Economic Analysis Division Emerging Markets Research

Transcription

1 Bulgaria EU EMDE* Greece FYROM Egypt Cyprus Romania Serbia Turkey Albania Cyprus Serbia Greece Bulgaria EU Turkey Albania FYROM Romania EMDE* Egypt Cyprus Greece FYROM EU Albania Bulgaria Serbia World Romania EMDE* Turkey Egypt Egypt EMDE* Turkey Romania Albania Cyprus World Bulgaria Serbia FYROM EU Greece Economic Analysis Division Emerging Markets Research Bi-Weekly Report April TURKEY Presidential elections to take place on June th -- 7 months ahead of schedule The fiscal stance became more expansionary in Q: The current account deficit reached a -year high of.% of GDP on a -month rolling basis in February ROMANIA Headline inflation rose to a -year high of.% y-o-y in March from.% at end-7 The NBR keeps its key rate on hold, but initiates liquidity-absorbing operations NBG - Economic Analysis Division BULGARIA Headline inflation declined to.% y-o-y in March from.% at end- 7 due to a positive base effect Leading indicators point to a rebound in economic growth in Q:, driven by investment Emerging Markets Research 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 SERBIA Headline inflation declined sharply to.% y-o-y in March NBS may have ended a long cycle of monetary policy loosening, with a surprising cut of its central rate by bps to.% at its April MPC meeting FYROM The Central Bank proceeded with a bp cut of its key rate (-day CB rate) to an all-time low of.% House prices posted positive growth for the first time in 7 quarters in Q:7 (up.% y-o-y), on the back of dissipated domestic political and economic uncertainty Real GDP Growth (%, F) ALBANIA Headline inflation has embarked on a mild upward trend since the beginning of the year, albeit remaining at a relatively low % The BoA is set to keep its key rate on hold before initiating a new cycle of monetary policy tightening in Q:9 * EMDE: Emerging Market & Developing Economies End-year Headline Inflation (%, F) 9 * EMDE: Emerging Market & Developing Economies 9 CYPRUS Headline inflation, from negative levels, is set to embark on an upward trend from May and end the year in positive territory An impressive fiscal performance in M:, due to strong tax revenue and strict spending control, despite the political cycle (February presidential elections) Fiscal Balance (% of GDP, F) EGYPT Customer deposits (FX-adjusted) gained momentum in H:7/, underpinned by strengthening confidence in the Egyptian economy and higher EGP remuneration rates * EMDE: Emerging Market & Developing Economies Credit to the private sector (FX-adjusted) lost momentum in H:7/, as a result of higher lending interest rates Current Account Balance (% of GDP, F) The NPL ratio declined further to a multi-year low of.9% in H:7/ APPENDIX: FINANCIAL MARKETS * EMDE: Emerging Market & Developing Economies Please see disclosures in page

2 /9 / / / / / / / / / / / / / / /7 /7 / /9 / / / / / / / / / / / / / / /7 /7 / Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: April Turkey BB / Ba / BB+ (S&P/ Moody s / Fitch) Tax Revenue, Primary Expenditure & Fiscal Balance (-Q Rolling Sum) Tax Revenue (y-o-y % change, lhs) Primary Expenditure (y-o-y% change, lhs) Fiscal Balance (% of GDP, rhs) 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 Apr. -M F -M F -M F -m TRIBOR (%).9... TRY/EUR.7... Sov. Spread (, bps) Apr. -W % YTD % -Y % Looking ahead, despite the expected gradual normalization in the gold 7E F 9F balance, the slowdown in domestic demand and buoyant external demand, the CAD is set to narrow only moderately during the remainder of the year (by. pps of GDP y-o-y in -M:), due to a persistently unfavourable energy bill. Overall, we see the CAD rising by. pps y-o-y to a -year high of.% of GDP in FY:. NBG - Emerging Markets Research Bi-Weekly Report ISE, Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Presidential elections to take place on June th 7 months ahead of schedule. President Erdogan called snap presidential elections on June th, on the grounds that It is imperative to eliminate the idea of elections quickly while there are very important decisions on issues such as the fast paced developments in Syria as well as macroeconomic issues and large investments". In our view, the decision to hold early elections should be welcomed by - the markets, as it shortens significantly the period of political - uncertainty and opens the way to address the exacerbating domestic and external imbalances (see below). Indeed, we expect the CBRT to - hike rates by 7- bps in the next week, which would bring the rate of the only effective financing facility, the late liquidity window, to.%- -.%. Such a hike should be enough to put an end to the depreciation - pressures on the (c. % y-o-y against the equally-weighted EUR-USD basket in Q:) and ensure financial stability ahead of the elections. - Moreover, once the elections are held, the Government will no longer be under pressure to resort to fiscal and quasi-fiscal stimulus to temper the expected sharp slowdown in economic activity in H: (reflecting tighter liquidity conditions and a strong base effect). The fiscal stance became more expansionary in Q:. The fiscal balance deteriorated by. pps of GDP y-o-y in Q:, following consecutive quarters of improvement. The Q: negative performance was driven by higher primary expenditure (up. pps of GDP y-o-y), primarily reflecting higher capital expenditure, wage bill and agricultural subsidies and, to a lesser extent, larger interest payments, in line with the ongoing tightening of domestic and global liquidity conditions. The Q: fiscal performance would have been even worse had tax revenue not improved (up.7 pps of GDP y-o-y). The improvement was broad based, reflecting persistently strong economic activity, favourable base effects (tax cuts on white goods and furniture in February 7) and the rise in January of both the CIT rate for banks and other financial companies and the PIT rate for the third bracket. With the Q: outturn, the -quarter rolling budget deficit widened to.7% of GDP from.