rather short-lived with the exception of Turkey, where we expect the pressured LCY bond market to keep the lira at elevated levels. Nevertheless, after market participants get used to the post-qe3 world, the expected improvement in economic conditions should lend support to CEEFX with the Polish zloty likely to outperform regional peers on a 12m horizon. Since EM sovereign debt prices already took a plunge in 213, EM spreads might even experience some marginal relative tightening in H1 due to a smaller pass-through from increasing US treasury yields. Net debt issuance is likely to remain small with more EM sovereigns matching the issuance with retiring debt. Consequently CEE will need to issue about USD 5 bn in new debt to fund all Eurobond payments, which will be broadly similar to USD 48 bn issuance seen this year. The resulting net issuance is likely to reach USD 3-5 bn for next year, which should strengthen the CEE technical picture. On the other hand, demand for new paper might continue to outstrip supply assuming no large investment fund withdrawals. As already mentioned above, fundamentals will move to the forefront with investors opting for bonds of economically stronger countries. In fact, apart from Slovenia, we expect no downgrade actions for CE, which will translate into an A-minus average rating for CE including Baltics. At the same time, SEE will face difficult times due to higher imbalances and slower growth putting its average rating outlook under pressure. Hot spots will include Croatia and Serbia, while the average SEE rating is likely to dip from BB to BB-minus. Finally the CIS average score will remain at BB-minus due to worse ratings for Ukraine and Belarus while only investment-rated Russia and Kazakhstan will remain stable. In summary, we foresee more defensive positioning favouring stable CE region while SEE will be under more downward pressure and CIS may attract fewer attention. CEE rating spread map 1, BY (B-/B3) UA (B-/Caa1) RS (BB-/B1) HU (BB/Ba1) TR (BB+/Baa3) RO (BB+/Baa3) HR (BB+/Ba1) RU (BBB/Baa1) LT (BBB/Baa1) KZ (BBB+/Baa2) PL (A-/A2) EMBIG spread Rating level in brackets * EMBIG USD spread basis points, rating levels on scale 1-1 aligned to particular country spread level Rating levels S&P-/Moody s l-t foreign currency Source: Bloomberg, rating agencies, Raiffeisen RESEARCH Yield chg since taper signal (22 May) DE US CZ HU PL RO RU TR BR ZA 2y yield chg (bp) Source: Bloomberg 1y yield chg (bp) CEE local debt already turned out to be quite resilient to the tapering tantrum, which is line with CEEFX moves. Although the share of non-resident holdings is relatively high, foreigners seem to have a longer-term investment approach and only small outflows were registered during 213 (if at all!). In addition, in some countries like Hungary and Romania rate cutting cycles are still underway, which brightened the outlook in contrast to countries that were forced to pursue emergency rate hikes. Nevertheless, our overall view on CEE debt remains bearish with rising core market yields driving longer yields in CEE upwards which is normal in times of accelerating economic growth. In our view, the most vulnerable credits to the gradual materialization of Fed tapering are first of all Turkey, and to a much lesser extent, Hungary and Russia. However, once the adjustment process to a post-qe3 comes to an end, attractive opportunities should pop up in the course of 214. Stephan Imre, Andreas Schwabe CEE LCY curves very steep (bp)* Jan-13 Apr-13 Jul-13 Oct-13 HU PL RO EUR/USD (r.h.s.) *1y minus 2y yield (last data point: 18 Dec 213) 1 st quarter

12 Austria Economy has overcome drought period Turnaround in economic activity in Q3 213 Significant improvement in leading indicators Domestic demand slowly beginning to pick up Dependence on foreign trade should continue to fall Industry: Upswing around the corner PMI Manufacturing (Output) PMI Manufacturing Industrial production (% yoy, r.h.s.) Source: Thomson Reuters, Markit, Raiffeisen RESEARCH Domestic demand is gaining steam Q1 Q1 1 Q1 2 Q1 3 Q1 4 Q1 5 Q1 6 Q1 7 Q1 8 Q1 9 Q1 1 Q1 11 Q1 12 Q1 13 Growth contribution of domestic demand* Growth contribution of external trade* * Contribution in percentage points to qoq real GDP growth, 4Q moving average During H2 212 and H1 213 the Austrian economy was essentially treading water. This was followed by a tentative recovery in economic activity in Q While the figure of.2% qoq for real GDP growth was modest, it was still the biggest quarterly gain since Q Domestic demand also gathered steam. For the first time since the beginning of 212, gross fixed capital formation as well as private and public consumption made stronger contributions to GDP growth (qoq) than external trade, which had previously been the main pillar supporting growth. On the whole, economic activity should continue to pick up in the coming quarters. This is not least because of the tangible improvement in leading indicators seen in recent months such as the purchasing managers index for the manufacturing sector and the economic sentiment indicator released by the European Commission. The former is currently at its highest level (November: 54.3) since May 211. Economic sentiment has also gained ground again recently, moving above the long-term average in October. These positive developments should be more and more reflected in the hard data in the quarters ahead. The high point in the business cycle should be reached in the winter half year 214/215. For 214, we thus project growth to accelerate to 1.5%, up from the estimated increase of.3% in 213, and followed by 2.3% one year later (215). The trend of an upturn in domestic demand in conjunction with declining dependence on external trade should continue to characterise business cycle dynamics in the quarters ahead. For example, gross fixed capital formation will likely expand again, building on the first tentative signs of improvement. Whilst this is still contrasted with the slightly below average capacity utilisation and the still torpid development of industrial production (Q3: -.2% qoq), an upturn in industrial production is suggested by the tangible increase in the production Key economic figures and forecasts e 214f 215f Real GDP (% yoy) Private consumption (% yoy) Gross fixed capital formation (% yoy) Nominal exports (% yoy) Nominal imports (% yoy) Trade balance (goods and services, 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 1 st quarter 214

13 Austria and new orders components of the manufacturing PMI. In turn, this should be reflected in more investment activity by companies, supported by the still favourable financing conditions. Another factor pointing to a recovery in industrial activity is the industrial confidence compiled by the European Commission, which climbed above the long-term average. While there was a small gain in private consumption in Q3 213, the rise was only marginal (+.1% qoq). Retails sales were also weak in September and October (both -.8% mom). Nevertheless, the expected increases in real wages should foster a recovery in private consumption. Although the development of employment continues to be very stable, tangible acceleration in employment growth is only expected to be seen during the course of 214, which should then also support private consumption. By contrast, the unemployment rate (int. definition) will only fall again in 215 (full year), as the labour force expands further in 214 and the qualification mismatch between supply and demand continues to be high. Even though there should be a strong increase in Austrian exports thanks to the improving economic conditions in key export markets during the coming quarters, foreign trade should become somewhat less important for GDP growth. Because due to the projected rise in investment and private consumption, there will probably also be a concomitant rise in imports. On the other hand, the current account surplus will probably have widened noticeably in 213, due to a rising surplus of the services balance and a much lower trade balance deficit. GDP: value added by sector Change (% yoy, in real terms) e 214f 215f 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 215f Private consumption Public consumption Gross fixed capital formation Equipment Construction Exports Imports Gross domestic product Source: Statistics Austria, Thomson Reuters, Raiffeisen RESEARCH During 213, the annual rate of change (%) in consumer prices steadily declined, not least due to the development of fuel prices. For 213 as a whole, inflation should amount to 2.1%. Although increases of indirect taxes will cause inflation to rise in the course of 214, the inflation in 214 should be lower than in 213 as inflationary dynamics should remain muted in the months ahead (214: 1.8%; 215: 1.8%). Matthias Reith Contributions 1 to real GDP growth (qoq) Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Private Consumption Public Consumption Investment Stocks External Trade Real GDP 1 in percentage points 1 st quarter

14 Poland Market headwinds expected in Q1, despite solid recovery Acceleration of quarterly growth rates with larger domestic demand contribution Implementation of pension system reform is the major fiscal topic in 214 Increase in inflation, but real rates argument as the driver of rate hike(s) in H2 214 LCY bonds in a bearish trend, buying opportunities when uncertainty regarding key rate path arises Real GDP (% yoy) e Real GDP (% yoy) 214f Industrial output (% yoy) Budget balance and public debt e 214f 215f 215f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Economic outlook Preliminary GDP data for Q3 showed growth of 1.9% yoy, with net exports still functioning as the main engine, contributing 1.4 pp. Exports stayed strong growing by 6.4% yoy, but import dynamics unexpectedly jumped to 3.7% yoy. This resulted mainly from the first growth in five quarters in gross fixed capital formation, which amounted to.6% in annual terms. Growth in this category supported internal demand, which increased by.5% yoy. However, more important was a visible uptick in private consumption, which grew by 1% yoy. The dynamics of real wages have been growing since the beginning of 213, which according to our analyses should support consumption after 2-3 quarters, so this effect should materialise precisely in Q Throughout the whole of 214, we expect GDP to continue accelerating, and its structure should change towards a larger contribution of domestic demand. According to our estimates, the first quarter of 214 will feature annual economic growth close to 2.7%, with domestic demand up by 1.5%. For the whole year 214 we expect GDP growth at close to 3% yoy. It must be stressed, however, that even in such an optimistic scenario growth should not generate inflationary pressure. With growth just approaching the potential GDP growth path it is hard to expect the existing negative output gap to close earlier than in 215. Yet, from the beginning of next year, CPI will be pushed up by a low base effect and the increase of excise taxes on tobacco and alcohol. According to our estimates, this may push CPI up by.5--7 pp. Later in the year, however, CPI should stabilise close to 2.% yoy (below the central bank s target of 2.5%). Despite low inflation we expect the first rate hikes in September 214 as a real interest rate close to zero may be unacceptable for hawkish MPC members. We do not buy the arguments for additional rate cuts and expect this discussion to peter out in Q With better outlook for economic growth, next year will also bring an improve- Key economic figures and forecasts e 214f 215f 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) * with one-off effects from pension funds transfer in 214/ st quarter 214

15 Poland ment in the fiscal balance. Another very important factor is also the pension system reform, which assumes the shift of PLN 13 bn in bonds to the state-owned social security institution (ZUS). Not only will this lower debt to below 5% of GDP, but also the deficit will fall as debt servicing costs and increased pension fees paid to ZUS may altogether generate additional income. Exchange rate development Financial market outlook For EUR/PLN, we expect 214 to be a year of two distinct halves. With regards to H1 214 and especially in Q1, we see PLN downside risks from global markets. As tapering and its implementation will be on the agenda and our Western markets team expects a fairly swift reduction of the Fed s bond buying we may see some fall-out in the EUR/PLN exchange rate. The transmission channels would be a generally volatile market environment, a stronger USD vs. EUR (which usually does not bode very well for EUR/PLN), increasing volatility on the Polish LCY bond market as well as some modest outflows from the Polish bond market. Furthermore, the external liquidity position in Poland is not as favourable as in C/A surplus countries (Hungary, Czech Rep.). Nevertheless, our Q1 forecasts still imply that EUR/PLN will not take a very strong hit as was also the case in the first tapering sell-off in 213 (in 213 the zloty was one of the best performing currencies from the EM universe). For the remainder of 214 we remain fairly constructive for EUR/PLN, suppored by a tangible recovery in the real econom and the resulting outlook for a less dovish monetary policy stance. Given our call for fairly strong GDP growth in 213 (at the upper range of consensus), we still consider it likely that we may see first key rate hikes by the end of Q At least the central bank has to move from to a more hawkish position in H However, we do not expect very strong EUR/PLN appreciation for the remainder of 214. We think that capital inflows to the Polish LCY bond market will be limited compared to previous years and the widening C/A deficit (from low levels) should not be EUR/PLN supportive as well per se. For the LCY bond market, our view for 214 is less differentiated than on the currency side. From a structural perspective, we expect the uptrend in yields, which started in recent months, to continue. This expected trend is backed by domestic drivers as well as the expected trend rise in Bund yields (by our Western market colleagues). However, buying opportunities on the Polish bond market may emerge in the case of uncertainties with regards to the future monetary policy stance and mounting market speculations. As the market may price in a less hawkish monetary policy from time to time (i.e. flat key rate for the whole year of 214), the uptrend in yields could be partially stopped and reversed in Q1 and possibly Q2 214; with risks of upside corrections later down the road. Pawe³ Radwañski, Gunter Deuber Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun EUR/PLN (eop) Exchange rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ PLN Cons USD/ PLN Cons : p.m. (CET) PLN rate and yield curve (%)* Yields as of Dec-13 Yield curve Dec-13 Yield curve Sep-13 Mar-14 * 1m 12m interest rates; 2y 1y LCY gov. bond yields Interest rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Key rate Consensus Yield forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-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 1 st quarter

16 Hungary Balanced economic growth pattern begins to emerge Turnaround in investment activity public and private investments both on the rise In 214 we expect a balanced economic growth pattern to emerge Parliamentary elections in April 214 ruling Fidesz leads the polls Interest rate reduction cycle expected to end in Q1 Real GDP (% yoy) e Real GDP (% yoy) 214f 215f Industrial output (% yoy, r.h.s.) Public and external debt e 214f Public debt (% of GDP) Gross foreign debt (% of GDP) 215f Economic outlook The economy gained strength in Q3 213, with GDP growth reaching 1.8% yoy (and.9% qoq). After two years, this was the first quarter when all sectors contributed positively to GDP, but the bulk of growth was delivered by agriculture. On the demand side, the strong investment activity was a positive surprise, as gross fixed capital formation jumped by over 8% (yoy). While public sector investment is being fuelled by a pre-election spending spree (with heavy utilisation of EU funds), the private sector also managed a turnaround. It is noteworthy to mention that there is an unusually balanced picture here as well: as opposed to the trend from the past year when growth was registered only in isolated areas of the economy (most typically net exports), in 213 domestic demand (both investment and consumption) is on the rise. Q4 GDP growth should stay above 1% supported by strong industrial output and export data, and for 214 we forecast at least 1.5% GDP growth. Economic growth will accelerate as export demand in the EU is seen to rise strongly, and domestic demand is likely to slowly recuperate. We identify two risk factors 214: 1) agricultural output is unpredictable, especially taking into consideration this year s above average harvest; 2) the fiscal stimulus that is definitely spurring the economic turnaround this year should be partially removed in the post-election period (parliamentary elections are due in April 214). On the other hand, the Funding for Growth Scheme of the National Bank of Hungary should further boost private investments (with another maximum HUF 2, bn in cheap funding available after the recent disbursement of HUF 7 bn). Parliamentary elections are due in April 214. The ruling centre-right Fidesz consistently leads the opinion polls (by an increasing margin over the past 12 months) and has good chances to remain in power. The election system favours big parties and is designed with the purpose of avoiding political stalemates. Nevertheless, politics can be rather unpredictable. Therefore, the government might be in- Key economic figures and forecasts e 214f 215f 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) st quarter 214

17 Hungary clined to continue with its series of popular measures (i.e. pension and minimum wage increase; utility price cuts; public infrastructure development, etc.). A personal income tax cut in the longer-term has already been aired, but another action focussed on FX mortgages may come even before elections. While this is technically difficult and politically risky in our view, this might not stop the government from moving ahead. This highlights the government s bias towards unorthodox measures which should remain intact in case Fidesz stays in power. Exchange rate development Financial market outlook The forint weakened moderately in the last quarter of 213, despite improving economic indicators and a positive surprise in GDP in Q3. The continuation of fairly aggressive interest rate cuts led to some pressure on the forint in our view. The rate-cutting cycle remains the big unknown regarding its duration and the level where it will end. Apart from the stable forint, the low inflation rate is likely to add to the central bank s argument for ongoing rate reductions. We expect the central bank to continue with the interest rate cuts as long as the forint remains stable at around EUR/HUF 3 and we thus fear a possibly too aggressive rate reduction which could lead to stronger HUF volatility thereafter. However, with our expectation of an ongoing economic recovery, benign C/A developments and hopefully an appropriate assessment of the central bank regarding rate reductions we would expect the forint to remain rather stable in Q1 214 between EUR/HUF On the other hand, the continuing interest rate cuts could bring phases of short-term pressure and volatility for the forint. While in the past months the short-end of the yield curve declined due to the ongoing interest rate cuts the long-end of the yield curve saw volatile moves between 6.17% and 5.4% (1-year segment). We expect this pattern to continue in Q Interest rate reductions are going to take down the short-end of the yield curve while the long-end is expected to show rising yields, due to tapering and upcoming elections. For the remainder of 214, we then project the shortend to remain stable as no further interest rate cuts are expected. The long-end should then follow the upward yield trend we project for the Euro area. The yield spread versus Germany should remain at 3.5-4% throughout 214 in our view. Non-resident holdings of HGBs have declined since mid-213, falling towards 43%, which reflects stronger local demand and at the same time lowering the threats of external shocks for the bond market. Zoltan Török, Wolfgang Ernst 28 Dec-11Jun-12 Dec-12Jun-13 Dec-13Jun-14 EUR/HUF (eop) Exchange rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ HUF Cons USD/ HUF Cons : p.m. (CET) HUF rate and yield curve (%)* Yields as of Dec-13 Yield curve Dec-13 Yield curve Sep-13 Mar-14 * 1m 12m interest rates; 3y 1y LCY gov. bond yields Interest rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Key rate Consensus Yield forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 3y 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 1 st quarter

