South Eastern Europe and Mediterranean Emerging Market Economies

Transcription

1 South Eastern Europe and Mediterranean Emerging Market Economies Weekly Report 1 November 1 TURKEY October inflation ROMANIA Results of the 1 st round of presidential elections November policy rate NBG Strategy & Economic Research Division Director: Paul Mylonas : : pmylonas@nbg.gr Emerging Markets Research Head: Michael Loufir : : mloufir@nbg.gr Analysts: Evlabia Fetsi : : efetsi@nbg.gr Konstantinos Romanos-Louizos : : romanos.louizos.k@nbg.gr Louiza Troupi : : troupi.louiza@nbg.gr Finansbank Research Chief Economist: Inan Demir : : inan.demir@finansbank.com.tr Analyst: Gökçe Çelik : : gokce.celik@finansbank.com.tr BULGARIA A minority coalition government takes office The licence of Corporate Commercial Bank is revoked SERBIA Q3:1 real GDP growth FYROM M:1 balance of payments ALBANIA September bank lending and deposits UKRAINE Heightening tensions between Kiev and pro-russian separatists Q3:1 real GDP growth CYPRUS Mortgage foreclosure issue is resolved H1:1 balance of payments EGYPT October FX reserves Q1:1/15 Suez Canal receipts The information in this document, being distributed by National Bank of Greece S.A., is based upon data and sources of information believed to be correct and reliable but the accuracy of which cannot be guaranteed. Accordingly, no representation or warranty, implied or expressed, is made by any member of National Bank of Greece S.A. as to its accuracy adequacy, timeliness or completeness.

2 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/1 1/1 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/1 1/1 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/1 1/1 1 November 1 Turkey Headline & Core Inflation (y-o-y % change) Headline Inflation Food Inflation Core-I Inflation (excluding energy, food, bevarages, tobacco products and gold) Interest Rates (%) CBRT O/N Lending Rate CBRTO/N Borrowing Rate CBRT1-w Repo Rate Interbank Market Overnight Rate Core Inflation, Interest Rate & Exchange Rate Currency Basket (.5*TRY/EUR+.5*TRY/USD, y-o-y % change, inverted, rhs) Core CPI-I (y-o-y % change, lhs) CBRT Effective Funding Rate (%, lhs) 7 Nov. 3-M F -M F 1-M F 1-m TRIBOR (%) TRY/EUR Sov. Spread (1, bps) Nov. 1-W % YTD % -Y % ISE 1 77, F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation remains high in October, suggesting the continuation of a cautious monetary policy stance. Headline inflation rose to 9% y-o-y in October from.9% y-o-y in September, as the 9% increase in prices of natural gas and electricity (adding. pps to inflation) was largely offset by a moderation in food inflation to 1.% y-o-y from 13.9% in September (subtracting.3 pps from inflation). Encouragingly, the CBRT s favourite core inflation measures, i.e., CPI-H (that excludes energy, unprocessed food, alcohol, tobacco and gold) and CPI-I (that also excludes processed food) eased for a second consecutive month, standing at 9% y-o-y and 9.% y-o-y, respectively, in October, down from 9.7% and 1.% in August. This positive development suggests that the bulk of the impact from the weakening of the TRY has already passed through to prices. Going forward, the course of the TRY will continue to be the key risk to the inflation outlook. In this regard, note that the TRY has depreciated by.% against the USD and by 1.7% against the currency basket (5%*EUR/TRY + 5%*USD/TRY) since the previous cut to the key policy rate on July 17 th. Therefore, the CBRT should continue to resist increasing political pressure for immediate cuts in the key policy rate (the 1-week repo rate, currently at.5%), in view of: i) still high underlying inflation; ii) higher-than-projected food inflation (the y-t-d food inflation in October already stood at the CBRT s upwardly-revised FY:1 food inflation forecast of 1.5%); iii) continued pressure on the domestic currency, as US monetary conditions tighten on the back of the recent strengthening of the USD; iv) a possible surge in political risk, ahead of the parliamentary elections to be held between April and June 15; and v) geopolitical risks, emanating from Iraq and Syria. Despite favourable global oil prices, we foresee headline inflation reaching 9.% y-o-y in December, on the back of a further increase in food inflation. This forecast is in line with the medium-term programme projection but above the CBRT s most recent forecast of.9% (revised up from 7.%) and the end-13 outcome of 7.%. For 15, we foresee headline inflation embarking on a downward trend in January, on the back of base effects and lower global oil prices, reaching a trough of.5% y-o-y in July. In the last 5 months of 15, headline inflation should rise steadily, as base effects fade and the Government proceeds with an adjustment of administrative prices. We see end-15 inflation at 7.5% -- above the CBRT s most recent forecast of.1% (revised up from 5%) but well below our end-1 forecast of 9.%. Against this backdrop, we expect the CBRT to remain cautious, at least until the end of this year, leaving both its key rate and the ceiling of its interest rate corridor (overnight lending rate) at.5% and 11.5%, respectively. Recall that the CBRT cut the 1-week repo rate by 175 bps between May and July and reduced the overnight lending rate by 75 bps in August, partly reversing the sharp rate increases implemented at end-january (55 bps and 5 bps, respectively). Should pressures on the TRY intensify, the CBRT would react first through a tightening of domestic liquidity conditions through liquidity management (by reducing the amount of auctions at the 1-week repo rate of.5%), and would eventually increase the amount of daily FX sales (currently USD mn). Note that the CBRT has tightened TRY liquidity conditions since end-september, pushing up the interbank market overnight rate significantly (by around bps) towards the ceiling of the corridor (currently at 11.5%) and maintaining it within the range of 9.%-11% (bringing it into positive territory in real terms for the first time since January). On the other hand, should pressures on the TRY weaken, the CBRT could ease domestic credit conditions and bring the interbank market overnight rate closer to its key policy rate. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 1

