Economic Analysis Division Emerging Markets Analysis

Transcription

1 Bulgaria EU FYROM EMDE* Greece 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 7 December TURKEY Economic activity is set to contract in Q:, after having experienced a sharper-than-expected slowdown in Q: The CBRT is likely to keep its key policy rate unchanged at.% and maintain a tightening bias at least until end-h:9 ROMANIA The Romanian economy gained further momentum in Q: Economic growth is set to ease slightly in FY:9 NBG - Economic Analysis Division Emerging Markets Analysis Head: Michael Loufir : + : mloufir@nbg.gr 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 End-year Headline Inflation (%, F) * EMDE: Emerging Market & Developing Economies Fiscal Balance (% of GDP, F) * EMDE: Emerging Market & Developing Economies Current Account Balance (% of GDP, F) BULGARIA The Bulgarian economy lost momentum in Q: GDP growth is set to rebound in FY:9, fueled by a looser fiscal stance The labour market is showing signs of stagnation SERBIA The fiscal policy stance turned expansionary in 9M: The 9 Budget is set to meet its deficit target of.% of GDP FYROM GDP growth rebounded to.% y-o-y in 9M: from -.% a year earlier The -quarter rolling current account balance turned into a surplus of.% of GDP in Q: from a deficit of.% in Q:7, due to a favourable balance of goods & services The Central Bank lowered its key rate for the third time this year, by bps, to an all-time low of.% ALBANIA The fiscal balance improved in M:, due to expenditure restraint The 9 Budget is set to meet its deficit target of.9% of GDP CYPRUS Economic activity posted solid growth of.7% y-o-y in Q: The European Commission for Competition (ECC) approved the revised subsidy scheme Estia -- set to provide support to vulnerable distressed borrowers with loans secured with their primary residence EGYPT Fiscal consolidation to continue for a third consecutive fiscal year in /9, but at a slower-than-envisaged pace due to a higher-thanbudgeted interest bill SDR-denominated Suez Canal receipts are set to post solid growth for a second consecutive fiscal year in /9, provided there is no escalation in the global trade war APPENDIX: FINANCIAL MARKETS * EMDE: Emerging Market & Developing Economies Please see disclosures on page

2 /7 /7 /7 7/7 /7 9/7 /7 /7 /7 / / / / / / 7/ / 9/ / / /7 /7 /7 /7 /7 7/7 /7 9/7 /7 /7 /7 / / / / / / 7/ / 9/ / / / Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q:7 Q:7 Q: Q: Q: 7 December Turkey BB- / Ba / BB (S&P/ Moody s / Fitch) 7 Contributions to Annual Real GDP Growth (pps) Private Consumption Government Consumption Gross Fixed Capital Formation Change in Stocks Net Exports GDP y-o-y % change Interest Rates (end of period, %) CBRT O/N Lending Rate CBRT O/N Borrowing Rate CBRT Effective Funding Rate Interbank Market Overnight Rate CBRT -week Repo Rate Late Liquidity Window Lending Rate Headline Inflation Annual Inflation (%) CBRT Inflation Target Range Headline Inflation Core-C Inflation Food Inflation Dec. -M F -M F -M F -m TRIBOR (%).7... TRY/EUR.9... Sov. Spread (, bps) 7 Dec. -W % YTD % -Y % ISE 9, F 9F F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Economic activity is set to contract in Q:, after having experienced a sharper-than-expected slowdown in Q:. GDP growth moderated sharply to.% y-o-y in Q: from.% in Q:. The Q: growth rate was lower than the consensus estimate of.% and our more optimistic forecast of.% and the weakest since Q:, when a failed coup attempt against President Erdogan hit economic activity. The sharp slowdown is attributed to the currency crisis in August and the subsequent policy tightening to restore confidence. Importantly, the slowdown in economic activity in Q: was accompanied by a welcome rebalancing. Indeed, domestic demand shaved. pps off headline growth in Q:, after having contributed. pps in Q:, while net exports had seen its contribution to overall growth rising sharply to.7 pps in Q: the highest since the global financial crisis -- from.9 pps in Q:. The strong performance in net exports in Q: reflects both an acceleration in exports, mainly due to a sharp improvement in price competitiveness, and a compression in imports, reflecting limited access to external funding and weaker domestic demand. The sharp deterioration in domestic demand in Q: was broadly based, with a significant slowdown in private consumption, a decline in gross fixed capital formation and a large depletion of inventories. Government consumption was the only component that did not drag down domestic demand in Q:. Looking ahead, in view of the recent high frequency economic indicators, the ongoing tight monetary policy stance (see below), the absence of fiscal policy support and tight external financing conditions, we expect economic activity to contract in Q: (-.% y-o-y). Provided that the 9M: growth performance (.% y-o-y) is not revised, we foresee FY: GDP growth at.%. The CBRT is likely to keep its key policy rate unchanged at.% and maintain a tightening bias at least until end-h:9. Despite the sharp decline in headline inflation in November (to.% y-o-y from a -year high of.% in October) and the significant slowdown in economic activity in Q:, the CBRT maintained unchanged its central policy rate -- -week repo rate -- at.