% in Q:7 still below its end-year target of.9%. Looking ahead, following a further widening of the fiscal deficit ahead of the June elections and in view of large domestic imbalances (the current account deficit is set to reach a -year high this year of.% of GDP see below -- while inflation is not expected to return to single digits before December), the authorities are set to tighten the fiscal stance in H: so as to bring the FY: fiscal deficit near its target of.9% of GDP and preserve economic and financial stability. The current account deficit (CAD) reached a -year high of.% of GDP on a -month rolling basis in February. The CAD widened significantly, by. pps y-o-y to.% of GDP in M:, on the back of an across-the-board deterioration of its key components (see chart). The capital and financial account (CFA) strengthened and more than covered the CAD in M:. The CFA balance improved significantly, by.9 pps to a surplus of.% of GDP in M:, supported by higher net currency & deposits inflows, borrowing and portfolio inflows. As a result and accounting for valuation effects, FX reserves rose by USD.9bn y-t-d to USD.bn in February, covering. months of imports of GNFS.

3 7 F / 7/ / 7/ / 7/ / 7/ / 7/ / 7/ / 7/ /7 7/7 / 7/ /9 7/9 / / / 7/ / / / 7/ / / / 7/ / / / 7/ / /7 /7 7/7 /7 / / April Romania BBB- / Baa / BBB- (S&P / Moody s / Fitch) Contributions to Annual Headline CPI Inflation (pps) Food Fuels Other Headline (y-o-y % change) Adjusted Core II Inflation (y-o-y % change) Monetary Conditions Index Exchange Rate Contribution Monetary Conditions Index tighter monetary conditions looser monetary conditions Forecast Interest Rate Contribution Real GDP Growth, Budget Deficit & Current Account Deficit Budget Deficit (% of GDP) Current Account Deficit (% of GDP) Real GDP Growth (y-o-y % change) Apr. -M F -M F -M F -m ROBOR (%).... RON/EUR.... Sov. Spread (, bps) Apr. -W % YTD % -Y % BET-BK, F 9F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation rose to a -year high of.% y-o-y in March from.% at end-7. The sharp rise in headline inflation in Q: was driven by: i) a higher energy bill (up.% y-o-y in March against a rise of.7% at end-7), reflecting developments in global oil markets; and ii) strengthening domestic demand (as suggested by adjusted core II inflation which rose to.% y-o-y in March from.% at end-7). The latter continues to be fueled by a loose incomes policy (public sector wages rose by % in January, with the education and health sectors receiving a further % raise in March), and its spillover to the private sector. Note, however, that the impact of the loose incomes policy is curtailed by the shift in the bulk of the social security contributions (SCC) burden onto employees (the SCC rate for employees is up. pps, while that for employers is down. pps), thus boosting firm profitability. Headline inflation is set to continue on a mild upward trend until mid-. Robust domestic demand, on the back, inter alia, of the ongoing easing in fiscal policy (see below), should continue to fuel inflationary pressures throughout Q:, with headline inflation hitting a high of c..% y-o-y in mid-year. Tighter monetary conditions (see below) and positive base effects from the hikes in administered electricity and gas prices in H:7 (adding.9 pps to headline inflation) should, however, lead to a deceleration in headline inflation in H:, ending the year at.%, above the NBR s target range (.±%). At the same time, adjusted core II inflation should converge towards headline inflation. The NBR keeps its key rate on hold, but initiates liquidityabsorbing operations. Surprisingly, following two consecutive bp rate hikes in the first months of the year, the NBR Board opted to maintain unchanged the policy rate (-week repo rate) at.% at its early-april meeting. According to its Governor, the NBR decided to remain on hold mainly because the interest rate differential remains favourable to the RON. Shortly after the Board s meeting, however, and in a bid to improve the effectiveness of monetary policy transmission, which has been distorted by excess liquidity in the market, the NBR initiated a liquidity-absorbing operation (worth EUR.bn or.% of GDP, its first since and the largest since 7). As a result, money market rates moved significantly higher and closer to the policy rate (the -week MMR was up bps to.%). Overall, however, effective monetary conditions still remain markedly loose (the ex-post real -month money market rate is estimated at -.%, well below its 7-year average of.%, see our MCI). The NBR needs to raise interest rates further to address overheating. The economy appears to be overheating, with GDP growth (projected at.% in FY: against 7.% in FY:7) well above its long-term potential (of c..%), headline inflation rising, and the current account deficit up sharply (to a projected.% of GDP in FY: from.% in FY:7 and a low of.7% in FY:). At the same time, fiscal policy remains expansionary (the budget deficit is projected to rise sharply to.% of GDP in FY: from.% in FY:7, well above the EU threshold of.%). Against this backdrop, the NBR appears to be significantly behind the curve. In view of the authorities reluctance to proceed with aggressive rate hikes, we nevertheless believe that the NBR will tighten its stance in a gradual manner. All said, we see the NBR raising its key rate by another bps in FY: and bps in FY:9 while, at the same time, continuing with tight liquidity management. The balance of risks lies towards the NBR needing to tighten policy even faster. NBG - Emerging Markets Research Bi-Weekly Report

