Economic Analysis Division Emerging Markets Analysis

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1 Bulgaria EU Greece EMDE* FYROM Egypt Cyprus Romania Serbia Turkey Albania Cyprus Serbia Greece Bulgaria EU Turkey Albania FYROM Romania EMDE* Egypt Cyprus Greece FYROM EU Albania Bulgaria Serbia World Romania EMDE* Turkey Egypt Egypt EMDE* Turkey Romania Albania World Bulgaria Serbia Cyprus FYROM Greece EU Economic Analysis Division Emerging Markets Analysis Bi-Weekly Report May TURKEY Banking sector profitability decelerated sharply in Q:, on the back of slowing credit activity, narrowing interest margins and rising provision charges ROMANIA Tensions escalate between the President and the Government The NBR hiked its key rate by a further bps to.% NBG - Economic Analysis Division BULGARIA Lower grants from the EU and higher budget spending pushed down the budget surplus to.% of GDP on a -quarter rolling basis in Q: from.9% in Q:7 Bulgaria s already low public debt is set to decline further in FY: 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 SERBIA Fiscal policy stance turned expansionary in Q:, with the -quarter rolling fiscal surplus declining by. pps y-o-y to.% of GDP FYROM Credit to the private sector maintained momentum in Q: (up.7% y-o-y), supported by improving bank asset quality and easing liquidity conditions Customer deposits gained momentum in Q: Tourism activity picked up significantly in Q: (up.% y-o-y), mainly due to the normalization of the political situation Real GDP Growth (%, F) ALBANIA Economic growth reached a post-global crisis high of.% in FY:7, supported by two large energy projects and their spill-over effects * EMDE: Emerging Market & Developing Economies End-year Headline Inflation (%, F) 9 * EMDE: Emerging Market & Developing Economies 9 CYPRUS Customer deposits declined in Q:, as a result of temporary pressures on the customer base of Cyprus Cooperative Bank (CCB) Credit deleveraging accelerated in Q:, mainly reflecting increased efforts by banks to reduce NPLs Tourist activity began the year on a strong footing, with growth in arrivals up to.7% y-o-y in March, on a -month rolling basis, from.% in December Fiscal Balance (% of GDP, F) EGYPT FX reserves rose by USD 7.bn to a record high USD.bn in the first four months of, supported by the solid implementation of the loan agreement with the IMF Headline inflation eased further to.% y-o-y in April * EMDE: Emerging Market & Developing Economies Current Account Balance (% of GDP, F) APPENDIX: FINANCIAL MARKETS * EMDE: Emerging Market & Developing Economies Please see disclosures in page

2 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: May Turkey BB- / Ba / BB+ (S&P/ Moody s / Fitch) Quarterly Net Banking Sector Profit (Bn, TRY, Annualised) Net Interest Income Provisions Net Non-Interest Income Taxes Operating Expenses Net Income (right scale) Quarterly ROAE and Net Interest Margin (Annualised) ROAE (%, left scale) Net Interest Margin (bps of Average Assets, right scale) Quarterly Cost of Risk (Annualised) and NPL Ratio NPL Ratio (bps, left scale) Cost of Risk (bps, right scale) May -M F -M F -M F -m TRIBOR (%).... TRY/EUR.... Sov. Spread (, bps) May -W % YTD % -Y % ISE, F 9F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Banking sector profitability decelerated sharply in Q:, on the back of slowing credit activity, narrowing interest margins and rising provision charges. Banking sector net profits posted their weakest growth performance in ½ years in Q: up.% y-o-y to TRY.9bn (EUR.bn or.% of GDP) against increases of.% in Q:7 and.% in FY:7. The slowdown reflects both decelerating pre-provision earnings and accelerating provision charges. As a result, (annualised) ROAA and ROAE declined to.7% and.%, respectively, in Q: from.% and 7.% a year ago. Pre-provision earnings lost momentum in Q: -- up.% y-o-y against a rise of.% a year earlier due to a slowdown in the top line and an acceleration in operating expenses. Net interest income (NII) growth declined to.% y-o-y in Q: from 9.% a year earlier, due to weaker average asset growth (up 7.% y-o-y against a rise of 9.% in Q:7) and a lower net interest margin (NIM, over average assets, down bps y-o-y to 7 bps annualised). Note that the deceleration in average gross loans was even sharper (up 9.% y-o-y against a rise of.% in Q:7), reflecting a base effect. In fact, ahead of the April 7 constitutional referendum, the BRSA relaxed some macro-prudential measures and the Government increased the amount allocated to the credit guarantee fund (CGF) -- established to stimulate lending to SMEs in their efforts to boost economic activity, which had slowed sharply since the July failed coup. The deterioration in NIM was largely driven by unfavourable funding costs, reflecting tighter liquidity conditions (total and local currency loans-to-deposits ratios rose to record highs of.% and 7.%, respectively, at end-q: from 9.% and.% in Q:7) and a tighter monetary policy stance (the CBRT effective funding rate stood at a record high of.% in Q: up from.% a year earlier). Indeed, interest rates on TRY and USD deposits reached multi-year highs of.% and.9%, respectively, in Q: up from 9.% and.% in Q:7. Net non-interest income (NNII) growth also declined, to 9.7% y-o-y in Q: from 7.% a year earlier, mainly due large losses from foreign currency trading. The deceleration in pre-provision earnings was also driven by an acceleration in operating expenses (up.% y-o-y in Q: against a rise of 7.% in Q:7), mainly due to personnel expenses. The latter rose by.% y-o-y in Q: against.7% in Q:7, despite reductions in the headcount and the number of bank branches (down.% and.% y-o-y, respectively, to k and.k in Q:). Provisions charges rose sharply in Q: -- up.% y-o-y against 7.% in Q:7 -- in view of the deteriorating operating environment and due to the implementation of IFRS 9. In addition to the negative impact from the implementation of IFRS 9 from January st, banks expect: i) a continued slowdown in credit activity; ii) a further narrowing of net interest margins; and iii) an imminent reversal of the downward trend in NPLs, due to a sharp weakening of the TRY (by c..% y-t-d and c..% y-o-y against the equally-weighted USD- EUR basket as at March th ) and a significant slowdown in economic activity (we expect GDP growth to slow to.% in FY: from 7.% in FY:7). Note that several large Turkish companies have recently sought to restructure their debts, including the food giant Yildiz Holding -- seeking to restructure USD.bn of its debt of USD.bn (according to Reuters). As a result, the cost of risk rose by bps to a -year high of bps in Q:. NBG - Emerging Markets Analysis Bi-Weekly Report