% at its December th MPC meeting. In the statement accompanying the rate decision, the CBRT noted that while developments in import prices and domestic demand conditions improved the inflation outlook somewhat, risks on price stability continue to prevail. Accordingly, it reiterated that a tight monetary policy stance will be maintained until the inflation outlook displays a significant improvement, and emphasized its determination to deliver further tightening, if needed. Looking ahead, barring strong political pressures for lower rates in the run-up to the March local elections, we expect the CBRT to refrain from initiating a new cycle of monetary policy loosening at least until June 9, in view of a challenging inflation outlook (headline inflation is set to remain above.% y-o-y until June 9) and tight external financing conditions. Note that, in M:, the capital and financial account did not help finance the current account deficit of USD 7.bn, as it posted a deficit of USD.bn against a surplus of USD 9.7bn a year earlier, while the two gaps were covered through large nonidentified capital inflows (errors & omissions, USD.bn) and a significant depletion of FX reserves (USD.bn or.% of end- 7 stock of FX reserves). According to our Taylor rule, assuming, inter alia, a softer inflation at end-9 (c..% y-o-y against c..% at end-), the CBRT should cut the -week repo rate by bps to.% in the last 7 months of 9. NBG - Emerging Markets Analysis Bi-Weekly Report

3 7 F 9F Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q:7 Q:7 Q: Q: Q: 7 December Romania BBB- / Baa / BBB- (S&P / Moody s / Fitch) Contribution Rates to Annual Real GDP Growth (pps) Net Exports GFCF Private Consumption GDP (excl. agriculture, %, y-o-y) Change in Stocks Public Consumption GDP (%, y-o-y) Private Consumption, Net Wages & Unemployment Net Wages (real terms, y-o-y % change, lhs) Private Consumption (real terms, y-o-y % change, lhs) Unemployment Rate (%, rhs) Real GDP Growth, Budget Deficit, Current Account Deficit & Inflation Budget Deficit (% of GDP) Current Account Deficit (% of GDP) Real GDP Growth (y-o-y % change) Inflation (y-o-y % change, aop) 7 Dec. -M F -M F -M F -m ROBOR (%).7... RON/EUR..7.. Sov. Spread (, bps) 7 7 Dec. -W % YTD % -Y % BET-BK, F 9F F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The Romanian economy gained further momentum in Q:. GDP increased by a solid.9% q-o-q s.a. in Q: following a rise of.% in Q: and a weak.% in Q:. As a result, the annual pace of economic expansion picked up slightly to.% y-o-y in Q:, bringing 9M: growth to.% y-o-y, still below its 9M: outcome of 7.%. Private consumption remained the main engine of growth in Q:. Private consumption continued to expand at a strong pace (up.% y-o-y for a nd consecutive quarter in Q:), sustained by higher agricultural income (the sector added. pps of GDP to overall growth). Note that, albeit having slowed significantly from the doubledigit rates witnessed last year, growth in private consumption remains solid, reflecting tight labour market conditions (the LFS unemployment rate currently stands at a historical low of.%), strong consumer confidence and the loose incomes policy. Regarding the latter, public wages rose by % in January, with certain sub-sectors receiving another % increase in March, and pensions were raised by % in July. The PIT was also cut by pps to %. The impact of the loose incomes policy on disposable income was moderated, however, by the shift in the bulk of the social security contributions burden onto employees as of the beginning of the year. Worryingly, fixed investment continued to drop in Q: (down.% y-o-y following a decline of.% in Q:). Note that the (-quarter rolling) investment-to-gdp ratio fell to a low of.% in Q: from a pre-crisis high of.%. This deterioration was more than offset, however, by the build-up in inventories (incl. statistical discrepancies, adding a sizeable. pps to overall growth in Q:). Against the backdrop of strong domestic demand, net exports remained a drag on overall growth in Q: (shaving.7 pps off headline growth against. pps in Q:). Economic growth is set to ease slightly in FY:9. Looking ahead, in view of negative base effects and better absorption of EU funds, fixed investment should gain momentum, driven by the public sector. At the same time, despite gradually easing inflation, private consumption is expected to slow, as nominal wage growth moderates on the back of a far more modest incomes policy (pensions are due to rise by % in September, while public sector wages are expected to be frozen at their current levels). Reflecting the economic imbalances, net exports are due to remain a large drag on overall growth. All said, assuming normalization in agricultural production, we see FY:9 GDP growth easing to.% from.% in FY: (an implied.% in Q:). Worryingly, overheating concerns remain, with GDP growth well above its long-term potential (of c..%) for a 7 th consecutive year and the current account deficit up sharply (to a projected.% of GDP in FY:9 from a low of.% in FY:). At the same time, fiscal policy remains expansionary (under no policy change, the budget deficit is set to widen to.9 of GDP in FY:9 -- above the critical EU threshold of.% -- from.% in FY: and a low of.% in FY:). Against this backdrop, the NBR appears to be significantly behind the curve. Our Taylor rule estimates suggest that rates should be raised to.% from.% currently, to address these challenges. However, with headline inflation projected to fall within its target range (.±%), the authorities appear reluctant to proceed with aggressive rate hikes, especially in the context of limited or no tightening by other central banks in the region. Overall, we expect the NBR to continue to tighten its stance gradually, raising its key rate by another bps to.% in FY:9 (following 7 bps of hikes in FY:). NBG - Emerging Markets Analysis Bi-Weekly Report