18 Czech Republic Less active fiscal policy, more aggressive monetary policy Economic prospects rosier, thanks to a weaker currency Less active fiscal policy, more aggressive monetary policy Central bank fighting against deflation risks by intervening against CZK Yield curve expected to steepen Real GDP (% yoy) e Real GDP (% yoy) 214f 215f Industrial output (% yoy, r.h.s.) Budget balance and public debt e 214f 215f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Economic outlook The Czech economy showed a mixed picture in Q3. Whilst monthly indicators such as the PMIs and industrial production continued on an upward trend, GDP declined by.1% qoq after expansion of.5% in Q2. The disappointing result for Q3 GDP fuelled fears that the Czech economy had fallen into a recession again. But we do not think that another recession is a realistic scenario because, among other factors, the structure of GDP in Q3 was encouraging. Firms have been importing more inputs, very likely in expectation of future production. Such a development will probably translate into a higher performance of the Czech economy in the future. Given the weak economic performance in Q3 and the downward revision of GDP in H1 213, we had to revise our annual GDP growth forecast downwards to -1.3%. The FX intervention of the CNB is expected to boost GDP growth in 214 (we can already see a one-off rise in consumption in Q4 213) by.4 pp to 2.3%. The FX intervention will boost exports in the medium term. The impact on consumption is questionable. We think, unlike the CNB, that it will be negative. Because of an expected exit from FX intervention, growth will be mild in 215 in our view. We estimate it at 2.4%. The lack of a long-term structural policy and pro-growth oriented fiscal policy provoked the monetary authorities to take a radical (aggressive) step: direct intervention against the Czech koruna. For almost one year, the government policy has been paralyzed by the instability of the former right-centre coalition and the installment of the interim government that did not pass the confidence vote in parliament. It was hoped that early elections would bring some change. The formation of a coalition composed of the Social Democrats (CSSD), the new pro-business movement called ANO and the Christian Democrats (KDU-CSL) does not offer any radical change. They plan to make changes to some parameters in the tax system (e.g. to introduce a third VAT rate) but do not tackle the bottlenecks: Key economic figures and forecasts e 214f 215f 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) st quarter 214

19 Czech Republic 1) relatively high social contribution of employers, and 2) low share of environmental and property taxes. One potential risk for the economy is the idea to introduce specific taxes for regulated sectors. Although the coalition partner ANO is ready to target the efficiency of public expenditure, their ideas are not easily and swiftly realizable. Financial market outlook In November, the Czech National Bank decided to intervene on the FX market by putting a floor at EUR/CZK 27.. Although the decision did not come out of the blue, the market was far from expecting such a move. The exchange rate immediately rose to EUR/CZK 27. from EUR/CZK Within a couple of weeks EUR/CZK gradually rose close to CNB governor Singer asserted that he could hardly imagine changing the FX floor (to a stronger side) sooner than in 1.5 years. On the other hand, the CNB forecast assumes interest rate increases at the turn of In Q1 214, inflation will drop sharply to nearly % as regulated energy prices will decline. This is well known, but the fact might have some additional psychological effect. Also, there could easily be some surprises for both sides as the beginning of the year is ideal for changes in price lists and also the price effects of FX intervention will be passed on. Nevertheless, we expect that inflation will rise above the 2% inflation target in Q4 214 and it is expected to rise further. The economy will continue to grow. Consequently, without having to intervene on the market too much, the CNB will decide to let the CZK appreciate in Q4 in our view. Obviously the timing of such a decision is quite tricky. The exit strategy from the controlled currency regime will also be a hard job and one should reckon with higher market volatility at that time. Long-dated Czech government bond yields slightly rose over the last quarter, but after this correction the level of 1-year Czech government bond yields is at roughly the same level where it was three months ago. The short-end of the curve declined as the central bankers promised that monetary policy will remain relaxed for a longer period of time. It is very likely that both the gross and net borrowing needs of the Czech government will increase for three reasons: 1) redemptions of CZK (85 bn) and mainly EUR (3 bn) denominated bonds, 2) end of the dilution of the ministry s financial reserves, 3) a slightly higher budget deficit. Net CZGB issuance in 214 might be about CZK 1 bn, higher than in 213 (around CZK 35 bn). This and the relaxed monetary policy are arguments why we expect increasing Czech government bond yields. The yield curve will probably steepen as the short-end of the curve will be held down by the CNB s monetary policy. We forecast that a first CNB interest rate hike will be delivered in Q Michal Brozka, Vaclav France Exchange rate development Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 EUR/CZK (eop) CZK rate and yield curve (%)* Yields as of Dec-13 Yield curve Dec-13 Yield curve Sep-13 Mar-14 Exchange rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ CZK Cons USD/ CZK Cons : p.m. (CET) * 1m 12m interest rates; 2y 1y LCY gov. bond yields Interest rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Key rate Consensus Yield forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-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 1 st quarter

20 Slovakia Lack of investments lack of growth Economic recovery will be modest as long as investments remain weak Inflation will hit a historical low, but no upside risks for 214 Prospects for the hard-hit construction sector are improving Public finance consolidation, but largely based on temporary and one-off items Real GDP (% yoy) Budget balance and public debt e 213e 214f 214f 215f Real GDP (% yoy) Industrial output (% yoy, r.h.s.) 215f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) The data in Q3 213 did not provide any real surprises. Foreign trade was once again the main impetus for the economy, whereas household consumption stagnated (+.1% yoy), in line with flat retail sales. Government consumption increased by almost 3%, in contrast with the aim of decreasing the budget deficit. In fact, deficit reduction is being carried out more via public investment and tax increases rather than via government consumption (e.g. wages). The only negative surprise in Q3 was investments, which showed a real drop of 1% in yoy terms. We expected a small rebound in investment activity after 1.5 years of continuous declines. One of the drivers (source) of investment activity will be EU funds mostly destined for infrastructure projects. Due to the revival in these projects, we also expect to see a rebound in construction activity. In Q4 213, we expect slightly stronger quarterly GDP growth (+.4%), which should help to bring annual average GDP growth to.9%. In 214, we expect a gradual acceleration of GDP growth towards 2-2.2%. CPI developments are becoming more and more interesting as talk about deflation risks is increasing. In our main scenario, the lowest inflation rate should be reached in Q1 214 at.2 % yoy. By end-214, we expect CPI at 1.2 % yoy, which is still very modest for Slovak standards. Due to better value added tax collection, parliament was able to pass a budget bill with more ambitious fiscal consolidation in 214. The fiscal deficit should be lower by.2%. However, the deficit target will be largely achieved by temporary and one-off items (such as bank and monopoly levy or special dividends from state-owned companies), while the structural deficit will increase. In general, the government continues with consolidation per se, but the necessary structural reforms are postponed. Boris Fojtik, Juray Valachy Key economic figures and forecasts e 214f 215f 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 st quarter 214

21 Slovenia Bank recapitalisation manageable without external aid GDP to continue its decline in 214 Bank recapitalisation expected to amount to EUR 4.8 bn Financing banking sector recapitalisation is possible without external aid Ongoing austerity and reform requirements to put pressure on government coalition Despite stagnating economic indicators, the Q2 and Q3 GDP data surprised on the upside. Nevertheless, Slovenian GDP will retreat by approximately 2% yoy in 213 and should not manage to show year-on-year growth in 214 either. Restructuring of the banking sector and the over-indebted corporate sector is necessary in order for there to be a sustained economic recovery. The results of the banking sector stress test are now available, and according to statements by the central bank the recapitalisation needs for the total banking sector amount to EUR 4.8 bn (of which EUR 3 bn will be needed by the three largest banks alone). Thus, Slovenia should manage to recapitalise the sector without having to turn to external financial aid. The government had passed a bill that up to EUR 4.8 bn could be injected into the banking sector. The entire refinancing process for the banking sector has been delayed in recent months, causing additional uncertainty. In our view, external financial aid by the ESM/IMF would have been the easier decision in the past as (forced) reform efforts would have been faster and more comprehensive. Nevertheless, Slovenia s access to financial markets (bond issuance) should remain intact, and therefore we do not expect significant difficulties for refinancing efforts in 214. Slovenia has refinancing requirements 214 of about EUR 4 bn to cover its budget deficit and maturing debt. Nevertheless, the government coalition remains under pressure to come up with additional austerity measures and a breakup of the coalition in 214 cannot be excluded. Additionally, there are tensions within the ruling party of PM Bratusek that could endanger the coalition as well. 214 is a pre-election year in Slovenia, and therefore we see diminished chances for more pronounced reforms. Other topics, such as the privatisation plans have been slow so far. Wolfgang Ernst Real GDP (% yoy) e 214f 215f Real GDP (% yoy) Industrial output (% yoy, r.h.s.) Public and external debt e 214f 215f Public debt (% of GDP) Gross foreign debt (% of GDP) Key economic figures and forecasts e 214f 215f 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 1 st quarter

22 Croatia Another tough year ahead Refinancing needs remain high in 214 Without reforms, capital is increasingly expensive and scarce EUR/HRK expected at levels higher than in 213 High system liquidity still undisturbed Real GDP (% yoy) e Real GDP (% yoy) 214f Industrial output (% yoy) Budget balance and public debt e 214f 215f 215f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Key economic figures and forecasts Economic outlook The fifth year of economic decline is behind us. As in the previous four years, 213 will end with very poor progress in reforms and continued deterioration of the domestic economy. Prerequisites for a recovery were not achieved and there is still one tough year ahead which will not feature recovery, but only stagnation, in the baseline scenario. Rescue for the weakened economy should come from a recovery in investment activity, especially activity which will raise export competitiveness. Growth in exports of goods and services first requires growth in foreign demand through a recovery in economic activity in the most important trade partners and a more favourable business climate. Nevertheless, without deep-reaching, serious structural changes (which should include the labour market, health, education, social and pension systems) we cannot expect an upswing in investment activities. 213 saw further deepening of the budget deficit (primarily due to rising healthcare costs) and accelerating growth in public debt. Significantly improved tax collection and measures aimed at tightening tax discipline and combating the grey economy we see as positive effects. On the other hand, the desired consolidation of the expenditure side of the budget paired with concrete structural measures aimed at achieving long-term sustainability was once again not seen. The fiscal consolidation process was not furthered, given the dynamic changes in VAT collection, lower VAT rate on tourism services and new expenses for the EU budget. Mounting interest on public debt also has a cumulated negative impact on the government deficit. Due to the growing cost of EU membership and rising interest expenses as a result of the higher risk premium (for servicing the public debt), Croatia s fiscal deficit will rise in 214. As the country enters the excessive deficit procedure (EDP), the impetus for reforms and change in public finances will come from abroad. However, given that the results of the reforms are visible only in the medium to long term it is difficult to expect results in 214. According to the government s projections, further deepening of the fiscal deficit e 214f 215f 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) st quarter 214

23 Croatia is expected in 214. If we were to believe the government s projections, Croatia would not complete the EDP until 219. On the other hand, with stronger pressure from the European Commission we might see positive changes even earlier. Financial market outlook Although the exchange rate of the kuna against the euro remained relatively stable, EUR/HRK moved at slightly higher levels for most of 213, due to weak inflows of foreign exchange and deleveraging of all domestic sectors except for the government and the still-high risk aversion. However, as in previous years, FX volatility was low with the usual strengthening of the domestic currency against the euro less prominent during the peak tourism season. In addition, foreign trade developments also speak in favour of a weaker kuna considering the growth in the trade deficit. The central bank remained consistent in protecting FX stability. Similar developments should continue in 214. Although in the absence of the economic recovery we might see slight upward pressures on the EUR/HRK rate. In conditions of abundant liquidity in the system, additionally supported with the recent CNB decision measure to strengthen corporate lending and thus stimulate an economic recovery (lowering of the reserve requirement from 13.5% to 12%), market interest rates recorded a further decline. While surplus liquidity in the system paired with weak demand for loans by the private sector enables cheap short-term financing for the government, the price of long-term borrowing is currently much more unfavourable than it was at the beginning of the year. Except for the expected growth in yields on core markets, the growth of financing costs is also aided by weak fundamentals and the lack of measures for serious reduction and restructuring on the expenditure side of the budget. A domestic EURlinked bond worth EUR mn (principal + coupon) and a Eurobond worth EUR mn (principal + coupon) are coming due in the first half of 214. However, 214 will be challenging in terms of refinancing maturing liabilities (estimated at around EUR 6. bn). Given the forecasted deficit growth next year and weak fundamentals paired with the likely increase in yields on core markets, we expect financing costs to be higher than this year with the spread on benchmark securities possibly ranging between 32 and 38 basis points. The government s financing needs in the upcoming period surpass the abilities of domestic investors, so we expect the government to be forced to tap foreign capital markets in the second half of the next year. Elizabeta Sabolek-Resanovic Exchange rate development Dec-11Jun-12 Dec-12Jun-13 Dec-13Jun EUR/HRK (eop) HRK rate and yield curve (%)* Yields as of Dec-13 Yield curve Dec-13 Yield curve Sep-13 Mar-14 Exchange rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ HRK Cons USD/ HRK Cons : p.m. (CET) * 1m 12m interest rates; 2y 1y LCY gov. bond yields Interest rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Key rate Consensus Yield forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-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 1 st quarter

24 Romania Keeping appropriate policies as a key requirement Economic activity to remain on an upward trend supported by external and domestic demand Room for NBR to reduce key rate, but RON money market rates and yields are already at low levels Domestic politics and expected increase in core market yields as the main challenges Policy slippages should be avoided in order to maintain the current positive sentiment towards RON markets Real GDP (% yoy) Budget and current account balance e Real GDP (% yoy) 213e 214f Industrial output (% yoy) 214f 215f General budget balance (% of GDP) Current account balance (% of GDP) 215f Key economic figures and forecasts Economic outlook Real GDP excluding agriculture remained on an upward trend in Q3 213 (2.% yoy,.8% qoq), with all sectors (industry, construction, services) fuelling the growth. Helped by agriculture, real GDP advanced much faster in Q3 (4.1% yoy, 1.6% qoq). Real GDP excluding agriculture went up by 1.8% yoy in Q1- Q3 213 and the full year s dynamics should have remained close to this level. Activity should have expanded further in Q4 213 in all sectors supported both by demand for exports and by consumption and investments (both very weak up to Q3). We foresee growth in real GDP excluding agriculture to accelerate to 2.4% in 214 on the back of larger contributions from investments and consumption. RON and FCY lending rates will be at their lows in 214, which bodes well for the disposable income of indebted individuals and companies. Moreover, we expect better use of EU funds in 214, and parts of these have been channelled in public infrastructure projects (a disappointment in 213). Confidence of individuals and companies to spend and borrow has remained low, however, and we see this as the main constraint to a faster recovery in 214. Improving external demand should continue to support exports and industry. The public budget deficit targets for 213 and 214 were revised upwards in November during negotiations between the government and the technical staff of the IMF and EC. However, they remain below 3.% of GDP, and we expect the government to make efforts not to exceed this threshold. President Basescu disagreed with the introduction of an additional excise for fuels as he saw room to cut some public spending as an alternative to meet the budget deficit target for 214. In a surprise move, however, a temporary solution was delivered. The introduction of the tax was postponed by three months, while in exchange the President signed the 214 budget law. An IMF mission will visit Romania in January. We expect that measures needed to offset the impact that the postponement of the additional excise for fuels will have on public revenues will be one of the top issues e 214f 215f 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) st quarter 214

25 Romania Financial market outlook The hike in excises has worsened the inflation outlook for 214. Hence, the annual rate of inflation may climb towards its medium-term trend of % in Q4 214 without other adverse shocks materialising (i.e. a bad agricultural year). Meanwhile, annual inflation should temporarily touch new lows in Q1 214 (below 1.% yoy), thanks to favourable supply side shocks (cut in VAT for bread products in Sept 213, decrease in volatile food prices). The central bank should not focus on the dynamics of the headline inflation rate, which is highly impacted by supply side shocks (favourably in H1, adversely in H2 214), but rather on underlying inflationary pressures and inflation expectations. These are low and support further reduction of the monetary policy rate to 3.5% from 4.% at present (two consecutive 25bp cuts in January and February). However, interbank interest rates are already trading at levels consistent with a key rate of less than 3.5%, and RON yields are already trading at levels consistent with the key rate at 3.5%. Accordingly, we see almost no room for money market rates and yields to decrease further, even though the NBR will cut the key rate. How market rates and RON yields will cope with the foreseen increase in long-term yields in developed countries is the key question. Several factors suggest Romania is better positioned than other EM in this case. The public budget deficit should remain below 3.% of GDP (SBA with IMF, EU fiscal surveillance framework), the public debt is low and redemptions in government securities in 214 are substantially lower compared to previous years. The C/A deficit should remain at a low level and moreover it will be more than fully covered by public capital transfers and FDIs. The Finance Ministry has a large liquidity buffer which should allow it to refrain from borrowing in adverse market conditions and room to borrow from local banks which have liquidity (although short term). Official FX reserves are high and can easily cope with IMF debt servicing and hard currency outflows (not very large given limited opportunity for non-residents to transfer their exposure to residents). All these should be well received by investors. Political noise is likely to remain intense in 214 however. With the increasing divergences between PNL and PSD, the USL ruling alliance might break down. Given that the PSD has the most seats in Parliament it has the first chance to form a new government. Developments on the political scene will probably not substantially alter the course of policies in 214, but might create uncertainty for 215. When putting together all the factors (external and local) a mild upward trend in rates and yields appears likely in 214, whilst the exchange rate should remain relatively flat. Nicolae Covrig, Stephan Imre Exchange rate development Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 EUR/RON (eop) Exchange rate forecasts RON rate and yield curve (%)* Yields as of Dec-13 Yield curve Dec-13 Yield curve Sep-13 Mar Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ RON Cons USD/ RON Cons : p.m. (CET) * 1m 12m interest rates; 2y 1y LCY gov. bond yields Interest rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Key rate Consensus Yield forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-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 1 st quarter

26 Bulgaria Turning point Economic growth in Q3 above expectations, on the back of exports and public consumption Domestic demand will gain momentum by the end of 214 Record-high C/A surplus in 213, exports expected to keep expanding Labour market to remain difficult in 214 Real GDP (% yoy) e 214f 215f Real GDP (% yoy) Industrial output (% yoy, r.h.s.) Current account and FDI inflows e 214f 215f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) Key economic figures and forecasts Mid-213 marked a transition from the downturn in H1 to an expected growth track. The Q3 213 GDP data was more favourable than our forecast, as the economy expanded by 1.5% yoy, significantly improving after the.2% yoy decline in Q The positive development is expected to continue in Q4, albeit at a somewhat more modest pace. Therefore, we have revised our forecast for annual GDP growth to.8%. In 214, economic growth is expected to accelerate to 2.%. In the first half of the year, the external sector is expected to be the main driver, while investment and private consumption is forecast to take the lead in the second half. The external environment is seen as supportive. In the first nine months of 213, exports increased dynamically, expanding by 8.6% yoy, and this favourable trend is expected to continue on the back of the EU recovery. Exports are expected to rise by 8.% in 213 and 5.3% in 214. The envisaged export growth and inflows of transfers from EU are behind the anticipated C/A surpluses in 213 and 214. The election of the new government in May marked a change in fiscal policy. In Q3, public consumption increased by 6.% yoy and was the main reason that GDP dynamics accelerated above our expectations. After the budget consolidation in the last few years, which narrowed the fiscal gap to.5% of GDP in 212, some fiscal loosening in 213 and 214 is expected to give a push to domestic demand. Nevertheless, the budget deficits are envisaged to remain below 2% of GDP in these two years. Still, the economy is forecast to continue operating below potential in , which will weigh on price dynamics. In 213, Bulgaria is expected to post unusually low inflation: 1.2% yoy annual average, which will increase to only 2.2% in 214. The labour market is also projected to remain difficult the unemployment rate is expected to pick up to 12.9% in 213 and fall only slightly to 12.5% in 214. Hristiana Vidinova e 214f 215f 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 1 st quarter 214