3 7 F / 7/ / 7/ / 7/ / 7/ / 7/ / 7/ / 7/ /7 7/7 / 7/ /9 7/9 / May Romania BBB- / Baa / BBB- (S&P / Moody s / Fitch) Ruling Coalition Composition of Parliament Monetary Conditions Index Exchange Rate Contribution Monetary Conditions Index Chamber of Deputies tighter monetary conditions looser monetary conditions Forecast Interest Rate Contribution Real GDP Growth, Budget Deficit, Current Account Deficit & Inflation Budget Deficit (% of GDP) Current Account Deficit (% of GDP) Real GDP Growth (y-o-y % change) Inflation (y-o-y % change, aop) Senate Party Seats Seats PSD 7 ALDE 9 PNL 7 9 USR UDMR 9 PMP Minorities Independent MPs Total 9 May -M F -M F -M F -m ROBOR (%) RON/EUR.... Sov. Spread (, bps) 7 May -W % YTD % -Y % BET-BK, F 9F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Tensions escalate between the President and the Government. In early-may, the opposition-linked President K. Iohannis called for the resignation of PM V. Dancila, after the latter overstepped her powers on foreign policy by endorsing a deal to move the country s embassy in Israel to Jerusalem. Some days later, the President reiterated his call, citing, this time, the significant deterioration in the fiscal accounts in Q:. Note that a PM can only be removed through a vote of no confidence; however, in view of the comfortable majority of the ruling PSD-ALDE coalition in Parliament (see table), PM Dancila should easily survive such a vote. At the same time, the President challenged a series of bills overhauling the judiciary at the Constitutional Court, on the basis that they do not respect the rule of law. The main points of the proposed reform include granting control to the Ministry of Justice over the judicial inspection unit (currently managed by an independent watchdog) and depriving the President of the power to appoint senior judges. The Government s initiatives have drawn strong criticism both domestically and internationally and come at a time when the EU is considering a proposal to cut funding to countries where the rule of law is under threat. Worryingly, Romania has yet to comply with the benchmarks set years ago by the EU s Cooperation and Verification Mechanism (mainly focusing on the reform of the judicial system and fight against corruption). Concerns were also raised over the pending changes to the criminal code. These include, inter alia, the decriminalisation of several graft offenses. According to the opposition, the changes would benefit convicted PSD members, including the party leader and the real power behind PM Dancila s Government, L. Dragnea. All said, we expect tensions between the Government and the President to escalate further, especially ahead of the next year s Presidential elections. As a result, political uncertainty is unlikely to subside soon, hindering policy implementation and hurting investor confidence. The NBR hiked its key rate by a further bps to.%. In early- May, the NBR raised its -week repo rate by bps to.%, bringing total rate hikes to 7 bps since January. Importantly, the extent of the monetary policy tightening carried out is, in fact, much larger. It amounts to c. bps, considering the hike in money market rates, following the absorption of excess liquidity in the market by the NBR in early-april, through deposit-taking operations. Nevertheless, monetary conditions still remain loose, with the ex-post real -month money market rate estimated at -.%, well below its 7-year average of.%. The NBR is set to continue to raise rates in an effort to attenuate overheating pressures. The economy appears to be overheating, with GDP growth (projected at.% in FY: against 7.% in FY:7) well above its long-term potential (of c..%), headline inflation at high levels (projected at.% at end-, above the target of.±%) and the current account deficit up sharply (to a projected.% of GDP in FY: from.% in FY:7). At the same time, fiscal policy remains expansionary (the budget deficit is prοjected to rise to.% of GDP in FY: from.% in FY:7, well abοve the EU threshold of.%). Against this backdrop, the NBR appears to be behind the curve. Our Taylor rule estimates suggest that the policy rate should be raised to.% to address these challenges, from.% currently. However, in view of the authorities reluctance to proceed with aggressive rate hikes, especially in the cοntext of limited or no tightening by other central banks in the region and still flat ECB rates, we believe the NBR will tighten its stance gradually. All said, we see the NBR raising its key rate by another bps in FY: and by 7 bps in FY:9. NBG - Emerging Markets Analysis Bi-Weekly Report