4 Q: Q: Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: 7 F 9F Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q:7 Q:7 Q: Q: Q: 7 December Bulgaria BB+ / Baa / BBB- (S&P / Moody s / Fitch) Contribution Rates to Annual Real GDP Growth (pps) Private Consumption Public Consumption GFCF Change in Inventories Net Exports Real GDP (y-o-y % change) Real GDP Growth & Fiscal Impulse Fiscal Impulse/Contraction (pps of GDP, lhs) Real GDP (y-o-y % change, rhs) Labour Market Indicators (-quarter m.a.) Employment Rate (%, lhs) Participation Rate (%, lhs) Unemployment Rate (%, rhs, inverted scale) 7 Dec. -M F -M F -M F Base Interest Rate (%).... BGN/EUR Sov. Spread (, bps) 9 7 Dec. -W % YTD % -Y % SOFIX F 9F F Real GDP Growth (%) Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The Bulgarian economy lost momentum in Q:. The annual pace of economic expansion slowed to.7% y-o-y (up.7% q-o-q s.a.) in Q: from.% (up.% q-o-q s.a.) in Q:, bringing 9M: growth to.% y-o-y against.% in 9M:7. Private consumption continued to provide the main impetus to economic growth, while investment decelerated further. Notwithstanding the stagnation in the labour market (see below), private consumption expanded at a solid pace in Q: (up 7.% y-o-y following.% in Q:), sustained by the pick-up in consumer lending (up 9.9% y-o-y in real terms in Q: against just.% in Q:7) and wealth effects (housing prices gained % in real terms over the past years). On the other hand, amid poor business confidence, fixed investment weakened in Q: (up.% y-o-y against 7.% in Q:), despite higher public investment (up. pps of GDP y-o-y). Worryingly, net exports remained a large drag in Q: (subtracting.7 pps from headline growth against. pps in Q:), due, inter alia, to weaker external demand from Bulgaria s non-eu trade partners. The latter is attributed to the appreciation of the EUR against the USD (up.% y-o-y in real terms on average in 9M:). GDP growth is set to rebound in FY:9, fueled by a looser fiscal stance. We expect private consumption to strengthen in FY:9, reflecting a looser incomes policy (public wages are due to rise by % in January, with the education sector receiving an extra % raise, and pensions will rise by.% in July) and its spillover to the private sector. Fixed investment is also set to gain momentum, driven by the public sector (according to the FY:9 budget, public investment is due to rise by. pps of GDP). At the same time, favorable domestic liquidity conditions (the loan-to-deposit ratio stands at 7%) and low interest rates should sustain private investment. Against the backdrop of strong domestic absorption, net exports should remain a drag on overall growth, albeit smaller compared with FY:, mainly due to positive base effects. All said, we see FY:9 GDP growth improving to.% from.% in FY: -- above its long-term potential of c..%. The labour market is showing signs of stagnation. The unemployment rate fell by. pps y-o-y to a low of.% in Q:, a 9 th consecutive quarter of decline. However, for a nd consecutive quarter, the improvement in the unemployment rate was due to the decline in the number of unemployed seeking work, as suggested by the easing participation rate (down. pps y-o-y to.%), rather than higher employment. Indeed, after a strong rise in -7 (at a CAGR of.9%), employment has begun to decline, albeit slowly (down.% y-o-y for a nd consecutive quarter in Q:). In this context, wage pressures eased (up.% y-o-y in real terms in Q: against hikes of.% in H: and 7.% in FY:7). Albeit slowing, real wage growth still surpasses productivity gains (c..% p.a. over the past years). Structural problems cloud the outlook for the labour market. Long-term unemployment remains high (% of people have been unemployed for months or more in Bulgaria -- the nd highest in the EU after Greece), reflecting labour market rigidities and skills mismatches. At the same time, the labour force is shrinking due to migration and ageing (down c..% p.a. over the past years). In this context, we expect the labour market to remain stagnant in FY:9, with employment falling marginally against broadly no change on average in FY: and the unemployment rate stabilising at c..%. As a result, and in view of the looser incomes policy, wage pressures are set to persist in FY:9. However, this is still not a major concern. Indeed, with total costs being / th of the EU average, competitiveness remains strong as reflected in the large current account surplus (see table). NBG - Emerging Markets Analysis Bi-Weekly Report