4 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: Q: Q:9 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: / / 7/ / / / 7/ / / / 7/ / / / 7/ / /7 /7 7/7 /7 / / April - - Bulgaria BB+ / Baa / BBB- (S&P / Moody s / Fitch) * Contributions to Annual Headline CPI Inflation (pps) Volatile Food Core Energy Headline (y-o-y % change) Retail Sales & Private Consumption (real terms, y-o-y % change) Retail Sales (lhs) Forecast Jan-Feb, aop Private Consumption (rhs) Gross Fixed Capital Formation & Construction Production Index (real terms, y-o-y % change) Construction Production Index Jan-Feb, aop Forecast - - Gross Fixed Capital Formation Apr. -M F -M F -M F -m SOFIBOR (%) BGN/EUR Sov. Spread (, bps) Apr. -W % YTD % -Y % SOFIX F 9F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation declined to.% y-o-y in March from.% at end-7 due to a positive base effect. Recall that adverse weather conditions in Q:7 had caused a supply shock in the domestic agricultural market, while boosting demand for energy at the same time. In light of this strong base effect, volatile food inflation declined sharply (to -.% y-o-y in March from.% at end-7) and energy inflation moderated (to.% y-o-y in March from.% at end-7). Adjusting for volatile food and energy prices, core inflation continued its upward trend (reaching.7% y-o-y in March against.9% at end-7), in line with stronger demand-side pressures (see below). Headline inflation is set to remain subdued throughout. Looking ahead, strong domestic demand, on the back, inter alia, of a significant fiscal impulse (projected at. pps of GDP in Q-Q:), and still tight profit margins (note that, albeit narrowing, the CPI-PPI gap remained negative at -. pps on average in Q: against -.9 pps in FY:7 and. pps in FY:) should put upward pressure on headline inflation. This pressure should be broadly offset, however, by favourable energy prices (the price of Brent is projected to remain at current levels until end-year, implying a decline of.% y-o-y in December against an increase of.% y-o-y in March). All said, we see headline inflation at.% y-o-y at end-, slightly lower than its end-7 outcome of.%. At the same time, core inflation should gradually converge upwards towards headline inflation. Leading indicators point to a rebound in economic growth in Q:, driven by investment. Construction activity accelerated in January-February (up.% y-o-y in real terms following an increase of.% in Q:7), mainly reflecting stronger demand for residential property, in an environment of rapidly rising real estate prices (currently up c. 9.% y-o-y). Note that investment activity would have been stronger had it not been for the poor absorption of EU funds (down. pps of GDP y-o-y in the first two months of the year). At the same time, retail sales remained strong (up.% y-o-y in real terms in January-February, broadly the same pace as in Q:7), pointing to robust private consumption. The latter can be attributed to tight labour market conditions (according to the latest available data, employment was up significantly by.% y-o-y in H:7), lower inflation (see above) and stronger consumer confidence. All said, we estimate increased domestic demand has more than offset the deterioration in net exports, reflecting, inter alia, weaker demand from Bulgaria s non-eu trade partners (especially, Turkey and China). As a result, we see GDP growth rebounding to.7% y-o-y in Q: from a nearly -year low of.% in Q:7. GDP growth is set to maintain momentum during the remainder of the year. Against the backdrop of the low investment-to-gdp ratio (currently at % against a pre-crisis high of %), we expect fixed investment to strengthen, in line with favourable domestic liquidity conditions (the loan-to-deposit ratio stands at 7%) and better absorption of EU funds. At the same time, private consumption should remain strong, despite structural problems in the labour market (high long-term unemployment -- estimated at c..% -- skills mismatches, and labour force migration). On a positive note, net exports are set to support overall growth, reflecting the sustained, albeit gradual, recovery in the EU and still favourable terms of trade (note that total hourly costs in Bulgaria are one-sixth of the EU- average). Overall, we see GDP growth firming to.% in FY: from.% in FY:7, above the economy s long-term potential of c..%. NBG - Emerging Markets Research Bi-Weekly Report