3 1/9 5/9 9/9 1/1 5/1 9/1 1/11 5/11 9/11 1/1 5/1 9/1 1/13 5/13 9/13 1/1 5/1 9/1 1/15 5/15 9/15 1/1 1/9 /9 11/9 /1 9/1 /11 7/11 1/11 5/1 1/1 3/13 /13 1/1 /1 11/1 V. Ponta (PSD) K. Iohannis (ACL) C. Popescu- Tariceanu (LRP) E. Udrea (PMP) M. Macovei (Independent) D. Diaconescu (PP-DD) C. V. Tudor (PRM) H. Kelemen (UDMR) Romania Presidential Election Results 1 st Round (%) Policy Rate, Exchange Rate and Inflation CPI (y-o-y % change, left scale) 1-W Repo Rate (policy rate, left scale) RON/EUR (eop, right scale, inverted) Headline Inflation & Policy Rate Headline Inflation (y-o-y % change) 1-Week Repo Rate NBR's Headline Inflation Target Range Forecast 7 Nov. 3-M F -M F 1-M F 1-m ROBOR (%) RON/EUR Sov. Spread (1, bps) Nov. 1-W % YTD % -Y % BET-BK 1, ,,1,,3,,5, F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) November 1 Incumbent PM V. Ponta wins the 1 st round of Presidential elections, and appears set to triumph in the runoff. Victor Ponta of the centre-left PSD party garnered.% of the vote. His main rival, Klaus Iohannis of the opposition ACL alliance, received 3.%. None of the other candidates took more than % of the vote. As a result, a runoff will be held between Ponta and Iohannis on November 1 th. In an effort to gain popular support, V. Ponta announced that, should he win the elections, his main choice for PM is former liberal PM C. Popescu- Tariceanu. All said, we expect V. Ponta to win the runoff, albeit by a narrow margin. The NBR continues to ease its monetary policy stance. At its final meeting for 1, the NBR Board cut the 1-week repo rate by another 5 bps, to a recent low of.75%, bringing total rate cuts since July 13 to 5 bps. At the same time, it reduced the minimum reserve requirement ratio (RRR) on FX liabilities by pps to 1% (effective as at November th ), while maintaining that on RON liabilities at 1%. The cut in the RRR is estimated to release c. EUR 5mn (1% of total deposits or.3% of GDP). Overall, the NBR has reduced its RRRs on RON and FX liabilities by a cumulative 5 and pps, respectively, since the beginning of the year, boosting liquidity by a significant.3% of GDP. Note, however, that part of this liquidity has been remitted to parent banks. The NBR s moves are attributed to favourable inflationary developments and the slowdown in economic activity. Specifically, headline inflation remained muted at 1.5% y-o-y in September, which is the lower end of the NBR s target range, mainly due to positive supplyside effects from a bumper harvest and weaker domestic demand. The latter is also confirmed by high-frequency data, which have deteriorated recently. Indeed, growth in industrial production and retail sales decelerated to.% and 5.1% y-o-y, respectively, in July-August, from.% and % in Q:1 and 1.% and 9.1% in Q1:1. All said, with the ex-post real policy rate (estimated at c.1.%) standing below its historical average (%), monetary conditions are relatively loose. Following the October cut in RRRs on RON liabilities (by pps), 1 there is excess liquidity in the banking system, with the spread between 1 the 1-week ROBOR and the policy rate reverting to negative territory (currently - bps). Note that, in a bid to reduce volatility in the money market, the NBR narrowed the interest rate corridor around the policy rate by a further 5 bps to ±.5 pps. The NBR should end its cycle of monetary policy easing in early- 15. We believe the NBR has some room to cut its key rate further, mainly in view of the better-than-expected inflation outlook. Indeed, we - revised down our end-year inflation forecasts to 1.% and.%, respectively, in 1 and 15 from 1.% and.% previously, still within the NBR s target range of.5±1%. The main reasons behind this revision include favourable global commodity prices and lower-thanexpected imported inflation, as well as a downward adjustment in inflation expectations. In this context, we see the NBR cutting its key rate by an additional 5 bps to.5% at its January meeting. We expect no change in policy until end-q:15, when inflation is projected to embark on an upward trend. The latter should prompt the NBR to gradually raise its key rate by up to 1 bps to 3.5% in H:15. In real terms, the implied ex-post policy rate should remain broadly flat at 1%. At the same time, in view of the need to boost credit to the private sector, which has been declining since mid-13, the NBR should continue to provide enough liquidity to the banking system and reduce further its RRRs, which are still high compared with ECB standards (%). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