5 7 December Serbia BB / Ba / BB (S&P / Moody s / Fitch) The fiscal policy stance turned expansionary in 9M:. The cumulative consolidated fiscal surplus moderated by. pps y-o-y to.% of GDP in 9M:, reflecting both lower revenue (by. pps of GDP y-o-y) and higher expenditure (up. pps of GDP y-o-y). Consolidated Fiscal Balance (% of GDP) The weaker revenue performance in 9M: resulted mainly from: * F 7 9M:7 9M: i) lower excises (down by. pps of GDP y-o-y in 9M:); and ii) lower Budget NBG VAT revenue (by. pp of GDP y-o-y), reflecting postponed 7 Revenue refund payments (of RSD bn, or.% of GDP) to January. Tax Revenue On the other hand, the rise in spending in 9M: resulted from: PIT..... CIT i) higher capital expenditure (up. pps of GDP y-o-y), in view of the VAT country s large infrastructure needs; and ii) a rise in personnel Excises expenditure (up by. pps of GDP y-o-y), partly due to the targeted Customs % hike in public sector wages (with a fiscal impact of. pps of Other taxes..... GDP in FY:). The rise in outlays in 9M: was, however, held back Soc. Contrib by lower interest payments (down. pps of GDP y-o-y), due to the Non-Tax Rev decline in public debt, lower interest rates and a stronger RSD. Grants..... The FY: deficit is set to overperform its target for a th Expenditure successive year by a wide margin. The Budget envisages an Current Exp expansionary fiscal stance, targeting a fiscal deficit of.7% of GDP -- Personnel Goods & Services pps above the FY:7 outcome. In our view, the y-t-d performance Subsidies..... and recent trends suggest that the deficit is set to overperform its Social Assist target. In fact, we expect a slight fiscal tightening in Q:, following an o/w Pensions expansionary fiscal stance in 9M:. Specifically, we foresee overall Other revenue weakening by. pps of GDP y-o-y in Q:, due to: Int. Payments i) weaker non-tax revenue, reflecting large once-offs in 7; ii) lower Capital Exp corporate income tax that reached a record high in 7; and iii) a Activated Guarant milder boost from collection efficiency (that supported the revenue Net Lending..... performance in FY:7). On the other hand, we expect expenditure to Fiscal Balance decline by.7 pps of GDP y-o-y in Q:, despite the abovementioned public sector wage hikes and a % increase in pensions Primary Balance (with a fiscal impact of. pps of GDP in FY:). The decline in expenditure in Q: should result from the continued drop in interest payments and a base effect from (once-off) pension and public sector wage bonuses (of.% of GDP at end-7). 77 Overall, we see the FY: fiscal balance posting a surplus (for a nd consecutive year) of.% of GDP -- overperforming its deficit target of 7.7% of GDP and resulting in a fiscal impulse of. pps of GDP (for 7 the first time in years). The expected FY: fiscal surplus, along with the repayment of a USD.bn Eurobond (or.% of GDP) and the early repayment of the EUR - 7.mn (.% of GDP) London Club debt, should help reduce the Other (rhs) - public debt-to-gdp ratio for a rd successive year to.% of GDP Exchange Rate Depreciation (rhs) Real Interest Rate (rhs) from.7% in FY:7 and a -year high of 7.% at end-. Real GDP Growth (rhs) 7 Primary Deficit (rhs) - The 9 Budget is set to meet its deficit target of.% of GDP. Public Debt (lhs) Change in Gross Public Debt (rhs) The 9 Budget envisages an expansionary fiscal stance, targeting a - 7 F 9F F fiscal deficit of.% of GDP --. pp above the expected FY: 7 Dec. -M F -M F -M F outcome. The FY:9 deficit target is attainable, in view of both the -m BELIBOR (%) FY:9 tax revenue and expenditure growth targets (of.% and.%, RSD/EUR.... respectively). Note that the FY:9 tax revenue growth target -- adjusted Sov. Spread (, bps) for the abolition of the.7% unemployment benefit contribution (with a fiscal impact of. pps of GDP in FY:9) -- is broadly in line with our BELEX- 7 Dec. -W % YTD % -Y % nominal GDP growth forecast of.7%, while the FY:9 expenditure growth target is inflated by the impact of the abolishment of the 7 F 9F F temporary pension reductions (introduced in ) and a 7%-% rise Real GDP Growth (%)..... in public sector wages (each with an estimated fiscal impact of.% of Inflation (eop, %)..... GDP in FY:9). Importantly, and despite the expansionary fiscal Cur. Acct. Bal. (% GDP) stance, the public debt-to-gdp ratio is set to ease further to c..% Fiscal Bal. (% GDP) of GDP in FY:9. NBG - Emerging Markets Analysis Bi-Weekly Report *The rise in spending in FY: is a result of large fiscal space following stronger-than-expected consolidation under the IMF programme in - 7 (that led to a structural adjustment of. pps of GDP against. pps projected under the programme). Contributions to Public Debt (pps of GDP)

