Economic Analysis Division Emerging Markets Analysis

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1 EU Bulgaria EMDE* Greece FYROM Egypt Turkey Romania Serbia Albania Cyprus Cyprus Serbia Greece Bulgaria EU Albania Turkey FYROM EMDE* Romania Egypt Cyprus Greece FYROM Serbia EU Albania Bulgaria Romania World EMDE* Egypt Turkey Egypt EMDE* Serbia Albania Romania FYROM World Bulgaria Cyprus Greece EU Turkey Economic Analysis Division Emerging Markets Analysis Bi-Weekly Report 5 January 9 TURKEY The Budget achieved its target -- a deficit of.9% of GDP mainly on the back of one-off non-tax revenue The current account deficit is estimated to have narrowed by. pps to a 9-year low of.% of GDP in FY: The capital and financial account is estimated to have not contributed, for the first time since the liquidity crisis, to the financing of the current account deficit in FY: ROMANIA Favourable food and energy prices contained end-year headline inflation -- up.% y-o-y, unchanged compared with end-7, and within the NBR s target range (.5±%) The NBR will likely maintain its key rate on hold, but tighten market liquidity to ease pressure on the RON 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 BULGARIA Headline inflation stood at.7% y-o-y at end, broadly unchanged compared with end-7, as favourable energy prices offset the impact of stronger domestic demand and higher volatile food prices Tourism activity weakened in FY:, mainly due to a negative base effect SERBIA End-year headline inflation moderated to.% y-o-y in from.% in 7, due to lower core inflation and favourable prices of fruits and vegetables The NBS is set to keep its central rate (the -week repo rate) on hold at an all-time low of.% this year FYROM Real GDP Growth (%, 9F) * EMDE: Emerging Market & Developing Economies 5 Credit growth reached a -year high of 7.% y-o-y at end, mainly on the back of higher lending to corporates Customer deposit growth almost doubled in FY: (up 9.5% y-o-y), due to improving confidence in the domestic economy Residential real estate prices recovered in FY: (up.%), due to improving economic activity and accelerating mortgage lending 5 9 End-year Headline Inflation (%, 9F) 5 9 ALBANIA Headline inflation ended at.% y-o-y -- well below its target for an th successive year The BoA is set to maintain its key rate on hold this year * EMDE: Emerging Market & Developing Economies CYPRUS Fiscal Balance (% of GDP, 9F) Banking sector returns to the black in 9M:, due to lower provisioning and an exceptional accounting gain related to Hellenic Bank s acquisition of Cyprus Cooperative Bank s operations EGYPT * EMDE: Emerging Market & Developing Economies Current Account Balance (% of GDP, 9F) The sizeable fiscal consolidation planned for this fiscal year --. pps of GDP is on track FX reserves increased by USD 5.5bn to an all-time high of USD.bn (7. months of imports of GNFS) in, underpinned by solid implementation of the loan agreement with the IMF (signed in November ) * EMDE: Emerging Market & Developing Economies APPENDIX: FINANCIAL MARKETS Please see disclosures on page

2 5/ / 5/ / 5/ / 5/ / 5/ / 5/5 /5 5/ / 5/7 /7 5/ / 5/ / 5/ / 5/ / 5/ / 5/ / 5/5 /5 5/ / 5/7 /7 5/ / Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:5 Q:5 Q: Q: Q:7 Q:7 Q: Q: 5 January 9 Turkey BB- / Ba / BB (S&P/ Moody s / Fitch) Tax Revenue, Primary Expenditure & Fiscal Balance (-Month 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 Jan. -M F -M F -M F -m TRIBOR (%) TRY/EUR.9... Sov. Spread (, bps) Jan. -W % YTD % -Y % ISE, E 9F F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The Budget achieved its target of a deficit of.9% of GDP mainly on the back of one-off non-tax revenue. Following a deterioration of. pps of GDP y-o-y in H:, stemming mostly from the June presidential and parliamentary elections, the fiscal balance remained unchanged on an annual basis in H:, reflecting the Government s efforts to attenuate investor concerns over the country s alarming economic imbalances amid a challenging global backdrop. The neutral fiscal stance in H: was achieved through a sharp rise in non-tax revenue (up. pps of GDP y-o-y), stemming from large oneoff revenue and, to a lesser extent, lower capital expenditure (down. pps of GDP y-o-y). The one-off non-tax revenue is estimated to have reached.% of GDP in FY:, following the entry into force of a tax amnesty and an illegal construction amnesty at end-may and the paid military service law in August (yielding.7%,.% and.% of GDP, respectively). The sharp rise in non-tax revenue in H: compensated for lower tax revenue (down.5 pps of GDP y-o-y in H:), primarily reflecting tax cuts in Q:, higher current primary expenditure (up. pps of GDP y-o-y in H:), mainly on the back of a larger wage bill and social transfers, and higher interest payments (up. pp of GDP y-o-y in H:), in line with tighter monetary policy stance. With the negative performance of H:, the budget deficit stood at.9% of GDP in FY: in line with its target but above the FY:7 outcome of.5%. For this year, despite the recently-announced higher-than-budgeted transfer of CBRT profits to the Treasury (.% rather than.5% of GDP), the fiscal deficit target of.