GREECE. The shipping sector displays remarkable flexibility during the international economic crisis, but considerable challenges remain

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1 N A T I O N A L B A N K * GREECE ECONOMIC & MARKET ANALYSIS September 9 The shipping sector displays remarkable flexibility during the international economic crisis, but considerable challenges remain The most remarkable expansionary cycle in recent shipping market history ended in H:8, when the more severe phase of the international financial crisis hit the world economy hard, driving dry bulk freight rates down 93 per cent from their historical high reached in June 8, and 7 per cent below their 1 year average. Nevertheless, the upturn in demand for commodities from China in H1:9, and successful short-term supply management practices by shipowners, triggered a strong rebound in dry market freight rates in Q:9, (up by 3 per cent in late-august despite the significant correction during the July-August period). NBG analysis suggests that the current level of freight rates is not sustainable unless large adjustments take place on the supply side, in the form of cancellations of high outstanding ship orders, as well as increased scrapping. Specifically, despite NBG Research s estimated pick-up in demand for dry bulk shipping by.3 per cent y-o-y during 1-11, and an estimated level of cancellations equal to 1 million dwt during 9-11, combined with scrapping amounting to 7 million dwt (out of a total bulker fleer size of 18 million dwt), the BDI level is projected to fall below in 1 before rising to 7 in 11, approaching its 1-year average of 87 a respectable outcome in view of the size of the initial disequilibrium. Macroeconomic Analysis pp.13-7 Paul Mylonas Director of Research, NBG Group Chief Economist (+31) 33 11, pmylonas@nbg.gr Similarly, in the tanker market, NBG Research projects that demand will pick up by.3 per cent y-o-y between 1-11 and that about 3 million dwt of single-hull tankers will be scrapped (out of a total tanker fleet size of 39 million dwt as of end-8), in conjunction with order cancellations of about million dwt, thus pushing tanker freights per cent above their current relatively depressed levels, but to per cent below their 1-year average. With Greek shipowners expected to participate proportionately in the supply adjustment, total revenue from the shipping sector in the Greek economy is not projected to recover until 11, implying that the Greek merchandise shipping sector will exert a net drag on Greek GDP growth of about. of a percentage point in both 9 and 1, and will have a positive contribution of.3 of a percentage point in 11. Strategy and Economic Research Division 8 Eolou Str., 1 3 Athens, Greece and Financial Bulletin

2 e Jan-1999 Dec-1999 Nov- Oct-1 Sep- Aug-3 Jul- Jun- May- Apr-7 Mar-8 Feb Nicholas Magginas (+31) nimagi@nbg.gr Evangelia Pateli (+31) pateli.evaggelia@nbg.gr The -year boom in the shipping market has come to an end Baltic Dry Index (left axis) Baltic Dry Index (1-year average) Baltic Dirty Tanker Index (right axis) Baltic Dirty Tanker (1-year average) Source: Clarksons with the dry bulk market registering its largest drop since the late-19s Freight Index year 188=1 Great Depression Source: Maritime Economics 3rd Ed. 9 by Martin Stopford % 1 8 The shipping market collapsed in Q3:8 along with the "decoupling scenario" GDP - BRICS (average annual change, left axis) Baltic Dry Index (annual average, right axis) Source: Clarksons, ΙΜFand NBG estimates The shipping sector survived the international economic crisis, but considerable challenges remain The most remarkable expansionary cycle in the shipping market since the early 19s came to an end in Q3:8. The exuberance of the market since, which drove freight prices to historical highs in June 8, and also resulted in an unprecedented surge in shipbuilding orders during -7, reversed course in the second half of the year when the more severe phase of the international financial crisis hit the world economy. Until H1:8, the shipping sector, and especially the dry bulk market -- which was at the center of the boom -- had maintained its momentum, with cargo demand continuing to keep up with accelerating new tonnage supply. Indeed, the Baltic Dry Index (BDI), the shipping industry benchmark for dry cargo freight rates, reached an all-time high of 11,7 points in June 8 (3 per cent above its average level in 7 and 38 per cent above its 1-year average). This rally had been driven by an insatiable appetite for raw materials from developing nations, especially China, in conjunction with a slow adjustment in shipping capacity. The tanker market also had one of its best years in a decade, with tanker freights rising in H1:8 by about per cent over their average level in 7, and 19 per cent above their 1-year average. The shipping sector -- and especially the dry bulk market -- stood out during H1:8 as the most striking example of the -- in the event temporary -- de-coupling scenario, according to which economic activity in rapidly growing developing economies, and especially those of the BRICs, would remain resilient in the face of the rapid deterioration in macroeconomic conditions in developed economies (the US economy was in recession from Q1:8). Indeed, the growth momentum of developing markets was expected to ameliorate the impact of the crisis on the world economy from the rapidly deteriorating macroeconomic outlook of developed economies. However, when the second, more severe, phase of the crisis began in September 8, developing economies succumbed to the crisis as well. There was a dramatic drop in their economic activity, triggering massive cutbacks in industrial production (industrial production in BRICS shrank by 13 per cent on an annual basis in Q:8 y-o-y after about 3 years of double digit expansion). The evolving financial crisis and the concomitant difficulties in obtaining trade finance have amplified the negative repercussions on the shipping sector. As a result, there was a shrinkage in international trade and tonnage demand (by an estimated 11 per cent y-o-y, on average, in Q:8 and Q1:9), the first decline in trade since The BDI index, just a few months after its historical high in June 8, tumbled by an astonishing 93 per cent to in December. NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

3 f Copper Nickel Zinc Iron ore Export HCC Export Thermal Platinum :Q Demand for key commodities tumbled... y-o-y growth Source: Clarksons Coal (Coking) Grain (includes soyabeans) Iron Ore...by the fastest pace in a decade... Source: Global Insight, Bloomberg, MySteel Source: IEA 8:Q-9:Q1, y-o-y change as did the demand for oil The correction in tanker, and especially in dry bulk freight, rates appears to have significantly undershot fundamentals. In fact, capacity utilization had fallen only slightly below its 1-year average in both segments of the shipping market in Q:8 and in the first months of 9 (to 8 per cent for bulkers and to 81 per cent for tankers compared with a 1-year average of 87 and 8 per cent, respectively). At the same time, the peak to trough correction in freight prices exceeded 9 per cent in the dry market and about per cent in the tanker market. The overcorrection reflected, to a significant extent, mounting uncertainty about the strength of the world economy looking forward, as well as about the ability of the market to absorb the extremely high level of new ship builds scheduled for the period In fact, these correspond, in the case of bulk carriers, to over per cent of the existing fleet in dwt terms, according to the end-8 orderbook, even following the recent spate of order cancellations and the pick-up in scrapping. Moreover, financing conditions for both shipowners and shipyards were deteriorating. The upturn in demand for commodities from China in H1:9, and favorable developments in tonnage availability -- partly reflecting successful short-term supply management practices by shipowners triggered a strong rebound in freight rates. Specifically, the BDI reached 1 in mid-june 9 ( per cent above its December trough). Nevertheless, NBG Research believes that the abovedescribed medium-term concerns on both the demand and the supply side of the market, will again reassert themselves, underscoring the considerable downside risks characterizing the shipping market. Indeed, the BDI fell to 7 in early September (39 per cent down from its annual peak in June) reflecting the uncertainty surrounding the medium-term prospects of this sector whereas tanker freight rates are also down 9 per cent from their June level. The key question NBG Research tries to answer is At what level will prices stabilize and how big a supply adjustment is required? The answer, based on our empirical analysis, suggests an unprecedented supply adjustment is needed. Specifically, on the basis of a total estimated level of cancellations of about 1 million dwt during 9-11 (about per cent of the current orderbook), and a total level of scrapping amounting to around 7 million dwt (or 1 per cent of outstanding capacity), NBG Research estimates that capacity utilization will remain below its 1-year average of 87 per cent during the next years. As a result, the BDI level is projected to fall below in 1 before rising to 7 in 11, remaining below its 1-year average of 87 (excluding the boom years). In the event of a weaker recovery in international demand (by 3 per cent annually in 1-11 versus per cent under the 3 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