4 Q:7 Q:7 Q: Q: Q:9 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: Q:7 Q:7 Q: Q: Q:9 Q:9 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: May Bulgaria BB+ / Baa / BBB- (S&P / Moody s / Fitch) Consolidated Budget (% of GDP) 7 Outcome Q:7 Q: Budget NBG Forecast Total Revenue Tax Revenue Non-Tax Rev Grants..... Total Expenditure Current Spending o/w Wages Goods & Services Subsidies..... Social Spending Interest Payments Capital Expend Contr. to the EU Fiscal Balance Tax Revenue, Primary Expenditure & Fiscal Balance (-Q rolling sum) Fiscal Balance (% of GDP, lhs) Tax Revenue (y-o-y % change, rhs) Primary Expenditure (y-o-y % change, rhs) Gross Public Debt & Fiscal Reseves (as % of GDP) - to BGN ), and the social benefits linked to it in January, pensions - are set to increase in July (by.%). - However, the expected slippage in current spending should be more - - than offset by the overperformance in tax revenue. Indeed, with the 7 9 Bulgaria s already low public debt is set to decline further in Gross Public Debt Fiscal Reserves FY:. Bulgaria s gross financing needs are estimated at BGN.9 bn May -M F -M F -M F (.% of GDP) in FY:, including domestic debt repayments worth BGN.bn. Note that the FY: budget law allows for new debt issuance worth up to BGN.bn. The remaining financing needs should be covered through the depletion of fiscal reserves (standing at EUR.bn or 9.9% of GDP at end-7). All said, gross public debt is May -W % YTD % -Y % projected to decline to c..% of GDP at end- from 7.% at end-7, remaining among the lowest in the EU (where the average 7E F 9F stands at c. % of GDP). Contingent liabilities from state-owned enterprises (SOEs) pose a significant, albeit manageable, fiscal risk. Note that non-financial SOE debt stands at c..% of GDP. More worryingly, around % of SOEs are loss-making, highlighting the need for deep structural reforms. NBG - Emerging Markets Analysis Bi-Weekly Report -m SOFIBOR (%) BGN/EUR Sov. Spread (, bps) 9 9 SOFIX Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Lower grants from the EU and higher budget spending pushed down the budget surplus to.% of GDP on a -quarter rolling basis in Q: from.9% in Q:7. In Q:, the consolidated budget surplus narrowed markedly to.% of GDP from.% in the same period a year ago. Specifically, budget revenue declined in Q: (by. pps of GDP y-o-y), driven by (temporarily) lower grants from the EU (down. pps of GDP y-o-y). Importantly, despite lower EU funding, public investment increased in Q: (by. pps of GDP y-o-y). At the same time, primary current spending accelerated (up. pps of GDP y-o-y in Q:), on the back of higher personnel expenses (see below) and public consumption, as well as a larger contribution to the EU budget. Fiscal policy is set to remain expansionary during the remainder of the year. The main driver behind the expected fiscal deterioration is public investment, which is projected to rise sharply in FY: (to an optimistic -year high of.9% of GDP from.% in FY:7). Indeed, several major construction projects, which had been cancelled by the caretaker Government in office in early-7 on procedural grounds, are set to be resumed during the remainder of the year. At the same time, current spending is set to accelerate, fueled by the loose incomes policy and higher public consumption (mainly spending related to defense). Regarding the former, in addition to the targeted hikes in public sector wages (up 9.% on average in the education and security and defense sectors) as well as the minimum wage (by.9% FY: budget projections based on an underestimated FY:7 tax revenue (an outcome of.% of GDP against a projection of.% of GDP), and in view of the implementation of additional revenueenhancing measures (including a hike in the excise duty on tobacco and a pp rise in social security contributions for pensions, projected to yield a total of.% of GDP in FY:), strong consumption-driven economic growth and improving tax compliance, we expect tax revenue to be well above its FY: budget target. Overall, assuming full implementation of the ambitious public investment programme, we see the fiscal balance turning into a deficit of.% of GDP in FY: from a surplus of.9% in FY:7, overperforming, however, compared with its deficit target of.% of GDP. The sizeable implied fiscal impulse (. pps of GDP), if it were to occur, would help the Bulgarian economy maintain a solid pace of expansion (we see FY: GDP growth at.%, above its long-term potential rate for a th consecutive year).