% of GDP should be difficult to meet, as the strong FY: non-tax revenue performance is unlikely to be repeated even if the tax and illegal construction amnesties, which expired at end-december, are extended. Overall, in the absence of new revenue-enhancing and expenditure-saving measures, we see the FY:9 deficit at around.5% of GDP above its target of.% and the FY: outcome of.9%. The current account deficit (CAD) is estimated to have narrowed by. pps to a 9-year low of.% of GDP in FY:. External rebalancing continued for a fifth consecutive month in November, with the -month rolling CAD declining to.% of GDP, after having widened to a -year high of 7.% in June from 5.% in December 7. The decline in the -month rolling CAD between June and November (by.7 pps of GDP y-o-y) was driven by a stronger underlying current account balance (excluding energy and gold, up. pps of GDP y-o-y), reflecting decelerating domestic demand, more competitive Turkish goods in global markets, as well as buoyant tourism activity, and to a lesser extent, the favourable gold balance (up. pps of GDP y-o-y), stemming from a normalization in gold imports. Not surprisingly, the energy balance deteriorated (by.5 pps of GDP y-o-y), due to higher global oil prices. Based on preliminary December trade statistics, we estimate that the CAD narrowed by. pps of GDP y-o-y in December and reached a 9- year low of.% of GDP in FY:. For this year, we expect the CAD to narrow to.% of GDP, mainly on the back of a lower energy bill. The capital and financial account (CFA) is estimated to have not contributed, for the first time since the liquidity crisis, to the financing of the CAD in FY:. The CFA balance deteriorated sharply, by 5. pps y-o-y to a deficit of.5% of GDP in M:, due to protracted uncertainty (June snap elections and the August currency crisis). The M: CAD and the CFA deficit were financed through large non-identified inflows (net errors and omissions,.5% of GDP) and a drawdown in FX reserves (.% of GDP). NBG - Emerging Markets Analysis Bi-Weekly Report

3 / / / / 5/ / 7/ / 9/ / / / / F 5 January 9 Romania BBB- / Baa / BBB- (S&P / Moody s / Fitch) - - Contributions to Annual Headline CPI Inflation (pps) Food Energy Core Headline (y-o-y % change) Exchange Rate & Interest Rates - -,,,, -W ROBOR (lhs) Policy Rate (lhs) EUR/RON (aop, rhs) Quarterly Tax Rate on Banks' Financial average M-M ROBOR Assets (%) avergae M-M ROBOR 5, 5,,5,,5,,5,,5,.5%.%.%.%.%.% Jan. -M F -M F -M F -m ROBOR (%).... RON/EUR Sov. Spread (, bps) 9 Jan. -W % YTD % -Y % BET-BK, E 9F F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) ,5,,5,,5,,5, Favourable food and energy prices contained end-year headline inflation -- up.% y-o-y, unchanged compared with end-7, within the NBR s target range (.5±%). Food inflation declined (to.% y-o-y at end from.% at end-7), due to positive supply-side effects from the bumper summer harvest. Similarly, energy inflation moderated (to 5.5% y-o-y at end from.9% at end- 7), in line with developments in global oil markets. Adjusted for food and energy prices, core inflation picked up, however (to.% y-o-y at end from.9% at end-7), reflecting stronger domestic demand, on the back of a loose incomes policy (public wages rose by up to 5% in certain sectors and pensions were up %). Note that the latter s impact on disposable income was tempered by the shift in the bulk of social security contributions burden onto employees. Headline inflation to ease slightly in FY:9, on weaker domestic demand and tighter monetary conditions. Softer demand-side pressures, on the back of a less expansionary incomes policy, combined with tighter monetary conditions, in the aftermath of the implementation of the new banking tax, should keep core inflation subdued (up.% at year-end). Favourable global oil prices, together with a positive base effect (of c.. pps) from the hike in gas and electricity prices in FY:, should also sustain the disinflation process. Note that the Government plans to keep energy prices frozen in 9-, breaching, however, the relevant EU law. All said, we see headline inflation falling as low as.% y-o-y by mid-9, and thereafter rebounding to.% at end-year, still within the NBR s target range. The NBR will likely maintain its key rate on hold, but tighten market liquidity to ease pressure on the RON. In view of the uncertainty surrounding the implementation of the banking tax, the NBR maintained its -week repo rate unchanged at.5% at its first meeting for FY:9. Recall that the NBR raised its key rate by 75 bps in M: and has remained on hold since then. At the same time, however, it has engaged in active liquidity management (conducted through deposit-taking operations and FX interventions), mainly with a view to keeping the RON contained. In this context, and in view of the underlying pressure on the RON (down.% y-t-d against the EUR), in the aftermath of the announcement of the tax changes, the NBR has significantly tightened liquidity conditions, with the premium of the - week ROBOR over the policy rate currently standing at bps against 5 bps at end-7. Overall, monetary conditions remain loose, with the ex-post real -week ROBOR at -.