5 Q: Q:7 Q: Q:9 Q: Q: Q: Q: Q: Q: Q: Q:7 Q: Q:9 / /9 /9 / / / / / / / / / / / / / / /7 /7 / / / / / / / 9/ / 7/ / /7 /7 / April Serbia BB / Ba / BB (S&P / Moody s / Fitch) Annual Inflation Fruit&Vegetable Prices (contribution rate to headline inflation) Energy Price (contribution to headline inflation) Core (contribution to headline inflation) Headline CPI (y-o-y % change) Core CPI (y-o-y % change) NBS Target Band Headline Inflation, Inflation Target, Nominal Policy Rate & Exchange Rate EUR/RSD (y-o-y % change, lhs) -Week Repo Rate Policy Rate (%) Actual Taylor Rule Target Band Inflation - Forecast Forecast for Q:-Q:9 Apr. -M F -M F -M F -m BELIBOR (%)..9.. RSD/EUR.... Sov. Spread (, bps) Apr. -W % YTD % -Y % BELEX F 9F Real GDP Growth (%) Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation declined sharply to.% y-o-y in March. Headline inflation has embarked on a sharp downward trend since the turn of the year, falling markedly to.% y-o-y in March from.% in December -- undershooting the lower bound of the NBS target range of ±.%. Core inflation (that excludes prices of fruit & vegetables and energy, and accounts for 77.7% of the CPI basket) moderated to a low of.% y-o-y in March from.9% in December. This occurred due to: i) lower non-energy regulated prices (as the hike in telecommunication services prices in March 7 -- that added. pps to CPI -- faded); ii) a stronger dinar (appreciating by.% y-o-y against the EUR in March); and iii) still subdued demand-side pressures, due to a negative (albeit closing) output gap (at -.% on a -quarter rolling basis in Q:) and a markedly tighter monetary policy stance (an ex post policy rate, in real and compounded terms, of.9% in March up from.% at end-7). In addition, fruit & vegetable prices eased markedly (contributing. pps to March inflation against. pp in December), due to a strong base effect (an unusually cold winter in early-7). Finally, energy prices decelerated significantly (contributing. pps to March inflation against. pps in December), mainly reflecting a drop in solid fuels prices (especially firewood), following a sharp rise in their prices in winter 7 as a result of a prolonged cold spell. Inflation is set to pick up moderately, reaching.% y-o-y at end-. Looking ahead, headline inflation is set to fluctuate around its current level in Q-Q:, mainly due to the continued normalization in volatile prices of fruit & vegetables following a weather-induced pick-up in 7. We expect inflation to increase gradually in Q:, mainly due to the rebound in domestic demand, reaching.% y-o-y at end- -- still well within its target band -- and. pps below its end-7 outcome. NBS may have ended a long cycle of monetary policy loosening, with a surprise cut of its central rate by bps to.% at its April MPC meeting. The NBS proceeded surprisingly with a further bp cut of its -week repo rate, at its April meeting, to a record low of.%. The decision was motivated by the sharper-than-expected decline in headline inflation (see above). The move was also prompted by continued appreciation pressures on the RSD (by.% y-o-y against the EUR in Q:), despite NBS interventions (purchasing EUR mn in February-March, or.% of end-7 FX reserves). With the latest move, cumulative cuts have amounted to 7 bps since the initiation of the cycle of monetary policy easing in May. Going forward, we expect the NBS to keep its key rate on hold until the start of a new cycle of monetary policy tightening in Q:.According to our Taylor rule (see chart), projecting: i) an increasing positive output gap by end-9 (from -.% in Q: to % in Q: and.% in Q:9); and ii) a modest increase in inflation by end-9 (from.% in March to.% at end- and.% y-o-y at end-9), we expect the NBS to initiate a new cycle of monetary policy tightening in Q:. We see the NBS hiking its key rate by a cumulative bps to.% (.% in ex post, real and compounded terms) between Q: and Q:9. This projection assumes that the RSD will not appreciate significantly in reaction to the higher policy rates. NBG - Emerging Markets Research Bi-Weekly Report

6 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: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: Q: Q:9 Q:9 / / 9/ / / / 9/ / / / 9/ / / / 9/ / / / 9/ / /7 /7 9/7 /7 / April F.Y.R.O.M BB- / NR / BB (S&P / Moody s / Fitch) - -,,,,, Headline Inflation & Nominal Policy Rate (%) Headline Inflation Rate -Day CB Rate Actual Taylor MKD, EUR Nominal Terms Policy Rate (%) Real Estate Price Index (Q:=) House Price Index Source: Central Bank of FYROM Forecast - - MKD, EUR, adj. for inflation Apr. -M F -M F -M F -m SKIBOR (%).... MKD/EUR.... Sov. Spread (. bps) 9 7 Apr. -W % YTD % -Y % MBI, ,,,,, F 9F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The Central Bank proceeded with a bp cut of its key rate (-day CB rate) to an all-time low of.%. With this move, total rate cuts have reached bps since the initiation of the new cycle of monetary policy loosening in December. The decision was motivated by: i) a positive inflation outlook (headline inflation moderated from a -year high of.% y-o-y in December to.7% y-o-y in March and is projected to end the year at.9%); ii) a still negative output gap by end-year (-.% on a -quarter rolling basis in Q:); iii) the expectations of a prudent fiscal stance (with the FY: budget envisaging a neutral stance), and; iv) the absence of pressures on external accounts (FX reserves are expected to increase by EUR.bn to EUR.bn at end-, mainly supported by the proceeds from a EUR.bn or.7% of GDP sovereign bond issue in early-january). The CB is set to keep its key rate on hold at.% until the initiation of a new cycle of monetary tightening in Q:9. According to our Taylor rule (see chart), projecting: i) a closing negative output gap at end-9; and ii) a benign inflation outlook (with the headline figure moderating modestly to.