6 / / / / / / / / / / / / / /7 /7 /7 / / / 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: 9M:9 9M: 9M: 9M: 9M: 9M: 9M: 9M: 9M:7 9M: 7 December F.Y.R.O.M BB- / NR / BB (S&P / Moody s / Fitch) GDP growth rebounded to.% y-o-y in 9M: from -.% a year earlier. Economic activity expanded by a solid.% y-o-y in 9M:, following a small decline of.% in 9M:7 and a subdued rise of.% in FY:7. The main driver of growth in 9M: was external demand. Contributions to Annual Real GDP Growth (pps) Indeed, net exports contributed. pps to headline growth, reflecting a strong export performance (up.9% y-o-y), mainly on the back of increased production in industrial zones and a subdued rise in imports (up.7% y-o-y). On the other hand, domestic demand was a drag on overall growth in 9M:, as strengthening private and government consumption were more than offset by a drop in gross capital - - formation (which includes gross fixed capital formation, changes in - - inventories and statistical discrepancies). The latter subtracted a - - sizeable. pps from 9M: growth, mainly due to a sharp decline in - - public investment, reflecting delays in the clearance of administrative obstacles to the resumption of key infrastructure projects. Private Consumption Gross Capital Formation Looking ahead, in view of recent trends, we expect the economic Government Consumption Net Exports recovery to strengthen in Q: (up.% y-o-y from.% in 9M:), GDP (y-o-y %) which will bring FY: growth to a -year high of.%. For 9, GDP Current Account Balance growth is set to accelerate to.%, mainly on the back of firming (-Quarter Rolling Sum, as % of GDP) domestic demand. The latter should reflect strengthening confidence in the domestic economy, with the finalisation of the name change agreement with Greece in Q:9, which will open the door for the country to start EU accession talks and join NATO. The -quarter rolling current account balance (CAB) turned into a - surplus of.% of GDP in Q: from a deficit of.% in Q:7, - - due to a favourable balance of goods & services. The latter - - improved by. pps of GDP y-o-y in 9M:, as a sharp rise in exports - - (up.% y-o-y) outpaced that of imports (up 9.% y-o-y). The positive CAB performance would have been even stronger had energy imports not increased (up. pps of GDP y-o-y), in line with global oil Trade Balance Services & Income Transfers CAB (excl. Energy) price developments. Current Acc Balance (rhs) The capital & financial account (CFA) balance posted a surplus of.% of GDP in 9M: against a deficit of.9% in 9M:7. The Headline Inflation & Nominal Policy Rate (%) improvement was due to a sharp rise in (net) portfolio investments (up. pps of GDP y-o-y), following the placement of a EUR.bn (.7% of GDP) Eurobond in January, and a significant rise in net FDI inflows (up. pps of GDP y-o-y), reflecting increased investor confidence stemming from the country s improved economic prospects. As a result, and accounting for valuation effects, FX reserves rose by EUR 7mn y-t-d to EUR.7bn in September (. months of imports). The Central Bank lowered its key rate for the third time this year, - - by bps, to an all-time low of.%. The NBRM proceeded with an - - additional bp cut to its key -day CB bill rate at its December MPC meeting, to a record low of.%, bringing total cuts to bps since the initiation of the cycle of monetary policy easing in December. Headline Inflation Rate -Day CB Rate The rate cut was motivated by: i) positive inflation developments 7 Dec. -M F -M F -M F (headline inflation is projected to ease to.9% y-o-y in December from.% a year earlier); ii) a still negative output gap (-.% on a - quarter rolling basis in Q:); iii) the absence of pressures on external accounts; and iv) continued fiscal prudence. Looking ahead, in view of a persistently negative, albeit closing, output 7 Dec. -W % YTD % -Y % gap and relatively stable inflation (up slightly to.% y-o-y at end-9 from.9% at end-) and barring a political crisis ahead of the April 7 F 9F F Presidential elections, we expect the CB to maintain its central rate unchanged at least until Q:9, when the ECB and most neighbouring countries are set to embark on a new cycle of monetary policy tightening. Overall, we expect the CB to hike its policy rate by - bps to.7-.% in Q:9. NBG - Emerging Markets Analysis Bi-Weekly Report -m SKIBOR (%).... MKD/EUR.... Sov. Spread (. bps) 9 MBI,7... Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP)

7 7 December 7 7 Albania B+ / B / NR (S&P / Moody s / Fitch) Consolidated Fiscal Balance (% of GDP) 7 M:7 M: Revised Budget Contributions to Public Debt (pps of GDP) NBG F Revenue Tax Revenue o/w VAT Grants Non-Tax Rev Expenditure Current Exp o/w interest..... Capital Exp Net Lending Contingency..... reserves Fiscal Bal Primary Bal Consolidated Fiscal Balance (% of GDP) 7 Revised Budget NBG E 9 Budget NBG 9F Revenue Tax Revenue o/w VAT Grants Non-Tax Rev Expenditure Current Exp Capital Exp Net Lending Contingency..... reserves Fiscal Bal Primary Bal Primary Deficit (rhs) Real Interest Rate (rhs) Real GDP Growth (rhs) Other (rhs) stock arrears (rhs) Public Debt (lhs) Change in Gross Public Debt (rhs) 7 F 9F F 7 Dec. -M F -M F -M F -m TRIBOR (mid, %) Therefore, meeting the FY:9 fiscal deficit target will require, once again, a significant under-execution of spending. In fact, in order to compensate for the expected revenue shortfall, FY:9 expenditure 7 Dec. -W % YTD % -Y % growth should be contained at.% -- below its target growth of 7.%. The achievement of the required moderate expenditure growth will be facilitated by lower-than-projected interest payments -- which were 7 F 9F F over-estimated in FY: (by. pps) and met through lower capital spending (. pps) and the saving of contingency reserves (. pps). Importantly, even with a broadly neutral fiscal stance, the public debtto-gdp ratio is set to narrow further, to a 7-year low of 7.