5 May The fiscal policy stance turned expansionary in Q:, with the Serbia -quarter rolling fiscal surplus declining by. pps y-o-y to.% BB / Ba / BB (S&P / Moody s / Fitch) of GDP. The cumulative consolidated fiscal surplus narrowed slightly by. pps y-o-y to.% of GDP in Q:, reflecting higher Consolidated Fiscal Balance (% of GDP) expenditure (up. pps of GDP y-o-y) and unchanged revenue. 7 Q:7 Q: F Indeed, overall revenue remained flat on an annual basis in Q:, as Budget NBG an improvement in tax revenue was offset by a deterioration in non-tax Revenue revenue. The positive tax revenue performance was mainly driven by Tax Revenue higher excise duties on hydrocarbon oils, corporate income tax and PIT social contributions (up. pps,. pp and. pp of GDP y-o-y, CIT..... respectively, in Q:). This was in line with: i) a marked improvement VAT Excises..... in employment, wages and consumption, as well as corporate Customs profitability in FY:7; and ii) a continued improvement in tax collection. Other taxes..... The negative non-tax revenue performance reflects large once-offs Soc. Contrib throughout FY:7, including (unusually large) dividends from stateowned Non-Tax Rev companies. Grants..... On the other hand, the rise in spending in Q: resulted from: Expenditure i) higher capital expenditure (up. pps of GDP y-o-y); and Current Exp ii) personnel expenditure (up by. pps of GDP y-o-y), partly due to Personnel the targeted -% rise in public sector wages (with a fiscal impact of Goods & Services pps of GDP in FY:). The rise in outlays in Q: was, however, Subsidies..... held back by lower interest payments (down. pps of GDP y-o-y), Social Assist o/w Pensions due to the decline in public debt and a stronger RSD (by.% and Other......% y-o-y, respectively, against the USD and the EUR, at end-q:). Int. Payments A weaker-than-budgeted expansionary fiscal stance in sight this Capital Exp year. The Budget envisages an expansionary fiscal stance, Activated Guarant targeting a fiscal deficit of.7% of GDP --.9 pps above the FY:7 Net Lending..... outcome. In our view, the FY: deficit target is overly pessimistic, as it Fiscal Balance is based on both under-estimated FY:7 revenue (a budgeted.% Primary Balance of GDP against an outcome of.%) and over-estimated FY:7 expenditure (a budgeted.% of GDP against an outcome of.%). In fact, we expect the expansionary fiscal stance, initiated in Q:, to Gross Public Debt in SEE- (% of GDP) continue during the rest of the year (.7 pps of GDP y-o-y in Bulgaria Romania FYROM Serbia Albania -M:). Emerging & Developing Economies SEE- Specifically, we foresee overall revenue weakening (by. pp y-o-y in -M:), due to: i) a milder boost from collection efficiency (that supported the revenue performance in FY:7); ii) weaker non-tax revenue, reflecting large once-offs in 7; and iii) weaker corporate income tax that reached a record high (mainly supported by lower funding costs). Note that the negative impact from the drop in the nontaxable salary (by.k to RSD.k as of January, estimated at. pps of GDP) should broadly be offset by the positive impact on social contributions from the % rise in the minimum wage. On the other hand, we expect expenditure to decline slightly (by. pps of GDP y-o-y in -M:), despite the above-mentioned hike in F public sector wages, a % increase in pensions (with a fiscal impact of. pps of GDP in FY:) and a strong increase in capital expenditure May -M F -M F -M F (set to rise by. pps y-o-y in -M:). The decline in expenditure in -m BELIBOR (%)..9.. RSD/EUR M: should result from lower net lending (reflecting the ongoing Sov. Spread (, bps) restructuring of SOEs), the continued public sector employment ban, as well as lower social assistance outlays (following the sharp decline May -W % YTD % -Y % in the unemployment rate). Overall, we see the FY: fiscal balance BELEX posting a surplus of.% of GDP -- overperfoming its deficit target of 7 F 9F.7% of GDP and resulting in a fiscal impulse of.9 pps of GDP (for Real GDP Growth (%) the first time in years). Should our FY: fiscal deficit forecast Inflation (eop, %)..... materialise, the public debt-to-gdp ratio should decline further for a rd Cur. Acct. Bal. (% GDP) successive year to c..% of GDP from.% in FY:7 and a Fiscal Bal. (% GDP) year high of 7.% at end-. NBG - Emerging Markets Analysis Bi-Weekly Report

6 FY: FY: FY: FY: FY: FY: FY:7 FY: May F.Y.R.O.M BB- / NR / BB (S&P / Moody s / Fitch) Credit to the Private Sector & Customer Deposits (y-o-y % change) / / / / / /7 / Total Credit Total Deposits Contribution of Credit Impulse to GDP Growth (pps) Forecast Credit Impulse Other GDP Growth Contributions to Tourist Arrivals Growth (pps) M: M: M: M: M: M:7 M: Βulgaria Turkey EU (excl. Greece, Bulgaria) Greece Οther Total, y-o-y % ch. May -M F -M F -M F -m SKIBOR (%).... MKD/EUR.... Sov. Spread (. bps) 9 May -W % YTD % -Y % MBI, F 9F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Credit to the private sector maintained momentum in Q: (up.7% y-o-y), sustained by improving bank asset quality and easing liquidity conditions. Credit to the private sector increased by a solid.7% y-o-y at end-q:, following a similar rise at end-7. The robust credit growth in Q: was supported, inter alia, by: i) easing liquidity conditions (the loan-to-deposit ratio reached a multiyear low of 9.% in Q:); ii) favourable lending interest rates (with the blended interest rate declining by bps y-o-y to a multi-year low of.7% in Q:); and iii) a further clean-up of banks balance sheets. Indeed, the NPL ratio declined to a historical low of.% in March from.% a year earlier and a peak of.% at end-, mainly on the back of the entry into force of the end- Central Bank regulation, requiring banks to write off their fully-provisioned loans held in loss category for more than two years. Note that the sharp decline in the NPL ratio was almost exclusively driven by the corporate segment (the NPL ratio for corporates eased significantly to 7.% in March from 9.7% a year earlier, while that for the retail sector declined slightly to.% in March from.% a year earlier). Looking ahead, we expect credit activity to gain momentum, in view of improving confidence, following the normalization of the political environment, and strengthening economic activity (GDP growth is set to rebound to.% in FY: from.% in FY:7). According to our baseline scenario, projecting credit growth of 7% this year, the credit impulse (defined as the change in the flow of bank credit scaled by nominal GDP) should return to positive territory in FY: (to.7 pps from -. pps in FY:7), contributing. pps to GDP growth, after having subtracted. pps from FY:7 GDP growth. Customer deposits gained momentum in Q:, supported by strengthening confidence. Customer deposits rose by a solid.% y-o-y at end-q: against.% at end-7, underpinned by strengthening confidence in the domestic economy following the Government s efforts to end its disputes with neighbouring countries, Greece and Bulgaria, which should open the way for the start of EU accession talks and NATO membership. The rebound was driven by both retail deposits and corporate deposits (up 7.% and.% y-o-y at end-q:, from.% and.% at end-7). The rebound in deposits would have been sharper had deposit remuneration rates not continued to decline (the blended deposit interest rate fell by bps y-o-y to.% in Q:). Tourism activity picked up significantly in Q: (up.% y-o-y), mainly due to the normalization of the political situation. Tourist arrivals increased sharply, by.% y-o-y in Q: against a rise of.9% a year earlier. The recovery reflects a favourable base effect from Q:7, when heightening political uncertainly deterred a large number of foreign visitors. Recall that there was a political vacuum in the first months of 7, as the ruling SDSM-led coalition Government took office months after the general elections. The strong Q: performance was also supported by the Government s financial incentives towards low-cost airline companies to bring European tourists to the country. Importantly, the rebound in arrivals in Q: was broad-based, with the number of visitors from Turkey, Bulgaria and the EU (excluding Greece and Bulgaria) rising by.%,.% and 9.% y-o-y, respectively, against %,.7% and.9% in Q:7. Looking ahead, we expect tourist arrivals to lose momentum during the remainder of the year, as base effects will will turn unsupportive from June. Overall, we see tourist arrivals rising by c..% to an all-time high of.mn in FY: -- the nd best growth performance in years. NBG - Emerging Markets Analysis Bi-Weekly Report