%, well below its 7- year average of.5%. The new banking tax affects the course of monetary policy. In a bid to contain the widening budget deficit, the Government announced a tax on banks financial assets. The tax varies based on the upward deviation of the average -M ROBOR from the reference rate, set at.% (see chart). Besides its sizeable impact on bank profitability (down 7%, ceteris paribus), the tax implies a significant tightening in monetary conditions. Indeed, in face of the tax shock, banks will be urged to reduce their balance sheets and/or pass on its cost to customers. At the same time, banks could shift towards (riskier) external funding. In any case, lending interest rates are set to rise and the pace of credit expansion should slow, affecting economic growth. As a result, we expect the NBR to be more dovish going forward and remain on hold throughout FY:9 (instead of hiking its key rate by 5 bps as initially projected). In the meantime, it will continue to rely on liquidity operations to manage pressures on the RON. Indeed, such operations, leading to temporary rises in ROBOR rates, would have a smaller impact on bank profitability compared with a policy rate hike. NBG - Emerging Markets Analysis Bi-Weekly Report

4 9 5 7 / / /5 / /7 / /9F 5 7 9F 5 January 9 Headline inflation stood at.7% y-o-y at end, broadly Bulgaria unchanged compared with end-7, as favourable energy prices BB+ / Baa / BBB- (S&P / Moody s / Fitch) offset the impact of stronger domestic demand and higher volatile food prices. Core inflation (comprising 75% of the CPI basket) Contribution to Annual Headline CPI Inflation strengthened to.7% y-o-y at end from.9% at end-7, on the 5 (pps) 5 back of solid private consumption. The latter was sustained by the pick-up in consumer lending (up.9% y-o-y at end against.% at end-7), wealth effects (house prices gained % over the past years) and improved consumer confidence. At the same time, volatile food inflation accelerated (to 5.% y-o-y at end from.5% at end- 7), due to negative supply-side effects from a poor summer harvest. These factors were offset, however, by the slowdown in - - energy inflation (to.% y-o-y at end from.% at end-7), in - - line with developments in global oil markets. - - Headline inflation is set to remain broadly at current levels until end-9, while at the same time, core inflation should pick up. * Volatile Food Energy The envisaged normalization in volatile food prices, combined with Core Headline (y-o-y % change) favourable global oil prices and a positive base effect from the hikes in Headline Inflation regulated energy and tobacco prices in FY: (adding. and. pps (y-o-y % change) to headline inflation, respectively), should broadly compensate for stronger demand-side pressures. The latter could be fueled by the loose incomes policy (public sector wages rose % in January) and its spillover to the private sector, amid particularly tight labour market conditions (unemployment is estimated to have fallen to a historical low of 5.% in FY:). All said, we see headline inflation at.9% y-o-y at end-9, broadly unchanged compared with its end outcome, - - but higher than that of most of Bulgaria s peers. At the same time, core inflation is set to converge towards that level, albeit from a lower - - starting point (up.7% at end). Tourism activity weakened in FY:, mainly due to a negative base effect. Tourist arrivals rose by.7% y-o-y in FY:, by a slower * Bulgaria Romania Serbia FYROM Albania Σειρά pace compared with that in FY:7 -- up 9.%. At the same time, tourist receipts are estimated to have increased by.5% y-o-y against 9.% Tourist Receipts & Arrivals (y-o-y % change) in FY:7, suggesting broadly stable spending per tourist. 5 5 The slowdown in tourist arrivals in Bulgaria in FY: was mainly due to a negative base effect from the return of EU tourists to Turkey and 9 9 Egypt, on the back of cheaper domestic currencies and improved security conditions. Indeed, growth in tourist arrivals from the EU to Bulgaria (accounting for 59% of total arrivals in FY:7) decelerated in FY: (to 5.% y-o-y from.% in FY:7). Tourism activity would - - have been weaker had arrivals from non-eu countries, especially - - Serbia (accounting for.7% of total arrivals in FY:7 -- up.9% y-o-y -9-9 in FY: against.% in FY:7) and Ukraine (accounting for.% of total arrivals in FY: -- up 5.% y-o-y in FY: against.% in FY:7) not improved. Note that Bulgaria s FY: performance in terms Tourist Receipts (EUR) Tourist Arrivals of tourist arrivals was broadly in line with that of its neighbouring Jan. -M F -M F -M F competitors. Base Interest Rate (%).... Looking ahead, we expect tourism activity to strengthen, sustaining BGN/EUR economic growth (the tourism sector contributes c..% and.%, Sov. Spread (, bps) respectively, to GDP and employment) and the current account surplus. The increase in the number of direct low-cost flights to the SOFIX Jan. -W % YTD % -Y % capital Sofia and the summer resorts Varna and Burgas, and the launch of a promotion campaign targeted (for the first time) to Chinese 7 E 9F F tourists should help to this end. Importantly, Bulgaria remains the most Real GDP Growth (%) price-competitive destination in the region (World Economic Forum, Inflation (eop, %) ). All said, we see tourist arrivals rising by 9.% in FY:9 to a high Cur. Acct. Bal. (% GDP) of.5mn, with receipts growing at a similar pace to EUR.bn (7.% Fiscal Bal. (% GDP) of GDP). NBG - Emerging Markets Analysis Bi-Weekly Report

