Economic Analysis Division Emerging Markets Analysis

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1 Bulgaria EU EMDE* Greece FYROM Egypt Romania Cyprus Serbia Turkey Albania Cyprus Serbia Greece Bulgaria EU Turkey Albania FYROM Romania EMDE* Egypt Cyprus Greece FYROM EU Albania Bulgaria Serbia World Romania EMDE* Egypt Turkey Egypt EMDE* Romania Turkey World Bulgaria Cyprus Serbia Albania EU Greece FYROM Economic Analysis Division Emerging Markets Analysis Bi-Weekly Report June July TURKEY President Erdogan was sworn in for another five-year term, with substantially expanded powers President Erdogan names a new cabinet as Turkey moves to an executive presidency Headline inflation rose sharply to a -year high of.% y-o-y in June, mainly due to stronger food inflation and weaker domestic currency ROMANIA Political uncertainty increases The NBR maintained its key rate flat at.% NBG - Economic Analysis Division BULGARIA United Patriots: the weakest link in the ruling coalition Leading indicators point to stronger economic growth in Q: Emerging Markets Analysis Head: Michael Loufir : + : mloufir@nbg.gr Analysts: Konstantinos Romanos-Louizos : romanos.louizos.k@nbg.gr Louiza Troupi : troupi.louiza@nbg.gr Athanasios Lampousis : lampousis.athanasios@nbg.gr Real GDP Growth (%, F) * EMDE: Emerging Market & Developing Economies End-year Headline Inflation (%, F) * EMDE: Emerging Market & Developing Economies Fiscal Balance (% of GDP, F) * EMDE: Emerging Market & Developing Economies Current Account Balance (% of GDP, F) SERBIA FX-adjusted customer deposit growth accelerated in M:, reaching.% y-o-y in May, on the back of strengthening confidence in the domestic economy Credit growth (adjusted for FX movements) accelerated in Μ:, reaching a -year high of.% y-o-y in May, despite continued large write-offs FYROM FYROM to receive a start date for EU accession talks in June, conditional on further progress on reforms and the implementation of the name agreement with Greece The -month rolling fiscal deficit narrowed to.% of GDP in May from.% in December, mainly on under-executed capital spending ALBANIA A starting date for EU accession talks to be granted in June, conditional on continued progress in reforms Economic growth strengthened in Q: (up.% y-o-y), mainly due to buoyant electricity production CYPRUS Headline inflation rose temporarily to a ¾-year high of.% y-o-y in June from -.% at end-7 The current account deficit narrowed sharply to.% of GDP on a -quarter rolling basis in Q: from a 7-year high of.7% in Q:7, mainly due to an improvement in the ship trade balance EGYPT The current account deficit is estimated to have narrowed sharply to.% of GDP in FY:7/ (July 7-June ) from a ½-decade high of.% of GDP a year earlier The capital and financial account, excluding IFI support, is estimated to have comfortably covered the CAD and boosted FX reserves in FY:7/ APPENDIX: FINANCIAL MARKETS * EMDE: Emerging Market & Developing Economies Please see disclosures in page