27 Serbia Preparing for implementation of the second fiscal package Fiscal consolidation package will slow economic growth in 214 Monetary policy easing will continue as inflation abates New investments should be supported after the start of EU accession negotiations in early 214 Gross financing needs will be secured via bilateral loans and to minor extent from the market Although we welcome the 2nd package of consolidation measures as being more realistic and transparent in terms of financing needs, we believe that it will dampen economic growth in 214 (1% yoy vs. old 2% yoy), despite the agreed United Arab Emirates investments and the start of the South Stream gas pipeline construction. The reason behind is that the effects of the measures will be spent on the bankrupt state-owned banks and on financing the maturing debts of loss-making publicly owned companies. The package will further reduce public spending, along with already weak private spending. Positive momentum will come from FIAT exports although the volumes will somewhat undershoot the levels we saw in 213, and from private investment inflows. The latter will be underpinned by the start of accession negotiations with the EU. With inflation falling, the NBS will continue its key rate cuts, but adopt a more gradual pace because of the present fiscal risks. We believe that EUR/RSD weakening due to slower exports and fiscal measures implementation will not spill over into inflation because of weak retail demand. The new fiscal strategy plans to stabilise public finances from 215 with the key measures (public companies privatisation and the related redundancy programs, spending cuts, pension indexation limited to.5%) being implemented in 214. Instead of signing a stand-by arrangement with the IMF, the government is opting for a precautionary deal due to the delay in pension system reform which is one of the prerequisites for the SBA deal. Nevertheless, the pension reform will start with revision of conditions for early retirement in 214. The government will continue cooperation with all sides (EU, Russia, China, UAE) hoping that fiscal measures and changes to the labour and construction law will support investment flows. Early parliamentary elections might loom in 214 given the increasing support for the leading Serbian Progressive Party (SNS) and its leader Mr Vucic, but again this will depend on global and internal market developments. Ljiljana Grubic Key economic figures and forecasts Real GDP (% yoy) Real GDP (% yoy) Industrial output (% yoy, r.h.s.) Exchange rate development e 15 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 EUR/RSD (eop) 214f 215f e 214f 215f 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) st quarter

28 Bosnia and Herzegovina Investment cycles as a tailwind for economic recovery in 214 Solid export and industry performance, backed by a strong revival in private investments Despite constant political turmoil, the IMF conditions are being fulfilled Economic recovery in 214 borne by investment cycles in energy and infrastructure sectors Exports and industry will benefit from brightening outlook in the Euro area Real GDP (% yoy) Real GDP (% yoy) Industrial output (% yoy) Current account and FDI inflows e 213e 214f 215f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) 214f 215f Key economic figures and forecasts The latest available heavyweight indicators published for Q3, such as exports and industrial production which correlate strongly with overall GDP growth, showed no slowdown in their continuous upward trend. As of October, exports of goods and industrial production reported robust cumulative growth of 6.5% yoy and 6.4% yoy, respectively, thus coming in above our expectations of a more pronounced deceleration in the dynamics in Q3 and Q4. We have revised up our real GDP estimate for 213 to 1% yoy, on the back of the better real sector dynamics and even more, thanks to the strong revival of the construction sector and private investments which is expected to positively contribute to GDP growth this year after four years of deep recession. Moreover, exports of goods and services are expected to rise by 3.5% yoy in real terms, followed by 3% yoy growth in private investments which will be only two positive contributors to a broadly timid economic recovery. On the other hand, the constant political stalemate and slow progress with the reform agenda keeps domestic demand depressed, with private consumption now in negative territory (-.5%) for five years in a row, pressured by the record unemployment rate (28%) and negative real growth in disposable income. Despite the political stalemate, B&H is fulfilling the IMF s SBA conditions successfully, although the savings measures implemented will result in negative growth of public spending in 213 (-.3%). In 214, we expect to see stronger economic dynamics, driven primarily by the expected start of the investment cycles by the public utility company Elektroprivreda BiH and continuation of infrastructure projects on Corridor VC, both worth EUR 1.7 bn or 12.6% of GDP. Hence, private and public investments will come to the forefront of the economic recovery with expected real growth by 9% yoy, followed by robust dynamics of exports and the export-oriented industrial production which will benefit from brightening economic outlook in Euro area, growing by 5% yoy and 4.5% yoy, respectively. Ivona Zametica e 214f 215f 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) st quarter 214

29 Albania A new beginning Government recognises arrears to private sector of around EUR 3 mn Public debt to increase to 72% of GDP by end-214 Government arrears financed by IMF and World Bank on relaxed terms Granting EU candidate status postponed until June 214 The new government recognised arrears to the private sector amounting to nearly EUR 3-4 mn. This development is expected to drive public debt up to 68% of GDP by the end of 213 and probably to 72% of GDP by the end of 214. However, the government is expected to be financed for the volume of the arrears by the IMF and World Bank. A new programme with the IMF is very likely to be signed in early 214. Nearly 25% of these arrears are linked to the country s NPL level that hit 24.7% in September 213. The payment of these arrears is expected to increase confidence and would lead to a moderate revival of the banking sector. The budget deficit widened this year, as the electoral period led to a relaxed fiscal policy with revenues decreasing by 3% yoy in October and expenditures increasing by 7%. Therefore, the budget deficit is expected to be at 6% by the end of the year compared to the target of 3.5%. This deficit is expected to be start contracting in 214 as fiscal consolidation is planned by the government and the new restrictive fiscal package has been approved. This package foresees a scale-based taxation system compared to the flat income tax of the previous government. From this system, it is mostly small business and private individuals that will profit. On the other hand, tax hikes are foreseen for excise products, and for corporate businesses the tax on profit is going to increase from 1% to 15%. External demand was the leading sector of the economy in 213 and should also continue to be in 214, with energy, oil and textiles as the main industries. The projection for economic growth in 214 is at around 2%, conditioned by the increase of public debt and the budget deficit affecting growth from the public sector. Domestic demand may be motivated by a revival in the financial sector, but we would still expect the real effects to kick in during 215. Furthermore, in 214 the TAP (Trans Adriatic Pipeline) project will start. This investment exceeds EUR 4 mn and will be completed by 219. Valbona Gjeka Real GDP (% yoy) Budget balance and public debt e 213e Real GDP (% yoy) 214f 214f Industrial output (% yoy) 215f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) 215f Key economic figures and forecasts e 214f 215f 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) st quarter

30 Kosovo Tailwinds ahead Consumer confidence propelled by remittances Elections push the government to spend more on infrastructure Growing exports, domestic agricultural output and low oil import prices reduce the trade deficit Telecom privatisations on the brink of failure Real GDP (% yoy) e 214f 215f Real GDP (% yoy) Economic activity in Kosovo continued to grow in the fourth quarter of 213, and in Q1 214 no change is expected in the clear upward trend of the last straight three quarters. This improvement is driven by stronger business activity, an optimistic consumption outlook, continued fiscal expansion and progress in reducing trade imbalances. These four factors are expected to continue in the following quarters. Businesses report a more favourable environment and are experiencing an increase in orders. They complain about tighter loan conditions by banks, but the financial sector is expected to ease its conditions for corporate lending, in particular to small and medium-sized enterprises. Domestic consumption reached its height during the holiday season, but is in much better shape than a year ago. This is also based on continued solid remittance inflows, which finance private sector consumption. Budget balance and public debt e 214f 215f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) The government budget for 214 foresees unreserved expenditures similar to the previous years. It includes a strong weighting on capital investments, focusing on a few major projects. The agricultural sector is being supported through subsidies on a broader scale, and through tax relief for imports of base materials. The government failed to privatise the telecom provider for the second time and intends to re-launch the process again. Government bills have been issued for the first time for periods up to one year, but the offers outweigh supply, and the low yield rates demonstrate market trust in prudent government budgeting. The balance of payments is profiting from the improved current account balance with reduced imports and increased exports, showing signs of domestic supply replacing imports. Remittances and foreign direct investments are on the rise as well, while the capital account continues to be a marginal indicator, mainly in capital outflows of foreign firms profits. Fisnik Latifi Key economic figures and forecasts e 214f 215f Nominal GDP (EUR bn) Real GDP (% yoy) Unemployment rate (avg, %) 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)* * EUR official currency in Kosovo 3 1 st quarter 214

31 Belarus Household consumption not enough Economy turns to a slow growth path: 213 GDP growth estimated at 1%, accelerating slightly to 2% in 214 Inflation picked up in H2 213, due to hikes in regulated prices Pressures on BYR to continue, FX reserves cover less than 2 months of imports Russian financial support and privatisation proceeds may help to make external debt service more bearable in 214 This year turned out to be not as good for the Belarusian economy as previously expected. Despite some positive dynamics in H1 213, GDP growth for the full year is forecasted at only 1% yoy, one of the lowest figures over the long run (except 29). Existing troubles with exports amidst lower external demand provoked a contraction in industrial output (-4.6% yoy). Private consumption still plays a supporting role for economic growth, but will likely decelerate in the midterm perspective. The widening of the C/A deficit (forecast for 213: 1.5% of GDP) is mainly driven by the downturn in the trade balance, which together with uncertainties about coverage for external debt repayments is cause for concern. Inflation has speeded up in recent months amidst a gradual increase in regulated prices (communal services, transport, energy), and thus the CPI reached almost 14% ytd in 11M 213. The Belarusian rouble has edged weaker and by mid- December it had registered 1% depreciation versus USD and lost about 15% of its value versus EUR since early 213. FX reserves also continue their decline, due to considerable external debt redemptions and net FX purchase from households (USD 1.9 bn in Jan-Nov 213) and now amount to less than USD 6.5 bn (covering only 1.7 months of imports, below the recommended level of 3 months) compared to a maximum level of USD 8.2 bn in May. Further economic development will be heavily influenced by Russian financial support (last USD 44 mn tranche of EurAsEC loan still to be received) as well as by the government s economic measures and the National Bank s fiscal and monetary policies. Going forward, GDP growth in 214 is expected to accelerate modestly to 2%, based on a revival of industrial output growth to 1.5% yoy, while the deficit of the trade balance will likely narrow to USD.5 bn. In H1 214, some progress in privatisation seems possible with the purpose of generating revenues for external debt servicing. The depreciation path of the Belarusian currency will likely continue in 214. Mariya Keda Key economic figures and forecasts Real GDP (% yoy) e Real GDP (% yoy) 214f Industrial output (% yoy) Current account and FDI inflows e 214f 215f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) 215f Source: Statistical Committee of the RB, Raiffeisen RESEARCH e 214f 215f 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) 3,894 3,951 6,9 1,7 12,2 14,6 16,1 USD/BYR (avg) 2,793 2,979 4,975 8,337 9,2 11, 12,4 1 st quarter

32 Russia Russia: Struggling for growth Economic growth perspectives to improve gradually due to a rebound of investments Huge long-term investments from the National Wealth Funds as a proxy for fiscal easing Neutral-to-negative outlook for RUB stemming from weaker BoP and external risks RUB decouples increasingly from oil prices Real GDP (% yoy) Budget and current account balance e 213e 214f Real GDP (% yoy) Industrial output (% yoy) 214f General budget balance (% of GDP) Current account balance (% of GDP) 215f 215f Economic outlook Recent data show ongoing deterioration in key macro indicators, justifying our revision of GDP growth in 213 from 2.% to 1.5% in November. However, we expect the Russian economy to regain some momentum in 214 and GDP growth to accelerate to 1.7%, borne by a rebound in investments. The completion of state-sponsored mega-projects (e.g. Sochi Olympics) is the main factor behind the sharp slowdown of investments in 213 and should translate into faster growth in 214. But this improvement alone will not change the situation dramatically, due to its statistical nature. The government initiative to invest about EUR1 bn in new infrastructure projects should contribute to investment growth in 214. However, a positive effect from this may not become visible earlier than in H Nevertheless, we believe that the rebound in investments will be enough to offset weaker household consumption growth in 214. We anticipate that construction and industrial production stagnation will affect real wages and unemployment dynamics in 214. Among other factors which could limit consumption growth are expectations of slower retail lending, due to slack economic activity and tighter regulation. Overall, while expecting some improvement, we do not see 214 as a turning point for the mid-term economic outlook. On the upside, headline CPI is at its lows, and we expect further deceleration in 214. Among the fundamental factors behind the CPI decline are more effective interest rate policy of the CBR, replenishment of the Reserve Fund and low economic growth. However, the government decision to freeze regulated utility prices for households in 214 will play the key role in CPI deceleration, resulting in the headline CPI rate dropping to about 5% by end-214. A liquidity shortage in the banking system creates the dilemma of more intensive liquidity provision vs. inflation control. Thus, we believe that the CBR will avoid direct interest rate cuts and chose more implicit easing measures instead. Key economic figures and forecasts e 214f 215f 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) st quarter 214

33 Russia Financial market outlook Rouble weakening continued in Q Apart from external market sentiment driven by changing expectations of QE3 tapering, this was the result of internal factors as some large local FX market players showed strong demand for foreign currency. In addition, the upward shifts of the CBR FX band boundaries continued adding to the already strong expectations of rouble depreciation. As such expectations are mostly speculative in nature, but they might become self-sustaining. However, with the oil price around USD11/bbl the intensity of the recent rouble depreciation seems excessive. The medium-term risks for the rouble are associated not only with the oil price, but also with the US Fed s tapering schedule. However, we anticipate that this process will be very smooth. At any rate, it may still be a serious downward risk for rouble in the beginning of 214. However, taking into account that Q1 is historically the most favourable period for the rouble due to the seasonal surge in the C/A surplus, negative external pressure on the FX rate may be limited. Moreover, the Sochi 214 Olympics may have some positive effects for the rouble. Overall, we expect that external risks for rouble in Q1 will prevail, resulting a tendency for depreciation during that period. From a fundamental perspective, we expect moderate rouble weakening in 214, due to deterioration of trade balance dynamics (we see risks for Russian oil and gas exports from the supply side). At the same time, the current slowdown in imports (mainly due to industrial production stagnation) is not enough to offset the loss of export revenues in the near future. As a result, we expect a gradual shrinkage of the C/A surplus, which with ongoing capital outflows will lead to moderate negative pressure on RUB in the mid-term. The OFZ market has been quite volatile in H2 213 as well. In Q4, OFZ yields were rising in line with other GEM local currency sovereign bonds. Apart from global market sentiment, the correction for OFZ was triggered by the rouble liquidity deficit which pushed o/n money market rates to 6.5% p.a. As of the end of Q4, OFZs are trading with real yields (=nominal yields - CPI) of 12bp for 1Y paper in comparison with UST (188bp for 1-y bonds) and Emerging Market local currency government bonds (e.g. 1Y SAGB 25bp, MBONO 28bp, Brazil 448bp, TURKGB 15bp). Thus, in the case of further UST yield increase OFZs may find themselves facing selling pressure. Assuming our baseline case that sentiment remains subdued in Q1 214, we think the yield on long-dated OFZ will increase further to 8.%. Maria Pomelnikova, Denis Poryvay Exchange rate development Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun USD/RUB (eop) Exchange rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ RUB Cons USD/ RUB Cons RUB basket : p.m. (CET) RUB rate and yield curve (%)* Yields as of Dec-13 Yield curve Dec-13 Yield curve Sep-13 Mar-14 * 1m 6m interest rates; 1y 1y LCY gov. bond yields Interest rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Key rate Cons Yield forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 2y T-bond Cons. n.v. n.v. n.v. n.v. 1 month month month : p.m. (CET) 2 refers to refinancing rate of currently 8.25% 3 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 1 st quarter

34 Ukraine Russian bailout buys time until 215 elections Sudden turnaround in foreign policy triggers massive public protests Russia announces a massive bailout: USD 15 bn bond purchase and a reduction in gas prices Risk of economic crisis and devaluation is largely contained for the next 12 months Growth remains unfavourable amidst political quarrels, poor business climate and a sluggish global recovery Real GDP (% yoy) e Real GDP (% yoy) 214f 215f Industrial output (% yoy) Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH Budget balance and public debt e 214f 215f General budget balance (% of GDP) Public debt (% of GDP, r.h.s.) Source: National Bank of Ukraine, Raiffeisen RESEARCH Events in Ukraine have turned very exciting since mid-november, when the local authorities shocked the public with a sudden foreign policy turnaround shortly ahead of the EU Eastern Partnership Summit, shying away from EU integration and turning back to closer ties with Russia. This triggered wide-scale pro-eu public demonstrations in Ukraine, which grew larger and larger after a few unsuccessful attempts by the authorities to brutally crack down on the protests. In particular, hundreds of thousands of people gathered on a few occasions in downtown Kyiv, thus creating a déjà vu of the Orange Revolution in late 24. However, on 17 December, President Yanukovych turned the wheel in his favour, when Russia announced a large-scale financial assistance package for Ukraine, including USD 15 bn in direct financing and a reduction in import gas prices. The deal seems big enough to cover Ukraine s external financing gap for the next 15 months. Hence, if the deal with Russia comes through, the Ukrainian authorities seem fully capable of preserving economic stability until the key date of March 215 (i.e. next presidential elections). This essentially means that the currency will remain largely stable, domestic energy tariffs for households will not be raised, while the authorities also get additional resources for boosting social spending ahead of elections. The economy remains in dire straits, with the recession now going on for 5 quarters in a row. GDP declined by 1.3% yoy in Q3 213 amidst feeble external demand, slack domestic investment activity and decelerating private consumption growth (on the back of large-scale fiscal disarray). We now see GDP declining by 1% yoy in 213. The impact of the bailout deal on growth is likely to be only marginally positive, mostly stemming from acceleration in domestic demand growth, while the net effect will be negative on the back of real effective exchange rate appreciation and accelerating import growth (propped up Key economic figures and forecasts e 214f 215f 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) st quarter 214