4 F Bulgaria Results of the 1 Parliamentary Elections Number of Seats, % of the vote Ataka 11 seats,.5% BBT 15 seats, 5.7% GERB seats, 3.7% Reformist Bloc 3 seats,.9% ABV 11 seats,.% Patriotic Front 19 seats, 7.3% MRF 3 seats, 1.% BSP 39 seats, 15.% Results of the 13 Parliamentary Elections Number of Seats, % of the vote Coalition for Bulgaria (led by the BSP) MRF 3 seats, 11.3% Ataka 3 seats, 7.3% Fiscal Balance (% of GDP) EU Deficit Threshold GERB 97 seats, 3.5% 7 Nov. 3-M F -M F 1-M F 1-m SOFIBOR (%).... BGN/EUR Sov. Spread (17, bps) Nov. 1-W % YTD % -Y % SOFIX F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) November 1 A minority coalition Government emerges from the snap legislative elections. The centre-right GERB, which emerged as the strongest political force in the October 5 th elections but failed to obtain an outright majority, was joined by the RB, an alliance of five small right-wing parties, and the centre-left Alternative for Bulgarian Revival (ABV) party to form a minority Government. The new Government, headed by the former PM and leader of the GERB, B. Borissov, holds 11 seats in the -seat assembly, and will have to rely on the nationalist Patriotic Front (PF), which secured 19 seats. Recall that the GERB was in power until early-13, when it fell following mass protests over high utility prices and low living standards. In the May 13 elections, the GERB won the largest number of seats, but failed to form a Government, due to a lack of majority in Parliament. A technocrat Cabinet, backed by the BSP and the MRF, faced strong criticism and massive anti-corruption protests, and was forced to step down 1 months after its formation. Although the formation of the new Government marks a significant breakthrough after months of political uncertainty, we remain highly concerned over its effectiveness and durability. Indeed, the frictions between the leaders of the RB, which were evident during the negotiations with the GERB, could lead to a split of the alliance, jeopardizing the stability of the Government. At the same time, the PF (which is only loosely committed to the Government and did not take any seats in the Cabinet), could withdraw its support, should it disagree over Government policies. All said, political risk will continue to weigh on Bulgaria s outlook in the period ahead. The new Government will face major challenges. Despite the economy s relatively weak growth prospects, the new Government will need to tighten the fiscal stance. Note that the budget deficit is projected to widen to % of GDP this year from 1.9% in 13, breaching, by a wide margin, the EU threshold for the deficit (3%). Moreover, the new Government will need to restore investor confidence, which has been shaken significantly by the recent turmoil in the banking system (see below). At the same time, it should accelerate structural reforms, especially in the energy system, which is plagued by large deficits (the state-owned power company, NEK, has already accumulated a sizeable debt of c. % of GDP). Lastly, the new Government will need to restore the flow of EU funds (payments worth c..5% of GDP are currently on hold) and improve the absorption rate of EU funds, which is among the lowest in the Union (5% in 7-13). The central bank (BNB) revokes the license of the Corporate Commercial Bank (CCB), opening the way for the repayment of guaranteed deposits. The BNB s move followed the publication of an international audit into the CCB s books that showed that the need for EUR.bn in write-offs (equivalent to c. ⅔ of the bank s assets) pushes the bank s capital deep into the red (minus EUR 1.9bn, equivalent to.% of GDP). Recall that the CCB was put under the control of the BNB in June, when a run on its deposits forced it to cease its operations. According to the Deposit Insurance Fund (DIF), the repayment of guaranteed deposits (up to EUR 1k) will start on December th (total funding requirements of DIF are around EUR bn or.7% of GDP). Note, however, that the DIF has an estimated shortfall of c. EUR 5mn (% of GDP) as regards the required funds. The DIF has three options to cover the shortage: i) the issuance of bonds, secured by a state guarantee; ii) a loan from the state budget; or iii) a loan from international financing institutions (following the example of the Albanian DIF, which recently secured a loan from the EBRD). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 3

5 Forecast Q1 Q Q3 Q Q1 9 Q 9 Q3 9 Q 9 Q1 1 Q 1 Q3 1 Q 1 Q1 11 Q 11 Q3 11 Q 11 Q1 1 Q 1 Q3 1 Q 1 Q1 13 Q 13 Q3 13 Q 13 Q1 1 Q 1 Q3 1 Q3 Q1 5 Q3 5 Q1 Q3 Q1 7 Q3 7 Q1 Q3 Q1 9 Q3 9 Q1 1 Q3 1 Q1 11 Q3 11 Q1 1 Q3 1 Q1 13 Q3 13 Q1 1 Q3 1 1 November Serbia Real GDP (q-o-q % change, s.a.) Euro Area Romania Serbia pps Contribution Rates to Real GDP Growth agriculture construction GDP (y-o-y, % change) GDP excluding agriculture (y-o-y, % change) industry services Real GDP growth in SEE and Euro Area (y-o-y % change) Romania Bulgaria Serbia FYROM Albania Euro Area pps NBG forecast F 7 Nov. 3-M F -M F 1-M F 1-m BELIBOR (%) RSD/EUR Sov. Spread (1, bps) Nov. 1-W % YTD % -Y % BELEX F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The decline in economic activity accelerated to 3.7% y-o-y in Q3:1, bringing 9M:1 real GDP growth to -1.7% y-o-y. According to our estimates, the quarterly seasonally-adjusted (s.a.) real GDP declined, for a th successive quarter in Q3:1, and at an accelerating pace (-1.5% q-o-q, following an average drop of.9% in H1:1), mainly due to the mid-may devastating floods. As a result, on an annual basis, the pace of real GDP contraction increased to 3.7% y-o-y in Q3:1 according to the flash estimate -- the sharpest drop since Q:9 -- from -1.1% in Q:1, following a marginal rise of.1% in Q1:1. The deterioration in economic activity was broad-based. Though a detailed breakdown is not due until end-november, we estimate that growth in the industrial sector (% of GDP) remained negative for a nd successive quarter. Indeed, industrial production slipped deep into negative territory in Q3:1, declining by 1.5% y-o-y, compared with a drop of.7% in Q:1. This was driven by an accelerating decline in power generation and mining (representing 15% and % of industrial production, respectively, and down 39.