4 Jan- Jun- Nov- Apr- Sep- Feb- Jul- Dec- May-7 Oct-7 Mar-8 Aug-8 Jan-9 Sep- Feb-7 Jul-7 Dec-7 May-8 Oct-8 Mar-9 Aug f driving capacity utilization to a 1-year low baseline scenario), an additional decline in expected bulker tonnage supply of about 3 million dwt should occur until 11 in order support the previously described BDI path. As regards the tanker market, it is expected that the phasing out of about 3 million dwt of single-hull vessels (almost 9 per cent of outstanding capacity) in conjunction with an estimated total level of cancellations of about million dwt (or 8 per cent of tankers orderbook as of December 8) will drive capacity utilization in the vicinity of 8 per cent in 9 and to 81 and 8 per cent in 1 and 11 respectively, and thus push tanker freights per cent higher that their current relatively depressed levels Dry Bulkers (1-year average) Tankers (1-year average) Dry Bulkers Tankers The shipping market has rebounded in Q:9 as... Source: Clarksons Baltic Dry Index (left axis) Baltic Dirty Tanker Index (right axis)...china took advantage of low commodity prices... Iron Ore imports (mt, left axis) 1 1 Iron Ore Import Prices ($ per ton, right axis) Source: TEX, Morgan Stanley Research China s key role in the market for international commodities After about five months of severe inventory depletions, which brought international trade of basic primary materials to a near standstill, tentative signs of a turnaround in demand emerged at the end of Q1:9. These were based almost exclusively on the reemergence of China s appetite for commodity imports. Indeed, China accounted for an overwhelming 38 per cent of the world seaborne trade of primary materials in 8. Increasing demand for iron ore from China since the beginning of the year, and more recently, for coking coal, other industrial metals and oil have started to outweigh the drop in demand from the rest of the world. This development has led to an increase in seaborne trade for the five major bulk cargoes by about 1 per cent q-o-q in Q:9 compared with a decline of per cent q-o-q in Q1:9 and 13 per cent per cent q-o-q, in Q:8. Chinese demand was fuelled, inter alia, by the $8 billion fiscal stimulus plan announced by the Chinese Government in March, the bulk of which is expected to fund construction and transport infrastructure projects, as well as rapid credit expansion by Chinese banks. It appears to have prompted domestic companies to replenish their stocks of primary commodities, taking advantage of lower commodity prices (international prices of iron ore and coal have returned to levels during Q1:9) and lower freight costs. In several cases (like the Chinese steel industry) low cost imports have substituted for more expensive and lower quality domestic production, providing an additional boost to imports. The tanker market has also benefited from increasing demand for crude oil by China. The quantitative impact however was significantly lower, reflecting that the rebound in oil and oil product imports was more muted compared with the dry cargo sector as well as the fact that the share of China in international oil imports is considerably lower compared with its share in the dry bulk market (3 per cent compared with 38 per cent in dry cargo). This rebound in demand is not sustainable The recent rally in dry bulk freight rates and, to some extent, in tanker freight rates does not signal a sustainable revival in the NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

5 e 9f Apr-3 Sep-3 Feb- Jul- Dec- May- Oct- Mar- Aug- Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb to rebuild commodity stocks... Chinese coking coal imports in kt Source: Reuters 1 % change China contribution to world seaborne trade of iron ore World seaborne trade of iron ore (excl. China) Total world trade of iron ore Source: Clarkson 3 1 counterbalancing the declines in demand internationally, especially in the iron market......and reinforcing its role as the key driver of dry bulk trade Chinese demand as % of global demand 7 8 9E 1E Iron Ore Crude Steel Source: Datastream, DB Research shipping industry and this has already been reflected in the significant correction of the Baltic Dry Index (BDI) since early July (down by 39 per cent in early September, compared with its annual peak in June). For this to occur, the improving trend in industrial sentiment internationally must translate into stock replenishments and increases in manufacturing production in the developed economies, compensating for the eventual slowing in demand from China. Even in this case, further adjustments from the supply side in the form of cancellations of high outstanding ship orders will be necessary to support freight prices (see below). Indeed, there are lingering doubts about the ability of China to continue boosting demand for shipping services in the following months. Inventories of primary commodities (iron ore, coal, copper, grain) at China's main ports have risen almost 7 per cent compared with their level in H:8 (exceeding their -year average by more than per cent), whereas demand from downstream industries (such as the steel industry) continues to fall short in comparison to its average annual growth in the -8 period. Moreover, the attractiveness of imports and commodity stockpiling is fading fast, as freight and commodity prices increase (industrial metal prices have increased by 3 per cent between December 8 and August 9, although they remain about 1 per cent below their 1-year average). Demand for shipping services could gather further momentum in the near term only under a very optimistic scenario. Necessary conditions would comprise that the import frenzy from China in H1:9 is maintained for the remainder of the year -- which is highly unlikely -- and is combined with accelerating demand from the rest of world, resulting in the need for commodity stock replenishment -- from its current very depressed level. International demand for shipping services is projected to bottom out in H:9 but will regain its 7 level in 11 To estimate empirically the future path of seaborne dry cargo trade, NBG Research uses a simple demand equation describing the growth rate of dry cargo trade as a function of the growth of world industrial production and the composite index of commodity price inflation. World industrial production was constructed as a weighted average of regional industrial production indices for developed and major developing countries with the weights corresponding to the share of each region in world seaborne trade of dry cargo. The composite price index for primary goods was constructed as a weighted average of fob prices for the major five dry cargoes with their weights corresponding to the relative significance of each cargo. The expected path of seaborne trade is based on the view that world industrial production bottoms out in Q3:9, as reflected in the NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

6 * 1e 11e Jan-99 Oct-99 Jul- Apr-1 Jan- Oct- Jul-3 Apr- Jan- Oct- Jul- Apr-7 Jan-8 Oct-8 Jan- May- Sep- Jan- May- Sep- Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May Stockpiles of industrial materials -- and especially iron ore -- climbed to extremely high levels iron ore stockpiles at major Chinese ports in mt Source: MySteel although the production of downstream industries has not yet recovered. Europe Japan Source: Clarksons industrial production y-o-y growth USA China Supply-side pressures were muted until now, as deliveries of new ships fell short of the initial orderbook million DWT Realized Bulkcarrier deliveries Expected Bulkcarrier deliveries Estimated cancellations Source: Clarksons recovery in manufacturing PMIs in recent months. Specifically, world industrial production is projected to decrease by per cent y-o-y in H:9 (following a decline of 13 per cent in H1:9) benefiting from favorable base effects from the breakdown in production in Q:8, and to increase by 3. and. per cent, y-o-y, respectively in 1 and 11, nevertheless remaining below its 1-year average pace of.1 per cent annually. Under this scenario, we foresee a decline in seaborne trade by.3 per cent y-o-y in 9 (corresponding to an estimated demand for transport capacity of about 19 million dwt in H1:9 and 18 million dwt in H:9 or a total of 37 million dwt for 9 as whole), followed by average annual increases of. per cent in the next years (corresponding to an annual level of demand for shipping capacity of 388 million dwt in 1 and 1 million dwt in 11). These numbers correspond to an elasticity of seaborne trade growth to industrial production growth of about 1. for the 1-11 period which is broadly in line with its 1-year average. As regards demand for tankers, we project the expected level of seaborne trade of oil and oil products on the basis of the strong correlation with international oil consumption as obtained by IEA historical data and respective forecasts for the period Specifically, the volume of seaborne oil trade is expected to remain below its five year average for the period 9-1 and to recover to higher levels only by 11 (corresponding to a transport capacity demand of 33 million dwt in 9, 3 million dwt in 1 and 38 in 11). Temporary supply-side factors have contributed to the upturn of the shipping market The shipping market has recently benefited from developments in a number of key supply side factors, which have helped tighten available capacity, albeit providing only temporary support: i. The shipbuilding boom of 9 had a slow start Despite the orders boom during -7, the increase in capacity so far has been considerably lower than initially anticipated and as a result supply-side pressures were relatively muted during H:8 and in the first months of 9. Indeed, new deliveries fell significantly short of the initial orderbook (amounting, in the first five months of the year, to only 1 per cent of the total expected deliveries for 9 in dwt terms). The delays are a reflection of several factors, including more difficult financial conditions for all parties, but only push out in time the large supply overhang. ii. Port congestion contained effective tonnage supply The surge in Chinese demand for industrial commodity imports from Australia, Brazil and India, as well for crude oil from a number of oil exporting countries, resulted in increasing NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