% of GDP in FY:9. NBG - Emerging Markets Analysis Bi-Weekly Report ALL/EUR.9... Sov. Spread (bps) Stock Market Real GDP Growth (%)..... Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The fiscal balance improved in M:, due to expenditure restraint. The cumulative fiscal balance turned into a surplus of.% of GDP in M: from a deficit of.% in M:7, as lower revenue (down. pps of GDP y-o-y in M:) was more than offset by expenditure restraint (down.9 pps of GDP). The poor revenue performance resulted from: i) lower grants (down. pps of GDP y-o-y in M:); as well as ii) lower VAT and excise revenue (each down by. pps of GDP), mainly due to the ALL appreciation. The revenue performance would have been worse in M: had revenue-enhancing measures not been introduced (c.. pps of GDP in FY:, including a hike in excises on cigarette) and had the PIT and social contributions not increased, on the back of strong economic activity and tightening labour market conditions, as well as the Government s campaign against informal employment. On the other hand, the decline in expenditure in M: occurred on the back of lower net lending for the energy sector (that reflected high energy imports in FY:7, following a prolonged drought that limited hydropower production), as well as lower social transfers (each down by. pps of GDP). As a result, the -month rolling fiscal deficit shrank to.7% of GDP in October from its level of.% at end-7. Fiscal prudence to be observed in. The (revised) Budget envisages a neutral fiscal stance, targeting a deficit of.% of GDP, unchanged from the FY:7 outcome. In view of the y-t-d performance and recent trends, the FY: deficit target should be attained. In fact, we expect an expansionary fiscal stance during the rest of the year (. pps of GDP y-o-y in -M:), offsetting the tightening in M:. Specifically, we expect expenditure to rise (by. pps of GDP y-o-y in -M:), due to a strong increase in capital expenditure (up. pps of GDP y-o-y in -M:), and the payment of a bonus to pensioners (adding. pps of GDP to the fiscal deficit). Moreover, we expect revenue to remain broadly unchanged in -M: from its level in in -M:7. Overall, we see the FY: fiscal deficit at.% of GDP. Importantly, even with a neutral fiscal stance, the public debt-to-gdp ratio is set to decline further, to a -year low of 7.% of GDP in FY:. The 9 Budget is set to meet its deficit target of.9% of GDP. The 9 Budget envisages a slightly tighter fiscal stance, targeting a deficit of.9% of GDP,. pp of GDP below the expected FY: outcome. In our view, the FY:9 deficit target appears challenging, as it is based on over-estimated FY: revenue (.% of GDP against an expected outcome of 7.%). In fact, in the absence of new tax measures, we expect FY:9 revenue growth at.% y-o-y (below our nominal GDP growth forecast of.%) -- underperforming its target of.% and resulting in a revenue shortfall of.9 pps of GDP in FY:9.

8 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q:7 Q:7 Q: Q: 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 December Cyprus BBB- / Ba / BBB- (S&P / Moody s / Fitch) Economic activity posted solid growth of.7% y-o-y in Q:. The annual pace of economic expansion stood at a solid.7% y-o-y in Q:, down slightly from.9% y-o-y in H: and comparing favourably with the EU- Q: outcome of.9% y-o-y. Real GDP (y-o-y % change) The strong growth performance in Q: was driven by an across-theboard improvement in domestic demand. Indeed, gross fixed capital formation (GFCF) contributed. pps to overall growth in Q:, mainly on the back of higher mostly-imported (net) investment in shipping (see below) and double-digit growth in residential and tourism infrastructure investment. - - Moreover, both private and public consumption supported domestic - - demand in Q: (contributing.7 pps of GDP and. pps of GDP, - - respectively). The former continued to benefit from rising real disposable income, in line with strong employment growth (broadly - - unchanged at a solid.% y-o-y since the beginning of the year) and higher real wages, reflecting mainly the resumption of the Cost of Cyprus EU- Living Allowance and automatic wage increments for public sector employees last January. Government consumption saw its contribution Contributions to Annual Real GDP Growth (pps) to overall growth turning positive for the first time this year in Q:, in line with a slight easing of the fiscal policy stance. Not surprisingly, net exports were a drag on headline growth in Q: (subtracting. pps of GDP), mainly on the back of a sharp decline in exports of ships (reflecting de-registration of ships) which outpaced that of imports of ships. However, excluding ships, the drag from net - - exports on Q: overall growth was milder (. pps of GDP), mainly - - due to a weaker tourism sector, reflecting declining support from the island s main source countries -- the UK, Russia and Israel. - - Looking ahead, we expect Q: GDP growth to rebound to.% y-o-y, on the back of a supportive base effect, bringing FY: GDP growth to.% -- well above the long-term growth potential of.% for Δ Stocks & Stat. Gap. Private Consumption Gov. Consumption Net Exports a third consecutive year. For FY:9, GDP growth is set to decelerate to GFCF GDP (y-o-y %, rhs) a still strong.