% and 3.5% y-o-y in Q3:1), as the mid-may heavy rains disrupted production in hydro-power plants and flooded coal mines, that also limited power generation in large thermal-power plants. Production was also constrained in the manufacturing sector (a decline of 5.1% y-o-y in Q3:1), due to: i) the above-mentioned reduction in electricity supply and damages in infrastructure; and ii) lower production in FIAT, due to factory maintenance (vehicle production fell by 3% y-o-y in Q3:1). The deterioration in activity in Q3:1 was also attributed to: i) the estimated sharper drop in agricultural output, due not only to its normalization, following a bumper harvest in 13, but also the negative impact of floods; and ii) the estimated drop in the services sector, driven by a weakening in the trade and transportation subsectors, due to damages in public infrastructure. The decline in activity is set to ease in Q:1. We expect a rebound in the construction sector in Q:1 -- likely posting double-digit growth, after 9 successive quarters of negative growth -- boosted by the rehabilitation of public infrastructure (including roads and railways) and residential buildings following the mid-q:1 floods. We also expect a restoration of electricity production. Overall, in view of the worse-thanexpected Q3:1 performance, we revised down our projection for FY:1 real GDP growth by 1 pp to -1.5% compared with.5% in FY:13. Note that this year s negative growth performance reflects: i) the impact of the floods (set to subtract 1 pp from growth); ii) base effects from strong agricultural production in 13 (subtracting c.. pps from GDP growth this year after contributing 1. pps in 13); and iii) the fading-out of the impact of the strengthening production base in 13 (including FIAT). For 15, assuming that an SBA with the IMF is signed (see below), we expect a rebound in activity, supported by reconstruction, the restoration of production, improved confidence, and stronger activity in the euro area (real GDP growth is set to accelerate to 1.1% in FY:15 from.% in FY:1, according to the EC s autumn forecast). A long-delayed IMF programme is likely to be concluded in Q1:15. An IMF mission will remain in Serbia until November th for consultations under Article IV and talks on a new 3-year precautionary SBA. The Government recently approved fiscal consolidation measures (including public sector wages and pension cuts from November 1 st, saving EUR.bn, or 1.% of GDP, in FY:15). However, additional consolidation measures (of c. EUR 1-1.5bn over the next 3 years) and important structural reforms (incl. restructuring of SOE) will be necessary for the conclusion of an SBA with the IMF. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

6 1/ /9 /9 1/9 /1 /1 1/1 /11 /11 1/11 /1 /1 1/1 /13 /13 1/13 /1 /1 1 November F.Y.R.O.M. Balance of Payments (% of GDP) FY:13A M:13A M:1A FY:1F Current Account Balance Trade Balance Exports Imports Services Balance Income Balance Transfers Balance Capital & Financial Account (excluding IMF) FDI Portfolio Investments Other Investments Currency & Deposits Loans Other Errors & Omissions Overall Balance Repayments to the IMF Change in Reserves (+ denotes increase ) Private tranfers (1-M Rolling Sum) Private Transfers (% of GDP, lhs) Private Transfers (EUR mn, rhs) 1,7 1, 1,5 1, 1,3 1, 1,1 1, 9 7 Nov. 3-M F -M F 1-M F 1-m SKIBOR (%) MKD Sov. Spread (1, bps) Nov. 1-W % YTD % -Y % MBI 1 1, F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The current account deficit (CAD) widened by. pps y-o-y to a still low 1.% of GDP in M:1 on the back of a weaker services surplus. Specifically, the services surplus narrowed by. pps y-o-y to.% of GDP in M:1, due to a sharp increase in payments to foreign construction companies in the context of the Skopje 1 project and significant investments in road and railway infrastructure. The income deficit also widened in M:1 (by.1 pps y-o-y to 1.5% of GDP), mainly due to increased outflows related to the compensation of foreign employees linked to the above-mentioned projects. These negative developments were partly offset by the narrowing in the trade deficit (by. pps y-o-y to 1.% of GDP in M:1), reflecting a significant increase in exports. Indeed, export growth accelerated (up 13.% y-o-y in M:1 y-o-y in EUR terms following a rise of 5.9% in H:1), on the back of higher exports of machinery & transport equipment and chemical products (up 95.% and 9.7%, respectively) from the technological industrial development zones (TDIZ), more than compensating for a rebound in import growth (to 7.9% y-o-y in EUR terms in M:1 from -.3% in H:13). Eurobond proceeds boost FX reserves in M:1. Net portfolio investment surged in M:1 (to 5.