7 Q1:7 Q1:73 Q1:7 Q1:79 Q1:8 Q1:8 Q1:88 Q1:91 Q1:9 Q1:97 Q1: Q1:3 Q1: Q1:9 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May million barrels Source: FirstEnergy, Capital Corp, Bloomberg 3 An extensive use of floating oil storage occurred in H1:8 Total bulkcarrier demolitions (-month ma) Total tanker demolitions (-month ma) Source: Clarksons mdwt together with the remarkable acceleration in scrapping activity, have tightened available supply There are significant margins for scrapping in the bulk carrier fleet... years plus 1-19 years Source: Clarksons Average fleet age 1-1 years -9 years - years 3 congestion at some northern Chinese ports (in several cases analogous to that observed during H1:8), which effectively took vessels out of the market. Indeed, an estimated 7 per cent of the total bulk fleet especially large carriers like capesize and panamax -- waited for more than eight days to unload, with the effective tightening for the tankers tonnage availability estimated at about 3 per cent of the total tanker fleet capacity. iii. Shipowners struggled to exploit any opportunity in order to avoid leaving available tonnage capacity idle Techniques for offsetting lower demand were to reduce the average sailing speed (by about per cent) and to use ships as floating storage. The tanker market, especially, drew considerable support from the contango price structure characterizing the crude market at end-8. In such a price phenomenon, near-term oil contracts are cheaper than those for later delivery, encouraging traders to store oil at sea for sale at a later date. IEA data suggest that oil in short-term floating storage averaged about 77 million barrels per day during H1:9 (reaching the highest level in at least two decades, compared with a 1-year average of about million barrels). Indeed, the tankers involved in such activities corresponded to about 8 per cent of available tonnage. Increasing oil prices since May 9 have gradually narrowed the contango margin, making storage a less favorable option, precipitating, in June, the first sustained fall in short-term floating storage levels since they started building up rapidly in the fourth quarter of 8, a trend which appears to be continuing during the July- August period. The huge pending orderbook remains the main challenge for the shipping sector Dry bulk sector Our projections for demand indicate that cargo shipments will remain subdued in 9-11, and thus the level of tonnage supply, as adjusted by the confluence of shipbuilding orders/cancellations/rescheduling and demolition activity, will be the key determinant of shipping market prospects in the medium term. Indeed, based on orderbooks as of December 8, about million dwt of new capacity would enter the market in H:9, with a total expected cumulative increase in supply of about million dwt between 9 and 11 (equivalent to an increase of available tonnage by about 1 per cent). From the above numbers, we must exclude subsequently reported cancellations corresponding to about 39 million dwt (or 1 per cent of the total bulkers orderbook as of December 8). Estimates for cancellations are surrounded by considerable uncertainty, however, as some of the reported cancellations include deals made even before the contract with the yards were signed, or ones that reflect 7 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

8 f 1f 11f NBG forecasts mdwt years 1-19 plus years Source: Clarksons but less so for the tanker fleet Average fleet age 1-1 years -9 years - years Further cancellations are expected in the dry bulk market... Dry Bulk Index (right axis) 1 8 Dry Bulkers Capacity Utilisation (left axis) period average in mdwt 8 9e 1f 11f Demand Supply (based on end-8 orderbook). Supply (adj. for realized cancellations, deferrals and scrapping) 3. Supply (adj. for expected cancellations, deferrals and scrapping) New Scrapping (cumulative) 33 7 New Cancellations/.. deferrals (cumulative) Dry Bulk Market 1 9 Excess Supply Capacity utilization (%) BDI index -baseline scenario tentative reservations with the shipyards, or ones with letters of intent for a new ship to be built (implying that these orders were never included in the reported orderbook). This uncertainty also reflects the fact that yards appear reluctant to report cancellations (especially yards of the world's two largest shipbuilding countries, South Korea and China). Their reluctance reflects the desire to protect owners who face financial difficulties and the desire to avoid publishing any kind of underlying contract re-arrangements. Moreover, the inability of many shipowners to obtain secured financing for their large order books (less than per cent of shipbuilding projects had secured financing before credit conditions worsened dramatically in late-8) is reinforcing the trend towards cancellations. In the same vein, banks became increasingly selective regarding lending against an asset that might not be delivered for another -3 years. At the same time, a significant acceleration in bulk carriers demolition was observed at the end of 8 and in Q1:9, with the level of scrapping being equal to the total bulkers scrapping over the past five years. Specifically, about million dwt of bulk carriers corresponding to about per cent of the existing fleet were phased out in H1:9. Nevertheless, there remains substantial potential for demolition. All in all, even when taking into account scrapping, estimated delays (of the order of 3 million dwt in H1:9) and all confirmed cancellations, the total scheduled delivery still remains the biggest in history, creating medium-term oversupply especially in the dry bulk market. Nevertheless, in view of the poor environment, shipowners are expected to react decisively. The consensus view of market participants is that the total level of cancellations (confirmed and prospected) is likely to reach 1 million dwt (from million dwt currently) or about per cent of the end-8 orderbook. Moreover, we expect the demolition of most ships older than years to subtract about 7 million dwt of capacity. In this event, and provided that expected demand will decline to 37 million dwt in 9 and will recover to 388 and 1 million dwt in the next years, capacity utilization will remain below its 1-year average of 87 per cent, declining to around 8 per cent in 9 and 1 and will pick up to 83 per cent in 11. According to a simple freight pricing model -- describing dry bulk developments as a function of fleet capacity utilization, and BRICs industrial production gap a one percentage point reduction in capacity utilization leads to a 7 point decline in the BDI index. On the basis of the above projections for capacity utilization we expect an average BDI level of : (i) 1 in 9 (corresponding to an average BDI of 7 in H:9); (ii) 197 points in 1; and (iii) 7 points in 11. Under an alternative scenario foreseeing a NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9 8

9 f 1f NBG forecasts period average in mdwt 8 9e 1f 11f Demand Supply (adj. for expected cancellations, deferrals and scrapping) Additional Supply adjustment compared with the baseline scenario 1 Dry Bulk Market -Weak Demand Scenario as well as in the tanker market, which will provide some respite to the market. 1 1 Tankers Capacity Utilization (left axis) Dirty Tanker Index (right axis) in mdwt 8 9e 1f 11f Demand Supply (based on end-8 orderbook). Supply (adj. for realized cancellations and scrapping) 3. Supply (adj. for expected cancellations and scrapping) New Scrapping (cumulative) New Cancellations/... deferrals (cumulative) 1 11 Excess Supply Capacity utilization (%) BDTANI (Tanker) index -baseline scenario Tanker Market weaker recovery in dry bulk seaborne trade in the next years (by 3 per cent annually in 1-11 compared with per cent under the baseline scenario), it is estimated that an additional reduction in supply of about 3 million dwt should take place until 11 to support the above described levels of BDI during the same period. Tanker sector As regards the tanker segment, envisaged completions under the tankers orderbook as of December 8 amount to 1 million dwt during the 9-11 period (or 38 per cent of existing fleet capacity). In this segment, slippages in deliveries remain at low levels compared with the dry bulk market, partly due to fact that tanker orders had peaked earlier than orders for bulk carriers. According to NBG Research, most of the restoration of the imbalance in the tanker market will be achieved through the demolition of older tankers. It is estimated that. million dwt of tankers were scrapped in H1:9, whereas around 3 million dwt of excess tanker capacity could be taken away from the market mainly through the phasing out of single-hull vessels. Moreover confirmed cancellations amount to 1 million dwt (or 1 per cent of tankers orderbook as of December 8). All in all, total cancellations are projected to reach million dwt or about 7 per cent of the order book level as of end-8. At the same time, as detailed above, demand is expected to decline by.7 per cent, y-o-y, in 9 and increase by 3. per cent in 1 and 7. per cent in 11. If this supply adjustment is achieved, the NBG Research tankerfreight pricing model -- describing developments in the Baltic dirty tanker index (BDTANI) as a function of tanker capacity utilization and oil price variability around its 3-year moving average -- projects that BDTANI will stabilize to around points in H:9 (from 9 in H1:9), to 9 in 1 and to above 8 points in 11 corresponding to a capacity utilization of 8 per cent in 9 and 1 and 8 per cent in 11. Under a more pessimistic demand scenario envisaging a weaker recovery in oil consumption in 1-11 (by. per cent annually compared with.3 per cent y-o-y in our baseline scenario) an additional effective decline in tanker supply of about million dwt should occur until 11 to ensure the above described path of fleet capacity utilization and freight rate recovery. Significant downside risks arise in the event of an insufficient supply adjustment The shipping market, and especially the dry bulk segment, faces the danger of re-entering a period of freight rate corrections comparable to that witnessed after September 8, in the event that supply side adjustments, as described above, fall short of the levels necessary to keep capacity utilization at appropriately high levels. 9 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