7 FY: FY: FY: FY: FY: FY: FY:7 FY: FY:9 FY: FY: FY: FY: FY: FY: FY: FY:7 FY: 9 7 F May Albania B+ / B / NR (S&P / Moody s / Fitch) pps Contribution Rates to Real GDP Growth pps - Real GDP (y-o-y % change) Real GDP excluding Agriculture (y-o-y % change) - 7 Agriculture Industry Construction Services Taxes & Subsidies Real GDP Growth in SEE- and EU- (%) Romania Serbia Albania Bulgaria FYROM EU- Contributions to Actual Real GDP Growth (pps) Actual GDP - CAGR (Boom) Change in Output Gap Potential GDP Growth Actual GDP Growth Actual GDP 9- CAGR (Post Global Crisis) May -M F -M F -M F -m TRIBOR (mid, %).... ALL/EUR Sov. Spread (bps) 7 7 May -W % YTD % -Y % Stock Market F 9F Real GDP Growth (%) Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Economic growth reached a post-global crisis high of.% in FY:7, supported by two large energy projects and their spill-over effects. GDP growth accelerated in 7, for a fourth successive year, to a -year high of.% from.% in FY: and.% in FY:, despite political turbulence ahead of the June general elections. The robust performance in FY:7 mainly reflects the strengthening in the construction sector (up sharply by.% in FY:7, contributing. pp to overall GDP growth, against a rise of.% in FY:). The double-digit growth in the construction sector was underpinned by: i) the intensification in construction of two major energy projects (i.e. Trans-Adriatic Pipeline, TAP, and the two Statkraft/Devoll hydropower plants); as well as ii) capital expenditure (up sharply by.% in FY:7 against a decline of.7% in FY:). Moreover, industrial output accelerated in FY:7, expanding by.% (contributing. pps to GDP growth) compared with a rise of just.% in FY:. Industrial output was likely supported by stronger extraction output (especially the oil industry, following sharp declines in -). The latter reflects: i) the recovery in oil prices (up 9.%, in EUR terms, in FY:7 against a decline of.7% in FY:); and ii) the acquisition of the Canadian-based oil company, Bankers Petroleum, by China s Geo-Jade Petroleum Corporation at end- September. Industrial output was also reinforced by the rebound in the textile and footwear subsector (its exports rose to.7%, in EUR terms, in FY:7 from 9.% in FY:, according to BoP data). A further boost to industrial output was likely provided by a rise in production of construction material and metals, in view of the large construction projects and high exports. Note that the strengthening in industrial production would have been even stronger in FY:7 had electricity generation (which is fully based on hydroelectric production) not declined sharply due to the summer drought (electricity production declined by.% in FY:7 against a robust rise of.7% in FY: and is estimated to have subtracted. pps from GDP growth in FY:7 after having contributed. pps in FY:). On a negative note, the adverse weather conditions (including winter floods and the summer drought) also hit the agricultural sector. Excluding agriculture, activity accelerated at a stronger pace, by.% in FY:7 from.7% in FY:. Growth to moderate slightly to.% in FY: as large energy projects fade. The slowdown in FY: should be driven by the large energy-related projects, as they approach their completion. This impact should by partly offset by: i) stronger agricultural output, following a weather-related weak performance in FY:7; ii) a rebound in electricity production, following a drought-induced sharp drop in FY:7; and iii) the continued strong performance in the oil industry (supported by a further increase in oil prices by an estimated.%, in EUR terms, in FY:). Activity in FY: should also be underpinned by the improved confidence in the domestic economy, the expected acceleration in structural reforms and strong commitment to economic reforms, in view of both the expected launch of EU accession talks and the continued engagement with the IMF under the Post- Programme Monitoring process. Growth should also be supported by the continued improvement in the labour market, the rebound in credit activity, and robust activity in the country s main trading partners, as well as an accommodative policy mix. Importantly, the output gap is set to turn positive (.% in FY: against -.% in FY:7) for the first time in years in FY:. NBG - Emerging Markets Analysis Bi-Weekly Report