%, due to a normalization in GFCF and, to a lesser extent, weaker private consumption in line with increased household Revised Estia subsidy scheme Provides state financial assistance, in the form of debt debt servicing following the recent efforts to reduce banks stocks of Overview reduction subsidies, to eligible distressed borrowers non-performing exposures (see below). with loans secured with their primary residence The European Commission for Competition (ECC) approved the - Borrowers: Households and micro companies residents in Cyprus with: revised subsidy scheme Estia -- set to provide support to a) at least % of outstanding loan balance more than 9 days past due (9+ DPD) as of end-q:7, and vulnerable distressed borrowers with loans secured with their b) market value of primary residence pledged as Eligibility primary residence. Recall that, along with the privatisation of Cyprus collateral not exceeding EUR k criteria - Income: between EUR k for households with one Cooperative Bank and amendments to the foreclosure and insolvency, member and EUR k for households with at least the House of Parliament approved in mid-july an initial draft of the dependent family members (in total income brackets) - Wealth (excl. primary residence): Up to % of Estia scheme, aimed at providing financial assistance to vulnerable market value of primary residence (max EUR k) (subject to wealth and income criteria) distressed borrowers to start - Duration: max years (depends on borrower s age) - Interest rate: M Euribor + premium of.% during servicing their debt secured with their primary residence. The initial Terms & first 7 years (max.%); M Euribor +.% thereafter conditions - Subsidy: fixed at / of restructured loan installment draft of the scheme was later revised in line with the ECC s conditional that borrower is current on his obligation recommendations to address moral hazard and fairness problems (through tighter wealth and income criteria). The ECC approved the 7 Dec. -M F -M F -M F -m EURIBOR (%) revised scheme as being well-targeted, and limited in time and scope EUR/USD.... and concluded that it does not involve any state aid to borrowers. In Sov. Spread (. bps) 9 its final form, the scheme grants an annual subsidy payment amounting to ⅓ of entitled borrowers principal and interest payments CSE Index 7 Dec. -W % YTD % -Y % subject to strict performance, wealth and income criteria (see table) Estia is expected to be implemented within H:9, at an annual 7 F 9F F budget cost of EUR mn (.% of GDP in FY:9). Importantly, the Real GDP Growth (%)..... scheme will contribute to the acceleration of the reduction of banks Inflation (eop. %) high stock of non-performing exposures (standing at.9% of gross Cur. Acct. Bal. (% GDP) loans at end-h:) and thus ease pressures on banks profitability Fiscal Bal. (% GDP)..... and improve their lending capacity. 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 FY:/ FY:/ FY:/ FY:/7 FY:7/ FY:/9 FY:9/ FY:/ FY:/ FY:/ FY:/ FY:/ FY:/ FY:/7 FY:7/ FY:/9 7 December Egypt B / B / B (S&P / Moody s / Fitch) 9 7,,,,,,,, Fiscal Accounts (% of GDP) Q: Q: 7/ 7/ /9 Estimate Outcome Outcome /9 Budget General Government Gross Debt (% of GDP) Forecast Suez Canal Receipts, -Quarter Rolling Sum NBG /9 Forecast Revenue Tax Revenue Other Revenue Expenditure Wages & Salaries..... Purch. of G. & S Interest Payments Subsidies. grants & social benefits Other Expenditure..... Fiscal Balance Primary Balance in bn SDR (lhs) in USD (y-o-y % change, rhs) in SDR (y-o-y % change, rhs) in EGP (y-o-y % change, rhs) 7 Dec. -M F -M F -M F O/N Interbank Rate (%).9... EGP/USD Sov. Spread (. bps) 9 7 Dec. -W % YTD % -Y % HERMES / /7 7/E /9F 9/F Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Fiscal consolidation to continue for a third consecutive fiscal year in /9, but at a slower-than-envisaged pace due to a higherthan-budgeted interest bill. The primary fiscal balance turned into a surplus of.% of GDP in Q:/9 from a deficit of.% of GDP a year ago, as a small rise in primary expenditure (up. pp of GDP y-o-y) was more than offset by a sharp increase in revenue (up. pps of GDP y-o-y). Specifically, the strong revenue performance was mainly driven by taxes on income and goods & services (each up. pps of GDP y-o-y), reflecting stronger economic activity and better collection. On the other hand, the increase in primary expenditure reflects exclusively higher purchases of goods & services. However, the overall fiscal balance did not improve in Q:/9, posting a deficit of.9% of GDP as in Q:7/, due to higher interest payments (up. pps of GDP y-o-y). Looking ahead, we expect the primary fiscal balance to improve further during the rest of the fiscal year, mainly on the back of a sharp decline in energy subsidies following the recent correction in global oil prices. Indeed, the average price of Brent for FY:/9 is set to be in line with the Budget projection of USD 7., as its sharp rise of c..% y-o-y in Q:/9 is expected to be followed by a decline by c. 7.% y-o-y in -//9 (consensus forecast). As a result, the primary balance will reach c..% of GDP in FY:/9 in line with its target and well above the estimated FY:7/ outcome of.