Economic Analysis Division Emerging Markets Analysis

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1 Bulgaria EU EMDE* Greece FYROM Egypt Romania Turkey Serbia Albania Cyprus Cyprus Serbia Greece Bulgaria EU Turkey Albania FYROM Romania EMDE* Egypt Greece FYROM EU Albania Cyprus Serbia Bulgaria Romania World EMDE* Egypt Turkey Egypt EMDE* Serbia Romania Albania Cyprus World Bulgaria Turkey FYROM EU Greece Economic Analysis Division Emerging Markets Analysis Bi-Weekly Report 9 October TURKEY The fiscal deficit narrowed on a -month rolling basis for the first time in months in September (to.% of GDP) A sharp external adjustment is underway, with the -month rolling current account deficit narrowing from a -year high of 7.% of GDP in May to.% in August ROMANIA The banking sector s bottom line improved further in Q:, mainly due to a slowdown in provisioning The banking system has strengthened significantly over the past few years; however, new vulnerabilities are emerging NBG - Economic Analysis Division BULGARIA Headline inflation rose to a ½-year high of.% y-o-y in September from.% at end-7, on the back of higher volatile food prices and stronger domestic demand The real estate market maintained its momentum in Q: Emerging Markets Analysis Head: Michael Loufir : + : mloufir@nbg.gr SERBIA Headline inflation declined to.% y-o-y in September from.% in December -- remaining within the NBS target range of ±.% NBS to initiate a new cycle of monetary policy tightening in H:9 Analysts: Konstantinos Romanos-Louizos : romanos.louizos.k@nbg.gr Louiza Troupi : troupi.louiza@nbg.gr Athanasios Lampousis : lampousis.athanasios@nbg.gr Real GDP Growth (%, F) * EMDE: Emerging Market & Developing Economies FYROM Parliament voted to amend the constitution, allowing the country to change its name -- a sine qua non condition for joining NATO and starting EU accession talks Headline inflation declined to.% y-o-y in September from a -year high of.% at end-7 Credit to the private sector reached a ¼-year high of 7.7% y-o-y at end-q:, due to higher supply and demand for loans ALBANIA Headline inflation has embarked on a mild upward trend since the beginning of the year, albeit remaining at a relatively low.% in September The BoA is set to maintain its key rate on hold until the initiation of a new cycle of monetary policy tightening in Q:9 End-year Headline Inflation (%, F) * EMDE: Emerging Market & Developing Economies CYPRUS Headline inflation reached a peak of.% y-o-y in September, but is set to ease by end-year The EC/ECB th Post-Programme Surveillance mission commended the country s significant progress on resolving NPLs Fiscal Balance (% of GDP, F) * EMDE: Emerging Market & Developing Economies Current Account Balance (% of GDP, F) EGYPT Headline inflation accelerated temporarily to.% y-o-y at end- Q:/9 from.% at end-q:7/ due to a sharp rise in volatile prices of fruit & vegetables The CBE is likely to remain in a wait-and-see mode until the ongoing emerging market volatility subsides FX reserves reached a record high USD.bn at end-q:/9, supported by the solid implementation of the loan agreement with the IMF APPENDIX: FINANCIAL MARKETS * EMDE: Emerging Market & Developing Economies Please see disclosures in page

2 / / / / / / / / / / / / / / /7 /7 / / / / / / / / / / / / / / / / /7 /7 / / / 9/ / 9/ / 9/ / 9/ / 9/ / 9/ / 9/ /7 9/7 / 9/ 9 October Turkey BB- / Ba / BB (S&P/ Moody s / Fitch) Tax Revenue, Primary Expenditure & Fiscal Balance (-M Rolling Sum) Fiscal Balance (% of GDP, rhs) Tax Revenue (y-o-y % change, lhs) Primary Expenditure (y-o-y % change, lhs) Current Account Balance (-M Rolling Sum, as % of GDP) Trade Bal., excl. gold & energy Energy Balance Gold Balance Core Current Account Bal. Other Tourism Balance Current Account Bal. Overall Balance (-M Rolling Sum, as % of GDP) Capital & Financial Acc. Balance Current Account Balance Net Errors & Omissions Overall Balance Oct. -M F -M F -M F -m TRIBOR (%).... TRY/EUR.... Sov. Spread (, bps) Oct. -W % YTD % -Y % ISE 9, F 9F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The fiscal deficit narrowed on a -month rolling basis for the first time in months in September (to.% of GDP). The fiscal balance improved by. pp y-o-y to a deficit of.% of GDP in September, following a cumulative deterioration of. pps of GDP y-o-y in the first months of the year, stemming mostly from the June snap presidential and parliamentary elections. Both tax and non-tax revenue were behind the August positive budget performance. The former rose by. pps of GDP y-o-y, mainly on the back of higher personal income tax and taxes on imports despite weaker proceeds from the special consumption tax following the Government s decision to offset any rise in TRY-denominated energy prices through a lower SCT rate. The latter also increased by. pps of GDP y-o-y, mainly due to stronger revenue from land amnesty. On the other hand, expenditure rose by. pps of GDP y-o-y, on the back of a higher wage bill, current transfers and interest payments. With the September outturn, the -month rolling budget deficit narrowed for the first time in months to.% of GDP from a -year high of.% in August slightly above its end-year target of.9%. Looking ahead, the Government is expected to keep the fiscal deficit in check in the coming months, in its efforts to stabilise the TRY and restore confidence in the Turkish economy amid increasingly less friendly markets towards vulnerable emerging economies. A fiscal consolidation of c.. pps of GDP in Q: will be sufficient to meet the FY: target of.9% of GDP. This target is attainable in view of the higher-than-initially-expected Q: nominal GDP and ample room for cuts in capital spending. A sharp external adjustment is underway, with the -month rolling current account deficit (CAD) narrowing from a -year high of 7.% of GDP in May to.% in August. The current account balance improved significantly, by. pps y-o-y to a surplus of.% of GDP in August, due to a stronger underlying current account balance (excluding energy and gold, up. pps of GDP y-o-y), reflecting decelerating domestic demand, more competitive Turkish goods in global markets, as well as buoyant tourism activity, and to a lesser extent, the favourable gold balance (up. pp of GDP y-o-y), stemming from a normalization in gold imports. Not surprisingly, the energy balance deteriorated (by. pp of GDP y-o-y), due to higher global oil prices. Importantly, the August outcome confirms that a sharp external adjustment is underway since June (a cumulative.7 pps of GDP y-o-y) following 9 consecutive months of deterioration. The capital and financial account (CFA) deteriorated sharply in August. The CFA balance turned into a deficit.9% of GDP in August from a surplus of.% a year earlier, as the currency crisis culminated due to the absence of an adequate policy response to the country s alarming imbalances and tensions with the US. The deterioration was mainly driven by large deposit placements abroad by domestic banks, (net) portfolio outflows and (net) loan repayments by banks (. pps,. pps and. pps of GDP y-o-y, respectively). The bulk of the CFA deficit was covered by a drawdown in FX reserves (.% of GDP) and large non-identified inflows (net errors & omissions,.% of GDP). Looking ahead, the CBRT and the Government s strong policy response over the past month, as well as easing geopolitical tensions with the US (following the release in the past week of the pastor, A. Brunson, two years after he was arrested and charged with aiding a coup attempt against President Erdogan) should help improve further the current account in 9-M:. We see the -month rolling CAD narrowing to.% of GDP in December from.% in August and a -year high of 7.% in May. NBG - Emerging Markets Analysis Bi-Weekly Report