% y-o-y at end-9 from.% y-o-y at end-7), we expect the CB to maintain policy on hold before gradually increasing its key rate by a cumulative bps to.% in Q-Q:9. Importantly, the current record low policy rate should boost credit activity in an improving political and economic outlook and a consistent policy mix. According to our conservative forecast for FY: lending growth (up 7% from % in FY:7), the credit impulse (defined as the change in the flow of bank credit scaled by nominal GDP) should return to positive territory this year (to an estimated.7 pps from -. pps in FY:7) and consequently boost economic activity. Our model shows that the credit impulse should contribute. pps to headline GDP growth this year (seen at.%) after having subtracted. pps from the past year s overall growth (of %). House prices posted positive growth for the first time in 7 quarters in Q:7 (up.% y-o-y), on the back of dissipated domestic political and economic uncertainty. The quarterly Central Bank s House Price Index (HPI) has embarked on an increasingly positive trend in Q:7 following consecutive quarters of decline. Indeed, annual HPI growth reached a -quarter high of.% y-o-y in Q:7, up from a trough of -.9% in Q:7, limiting the full-year decline of the HPI to -.%. The increasingly positive HPI trend, started in Q:7, reflects the gradual dissipation of protracted political and economic uncertainty. Recall that the current coalition Government took office ½ months after the mid-december general elections and could not proceed with its ambitious reform programme (due to its slim majority in Parliament) until it secured a landslide victory in the October local elections. Looking ahead, we expect the HPI to gain momentum this year, mainly supported by a stronger economic performance (output growth is projected to accelerate to.% in FY: from.% in FY:7) and a pick-up in lending activity. The latter should be supported by: i) easing credit standards, following past years significant clean-up of banks balance sheets (with the NPL ratio standing at a historical low of.% and banks foreclosed assets-to-equity ratio at a post-global crisis low of.% at end-7; ii) moderating lending interest rates; iii) adequate liquidity; and iv) a strong capital base (.7% in December). NBG - Emerging Markets Research Bi-Weekly Report

7 Q:7 Q: Q:9 Q: Q: Q: Q: Q: Q: Q: Q:7 Q: Q:9 /7 / / /9 /9 / / / / / / / / / / / / / / /7 /7 / / /9 /9 / / / / /7 / April Albania B+ / B / NR (S&P / Moody s / Fitch),,,,,,, -, 7-7 Contributions to Annual Headline CPI Inflation (pps) Core Energy Food and Vegetables Headline (y-o-y % change) Inflation and Nominal Policy Rate Actual Taylor Rule -week repo rate (%) CPI (y-o-y % change) Inflation Target Policy Rate (%),,,,,,, -, 7 Forecast Forecast for Q:-Q:9 Apr. -M F -M F -M F -m TRIBOR (mid, %).... ALL/EUR.... Sov. Spread (bps) 7 Apr. -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 %. Inflation rose moderately to.% y-o-y in March from.% in December. Although embarking on an upward trend, it has remained well below the BoA s target (of.%) for almost six successive years. The increase was almost exclusively driven by the acceleration in the prices of fruit & vegetables (contributing. pps to headline inflation in March against. pps in December), stemming from floods. Headline inflation was held back by softer core inflation (that excludes prices of fruit & vegetables and energy, and accounts for.7% of the CPI basket). Core inflation remained low, easing slightly to.9% y-o-y in March from.% in December, despite pressures from the gradual recovery in domestic demand, excise hike on tobacco and the 7.7% increase in tap water prices (adding. pps to March inflation). Core inflation is still weak, due to: i) low imported inflation (supported by low international commodity 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 March); and ii) a persistent negative (yet closing) output gap (at -.% on a -quarter rolling basis in Q:). Headline inflation to remain on a mild upward trend, rising to.% y-o-y at end-, moving closer to the BoA s target. We expect headline inflation to accelerate further, reaching a -year high of.% at end- --. pps y-o-y above its end-7 outcome. However, despite its pick-up, end-year inflation should remain well anchored and far below the BoA s target throughout for an th successive year. The expected acceleration should almost exclusively result from the gradual pick-up in core inflation, due to mounting domestic demand pressures, as the output gap will close in Q: and turn positive in Q: (reaching.% on a -quarter rolling basis). Inflationary pressures should, however, be held back by: i) lower global food prices and still low inflation in the country s major trading partners; ii) favourable energy prices in line with global oil price developments (set to decline by.% in ALL terms in Q:); and iii) LEK appreciation (by c..% y-o-y against the EUR at end-). The BoA is set to keep its key rate on hold before initiating a new cycle of monetary policy tightening in Q:9. The BoA has maintained its key policy rate unchanged since June, at a record low of.%, following a total cut of bps since the initiation of the cycle of monetary policy easing in September. Looking ahead, we expect the BoA to keep its key rate on hold until the start of a new cycle of monetary policy tightening in Q:9. According to our Taylor rule (see chart), projecting: i) moderately increasing positive output gap by end-9 (from % in Q: to.