35 Ukraine by higher consumer and investment demand). The current political turmoil will dampen growth performance at least in Q Consequently, we keep our zero GDP growth forecast for 214 intact for now, but see a potential marginal upside to this figure, i.e % growth. Consumer price inflation (end-of-period) is likely to accelerate to 5.-6.% yoy in 214 on the back of increasing domestic demand. We expect the C/A deficit to retreat marginally next year (from 8.7% of GDP to 6.5%) as the positive effect from lower gas price and improved trade relations from Russia will be partially offset by increased imports. Judging from the market perspective, the deal appears highly encouraging since it boosts Ukraine s liquidity position and reduces immediate default risk. Unsurprisingly, the initial positive reaction of the market was based on similar conclusions. We believe that the leading rating agencies will admit the short-term benefit of the liquidity buffer creating loan solution, but will remain unimpressed as regards fundamental situation, including new debt accumulation resulting in a higher leverage of the Ukraine government and an extended political crisis which Russia s deal apparently may not resolve. We see a number of downside risks for the medium- and long-term outlook. First, political uncertainty is still high, since even with the Customs Union condition dropped for now, the protests are not likely to fade away quickly. Second, given the structure of the deal (i.e. quarterly revision of the gas price and loan disbursements in quarterly instalments), financing uncertainty is not expected to go away completely. In fact, the agreement very much reminds of the similar deal struck by Russia with Belarus two years ago the country gets financial support on a quarterly basis, while the volume of oil exports is also renegotiated every three months. So, the risk remains that the deal might fall apart at some stage because of political or economic reasons. Third, over the longer run, the deal does not seem so beneficial for the Ukrainian economy. Specifically, the financial support from Russia is apparently not tied to any structural reforms. Therefore, the fundamental position of the Ukrainian economy is not likely to improve and the country will still be plagued by a persistently high C/A deficit, unstable depreciation expectations, low energy efficiency, obsolete infrastructure and a poor business climate. Moreover, the USD 15 bn deal significantly exacerbates the Ukrainian government s debt position and substantially increases the country s public debt and overall external debt. Therefore, in our view, the risk of economic adjustment is largely contained for the next 12 months, while beyond that date the situation might take a turn for the worse. Exchange rate development Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun USD/UAH (eop) e 214f Exchange rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ UAH Cons USD/ UAH Cons : p.m. (CET) Current account and FDI inflows 215f Current account (% of GDP) Net FDI (% of GDP, r.h.s.) 1 Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH Dmytro Sologub, Andreas Schwabe Inflation and unemployment e 214f 215f Unemployment rate (avg, %) Consumer prices (avg, % yoy) Source: National Bank of Ukraine, Raiffeisen RESEARCH 1 st quarter

36 Turkey Improving fundamentals amidst elevated market volatility ahead Risks to our full-year GDP forecasts tilted to the upside, due to better-than-expected headline prints in Q1-Q3 213 GDP structure a mixed bag with the unfavourable development of net exports the major concern Financing risks of high C/A deficit to keep lira under pressure, but no threat to government s ability to service debt After adjustment of TRY markets to a post-qe3 world, TRY bond market to offer attractive opportunities Real GDP (% yoy) e 213e 214f Real GDP (% yoy) Industrial output (% yoy) 214f 215f Budget and current account balance 215f General budget balance (% of GDP) Current account balance (% of GDP) Key economic figures and forecasts Economic outlook Q3 GDP surpassed our expectations again coming in at 4.4% yoy (.9% qoq). This was the third quarter in a row that the annual expansion rate was higher than market consensus, bringing average year-to-date (YTD) growth to 4.%. The growth structure is a mixed bag, with credit-fuelled private consumption contributing the most again (+3.3pp). Inventory building was also a strong growth driver again, but added less to the headline print (+1.9pp) compared to previous quarters. The most welcome development was the positive contribution of capital formation for the first time in two years (+1pp), whilst reduced government consumption (down from +2.3pp in Q2 to +.4pp) is also a favourable feature. Net exports, by contrast, subtracted 2.2pp from the overall growth number with exports declining for the first time in three years (-2.2% yoy). As expected, the export sector is hitting its structural limits, despite the gradual pick-up in external demand. Given the parallel acceleration of import growth, the resulting mix does not bode well for Turkey s C/A deficit. However, on a positive note, the export sector is becoming more and more diversified and export volumes are almost 3% higher than in 28 (other EM +2%). Overall, our full-year 3.5% GDP forecasts for 213 and 214 could turn out to be overly cautious. Since the tapering signal on 22 May, financial markets such as the South African, Indonesian and Turkish markets were hit hardest due to their high C/A deficits and their related dependence on foreign capital inflows to cover their shortfalls. The rising trend in Turkey s external deficit added to investors concerns: The 12m rolling deficit increased from to 7.5% of GDP in October keeping our 7.6% forecast for end-214 in check. However, tighter monetary conditions and administrative measures to rein in credit growth should be the main factors for the expected decrease in the C/A deficit in 214. These developments are of much more market relevance than local politics, although we will monitor local elections (March) and presidential elections (August) as an additional source of uncertainty e 214f 215f 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 1 st quarter 214

37 Turkey Financial market outlook The ongoing pass-through from the continued lira weakness to local prices and rising services inflation were the main reasons which prompted the Turkish central bank (TCMB) to tighten its monetary policy stance at its latest meetings. The TCMB admitted that CPI inflation is likely to exceed their earlier raised forecast of 6.8% yoy for end-213 (we continue to target 7%). While the central bank kept its three interest rates (overnight borrowing and lending rate at 3.5% and 7.75%, respectively, and one-week repo rate at 4.5%) stable in line with their forward guidance which explicitly refrains from outright rate hikes, tighter liquidity conditions were announced in November and additionally in December. Interbank money market rates will therefore be pushed towards 7.75%, i.e. right at the upper boundary of the o/n interest rate corridor. A positive surprise was the announcement of a new monetary policy framework: the one-week repo rate is no longer considered the policy rate and is likely to be cancelled following a certain transitional period. The new reference rate will likely be 7.75%, the o/n lending rate. However, with rates planned at the upper end of the interest rate corridor the room for higher funding costs on days of elevated market stress has completely vanished. Exchange rate development Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 USD/TRY (eop) Exchange rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 EUR/ TRY Cons The Turkish lira depreciated more than 1% versus USD between 22 May and mid-december. In the same timeframe, LCY bond yields were also among the hardest hit with the 2y and 1y yields skyrocketing. The already high long-term correlation with US Treasuries even increased since 22 May, whilst the ailing lira also took its toll on LCY bonds. Since we anticipate 1y US Treasury yields to climb gradually due to the Fed s announcement that tapering starts in January 214, but also due to the ordinary upward pressure on yields on the back of accelerating economic growth dynamics, their Turkish counterparts should follow this direction, but to a much more limited extent than in mid-213. The lira should also remain under depreciation pressure. In a delayed response to these market jitters, the TCMB is expected to adjust its base rate by a total of 1bp in Q1/Q2, limiting the severity of our bear case scenario. Our assumption of continued lira weakness should have only a limited effect on the government s ability to service its debt because of the relatively low amount of FX debt (only 3% of total debt stock or 13% of GDP). In addition, thanks to ongoing efforts to lengthen its domestic and external debt profile to maturities of 3.7 and 9.5 years, respectively, interest rate sensitivity has been reduced. Following a temporary adjustment to rising core market yields and tighter, but still ample global liquidity in a post-qe3 world, the local debt market should finally offer attractive opportunities. Stephan Imre USD/ TRY Cons : p.m. (CET) TRY rate and yield curve (%) Yields as of Dec-13 Yield curve Dec-13 Yield curve Sep-13 Mar-14 * 1m 12m interest rates; 2y 1y LCY gov. bond yields Interest rate forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Key rate Consensus n.a. n.a. n.a. n.a. Yield forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-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 1 st quarter

38 Sovereign Eurobonds Fighting fears 1 Higher beta CEE sovereigns enjoyed larger benefits from the market turnaround in Q4 We expect stronger appetite for CEE risk in 214 Smaller net issuance of USD 3-5 bn in CEE should help strengthen the technical picture Positive performance expectations for Q1 and Q4 214, sell-off risk in Q2 EMBIG USD performance Index Change (%) Spread (bp) 19-Dec 1 qoq YTD 19-Dec 1 qoq PL (A-) LT (BBB) BG (BBB) RU (BBB) TR* (BBB-) HR (BB+) RO (BB+) HU (BB) RS (BB-) UA (B-) BY (B-) CEE Africa Asia Mid East Latam Global Inv.grade BB B closing prices 5: p.m. (CET) * TR - Turkey Fitch rating, Source: Thomson-Reuters, Raiffeisen RESEARCH Market trends Developments on the Eurobond market in Q4 212 were broadly in line with the scenario we painted three months ago. Emerging Market debt volatility fell on the back of smaller risk aversion, rolled back by the declining immediacy of the Fed s QE tapering risk. This situation can be illustrated by two short periods of falling correlation of EMBIG USD yield changes to UST yield changes. In the second half of October, the UST-EMBIG 1-month correlation briefly fell into negative territory before rebounding back to.7, while the correlation fell again to.5 for the second time at the end of November and early December. So far the 3-month rolling correlation has dropped from.8 to.45 in the first half of December, which roughly corresponded to a period of the EMBIG yield decoupling from UST, resulting in positive price returns for EMBIG price indices. Consequently, the CEE EMBIG USD spread fell from 3bp at the end of Q3 to 28bp during that period netting a 1% surplus return in gross price terms. Still, we find the CEE segment s results unimpressive due to nearly zero outperformance versus the EMBIG Composite index. Moreover, comparing relative price performance we see that more often market gains occurred due to accrued interest rather than because of clean price gains. Higher beta CEE sovereigns enjoyed a larger benefit from the market turnaround in Q4, leading to bigger gains for Belarus, Serbia, Ukraine, and Hungary. On the other hand, except for Hungary, none of the aforementioned countries managed to strengthen fundamentals and their outlooks deteriorated through 213. At the same time, more stable Russia and Turkey underperformed the rest of CEE. As a result, the positive outperformance of our Serbia and Hungary recommendations was partly offset by abysmal results for the Turkish market. EMBIG USD to UST yield correlation* Sep-13 Oct-13 Nov-13 Dec-13 3M 1M * JPM EMBI Global index family Source: Thomson-Reuters, Bloomberg Primary markets As we projected, activity in the primary markets resurged in Q4 as CEE governments seized the opportunity of falling risk aversion to fund the remaining plans which they had to postpone during Q2-Q3. Consequently, Q4 to-date issuance volumes surged to USD 11.3 bn with six CEE countries and Turkey placing new bonds. The USD issues accounted for 67% of overall CEE placements. Geographically Russia, Hungary, Turkey, and Slovenia topped the primary market issuance. Assuming slow change in market bias and better liquidity in the USD market, we project similar currency preferences for 214, but with a small increase for the EUR segment. In 214, CEE sovereign Eurobond redemptions are projected to reach just 56% of total payouts with the remaining 44% going to coupons. Therefore, CEE will need to issue about USD 5 bn in new debt to fund all Eurobond payments or about USD 3 bn to cover only principal due, which makes it look broadly similar to the USD 48 bn issuance this year. The resulting net issuance is likely to top USD 3-5 bn for 214, which is a pretty small number and overall should help strengthen the CEE technical picture. 1 Fighting Fear is a 211 Australian documentary film about professional surfing. In 213, the film was honoured by the Australian Film Institute with two Australian Academy of Cinema and Television Arts Awards, specifically for Best Cinematography in a Documentary and Best Direction in a Documentary st quarter 214

39 Sovereign Eurobonds Outlook & Strategy In 214, we expect stronger appetite for CEE risk to emerge mainly due to the stronger financing positions of many governments, the relative underperformance of Eurobond market in general during 213 and a smaller net issuance after accounting for debt redemptions and interest payments. On the one hand, technically speaking, we remain constructive on the CEE sovereign Eurobond market in Q1 expecting market demand for CEE bonds to strengthen amid larger payouts and limited supply of new debt. On the other hand, we foresee a risk of higher correlation of emerging debt yields to UST yields dampening some of the appeal of EM debt. In particular the return of correlation to.8 or a higher number in Q1 will signal the increase of tail risk for CEE Eurobonds from UST yields. Still, the past periods show the drop of the EMBIG correlation to UST marking the decoupling effect, and the Fed QE tapering in Q1 was largely preannounced and factored into the Eurobond prices. We anticipate the tapering impact to grow again during Q2-Q3, which will be partly offset in Q4. Accordingly, there remain positive performance expectations for Q1 and Q From the rating perspective, we see the CE sub-region offering a stable outlook except for Slovenia where the fiscal and banking crisis will add negative pressure. At the same time, we expect improvement in the economic situation in Hungary to help its fiscal and liquidity position. The SEE outlook will remain under pressure from Serbia and Croatia where the risk of rating downgrades remains high due to weak fiscal positions and sluggish growth. In CIS the Ukraine risk remains a wild card because of the largely unpredictable political situation, while Russia might lack performance due to slow growth and tighter valuations. From a long only perspective, we recommend market weight for CEE Eurobonds expecting no relative outperformance vs. other EMs. Inside CEE, we prefer Hungary and Romania while we sell Serbia and Croatia. For speculative reasons, we are buying Ukraine outright as Russia s sponsored USD 15 bn deal removes the immediate risk of default and devaluation, so Ukraine bond prices should continue moving up. CEE EMBIG vs. UST 1Y yields, %* Dec-12 Apr-13 Aug-13 Dec-13 EMBIG USD UST 1Y (r.h.scale) * JPM EMBI Global index family Source: Thomson-Reuters, Bloomberg, Raiffeisen RESEARCH CEE sovereign issuance 213, USD bn* RU HU TR SI SK RO HR UA RS PL KZ CZ LT * cumulative issuance 213, Eurobonds only, arranged by country including sovereign & state agencies Source: Bloomberg, Bond Radar, Raiffeisen RESEARCH Gintaras Shlizhyus Benchmark Eurobond forecast and performance Spread Range Spread Range Spread Range Rating Dur. 19-Dec 1 Mar-14 min. max. Perf. (%) Jun-14 min. max. Perf. (%) Sep-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 1 st quarter

40 Corporate Eurobonds CIS corporates: Orderly tapering benign for spreads in Q1 213 was another record year on the primary market, pipeline building up for 214 Spread convergence to 213 minima still on the cards Towards end-214: less resilience of CIS credits to potential market turbulence Long tenors more risky due to rising maturity premia 213 YTD returns CEMBI UA CEMBI RU CEMBI ASIA CEMBI MIDEAST CEMBI KZ CEMBI CEMBI LATIN EMBIG -9% -6% -3% % 3% 6% Source: JP Morgan, Raiffeisen RESEARCH UST vs. CEMBI RU Index Dec 19-Mar 19-Jun 19-Sep 19-Dec UST 5y (%) CEMBI BROAD RU (bp, r.h.s.) Source: Bloomberg, JP Morgan, Raiffeisen RESEARCH EM corporate issuance (%) 1% 8% 6% 4% 2% % Asia CIS CEE MENA LatAm Source: Bond Radar, Raiffeisen RESEARCH YTD We think that the convergence of Russian corporate spreads to the record tights seen in January 213 is still on the cards if the market is not faced with any abrupt hikes in US Treasury (UST) yields in Q1. If the much debated start of tapering of US bond purchases by the Fed translates into EM market outflows and a rapid increase in UST yields which is not our baseline scenario we would regard this as a short-term buying opportunity. Elsewhere in CIS, we prefer the Kazakh segment to Ukraine with the former offering a more solid fundamental and technical picture. However, with the monetary cycle turning and an increase in UST yields on the cards in 214 higher CIS corporate bond yields seem unavoidable. This clearly hurts total return investors and brings headwinds to our shortterm spread tightening scenario. Towards end-214, we expect weakening resilience of CIS credit spreads to potential market turbulences on the global markets which may translate into a slower reversion of spreads to pre-sell-off levels and widening pressure. One of the most decisive factors for CIS credit valuation in Q1 remains the shape of the US Fed s monetary policy. Our macroanalysts expect a gradual rather than an abrupt increase in UST yields as well as a continuation in the steepening of the US government yield curve in 214. We would like to note that we have observed a rather strong positive correlation of CIS corporate spreads and UST yields in times of abrupt increases in UST yields. In a nutshell, the abrupt increases in UST yields in 213 were associated with outflows from EM corporate bonds which caused risk premia to rise. Subsequent counter-movements and normalisation in UST yields translated into rising bond prices, reduction of risk premia and tighter spreads. As a result, the two mini sell-offs in June and September 213 created short-lived buying opportunities for a dedicated investor base. In Q4, the global emerging markets (EM) corporate credit index returned 1.7% for the quarter-to-date. The CIS segment ranked together with Asia amongst the main contributors to the index s solid quarterly performance. Although Russia returned a decent 2.% qtd, ahead of Kazakh high-yields (-.5%), it underperformed Ukraine (9.4%) due to the repricing after the announcement of the Russia s decision to buy Ukrainian sovereign bonds. By contrast, Kazakh investment grade issuers disappointed again with the EMBIG KZ returning.4% qtd, whereas the total return of EMBIG was a less discouraging 1.%. Looking at Russian spreads, these returned to April levels. Despite the fact that most of the June widening attributable to capital flight from EM was erased, we are still some 2bp away from this year s lows seen in January. The term structure of credit spreads changed in 213. Even though the spreads of longer tenors offer higher premium to this year s local lows, we think that much of this is due to a growing maturity premium which is here to stay. For instance, 3y and 1y spreads of the interpolated Russian BBB curve offer premiums of bp and 6bp, respectively, compared to this year s lows. That said, we expect steeper credit curves in 214 and additional risk for holders of longer tenors. The picture is somewhat different in the other two CIS countries. In the case of Kazakh high yields, the spread decompression observed in June-July was only 4 1 st quarter 214