3 Q:7 Q:7 Q: Q: Q:9 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: Q:7 Q:7 Q: Q: Q:9 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: M:7 M:7 M: M: M:9 M:9 M: M: M: M: M: M: M: M: M: M: M: M: M: M: M:7 M:7 M: 9 October Romania BBB- / Baa / BBB- (S&P / Moody s / Fitch) ROAE (cumulative, annualised, %) NPL Ratio (%) Loan Loss Ratio (standard, watch, substandard, doubtful and loss with over 9,,, and dpd, respectively) NPL Ratio (sample banks using the standard approach in credit risk assessment) NPL Ratio (all banks using the standard approach in credit risk assessment) NPL Ratio (EBA definition, exposures more than 9 dpd or unlikely to be collected without use of the collateral regardless of the dpd) Capital Adequacy Ratio (%) Total Capital Ratio (NBR definition) Common Equity Tier Ratio (EBA definition) Oct. -M F -M F -M F -m ROBOR (%).... RON/EUR...7. Sov. Spread (, bps) Oct. -W % YTD % -Y % BET-BK, F 9F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The banking sector s bottom line improved further in Q:, mainly due to a slowdown in provisioning. Net profit after tax rose by.% y-o-y to RON.bn (EUR 9mn or.% of GDP) in Q:. As a result, net profit amounted to RON.bn in H: (up.% y-o-y), with the annualised ROAA and ROAE rising to post-crisis highs of.7% and.7%, respectively, from.% and.9% in H:7. As in previous quarters, the positive performance in Q: can be largely attributed to a slowdown in provisioning, in line with the sharp decline in NPLs. Indeed, the NPL ratio fell to.7% in Q: from.% in Q:7, and a peak of.% in early-, mainly on the back of large (NBR-motivated) write-offs and NPL sales (equivalent to c..% of the current stock of total gross loans). Moreover, following last year s ruling by the Constitutional Court that precludes the retrospective application of the Debt Settlement Law (effectively a norecourse framework), banks continued to reverse the provisions made for this purpose, further sustaining profitability. That being said, the NPL coverage ratio reached c..%, among the highest in the EU. At the same time, we estimate pre-provision income to have remained broadly flat in Q:. On the one hand, net interest income (NNI) is estimated to have risen strongly in Q:, in line with faster credit expansion (average balances rose by.% y-o-y in Q: against.9% in Q: and.% in FY:7). The latter more than offset the impact of higher funding costs (recall that the NBR raised its key rate by 7 bps to.% in H:, with money market rates rising far more at the same time -- bps on a -month basis). On the other hand, operating expenses rose sharply, due to the upgrade of banks IT systems and rising inflation (up.% y-o-y in Q: and.7% in Q: against just.% in FY:7). All said, the cost-to-income ratio remained flat at.9% in Q: -- lower than the EU average (over %). Profitability is set to remain strong throughout the year. Despite the ongoing tightening in monetary policy (we see the NBR hiking its key rate by an additional bps to.7% at end-), NII should continue to grow at a solid pace, reflecting fast credit expansion against the backdrop of a favourable environment (as suggested by the country s low lending penetration rate --.% of GDP, well below the SEE- average of.9% -- and the system s ample liquidity -- the loan-to-deposit ratio stands at.%). This factor should more than compensate for elevated operating expenses, on the back, inter alia, of stubbornly high inflation. Importantly, in light of the high NPL coverage and the relatively low NPL ratio, we expect provisioning to remain subdued throughout the year. All said, we see ROAE rising to.% in FY: from.% in FY:7. The banking system has strengthened significantly in recent years; however, new vulnerabilities are emerging. Specifically, banks have a large exposure to sovereign risk through large positions in domestic debt (amounting to c. % of assets, which is one of the highest ratios in the EU) and state guarantees for First House loans. At the same time, the banking system is becoming increasingly exposed to real estate (mortgages account for % of retail loans against % in ). Moreover, albeit having been reduced significantly since the global financial crisis, the share of FX loans still remains relatively high (c. %), with a large share of borrowers being unhedged. The stress tests recently carried out by the IMF appear to confirm these weaknesses. Indeed, under the baseline scenario, the CET ratio for the top banks (accounting for % of total assets) would decline to.% by from 7.% in, while under the adverse scenario, the ratio would fall even further to.%, with several banks failing to meet regulatory minimum requirements (i.e. %). NBG - Emerging Markets Analysis Bi-Weekly Report