% in Q:9); and ii) a modest increase in inflation by end-9 (from.% in March to.% at end- and.% at end-9), we expect the BoA to maintain its central rate on hold before hiking it gradually by a cumulative bps to.% in Q-Q:9. Our forecast of no change in the policy rate this year () is consistent with the IMF s opinion in its latest Article IV (released in December 7), according to which the Bank of Albania s accommodative monetary policy stance remains appropriate, and any unwinding of monetary easing should await evidence of a sustained rise in inflation. Indeed, against a backdrop of subdued inflationary pressures (with inflation fluctuating around.% y-o-y throughout FY: and significantly undershooting its target), maintaining the policy rate on hold at.% throughout this year is welcome, as this should boost the stagnant credit activity (up a mere.7% y-o-y in February) and, therefore, economic activity, which is set to slow following the completion of large energy projects in FY:7. NBG - Emerging Markets Research Bi-Weekly Report

8 April Cyprus BB+ / Ba / BB (S&P / Moody s / Fitch),, -, -, -, -, -, Contributions to Headline Inflation (pps) / / / / /7 / F&V Energy Core Headline (y-o-y %) General Government Fiscal Balance (% of GDP) 7 M:7 M: Budget,, NBG Forecast Revenue Tax Revenue Indirect Taxes..... Direct Taxes Soc. Contrib Non-Tax revenue..... Expenditure Cur. Expenditure n.a.. G. & Services.7.. n.a..7 Wag.& Salaries... n.a.. Soc. Transfers... n.a..7 Int.Payments..... Subsidies... n.a.. Other... n.a.. Capital Expend.... n.a.. Fiscal Balance Primary Balance , -, -, -, -, This positive performance will help contain the deterioration in the public debt-to-gdp ratio following the Government s decision to Apr. -M F -M F -M F provide an emergency deposit of EUR.bn (.% of GDP) to the island s second largest financial institution -- the Cyprus Cooperative Bank (CCB) at end-march. The deposit consisted of EUR.bn (.% of GDP) of Government long-term bonds (with private Apr. -W % YTD % -Y % placement and an option for early repayment) and EUR.bn (.7% of GDP) in the form of cash. The move was prompted by intensifying pressures on the bank s deposit base, amid increased uncertainty over 7 F 9F the outcome of its privatisation process, launched in mid-march. Should our full-year forecast of a primary surplus of.% of GDP (see table) materialise, the public-debt-to-gdp ratio would moderate to c..% at end- after having risen sharply to c..% at end-q: from a -year low of 9.% at end-7. NBG - Emerging Markets Research Bi-Weekly Report 7 -m EURIBOR (%) EUR/USD.... Sov. Spread (. bps) 7 CSE Index. -.. Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation, from negative levels, is set to embark on an upward trend from May and end the year in positive territory. Headline inflation rose slightly to -.% y-o-y in March from -.% y-o-y at end-7, reflecting increasing core inflation (excluding volatile food and energy prices) -- marginally up.% y-o-y against a decline of.% December -- and a milder decline in prices of fruit and vegetables (down.% y-o-y, against a decline of.% in December). The rise in headline inflation would have been higher had energy inflation not declined -- down.% y-o-y against a rise of.% y-o-y in December. Looking ahead, we see headline inflation reaching a trough of -.% y-o-y in April, as a result of continued supportive base effects from volatile prices of fruit & vegetables, and embarking therafter on an upward trend, mainly as a result of mounting demand-pull pressures emanating from the widening of the positive output gap (to.9% in Q: from.% in Q:7 on a -quarter rolling basis). Overall, we see headline inflation turning positive for the first time in six years, reaching.% y-o-y at end-. An impressive fiscal performance in M:, due to strong tax revenue and strict spending control despite the political cycle (February presidential elections). The fiscal balance improved significantly, by. pps y-o-y to a surplus of.% of GDP in M:. The improvement was driven by buoyant tax revenue and, to a lesser extent, continued spending discipline. Indeed, tax revenue rose by. pps of GDP y-o-y in M:, due to higher indirect taxes (including VAT and taxes on imports -- up. pps of GDP), direct taxes (up. pps of GDP) and social security contributions (up. pp of GDP). The improved tax revenue performance was in line with solid economic activity (GDP is projected to grow by -.% during -9, compared with.9% in FY:7, according to the IMF Staff concluding statement of the second Post-Programme Monitoring Mission, released on March th), better collection and a further tightening in labour market conditions. Indeed, the (average) seasonally-adjusted unemployment rate declined by.9 pps y-o-y to a 9.% in M:. On the other hand, strict spending control continued in M:, despite the February presidential elections, with primary expenditure declining by. pp of GDP y-o-y. Looking ahead, we foresee a further strengthening of the fiscal surplus, albeit at a moderating pace, during the remainder of the year. The moderation should result from strong base effects. Overall, we see the fiscal surplus rising by. pps y-o-y to.% of GDP in -M: (against a rise of. pps y-o-y in M:), which will bring the FY: surplus to a sizeable.% of GDP -- surpassing its target of.% of GDP and the FY:7 outcome of.% of GDP.