5 5 7 / / / / / /5 / /7 / /9 / / /5 / /7 / /9 5 January 9 Serbia BB / Ba / BB (S&P / Moody s / Fitch) End-year headline inflation moderated to.% y-o-y in from.% in 7, due to lower core inflation and favourable prices of fruits & vegetables. Note that, albeit standing below its target midpoint, end-year inflation remained within the NBS target range of Contributions to Annual Headline CPI Inflation ±.5%, for a nd successive year in, after persistently (pps) Energy Forecast undershooting the NBS lower bound (for successive years). F&V The easing in end-year headline inflation was mainly due to lower core Core Headline (y-o-y % change) inflation (that excludes prices of fruit & vegetables and energy, and accounts for c. 7.% of the CPI basket). Core inflation moderated to a record low of.% y-o-y at end from.9% at end-7, despite increasing demand-side pressures (with private consumption accelerating to.% y-o-y in 9M: from.% in FY:7). This occurred due to: i) lower non-energy regulated prices (as the impact of the hike in telecommunication services prices in March 7 -- that added. - - pps to CPI -- faded); ii) low international food prices, along with a stronger dinar (appreciating by.% against the EUR at end); and iii) a tighter monetary policy stance (an ex post policy rate, in real and compounded terms, of.% in FY: up from.7% in FY:7). Headline Inflation, Inflation Target and In addition, energy prices moderated (contributing. pps to end Nominal Policy Rate Forecast inflation against. pps at end-7), in line with the drop in global oil prices (falling by.9% y-o-y, in RSD terms, at end against a rise of.% in December 7). Inflation is set to decline slightly, to a -year low of.% y-o-y at end-9 from.% a year earlier -- remaining within its target band. Looking ahead, headline inflation is set to remain on a downward path, reaching a trough of.% y-o-y in August -- temporarily falling below the lower bound of the NBS target band -- mainly due to a normalization in volatile prices of fruit & vegetables following a pick-up in H:. We expect inflation to increase gradually, thereafter, due to higher regulated prices (contributing an expected. Upper Bound Lower Bound -Week Repo Rate Inflation pps to end-9 inflation compared with. pps at end) and increasing demand-side pressures, ending the year at.% y-o-y --,5 NBS Interventions & Exchange Rate 5 below the end outcome of.% and within its target range. The NBS is set to keep its central rate (the -week repo rate) on, hold at an all-time low of.% this year. The NBS maintained its,5 -week repo rate unchanged, for a 9 th successive month, at its January, meeting, at a record low of.% (remaining above that of peer,5 5 countries), following four (unexpected) cuts between September 7, and April, by a cumulative bps. Recall that the NBS -,5 proceeded with these cuts -- after a pause of more than a year -- -, despite higher-than-expected growth in (the highest in past Net NBS Interventions (EUR bn, lhs) 5 years), due to the sharper-than-expected decline in headline and core -,5 EUR/RSD (rhs) inflation, and the continued appreciation pressures on the RSD, -, reflecting inter alia improved fundamentals. Appreciation pressures on the RSD were, however, dampened through sizeable NBS interventions in the FX market (purchasing EUR.bn in FY:, Jan. -M F -M F -M F equivalent to.% of end-7 FX reserves, see chart). Note that, in -m BELIBOR (%) view of the large interventions aimed at dampening the EUR/RSD RSD/EUR fluctuations, the IMF reclassified Serbia s exchange rate regime as a Sov. Spread (, bps) de facto crawl-like arrangement in. Jan. -W % YTD % -Y % Going forward, in view of persistently subdued inflation (set to fluctuate BELEX close to the lower bound of the NBS target band) and moderating economic activity (to.% in FY:9 from.% in FY:), we expect 7 E 9F F the NBS to maintain its key rate on hold until end-year. Real GDP Growth (%)..... Should our forecast materialise, the monetary policy will become Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) slightly less accommodative, with the ex post policy rate, in real and Fiscal Bal. (% GDP) compounded terms, standing at.% at end-9 up from.% at end. NBG - Emerging Markets Analysis Bi-Weekly Report