% of GDP. However, the envisaged consolidation of the overall fiscal balance of. pps of GDP in FY:/9 is unattainable, due to higher-thanbudgeted interest payments (by an estimated. pps of GDP), reflecting persistent higher-than-envisaged funding costs. Overall, in the absence of corrective fiscal measures, we see the FY:/9 fiscal deficit at 9.% of GDP -- above its target of.% but below the FY:7/ outcome of 9.7%. SDR-denominated Suez Canal receipts (SCR) are set to post solid growth for a second consecutive fiscal year in /9, provided there is no escalation in the global trade war. On a -quarter rolling basis, SCR continued on their upward trend for a th consecutive quarter in Q:/9, rising by.% y-o-y to an all-time high of SDR.bn, on the back of strong global trade. In fact, growth of world trade volume of goods is expected to reach.% in, after having rebounded to a -year high of.% in 7 from.% in, according to the latest IMF World Economic Outlook -- October. The strong performance of SCR in SDR terms solely reflects developments in (net) tonnage of ships crossing the Canal, as transit tolls have not changed since May. Looking ahead, barring an escalation in the global trade war, we expect SCR to continue to rise, albeit at a slower pace, during the rest of the fiscal year (ending in June 9), in view of a further slowdown in global trade in 9 (according to the latest IMF forecasts, growth of world trade volume of goods is set to decelerate further to.% in 9 from.% in ). We see SCR increasing by c..% to a record high of SDR.bn in FY:/9. Importantly, due to currency valuation effects (the SDR is set to depreciate by c..% against the EGP and c..% against the USD in FY:/9, according to consensus forecasts), the contribution of SCR to: i) budget revenue (through corporate income tax and dividends) should increase by c..% to c. EGP 7.bn (.% of GDP) in FY:/9 from an estimated EGP 7.bn (.% of GDP) in FY:7/; and ii) the current account should rise by c..% to c. USD.bn (.9% of GDP) in FY:/9 from USD.bn (.% of GDP) in FY:7/. NBG - Emerging Markets Analysis Bi-Weekly Report

10 7 December FOREIGN EXCHANGE MARKETS, DECEMBER 7 TH 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 (December 7 th ) 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 7 December MONEY MARKETS, DECEMBER 7 TH 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, DECEMBER 7 TH 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, DECEMBER 7 TH 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 //. South Africa FirstRand Bank Ltd.% ' USD BBB-/Baa //. 7 FirstRand Bank Ltd.% ' EUR NA/NA //.9 Arcelik AS.7% ' EUR BB+/NA /9/. 7 Garanti Bank.% ' USD NA/Ba /9/ 7 7. Turkiye Is Bankasi % ' USD NA/B //, Turkey Vakifbank.7% ' USD NA/Ba // TSKB.% ' USD NA/Ba //.7 9 Petkim.7% ' USD NA/B //. KOC Holding.% ' USD BB+/Ba // 7 7. CREDIT DEFAULT SWAP SPREADS. DECEMBER 7 TH 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 7 December EUR-DENOMINATED SOVEREIGN EUROBOND SUMMARY. DECEMBER 7 TH 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 //,. 9 Bulgaria.9% ' EUR BBB-/Baa /9/, Bulgaria.% '7 EUR BBB-/Baa //7,. 9 Bulgaria.% ' EUR BBB-/Baa // 9.7 Cyprus.% ' EUR BBB-/Ba //. 9 Cyprus.7% ' EUR NA/Ba //,.7 7 Cyprus.7% ' EUR NA/Ba /7/,. Cyprus.7% ' EUR NA/Ba 7//. 9 Cyprus.% ' EUR NA/Ba //, FYROM.7% ' EUR BB-/NA // 7. 7 FYROM.97% ' EUR BB-/NA /7/. FYROM.% ' EUR BB-/NA /7/ FYROM.7% ' EUR BB-/NA //. 7 Romania.% ' EUR BBB-/BBB- /9/,. Romania.% ' EUR BBB-/BBB- //,. 7 7 Romania.7% '7 EUR BBB-/BBB- 9//7,. 7 Turkey.% ' EUR NR/Ba //,. 9 Albania.7% ' Bulgaria.% ' EUR-Denominated Eurobond Spreads (December 7 th ) 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 7 December USD-DENOMINATED SOVEREIGN EUROBOND SUMMARY. DECEMBER 7 TH Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Brazil.7% ' USD NA/Ba // 7. 7 Brazil.7% ' USD NA/Ba //,7.7 Bid Yield Gov. Spread Asset Swap Brazil.7% ' USD NA/Ba //.7 Egypt.7% ' USD B/B 9//, Egypt.7% ' USD NA/B //,. Egypt.7% ' USD B/B // 7.7 Egypt 7.% ' USD NA/B //,. 9 Egypt.7% ' USD B/B //,.9 7 Egypt.% '7 USD NA/B // Romania.7% ' USD BBB-/BBB- //,. 9 Romania.7% ' USD BBB-/BBB- //,. Romania.% ' USD BBB-/BBB- //,. 7 Russia.7% ' USD BBB-/Ba //,. 7 Russia.7% ' USD BBB-/Ba /9/,. 9 Serbia.7% ' USD BB/Ba //,. 9 Serbia 7.% ' USD BB/Ba /9/,. S. Africa.7% ' USD BB/Baa /9/, S. Africa.% ' USD BB/Baa // 7. Turkey 7.% ' USD NR/Ba //,. Turkey 7.7% ' USD NR/Ba //, 7. 9 Turkey.7% ' USD NR/Ba //, Turkey.% ' USD NR/Ba //, 7.9 Turkey.7% ' USD NR/Ba //, 7. Ukraine 7.7% ' USD B-/Caa /9/,. 7 Spread Brazil.7% ' USD-Denominated Eurobond Spreads (December 7 th ) 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 7 December Level -week % change STOCK MARKETS PERFORMANCE. DECEMBER 7 TH -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 9, Bulgaria (SOFIX) China (SHCOMP), ,9, Cyprus (CSE GI) Egypt (HERMES), ,7, F.Y.R.O.M (MBI), ,, India (SENSEX), ,, Romania (BET-BK), ,7, Russia (RTS), ,7, Serbia (BELEX-) South Africa (FTSE/JSE), ,, Turkey (ISE ) 9, ,, Ukraine (PFTS) MSCI EMF , MSCI EAFE, ,7, Greece (ASE-General) Germany (XETRA DAX), ,, UK (FTSE-), ,7 7, USA (DJ INDUSTRIALS), ,, USA (S&P ), ,, Brazil (IBOV) Bulgaria (SOFIX) Equity Indices (December 7 th ) 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 ) - 9 Loss Gain NBG - Emerging Market Research Bi-Weekly Report

15 7 December 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