9 :9/ :/ :/ :/ :/ :/ :/ :/7 :7/ :7/ :/9 :9/ :/ :/ :/ :/ :/ :/ :/7 :7/ :9/ :/ :/ :/ :/ :/ :/ :/7 :7/ April Egypt B- / B / B (S&P / Moody s / Fitch) 7 Loans to the Private Sector and Customer Deposits (y-o-y % change) Loans Loans (adj. for FX variations) Deposits Deposits (adj. for FX variations) Private Sector Loans-to-Customer Deposits Ratios (%) LC Loans-to-LC Deposits Ratio FX Loans-to-FX Deposits Ratio Total Loans-to-Total Deposits Ratio NPL Ratio and NPL Coverage Ratio (%) NPL Ratio (%, lhs) NPL Coverage Ratio (%, rhs) 9 Apr. -M F -M F -M F O/N Interbank Rate (%) EGP/USD Sov. Spread (. bps) 9 Apr. -W % YTD % -Y % HERMES, / / /7E 7/F /9F Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Customer deposits (FX-adjusted) gained momentum in H:7/, underpinned by strengthening confidence in the Egyptian economy and higher EGP remuneration rates. Adjusted for FX fluctuations, growth in customer deposits accelerated to a multi-year high of 7.% y-o-y at end-h:7/ (December 7) from.% at end-/7 (June 7), reaching c. 7.% of GDP. From a segment perspective, the acceleration in (FX-adjusted) overall deposits was driven by the retail segment. The latter increased by.% y-o-y in December compared with a rise of 9.% June, supported by strengthening confidence in the domestic economy following the solid implementation of the loan agreement with the IMF (signed in November ) and a more attractive remuneration of EGP-denominated deposits (interest rates on to months, to months and 7 to months EGP-denominated deposits rose by. pps,. pps and. pps, respectively, to.%,.% and.% between June and December 7). A recovery in workers remittances from abroad and tourist receipts also contributed to the acceleration in overall deposits (FX-adjusted). Indeed, tourist receipts rose by c. % y-o-y to a post-january Revolution high of.% of GDP in H:7/, due not only to more competitive prices (the EGP had depreciated against the USD by c..% y-o-y in H:7/ and c..% since the flotation), but also to the removal of travel bans and/or warnings by key source countries following a significant improvement in security conditions. Moreover, workers remittances increased by c. % y-o-y to an all-time high of.% of GDP in H:7/, continuing on the upward trend started in Q:/7, when the Central Bank floated the domestic currency. Credit to the private sector (FX-adjusted) lost momentum in H:7/, on the back of higher lending interest rates. Adjusted for FX movements, lending growth declined to.% y-o-y at end-h:7/ from 7.7% at end-/7. The deceleration in (FX-adjusted) overall lending was driven by the corporate segment. The latter lost momentum (up.% y-o-y in December compared with a rise of 7.9% June), mainly due to a further increase of already prohibitive lending interest rates (interest rates on up to months EGP-denominated loans rose by. pps to 9.% between June and December 7) arising from a tighter monetary policy framework. As a result, bank liquidity conditions eased further, with the loan-to-deposit ratio declining to an all-time low of.% in December from 9.% in June. The NPL ratio declined further to a multi-year low of.9% in H:7/. The NPL ratio continued on its downward trend in H:7/ -- to.9% at end-h:7/ from.% at end-/7 and a peak of.% at end-9/. The improvement in H:7/ was supported by the acceleration in economic activity (GDP growth accelerated to.% y-o-y in H:7/ from.7% in H:/7 and.% in FY:/7), the stabilisation of the domestic currency and tight credit standards. On another positive note, the NPL coverage ratio has remained close to the % threshold since end-/. Looking ahead, lending activity is set to accelerate in the coming quarters. Banks are expected to ease credit conditions, in view of their ample liquidity, good asset quality metrics, and strong capital base. Households and corporates are set to increase their demand for loans, against a backdrop of easing monetary policy, a very low lending penetration rate and accelerating economic activity. Note that that the CBE initiated a cycle of monetary policy easing in Q:7/, cutting its key rate (overnight deposit rate) by bps to.7%. NBG - Emerging Markets Research Bi-Weekly Report