4 Q:9 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: 7 F / / / / /7 9/ 9 October Bulgaria BB+ / Baa / BBB- (S&P / Moody s / Fitch) * - - * Contribution to Annual Headline CPI Inflation (pps) Volatile Food Core Energy Headline (y-o-y % change) Headline CPI Inflation, Nominal Wages & Employment (y-o-y % change) Core Inflation (lhs) Nominal Wages (rhs) Employment (rhs) Real Estate Price Index & Retail Time Deposits Yields 9M: 9M: Real Estate Price Index (Q:9=, BGN Nominal Terms, lhs) Retail Time Deposit Yields (%, rhs, inverted) Oct. -M F -M F -M F Base Interest Rate (%).... BGN/EUR Sov. Spread (, bps) Oct. -W % YTD % -Y % SOFIX F 9F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP)..... Fiscal Bal. (% GDP) Headline inflation rose to a ½-year high of.% y-o-y in September from.% at end-7, on the back of higher volatile food prices and stronger domestic demand. Volatile food inflation accelerated in September (to.7% y-o-y from.% at end-7), reflecting negative supply-side effects from a poor summer harvest. At the same time, core inflation (making up 7% of the CPI basket) picked up (to.% y-o-y in September from.9% at end-7). Indeed, despite slower employment and wage growth (up.% and 7.% y-o-y in H: against.% and.%, respectively, in H:7), private consumption continued to expand at a solid pace in 9M:, sustained by wealth effects (housing prices and the stock market gained % and %, respectively, over the past years) and stronger consumer confidence. Headline inflation would have been higher had energy inflation (up.9% y-o-y in September against.% at end-7) not been held back by a positive base effect from the hikes in administered electricity, gas and heating prices in 9M:7 (adding. pps to headline inflation). Headline inflation is set to reverse course and ease modestly by end-9. We expect headline inflation to decline modestly in Q:, in line with the envisaged slowdown in global oil inflation (to.% y-o-y in BGN terms at end- from.% in September) and lower imported inflation from the EU. Note that the impact of the October hike in administered gas and heating prices should be minimal (c.. pp). Overall, we see headline inflation ending the year at.% y-o-y, marginally higher compared with end-7 -- up.%. Headline inflation is set to continue on its mild downward path in FY:9. Indeed, the envisaged normalisation in volatile food prices, combined with favourable global oil prices (down c..% y-o-y in BGN terms at end-9 against a rise of.% at end-), should more than compensate for stronger demand-side pressures. The latter should be fueled by the loose incomes policy (public wages will reportedly rise % from January) and its spillover to the private sector. All said, we see headline inflation easing to.7% at end-9, with core inflation converging towards that level at the same time. The real estate market maintained its momentum in Q:. The Housing Price Index increased strongly in Q: (up 7.% y-o-y, a somewhat faster pace than in Q: but still slower than in FY:7 -- up.7%). As a result, the index is now at its early-9 level, down % from its mid- peak but up % from its mid- trough. In our view, in addition to the solid economic recovery, a key factor for the pick-up in the real estate market is the sharp decline in retail deposit rates (to.% for both LC and FX deposits in mid- from.7% and.% at end-, respectively), and bond yields (the - year bond yield stood at.% in mid- against.% at end-) which, in turn, has increased the attractiveness of real estate as an asset class. Note that rental yields in Sofia stood at.% in mid- against.% at end-, highlighting the mismatch between supply and demand for real estate. Against this backdrop, growth in retail deposits has slowed (up by a CAGR of.% in -H: against a CAGR of.% in -), with investments in real estate picking up. Importantly, FDI in real estate, which was the engine of growth for the sector in the post-crisis period, has shown signs of recovery (.% of GDP on a -quarter rolling basis in Q: against -.% a year ago). Looking ahead, we expect real estate prices to continue on an upward trend, in line with: i) the solid economic recovery; ii) a further easing in credit standards by banks, in view of the sustained drop in problematic loans (currently accounting for 9.% of total mortgage loans against a peak of.% at end-); and iii) higher FDI inflows to the sector. NBG - Emerging Markets Analysis Bi-Weekly Report