10 capacity in millions of dwt 1999Q1 Q1 1Q1 Q1 3Q1 Q1 Q1 Q1 7Q1 8Q1 9Q1 1Q1 11Q1 NBG forecasts 1999Q1 Q1 1Q1 Q1 3Q1 Q1 Q1 Q1 7Q1 8Q1 9Q1 1Q1 11Q1 NBG foracasts Tanker Market-Weak Demand Scenario period average in mdwt 8 9e 1f 11f Demand Supply (adj. for expected cancellations and scrapping) Additional Supply adjustment compared with the baseline scenario Baltic Dry Index: actual and fitted Baltic Dry Index (actual) Baltic Dry Index (fitted) Baltic Dirty Tanker Index: actual and fitted Dirty Tanker Index (fitted) Dirty Tanker Index (actual) The Greek fleet has maintained its leading position in the shipping market Japan China average annual rate of capacity growth between - and 7-1 Source: Clarksons & NBG estimates Germany The significant deceleration in the pace of confirmed cancellations in recent months after the respectable improvement in shipping market conditions is indicative of these underlying risks. An additional risk is related to the increasing ship-operating capacity of large primary material producers (e.g. the 3 largest iron ore mining companies Vale, BHP Billiton and Rio Tinto, which now jointly control 7 per cent of global production of iron ore). Their strategy appears to be to rapidly take control of their own shipping requirements, taking advantage of the strong correction in new build prices as well as their significant liquidity buffers. They are therefore unlikely to cancel their orders, and could even take over canceled orders. Along the same vein, several Asian Governments appear eager to protect their shipbuilding industries and to secure the supply of primary resources through nationally-owned fleets, again hindering orderbook adjustments. Indeed, widely-predicted massive cancellations have been delayed as state-owned Chinese shipowners and shipyards are being offered sizeable government subsidies to soak up cancellations from foreign owners aiming primarily at expanding their national fleets. South Korea has offered fiscal support in the form of bank guarantees and direct finance through buy-and-leaseback arrangements (since the beginning of 9), to ensure that domestic shipbuilding orders do not slip into the hands of foreign owners at very low prices. These developments will lead to a gradual eastward shift in the balance of shipowning primacy. The Greek-owned shipping sector maintains its leading position in a very challenging environment The Greek-controlled mercantile fleet remains the world leader (followed by Japan, Germany and China), despite the severe competition from the East, carrying more than 1 per cent of the world s total volume of cargo annually in the -8 period. During this period, Greek shipowners took advantage of their dominant position in the sector, making considerable investments to upgrade the quality and capacity of their fleet in order to maximize their revenues during the upward cycle in the world shipping markets. The payoff from the evolving investment strategy of Greek shipowners is exemplified by the declining age of the Greekcontrolled fleet. Indeed, the average age of the Greek-owned fleet has decreased further to 11.9 years in 8 from 1. years in 7 and is estimated to be one year lower than the average age of the world fleet (1.9 years). As a result, net revenue from the shipping sector, as reflected in the respective inflows in the Greek balance of payments accounts, has increased by 11 per cent annually during the -7 period and by 3.7 per cent, y-o-y, in 8, reaching 7. per cent of GDP. NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9 1

11 Mar-1 Nov-1 Jul- Mar-3 Nov-3 Jul- Mar- Nov- Jul- Mar-7 Nov-7 Jul-8 Mar-9 1, 1, 1,,8 renewing its comparative advantages 3 3 Relative age of Greek-owned fleet (left axis) Size of Greek-owned fleet in million dwt (right axis) Greek shipowners re-emerged as net buyers of ships in H1:9 Against the poor international background, the Greek shipowners exhibited remarkable responsiveness at the outburst of the crisis. They turned into net sellers of ships in H:8, before ship prices reached a trough in December 8. In contrast, Greek shipowners re-appeared as net buyers in H1:9 taking advantage of very low ship prices. More specifically, the Greek-controlled fleet fell to 1. per cent of the world fleet in dwt terms in 8, from 1. per cent a year earlier, with its share in world oil tanker and bulk carrier fleets corresponding to.3 and 18.1 per cent, respectively (in dwt terms), down from.9 and 19.8 per cent in 7. The decline in market share also reflects the more frontloaded orderbook of some of Greece s main competitors (such as Japan, China and South Korea). Shipping revenue dropped by 18.8 per cent y-o-y in Q:8 -- for the first time since. The contraction in shipping revenue has intensified in the first half of 9 (-8. per cent y-o-y, during the January-June period) and is expected to continue at about the same pace in the coming months, although this decline is exaggerated by the record high levels in freight prices reached in Q:8. A bottoming-out in shipping revenues is expected after Q3:9, and the future path of net revenues will be determined by the confluence of international freight rates, as described above, in conjunction with developments in the size and structure of the Greek fleet. - H1:8 H:8 H1:9 Sales of ships by Greek shipowners (in dwt) Purchases by Greek shipowners (in dwt) Net purchases Source: Clarksons and NBG estimates Time chartering permitted Greek ship-owners Time charter rate -1-year-of 11, dwt D/H Modern Tanker ($/day, 1-month ma) Baltic Dirty Tanker Index (y-o-y % change) The significant quality upgrade and the differentiation of revenue sources, especially the significant share of tankers in the Greekowned fleet ( per cent compared with 3 per cent for the world fleet) -- with the tanker segment exhibiting more defensive characteristics during the crisis has provided some cushion to Greek shipowners. In addition, the extensive utilization of time chartering by Greek shipowners permitted them to smooth out the exceptional volatility of spot freight prices. Moreover, the share of revenues entering the Greek economy contains more inelastic categories of transportation revenues, such as those related to maintenance and cleaning of ships, storage and warehousing as well as agents fees associated with insurance and brokerage, thus reducing, to some extent, the volatility of shipping revenues. Indeed, receipts from shipping and auxiliary services declined at a significantly lower pace compared with the annual decline in composite freight prices (by 1 per cent y-o-y, between October 8 and March 9, compared with 3 per cent for the composite freight rate), whereas the long-term elasticity of shipping revenue with respect to freight prices is about.8. Indeed, NBG estimates that total shipping receipts in the Greek services balance correspond to a respectable 7 per cent of total imputed earnings of the Greek-owned fleet in H1:9 and about per cent in 8 (as inferred by average revenue per ship category adjusted for the 11 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

12 :Q1 Mar-1 Nov-1 Jul- Mar-3 Nov-3 Jul- Mar- Nov- Jul- Mar-7 Nov-7 Jul-8 Mar to smooth out the volatility of spot freight prices structure of the Greek fleet and the average level of capacity utilization) in comparison to per cent for Norway. The main challenge for Greek shipowners is how to manage down their large orderbook. The dramatic correction in shipping markets since September found Greek shipowners exposed to the deteriorating environment with a considerable size of pending shipbuilding orders (corresponding to about per cent of the existing Greek-owned fleet), especially of bulk carriers Time charter rate -1 year- of, dwt bulkcarrier ($/day, 1-month ma) Baltic Dry Index ( y-o-y % change) The correction in freight prices will take a toll on shipping revenue y-o-y % change Net shipping revenues (left axis) Clarksea Index (annualized, right axis) A significant share of inelastic payments also sustains inflows to the Greek economy Bulkers Crew Stores Administrative costs Source: Paragonship Tankers Insurance Repairs/ Maintenance We make the brave assumption that Greek shipowners will try to maintain their current share in the global fleet capacity against a sustained expansionary trend of the Chinese fleet. If this holds true, it is estimated that a cumulative cancellation of about 8 per cent of the Greek tankers orderbook as of December 8 and of 3 per cent of the bulk carriers orderbook would result in a constant world market share for the Greek tanker and bulker fleets, respectively. Nevertheless, under this scenario for the market shares and under the above-described scenarios for freight prices, total revenue from the shipping sector in the Greek economy is not expected to exceed its 8 level until 11, suggesting that the Greek merchandise shipping sector (which corresponds to about.8 per cent of GDP including ancillary services) will be a net drag on Greek GDP growth, of about. and.3 of a percentage point respectively, in 9 and 1, and will have a positive contribution of.3 of a percentage point in 11. Beyond the orderbook adjustment challenge, Greek shipowners must cope with the fierce competition from Asian shipowners -- who in several cases enjoy government support as well as favorable access to bank financing in conjunction with more aggressive strategies of large commodity exporting companies, which attempt to control freight costs and trade volumes. Finally, the significant dependence of the Greek shipping sector on foreign bank financing (shipping-loan portfolios of Greek banks correspond to about per cent of total loans to Greek shipping companies which amount to about 7bn) exposes Greek shipowners to additional financing risks -- in comparison to their major competitors from the Far-East -- related to the adaptation of more conservative credit risk management practices by financial institutions suffering capital and liquidity shortages. NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9 1