41 Corporate Eurobonds slightly reversed and the Kazakh index spread is still 27bp wider than the tights seen in January. With regard to Ukraine, the volatile spread pattern and the current levels over 9bp are fully commensurate with the escalation of the country s political risk. This year s summer lull was exacerbated by market turbulence in June-July which squeezed EM primary market issuance in the three summer months to just 45% of the issued volume recorded in the same period of 212. We recap that EM corporates raised USD 25 bn in H1 213, compared to just USD 149 bn in H In contrast, H2 213 volume has only reached a mere USD 12 bn ytd, making for a 3% slump yoy. All in all, this year s excellent H1 and a pick-up in issuance in the autumn seem to have translated into another record year on the EM primary market. EM corporates total issued volume for the year to date reached USD 326 bn by the time of writing, which compares to USD 321 bn for the full year 212. With respect to the CIS segment, the total issued volume has reached USD 55 bn ytd in 213, which compares to USD 44 bn for the full year 212 and represents a pick-up of 24% yoy. Taking a look at the CEE ex CIS segment, the total issued volume has reached USD 14 bn ytd in 213, for a 21% increase yoy. With respect to the geographical mix, the share of CIS issues in the total EM issued volume in 213 reached 17%, up by 3% yoy whereas that of CEE ex CIS segment surged to 4%, for a.7% rise yoy. As regards next year s pipeline, we have seen a host of new issue announcement for 214 lately. In Russia, we expect Promsvyazbank and Tinkoff Credit Systems to issue subordinated bonds. Also, Vnesheconombank announced its intention to issue EUR-denominated notes in early 214. Moreover, a debut benchmark issue from International Bank of Azerbaijan is expected next year as well as an issue from Ukrzaliznitsya the State Administration of the Ukrainian Railways. As things stand, we think that the booming primary market activity may continue well into 214, subject to no major disruptions on the secondary market. Taking a brief look at the most pertinent fundamental stories, we do not expect many positive surprises in Q1. In Russia, the banks are faced with a slowdown of economic growth which puts pre-provision profitability and asset quality under strain. Also, the more stringent regulation makes the consumer lending business more costly, whilst rising risk costs are exerting more pressure on bottom line results. As a result, we expect more downgrade rating pressure on Russian consumer lenders and banks with lower capital adequacy ratios in 214. That said, in Russia we recommend overweighting universal banks to monoliners and avoiding Promsvyazbank due to the lender s weak capitalisation. In Ukraine, the political agenda seems to dominate and the corporate risk premia are largely hostage to the changes in sovereign risk perception. We suggest a wait-and-see approach and maintain our 9 July hold recommendation on EX- IMUK 8.75% due 218. In Kazakhstan, the acquisition of BTA Bank by Halyk Bank is off the table, as is the consolidation of pension assets in one state-owned pension fund, which removed the fundamental risk premium inherent in Halyk s bond valuations. Even though we still see significant tail risks in the Kazakh banking remit, we view Halyk as the country s most solid banking credit and recommend overweighting HSBKKZ 7.25% due 217 against ALFARU 7.875% due 217. Martin Kutny EM corporate issuance USD bn Rating drift in Russia YTD CIS CEE ex. CIS LatAm MENA Asia Source: Bond Radar, Raiffeisen RESEARCH ,5 1,4-6 1,75 Jan-6 Jan-8 Dec-9 Nov-11 Oct-13 # upgrades - # downgrades JP Morgan RUBI (bp, r.h.s.)* * reverse order Source: Bloomberg, JP Morgan, Raiffeisen RESEARCH Selected CIS Eurobonds Issuer ISIN Maturity Yield in % Alfa Bank XS /9/ Alrosa XS /11/ Evraz XS /4/ Gazprom XS /2// Halyk Bank XS /5// KazMunay- XS /4/ Gaz VimpelComXS /2/ st quarter

42 Equity market/austria Improving fundamental data provide support Economic recovery is supportive Earnings to rise strongly in 214 We expect higher index levels for the ATX in Q1 Value matrix* Domestic business activity 2 (2) Exports OECD - excl. Eastern Europe 2 (2) Eastern Europe 2 (2) Asia 2 (2) Company earnings 2 (2) Key sectors 2 (3) Valuation - P/E-ratio 2 (2) Interest rates / yields 2 (2) Exchange rates 2 (2) Foreign equity markets 2 (2) European liquidity 2 (2) Technical outlook 2 (3) 1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally. * expected trend for the next 3 to 6 months Source: Raiffeisen RESEARCH, Raiffeisen Centrobank ATX shows valuation discount 5, In 213, the Austrian stock market had a more or less rough ride. Thanks to the robust recovery since the middle of the year, however, the ATX managed to finish the period with a small gain in the end. In doing so, the performance of the ATX was only marginally better than that of most Eastern European indices. Compared to the established Western European markets, however, the ATX shows significant underperformance. The main factors in this regard were broadly external in nature, with the repeated debates about tapering playing the biggest role. Austria s economy appears to be gaining momentum, albeit slowly. As far back as Q3 213 there was already a modest increase in activity. As for the prospects going forward, indicators are pointing to a sustained improvement in the situation. This is suggested, for example, by the purchasing managers index for the manufacturing industry and the EU Commission s economic sentiment indicator. In our opinion, the positive trend seen in these indicators will materialise and this will be reflected in higher growth rates in 214. In this regard, we believe that one of the most important driving factors is the development of domestic demand, along with a simultaneous fall in Austria s dependence on foreign trade. There are also hopes for a revival of economic activity in Eastern Europe, in particular CE, where the leading indicators are tending to paint a positive picture as well. At the same time, it should also be clear that there will not be a robust upturn in the immediate future. 1% 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 8% 6% 4% 2% % -2% -4% -6% -8% Corporate results for Q3 failed to reflect any outstanding growth trends. Whilst the quarterly reports at the overall European level tended to be rather disappointing, most of the results of Austrian companies were in line with our expectations. There were only a few changes in guidances recently. One exception was Lenzing: due to the difficult market conditions, the fibre producer had to issue a profit warning. -1% ATX Valuation discount ATX vs DAX (r.h.s.)* * Cyclically adjusted price/earnings ratio based on rolling 1 year trailing index earnings Although the difficult economic conditions had a negative effect on earnings performance in 213, we still expect a slightly positive growth rate. At the aggregate level, we project a gain of.6%. While this may appear low Sector structure ATX Sector Company Weight Financials CA Immobilien, conwert, Erste Group, Immofinanz, Raiffeisen Bank International, Vienna Insurance Group 42.6% Industrials Andritz, Oesterreichische Post, Strabag, Wienerberger, Zumtobel 17.4% Energy OMV, Schoeller-Bleckmann 15.9% Basic materials Mayr-Melnhof, Lenzing, RHI, voestalpine 16.9% Telecom Telekom Austria 3.7% Utilities EVN, Verbund 3.6% Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Vienna Stock Exchange 42 1 st quarter 214

43 Equity market/austria at first glance, compared to other companies from the DAX (-1.4%) or the Euro STOXX 5 (-6.1%) it looks quite decent. Despite this development, one must keep in mind that Austrian companies earnings are still down by more than 4% compared to the record-setting level from 27. At the European level, there is still a gap of around 25% to the peak levels, whereas new record highs are being celebrated in the USA. It appears very doubtful that the ATX companies will be able to quickly return to their earnings levels from back then, as both the rates of economic growth forecast in Austria and the Euro area over the long term and the increasingly tight regulation of the financial sector run counter to such a scenario. At the same time, we expect that at least the prospects for a modest economic recovery in 214 will allow for a clear increase in earnings compared to 213 (+26.1%). The higher earnings level which we expect to see will also help to keep valuations moderate. Based on our estimations, the P/E ratio for 214 should be around The cyclically adjusted P/E ratio based on longer-term earnings still offers a great deal of leeway on the upside, as it remains far below its historical average and also exhibits a clear discount compared to the DAX. One key point for the Austrian equity market will certainly be the reduction of the US Fed s bond purchase programme. With tapering the liquidity, one of the main drivers and pillars of support from the past, will disappear in 214. It is doubtful, however, that this will be able to cause a prolonged, intense disturbance on the equity markets. On the one hand, the ATX already lost a good bit ground when the tapering discussions flared up again in December, and on the other hand, there are several factors which currently point to a continuation of the positive trends for the equity markets in 214. For us, the main specific arguments for a positive performance by the ATX in Q1 214 are further stabilisation of economic conditions in the Euro area, prospects of renewed increases in profits and margins, modest valuations and the persistent lack of promising investment alternatives. Buy. Johannes Mattner Fair value of ATX 1 - December 214 Bond yields (1y) EY-BY 2 2.5% 3.% 3.5% 6.% 2,454 2,318 2, % 2,528 2,384 2, % 2,67 2,454 2, % 2,691 2,528 2,384 5.% 2,781 2,67 2, % 2,877 2,691 2, % 2,98 2,781 2, % 3,9 2,877 2,691 4.% 3,29 2,98 2, % 3,337 3,9 2, % 3,476 3,29 2, % 3,628 3,337 3,9 3.% 3,792 3,476 3, % 3,973 3,628 3,337 1 based on the expected earnings for 213/214 (i.e index points) 2 earnings yield less bond yield Source: Raiffeisen RESEARCH, Raiffeisen Centrobank Earnings yield* less bond yield * earnings yield = E/P; based on 12-month forward earnings, Raiffeisen Centrobank Valuation and forecasts 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec months forward earnings Bond yield forecast Earnings yield less bond yield (EY-BY) ATX-forecast based on EY-BY ATX-forecast 2, ,63 2,7 2,65 2,8 Expected price change 5.9% 8.7% 6.7% 12.7% Range P/E based on 12-month forward earnings :59 p.m. (CET); Source: Raiffeisen RESEARCH, Raiffeisen Centrobank 1 st quarter

44 Equity market/cee Positive start to the year expected Economic recovery varies across regions Demand for equities expected to be higher on seasonal factors CEE equity markets have relatively attractive valuations and potential to catch up Local topics coming more to the forefront CE core indices BUX WIG2 PX SEE indices in comparison CROBEX BET BIST National 1 MICEX vs Oil 2,1 1,8 1,5 1, MICEX Urals Oil (r.h.s) USD per Barrel With the exception of Romania, CEE equity markets were lagging in 213, with most of these markets suffering mildly declining prices. Consequently, this region lagged far behind the developed markets. In 214, economic conditions in the USA and the Euro area will improve significantly, and the neighbouring CE countries will profit from this in particular (GDP 214f: +2.3%). The export-led recovery in CE (in conjunction with fledgling increases in domestic demand) is also underlined by the recent spate of positive leading indicators (e.g. PMIs well over 5 in the region). The outlook is less appealing in the CIS region (GDP 214f: +1.6%). In this region, structural weaknesses (including slack industrial production and investments) are holding back stronger growth. In general, various local topics will come more to the forefront again. The confirmed reduction of the US Fed s bond purchase programme (known as tapering) has been discussed on the market for months and the lion s share should be priced in. The negative impact may remain limited as the Fed sees a better economic development than before. We tend to prefer a cyclical sector positioning. From the beginning of 213, prices stagnated on the Russian MICEX, which caused the discount in valuation compared to the developed markets to increase, but was also justified by the disappointing economic performance of the country. The main reasons why Russia has drifted away from unbridled economic growth are low investments by historical standards, slack industrial production and fading private consumption. Although the downward trend in GDP growth probably bottomed out in Q3 213, our forecast of +1.7% for 214 is certainly no reason for exuberance. In line with this, projected aggregate corporate earnings will also shrivel to.6% in 214. At the same time, one must note that the energy sector, which has a high weighting of roughly 5% in the MICEX, will be one of the main drivers of this development, as earnings are projected to contract by around 7%. However, less strongly weighted sectors such as materials, retail trade and financials will post double-digit earnings growth rates. Another positive aspect is the handsome dividend yield (213e: 4.2%). As for the oil price, which is so important for Russia s performance, we forecast an annual average price of USD 115 for 214. During these times of sluggish economic growth, the favourable valuation (P/E ratio 214f: 5.6) will not provide any positive impe- Value matrix stock markets PL HU CZ RU RO HR TR Politics 2 (3) 4 (4) 2 (3) 2 (2) 2 (2) 2 (2) 3 (3) Interest rate trends 3 (2) 2 (1) 1 (1) 2 (1) 1 (1) 2 (2) 3 (2) Earnings outlook 3 (3) 1 (2) 1 (1) 4 (3) 1 (1) 4 (3) 2 (2) Key sectors 3 (3) 2 (3) 2 (3) 4 (3) 2 (2) 3 (3) 2 (2) Valuation (P/E) 3 (2) 2 (1) 2 (2) 1 (1) 1 (1) 4 (2) 2 (2) Liquidity 1 (1) 3 (3) 3 (3) 2 (1) 3 (3) 4 (4) 1 (1) Technicals 3 (3) 3 (2) 3 (1) 1 (2) 1 (1) 2 (2) 4 (3) 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 1 st quarter 214

45 Equity market/cee tus. The spectre of tapering may also trigger at least temporarily higher liquidity outflows during the quarter, as foreign investors play a key role in Russia. HOLD. Expected index performance 15% The performance of the Polish equity market index WIG 2 was mildly negative for FY 213, mainly due to the relatively weak economic activity, the negative development of aggregate earnings and the pension reform. For 214, however, we believe that the Polish economy may easily surprise on the upside, prompting us to boost our GDP forecast for 214 from 2.5% to 2.9%. Earnings growth for 214 is estimated at a modest 2.5% and the valuation still looks moderate with a 214f P/E ratio of 13.. Furthermore, after the Polish government provided more details on the pension reform, private pension funds may switch over to being net sellers of Polish stocks more quickly than anticipated. In light of our positive expectations for the Euro area, we look forward to positive Polish performance in Q1, despite the aforementioned limiting factors, albeit we do not anticipate any outperformance at the regional level. BUY. 1% 5% % -5% ATX WIG 2 BUX PX Mar-14 Source: Raiffeisen RESEARCH MICEX BET Dec-14 CROBEX1 BIST Nat. 1 The Czech economy (GDP growth 214f: +2.3%) should profit strongly from the upswing in the Euro area. This is already reflected in the anticipated corporate earnings, aggregated for the PX. Currently, an increase of 31.2% is prognosticated for 214. At a 214f P/E ratio of 11.6, the valuation of the index still appears to be moderate. The future government will probably not make negative headlines in 214 with broad-based tax hikes, as was recently aired in the me- Indices in performance comparison Dec 1 ATX 57.4% 5.8% 21.7% 1.1% -61.2% 42.5% 16.4% -34.9% 26.9% 3.5% BUX 57.2% 41.% 19.5% 5.6% -53.3% 73.4%.5% -2.4% 7.1% 2.5% WIG % 35.4% 23.7% 5.2% -48.2% 33.5% 14.9% -21.9% 2.4% -7.9% PX 56.6% 42.7% 7.9% 14.2% -52.7% 3.2% 9.6% -25.6% 14.% -6.1% MICEX 6.6% 84.3% 67.5% 11.5% -67.2% 121.1% 23.2% -16.9% 5.2% 1.6% BET 11.% 5.9% 22.2% 22.1% -7.5% 61.7% 12.3% -17.7% 18.7% 23.7% CROBEX 32.1% 26.4% 62.2% 63.2% -67.1% 16.4% 5.3% -17.6%.% 2.7% BIST Nat. 1 n.a. n.a. -1.7% 42.% -51.6% 96.6% 24.9% -22.3% 52.6% -11.6% CECE Composite Index 57.1% 44.7% 14.7% 1.5% -53.7% 4.5% 15.7% -29.1% 25.7% -1.6% DAX 7.3% 27.1% 22.% 22.3% -4.4% 23.8% 16.1% -14.7% 29.1% 22.6% Euro Stoxx 5 6.9% 21.3% 15.1% 6.8% -44.4% 21.1% -5.8% -17.1% 13.8% 15.% S&P 5 9.% 3.% 13.6% 3.5% -38.5% 23.5% 12.8%.% 13.4% 26.9% MSCI World 9.5% 13.7% 13.5% 2.8% -4.1% 22.8% 7.8% -7.6% 13.1% 23.3% 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 13e ATX 5.6%.9%.6% 26.1% % WIG 2 3.8% -4.5% -23.1% 2.5% % BUX 4.9% -16.5% -19.4% 18.1% % PX* 6.8% 24.3% -17.9% 31.2% % MICEX 4.3% -12.2% 3.4% -.6% % BET 6.8% -1.% 28.% 15.2% % CROBEX1 3.4% 45.4% -2.% 2.9% % BIST Nat % 23.7% 1.1% 8.4% % 1 Czech Rep. (PX): excl. Tatry Mountain Resorts Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH 1 st 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. Tatry Mountain Resorts Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH Earnings growth 5% 4% 3% 2% 1% % -1% -2% Austria Poland Hungary Czech Rep.* Russia Romania Croatia e 214f Turkey * Czech Rep. (PX): excl. Tatry Mountain Resorts Source: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH dia. However, there might be a small remaining risk to levy special taxes on certain sectors (e.g. banking tax). Following the artificial depreciation, CZK is an advantage for exporting companies (some 5% of exports go to the Euro area), and the currency should remain at the current levels until later in H2. In our view, the key rate will stay at the record low of.5%, and yields on Czech government bonds (1-year: 2.4%) look rather unattractive versus the PX s dividend yield 213e of 4.8%, The only negative factor for the market will be the possible withdrawal of Telefonica CR from the exchange (change in ownership). BUY. The Hungarian equity index BUX only managed a marginal gain in 213. Considering our expectations of a recovery in 214, we still project a slow improvement in economic activity (GDP growth 214f: 1.5%), with exports taking the lead. Furthermore, we forecast another rate cut in Q1. Turning to politics, general elections will be held in April 214, and current opinion polls show Viktor Orbán holding a clear lead. On an index basis, aggregated earnings growth is tagged at 18.1%, leading to our expectations for an index P/E ratio of 9.7. Due to the slow but steady improvement in local conditions and our expectations of positive international developments, we have a positive attitude for Q1 and for 214 as a whole, despite the political uncertainty factors (e.g. FX conversion, 214 elections, etc.). BUY. After an impressive rally in H1 (+2%), the Turkish BIST National 1 conceded its gains again due to political protests and the generally weak performance of EM assets and is now in the red for the year at -12%. In light of the volatility of capital flows into and out of the Turkish financial market, we remain cautious in our assessment of the outlook for the stock market in Istanbul at the beginning of the year. In the course of tapering, capital outflows of international investors will likely be a negative factor, which is why we see limited potential for Turkish shares during the first three months of the year, despite the positive outlook for the market as a whole. After this risk factor has been priced out, we are optimistic for the rest of 214. In our view, the flourishing Turkish economy will also provide more support for the stock market. In fundamental terms, the securities in the BIST National 1 now feature attractive valuations again (P/E ratio 214f: 9.2) and there is a higher likelihood of upward revisions with regard to anticipated corporate earnings growth (214f: +8.4%). HOLD. Index estimates 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Recommendation ATX BUY Performance 5.8% 8.7% 6.6% 12.7% since 1/1/13 Range % WIG BUY Performance 4.7% 6.% 3.% 8.5% since 1/1/13 Range % BUX BUY Performance 6.3% 8.4% 5.2% 1.6% since 1/1/13 Range % PX BUY Performance 6.7% 8.7% 5.6% 1.8% since 1/1/13 Range % In local currency 1 11:59 p.m. (CET) 46 1 st quarter 214