8 / / 7/ / / 7/ / / 7/ / /7 7/7 /7 / 9/ /9 9/9 / 9/ / 9/ / 9/ / 9/ / 9/ / 9/ / 9/ /7 9/7 / May Cyprus BB+ / Ba / BB+ (S&P / Moody s / Fitch) Credit to the Private Sector & Customer Deposits (y-o-y % change) : : : : : :7 : Total Deposits Total Credit Loans = Deposits Loans-to-Deposits Ratio (%) Contributions to Annual Tourist Arrivals Growth (-M Rolling Sum) % EU (excl. UK) UK Russia Israel Other Total (y-o-y %) May -M F -M F -M F -m EURIBOR (%) EUR/USD.9... Sov. Spread (. bps) May -W % YTD % -Y % CSE Index F 9F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Customer deposits declined in Q:, as a result of temporary pressures on the customer base of Cyprus Cooperative Bank (CCB). Customer deposits posted a decline of.% y-o-y at end- Q: against a rise of.% at end-7, mainly due to heightened depositor uncertainty at end-march over the ongoing privatisation process of CCB -- the island s second largest credit institution. Depositor confidence was, however, immediately restored following an emergency deposit by the Government at the bank, worth EUR.bn (.% of GDP). The negative deposit performance in Q: was also driven by moderating deposit remuneration rates, reflecting easing liquidity conditions (the L/D ratio declined to 9.7% at end-q: from.% at end-7 and a peak of.% in February ). Credit deleveraging accelerated in Q:, mainly reflecting increased efforts by banks to reduce NPLs. Credit to the private sector fell by.% y-o-y at end-q:, compared with a decline of.% at end-7. The faster decline in lending activity in Q: was driven by both households and corporates (down.% y-o-y and.% y-o-y, respectively, at end-q: against smaller declines of.% and.% in December). The stronger pace of credit contraction was mainly due to banks increased write-offs and debt-for-asset swaps, in response to supervisory pressure to reduce their stock of NPLs (standing at EUR 7.bn or.% of GDP or.% of gross loans in January). A decline in new corporate loans (down.% y-o-y to EUR.bn in Q:) was also a drag on overall credit activity. Credit contraction would have been sharper had new retail loans not increased, in line with banks eased credit conditions to households. Indeed, according to the Central Bank, new loan originations to households (pure new and renegotiated loans) rose by 7.% y-o-y (to EUR.bn) in Q:, following a mild decline of.% (to EUR.bn) in FY:7. Tourist activity began the year on a strong footing, with the - month rolling arrivals growth rising to.7% y-o-y in March from.% in December. The acceleration in tourist arrivals was broadbased, with the -month rolling number of visitors from the UK and the EU (excl. UK) -- accounting for % and %, respectively, of total arrivals in FY:7 -- increasing by.% y-o-y and.% y-o-y in March, against smaller rises of.% and.% in December. The improvement was due to this year s early Easter holiday (Easter Sunday was on April st, compared with April th last year) and, to a lesser extent, continuous efforts to extend the tourism season beyond the summer. Looking ahead, we expect tourist arrivals to lose momentum during the remainder of the year. The deceleration will be driven by the gradual return of Russian and British visitors to neighbouring countries -- Turkey and Egypt -- due to improved domestic security conditions and more competitive prices. Note that direct flights between Russia and Egypt resumed on April th, following a cooperation agreement on civil aviation security between the two countries at end-december, aimed at removing Russia s travel ban imposed after the downing of a Russian passenger plane in the Sinai Peninsula in October. All said, we see the number of tourist arrivals rising by c. 9.% to a record high of.mn in FY:. With tourism accounting for.% of GDP and.7% of employment (according to the World Travel & Tourism Council -- report), we estimate that tourist activity will contribute c.. pps to FY: GDP growth (projected to accelerate to.% from.9% in FY:7) and shave c.. pps off the FY: unemployment rate (projected to decline to 9.% from.% in FY:7). NBG - Emerging Markets Analysis Bi-Weekly Report 7