5 9/ /9 9/9 / 9/ / 9/ / 9/ / 9/ / 9/ / 9/ / 9/ /7 9/7 / 9/ / /9 /9 / / / / / / / / / / / / / / /7 /7 / / /9 /9 / / / / /7 9/ /9 9 October Serbia BB / Ba / BB (S&P / Moody s / Fitch) Contributions to Annual Headline CPI Inflation Energy F&V Core (pps) Forecast Headline (y-o-y % change) Headline Inflation, Inflation Target, Nominal Policy Rate & Exchange Rate EUR/RSD (y-o-y % change, lhs) -Week Repo Rate Target Band Inflation NBS Interventions & Exchange Rate Net NBS Interventions (EUR mn, lhs) EUR/RSD (rhs) - Forecast Oct. -M F -M F -M F -m BELIBOR (%)..9.. RSD/EUR Sov. Spread (, bps) Oct. -W % YTD % -Y % BELEX F 9F Real GDP Growth (%) Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation declined to.% y-o-y in September from.% in December -- remaining within the NBS target range of ±.%. Core inflation (that excludes prices of fruit & vegetables and energy, and accounts for c. 7.% of the CPI basket) moderated to a low of.9% y-o-y in September from.9% in December, despite increasing demand-side pressures (with private consumption accelerating to.% y-o-y in H: from.% in FY:7). This occurred due to: i) lower nonenergy regulated prices (as the hike in telecommunication services prices in March 7 -- that added. pps to CPI -- faded); ii) low international food prices, along with a stronger dinar; and iii) a tighter monetary policy stance (an ex post policy rate, in real and compounded terms, of.% in 9M: -- up from.7% in FY:7). In addition, fruit & vegetable prices eased (contributing. pps to September inflation against. pp in December), due to a strong base effect stemming from an unusually cold winter in early-7. Nevertheless, energy prices accelerated (contributing. pps to September inflation against. pps in December), in line with the rise in global oil prices (rising sharply by.% y-o-y, in RSD terms, in September against a rise of.% in December 7). Inflation is set to pick up moderately, reaching.% y-o-y at end-. Looking ahead, headline inflation is set to increase gradually in Q:, mainly due to the ongoing rebound in domestic demand, ending the year at.% y-o-y -- still well within its target band. Despite the slight rise, end- inflation is set to remain. pps below its end-7 outcome, due to the normalization in volatile prices of fruit & vegetables and lower regulated prices. Next year, inflation is expected to remain on a mild upward path, increasing slightly to.% y-o-y at end-9, solely on the back of demand-side pressures (supported by pension and public sector wage increases next year, as well as the.% rise in the minimum wage as of January st 9). NBS to initiate a new cycle of monetary policy tightening in H:9. The NBS maintained its -week repo rate unchanged, for a th successive month, at its October meeting, at a record low of.% (remaining well above that of peer countries), following four (unexpected) cuts between September 7 and April by a cumulative bps. Recall that the NBS proceeded with these cuts -- after a pause of more than a year -- due to the sharper-than-expected decline in headline and core inflation, and the continued appreciation pressures on the RSD. The latter were prompted by the gradual return of confidence, reflecting improved fundamentals, hurting competitiveness of Serbian goods in global markets and thus weakening growth and external accounts. Appreciation pressures on the RSD were, however, dampened through sizeable NBS interventions in the FX market (purchasing EUR.bn in 9M:, equivalent to.% of end-7 FX reserves). Going forward, in view of persistently subdued inflation (remaining below the target midpoint), we expect the NBS to maintain its key rate on hold until Q:9. Thereafter, the NBS is set to initiate a new cycle of monetary policy tightening, in view of: i) rising inflation in H:9; ii) a positive output gap by end-9 for the first time since FY: (.% in Q:9 from % in Q: and -.% in Q:7); and iii) a rise in rates in neighbouring countries and the ECB. We see the NBS hiking its key rate by a cumulative bps to.% in H:9 (implying an ex post policy rate, in real and compounded terms, of.7% at end-9 up from.% at end-). NBG - Emerging Markets Analysis Bi-Weekly Report

6 / / / / / / / /7 /7 /7 /7 /7 /7 / / / / / / 9 October F.Y.R.O.M BB- / NR / BB (S&P / Moody s / Fitch),,,,,, -, -, -, - Contributions to Headline Inflation (pps) Fcst F&V Energy Core Headline (y-o-y% ch.) Credit to the Private Sector & Customer Deposits (y-o-y % change) / / / / /7 9/ Total Credit NPL Ratio (%) Total Deposits / / / / /7 9/,,,,,, -, -, -, Overall NPL Ratio Retail NPL Ratio Corporate NPL Ratio Oct. -M F -M F -M F -m SKIBOR (%).... MKD/EUR.... Sov. Spread (. bps) 9 Oct. -W % YTD % -Y % MBI, F 9F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Parliament voted to amend the constitution, allowing the country to change its name a sine qua non condition for joining NATO and starting EU accession talks. An advisory referendum on the name change agreement reached with Greece in June failed to pass the % turnout threshold necessary for the vote to be considered legally valid. Thereafter, PM Zaev sought parliamentary approval to amend the constitution in accordance with the agreement. Although controlling only 7 seats in the -seat parliament, PM Zaev managed to secure the two-thirds majority necessary for the commencement of the drafting of the constitutional amendments, with the support of MPs from the opposition party -- VMRO-DPMNE. The completion of the revision to the constitution will require parliamentary endorsement of: i) individual changes by a simple majority; and ii) the whole constitution by a two-thirds majority, and could take up to three months. In the event and once the Greek parliament ratifies the agreement, the door will be opened for the country to start EU accession talks and join NATO next year. Headline inflation slowed to.% y-o-y in September from a - year high of.% at end-7. The deceleration was due to a moderation in core inflation (contributing. pps to the overall decline between end-7 and September), driven by lower food inflation (excl. prices of fruit and vegetables, F&V) and favourable base effects from sharp increases in prices of communication services last year. Headline inflation was also held back by a downside correction in volatile F&V prices and would have been more subdued had it not been for higher energy prices. Looking ahead, we expect headline inflation to rise slightly from.% y-o-y in September to.9% at end-year -- below the end-7 outcome of.%. The pick-up will be driven by stronger demand-side pressures, reflecting the rebound in economic activity, which will, however, be tempered by lower energy inflation, in line with developments in global oil markets. The Central Bank (CB) is set to maintain its key rate on hold at a record low of.7% at least until Q:9. In view of a persistently negative, albeit closing, output gap and the absence of pressures on external and fiscal accounts in the coming quarters, we expect the CB to maintain its central rate unchanged, at least until Q:9, when the ECB and most neighbouring economies are set to embark on a new cycle of monetary policy tightening. Recall that the CB initiated a cycle of monetary policy loosening in December, cutting the policy rate by a cumulative bps to a record low of.7%. Credit to the private sector reached a ¼-year high of 7.7% y-o-y at end-q:, on the back of higher supply and demand for loans. Credit activity accelerated to a solid 7.7% y-o-y in September from.% at end-7, driven by both the retail and corporate segments. The acceleration was driven by both stronger demand and supply for loans. The former was supported by more favourable lending rates and brighter economic prospects, stemming from the country s efforts to secure a start date for EU accession talks next year, while the latter was underpinned by adequate sources of funding (the loan-to-deposit ratio stood at 9.% at end-q:) and improved bank asset quality. Indeed, the NPL ratio stood at a multi-year low of.9% in September down from a peak of.% in mid-. Customer deposit growth reached double-digits at end-q:, due to strengthening confidence in the domestic economy. Indeed, despite more unfavourable deposit remuneration rates, deposits rose by an impressive.% y-o-y in September, up from.% at end- 7, supported by both the retail and corporate segments. NBG - Emerging Markets Analysis Bi-Weekly Report