13 Weak service exports and investment spending push the Greek economy into its first recession since 1993 The Greek economy lost further steam in Q:9, with GDP declining by.3 per cent y-o-y, (down from +.3 per cent y-o-y in Q:9), the first decline since 1993, as falling fixed capital formation, and exports, as well as inventory depletion outweighed the positive contribution from a large fiscal impulse and plummeting imports. The service sector orientation of the economy, especially tourism, has muted the impact of the manufacturing-centered crisis on the Greek economy, and has delayed the impact to H:9, when the decline in output is expected to be greater (-½ per cent y-o-y), especially as the room for further fiscal stimulus has narrowed. Overall activity is projected to decline by 1. per cent y-o-y in 9, somewhat less than our previous forecast in view of the large fiscal stimulus to date, and remain weak in 1 as fiscal policy will tighten, offsetting the improving world environment. Private consumption had a negative contribution to GDP growth in H1:9 (of -.8 of a percentage point, compared with a positive contribution of.9 percentage points, on average, during the past decade). The drag derives from deteriorating labor market conditions (with employment declining by.8 per cent, y-o-y on average, in the second quarter of 9 and by significantly more on an FTE basis) and tighter credit conditions, offsetting high real wage increases (by about 3 per cent in 9, but higher in the private sector and broadly flat in the civil service). The risks for private consumption growth continue to be tilted to the downside as employment is expected to shrink further (with unemployment expected to reach 9. per cent in 9 from 7. per cent in 8), mainly in the tourism-related services sub-sectors as well as in the retail and wholesale trade, offsetting the positive impact from fiscal policy (of the order of. per cent of GDP). Moreover, additional downward pressure on consumption spending is expected to arise from: i) the need for intensifying the fiscal adjustment effort in view of EMU commitments and the high debt burden, ii) an expected containment of wage costs in the private as well as public sectors, with a view to sustaining employment, and iii) the weakening of fading favorable terms of trade effects from falling energy prices. In addition, in view of the highly uncertain environment, household savings are expected to increase, putting further downward pressure on consumption. The continuing retrenchment in construction activity compounded by shrinking business investment, amid poor demand prospects, and margins for additional adjustment in inventories, are expected to exert a net drag of more than percentage points on economic activity in 9, before reversing course in mid-1 (see June 9 issue). The continuing shrinkage in imports (especially imports of capital and intermediate goods as well as of consumer durables) is expected to more than compensate for the significant drop in exports of goods and services. Indeed, increasing signs of a faster than-initially-expected stabilization of the world economy could confine the losses in tourism and shipping revenues in the range of -1 to -1 per cent y-o-y in H:9, from nearly per cent in H1:9. Against this background, the contribution of net exports will be of the order of percentage points. Moreover, the current account deficit is expected to shrink by almost percentage points of GDP (to around 1. per cent of GDP), the lowest level since. Data on budget implementation in H1:9 continue to point to sizeable deviations from the targets of the Stability and Growth Pact (of the order of. billion or.7 per cent of GDP, at the level of the central government). The slippage reflects several factors: (i) declining revenue due to weakening domestic demand, (ii) delays in the implementation of new revenue measures, (iii) the introduction of fiscal packages for vulnerable sectors of the economy, (iv) higher-than-projected transfers due to the operation of automatic stabilizers, and (v) accelerating public investment. All in all, with both 13 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

14 f f f f seasonal factors and the snap elections weighing against the Budget, the fiscal stimulus is estimated to be of the order of per cent of GDP for the full year, adding around percentage points to GDP growth in 9. Of the total deficit, only 1.3 percentage points is due to traditional cyclical factors (though there may be a political-cycle effect whose size is hard to gauge) and thus the deficit will likely be large again in 1. Strict measures may not provide a commensurate brake to the economy if medium-term prospects and credibility are seen to improve. Headline inflation will remain muted in 9, near 1. per cent, while the core measure will stubbornly remain near 1.7 per cent despite the sizeable output gap (of the order of -1½ per cent of potential GDP), due to rapidly rising unit labor cost, by per cent y-o-y, and structural rigidities in domestic markets.1 Monetary conditions have eased over recent months, reflecting successive interest rate reductions by the ECB (with the short-term interbank rate lying below. per cent since June) in conjunction with additional measures for liquidity enhancement (e.g. the unprecedented, large fixed rate tender with a 1-month maturity). Nevertheless, in view of weakening demand and higher credit criteria, credit expansion to the private sector decelerated further to. per cent y-o-y in July. However, on a m-o-m basis outstanding balances are picking up for both households and enterprises in July (to +.3 per cent m-o-m), compared with the March-June monthly averages (+.17 and -. per cent y-o-y respectively), suggesting that credit conditions are beginning to normalize. The main sources of uncertainty to this outlook now appear more balanced and include: (i) a more significant correction in private consumption, reflecting enduring uncertainty about the path of fiscal policy post-elections, and a continuing deterioration in labor market conditions; and ii) a faster-thaninitially-expected stabilization in the international economic environment which could be transmitted into the domestic economy through the external demand channel with an estimated lag of to 3 quarters ,,, - -3 y-o-y change y-o-y change -, -, Private Consumption -Greece Real Disposable Income - Greece Source: NSSG and NBG estimates Greek Exports (left axis) Euro area GDP (right axis) Source: NSSG and NBG estimates y-o-y change y-o-y change Greek Imports (left axis) Domestic Demand (right axis) Source: NSSG and NBG estimates Number of residential building permits (left axis) Residential Investment (right axis) Source: NSSG and NBG estimates NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9 1

15 3:Q1 3:Q3 :Q1 :Q3 :Q1 :Q3 :Q1 :Q3 7:Q1 7:Q3 8:Q1 8:Q3 9:Q1 Mar-3 Aug-3 Jan- Jun- Nov- Apr- Sep- Feb- Jul- Dec- May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 1:Q1 1:Q :Q3 3:Q :Q1 :Q :Q3 :Q 7:Q1 7:Q 8:Q3 9:Q GROWTH OUTLOOK 8,,,,, -, -, Contribution to GDP Growth Consumption Investment Net Exports Inventories GDP growth Economic activity shrunk by.3 per cent y-o-y in Q:9 -- for the first time since as expanding public consumption (3. per cent y-o-y) and rapidly declining imports (-1.8 per cent y-o-y) proved insufficient to counterbalance the drag from plunging investment spending (-1. per cent y-o-y), declining private consumption (-. per cent) and contracting exports (-1.9 per cent). Looking ahead, GDP growth is expected to remain in negative territory (-1. per cent, y-o-y for the whole year) dragged down by shrinking private investment, continuing inventory depletions and declining service exports, but will remain more resilient in comparison to the euro area, reflecting the service sector orientation of the economy. The main sources of support are loose monetary conditions and a large fiscal impulse (of about per cent of GDP). Nevertheless, leading indicators are starting to show signs of life, and the economy is expected to return to positive growth in 1. GDP and Services Confidence, Purchasing Managers' Indices ,, 3,, 1,, , 3 3 Services confidence, y-o-y growth (left axis) GDP, y-o-y growth (right axis) Greece Euro area Greece: Growth Outlook f 1f 8f 9f Q1 Q Q3 Q Q1 Qe Q3f Qf GDP (per cent y-o-y),,9-1,, 3, 3,,7,,3 -,3 -,3 -, GDP (per cent q-o-q),9,9,,3-1,, -1,, Domestic Demand (y-o-y),1,7-3,1,8,,9 -,8,8 -,7 -, -3, -3,7 Final Consumption (y-o-y) 3,9, -,,3 3,1 3,3, 1, 1, -,9-1, -, Private Consumption (y-o-y) 3,1, -,,9 3, 3, 1,,9 -,1 -, Public Consumption (y-o-y) 7,7 3,,,1,7 3,9,8 1,,1 3, Fixed Capital Formation (y-o-y), -11, -13,9 1, -1, -1, -1, -,3 -,3-1, -1, -1, Construction 1,8-1, -11,8,8-11, -19, -7,,,7-9,1 Equipment 9,3-9, -1, 1,1-1, -8,7 -, -1,3 -,3-31,9 Inventories (contribution to GDP) 1, 1, -,7,3, 1, 1, 1, -, -,7 -, -1,3 Net exports (contribution to GDP) -1,,1, -,3 1,, 3,7 1, 1,1, 1, 1, Exports (y-o-y) 3,1,3-13,, 7,,,8-1, -, -1,9-1, -9, Imports (y-o-y),8 -, -1,,9,1 -,1-9, -, -1,8-1,8-1, -11, 1 New revised quarterly series by NSSG (November 8) 1 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

16 :Q 3:Q 3:Q :Q :Q :Q :Q :Q :Q 7:Q 7:Q 8:Q 8:Q 9:Q :Q1 :Q3 :Q1 :Q3 :Q1 :Q3 7:Q1 7:Q3 8:Q1 8:Q3 9:Q1 Nov- Apr-3 Sep-3 Feb- Jul- Dec- May- Oct- Mar- Aug- Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Nov- Apr-3 Sep-3 Feb- Jul- Dec- May- Oct- Mar- Aug- Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Nov- Apr-3 Sep-3 Feb- Jul- Dec- May- Oct- Mar- Aug- Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 CONSUMPTION % Consumption Indicators New Passenger Car Registrations (right axis) Consumer Durables, vol (y-o-y change, left axis) Private consumption continues on a downward trend, with retail sales volumes (excluding autos and auto fuels) declining by 1. per cent y-o-y in June, as deteriorating labor market conditions and decelerating consumer credit weigh increasingly on household spending decisions -- especially consumer durables (down by. per cent in June). The improvement in car registrations in the July-August period (up by 18.8 per cent y-o-y, on average) reflects the impact of a subsidy scheme implemented from April to end-august. Despite a recent pick-up, consumer sentiment remains near historic lows (- in August compared with -9 during Q:9) -- notwithstanding annual real wage increases estimated to be 3. per cent -- reflecting declining employment (-.8 per cent y-o-y in the second quarter of the year) and lower working hours (by about 3. per cent compared with their average level in 8). The situation is unlikely to recover soon, and overall private consumption will remain in negative territory in 9, although its shrinkage on a q-o-q basis is likely to wane in the final two quarters. % Retail Sales Volume ( y-o-y growth) Consumer Confidence Greece -year average Euro area Greece Greece (left axis) Euro area (right axis) 7, 1, Private Consumption and Household Lending, 3, 1, %,,, Private Consumption and Consumer Confidence , -, 1, - -, - Household lending (in real terms, y-o-y left axis) Private consumption (in real terms y-o-y, right axis) Private Consumption (y-o-y growth, left axis) Consumer Confidence (right axis) NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9 1