9 / / 9/ / / / 9/ / / / 9/ / / / 9/ / /7 /7 9/7 /7 / / 9/ / / / 9/ / / / 9/ / / / 9/ / / / 9/ / /7 /7 9/7 /7 / / 9/ / /9 /9 / / / / / / / / / / / / / / /7 /7 / May Egypt B- / B / B (S&P / Moody s / Fitch) FX Reserves FX Reserves excl. IFI Suport (USD bn, lhs) IMF & WB Support (USD bn, lhs) Months of import of GNFS (rhs) Critical Number of Months of Imports (rhs) Contribution Rates to Annual Headline Inflation (pps) Core CPI Regulated Items Prices Fruit & Vegetables Prices Headline Inflation (%) Policy Rates and Inflation (%) Headline inflation Overnight Lending Rate -week Repo Rate Overnight Deposit Rate 9 7 Forecast Forecast May -M F -M F -M F O/N Interbank Rate (%) EGP/USD Sov. Spread (. bps) May -W % YTD % -Y % HERMES, / / /7 7/F /9F Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) FX reserves rose by USD 7.bn to a record high USD.bn in the first four months of, supported by the solid implementation of the loan agreement with the IMF (signed in November ). FX reserves rose to USD.bn at end-april (covering. months of imports of GNFS) from USD 7.bn at end-december, mainly on the back of the issuance of USD.bn in Eurobonds (USD.bn in February and USD bn in April) and the release of the third and final USD.bn tranche from a USD.bn WB loan in March. Note that between November -- when the IMF-supported programme was signed -- and end-7, FX reserves rose sharply by USD.bn. The pick-up reflects: i) the disbursement of USD.bn by the IMF as part of a USD.bn loan; ii) the issuance of Eurobonds totaling USD 7.bn; iii) the disbursement of the second USD.bn tranche from the USD.bn WB loan; iv) large foreign investments in the high-yielding domestic debt market; v) a sharp recovery in the tourism sector; and vi) a significant rise in workers remittances from abroad, propelled by the eradication of the parallel FX market following the flotation of the domestic currency (in November ). Importantly, non-official sources were the main contributors to the foreign currency build-up. Since the start of the IMF-supported programme, non-official sources provided USD.bn out of a total increase of USD.bn, reflecting the return of foreign investor confidence. Excluding the IMF and WB support (USD.bn and USD.bn, respectively), FX reserves stood at USD.9bn at end-april (covering. months of imports of GNFS). Headline inflation eased further to.% y-o-y in April. Headline inflation declined for a 9 th consecutive month in April down to a ½year low of.% y-o-y from a -decade high of.% in July. Recall that the July peak resulted from: i) further adjustments in regulated prices (prices of fuel and electricity were increased by up to % and %, respectively, in July 7); ii) a rise in the VAT rate (by pp to % in July 7); and iii) the flotation of the EGP in November (leading to a depreciation of the EGP against the USD by % y-o-y in July 7). The 9. pp decline in headline inflation between July and April had been largely supported by sharp policy rate hikes, the absorption of excess liquidity through open market operations, the increase in the bank reserve requirement ratio (up pps to.% in October 7), as well as the fading direct and indirect impacts of the flotation of the EGP --- which has stabilised against the USD since March 7 -- and the rise in energy prices. Looking ahead, we expect headline inflation to reverse its downward trend in July, on the back of a new cycle of increases in regulated energy prices and taxes. Overall, we see headline inflation reaching a trough of.% in June and ending the current calendar year at.% y-o-y -- well within the CBE s end- target range of %-%. As the deterioration in inflation in H: is expected to result mainly from supply shocks and the domestic currency is set to remain stable, the CBE should continue with its new cycle of monetary policy loosening started in February. We expect the CBE to proceed with additional cuts to its key rates, totalling bps, by December, bringing total cuts to bps in FY:. Should our forecasts materialise, the overnight deposit, -week repo, and overnight lending rates would reach.7%,.%, and.7%, respectively, in December (or.%,.7% and.%, respectively, in ex post, real and compounded terms, compared with.%,.% and.% in April). NBG - Emerging Markets Analysis Bi-Weekly Report

10 May FOREIGN EXCHANGE MARKETS, MAY TH Against the EUR 7 Currency SPOT -week %change -month %change YTD %change* -year %change Year- Low Year- High -month Forward rate** -month Forward rate** -month Forward rate** % change* % change* Albania ALL Brazil BRL Bulgaria BGL China CNY Egypt EGP FYROM MKD India INR Romania RON Russia RUB Serbia RSD S. Africa ZAR Turkey YTL Ukraine UAH US USD JAPAN JPY UK GBP * Appreciation (+) / Depreciation (-) ** Forward rates have been calculated using the uncovered interest rate parity for Brazil, China, Egypt, India and Ukraine Currencies against the EUR (May th ) ALL BRL BGL CNY EGP -week % change -month % change YTD % change MKD INR RON RUB RSD ZAR TRY UAH USD JPY GBP Depreciation Appreciation NBG - Emerging Market Analysis Bi-Weekly Report 9

11 May MONEY MARKETS, MAY TH Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine EU US O/N T/N S/W Month Month Month Month Year LOCAL DEBT MARKETS, MAY TH Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine EU US -Month Month Month Year Year Year Year Year Year Year Year *For Albania. FYROM and Ukraine primary market yields are reported CORPORATE BONDS SUMMARY, MAY TH Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Bulgaria Bulgaria Energy Hld.7% ' EUR NA/NA //. South Africa FirstRand Bank Ltd.% ' USD BBB-/Baa //. FirstRand Bank Ltd.% ' EUR NA/NA //. 9 Arcelik AS.7% ' EUR BB+/NA /9/. 7 Garanti Bank.% ' USD NA/Ba /9/ 7. Turkiye Is Bankasi % ' USD NA/Ba //, 7. 9 Turkey Vakifbank.7% ' USD NA/Ba // 7. 9 TSKB.% ' USD NA/Ba // Petkim.7% ' USD NA/B //. KOC Holding.% ' USD BBB-/Baa // 7. CREDIT DEFAULT SWAP SPREADS, MAY TH Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine -Year Year NBG - Emerging Market Analysis Bi-Weekly Report

12 May EUR-DENOMINATED SOVEREIGN EUROBOND SUMMARY, MAY TH Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Albania.7% ' EUR B+/B //. Bulgaria.% ' EUR NA/NA //. 9 Bulgaria.% ' EUR BBB-/Baa //,. 9 - Bulgaria.9% ' EUR BBB-/Baa /9/,9. Bulgaria.% '7 EUR BBB-/Baa //7,. 9 Bulgaria.% ' EUR BBB-/Baa // 9. 7 Cyprus.% ' EUR BB+/Ba //. Cyprus.7% ' EUR NA/Ba //,. Cyprus.7% ' EUR NA/Ba /7/, Cyprus.7% ' EUR NA/Ba 7//.9 Cyprus.% ' EUR NA/Ba //,. 9 FYROM.7% ' EUR BB-/NA // 7. 7 FYROM.97% ' EUR BB-/NA /7/. FYROM.% ' EUR BB-/NA /7/. FYROM.7% ' EUR BB-/NA //. Romania.% ' EUR BBB-/Baa /9/,. Romania.% ' EUR BBB-/Baa //,. Romania.7% '7 EUR BBB-/Baa 9//7,. 7 Turkey.% ' EUR NR/Ba //,. 9 Albania.7% ' Bulgaria.% ' Bulgaria.% ' EUR-Denominated Eurobond Spreads (May th ) Bulgaria.9% ' Bulgaria.% '7 Bulgaria.% ' Cyprus.% ' -week change -month change YTD change Cyprus.7% ' Cyprus.7% ' Cyprus.7% ' Cyprus.% ' FYROM.7% ' FYROM.97% ' FYROM.% ' FYROM.7% ' Romania.% ' Romania.% ' Romania.7% '7 Turkey.% ' Tightening Widening NBG - Emerging Market Analysis Bi-Weekly Report