% of GDP from -1.7% of GDP in M:13), with the former, however, including the proceeds from the placement of a sovereign Eurobond worth EUR 5mn (% of GDP) in July (the country s largest ever Eurobond issue, at a favourable spread of 3 bps over mid-swaps) and the latter including the repayment of a Eurobond worth EUR 15mn (.3% of GDP) in January 13. Excluding this impact, net portfolio investment flows turned negative to -.% of GDP in M:1 from.% of GDP in M:13. At the same time, other net capital flows deteriorated significantly in M:1 (with outflows reaching 1.% of GDP against inflows of.3% in M:13), mainly due to a base effect from a large 5-year commercial loan of EUR 5mn (3.1% of GDP) from Deutsche Bank (backed by a World Bank guarantee) secured in January 13. In contrast, non-debt generating (net) FDI inflows continued in M:1, albeit at a slower pace (.% of GDP against.% in M:13), reflecting lower intercompany lending. All said, the overall balance improved by 5.5 pps y-o-y to a surplus of 5.% of GDP in M:1, with FX reserves rising to EUR.bn in August from EUR bn at end-13, thus covering 5.5 months of imports of GNFS. The CAD is set to widen slightly to.% of GDP this year (from 1.% in 13). Looking ahead, we expect the negative trends of the balances of services and income to worsen in 9-1M:1, as payments to foreign construction companies and compensation of foreign employees are set to accelerate. Moreover, private transfers should moderate towards historical levels, standing at 17.% of GDP at end- 1 from 1% in August on a 1-month rolling basis, continuing the trend of normalization in unrecorded remittances initiated in late- 1. These negative trends should, however, be contained by a lower-than-initially-expected trade deficit in 9-1M:1, reflecting favourable global oil prices. Indeed, under the assumption of a moderation in the average price of Brent oil to EUR 7 per barrel in 9-1M:1 from EUR 1 in 9-1M:13, the trade deficit should narrow by. pps of GDP y-o-y in 9-1M:1. Regarding financing, in view of almost unchanged FDI inflows (3.5% of GDP in FY:1 compared with.% y-t-d and the FY:13 outcome of 3.%) and the particularly large July Eurobond, we foresee an overall surplus balance of EUR mn this year, which will allow the repayment of EUR 57.mn to the IMF and increase FX reserves by EUR 1mn to EUR.1bn, covering 5 months imports (following a decline of EUR mn in 13). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 5

7 Q1: Q: Q3: Q: Q1:9 Q:9 Q3:9 Q:9 Q1:1 Q:1 Q3:1 Q:1 Q1:11 Q:11 Q3:11 Q:11 Q1:1 Q:1 Q3:1 Q:1 Q1:13 Q:13 Q3:13 Q:13 Q1:1 Q:1 / 1/ /9 1/9 /1 1/1 /11 1/11 /1 1/1 /13 1/13 /1 1/1 / 1/ /9 1/9 /1 1/1 /11 1/11 /1 1/1 /13 1/13 /1 1/1 Albania Credit to the Private Sector and Customer Deposits (y-o-y % change) Customer Deposits Customer Deposits (FX-Adjusted) Credit to the Private Sector Credit to the Private Sector (FX-Adjusted) Loans-to-Deposits Ratios (%) FX Loans-to-FX Deposits Total Loans-to-Total Deposits NPL Ratio Loss Loans Rate (%, left scale) Doubtful Loans Rate (%, left scale) Substandard Loans Rate (%, left scale) Overall NPL Ratio (%, left scale) Nov. 3-M F -M F 1-M F 1-m TRIBOR (mid, %) ALL/EUR Sov. Spread (bps) Nov. 1-W % YTD % -Y % Stock Market F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) November 1 Customer deposits continued to slow, on the back of weak economic activity and households preference for high-yielding domestic public debt. Growth in customer deposits continued to moderate, reaching a ½-year low of.7% y-o-y in September (1.% y- o-y adjusted for FX fluctuations), down from.% y-o-y in December 13. The deceleration is attributed to weak economic activity (real GDP growth is estimated to have reached 1% y-o-y in 9M:1 against 1.% in FY:13) and large placements by households in high-yielding domestic public debt. Note that since the initiation of the cycle of monetary policy loosening in September 11, deposit interest rates have declined sharply. Indeed, in September, the 1-month T-bill rate was 15 bps higher than the 1-month deposit interest rate, which reached an all-time low of 1.% compared with 3.% a year earlier. From a currency perspective, LC-denominated deposits (representing 51% of total deposits) continued on their downward trend, declining by 1.7% y-o-y in September against a rise of.1% y-o-y in December, while FC-denominated deposits continued on their upward trend, started in January, increasing by 3.% y-o-y in September against a rise of.% y-o-y in December. Importantly, the pick-up in FCdenominated deposits since the beginning of the year was largely supported by the retail segment (contributing 7% to the increase in September), reflecting a slight recovery in workers remittances from Greece and Italy (hosting the bulk of Albanian migrants -- around 1mn) after consecutive years of decline (they had reached a trough of 5.1% of GDP on a 1-month rolling basis in Q:13, down from 9% of GDP in Q:9). Credit activity recovered moderately, underpinned by easing credit standards by banks. Private sector credit growth rebounded to.1% y-o-y in September from a recent trough of -.% y-o-y in April and -1.% y-o-y in December 13. Specifically, corporate lending, amounting to 7% of total loans, was the engine of credit activity during the past 5 months, increasing by.7% y-o-y in September, while retail loans remained broadly flat. This positive trend reflects easing credit standards by banks, in anticipation of a significant improvement in their asset quality, as the Government is set to clear its accumulated arrears (unpaid bills to corporates and VAT refunds), amounting to 5.3% of GDP by end-1, with the help of the IMF and the WB. Note that the repayment of arrears began in March and reached EUR 15mn or 1.