6 5 January 9 F.Y.R.O.M BB- / NR / BB (S&P / Moody s / Fitch) - - Credit to the Private Sector & Customer Deposits / / /5 / /7 / Retail Loans (contr.) Corporate Loans (contr.) Total Loans (y-o-y %) Total Deposits (y-o-y %) NPL Ratio (%) / / /5 / /7 / Overall NPL Ratio Retail NPL Ratio Corporate NPL Ratio Residential Real Estate Prices and Mortgage Loans (y-o-y % change) FY: FY: FY:5 FY: FY:7 FY: Housing loans House Prices (rhs) Jan. -M F -M F -M F -m SKIBOR (%).... MKD/EUR.... Sov. Spread (. bps) 9 Jan. -W % YTD % -Y % MBI, E 9F F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Credit growth reached a -year high of 7.% y-o-y at end, mainly on the back of higher lending to corporates. Growth of credit to the private sector accelerated, for a second consecutive year, reaching 7.% y-o-y at end up from 5.% at end-7 and % at end-. As a result, the credit impulse (defined as the change in the flow of credit scaled by nominal GDP) turned positive for the first time in years in FY: (. pps from -.7 pps in FY:7 and -. pps in FY:). The improved performance was mainly driven by the corporate segment (up.% from a subdued rise of.% at end-7, contributing. pps to the overall increase), benefiting from both higher supply and demand for loans. The strong demand for corporate loans was supported by stronger business confidence, in view of the finalisation of the name agreement with Greece in early-q:9 set to pave the way for the start of EU accession talks and NATO membership -- as well as more favourable lending rates. The strong supply of corporate loans resulted from strengthening economic activity and a further moderation in the non-performing corporate loans ratio. Indeed, the latter eased to 7.% at end from 9.% at end-7 and a peak of.% at end-. On the other hand, growth in retail loans reached double digits at end- (up.% y-o-y from 9.% at end-7), sustained by solid demand and strong supply of loans, stemming from low credit risk (the non-performing retail loans ratio was broadly unchanged on an annual basis at a low of.% at end). Note that the sharp decline in the overall NPL ratio from a peak of.% at end- to 5.% at end- was largely due to the entry into force of the end-5 Central Bank regulation, requiring banks to write-off their fully-provisioned loans held in loss category for more than two years. Customer deposit growth almost doubled in FY: (up 9.5% y-o-y), due to improving confidence in the domestic economy. Deposit growth accelerated to 9.5% y-o-y in December from 5.% at end-7, supported by both the retail and corporate segments (up 9.5% each), despite more unfavourable deposit remuneration rates. The expansion in the retail deposit base was supported by stronger real disposable income, in line with higher employment and wages and low inflation, while that of corporates was sustained by improving confidence and rising profitability. With deposits increasing at a faster pace than loans, the overall loanto-deposit ratio declined to 9.% at end from 9.% at end- 7. Moreover, the denarisation continued on its upward trend, with the FC loans-to-total loans ratio easing to.% at end from a peak of 57.9% at end-, and the FC deposits-to-total deposits ratio moderating to.% at end from a peak of.% at end-9. Residential real estate prices recovered in FY: (up.%), due to improving economic activity and accelerating mortgage lending. The Central Bank s House Price Index (HPI) rose by.% in FY:, following a decline of.% in FY:7, underpinned by strengthening economic growth (see Table) and double-digit mortgage lending growth (up 5.5%). The latter was supported by moderating interest rates amid bank competition for market shares and relaxed bank lending standards due to households low indebtedness (c..% of GDP at end) and rising real disposable income. Banks supply of mortgage loans was also sustained by a low credit risk. Indeed, the non-performing retail loans ratio is low and banks recovery of real estate collateral has improved sharply, as pointed by banks record low stock of foreclosed property assets (with a net book value of.% of equity at end-september compared with.% at end- 7 and a peak of.% at end-). NBG - Emerging Markets Analysis Bi-Weekly Report 5

7 / / /5 / /7 / / / /5 / /7 / /9 / / /5 / /7 / /9 5 January 9 Albania B+ / B / NR (S&P / Moody s / Fitch),,5,,5,,5, -, Contributions to Annual Headline CPI Inflation (pps) Forecast Core Energy Inflation and Nominal Policy Rate -week repo rate (%) CPI (y-o-y % change) Inflation Target Food and Vegetables Headline (y-o-y % change) Exchange Rate, Domestic and Imported Headline Inflation Forecast Albania CPI (y-o-y % change, lhs) Albania Core CPI (y-o-y % change, lhs) Italy CPI (y-o-y % change, lhs) Greece CPI (y-o-y % change, lhs) ALL/EUR (rhs),,5,,5,,5, -, Jan. -M F -M F -M F -m TRIBOR (mid, %).... ALL/EUR Sov. Spread (bps) 5 5 Jan. -W % YTD % -Y % Stock Market E 9F F Real GDP Growth (%)..... Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Headline inflation ended at.% y-o-y -- well below its target for an th successive year. Headline inflation stood at.% y-o-y at end, unchanged from its end-7 level, and well below the BoA s target (of.%) for successive years. The end-year inflation was contained by low core inflation (that excludes prices of fruit & vegetables and energy, and accounts for c..% of the CPI basket) that offset pressures from higher prices of fruit & vegetables. Indeed, core inflation declined to just.5% y-o-y at end from.% at end-7, despite: i) increasing pressures from the gradual recovery in domestic demand (private consumption was up.% y-o-y in 9M: against a rise of.% in 9M:7); ii) the 7.% increase in tap water prices (adding. pps to end inflation); and iii) the excise hike on tobacco (contributing. pp to end inflation against zero at end-7). The decline in core inflation occurred on the back of low imported inflation, supported by: i) low international food prices; and ii) low inflation in the country s major trading partners -- Italy and Greece (.