47 Equity market/cee With a performance of +24% since the beginning of the year, the Romanian BET was clearly the top performer for this year. Political and economic conditions offer a good foundation for more positive performance by the stock market in Bucharest. The government is doing its homework and maintaining budgetary discipline. This was rewarded not only by the IMF but also by the rating agency S&P, which recently raised its outlook to positive, thus suggesting that an upgrade of Romania to the important investment grade ranking is probable. We are also optimistic thanks to the economic developments, which have prompted us to raise our forecasts for GDP (214f: +2.3%; 215f: +2.5%). With this, we see good support for corporate earnings prospects and anticipate solid growth in corporate earnings next year. Fundamentally speaking, the valuation of Romanian stocks still looks attractive, despite the rises. On an index basis, the P/E ratio is 6.5 (214f). Together with further expected rate cuts, this all means that conditions are beneficial for the Romanian equity market, both in macro-economic and in fundamental terms. BUY. Market capitalisation overview Russia Turkey Poland Austria Romania Czech Rep. Croatia In EUR bn; end of November 213 Source: FESE, WFE, BSE, ZSE, Raiffeisen RESEARCH Hungary In the fourth quarter the Croatian CROBEX1 index lost around 2%, leaving it as a loser in the last quarter. We were not surprised by the sub-average development of the Zagreb exchange, as the economy has been contracting for five years and acceleration of the convergence process is not going to happen right now in this new EU member state. For 214 we only forecast a stagnation for the economy. Accordingly, we see a threat to growth in corporate earnings for the CROBEX1 index (214f: +2.9%). The deteriorating fiscal policy situation will probably result in further rating downgrades next year (Q1), and consequently we see a bleak outlook for the Croatian equity market in 214. Along with the relatively high valuation, we expect further declines in prices in Q SELL. Aaron Alber, Richard Malzer Avg. daily turnover (EUR mn) bn.73 bn bn Russia Turkey Poland Austria Hungary Czech Rep. Romania Croatia 212 End of Nov. 213 Source: FESE, WFE, BSE, ZSE, Raiffeisen RESEARCH Index estimates 19-Dec 1 Mar-14 Jun-14 Sep-14 Dec-14 Recommendation MICEX HOLD Performance 2.1% 5.5% 2.1% 6.8% since 1/1/13 Range % BET BUY Performance 7.5% 11.4% 8.3% 13.% since 1/1/13 Range % CROBEX SELL Performance -2.4% 3.6% -.4% 6.6% since 1/1/13 Range % BIST Nat HOLD Performance 2.7% 8.5% 7.1% 12.9% since 1/1/13 Range % In local currency 1 11:59 p.m. (CET) 1 st quarter

48 Utilities Utilities: Has the bottom been reached? Disappointing energy transition 2., flat electricity price trend Results for 214f to decline on weaker prices Buy recommendations: CEZ, E.On Russia Utilities underperform somewhat 2% 15% 1% 5% % -5% -1% -15% Eurostoxx5 EVN Translecetrica DJ Eurostoxx Utilities PGE RusHydro CEZ Verbund RusHydro InterRAO Tauron Enel OGK-5 Transgaz E.On Russia InterRAO Source: Bloomberg Power prices flattish In Europe the sector performance largely resembled that of the overall market, but Austrian utilities trailed behind the market performance. Also the outperformance of Polish utilities changed into a relative underperformance in the aftermath of the IPO of Energa. In Q4 only the CEZ share beat the generally weak overall market. The coalition agreement in Germany failed to bring about far-reaching reforms of the subsidies for renewable energies: costs might be redistributed, but there is only little change in the planned build-up of wind and solar power plants. As a result, pressure on wholesale prices should persist. The decision to postpone the allocation of emission certificates covering.9 bn tonnes of CO 2 was confirmed at the European level. The reporting season brought a mixed picture. Verbund, EVN and CEZ fell short of expectations because of impairments and continuing burdens in connection with foreign activities (Italy, South-Eastern Europe). Polish utilities, by contrast, surprised positively because electricity generation was propped up by high short-term prices and downstream segments managed to extend the positive trend. Nevertheless, all utilities will grapple with considerably lower electricity prices next year, so that market expectations for 214f remain muted Sep-13 Oct-13 Nov-13 Power (EUR/MWh) Oil (EUR/bbl) CO2 Source: Bloomberg Although we believe that the regulatory system looks more balanced after the recent tightening, there is no serious positive trigger ahead. We believe that the market now requires some period of a stable regulatory environment to restore the ruined trust of investors. We see potential opex efficiency improvements and efficiency in terms of capex as the main drivers for the sector. Nonetheless, the market is unlikely to price in efficiency improvements until investors see the companies report tangible results, therefore this theme could start to be played out only in the second half of 214f. Sector comparison* It is still up to politics to implement stricter CO 2 standards until 23 in order to influence the pricing. Our buy recommendations are CEZ and E.On Russia. Teresa Schinwald, Fedor Kornachev Company Recommendation Target price P/E EV/EBITDA DY 213e 214f 213e 214f 213e 214f CEZ Buy CZK % 6.8% Enea Hold PLN % 1.9% Enel OGK-5 Hold RUB % 6.2% E.On Russia Buy RUB % 6.5% EVN Hold EUR % 3.9% Federal Grid Company Reduce RUB % 7.3% InterRAO Hold RUB.11 neg % 3.8% PGE Hold PLN % 4.8% RusHydro Hold RUB % 3.4% Tauron Reduce PLN % 3.1% Transelectrica Hold RON % 4.7% Transgaz UR UR % 14.2% Verbund Hold EUR % 3.6% UR = under revision * recommendation and target price refer to a 12 month horizon Source: Raiffeisen Centrobank estimates This analysis created by Raiffeisen Centro Bank AG is presented to you 48 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

49 Financials Watching out for AQR news-flow and expecting macro support AQRs could drive early actions from Euro area banks operating in CEE Regulatory uncertainty ahead: corporate tax in CZ, FX scheme in HU, NPLs in RO Our top picks are Erste, PKO, ALR, which are all discounted plays on macro recovery Although the ECB will publish the results of the AQRs incl. stress test in approximately a year, we expect that the banks might identify potential deficiencies on their books and take some (provisioning) actions much earlier, but do not see high probability for CEE M&A activity in the short term. From the macro side we expect good news and our team sees the environment turning more bank-friendly via key rate hikes in PL, CZ (incl. only moderate pressure still in HU, RO and RU), a revival of corporate/sme loan demand in CE3 and stabilizing currencies, which should ease pressure on retail asset quality. Not unexpectedly and therefore to some extent priced-in we do not rule out several local regulatory risks: 1) a higher corporate tax in CZ, 2) the FX scheme in HU depending on the government s pre-elections mood and on the outcome of on-going court rulings, 3) the new stance of the Romanian CB on NPL definition which could push up the CoR in H1 14 and 4) the start of the new pension fund scheme in PL, which may trigger some share oversupply of banking stocks. In this environment we favour attractively valued macro recovery plays (Erste due to high CoR leverage on earnings) and to some extent OTP, which is, however, exposed to high political risk in HU, M&A activity and RU restructuring. In Poland we would pick PKO (nicely discounted) and Alior (post-capital increase stock recovery), while GNB and mbank are still displaying some downside potential due to quite demanding bottom-line growth prospects and elevated multiples, respectively. The cautious outlook by Komercni s management on core revenues does not bode well for a dynamic bottom-line rebound in 214f (RCBe: +3.5%) despite an optimistic outlook for risk costs. We got a bit more cautious in Romania given the expected acceleration of impairments in H1 14 but would continue to prefer BRD over TLV on its mid-term RoE growth in combination with more attractive multiples. Sector comparison* Stefan Maxian NPL ratio and coverage 3% 25% 2% 15% 1% 5% % BRD OTP GNB TLV RBI Erste PKO BZW ALIOR PEO KB mbank MIL NPL ratio NPL coverage (r.h.s.) Source: Companies, Raiffeisen Centrobank estimates Core Tier 1 ratios as of Q % 2% 15% 1% 5% % 12% 1% 8% 6% 4% 2% % GNB RBI ALR TLV Erste BZW BRD PKO MIL mbank OTP KB PEO Source: Companies Company Recommendation Target price P/E P/B DY 213e 214f 213e 214f 213e 214f Erste Group Buy EUR % 2.2% Komercni Banka Hold CZK 4, % 5.6% OTP Hold HUF 4, % 3.6% PKO BP Buy PLN % 3.2% BZ WBK Hold PLN % 2.8% Getin Noble Bank Sell PLN %.% Bank Pekao SA Hold PLN % 4.8% mbank Sell PLN % 2.9% Bank Millennium Hold PLN % 2.1% Alior Bank Buy PLN %.% BRD-GSG Hold RON % 3.1% Banca Transilvania Reduce RON %.% Komercijalna UR UR %.3% Aik Banka UR UR %.% RBI NC NC % 3.9% NC = no coverage; UR = under revision * recommendation and target price refer to a 12 month horizon Source: Raiffeisen Centrobank estimates 1 st quarter 214 This analysis created by Raiffeisen Centro Bank AG is presented to you by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 49

50 Industrials Industrials: Steady state Q3 reporting generally brought solid results but no incremental impetus Most stocks benefited from multiple expansion over recent months We have upgraded Mayr-Melnhof to Buy Total plant and machinery orders* * Germany (yoy) VDMA From our point of view the Q3 13 reporting can be deemed solid but unspectacular. Generally, results lived up to expectations, however, there was overall no catalyst for meaningfully higher estimates. Nevertheless, at the same time most stocks confirmed the multiple expansion trends from which they have benefited during the past months. Management remarks confirmed that trading conditions should remain at solid levels. We have upgraded Mayr-Melnhof to buy from hold on the back of overall solid Q3 results and the acquisition of packaging facilities in Russia and Germany. While 212 and 213e have been determined by a largely stable earnings development, we envisage an improved momentum for f, looking at ca. 1% EBIT growth in both years. We reckon with growth being fuelled foremost by the packaging operations. MMK continues to trade at considerable discounts to the peer group which we think look excessive, even when considering the low share liquidity. Price development recovered paper FOEXOCC Index Source: Bloomberg Sector comparison* Andritz s order intake in Q3 beat expectations and also Q4 order intake levels should remain strong. Recently acquired Schuler was an outperformer, while the pulp and paper segment suffered from more provisioning for an overdue project in Uruguay. The sales outlook for 214f remains flat despite a tougher environment and ongoing weakness in metals and separation as well as price pressure in pulp and paper. Still, 213e results will be burdened by provisioning for project delays and restructuring at Schuler, while major orders should only be expected in the mid-term. Recently the new Zumtobel CEO Schumacher provided an initial insight on his ideas on how to improve the operating performance of the luminaire business. Apart from a closer integration of the Zumtobel and Thorn brand, plant closures seem to be on the agenda. Elsewhere we note that Semperit s Q3 basically resembled the Q2 results release with ongoing margin expansion in the three industrial divisions. However, we think that the industrial margins are at or at least close to peak levels, owing to the expected bottoming-out of raw material prices (which are still providing tailwind). Markus Remis Company Recommendation Target price P/E EV/EBITDA DY 213e 214f 213e 214f 213e 214f Andritz RS RS % 3.4% Palfinger Hold EUR % 2.1% Rosenbauer Hold EUR % 2.4% Lenzing RS RS % 4.6% Zumtobel Hold EUR % 2.7% Polytec RS RS % 6.8% Semperit Hold EUR % 2.6% Mayr-Melnhof Buy EUR % 2.7% RS = recommendation suspended * recommendation and target price refer to a 12 month horizon Source: Raiffeisen Centrobank estimates This analysis created by Raiffeisen Centro Bank AG is presented to you 5 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

51 Metals & Mining Metals & Mining: Drifting in a waiting mode Drop in China s PMI in December adds to uncertainty in global demand Weak seasonal activity in the steel sector does not provide support Slow growth in Russia prevents robust share price movement Apart from relatively solid economic data from the USA, the recent release of the Chinese PMI for December pointed at resilient but slowing economic growth in China (the PMI dropped to just 5.5 from 5.8 in November). Implementation of structural changes in the steel segment by the Chinese government aiming at industry consolidation and a reduction of coking coal consumption (in order to cope with domestic pollution) continued to pressure global benchmark prices. Thus, coking coal prices continued to drift down (-1.7% since 1 October 213), while prices for iron ore started to soften after a 3.5% increase since 1 October 213. In the meanwhile, demand for flat steel products in the US and EU regions helped CRC and HRC export prices from Russia (FOB) to move up by respective 1.8% and 5.5% since 1 October 213. Improving market sentiment in the EU region in terms of better expectations for growth in PMI and industrial production should provide some positive support to the steel sector in the coming months. Still, the major downside risk for steel stocks may come from slow economic growth in Russia as well as due to seasonal weakness in global demand for construction steel products and tapering of the QE in the USA. In Q1 14f we should see rather limited downside potential for the Russian steel names, mainly because of cheap relative valuations as well as due to improving sentiment in the EU. Given the current market conditions, we believe that Russian steel companies may perform somewhat better than the mining and precious metals names. As global inflation remains low, we see no robust upside potential to the precious metals prices in the near term. As a result, we expect continuing underperformance of the precious metals companies. Given still limited visibility in the sector, we recommend focusing on the names with high operating efficiency and attractive valuations (e.g. Bogdanka, Severstal). We also put NLMK on the watch list as a potential play on improving demand in the EU. Overall, however, we stay neutral on the metals and mining sector. Irina Trygub-Kainz Performance Q4 213 CRC, Russia Scrap HRC, Russia Iron ore, 62% Fe, China Nickel, spot Plate, Europe, Rebar, Europe Copper, spot Aluminium, spot Gold, spot Silver, spot Coking coal, China -12% -6% % 6% 12% Performance 1 Oct Dec 213 Source: Bloomberg China Steel inventory vs. HRC price ,2 8 4 Jan-11 Dec-11 Nov-12 Oct-13 Total Weekly Steel inventory* HRC steel index futures (USD/t. r.h.s.) * China (Beijing), 1, t Source: Bloomberg Sector comparison* Company Recommendation Target price P/E EV/Sales EV/EBITDA 213e 214f 213e 214f 213e 214f AMAG Hold EUR Bogdanka Buy PLN Evraz Hold GBp 141. neg JSW Sell PLN KGHM Buy PLN Mechel ur UR neg. neg MMK Hold USD 3.5 neg. neg New World Resources Hold CZK 32. neg. neg..8.9 neg. 9.2 NLMK Hold USD Petropavlovsk Reduce GBp 11. neg. neg Polymetal International Hold GBp Raspadskaya Coal Company Reduce RUB 29.3 neg. neg RHI Buy EUR Severstal Buy USD voestalpine Hold EUR UR = under revision * recommendation and target price refer to a 12 month horizon Source: Raiffeisen Centrobank estimates 1 st quarter 214 This analysis created by Raiffeisen Centro Bank AG is presented to you by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 51

52 Oil & Gas Oil price fundamentals to remain broadly balanced Iran interim nuclear agreement not to have a significant impact on oil prices European refiners facing fiercer competition from Middle East and US-based peers We favour Novatek and LUKoil in the CIS and OMV Petrom and MOL in CEE OPEC Crude Oil Production* Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec * mnboepd Source: IEA Oil Market Report Nov 213 Brent oil price, USD/bbl Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg Iran has finally sealed an interim six-month nuclear agreement, which triggered a temporary lifting of oil export sanctions. With core sanctions on oil and banking remaining in place, we do not expect a significant impact on the oil price. Even if a comprehensive agreement with Iran is signed next May, it still could take up to 12 months for Iranian production to recover the 1 mn boe of lost daily production due to international sanctions. In an environment of lower geopolitical risks, the market should focus more on fundamentals. The International Energy Agency projects global demand to grow by 1.2 mn boe/day in 214, while the production of non-opec countries is forecast to increase by 1.6 mn boe/day mainly driven by the USA and Canada. We expect Saudi Arabia to continue playing a leading role in balancing the physical markets and thus offsetting potentially higher output of Northern America and other OPEC members (i.e. Iran). The moderate recovery of motor fuels consumption in the CEE provided little support to regional refiners in Q3. Fiercer competition from lower-cost producers has squeezed motor fuel crack spreads even during high driving season. With seasonally lower sales in Q4-Q1, we maintain our cautious view for the European refiners, especially for those with no petrochemical exposure and/or lower conversion depth. We continue to favour upstream players. We believe that OMV Petrom ( buy ) stands to benefit from stable upstream production and the liberalisation of gas prices. We have turned bullish on MOL, since we believe that with most of the negative news being out, any progress towards a decision with respect to its stake in INA should be supportive for the stock. Moreover, once the bribery case against MOL is resolved, we would expect the negotiation process with the Croatian government to become more pragmatic. LUKoil s active share buyback and higher-than-expected dividends are regarded as short-term triggers, while the U- turn in production should be a long-term driver. In spite of a tariff freeze in 214, Novatek should demonstrate the highest increase in EBITDA among Russian oils thanks to organic growth of production, new acquisitions and additional sales of refined products. Oleg Galbur Sector comparison* Company Recommendation Target price P/E EV/EBITDA P/CE 213e 214f 213e 214f 213e 214f OMV Hold EUR OMV Petrom Buy RON MOL Buy HUF 17, PKN Reduce PLN Lotos Hold PLN Gazprom Hold RUB Novatek Buy RUB LUKoil Buy RUB 2, Rosneft UR UR Tatneft UR UR UR= under revision * recommendation and target price refer to a 12 month horizon Source: Raiffeisen Centrobank estimates This analysis created by Raiffeisen Centro Bank AG is presented to you 52 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