17 Jan- Jul- Jan-3 Jul-3 Jan- Jul- Jan- Jul- Jan- Jul- Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Q Q1 3 Q 3 Q3 Q Q1 Q Q3 7 Q 8 Q1 9 BUSINESS SECTOR % Industrial Production and Capacity Utilization Capacity Utilization (right axis) Industrial Production (left axis) Purchasing Managers' Indices and Industrial Production Manufacturing production shrank further (down by 9 per cent y-o-y in July), suggesting that the notable improvement in sentiment indicators has not yet been translated into increased production, reflecting the fact that Greece s industrial structure is largely dependent on sectors which lag behind the international economic cycle, such as constructionrelated sectors (e.g. metals and non-metallic minerals) as well as the chemical industry. The considerable rebound in the PMI (1.1 in August against an average of.9 in Q:9) largely reflects improving demand and price prospects -- from very depressed levels in previous months -- as well as the evolving de-stocking process, although survey data for inventories still remain significantly above their 1-year average. The continuing drop in permit issuance in April-May period (-.1 per cent y-o-y) foreshadows further contractions in residential construction activity in the months ahead, although some early signs of bottoming out are provided by the relatively improved confidence indicators (- in the July- August period compared with -7 in Q:9). 3 1 Stocks of Finished Goods and Industrial Production PMI, deviat. from (left axis) Industial production, y-o-y change (right axis) Stocks of finished goods, index (left axis) Industial production, y-o-y change (right axis) % Construction Confidence and Construction Permits % % Investment and Industrial Confidence Construction Confidence (left axis) Volume of Permits (y-o-y change, 3-month moving average, right axis) Real fixed investment (y-o-y growth, left axis) Industrial confidence (right axis) 17 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

18 :Q1 :Q :Q3 :Q :Q1 :Q :Q3 :Q 7:Q1 7:Q 7:Q3 7:Q 8:Q1 8:Q 8:Q3 8:Q 9:Q1 :Q1 :Q3 :Q1 :Q3 :Q1 :Q3 7:Q1 7:Q3 8:Q1 8:Q3 9:Q1 3:Q3 :Q1 :Q3 :Q1 :Q3 :Q1 :Q3 7:Q1 7:Q3 8:Q1 8:Q3 9:Q1 LABOR MARKET The Greek labor market exhibited further signs of deterioration during Q:9, with the unemployment rate being about 1. of a percentage point higher than a year earlier, reaching 8.8 per cent. Declining activity in the manufacturing and construction sectors, in conjunction with a poor start for the tourism season and weakening employment prospects in the retail and wholesale trade sectors, foreshadows an increasing trend in unemployment in the following quarters with the average unemployment rate for 9 rising to 9. per cent and to 1 per cent in 1 from 7.7 per cent in 8. Employment shrank by.8 per cent, y-o-y, on average, over the second quarter of 9, suggesting that slowing economic activity has started to take its toll on the labor market. Looking ahead, employment is expected to decline by about 1. per cent in 9, as labor market conditions deteriorate further in H:9 due to the usual lagged response of employment to changes in GDP growth. Job losses will be concentrated in the tourism and retail trade sectors and the construction sector. The high share of employment in the broader public sector (3 per cent) and of self-employment (8.8 per cent), in conjunction with the decline in hours worked (by an estimated 3. per cent y-o-y) are containing the expected increase in the unemployment rate compared with the euro area (to.3 percentage points between 8 and 1 compared with. percentage points for the euro area). Employment Rate (Population 1-) Unemployment Rate by Sex (per cent) Men (Greece) Women (Greece) Euro Area Greece Total (Greece) Women (Euro Area) Men (Euro Area) Total (Euro Area) Labor Productivity and Real wage 3 Employment Growth (y-o-y) (Population 1-) Greece: labor productivity Euro area: labor productivity Greece: Real min. wage of blue collar worker Euro area: real compensation per employee Greece Euro Area NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9 18

19 Q1 Q3 Q1 Q3 Q1 Q3 Q1 7 Q3 7 Q1 8 Q3 8 Q1 9 Q Q3 1 Q Q1 3 Q 3 Q3 Q Q1 Q Q3 7 Q 8 Q1 9 Q1: Q3: Q1: Q3: Q1: Q3: Q1:7 Q3:7 Q1:8 Q3:8 Q1:9 EXTERNAL SECTOR Merchandise exports and imports y-o-y change Exports (excl. oil & ships,q ma) Imports (excl. oil & ships q ma) The current account deficit has narrowed by.bn over the first half of 9 - compared with the same period a year ago - reflecting a shrinking oil import bill (down by.bn as a result of lower oil prices as well as slowing industrial production), much lower merchandise imports (down by.bn due to the persistent weakening in domestic demand) and l payments for ships (by around 1.bn), offsetting lower exports (merchandise, down by 1.bn) and net service receipts (down by bn). The pace of improvement in the deficit is expected to slow during the summer months as an estimated double-digit decline in tourism revenue (by around 1 per cent y-o-y) due to declining tourist arrivals and generous discounts in tourism packages, and the stabilization of oil prices at higher levels will temper the gains from rapidly dropping merchandise imports. The current account deficit is projected to fall to below 11 per cent of GDP in 9 from 1½ per cent of GDP in Annual Change in Net Travel and Transportation Balances -q mov. avg (y-o-y change) Current Account Deficit and Real Effective Exchange Rate Net travel receipts Net transportation receipts CA deficit as percent of GDP (excl. oil and transfers, left axis) REER (CPI based Index, =1; right axis) Balance of Payments (in billion EUR) 7 8 9f 8 9 Source: Bank of Greece Q1 Q Q3 Q Q1 Q Current Account -3, -3, -,7-9, -9,7 -, -1,3-7,3-7, Current Account ( % of GDP) -1,1-1, -1, -3,9 -, -,3 -, -3, -3, Non-oil Trade Balance -3,3-31,9-3,7-7,8-9, -7,7-7, -,8 -, Non-oil Exports 1, 1, 13,3 3,7 3,7,3 3,8 3,1 3, Non-oil Imports -,7-7, -37, -11, -1,8-1, -11, -8,8 9, Oil Balance -9, -1, -,8-3,1 -,9-3,7 -, -1,9-1,7 Services Balance 1, 17, 13,8 1,9, 8,,3 1, 3, Income Balance -9,1-1,9-11,1 -, -3,1-3, -,8 -, -,8 Current Transfers, net 1,,8, 1,,9,3,1 1,,1 Capital transfers,3,1 3, 1,,8,9 1,,, Financial Account 7, 3, 8, 8,7, 8, 7, 7, Foreign Direct Investment, net -, 1,7 -,, -,,,1 1,1 Portfolio Investment, net 17, 1,7 9,3-9, 17,7-1, Other Investment, net 1,7 1,1 -, 1, -1, 9, -8,3-1, Change in Reserve Assets -,3,,1, -,1,,1 -, 19 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

20 Dec- Jun- Dec- Jun- Dec- Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec- Jun- Dec- Jun- Dec- Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 INFLATION NBG Inflation Projections y-o-y change CPI Core Q1:8 (p.a),,8 Q:8 (p.a),7 3, Q3:8 (p.a),7 3,7 Q:8 (p.a),9 3, Average 8, 3, Q1:9 (p.a) 1, 3,3 Q:9 (p.a),7,3 Q3:9f (p.a),8 1, Q:9f (p.a) 1, 1,3 Average 9 (1) 1,,1 (1) Assuming oil prices at $/brl and $/ of 1.3 on average for 9 Headline inflation bottomed at a -year trough of. per cent y-o-y, on average, in the May-June period and ticked up to.8 per cent y-o-y in August, as favorable base effects on energy prices are starting to gradually fade. The reversal of the downward trend in inflation is expected to be muted as economic activity decelerates rapidly and labor market conditions continue to deteriorate. Core inflation will continue to exceed headline inflation by more than 1 percentage point (remaining in the vicinity of per cent) as a result of rapidly rising unit labor costs and structural rigidities in domestic markets, only partly offset by the impact of the output gap moving into negative territory and firms pricing power remaining weak. 3, Core Inflation and Producer Prices (excl. energy) y-o-y change 1, 7,, Core Inflation and Headline Inflation y-o-y change,,,, 3, 3,, 1, 1, 1, -,,, Core inflation (left axis) Producer prices (excl.energy) (right axis) Core Inflation Headline inflation NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