% and.% y-o-y, respectively, at end, broadly unchanged from their end-7 level, see chart) combined with the appreciation of the ALL (by.% y-o-y against the EUR at end, reaching a -year high). Lower core inflation more than offset the impact from the pick-up in volatile prices of fruit & vegetables (contributing. pps to inflation at end against. pps at end-7), stemming from floods and heavy snowfall in early. Headline inflation to remain below the BoA s target throughout 9, ending the year at.% y-o-y -- unchanged from its end- outcome. Headline inflation is set to embark on a mild downward trend, fluctuating around.% y-o-y until September, due to: i) low global food prices and still low inflation in the country s major trading partners, Greece and Italy, in 9; ii) the appreciation of the LEK (by an expected.% y-o-y against the EUR at end-9); and iii) the normalization in fruit & vegetable prices, following a sharp floodinduced rise. We expect inflation to pick up slightly thereafter, ending 9 at.% y-o-y, driven by higher core inflation, due to base effects and firming demand-side pressures. Despite its pick-up in Q:9, endyear inflation should remain well anchored and far below the BoA s target for a 9 th successive year. The BoA is set to maintain its key rate on hold this year. The BoA has maintained its key policy rate unchanged, at a record low of.%, since its last 5 bp rate cut in June. Recall that scope for the latest policy rate cut, following a pause of years, was provided by: i) the benign inflation outlook (with inflation significantly undershooting its target); and ii) persisting appreciation pressures on the ALL. Note that, in its efforts to dampen appreciation pressures on the domestic currency, the BoA: i) bought EUR 7.mn in 9M: in order to increase FX reserves (more than the FY:7 purchases of EUR 7.mn); ii) launched, in June, purchases in the FX market (amounting to EUR 79.9mn in 9M:, or.% of end-7 FX reserves); and iii) converted into ALL the EUR mn loan disbursed in June to the state-owned energy company, KESH, by the EBRD. Looking ahead, we expect the BoA to maintain its key rate on hold throughout the rest of the year, due to persistently subdued inflation (significantly undershooting its target), in an effort to support the stagnant credit activity (at -.% y-o-y in November, remaining negative for a nd successive year). Should our forecasts materialise, monetary policy will remain very accommodative, with the ex post policy rate, in real and compounded terms, at -.% at end-9 -- unchanged from its end and well below that of peer countries. NBG - Emerging Markets Analysis Bi-Weekly Report

8 / 9/ / /7 /7 9/7 /7 / / 9/ 5 January 9 Cyprus BBB- / Ba / BBB- (S&P / Moody s / Fitch),,,, -, -, -, Net Banking Sector Profit (bn, EUR, annualised),,,, -, -, -, 9M: 9M: 9M:5 9M: 9M:7 9M: Operating expenses Taxes Net non-interest income Provisions & impairments Net interest income Exceptional gains/losses Overall net income (rhs) Net income (Cont. Oper., rhs) Gross Loans, NPEs and NPLs NPE ratio (%, rhs) NPEs (y-o-y % ch.) Gross Loans (y-o-y % ch.) NPL ratio (%, rhs) NPLs (y-o-y % ch.) Year-to-Date Change in the Overall NPE Ratio Following CCB Resolution NPE ratio: Dec. 7:.5% Sep. :.% CCB's NPE carve-out (EUR 5.7bn) NPEs (EUR bn.) Gross Loans (EUR bn.) Dec. 7 Sep. CCB's loans acquired by HB (EUR.bn) Jan. -M F -M F -M F -m EURIBOR (%) EUR/USD.... Sov. Spread (. bps) Jan. -W % YTD % -Y % CSE Index E 9F F Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Banking sector returns to the black in 9M:, due to lower provisioning and an exceptional accounting gain related to the Hellenic Bank s (HB) acquisition of Cyprus Cooperative Bank s (CCB) operations. The banking sector bottom line turned into a surplus of EUR 7mn (.9% of GDP) in 9M: from a loss of EUR mn (.% of GDP) in 9M:7. This positive development was mainly due to a sharp decline in banks provisions (down 5% y-o-y) and an exceptional accounting gain ( negative goodwill ) amounting to EUR 9mn, related to the HB s acquisition of CCB in early-september. The latter resulted from the transfer of CCB s performing assets and liabilities (worth EUR 9.bn) to HB s books at an % discount on their net fair value. Recall that, last July, in an effort to reduce sharply the banking sector s stock of (NPEs), Parliament approved inter alia the transfer of CCB s NPEs (EUR 5.7bn) to a publicly-owned residual entity, the sale of CCB s remaining assets and liabilities to HB and the provision of state guarantees amounting to EUR.bn (covering 5.% of CCB s acquired loans). As a result, (annualised) ROAE and ROAA improved to estimated.% and.%, respectively, in 9M: from -.5% and -.% in 9M:7. The NPE ratio dropped to a low of.% at end-9m:, prompting banks to cut sharply loan loss provisions. Banks stock of NPEs contracted by.% y-o-y to EUR.9bn at end-september -- their lowest level since the inception of the database by the EBA in December. This positive performance was due to the carve-out of CCB s NPEs (accounting for more than half of the annual decline at end-september) and, to a lesser extent, sales of bad loans, write-offs and debt-for-asset swaps. Note that the country s largest bank Bank of Cyprus recently announced sales of NPEs worth EUR.7bn in the coming months (c..