7 / / / / /7 9/ / /9 / / / / /7 9/ /9 / / / / /7 9/ /9 9 October Albania B+ / B / NR (S&P / Moody s / Fitch),,,,,,, -, Contributions to Annual Headline CPI Inflation (pps) Forecast Core Energy Food and Vegetables Headline (y-o-y % change) Inflation and Nominal Policy Rate -week repo rate (%) CPI (y-o-y % change) Inflation Target Forecast Domestic and Imported Headline Inflation (y-o-y, % change) Forecast Italy Greece Albania Albania Core CPI,,,,,,, -, Oct. -M F -M F -M F -m TRIBOR (mid, %).... ALL/EUR.... Sov. Spread (bps) Oct. -W % YTD % -Y % Stock Market F 9F Real GDP Growth (%)..... Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation has embarked on a mild upward trend since the beginning of the year, albeit remaining at a relatively low.% in September and below its target. Inflation rose moderately to.% y-o-y in September from.% in December. Importantly, although embarking on an upward trend, it has remained well below the BoA s target (of.%) for almost seven successive years. The increase was mainly driven by higher core inflation (that excludes prices of fruit & vegetables and energy, and accounts for c..% of the CPI basket). Indeed, core inflation picked up to.% y-o-y in September from.% in December, due to increasing pressures from the gradual recovery in domestic demand (private consumption was up.% y-o-y in H: against a rise of.% in H:7), the 7.% increase in tap water prices (adding. pps to September inflation), the excise hike on tobacco and second-round effects from higher global oil prices. Importantly, albeit rising, core inflation remains subdued, on the back of: i) low imported inflation (supported by low international food prices and relatively low inflation in the main trading partners), combined with the appreciation of the ALL (by.% y-o-y against the EUR in September, reaching a -year high); and ii) a still negative output gap. The rise in the headline inflation was also due to unfavourable volatile prices of fruit & vegetables (contributing. pp to inflation in September against. pps in December), stemming from floods and heavy snowfall in early-. Headline inflation to remain on a mild upward trend, rising to.% y-o-y at end- --. pps y-o-y above its end-7 outcome. The expected. pp y-o-y increase in end-year inflation should result almost exclusively from the pick-up in core inflation, due to mounting domestic demand pressures. Inflationary pressures should, however, be held back by: i) low global food prices and still low inflation in the country s major trading partners, Greece and Italy; ii) the appreciation of the LEK (by an expected.% y-o-y against the EUR at end-); and iii) the normalization in fruit & vegetable prices, following a sharp flood-induced rise. Despite its pick-up to a -year high, end-year inflation should remain well anchored and far below the BoA s target throughout for an th successive year. Inflation is set to move closer to the BoA s target next year, accelerating to.% at end-9, solely on the back of firming demand-side pressures. The BoA is set to maintain its key rate on hold until the initiation of a new cycle of monetary policy tightening in Q:9. The BoA has maintained its key policy rate unchanged, at a record low of.%, since its last bp rate cut in June. Recall that scope for the latest policy rate cut, following a pause of years, was provided by: i) the benign inflation outlook (with inflation significantly undershooting its target); and ii) persisting appreciation pressures on the ALL. Note that the BoA bought EUR.mn in H: in order to increase FX reserves (against EUR 7.mn in FY:7), while it launched, in June, purchases in the FX market (amounting to ALL mn, or.% of end- 7 FX reserves in June) in its efforts to dampen appreciation pressures on the ALL. Moreover, in June, the BoA converted into ALL the EUR mn loan disbursed to the state-owned energy company, KESH, by the EBRD to stem the strengthening of the ALL. Looking ahead, we expect the BoA to maintain its key rate on hold until Q:9, due to persistently subdued inflation. Thereafter, the BoA is set to initiate a new cycle of monetary policy tightening, in view of: i) accelerating inflation in H:9; and ii) a rise in rates in neighbouring and the ECB. We expect the BoA to hike its key rate gradually by a cumulative bps to.% in H:9. NBG - Emerging Markets Analysis Bi-Weekly Report