53 Telecommunications Telecommunications: Profitability remains a concern Preferable stocks: TPSA, Netia, MTS Spectrum auctions completed in Austria, Czech Republic and Croatia while they loom in Poland and Hungary Dividend suspended at Magyar Telekom Key Q3 13 figures of CEE incumbents were generally weak. Top line declines ranged from -12% yoy (THT) to -6% yoy (Telekom Austria), while Magyar Telekom was able to grow its top line by 5% due to equipment sales and SI/IT. EBITDA of all players declined, between -22% yoy (THT) and -12% yoy (TCR) in Q Fixed line revenues were negatively influenced by continuing fixed-to-mobile substitution, while CEE mobile revenues were under pressure due to MTR cuts and intense competition. Frequency auctions already took place in Austria, Czech Republic and Croatia, and we still await the process in Hungary and Poland. So far we did not see an entry of newcomers, while pricing only got out of hand in Austria (1.75 EUR/ MHz/pop). Sales and EBITDA growth yoy Q3 13 TA Netia TPSA MT T-HT TO2CR -25% -15% -5% 5% 15% adj. EBITDA Sales Source: Companies, Raiffeisen Centrobank A dividend suspension has been announced by Magyar Telekom due to cash outflows on the upcoming spectrum tender (we estimate up to HUF 5 bn) and cable networks acquisition (HUF 85 mn) bringing the company s net debt ratio beyond the target for paying out dividends. The pricing of the upcoming Polish LTE auction will be a key determinant of the dividend prospects, and share price performance, of TPSA. TCR has been purchased by PPF in November and it remains to be seen whether the minority share will be left on the Czech stock market. Going forward we expect a continuing focus on cost-cutting (TPSA announced 3k job cuts for ) and searching for additional revenue streams. A diversified services provider model has been adopted by Magyar Telekom, which entails the expansion of non-core services such as e-commerce, e-health, energy, digital home and office, ICT and energy services. A similar plan is being implemented by THT, which has just started offering electricity services. These additional activities require lower capex, however they will also offer lower profitability and change the risk profile of the telcos (some pursued activities might end up not proving incrementally beneficial while others might prove worthwhile). Jakub Krawczyk EBITDA margin comparison 53% 48% 43% 38% 33% 28% TO2CR THT TPSA MT Netia adj EBITDA margin Q3 12 adj EBITDA margin Q3 13 TA Source: Companies, Raiffeisen Centrobank estimates Sector comparison* Company Recommendation Target price P/E EV/EBITDA DY 213e 214f 213e 214f 213e 214f Telekom Austria Hold EUR %.9% Hrvatski Telekom Hold HRK % 7.2% Magyar Telekom Hold HUF % 8.3% Telefonica CR Hold CZK % 1.2% TPSA Buy PLN % 2.6% Netia Buy PLN % 8.3% MTS Buy USD % 8.2% VimpelCom Ltd Hold USD % 6.5% MegaFon Reduce RUB % 5.3% Rostelecom Hold RUB % 2.5% * recommendation and target price refer to a 12 month horizon Source: Raiffeisen Centrobank estimates 1 st quarter 214 This analysis created by Raiffeisen Centro Bank AG is presented to you by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 53

54 Equities top picks Mayr-Melnhof: A decent value proposition Recommendation (12 months horizon): Buy Current share price: EUR / Target price: EUR 1. Market capitalisation: EUR 1,753 mn Mayr-Melnhof Dec-12 Apr-13 Aug-13 Dec-13 Mayr-Melnof ATX Source. Thomson Reuters While 212 and 213e have been determined by a largely stable earnings development, we envisage an improved momentum for f, looking at ca. 1% EBIT growth in both years. We reckon with growth being fuelled foremost by the packaging operations due to capacity additions and M&A. Regarding the latter we point out that after several rather smaller takeovers, the recent acquisition of three plants from A&R Carton will have a visible impact on the group financials. Focusing on tobacco and consumer goods packaging, the targets have been acquired for a price of some EUR 1 mn and add revenues of roughly EUR 122 mn, equal to approx. 6% of the group s top line and presumably contributing 4% to the operating profit (RCBe). The management is confident that cost synergies can be exploited that will bring the asset towards the usual profitability of MM Packaging of 9-1%. We acknowledge the industrial logic and welcome that MMK puts its excess cash to work. MMK continues to trade at considerable discounts to the peer group which we Income statement & balance sheet (IFRS) think look excessive, even when considering the low share liquidity. On in EUR mn e 214f 215f our f forecasts we find the Income Statement stock trading either in line or at a Consolidated sales 1,952 1,992 2,189 2,282 small discount in terms of P/E and EBITDA EBIT EBT Net profit b.m. Net profit a.m. Balance sheet Total assets Shareholders' equity Goodwill NIBD ,627 1, ,679 1, ,797 1, ,884 1, a slight double-digit discount on EV/ EBIT. However, adjusted for its net cash position which we project at EUR mn (after the aforementioned M&A cash outflow of EUR 1 mn), the cash-adjusted P/Es stand at 12.x and 1.4x, respectively. The valuation gap widens to above 3% on EV/EBITDA. We note that the stock Source: Mayr-Melnhof, Raiffeisen Centrobank estimates Key ratios also trades at a high discount to the sector as regards EV/Sales which in light of a much higher operating profitability in EUR e 214f 215f EPS looks exaggerated. P/E ratio In Q3 MMK delivered decent top line Operating CF per share growth of 5% to EUR 515 mn. EBIT of Price cash flow EUR 52.7 mn was inflated by a EUR Book value per share mn non-cash one-off gain (recognition Price book value Dividend yield 2.8% 2.6% 2.7% 2.9% of badwill) related to the recent ac- ROE 11.5% 1.8% 11.% 11.3% quisition of the pulp plant in Norway. ROCE 1.3% 9.8% 1.1% 1.4% Adjusted for this, EBIT of EUR 42.7 EV/EBITDA mn (clean margin of 8.3%) was down Source: Mayr-Melnhof, Raiffeisen Centrobank estimates 18% yoy. Net income came in at EUR 38.1 mn (EPS EUR 1.9), just 4% below 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 December 213 the prior period. Markus Remis This analysis created by Raiffeisen Centro Bank AG is presented to you 54 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

55 Equities top picks UNIQA: Jumpstarting the earnings momentum Recommendation (12 months horizon): Buy Current share price: EUR / Target price: EUR 1.75 Market capitalisation: EUR 2,8 mn The story behind UNIQA is about decent earnings momentum as the group is expected to reap the benefits of the restructuring program UNIQA 2., which should lead to strong profitability improvements in the coming years. We calculate PBT to rise from EUR 25 mn in 212 to EUR 53 mn in 215f, digesting cost savings on the one hand and growth stemming from more significantly leveraging the Raiffeisen network in Austria and CEE as well as a general catch-up of insurance penetration in CEE countries on the other hand. UNIQA has set itself quite ambitious targets like reducing the combined ratio from 11% in 212 to 95% in 215f and to improve the net cost ratio from 25% in 212 to 22% in 215f. The prospect of low-hanging fruits to be harvested on the cost side gives reason to expect positive news-flow in the short and mid term, in our view, and earnings to come at least close to the defined targets. UNIQA Dec-12 Apr-13 Aug-13 Dec-13 UNIQA ATX Source. Thomson Reuters Q trends are encouraging showing improvements on all lines. Total GWP increased by 7.4%, the combined ratio improved from 11.% in Q to 98.8% in Q despite flood claims of about EUR 3 mn net (impact on CR of approx. 1.6%p), the net cost ratio of the whole group fell from 24.8% to 23.1and PBT rose from EUR 152 mn to EUR 266 mn yoy including a positive one-off of EUR 51 mn from the sale of the Austrian hotel operations. Income statement & balance sheet (IFRS) in EUR mn e 214f 215f Income Statement Gross written premiums 4,651 5,322 5,529 5,751 Net earned premiums 4,624 4,992 5,26 5,414 Net investment income Insurence benefits net -3,759-4,27-4,139-4,278 Profit before tax We derive our TP of EUR 1.75 by giving 8% weighting to a fair value for 214f of EUR 1.4 and 2% weighting to a fair value of EUR 12. if the company delivers on our 215f forecast. Our fair value calculation approaches for UNIQA comprise (1) a Dividend Discount Gordon Growth (DDGG) model (fair value EUR 12.4), (2) an SOTP valuation splitting the company in its operating business lines P&C, Life and Health (fair value 14f of EUR 1.5), (3) a simple ROE/COE model (fair value 14f of EUR 11.) as well as (4) multiple-based valuation employing peer group averages (fair values 14f of EUR 9.3 EUR 12.7) and multiples of UNIQA s closest peer, Vienna Insurance Group (VIG, fair values 14f of EUR 9.6 EUR 1.4). Bernd Maurer Net profit a.m Balance sheet Total assets 3,37 31,863 32,895 33,476 Shareholders' equity 1,5 2,762 2,96 3,116 Goodwill Investments 17,866 18,95 19,518 19,518 Source: UNIQA, Raiffeisen Centrobank estimates Key ratios in EUR e 214f 215f Cost ratio net -25.% -24.1% -24.% -22.6% Benefit ratio group -81.3% -8.2% -79.1% -78.8% Combined Ratio -11.3% -99.% -97.% -95.5% DPS Dividend yield 2.8% 4.4% 5.% 6.1% EPS P/E ratio Book value per share Price book value ROE 9.1% 9.5% 1.7% 12.7% Source: UNIQA, Raiffeisen Centrobank estimates 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 December st quarter 214 This analysis created by Raiffeisen Centro Bank AG is presented to you by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 55

56 Equities top picks Alior: Re-start after some recent disappointments Recommendation (12 months horizon): Buy Current share price: PLN / Target price: PLN 91. Market capitalisation: EUR 1,217 mn Alior Dec-12 Apr-13 Aug-13 Dec-13 Alior Bank WIG 2 Source. Thomson Reuters Our latest new coverage seems to have embarked on a recovery path after collapsing on the profit warning and capital increase announcement prior to the Q3 earnings season. Alior has raised PLN 464 mn on the market and seems to have calmed down investors with the new banc-assurance outlook and the new accounting method. Based on our mid-term figures Alior trades at a 15% P/E premium in 213, at par on 214f, but on a double-digit 15% P/E discount in 215f (we are notably below the management outlook for the time being). We plug in 6.3 mn new shares sold at PLN 73 into our valuation tool and derive a TP per dilutive share of PLN 91. This confirms our buy call, but we still want to stress its high risk reflecting above-average loan growth and bad timing of the management share sale prior to the profit warning. What has slightly faded into the background of the banc-assurance issue is the fact that other P&L lines posted a mixed picture, which can be briefly described with reasonable cost growth, a somewhat accelerated quarterly CoR uptick from Income statement & balance sheet (IFRS) 212bp to 231bp in Q3 13 (12m rolling CoR broadly flat qoq) and falling in PLN mn e 214f 215f quarterly NIM (adj. for banc-assurance) by 11bp to 4.35%. Volumes on Income statement Net interest income 859 1,1 1,261 1,468 both sides were not as impressive as Risk provisions Net commission income Net trading result Pre-tax profit Net profit after minorities Balance sheet Loans and advances to customers Amounts owed to customers ,726 17, ,254 2, ,859 24, ,183 27,277 in the quarters before (+6% and +1%, respectively, qoq), but Alior managed to increase its quarterly sales of retail loans to PLN 1.25 bn mainly backed by mortgage origination, which for the first time exceeded PLN 3 mn. Shareholders equity Total assets Source: Alior, Raiffeisen Centrobank estimates Key ratios 1,938 21,48 2,151 24,637 2,457 28,859 2,872 32,563 We have fine-tuned our forecasts keeping the profitability almost unchanged: NII was upped by of 3-8%, while F&CI is down by a mid-2% figure on average. Although management has made in PLN e 214f 215f it very clear to be comfortable with EPS adjusted the consensus net profit estimate of P/E ratio PLN 385 mn for 214, we are rather Book value per share on the safe side, clearly falling short Price book ratio of the market by ~PLN 1 mn net. Price tang. book value Nevertheless, we continue to believe Dividend per share Dividend yield (%) RoE adj. Loans/deposits Tier 1 ratio Source: Alior, Raiffeisen Centrobank estimates.% 3.% 84.3% 12.3%.% 1.4% 99.3% 1.1%.% 13.3% 13.3% 9.5% 2.% 15.6% 17.% 9.6% that Alior remains a growth story with an expected 4bp NIM rise to 4.8%, CAGR of loans at 26%, steady, high CoR not undershooting the 2bp threshold and a C/I balance gradually improving to 5% from 58% in 213. Jovan Sikimic 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 December 213 This analysis created by Raiffeisen Centro Bank AG is presented to you 56 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

57 Equities top picks Ciech: Focus on inorganics means lower exposure to global trends Recommendation (12 months horizon): Buy Current share price: EUR 3. 1 / Target price: EUR 36. Market capitalisation: EUR 38 mn While major chemicals players in Poland struggle with the effects of the shale gas revolution and often depend on global price relations, Ciech represents a unique investment opportunity owing to its focus on inorganic chemicals (the soda segment and silicates and glass, which are not related to oil derivatives), where the local market is less dependent on the recent trends that do not favour European players. Owing to its raw materials base that is located in Poland (coal, limestone, coke), vertical integration (own energy supply) and the geographical rent in the soda business, we are confident regarding the company s core segment in the long term. The outstanding results delivered by the soda business in Q3 13 and further reduction in administrative expenses imply upside potential for 214f results. 18 Dec-12 Apr-13 Aug-13 Dec-13 Ciech WIG 2 Source. Thomson Reuters We stick to our expectations of small hikes in the yearly soda ash contracts in 214f. On top of Solvay s intention to increase prices, there was also an announcement of North American exporters grouped in ANSAC assuming an increase of natural soda ash prices by USD 3/t starting from 214. The Income statement & balance sheet (IFRS) growth may be partly related to an in PLN mn e 214f 215f increase in demand from China that Income Statement may also have a positive effect on Consolidated sales 4,378. 3,52.5 3,31.6 3,316.3 supply-demand relations in the Middle East and in effect also on Ciech s EBITDA EBIT Romanian unit Govora, which is exposed EBT to competition from Turkish pro- ducers. Moreover, given the successful restructuring in Romania and planned capacity expansion in Poland Ciech considers a gradual increase of soda ash sales to Russia, where a number of the company s clients already have production facilities this would mean Net profit b.m. Net profit a.m. Balance sheet Total assets Shareholders' equity Goodwill NIBD Source: Ciech, Raiffeisen Centrobank estimates , , , , , , , , , ,86.6 a nice addition to the volumes sold in Key ratios the EU. in PLN e 214f 215f Ciech We set our target price at PLN 36. and recommend Ciech as a buy. While there is a share overhang risk from the Polish state that does not exclude selling a stake via the stock exchange, we believe that the company is fundamentally attractive and deserves a higher valuation, especially given the discount to international players based on EV/EBITDA multiple. Dominik Niszcz EPS P/E ratio Operating CF per share Price cash flow Book value per share Price book value Dividend yield.%.%.% 2.1% ROE -39.1% 8.% 1.4% 11.6% ROCE -12.9% 9.2% 9.1% 9.4% EV/EBITDA Source: Ciech, Raiffeisen Centrobank estimates 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 December st quarter 214 This analysis created by Raiffeisen Centro Bank AG is presented to you by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 57

58 Equities top picks CTC Media: Watch out for the catch-up Recommendation (12 months horizon): Buy Current share price: USD / Target price: USD 15. Market capitalisation: EUR 1,519 mn CTC Media CTC Media missed the media stocks rally in summer 213, partially due to management reshuffles, and so we see it as poised for an outperformance further on. The key positive triggers could be: the improvement in prime-time audience dynamics, as the recent success of the Molodezhka series suggests, and increasing exposure to Internet advertising, which is, in our view, not priced in. The dividend yield is, by sector standards, a bonus Dec-12 Mar-13 Jun-13 Sep-13 The strategy of the recently appointed CEO Yuliana Slascheva is primarily based on two main concepts: the company s own content and the Internet. The former should support audience share and profitability, while the latter could give CTC Media Micex a boost to growth. The growth opportunity is even more emphasized by the recent anti-piracy law, which favours legal online content providers, with CTC Media being among the largest. Another growth opportunity lies in adjacent businesses, i.e. merchandising, e-commerce, etc. CTC Media expects non-advertising revenues to grow to 1% of revenues vs. 3% currently. Its own content normally Income statement & balance sheet (IFRS) has a more stable audience and more re-runs and thus has lower programming depreciation per episode in USD mn e 214f 215f Income Statement - and consequently carries a higher Consolidated sales margin, assuming equal content acquisition costs. EBITDA EBIT Source. Thomson Reuters EBT Net profit b.m Net profit a.m Balance sheet Total assets ,46.7 1, ,213.9 Shareholders' equity Goodwill NIBD Source: CTC Media, Raiffeisen Centrobank estimates Key ratios in USD e 214f 215f EPS P/E ratio Operating CF per share Price cash flow Book value per share Price book value Dividend yield 8.1% 5.3% 5.8% 6.3% ROE 12.8% 2.% 2.2% 2.4% ROCE 13.5% 2.2% 2.6% 2.9% EV/EBITDA Source: CTC Media, Raiffeisen Centrobank estimates On the downside, the advertising market is expected to slow down in 214 stemming from the reduced GDP growth forecast and pressure on margins from the transition to digital broadcasting. We think that these factors are priced in following the number of downgrades by the street after the Q3 13 results. Thus, we believe that the factors mentioned above may turn into a positive surprise in 214 and could lead to a stock re-rating, as its discount compared to peers keeps widening. It is worth mentioning that CTC Media aims at paying out 5% of its net profit in dividends, which translates into a dividend yield above 5%, and, as we see no significant risk to future earnings, this becomes another supporting factor. Sergey Libin 1 the indicated price is the last price as available at 6.3 a.m. (CET) on 2 December 213 This analysis created by Raiffeisen Centro Bank AG is presented to you 58 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