21 Sep- Dec- Mar- Jun- Sep- Dec- Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Jan-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 FISCAL DEVELOPMENTS (I) During the first half of 9, Ordinary Budget revenues continued to fall significantly behind the revised annual target, contracting by 3.3 per cent y-o-y, compared with the SGP target of an increase of 1.8 per cent (a deviation of the order of.bn), reflecting the unexpected slowdown of the economy as well as delays in the implementation of new revenue measures. Though revenue has remained a relatively constant share of (a much smaller) GDP, it has fallen by more than the euro area average, despite the relatively stronger economic activity in Q1 where there exist comparable data (+.3 per cent y-o-y increase in activity in Greece versus.9 per cent y-o-y for the euro area and - per cent versus broadly flat for revenue, respectively), possibly reflecting the impact of the political cycle on revenue collection in an economy with a large share of self-employed and small firms. Over the same period, Ordinary Budget primary expenditure rose by 1.9 per cent y-o-y, also overshooting the SGP target of 1. per cent y-o-y (by 1.bn) and as a result expenditure has risen by about percentage points of GDP compared with a year ago. The Government is finding it difficult to balance the increased need for social cohesion measures with the need to contain the fiscal imbalance. Reflecting these weaknesses, the central government deficit reached 7.1 per cent of GDP in H1:9 (on an accrued basis) compared with 3.7 per cent in H1:8. On a cash basis, the deficit of central government reached 7. per cent of GDP in the first half of the year, compared with 3.3 per cent in the same period of 8 and 7. per cent for the full year 8. Ordinary Budget Q1:9/Q1:8 H1:9/H1:8 SPG 9 Target 1.Net Revenues (a - b) -, -3,3 1,8 a. Revenues before tax refund Budget Implementation (annual percentage change), -,7 13,9 b. Tax Refund 77,8 31,9 1,3. Expenditure (a+b),9 13,3 9,8 1 1 Primary Outlays (Cumulative y-o-y change) Primary outlays SGP target Total revenues SGP target Primary outlays - Ordinary Budget (left axis) Total revenues - Ordinary Budget (right axis) a. Primary Expenditure 19,1 1,9 1, b. Interest Payments 8,8 9, 7,9 Public Investment Budget (%GDP) -1, -,3 -,1 3. Revenues -8, -7,7 -,7. Expenditure 7,9,1-8,. CG Budget Deficit (% of GDP) Source: Ministry of Finance,8 7,1,1 3,, 1,, -1, -, Primary Balance, Primary Outlays, Revenues % (GDP, 1 - month ma) Primary surplus (left axis) Net revenues (right axis) Primary outlays (right axis) Source: Ministry of Finance, 1,, 19, 18, 1 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

22 Italy France Belgium Germany Euro area Portugal Austria Greece USA Ireland OECD Spain Netherlands Finland UK f Sep- Feb- Jul- Dec- May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 Q1: Q3: Q1: Q3: Q1:7 Q3:7 Q1:8 Q3:8 Q1:9 FISCAL DEVELOPMENTS (II) Budget revenue may be supported in the second half of 9 by new revenue measures announced in June, which are expected to yield.bn by the end of the year. These measures comprise: (i) a hike in the special consumption tax on fuels and tobacco products ( mn), (ii) an increase in mobile telephone taxes ( 1mn), (iii) a fee for the legalization of semi-open spaces in residences ( 1bn), (iv) the abolishment of a tax-free allowance on lottery revenues ( 18mn), (v) the imposition of registration duties on recreational and sailing boats ( mn), and vi) a decrease in international aid ( 1mn). On top of that, another 1.bn will come from the new property tax on households for 8 (accruing in 9) and some 3mn from once-off tax hikes on high income individuals. On the basis of the current trends in budget implementation and the fact that snap elections will occur in October 9, implementation of many of the revenue measures may be delayed or cancelled and expenditure is unlikely to be tightened, especially in the seasonally high Q period. The market consensus is converging to the view that a large fiscal slippage in 9 is now inevitable. Indeed, without the envisaged impact from these measures and an improved effort on tax collection post election, the general government budget deficit is expected to be of the order of per cent of GDP in 9 compared with. per cent in 8. This deterioration is similar to that for the average of the euro area, albeit less welcome in a high debt economy. The Greek Government is estimated to have broadly covered its financing needs for 9 with the total level of sovereign debt issuance until late-august reaching bn against an estimated level of redemptions of 9.7bn (implying a net increase in financing of 9 per cent of GDP) VAT Tax Revenues against GDP Growth 1, 7,,,,,, 3, Central Government Net Borrowing Requirements (cash basis, BoG data),, 3,,, VAT (y-o-y growth, left axis) Gross Domestic Product (nominal, y-o-y growth, right axis) Source: Ministry of Finance, Bank of Greece Central government Ordinary budget Annual change in general government deficit (9 vs 8) General Government Deficit (% GDP) Source: OECD and NBG forecasts Greece Spain Ireland Euro area Germany Source: OECD and NBG forecasts NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

23 Apr-99 Mar- Feb-1 Jan- Dec- Nov-3 Oct- Sep- Aug- Jul-7 Jun-8 May-9 Apr-1 Dec-1 Aug- Apr-3 Dec-3 Aug- Apr- Dec- Aug- Apr-7 Dec-7 Aug-8 Apr-9 Jan-3 Jun-3 Nov-3 Apr- Sep- Feb- Jul- Dec- May- Oct- Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Jan- Sep- May- Jan- Sep- May-7 Jan-8 Sep-8 May-9 Aug-99 Jul- Jun-1 May- Apr-3 Mar- Feb- Jan- Dec- Nov-7 Oct-8 MONETARY CONDITIONS %, 3,, -3, -, Monetary Conditions Index tighter monetary conditions looser monetary conditions Greece MCI Average (199-) Euro area MCI Monetary conditions have eased over recent months, reflecting successive interest rate reductions by the ECB (with the short-term interbank rate lying below. per cent since June) in conjunction with additional measures for liquidity enhancement (e.g. the unprecedented billion injection by the ECB to the euro area banking system in June, at a fixed rate tender with a 1-month maturity). The marginal tightening in relative monetary conditions in Greece in comparison with the euro area, during the June-August period, largely reflects a larger drop in inflation compared with the euro area average. Credit expansion to the private sector decelerated further to. per cent y-o-y in July, as consumer and mortgage credit slowed to.8 and. per cent y-o-y, respectively (from 7.1 and. per cent in June), and credit to enterprises to.9 per cent (from 8. per cent in June). Nevertheless, on a m-o-m basis outstanding balances are picking up for both households and enterprises in July (to +.3 per cent m-o-m), compared with the March-June monthly averages (+.17 and -. per cent y-o-y respectively), suggesting that credit conditions are beginning to normalize. Interest Rates % % Retail and Corporate Loans (y-o-y growth) 3 1 Corporate loans (excluding bank overdrafts, up to and including 1 mn, new loans) Mortgage loans Corporate Lending (including bond loans, left axis) Loans to Households (including securitized loans, right axis) 3 Deposits and Loans to the Private Sector (y-o-y growth) 3 %, 3, Financial Conditions Index* tighter financial conditions , -1, -3, -, looser financial conditions Deposits (including repos) Loans to the Private Sector (including securitized loans and bond loans) FCI Average (199-) * Comprises the MCI adjusted for equity market developments 3 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

24 Jan-3 May-3 Sep-3 Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Jan- Mar- Jun- Sep- Nov- Feb-7 May-7 Aug-7 Oct-7 Jan-8 Apr-8 Jun-8 Sep-8 Dec-8 Mar-9 May-9 Jan-3 Jun-3 Nov-3 Apr- Sep- Feb- Jul- Dec- May- Oct- Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 BOND MARKET 1 1 Government Bond Yield and Turnover Turnover on HDAT (bn euros, left axis) Bond Yields (right axis),7,,7, 3,7 3, The spread of the 1-year Greek government bond over the benchmark bund has fallen in late-august below 13 bps (or some 13 bps lower than the highs reached in February), reflecting the remarkable improvement in investors risk appetite as well as the extraordinary liquidity enhancement measures by the ECB. Indeed, there has been a significant moderation in liquidity and credit risk premia, while the Greek sovereign issuance program for 9 has been broadly completed and the deterioration in the budget position was in line with other euro area countries. Turnover on the paperless trading system HDAT has improved considerably during the July-August period (to. billion per month compared with a monthly average of 17 billion in the first six months of 9), suggesting that the Greek, along with other peripheral euro area, debt valuations have benefited from improved liquidity conditions. Continuing on a downward trend from the peak reached in Q1:9, corporate bond spreads over swaps have further contracted in the July-August period, with the spreads for PPC and for HTO falling to 18 bps and 9 bps, respectively (down from bps and bps in H1:9). 3 Government bond spreads over Bund 3, Term Structure (as at /8/9), 1 Greek 1-y government bond spread over Bund in , 3,, 3, 1, 1,,, y 3y y y y 7y 8y 9y 1y 1y Italy Greece Ireland Source: Datastream Greece Germany, 3, 1-year Government Bond Yields and Spread against Bunds Corporate Bond Spreads over Swaps (bps) 1 1, - - Greek Bonds (left axis) German Bunds (left axis) Spread (right axis) OTE Corporate bond (BBB+) PPC Corporate bond (BBB+) NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