8 / / 9/ / /7 /7 9/7 /7 / / FY: FY: FY: FY: FY: FY: FY: FY:7 FY: Forecast / / / / / / / /7 /7 /7 /7 /7 /7 / / / / / / Forecast 9 October Cyprus BBB- / Ba / BBB- (S&P / Moody s / Fitch),,,,,,,, -, -, -, -, -, -, Contributions to Headline Inflation (pps),,,,,,,, -, -, -, -, -, -, F&V Energy Core Headline (y-o-y % ch.) Public Debt (% of GDP) Gross Loans, NPEs and NPLs NPE ratio (%, rhs) NPEs (y-o-y % ch.) Gross Loans (y-o-y % ch.) CCB sale NPL ratio (%, rhs) NPLs (y-o-y % ch.) Oct. -M F -M F -M F -m EURIBOR (%) EUR/USD.... Sov. Spread (. bps) 97 7 Oct. -W % YTD % -Y % CSE Index F 9F Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation reached a peak of.% y-o-y in September, but is set to ease by end-year. Headline inflation rose sharply to.% y-o-y in September from -.% at end-7, driven by an across-theboard deterioration in its main components. Indeed, higher energy prices, an upward correction in volatile prices of fruit and vegetables and rising core inflation (in line with building demand-side pressures) contributed. pps,. pps and. pp, respectively, to the overall increase between December and September. Looking ahead, we expect headline inflation to moderate by end-year, on the back of lower energy inflation, in line with developments in global oil markets (we project the price of Brent to increase by c..% y-o-y by December against a rise of c..% in September in EUR terms). With core and volatile food inflation set to fluctuate around their current levels by end-year, we see headline inflation easing to.% y-o-y at end- -- well above the end-7 outcome of -.%. The EC/ECB th Post-Programme Surveillance mission commended the country s significant progress on resolving NPLs. Specifically, the mission noted that: i) the strong economic recovery continues, contributing to the reduction of the country s vulnerabilities. Indeed, the economy posted impressive growth, for a second consecutive year, of.% in FY:7 and continued to expand at a solid pace of.9% y-o-y in H:. Moreover, the unemployment rate is declining rapidly down to 9.% in H: from.% in H:7 and a peak of.% in FY:. ii) while the fiscal performance remains impressive, continued strict spending discipline is key to reducing risks to public debt sustainability. Indeed, Government efforts to facilitate the sale of Cyprus Cooperative Bank (CCB) to Hellenic Bank (HB, through the issue of bonds worth EUR.bn) in H: pushed the public debt-to-gdp ratio above the % threshold (from a -year low of 9.7% at end-7) and could weaken further the country s fiscal position should contingent liabilities from State guarantees to CCB materialize (EUR.bn). Moreover, the introduction of the Estia subsidy programme (see below) and possible cost overrun from the roll-out of the National Health System next year are set to put pressure on the budget. iii) Recent bold moves to clean up banks balance sheets are set to improve depositor confidence and reduce uncertainty in the financial sector. The moves include: a) the carve-out of CCB s bad loans (EUR.7bn); b) the sale of a EUR.7bn loan portfolio by Bank of Cyprus; c) the adoption of legislative amendments in July aimed at facilitating NPLs securitisation and sales of loans and strengthening foreclosure and insolvency toolkits; and d) the design of a subsidy programme ( Estia ) aimed at providing financial assistance to vulnerable distressed borrowers (subject to income and wealth criteria) to start servicing their debt secured with their primary residency. The mission stressed, however, the need to: a) mitigate moral hazard risks and fairness issues that could result from the Estia scheme through tight eligibility criteria and the prompt initiation of foreclosure in case of redefault; and b) ensure that the residual entity of CCB, overtaken by the Government, remains committed to debt recovery and CCB s healthy operations are smoothly intergrated into those of the HB. iv) Reinvigorating structural reforms is key to sustaining strong growth in the medium term. The mission underlined the need for: a) completing reforms in the judicial and title deeds frameworks to enhance NPL-related legislative changes; b) improving the business environment to attract value-enhancing investment; c) proceeding with public sector and pension reforms; and d) strengthening financial sector supervision over the insurance sector. NBG - Emerging Markets Analysis Bi-Weekly Report 7

9 Q:/9 Q:9/ Q:9/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/7 Q:/7 Q:7/ Q:7/ Q:/9 9:/ :/ :/ :/ 9:/ :/ :/ :/ 9:/ :/ :/ :/ 9:/ :/ :/7 :/7 9:/7 :/7 :7/ :7/ 9:7/ :7/ :/9 9:/ :/ :/ :/ 9:/ :/ :/ :/ 9:/ :/ :/ :/ 9:/ :/ :/7 :/7 9:/7 :/7 :7/ :7/ 9:7/ :7/ :/9 9 October Egypt B / B / B (S&P / Moody s / Fitch) Contribution Rates to Annual Headline Inflation (pps) Core CPI Regulated Items Prices Fruit & Vegetables Prices Headline Inflation (%) Policy Rates and Inflation (%) Headline inflation Core Inflation Overnight Lending Rate -week Repo Rate Overnight Deposit Rate FX Reserves FX Reserves excl. IFI Support (USD bn) IMF & WB Support (USD bn) Months of import of GNFS (rhs) Critical Number of Months of Imports (rhs) Oct. -M F -M F -M F O/N Interbank Rate (%) EGP/USD Sov. Spread (. bps) Oct. -W % YTD % -Y % HERMES, / / /7 7/E /9F Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation accelerated temporarily to.% y-o-y at end- Q:/9 from.% at end-q:7/ on the back of a sharp rise in volatile prices of fruit & vegetables. Prices of fruit & vegetables increased sharply, by.% y-o-y at end-q:/9 (September ) against a rise of.% at end-q:7/ (June ), adding. pps to headline inflation (between June and September). On a positive note, core inflation eased (to.% y-o-y in September from.9% in June), reflecting the absence of demand-side pressures, and regulated prices decelerated (up.9% y-o-y in September against a rise of.% in June), on the back of supportive base effects, shaving. pps and. pps off headline inflation, respectively, between June and September. Headline inflation is set to end the fiscal year at.% y-o-y (June 9). Looking ahead, projecting a gradual normalization in prices of fruit & vegetables, continued prudent fiscal-monetary policy mix and a stable domestic currency throughout the rest of the fiscal year, we expect headline inflation to moderate to.% y-o-y in December and.% y-o-y at end-/9 (June) below the end-7/ outcome of.% and within the CBE s target range of.%-.%. The end- /9 forecast includes a new round of adjustments in regulated prices, expected in June, similar to that of a year ago (resulting in a. pp increase in monthly inflation). The CBE is likely to remain in a wait-and-see mode until the ongoing emerging market volatility subsides. The CBE maintained its overnight deposit, -week repo, and overnight lending rates unchanged at.7%,.%, and 7.7%, respectively, at its September 7 th MPC meeting, in its efforts to dampen depreciation pressures on the EGP and anchor inflation expectations. Indeed, amid a broader global sell-off in emerging markets, foreign holdings of Egyptian T-bills had declined by c. % to EGP 9bn (c. USD bn) from March to July and the EGP has lost c. % of its value against the USD since end-march. Looking ahead, despite a still negative output gap and continued fiscal consolidation, we do not expect the CBE to resume its cycle of monetary policy loosening, started last February (with a total cut of bps of its key rates), until the ongoing emerging market volatility eases. FX reserves reached a record high USD.bn at end-q:/9, supported by the solid implementation of the loan agreement with the IMF (signed in November ). FX reserves rose by USD 7.9bn y-o-y to USD.bn at end-q:/9 (September, covering 7.7 months of imports of GNFS), mainly on the back of the issuance of USD.bn in Eurobonds, the disbursement of USD.bn by the IMF as part of a USD.bn loan, and the release of the third and final USD.bn tranche from a USD.bn WB loan. The significant sharp annual increase in FX reserves at end-q:/9 was also supported by large foreign investments in the high-yielding domestic debt market, a sharp recovery in the tourism sector and a significant rise in workers remittances from abroad. Encouragingly, non-official sources were the main contributors to the foreign currency build-up. Indeed, since the start of the IMF-supported programme, non-official sources provided USD.bn out of a total increase of USD.bn, reflecting the return of foreign investor confidence. Excluding the IMF and WB support (USD.bn and USD.bn, respectively), FX reserves stood at USD.bn at end- September (covering.7 months of imports of GNFS). Importantly, the comfortable level of FX reserves and the flexible exchange rate regime should help the authorities well manage the increasingly less-friendly global environment for emerging markets. NBG - Emerging Markets Analysis Bi-Weekly Report