% of GDP in 9M:1 (7% of the envisaged amount for this year). From a currency perspective, the LC component (representing 37% of total loans) accounted for 5% of the improvement in credit activity since the beginning of the year. The FC component has been contained, due to banks reluctance to grant FX lending to unhedged borrowers (growth of FC-denominated loans to households plunged deeper into the red, standing at -.9% y-o-y in September compared with -.1% y-o-y in December 13). Credit growth is set to reach double digits by end-15. We expect credit growth to jump from -1.% y-o-y at end-13 to % y-o-y at end- 1 and be in double digits at end-15. The rebound should be supported by: i) abundant bank liquidity and non-reliance on foreign financing (ratios for total loans-to-total deposits and FX loans-to-fx deposits at just 5% and 9%, respectively, in April); and more importantly ii) a further easing of credit standards by banks, on the back of a sharp improvement in their asset quality. Indeed, the NPL ratio should decline significantly by end-1, mainly on the back of the envisaged clearance of the Government s accumulated arrears, after having stabilised at c. % during the past quarters. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

8 Retail Trade Construction Agricultural Production Industrial Production Q1 11 Q 11 Q3 11 Q 11 Q1 1 Q 1 Q3 1 Q 1 Q1 13 Q 13 Q3 13 Q 13 Q1 1 Q 1 Q3 1 Ukraine Contribution to Real GDP Growth pps GDP (y-o-y, % change) -1-1 NBG Forecast GDP excluding agriculture (y-o-y, % change) services construction industry agriculture NBG estimates Conjunctural Indicators pps Nov. 3-M F -M F 1-M F 1-m KIUAH (%) UAH/USD Sov. Spread (1, bps) Nov. 1-W % YTD % -Y % PFTS F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal.* (% GDP) *Consolidated budget, including Naftogaz Q1:1 Q:1 Q3:1 Growth Rate, % Donetsk and Luhansk Rest of Ukraine Ukraine Contribution to Total Growth, pps Donetsk and Luhansk Rest of Ukraine Growth Rate, % Donetsk and Luhansk Rest of Ukraine Ukraine Contribution to Total Growth, pps Donetsk and Luhansk Rest of Ukraine Growth Rate, % Donetsk and Luhansk Rest of Ukraine Ukraine Contribution to Total Growth, pps Donetsk and Luhansk Rest of Ukraine Growth Rate, % Donetsk and Luhansk Rest of Ukraine Ukraine Contribution to Total Growth, pps Donetsk and Luhansk Rest of Ukraine November 1 Tensions heighten as pro-russian separatists hold elections ahead of schedule. According to the September 5 th peace plan, local elections were due to be held in Donetsk and Luhansk under the auspices of Kiev on December 7 th. However, pro-russian separatists held these elections on November nd (7 weeks earlier than planned), without voter lists and international observer presence, casting doubts over their fairness. The election was condemned by the West as illegal. However, according to Russia, it provided the (incumbent) pro-russian separatist leadership (that won a landslide victory) a legitimate mandate to negotiate with Kiev. In an effort to cancel the results of the November nd elections and hold new polls organised by Ukraine, President, P. Poroshenko, pledged to provide the status of special economic zone to Donetsk and Luhansk, while threatening to withdraw the law granting temporarily broader autonomy, and freeze financing. More worrying, the Minsk peace agreement is in further jeopardy, following recent accusations by NATO that Russia has sent troops and heavy artillery to pro-russian separatists in recent days (according to Bloomberg). The decline in economic activity accelerated to.1% y-o-y in Q3:1. The pace of real GDP contraction accelerated slightly to 5.1% y-o-y in Q3:1 from -.% in Q:1 and -1.% in Q1:1, albeit far less than consensus and our pessimistic forecasts of -11.1% and -7.1%, respectively. These projections reflect estimates of the impact from the significant escalation of military operations against pro-russian separatists in the heavily-industrialised eastern regions in July-August. The better-than-expected Q3:1 real GDP growth is attributed to stronger-than-anticipated agricultural output. Excluding agriculture, the decline in real GDP reached -1.9% y-o-y in Q3:1. The impact from the escalating conflict in eastern regions affected all sectors, excluding agriculture. We estimate that growth in the industrial sector slipped deep into negative territory. In fact, industrial production fell by 1.% y-o-y in Q3:1 -- more than three times the decline in Q:1 (of.3%), largely due to the reduction in production in Donetsk and Luhansk, due to damages in infrastructure and the massive outflow of the population. Note that industrial production in these regions (accounting for ¼ of total industrial production) plunged by 5% y-o-y in Q3:1 against a decline of 11% in Q:1. Industry was also hit by spillovers to the rest of Ukraine (where the decline in industrial production also accelerated), weaker exports due to deteriorating relations with Russia (accounting for 5% of exports), the collapse in business confidence and scarce financing. The services sector is also estimated to have been hit hard by the intensification of fighting, due to a sharper decline in the trade and transportation subsectors, as well as retail