25 Jan-3 Jun-3 Dec-3 Jun- Dec- May- Nov- May- Nov- Apr-7 Oct-7 Apr-8 Oct-8 Dec-8 May-9 Jan-3 Dec- Jun- Oct- Mar-7 Aug-7 Jan-8 May-8 Oct-8 Feb-9 Jul-9 Jan- May- Oct- Feb- Jul- Dec- Apr- Sep- Jan-7 Jun-7 Nov-7 Mar-8 Aug-8 Dec-8 May-9 Jan-3 Jul-3 Jan- Jul- Jan- Aug- Feb- Aug- Feb-7 Aug-7 Mar-8 Sep-8 Mar-9 STOCK MARKET The Greek stock market outperformed during the past five months with equity market valuations rising by 9 per cent between March and August (when a -year low had been reached) compared with rises of 3. per cent and 3.3 per cent for US and euro area stock markets, respectively, during the same period. The over-performance of the Greek market largely reflects relatively more compressed Greek stock valuations in conjunction with a widespread improvement in risk appetite. Since the beginning of the year, medium-cap stocks have outperformed the large and the small-caps (increasing by 3. per cent as opposed to 3.7 per cent and 18. per cent). The best performing sectors over this period have been those of technology (.3 per cent), personal and household goods (. per cent) and banks (1. per cent), whereas travel and leisure (-1.9 per cent), telecommunications (-1.3 per cent) and media (7. per cent) displayed the worst performances. In terms of valuations, the trailing 1-month P/E of the broad Greek stock market index has risen to 1.9 in August, but is still short of its long-term average of 13.. The respective ratio for the US stock market (S&P Index) has risen to 18.1, against a long-term average of 1., whereas the P/E of the DJ Eurostoxx lies at 1., or 1 bps below its long-term average. Implied volatility, after peaking at per cent in mid-december, has been on a downward path and has receded further in late-august towards its 3-year average level, of 3.7 per cent against 7. per cent for the euro area reflecting the improvement in market sentiment, although the higher β for the Greek market underlines, inter alia, the strong economic interlinkages of the Greek economy with SE Europe, as well as concerns over the structural weaknesses of the economy. 7,, 17, Comparative PE Ratios 7,, 17, % Comparative Returns in Local Terms (1/1/3=1) 1, 7, 1, 7, 1 1,, ASE Index DJ EUROSTOXX Index S&P Index ASE GENERAL Index S&P Index DJ EUROSTOXX Index Implied Volatility Main Athens Stock Market Indices (1/1/3=1 ) FTSE-ASE Dow Jones Euro STOXX FTSE-ASE FTSE-ASE FTSE-ASE 8 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

26 Greek Economy: Selected Indicators f 1f year aver. year aver. Q Q3 Q Q1 Q Most recent Real sector (y-o-y period average, constant prices) GDP,1,9 3,,7,,3 -,3 Q:9 -,3-1,, Domestic demand,1,7,9 -,8,8 -,7 -, Q:9 -, -3,1,8 Final Consumption 3,9, 3,3, 1, 1, -,9 Q:9 -,9 -,,3 Gross fixed capital formation, -11, -1, -1, -,3 -,3-1, Q:9-1, -13,9 1, Exports of goods and services 3,1,3,,8-1, -, -1,9 Q:9-1,9-13,, Imports of goods and services,8 -, -,1-9, -, -1,8-1,8 Q:9-1,8-1,,9 Coincident and leading indicators (period average) Retail sales volume (y-o-y), -1, 1, -, -3,7-9, -13,3 Jun -1, Retail confidence (-yr. average: 1,3) 3, 1,, 9,7-1, -3,3 -,3 Aug -9, Car registrations (y-o-y) 3,3-7,9 -, -, -3, -38, -18,8 Aug,7 Consumer confidence (-yr. average: -37,1) -8, -, -, -7,3 -, -3, -9, Aug -, Industrial production (y-o-y), -3, -, -, -, -7, -1,1 Jul -9, Manufacturing production (y-o-y) 1,9-3,3-1,8 -,9 -,7-1,1-11,1 Jun -9, Capacity Utilization (-yr. average: 7,3 ) 77,1 7, 7, 77, 77, 71, 9,9 Jun 7, Industrial confidence (-yr. average: -3,3), -, -, -, -18, -33, -3, Aug -7, PMI Manufacturing (base=) 3,7,, 1, 3,8 39,,9 Aug 1,1 Construction permits (y-o-y) -3,1-1,1 -, -1,9-3, -11, May -1, Construction confidence (-yr. average: -18,) -9, -9, -7, -,7-17, -3, -7,3 Aug -7, PIP Disbursements (y-o-y) 8, 7,7 78, -8,, 19,7 8, Jun, Stock of finished goods (-yr. average: 1,9) 1,9 1,8 1,3 11, 1,3 3, 8, Aug 9, External sector (period average) Current account balance as % of GDP -1,1-1, -, -,3 -, -3, -3, Q:9-3, -1, -9, Current account balance (EUR mn) -3393, Q:9-79 Services balance, net (EUR mn) 191, Q:9 99 Current Transfers, net (EUR mn) , Q:9 7, Merchandise exports-- non-oil (y-o-y cum.) 9, 8, 7,8 13, 8, -17, -19, Q:9-19, Merchandise imports-- non-oil (y-o-y cum.) 17,, 1,,, -3,1-9,7 Q:9-9,7 Employment Unemployment rate 8, 7,7 7, 7, 7,9 9,3 8,8 Jun 8, 9, Employment growth (y-o-y) 1,3 1, 1, 1,1 1, -, -,8 Jun 1, -1, Prices (y-o-y period average) Headline inflation,9,,7,7,9 1,,7 Aug,8 1,, Core inflation 3, 3, 3, 3,7 3, 3,3,3 Aug 1,7,1, Producer prices, 8,7 11, 11,9 1, -, -8,8 Jun -9,1 Producer prices excl.energy,1, 7,1 7,, 1,1 May -, Fiscal policy Government deficit/gdp 3,, 8-9 Government debt/gdp 9,8 97, 1 Revenues--Ordinary budget (cum. % change), 1,1,3,1,1 -, -3,3 Q:9-3,3 Expenditure--Ordinary bugdet (cum. % change) 9,8 8,,7 9, 9,3 19,1 1,9 Q:9 1,9 Monetary sector (y-o-y, end of period) Deposits (including repos) 13,1 1,9 13,1 1,3 1,9 1, May 13, Loans to private sector (incl. sec. & bond loans),9 1,, 19,3 1,9 11, 7, Jul, Mortgage loans (including securitized loans) 1, 11, 17,1 1,1 11, 8,7, Jul, Consumer credit (including securitized loans), 1, 1,,7 1, 1,9 7,1 Jul,8 Interest rates (period average) 1-year government bond yield,,8,8,9,,7,3 Aug, Spread between 1 year and bunds (bps) 7, 79, 1, 7, 131,3 7, 19, Aug 1,3 Exchange rates (period average) USD/euro 1,37 1,7 1, 1, 1,3 1,3 1,3 Aug 1,3 1, 1, Real effective exchange rate (CPI based, =1) 1, 1, 1, 13,9 1,1 1,7 1,8 Aug 1, Stock market (y-o-y end of period) ASE capitalization/gdp (per cent) 8,,9 3,1 3, 7,9, 33,7 Jul 3, ASE Index 17,9 -, -9, -,3 -, -7,9-3,8 Aug -,9 FTSE-ASE 1,8-8,9-8, -,1 -, -8,9-39,1 Aug -7,3 FTSE-ASE 19, -9,7-31,9 -,7-9,7-3, -3,7 Aug -3, Sources: BoG, NSSG, MoF, ASE,NBG,Bloomberg NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9

27 * GREECE Economic & Market Analysis September 9 NATIONAL BANK This Bulletin can be viewed at: and Financial Bulletin Editor: P. Mylonas, Director of Strategy and Economic Research Division, Tel: (+31) 3311, FAX: (+31) 3317, pmylonas@nbg.gr. Main contributors to this issue (in alphabetical order): P. Agalopoulou, D. Brissimi, N. Magginas, E. Pateli. The Bulletin is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on its contents. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. Any data provided in this bulletin has been obtained from sources believed to be reliable. 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 accept no liability for any direct or consequential loss arising from any use of this report. Note: The Bulletin analysis is based on data up to September 1, 9, unless otherwise indicated. 7 NATIONAL BANK OF GREECE S.A. Greece: Economic & Market Analysis September 9