10 April FOREIGN EXCHANGE MARKETS, APRIL 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 (April 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 April MONEY MARKETS, APRIL 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 LOCAL DEBT MARKETS, APRIL 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, APRIL 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 //.9 9 South Africa FirstRand Bank Ltd.% ' USD BBB-/Baa //.7 9 FirstRand Bank Ltd.% ' EUR NA/NA //. 9 Arcelik AS.7% ' EUR BB+/NA /9/. Garanti Bank.% ' USD NA/Ba /9/ 7. Turkiye Is Bankasi % ' USD NA/Ba //,. 9 7 Turkey Vakifbank.7% ' USD NA/Ba //. 7 9 TSKB.% ' USD NA/Ba //. 7 Petkim.7% ' USD NA/B //. 9 7 KOC Holding.% ' USD BBB-/Baa // 7. CREDIT DEFAULT SWAP SPREADS, APRIL 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 April EUR-DENOMINATED SOVEREIGN EUROBOND SUMMARY, APRIL TH Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Albania.7% ' EUR B+/B //. 7 Bulgaria.% ' EUR NA/NA //. 9 Bulgaria.% ' EUR BBB-/Baa //,. - Bulgaria.9% ' EUR BBB-/Baa /9/,9. Bulgaria.% '7 EUR BBB-/Baa //7,. 7 Bulgaria.% ' EUR BBB-/Baa // 9. Cyprus.% ' EUR BB+/Ba //. 7 Cyprus.7% ' EUR NA/Ba //,. Cyprus.7% ' EUR NA/Ba /7/,. 9 9 Cyprus.7% ' EUR NA/Ba 7//. 9 Cyprus.% ' EUR NA/Ba //,. 7 FYROM.7% ' EUR BB-/NA // FYROM.97% ' EUR BB-/NA /7/. 9 FYROM.% ' EUR BB-/NA /7/. FYROM.7% ' EUR BB-/NA //. 7 Romania.% ' EUR BBB-/Baa /9/,. 7 Romania.% ' EUR BBB-/Baa //,. 7 Romania.7% '7 EUR BBB-/Baa 9//7,. 7 Turkey.% ' EUR NR/Ba //,. Albania.7% ' Bulgaria.% ' Bulgaria.% ' EUR-Denominated Eurobond Spreads (April th ) Bulgaria.9% ' Bulgaria.% '7 Bulgaria.% ' Cyprus.% ' -week change -month change YTD change 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 April USD-DENOMINATED SOVEREIGN EUROBOND SUMMARY, APRIL TH Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Brazil.7% ' USD BB-/NA // 7. - Brazil.7% ' USD BB-/NA //,7. Bid Yield Gov. Spread Asset Swap Brazil.7% ' USD BB-/NA //. 7 Egypt.7% ' USD B-/B 9//,. 7 Egypt.7% ' USD NA/B //,. Egypt.7% ' USD B-/B //. 9 Egypt 7.% ' USD NA/B //,. 9 Egypt.7% ' USD B-/B //, 7. Egypt.% '7 USD NA/B // Romania.7% ' USD BBB-/Baa //,.9 Romania.7% ' USD BBB-/Baa //,. Romania.% ' USD BBB-/Baa //,. 7 7 Russia.7% ' USD BB+/Ba //,. 97 Russia.7% ' USD BB+/Ba /9/,. Serbia.7% ' USD BB-/B //,. Serbia 7.% ' USD BB-/B /9/,.7 S. Africa.7% ' USD BBB-/Baa /9/,. S. Africa.% ' USD BBB-/Baa // 7.7 Turkey 7.% ' USD NR/Ba //,. 9 Turkey 7.7% ' USD NR/Ba //,. 7 Turkey.7% ' USD NR/Ba //,. 7 Turkey.% ' USD NR/Ba //,. 9 Turkey.7% ' USD NR/Ba //,. 7 Ukraine 7.7% ' USD B-/Caa /9/, 7. 7 Spread Brazil.7% ' USD-Denominated Eurobond Spreads (April 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 April Level -week % change STOCK MARKETS PERFORMANCE, APRIL 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), ,, Bulgaria (SOFIX) China (SHCOMP), ,, Cyprus (CSE GI) Egypt (HERMES),7....,9, F.Y.R.O.M (MBI), ,, India (SENSEX), ,9, Romania (BET-BK), ,7, Russia (RTS), ,7, Serbia (BELEX-) South Africa (FTSE/JSE), ,7, Turkey (ISE ), ,, Ukraine (PFTS) MSCI EMF,. -...,, MSCI EAFE,.. -..,99, Greece (ASE-General) Germany (XETRA DAX), ,77, UK (FTSE-) 7, ,7 7, USA (DJ INDUSTRIALS), ,, USA (S&P ), ,, Brazil (IBOV) Bulgaria (SOFIX) China (SHCOMP) Cyprus (CSE GI) Equity Indices (April th ) Egypt (HERMES) F.Y.R.O.M (MBI-) India (SENSEX) Romania (BET-BK) Russia (MICEX) -week % change -month % change YTD % change 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 April 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 Market Research Bi-Weekly Report