trade, especially in the east. Indeed, retail trade in Donetsk and Luhansk -- accounting for ¼ of retail trade -- plummeted by 5% y-o-y in Q3:1 against a drop of 15% in Q:1 compared with a significantly milder decline of 9.5% in Q3:1 and.5% in Q:1 in the rest of Ukraine. The primary sector was likely the only growth driver in Q3:1. In fact, agricultural production surged by 5% y-o-y against a drop of % in H1:1, due not only to strong base effects (as heavy rains delayed the summer harvest in 13), but also a bumper harvest this year (against an initially-expected marginal decline). Activity to deteriorate at a faster pace in Q:1, leading to a FY:1 contraction of %. Delays in restoring damaged infrastructure and, more importantly, a strong base effect from the surge in agricultural production in Q:13 (37% y-o-y) should weigh heavily on activity in Q:1. Overall, we now expect a milder fall of % in FY:1 (against -.5% previously) due to a better-than-expected FY:1 harvest. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 7

9 Cyprus 1 Sources of Financing (EUR mn) Total Financing Sources,33 Domestic Financing Source 1 Official Financing Source,333 IMF 333 ESM, of which released so far 9 IMF 17 ESM 75 Source: IMFCountry Report, N. 1/1, July 1 Balance of Payments (% of GDP) FY:13A H1:13A H1:1A FY:1F Current Account Balance Trade Balance Exports Imports Services Balance Income Balance Transfers Balance Capital & Financial Account (excluding IMF) FDI Other Investments Errors & Omissions Overall Balance Troika Disbursments Change in Reserves (+ denotes increase ) External Financing (EUR bn) 13E 1F 15F Financing Needs Current Account Deficit.5.7. Amortisations + Other Financing Sources FDI...3 Loans & Other External Financing Balance IMF-EU..5. Change in FX Reserves... 7 Nov. 3-M F -M F 1-M F 1-m EURIBOR (%) EUR/USD Sov. Spread (, bps) Nov. 1-W % YTD % -Y % CSE Index F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) November 1 The mortgage foreclosure legislation was brought into line with the terms of the MoU, paving the way for the disbursement of the sixth tranche of Troika financial assistance. The Cypriot Supreme Court declared, on October 31 st, that four legislative amendments limiting the scope of the basic mortgage foreclosure law were unconstitutional. The four amendments -- deemed as non-compliant with the requirements of the MoU by the Troika were rejected by President Anastasiades and referred to the Supreme Court to rule on their constitutionality. Specifically, they stipulate that: i) distressed borrowers with non-performing housing loans up to EUR 35k would be allowed to apply for court-ordered protection against foreclosure; ii) foreclosing on properties would relieve small borrowers of any further obligation, even if the property s auctioned value does not cover the outstanding loan; iii) guarantors will be relieved of any obligations after the property is sold; and iv) the implementation of the basic foreclosure law will be linked to an insolvency framework, which is not expected to come into effect before end-year. Following the Eurogroup meeting of November th, President J. Dijsselbloem welcomed the progress that Cyprus has made in putting in place an effective legal framework for private debt restructuring and added that should now enable us to move forward with the process of concluding the fifth review. We expect the sixth tranche of financial assistance, worth EUR 3mn (.% of GDP, EUR 35mn from the ESM and EUR mn from the IMF) to be released soon. The current account deficit (CAD) widened by. pps y-o-y in H1:1, on the back of a sharp deterioration in the trade deficit. The CAD rose to.% of GDP in H1:1 from % in H1:13, mainly due to a rebound in imports. Indeed, imports of goods rose by 1 pp y-o-y to 1.% of GDP in H1:1, on the back of the milder contraction in domestic demand (-1.% y-o-y in H1:1 compared with -9.% y-o-y in H1:13), more than offsetting a moderate increase in exports (by. pps y-o-y to 7.5% of GDP in H1:1). Although significantly improving, the capital and financial account (CFA) balance fell short of the CAD in H1:13 and the resulting gap was covered by the Troika. The CFA balance (excluding Troika support) improved significantly in H1:1 (up 1.7 pps of GDP y-o-y to a surplus of.9% of GDP), mainly due to a significant improvement in net FDI inflows (up 11.5 pps y-o-y to 1% of GDP in H1:1), reflecting a base effect from last year s large investments abroad by Cypriot-based companies. The CFA surplus, however, fell short of the CAD in Q:13 and the bulk of the resulting gap was filled by financial assistance from the Troika (EUR 3mn or 1.% of GDP). The decline in fuel prices should contain the widening of the CAD during the remainder of 1. Despite the easing pace of contraction in economic activity, the trade deficit is set to deteriorate at a slower pace in H:1, in line with the decline in global energy prices and the island s high dependence on energy imports (around 3% higher than the euro area average). Under the assumption that the average price of Brent oil would moderate to EUR 7 per barrel in H:1 from EUR in H:13, we expect the CAD to narrow by.3 pps of GDP y-o-y in H:1. Overall, we see a widening of the CAD to % in 1 from 3% in 13. Projecting: i) higher net FDI inflows (.9% of GDP against.1% in 13); and ii) an unchanged blended rollover rate of maturing external debt of 9% (excl. the Troika disbursements), the external financing gap should stand at EUR.5bn (against a gap of EUR.bn in 13). This gap will be covered by financial assistance from the Troika (EUR.bn with the ESM and EUR.3bn from the IMF against a respective EUR.bn from the ESM and EUR.bn from the IMF in FY:13). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