10 9 October FOREIGN EXCHANGE MARKETS, OCTOBER ND Against the EUR 7 Currency SPOT -week %change -month %change YTD %change* -year %change Year- Low Year- High -month Forward rate** -month Forward rate** -month Forward rate** % change* % change* Albania ALL Brazil BRL Bulgaria BGL China CNY Egypt EGP FYROM MKD India INR Romania RON Russia RUB Serbia RSD S. Africa ZAR Turkey YTL Ukraine UAH US USD JAPAN JPY UK GBP * Appreciation (+) / Depreciation (-) ** Forward rates have been calculated using the uncovered interest rate parity for Brazil, China, Egypt, India and Ukraine Currencies against the EUR (October ND ) ALL BRL BGL CNY EGP -week % change -month % change YTD % change MKD INR RON RUB RSD ZAR TRY UAH USD JPY GBP Depreciation Appreciation NBG - Emerging Market Research Bi-Weekly Report 9

11 9 October MONEY MARKETS, OCTOBER ND Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine EU US O/N T/N S/W Month Month Month Month Year *For Bulgaria, the Base Interest Rate (BIR) is reported. For Egypt, the O/N Interbank Rate is reported. LOCAL DEBT MARKETS, OCTOBER ND Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine EU US -Month Month Month Year Year Year Year Year Year Year Year *For Albania. FYROM and Ukraine primary market yields are reported CORPORATE BONDS SUMMARY, OCTOBER ND Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Bulgaria Bulgaria Energy Hld.7% ' EUR NA/NA //. 7 South Africa FirstRand Bank Ltd.% ' USD BBB-/Baa //. 7 7 FirstRand Bank Ltd.% ' EUR NA/NA //.9 Arcelik AS.7% ' EUR BB+/NA /9/.7 Garanti Bank.% ' USD NA/Ba /9/ Turkiye Is Bankasi % ' USD NA/B //,., Turkey Vakifbank.7% ' USD NA/Ba //. 7 TSKB.% ' USD NA/Ba // Petkim.7% ' USD NA/B //. 7 KOC Holding.% ' USD BB+/Ba // CREDIT DEFAULT SWAP SPREADS. OCTOBER ND Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine -Year Year NBG - Emerging Market Research Bi-Weekly Report

12 9 October EUR-DENOMINATED SOVEREIGN EUROBOND SUMMARY. OCTOBER ND Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Albania.7% ' EUR B+/B //. Bulgaria.% ' EUR NA/NA //. 7 Bulgaria.% ' EUR BBB-/Baa //,. - Bulgaria.9% ' EUR BBB-/Baa /9/,9.7 7 Bulgaria.% '7 EUR BBB-/Baa //7,. Bulgaria.% ' EUR BBB-/Baa // Cyprus.% ' EUR BBB-/Ba // Cyprus.7% ' EUR NA/Ba //,. 7 Cyprus.7% ' EUR NA/Ba /7/,. 9 Cyprus.7% ' EUR NA/Ba 7//. 7 Cyprus.% ' EUR NA/Ba //,. 7 FYROM.7% ' EUR BB-/NA // 7. FYROM.97% ' EUR BB-/NA /7/. FYROM.% ' EUR BB-/NA /7/.9 7 FYROM.7% ' EUR BB-/NA //. Romania.% ' EUR BBB-/BBB- /9/,. 7 Romania.% ' EUR BBB-/BBB- //,. Romania.7% '7 EUR BBB-/BBB- 9//7,. 7 Turkey.% ' EUR NR/Ba //,. 7 Albania.7% ' Bulgaria.% ' EUR-Denominated Eurobond Spreads (October ND ) Bulgaria.% ' Bulgaria.9% ' Bulgaria.% '7 -week change -month change YTD change Bulgaria.% ' Cyprus.% ' Cyprus.7% ' Cyprus.7% ' Cyprus.7% ' Cyprus.% ' FYROM.7% ' FYROM.97% ' FYROM.% ' FYROM.7% ' Romania.% ' Romania.% ' Romania.7% '7 Turkey.% ' - - Tightening Widening NBG - Emerging Market Research Bi-Weekly Report