13 May USD-DENOMINATED SOVEREIGN EUROBOND SUMMARY, MAY TH Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Brazil.7% ' USD BB-/NA // Brazil.7% ' USD BB-/NA //,7.7 9 Bid Yield Gov. Spread Asset Swap Brazil.7% ' USD BB-/NA //. 7 Egypt.7% ' USD B-/B 9//,.7 97 Egypt.7% ' USD NA/B //,. Egypt.7% ' USD B-/B //. Egypt 7.% ' USD NA/B //, Egypt.7% ' USD B-/B //, 7. Egypt.% '7 USD NA/B //7. 7 Romania.7% ' USD BBB-/Baa //,. Romania.7% ' USD BBB-/Baa //,. Romania.% ' USD BBB-/Baa //,. Russia.7% ' USD BB+/Ba //, Russia.7% ' USD BB+/Ba /9/,. Serbia.7% ' USD BB-/B //,. 7 Serbia 7.% ' USD BB-/B /9/,. S. Africa.7% ' USD BBB-/Baa /9/,. S. Africa.% ' USD BBB-/Baa // 7. 9 Turkey 7.% ' USD NR/Ba //,. Turkey 7.7% ' USD NR/Ba //,. 9 Turkey.7% ' USD NR/Ba //, Turkey.% ' USD NR/Ba //, 7. Turkey.7% ' USD NR/Ba //, 7. 9 Ukraine 7.7% ' USD B-/Caa /9/, 7. 7 Spread Brazil.7% ' USD-Denominated Eurobond Spreads (May th ) Brazil.7% ' Brazil,7% ' Egypt.7% ' Egypt.7% ' Egypt.7% ' Egypt 7.% ' Egypt.7% ' Egypt.% '7 Romania.7% ' Romania.7% ' Romania.% ' Russia.7% ' Russia.7% ' Serbia.7% ' Serbia 7.% ' S. Africa.7% ' S. Africa.% ' Turkey 7% ' Turkey 7.7% ' Turkey.7% ' Turkey % ' Turkey.7% ' Ukraine 7.7% ' -week change -month change YTD change Tightening Widening NBG - Emerging Market Analysis Bi-Weekly Report

14 May Level -week % change STOCK MARKETS PERFORMANCE, MAY TH -month % change 7 Local Currency Terms EUR Local Currency EUR Local Currency EUR Terms Terms terms terms terms YTD % change -year % change Year- Low Year- High YTD % change % change % change Brazil (IBOV),.... 7,, Bulgaria (SOFIX) China (SHCOMP), ,, Cyprus (CSE GI) Egypt (HERMES), ,9, F.Y.R.O.M (MBI), ,, India (SENSEX), ,, Romania (BET-BK), ,7, Russia (RTS), ,7, Serbia (BELEX-) South Africa (FTSE/JSE),.. -..,7, Turkey (ISE ), ,9, Ukraine (PFTS) MSCI EMF, ,, MSCI EAFE,7....,99, Greece (ASE-General) Germany (XETRA DAX),97....,77, UK (FTSE-) 7,7.9...,7 7, USA (DJ INDUSTRIALS), ,, USA (S&P ),7....,, Brazil (IBOV) Bulgaria (SOFIX) China (SHCOMP) Equity Indices (May th ) Cyprus (CSE GI) Egypt (HERMES) F.Y.R.O.M (MBI-) India (SENSEX) -week % change -month % change YTD % change Romania (BET-BK) Russia (MICEX) Serbia (BELEX ) South Africa (FTSE/JSE) Turkey (ISE-) Ukraine (PFTS) MSCI EMF MSCI EAFE Greece (ASE-General) Germany (DAX) UK (FTSE-) USA (DJ INDUSTRIALS) USA (S&P ) - Loss Gain NBG - Emerging Market Analysis Bi-Weekly Report

15 May DISCLOSURES: This report has been produced by the Economic Analysis Division of the National Bank of Greece, which is regulated by the Bank of Greece, and is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on its contents, i.e. only after effecting their own independent enquiry from sources of the investors sole choice. The information contained in this report does not constitute the provision of investment advice and under no circumstances is it to be used or considered as an offer or an invitation to buy or sell or a solicitation of an offer or invitation to buy or sell or enter into any agreement with respect to any financial asset, service or investment. Any data provided in this report has been obtained from sources believed to be reliable but have to be not been independently verified. Because of the possibility of error on the part of such sources, National Bank of Greece does not guarantee the accuracy, timeliness or usefulness of any information. The National Bank of Greece and its affiliate companies, its representatives, its managers and/or its personnel or other persons related to it, accept no liability for any direct or consequential loss arising from any use of this report. The final investment decision must be made by the investor and the responsibility for the investment must be taken by the investor. This report is not directed to, nor intended for distribution to use or used by, any person or entity that is a citizen or resident of or located in any locality, state, country or other jurisdiction where such a distribution, publication, availability or use would be contrary to any law, regulation or rule. The report is protected under intellectual property laws and may not be altered, reproduced or redistributed, to any other party, in whole or in part, without the prior written consent of National Bank of Greece. NBG - Emerging Market Analysis Bi-Weekly Report