% of the end-7 stock of total gross loans or c..% of the end-7 stock of NPEs). As a result, the overall NPE ratio declined to.% at end-september from.% a year earlier and a peak of 9.% in May. Against the backdrop of negative NPE formation, and despite increased impairment requirements due to IFRS-9 first-time adoption, banks lowered loan loss provisions. As a result, the (-quarter rolling) cost of risk declined by bps y-o-y to a low of 7 bps in Q:. A drop in operating expenses attenuated the negative impact of the weaker top line on pre-provision earnings in 9M: (down.% y-o-y). Net interest income (NII) declined by.% y-o-y in 9M: due to lower average interest-earning assets (down 7.7% y-o-y to % of GDP) and a weaker NIM (down 7 bps y-o-y to 7 bps), stemming mainly from large sales of NPEs, write-offs and continued deleveraging. Net non-interest income (NNII) also declined in 9M: (down.% y-o-y), reflecting, inter alia, losses from the revaluation and disposal of banks investment properties, lower net fees & commission income (down.% y-o-y) and a base effect from a once-off gain (EUR 9.mn) from HB s divesture of its arrears management unit last year. The deterioration in pre-provision earnings in 9M: was tempered by the decline in operating expenses (down.5% y-o-y), reflecting mainly lower staff costs (down.% y-o-y). The latter resulted mainly from the voluntary early exit scheme of HB at end-q:7 (c. employees) and the transfer of the remaining CCB staff (excluding those absorbed by HB -- c., employees) in early-september. As a result, the cost-to-income ratio increased by 9. pps y-o-y to an estimated 5.% in 9M: -- nevertheless, lower than the EU-average of.%. NBG - Emerging Markets Analysis Bi-Weekly Report 7

9 / /9 / / / / / /5 / /7 / FY:/ FY:/5 FY:5/ FY:/7 FY:7/ FY:/9 FY:9/ FY:/ FY:/ FY:/ FY:/ FY:/5 FY:5/ FY:/7 FY:7/ FY:/9 :/ 5:/ :/ :/ :/5 5:/5 :/5 :/5 :5/ 5:5/ :5/ :5/ :/7 5:/7 :/7 :/7 :7/ 5:7/ :7/ :7/ :/9 5:/9 5 January 9 Egypt B / B / B (S&P / Moody s / Fitch) Revenue, Expenditure & Fiscal Balance (-Month Rolling Sum, % of GDP) Tax Revenue (lhs) Non-Tax Revenue (lhs) Interest Payments (lhs) Primary Expenditure (lhs) Fiscal Balance (rhs) General Government Gross Debt (% of GDP) FX Reserves Forecast FX Reserves excl. IFI Support (USD bn) IMF & WB Support (USD bn) Months of import of GNFS (rhs) Critical Number of Months of Imports of GNFS (rhs) Jan. -M F -M F -M F O/N Interbank Rate (%) EGP/USD Sov. Spread (. bps) 5 Jan. -W % YTD % -Y % HERMES, / /7 7/E /9F 9/F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The sizeable fiscal consolidation planned for this fiscal year --. pps of GDP is on track. The primary balance turned into a surplus of.% of GDP in 5M:/9 (July-November ) from a deficit of.% in 5M:7/, on the back of higher revenue (up. pps of GDP y-o-y) and lower primary expenditure (down. pps of GDP y-o-y). Specifically, the strong revenue performance in 5M:/9 was mainly driven by taxes on income and goods & services (up. pps and. pp of GDP y-o-y, respectively), reflecting stronger economic activity and better collection. On the other hand, the decline in primary expenditure resulted from lower food and energy subsidies (down. pps of GDP y-o-y) and would have been sharper had purchases of goods & services and capital expenditure not increased (each up. pp of GDP y-o-y). Looking ahead, we expect the primary balance to improve at a more rapid pace during the rest of the fiscal year (. pps of GDP y-o-y in - M:/9), mainly on the back of a faster decline in subsidies (by c.. pps of GDP y-o-y in -M:/9), following the recent correction in global oil prices. Note that, 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. 5.% y-o-y in 5M:/9 is expected to be followed by a decline of c. 5.% y-o-y in -//9 (consensus forecast). Overall, we expect the primary balance to improve by. pps to a surplus of.% of GDP this fiscal year, meeting its target and leading to a cumulative fiscal consolidation of 5.5 pps of GDP since 5/ as envisaged in the -year IMF-supported programme. On the other hand, we see the overall fiscal balance improving, albeit at a slower pace, by. pps to a deficit of.% of GDP this fiscal year missing its target of.% -- due to a higher-than-budgeted interest bill (by c.. pps of GDP), in line with the persistent tight monetary policy stance. Importantly, the expected fiscal consolidation this financial year (. pps of GDP), along with high nominal GDP growth, will help reduce further the general government debt to.5% of GDP from 9.5% in 7/ and an all-time high of.