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 21.2 H m 22/11/ % % 2.1% Acron RU RUB 1,95 B h 27/3/13 UR % % 6.5% Bogdanka PL PLN 125. B h 19/11/ ,21 61% % 7.1% Ciech PL PLN 3. B m 5/12/ % %.% Evraz RU GBp 1.1 H h 11/1/ ,765 22% neg %.% Grupa Azoty PL PLN 6.2 H m 22/5/13 UR 1,43 46% % 4.3% JSW PL PLN S m 19/11/ ,577 45% %.9% Kety PL PLN 215. H m 29/1/ % % 4.7% KGHM PL PLN 115. B m 3/8/ ,524 68% % 5.% Lenzing AT EUR 43.6 RS m 8/5/13 RS 1,143 27% % 4.6% Mayr-Melnhof AT EUR 87.7 B m 19/11/ ,753 41% % 2.7% Mechel RU USD 2.35 UR h 13/9/13 UR % neg. neg %.% MMK RU USD 2.94 H h 6/11/ ,821 13% neg. neg %.% New World Resources CZ CZK 23.7 H h 19/11/ % neg. neg neg. 9.2.%.% NLMK RU USD H h 23/1/ ,339 17% % 2.% Petropavlovsk RU GBp 71.5 R h 22/8/ % neg. neg %.% PhosAgro RU USD 9.75 B h 3/4/13 UR 2,663 11% % 8.% Polymetal International RU GBp 516. H h 5/9/ ,388 5% % 2.7% Raspadskaya RU RUB R h 3/9/ % neg. neg %.% RHI AT EUR B m 18/12/ % % 3.4% Severstal RU USD 9.58 B h 16/5/ ,867 21% % 2.2% Synthos PL PLN 5.1 B m 15/1/ ,621 38% % 6.8% voestalpine AT EUR H m 9/8/ ,852 62% % 3.4% Mean (companies) % 2.9% Median (companies) % 2.7% FINANCIALS Aik Banka RS RSD 1,52 UR h 1/6/13 UR 133 8% n.a. n.a..%.% Alior Bank PL PLN B m 9/12/ ,217 55% n.a. n.a..%.% Banca Transilvania RO RON R m 9/12/ % n.a. n.a..%.% Bank Millennium PL PLN 7.16 H m 9/12/ ,86 35% n.a. n.a. 1.5% 2.1% Bank Pekao SA PL PLN H m 9/12/ ,128 5% n.a. n.a. 4.4% 4.8% BRD-GSG RO RON 8.99 H m 9/12/ ,399 4% n.a. n.a..% 3.1% BZ WBK PL PLN H m 9/12/ ,532 3% n.a. n.a. 2.5% 2.8% Erste Group AT EUR B m 9/12/ ,676 58% n.a. n.a. 1.5% 2.2% Getin Noble Bank PL PLN 2.75 S h 9/12/ ,75 38% n.a. n.a..%.% Komercijalna RS RSD 1,355 UR h 1/6/13 UR 23 % n.a. n.a..3%.3% Komercni Banka CZ CZK 4,32. H m 9/12/13 4,8. 5,98 4% n.a. n.a. 5.3% 5.6% mbank PL PLN 494. S m 9/12/ ,994 3% n.a. n.a. 2.8% 2.9% OTP HU HUF 4,21 H h 9/12/13 4,9 3,89 68% n.a. n.a. 2.9% 3.6% PKO BP PL PLN 39.3 B m 9/12/ ,798 69% n.a. n.a. 2.8% 3.2% PZU PL PLN H m 4/1/ ,19 35% n.a. n.a..2%.2% Raiffeisen Bank Intl. AT EUR NR m NR NR 3,899 37% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. UNIQA AT EUR 9.8 B m 19/11/ ,8 35% n.a. n.a. 4.4% 5.% Vienna Insurance Group AT EUR H h 18/12/ ,926 35% n.a. n.a. 3.4% 3.5% Mean (companies) n.a. n.a. 1.9% 2.3% Median (companies) n.a. n.a. 1.5% 2.5% 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 December 213; consensus estimates (Bloomberg) Source: Raiffeisen Centrobank 1 st quarter 214 This analysis created by Raiffeisen Centro Bank AG is presented to you by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 59

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 RS m 1/8/13 RS 4,538 7% % 3.4% Flughafen Wien AT EUR 6.57 H m 19/12/ ,272 5% % 2.5% Oesterreichische Post AT EUR H m 7/11/ ,269 47% % 6.% Palfinger AT EUR 28.6 H m 22/8/ ,12 34% % 2.1% Polytec AT EUR 6.57 RS h 31/7/13 RS % % 6.8% Rosenbauer AT EUR H m 27/11/ % % 2.4% Semperit AT EUR 36. H m 2/12/ % % 2.6% Teraplast RO RON.157 RS h 4/1/13 RS 1 46% %.% Mean (companies) % 3.2% Median (companies) % 2.6% OIL & GAS Alliance Oil RU SEK 59.8 RS h 13/8/13 RS 1,143 52% %.% Gazprom RU RUB 14 H h 13/3/ ,888 43% % 6.2% Lotos PL PLN H m 4/12/ ,8 47% %.% LUKoil RU RUB 2,38 B h 13/3/13 2,555 38,514 58% % 5.1% MOL HU HUF 14,49 B m 17/12/13 17,8 4,341 33% % 2.1% Novatek RU RUB 41 B h 11/12/ ,57 28% % 2.6% OMV AT EUR H m 26/11/ ,9 44% % 3.6% OMV Petrom RO RON.462 B m 17/12/ ,845 9% % 7.9% PGNiG PL PLN 5.25 H m 9/1/ ,439 27% % 2.9% PKN PL PLN 4.52 R m 28/1/ ,162 62% % 4.4% Rosneft RU RUB 245 H m 13/3/13 UR 57,589 15% % 2.6% SBO AT EUR UR m 23/5/13 UR 1,247 69% % 2.4% Tatneft RU RUB 29 IR h 13/3/13 UR 1,12 8% % 3.8% Mean (companies) % 3.4% Median (companies) % 2.9% HEALTHCARE Biofarm RO RON.3 RS h 31/8/12 RS 73 42% % 3.8% Gedeon Richter HU HUF 4,437 B m 1/1/13 4,59 2,748 75% % 1.6% Krka SI EUR 59. B m 24/6/ ,971 69% % 2.5% Mean (companies) % 2.6% Median (companies) % 2.5% TECHNOLOGY ams AT CHF 12.4 B h 29/1/ ,183 95% % 1.7% Asseco Poland PL PLN R m 7/11/ % % 5.6% AT&S AT EUR 7.26 H h 2/11/ % % 2.6% Ericsson Nikola Tesla HR HRK 1,445 R m 3/7/13 1, % % 9.7% Kapsch TrafficCom AT EUR B h 3/12/ % % 2.4% Mean (companies) % 4.4% 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 December 213 Source: Raiffeisen Centrobank This analysis created by Raiffeisen Centro Bank AG is presented to you 6 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

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 176 H m 18/12/13 2 1,894 36% % 7.2% Magyar Telekom HU HUF 32 H h 3/12/13 3 1,53 41% % 8.3% MegaFon RU USD R h 17/7/ ,41 15% % 5.3% MTS RU USD 2.78 B h 17/7/ ,116 49% % 8.2% Netia PL PLN 5.7 B m 12/11/ % % 8.3% Rostelecom RU RUB 112 H h 17/7/ ,352 4% % 2.5% Telefonica CR CZ CZK 293. H m 27/3/ ,349 31% % 1.2% Telekom Austria AT EUR 5.51 H m 26/11/ ,439 49% %.9% TPSA PL PLN 9.7 B m 16/7/ ,57 49% % 2.6% VimpelCom Ltd RU USD H h 12/11/ ,638 9% % 6.5% Mean (companies) % 6.% Median (companies) % 6.9% UTILITIES CEZ CZ CZK B m 3/1/ ,23 3% % 6.8% E.On Russia RU RUB B h 28/1/ ,238 18% % 6.5% Enea PL PLN H m 3/1/ ,5 29% % 1.9% Enel OGK-5 RU RUB 1.14 H h 28/1/ % % 6.2% EVN AT EUR H l 3/1/ ,1 16% % 3.9% Federal Grid Company RU RUB.84 R h 28/1/13.9 2,362 19% % 7.3% InterRAO RU RUB.1 H h 28/1/ ,949 18% neg % 3.8% PGE PL PLN 17. H m 3/1/ ,634 38% % 4.8% RusHydro RU RUB.5871 H h 28/1/ ,18 3% % 3.4% Tauron PL PLN 4.43 R m 3/1/ ,865 54% % 3.1% Transelectrica RO RON H m 3/7/ % % 4.7% Transgaz RO RON UR m 19/8/13 UR % % 14.2% Verbund AT EUR H m 2/12/ ,328 16% % 3.6% Mean (companies) % 5.4% Median (companies) % 4.7% CONSTRUCTION & MATERIALS Budimex PL PLN H m 3/1/ % % 3.5% Mostostal Warszawa PL PLN 4.6 RS h 12/3/13 RS 2 28% %.% PBG PL PLN 1.85 RS h 9/3/12 RS 6 41% %.% Polimex-Mostostal PL PLN.14 RS h 3/3/12 RS 18 75% %.% STRABAG SE AT EUR 21.1 H m 6/12/ ,16 13% % 2.4% Wienerberger AT EUR R m 21/8/ ,341 98% neg % 1.3% Zumtobel AT EUR 11.1 H m 13/12/ % % 2.7% Mean (companies) % 1.4% Median (companies) % 1.3% 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 December 213, Source: Raiffeisen Centrobank 1 st quarter 214 This analysis created by Raiffeisen Centro Bank AG is presented to you by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 61

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 4.24 RS m 2/4/13 RS 1,589 46% % 4.7% CA Immobilien AT EUR RS m 28/3/13 RS 1,111 82% % 3.% conwert AT EUR 9. RS m 9/4/13 RS % % 2.2% Echo Investment PL PLN 6.15 H m 26/11/ % %.% Globe Trade Centre PL PLN 7.16 RS m 3/4/13 RS % neg. neg %.% Immofinanz AT EUR 3.28 B m 11/11/ ,328 84% % 6.1% Polnord PL PLN 8.4 B h 26/11/ % 84.1 neg %.% S IMMO AT EUR 5.28 RS h 3/4/13 RS 359 8% % 1.9% Warimpex AT EUR 1.78 RS h 2/4/13 RS 96 45% neg. neg %.% Mean (companies) % 2.% Median (companies) % 1.9% CONSUMER, CYCLICAL Agora PL PLN 9.65 H m 17/9/ % % 5.2% AmRest PL PLN 91.9 H h 29/8/ % %.% CCC PL PLN 113. R m 13/9/ ,42 57% % 2.% Cinema City PL PLN 31. R h 5/9/ % %.% CTC Media RU USD B h 21/1/ ,519 37% % 5.8% Cyfrowy Polsat PL PLN 18.9 H m 12/9/13 UR 1,581 48% % 5.5% LPP PL PLN 8,699. H m 2/9/13 UR 3,72 48% % 1.7% M.video RU RUB 294 B h 26/3/ ,173 31% % 2.9% TVN PL PLN 14.3 H m 17/12/ ,187 46% neg % 3.1% Wolford AT EUR 18.5 H m 19/12/ % neg %.% Yandex RU USD H h 7/1/ ,236 56% %.% Mean (companies) % 2.4% Median (companies) % 2.% CONSUMER, NON-CYCLICAL Adris HR HRK H h 26/9/ % % 2.5% AGRANA AT EUR B m 3/1/ ,235 25% % 4.1% DIXY Group RU RUB 414 B h 31/5/ ,148 33% %.% Eurocash PL PLN B m 9/9/ ,59 51% % 1.2% Magnit RU USD 63.5 H h 31/5/13 UR 21,782 54% % 1.% OKey RU USD 12. R h 31/5/ ,362 14% % 2.1% Podravka HR HRK 254 B h 31/1/ % % 2.6% Viro HR HRK 612 UR h 19/2/13 UR % % 2.3% X5 RU USD H h 31/5/ ,253 32% %.% Mean (companies) % 1.8% Median (companies) % 2.1% 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 December 213 Source: Raiffeisen Centrobank This analysis created by Raiffeisen Centro Bank AG is presented to you 62 by Raiffeisen Bank International AG. Supervisory authority: Financial Market Authority FMA, Otto-Wagner-Platz 5, A-19 Vienna. 1 st quarter 214

63 Equities region overview Sector weightings in comparison Sector weightings Poland, WIG 2 Dom. market cap.: EUR 154,2 bn (Source: FESE; 29-Nov-13) Sector weightings Czech Republic, PX 1 Dom. market cap.: EUR 23,2 bn (Source: FESE; 29-Nov-13) Real Estate,94% Consumer staples 3.3% Insurance 13.94% Software & Services 1.9% Banks 39.78% Energy 15.62% Materials 11.89% Telecommunications 3.47% Utilities 9.44% Energy.74% Insurance Media 18.84% 1.22% Hotels, Restaurants, Leisure 1.9% Consumer Durables 1.64% Food Beverage & Tobacco 1.97% Banks 41.13% Materials 2.74% Telecommunications 8.55% Utilities 22.56% 1 excl. Orco Property Sector weightings Hungary, BUX Dom. market cap.: EUR 15 bn (Source: FESE; 29-Nov-13) Software & Services.1% Commercial Services (incl. Hotels, Restaurants) 1.11% Capital Goods.32% Sector weightings Russia, MICEX Dom. market cap.: EUR 547,3 bn (Source: WFE; 29-Nov-13) Consumer Durables Transportation.28% Capital Goods.4%.29% Retailing Automobiles 7.19%.14% Pharma & Biotechnology 25.27% Financials 33.46% Energy 3.29% Materials.26% Telecommunications 9.19% Financials 19.56% Utilities 2.18% Telecommunications 1.49% Materials 1.77% Energy 48.71% Sector weightings Romania, BET Sector weightings Turkey, ISE 1 Dom. market cap.: EUR 3,1 bn (Source: BSE; 29-Nov-13) Dom. market cap.: EUR 197,3 bn (Source: FESE; 29-Nov-13) Pharma & Biotechnology 3.6% Pharma & Biotechnology 3.67% Financial 43.25% Energy 26.19% Utilities 3.73% Pharma & Biotechnology.25% Consumer staples 13.69% Consumer discretionary 5.66% Industrials 16.41% Technology Hardware.18% Financials (Banks incl. Insurance) 47.82% Hotels, Restaurants, Leisure.17% Energy 3.96% Materials 6.42% Telecommunications 6.73% Utilities.65% 1 st quarter

64 Technical analysis Stock-Markets: Break-outs to be expected ATX ATX Last: 2,56.9 Fairly unchanged since the recent report the ATX now has hit this level from above. The yellow line at 2,4 indicates the buy-sell-balance and highlights a basically neutral trend. This line now serves as a co-support to the upward-trend s, intact since end of 211, rising-support line at 2,345. As long as this not crossed to the downside bullish confirmation at 2,71 -> 2,8 3,3 could be due. Sell 2,33 -> 2,2 2,17 Buy 2,71 -> 2,8 3,3 Price as of 19 December 213, 1:47 a.m. CET BELEX 15 BELEX 15 Last: 549. At its rising-support line, e.g. 537, the current upwardtrend prevailing since July 213, should be soon put to the test, but thereafter another increase towards the targets 56 and 585 be expectable. In case of a failure of the rising-support line at 537 another leg down towards 51, the upward-trend in effect since October 212, would be due. Position: long -> Stop 53 -> 51 Price as of 19 December 213, 11:15 a.m. CET BUX BUX Last: 18,61 Still within the barriers of its neutral rectangular pattern (yellow lines) the falling-resistance lines (red, at 13,987 and 19,285) have withstood the advance. This together with the recent failure at the buy-sell balance 18,9 hint on a possible sell-signal, that might get triggered at 17,53 -> 16,5 16,. Sell 17,53 -> 16,5 16, Buy 2,8 -> 21,2 21,8 Price as of 19 December 213, 11:44 a.m. CET Ar = arithmetic scale 64 1 st quarter 214

65 Technical analysis CROBEX 1 Last: 997 The neutral pattern in between 98 and 1,5 is in effect since November 213. Either a bullish at its upper or bearish signal at its lower barrier can be expected until end of January by the latest as the prevailing downwardtrend s falling-resistance line (red) does not leave much more time for this neutral phase s prolongation. Sell 975 -> Buy 1,5 -> 1,15 1,5 CROBEX Price as of 19 December 213, 11:46 a.m. CET MICEX Last: 1,497 The recently specified support 1,24 has met expectations, held firm, and our target 1,51 gotten hit, but the sideways-trend as of range 1,24 1,55 and in effect since 211 has not been broken-free of yet. A first bullish signal at 1,56, although the Triangle s falling-resistance line (red, at 1,5) is of massive type, is expectable, but a sell-signal at 1,42 not to be denied possible neither. Buy 1,56 -> 1,63 1,74 Sell 1,42 -> 1,3 MICEX Price as of 19 December 213, 12: noon CET WIG 2 Last: 2,41 The Rectangle, vulgo neutral trend (yellow lines), has been intact since 211. The recent three candles resemble a bearish reversal pattern by the name of Evening Star, confirmation of which at 2,35, the buy-sell balance, is still lacking. Therewith a decline towards about 2,, the Rectangle s lower barrier, would get indicated. As long as this signal has not been triggered, there s still a chance on a recovery beyond 2,64. Sell 2,35 -> 2,23 2, Buy 2,64 -> 2,925 WIG 2 Price as of 19 December 213, 12:35 p.m. CET Ar = arithmetic scale Rober Schittler 1 st quarter