13 9 October USD-DENOMINATED SOVEREIGN EUROBOND SUMMARY. OCTOBER ND Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Brazil.7% ' USD NA/Ba // 7. 7 Brazil.7% ' USD NA/Ba //,7. 9 Bid Yield Gov. Spread Asset Swap Brazil.7% ' USD NA/Ba //. 9 Egypt.7% ' USD B/B 9//,. 9 Egypt.7% ' USD NA/B //,. Egypt.7% ' USD B/B //. 7 Egypt 7.% ' USD NA/B //,. 7 Egypt.7% ' USD B/B //,. 7 Egypt.% '7 USD NA/B //7.7 Romania.7% ' USD BBB-/BBB- //,. Romania.7% ' USD BBB-/BBB- //,. Romania.% ' USD BBB-/BBB- //,. 9 Russia.7% ' USD BBB-/Ba //,. 9 Russia.7% ' USD BBB-/Ba /9/,. Serbia.7% ' USD BB/Ba //,. Serbia 7.% ' USD BB/Ba /9/,. S. Africa.7% ' USD BB/Baa /9/,. S. Africa.% ' USD BB/Baa // 7. Turkey 7.% ' USD NR/Ba //,.7 Turkey 7.7% ' USD NR/Ba //, 7. 7 Turkey.7% ' USD NR/Ba //, 7.9 Turkey.% ' USD NR/Ba //,. 7 Turkey.7% ' USD NR/Ba //,. 9 Ukraine 7.7% ' USD B-/Caa /9/,. 7 Spread Brazil.7% ' USD-Denominated Eurobond Spreads (October ND ) Brazil.7% ' Brazil,7% ' Egypt.7% ' Egypt.7% ' Egypt.7% ' Egypt 7.% ' Egypt.7% ' Egypt.% '7 Romania.7% ' Romania.7% ' Romania.% ' Russia.7% ' Russia.7% ' Serbia.7% ' Serbia 7.% ' S. Africa.7% ' S. Africa.% ' Turkey 7% ' Turkey 7.7% ' Turkey.7% ' Turkey % ' Turkey.7% ' Ukraine 7.7% ' -week change -month change YTD change - Tightening Widening NBG - Emerging Market Research Bi-Weekly Report

14 9 October Level -week % change STOCK MARKETS PERFORMANCE. OCTOBER ND -month % change 7 Local Currency Terms EUR Local Currency EUR Local Currency EUR Terms Terms terms terms terms YTD % change -year % change Year- Low Year- High YTD % change % change % change Brazil (IBOV), ,9, Bulgaria (SOFIX) China (SHCOMP), ,9, Cyprus (CSE GI) Egypt (HERMES), ,, F.Y.R.O.M (MBI),. 7...,, India (SENSEX), ,, Romania (BET-BK), ,7, Russia (RTS), ,7, Serbia (BELEX-) South Africa (FTSE/JSE), ,, Turkey (ISE ) 9, ,, Ukraine (PFTS) MSCI EMF , MSCI EAFE, ,, Greece (ASE-General) Germany (XETRA DAX), ,9, UK (FTSE-) 7, ,7 7, USA (DJ INDUSTRIALS), ,, USA (S&P ), ,, Brazil (IBOV) Bulgaria (SOFIX) Equity Indices (October ND ) China (SHCOMP) Cyprus (CSE GI) Egypt (HERMES) F.Y.R.O.M (MBI-) -week % change -month % change YTD % change India (SENSEX) Romania (BET-BK) Russia (MICEX) Serbia (BELEX ) South Africa (FTSE/JSE) Turkey (ISE-) Ukraine (PFTS) MSCI EMF MSCI EAFE Greece (ASE-General) Germany (DAX) UK (FTSE-) USA (DJ INDUSTRIALS) USA (S&P ) Loss Gain NBG - Emerging Market Research Bi-Weekly Report

15 9 October DISCLOSURES: This report has been produced by the Economic Analysis Division of the National Bank of Greece, which is regulated by the Bank of Greece, and is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on its contents, i.e. only after effecting their own independent enquiry from sources of the investors sole choice. The information contained in this report does not constitute the provision of investment advice and under no circumstances is it to be used or considered as an offer or an invitation to buy or sell or a solicitation of an offer or invitation to buy or sell or enter into any agreement with respect to any financial asset, service or investment. Any data provided in this report has been obtained from sources believed to be reliable but have to be not been independently verified. Because of the possibility of error on the part of such sources, National Bank of Greece does not guarantee the accuracy, timeliness or usefulness of any information. The National Bank of Greece and its affiliate companies, its representatives, its managers and/or its personnel or other persons related to it, accept no liability for any direct or consequential loss arising from any use of this report. The final investment decision must be made by the investor and the responsibility for the investment must be taken by the investor. This report is not directed to, nor intended for distribution to use or used by, any person or entity that is a citizen or resident of or located in any locality, state, country or other jurisdiction where such a distribution, publication, availability or use would be contrary to any law, regulation or rule. The report is protected under intellectual property laws and may not be altered, reproduced or redistributed, to any other party, in whole or in part, without the prior written consent of National Bank of Greece. NBG - Emerging Markets Analysis Bi-Weekly Report