% in /7. FX reserves increased by USD 5.5bn to an all-time high of USD.bn (7. months of imports of GNFS) in, underpinned by solid implementation of the loan agreement with the IMF (signed in November ). The rise was supported by: i) the disbursement of USD.bn by the IMF as part of a USD.bn loan; ii) the successful issuance of USD.bn in Eurobonds (USD.bn in February and USD.bn in April); and iii) the disbursement of the third and final USD.bn tranche from a USD.bn WB loan. The pick-up in FX reserves in was also underpinned by a strong recovery in the tourism sector, a significant rise in workers remittances from abroad and higher Suez Canal receipts. The rise in FX reserves in would have been sharper had foreign holdings of T-Bills not declined (down to USD.bn in November from USD7.9bn in December 7) amid a broader global selloff in emerging markets. Encouragingly, foreign holdings of T-Bills showed the first sign of stabilisation in November. For 9, the country s external position is set to strengthen further, underpinned by the continued strong implementation of the IMFsupported economic programme. The release of the fifth tranche of the IMF loan of USD.bn in late-january-early-february and the expected issuance of a Eurobond worth USD 5.bn by end-q:9 will help increase FX reserves to a record high of USD.5bn at end-9 from USD.bn at end. NBG - Emerging Markets Analysis Bi-Weekly Report

10 5 January 9 FOREIGN EXCHANGE MARKETS, JANUARY TH 9 Against the EUR 9 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 (January th 9) 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 5 January 9 MONEY MARKETS, JANUARY TH 9 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, JANUARY TH 9 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, JANUARY TH 9 Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Bulgaria Bulgaria Energy Hld.75% ' EUR NA/NA // 55. South Africa FirstRand Bank Ltd.5% ' USD BBB-/Baa // 5. 9 FirstRand Bank Ltd.5% ' EUR NA/NA //.9 9 Arcelik AS.75% ' EUR BB+/NA /9/ Garanti Bank 5.5% ' USD NA/Ba /9/ 75.7 Turkiye Is Bankasi % ' USD NA/B //, Turkey Vakifbank 5.75% ' USD NA/Ba // TSKB 5.5% ' USD NA/Ba // Petkim 5.75% ' USD NA/B // KOC Holding 5.5% ' USD BB+/Ba 5// CREDIT DEFAULT SWAP SPREADS. JANUARY TH 9 Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine 5-Year Year NBG - Emerging Market Research Bi-Weekly Report

12 5 January 9 EUR-DENOMINATED SOVEREIGN EUROBOND SUMMARY. JANUARY TH 9 Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Albania 5.75% ' EUR B+/B // 5. 5 Bulgaria.5% ' EUR NA/NA // Bulgaria.% ' EUR BBB-/Baa //,5. 55 Bulgaria.95% ' EUR BBB-/Baa /9/,9. Bulgaria.% '7 EUR BBB-/Baa //7, Bulgaria.% '5 EUR BBB-/Baa // Cyprus.% ' EUR BBB-/Ba // Cyprus.75% ' EUR NA/Ba /5/,. 9 Cyprus.75% ' EUR NA/Ba /7/,. 7 Cyprus.75% ' EUR NA/Ba 7// Cyprus.5% '5 EUR NA/Ba //5,.5 FYROM.75% ' EUR BB-/NA // FYROM.975% ' EUR BB-/NA /7/ FYROM 5.5% ' EUR BB-/NA /7/ 5. 9 FYROM.75% '5 EUR BB-/NA // Romania.% ' EUR BBB-/BBB- /9/, Romania.5% ' EUR BBB-/BBB- //, Romania.75% '7 EUR BBB-/BBB- 9//7,. Turkey.5% ' EUR NR/Ba //, Albania 5.75% ' Bulgaria.5% ' EUR-Denominated Eurobond Spreads (January th 9) Bulgaria.% ' Bulgaria.95% ' Bulgaria.% '7 -week change -month change YTD change Bulgaria.% '5 Cyprus.% ' Cyprus.75% ' Cyprus.75% ' Cyprus.75% ' Cyprus.5% '5 FYROM.75% ' FYROM.975% ' FYROM 5.5% ' FYROM.75% '5 Romania.% ' Romania.5% ' Romania.75% '7 Turkey.5% ' Tightening Widening NBG - Emerging Market Research Bi-Weekly Report

13 5 January 9 USD-DENOMINATED SOVEREIGN EUROBOND SUMMARY. JANUARY TH 9 Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Brazil.75% ' USD NA/Ba 5// Brazil.75% ' USD NA/Ba //,7.5 7 Bid Yield Gov. Spread Asset Swap Brazil.75% '5 USD NA/Ba //5. 79 Egypt 5.75% ' USD B/B 9//, 5. 5 Egypt.75% ' USD NA/B //,5. 57 Egypt 5.75% '5 USD B/B // Egypt 7.% ' USD NA/B //, Egypt.75% ' USD B/B //, Egypt.5% '7 USD NA/B // Romania.75% ' USD BBB-/BBB- //, Romania.75% ' USD BBB-/BBB- //,. 5 5 Romania.5% ' USD BBB-/BBB- //, Russia.75% ' USD BBB-/Ba //,5. Russia 5.75% ' USD BBB-/Ba /9/,5 5. Serbia.75% ' USD BB/Ba 5//,5. 7 Serbia 7.5% ' USD BB/Ba /9/,.9 7 S. Africa 5.75% '5 USD BB/Baa /9/5, S. Africa.5% ' USD BB/Baa // Turkey 7.% ' USD NR/Ba 5//, Turkey 7.75% '5 USD NR/Ba 5//5,5. Turkey.75% ' USD NR/Ba 5//, Turkey.% ' USD NR/Ba //, Turkey.75% ' USD NR/Ba //, Ukraine 7.75% ' USD B-/Caa /9/,55 9. Spread USD-Denominated Eurobond Spreads (January th 9) Brazil.75% ' Brazil.75% ' Brazil,75% '5 Egypt 5.75% ' Egypt.75% ' Egypt 5.75% '5 Egypt 7.% ' Egypt.75% ' Egypt.5% '7 Romania.75% ' Romania.75% ' Romania.5% ' Russia.75% ' Russia 5.75% ' Serbia.75% ' Serbia 7.5% ' S. Africa 5.75% '5 S. Africa.5% ' Turkey 7% ' Turkey 7.75% '5 Turkey.75% ' Turkey % ' Turkey.75% ' Ukraine 7.75% ' -week change -month change YTD change Tightening Widening NBG - Emerging Market Research Bi-Weekly Report

14 5 January 9 Level -week % change STOCK MARKETS PERFORMANCE. JANUARY TH 9 -month % change 9 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) 95, ,5 97, Bulgaria (SOFIX) China (SHCOMP), ,, Cyprus (CSE GI) Egypt (HERMES), ,9, F,Y,R,O,M (MBI),..7.7.,7, India (SENSEX) 5, ,, Romania (BET-BK), ,9, Russia (MOEX), ,5, Serbia (BELEX-5) South Africa (FTSE/JSE) 5, ,97 5, Turkey (ISE ), ,99, Ukraine (PFTS) MSCI EMF, , MSCI EAFE, ,79, Greece (ASE-General) Germany (XETRA DAX), ,7, UK (FTSE-), ,599 7, USA (DJ INDUSTRIALS), ,7, USA (S&P 5), ,, Brazil (IBOV) Bulgaria (SOFIX) Equity Indices (January th 9) 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 (MOEX) Serbia (BELEX 5) 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 5) Loss Gain NBG - Emerging Market Research Bi-Weekly Report

15 5 January 9 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