10 Q1:9/1 Q:9/1 Q3:9/1 Q:9/1 Q1:1/11 Q:1/11 Q3:1/11 Q:1/11 Q1:11/1 Q:11/1 Q3:11/1 Q:11/1 Q1:1/13 Q:1/13 Q3:1/13 Q:1/13 Q1:13/1 Q:13/1 Q3:13/1 Q:13/1 Q1:1/15 Q:1/15 Q3:1/15 Q:1/15 1/ /9 /9 1/9 /1 /1 1/1 /11 /11 1/11 /1 /1 1/1 /13 /13 1/13 /1 /1 1/1 1/ /9 /9 1/9 /1 /1 1/1 /11 /11 1/11 /1 /1 1/1 /13 /13 1/13 /1 /1 1/1 Egypt , 5, 5, 5,,,,,, 3, FX Reserves & Months of Imports of GNFS FX Reserves (monthly change, USD bn, lhs) Months of imports of GNFS (rhs) FX Reserves & Foreign Exchange Rate FX Reserves (USD bn, lhs) EGP : USD 1 (rhs) Critical level Suez Canal Receipts (-Q Rolling Sum, Level (left scale) USD bn) Forecast y-o-y % change (right scale) , 7,,,,,, 5, 5, 5, Nov. 3-M F -M F 1-M F 1-m CAIBOR (%) EGP/USD Sov. Spread (. bps) Nov. 1-W % YTD % -Y % HERMES /1 1/13 13/1E 1/15F 15/1F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) x -. Fiscal Bal. (% GDP) November 1 FX reserves remained broadly unchanged, for a fourth successive month, at the critical level of 3 months of imports, mainly on the back of continued assistance from Arab countries. Despite the repayment of USD.5bn to Qatar, FX reserves remained broadly unchanged in October from a month earlier at USD 1.9bn (or 3.1 months of imports of GNFS). This positive performance likely reflects not yet disclosed free shipments of oil from the country s firm backers (Saudi Arabia, Kuwait, and the UAE) and, to a lesser extent, lower imports, on the back of curtailed access to foreign currency funding. Recall that the UAE has pledged that an unspecified part of petroleum products to be exported to Egypt over a 1-year period starting from September (worth USD.7bn) will be in the form of grants. Note that, since the beginning of the political turmoil in January 11, FX reserves have more than halved, declining by USD 19.1bn from a high of USD 3bn (7. months of imports), despite the large external assistance of c. USD 7bn from oil-rich Arab countries (Kuwait, Qatar, Saudi Arabia, the UAE and Libya) and Turkey. Indeed, without such assistance, FX reserves would have been depleted long ago. Going forward, we expect FX reserves to increase in 1/15, despite the fact that Egypt must: i) return an additional USD.5bn of maturing debt to Qatar this month (November); and ii) pay an instalment of USD.7bn to the Paris Club in January 15. These repayments should, however, be more than fully offset mainly through continued bilateral assistance from Saudi Arabia, Kuwait and the UAE, which regard Egypt as a strong ally in the region-wide struggle against political Islam. Recall that following Mursi s removal from power, these countries granted the Interim Government substantial assistance (grants in cash, free oil shipments and deposits in the CBE) in FY:13/1, totalling USD 1bn (.1% of GDP), which had not only covered the FY:13/1 external financing gap (around 1bn), but also led to the first annual increase in FX reserves in 3 years (up USD 1.7bn to USD 1.7bn). Overall, we foresee FX reserves ending the FY:1/15 at around USD 1bn (or the critical level of 3 months of imports). Suez Canal receipts (SCR) likely reached their peak in Q1:1/15 (July-September) on a -quarter rolling basis. SCR, one of Egypt's main foreign currency earners -- along with tourism, oil & gas exports, and workers remittances increased by 1.% y-o-y in USD terms in Q1:1/15 against rises of.7% y-o-y in Q:13/1 and.% in FY:13/1. This improvement is attributed to an acceleration in the world trade volume (up.7%, 3.%, and 5.1% respectively, in 13, 1 and 15, according to the latest IMF estimates -- October 1 WEO). As a result, the -quarter rolling SCR reached USD 5.bn (1.% of GDP) -- its highest ever level. Looking ahead, we expect the positive trend in SCR to reverse course in the current quarter (Q:1/15), due to the sharp decline in global oil prices. Indeed, SCR highly depend on the value of the freight carried by oil tankers using the canal. A simple regression of SCR on the Brent price, covering the period January -September 1, shows that a USD 1 decline in the Brent barrel price should result in a.9% decline in SCR. Under our baseline scenario, assuming an average Brent barrel price of USD in Q-Q: USD lower than in Q- Q:13/1 -- we foresee SCR declining by 7% y-o-y and.% y-o-y, respectively, in Q-Q:1/15 and FY:1/15. Should our forecast materialise, SCR would: i) drag down overall GDP growth by.1 pp in FY:1/15 (after having contributed to it by a similar amount in FY:13/1), and ii) see its contribution to FY:1/15 fiscal revenue and FX reserves moderating by USD 15mn (following an increase of USD mn in FY:13/1). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 9

11 Strategy and Economic Research Division Eolou Street 1 3 Athens, Greece Publications available at South Eastern Europe & Mediterranean Emerging Market Economies - Weekly Report South Eastern Europe & Mediterranean Emerging Market Economies - Quarterly Chartbook South Eastern Europe & Mediterranean Emerging Market Economies - Macroeconomic & Financial Indicators Update Greece: Greek Macro View Sectoral Studies - Sectoral Reports Sectoral Studies - Survey of Greek Small and Medium Enterprises Global Economy & Markets - Weekly Roundup