2 Q: Q: Q:7 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q: / /7 /7 /7 /7 /7 /7 7/7 /7 /7 /7 /7 /7 / / / / / / / /7 /7 /7 /7 /7 /7 7/7 /7 /7 /7 /7 /7 / / / / / / June July Turkey BB- / Ba / BB+ (S&P/ Moody s / Fitch) Annual Inflation (%) CBRT Inflation Target Range Headline Inflation Core-C Inflation Food Inflation Interest Rates (end of month, %) CBRT O/N Lending Rate CBRT O/N Borrowing Rate CBRT Effective Funding Rate Interbank Market Overnight Rate CBRT -week Repo Rate Late Liquidity Window Lending Rate Policy Rate (%) Actual Taylor July -M F -M F -M F -m TRIBOR (%) TRY/EUR.7... Sov. Spread (, bps) July -W % YTD % -Y % ISE, F F Real GDP Growth (%) Inflation (eop, %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) President Erdogan was sworn in for another five-year term, with substantially expanded powers. In accordance with the April 7 referendum, endorsing the shift to an executive presidency from a parliamentary system, President Erdogan, who took.% of the vote in the June th presidential election, will: i) not only be the head of state but also the head of government; and ii) have the power to dissolve the national assembly, appoint cabinet ministers without parliamentary approval, impose states of emergency, propose budgets, and nominate out of Supreme Court judges. President Erdogan names a new cabinet as Turkey moves to an executive presidency. Erdogan announced a streamlined government, comprising ministers (against before), of whom are bureaucrats not formally belonging to any political party. The other ministers are members of Erdogan s AK Party and former ministers in the outgoing Government. Gul, Soylu and Çavugoglu retained their respective positions as Ministers of Justice, Interior and Foreign Affairs, while Albayrak, former Energy Minister and Erdogan s son-in-law, was appointed to head the Treasury & Finance Ministry. Not surprisingly, markets have so far reacted negatively to the announcement of the new cabinet, as the former deputy PM in charge of the economy, Simsek, and the former Finance Minister, Agbal, who had been avid defenders of economic orthodoxy, were sidelined. Headline inflation rose sharply to a -year high of.% y-o-y in June, mainly due to stronger food inflation and weaker domestic currency. Headline inflation rose to.% y-o-y in June from.% in May. Food prices (comprising c. % of the CPI basket) was the major driver of the sharp rise in headline inflation between May and June (. pps), increasing by.% y-o-y in June compared with a rise of.% in May, mainly due to Ramadan effects and supply shortages of certain products. Moreover, core inflation reached an all-time high since the inception of the series in, mainly on the back of a strong passthrough from a weaker TRY, rising wage pressures and Ramadan effects. The CBRT s favourite core inflation measure, i.e., CPI-C, rose sharply to.% y-o-y in June from.% in May. Looking ahead, according to our baseline scenario, projecting the commitment of the new Government to a consistent policy mix and bold structural reforms, headline inflation is set to slow throughout the rest of the year. The deceleration should be driven mainly by: i) a normalization in food inflation; ii) a milder depreciation of the TRY; iii) a sharp slowdown in economic activity; and iv) a continued tight monetary policy stance (see below). Overall, we see headline inflation ending at.% y-o-y -- well above the end-7 outcome of.%, the upper bound of the CBRT s target range of.%-7.% and the CBRT s upwardly-revised forecast of.%. The CBRT is likely to keep its key policy rate on hold at 7.7% throughout the rest of the year. According to our Taylor rule (see chart), projecting: i) a declining positive output gap (from.% in Q: to.% in Q:); ii) moderating headline inflation (from.% in June to.% at end-q:); iii) easing TRY depreciation (from.% in June to 7.% at end-q: against the equally-weighted USD/EUR basket consensus forecast); and iv) a further rise in the FED rate (from.% in June to.% at end-q: consensus forecast), the CBRT should maintain its key policy rate (-week repo rate) on hold at 7.7% at least until the end of the year. However, should the risk of policy slippage materialise ahead of the March local elections, the CBRT would be forced to tighten its stance to preserve macroeconomic and financial stability. NBG - Emerging Markets Analysis Bi-Weekly Report

3 7 F / 7/ / 7/ / 7/ / 7/ / 7/ / 7/ / 7/ /7 7/7 / 7/ / 7/ / / / 7/ / / / 7/ / / / 7/ / /7 /7 7/7 /7 / / 7/ June July Romania BBB- / Baa / BBB- (S&P / Moody s / Fitch) Excess Liquidity & Money Market Rates Stock of Deposits in the NBR deposit facility (RON bn, lhs) -M ROBOR (%, rhs) Monetary Conditions Index Exchange Rate Contribution Monetary Conditions Index tighter monetary conditions looser monetary conditions Forecast Interest Rate Contribution Real GDP Growth, Budget Deficit, Current Account Deficit & Inflation Budget Deficit (% of GDP) Current Account Deficit (% of GDP) Real GDP Growth (y-o-y % change) Inflation (y-o-y % change, aop) July -M F -M F -M F -m ROBOR (%).... RON/EUR.... Sov. Spread (, bps) July -W % YTD % -Y % BET-BK, F F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) Political uncertainty increases. In a controversial move, Parliament adopted changes in the Criminal Code that decriminalize several graft offenses, sparking massive protests domestically and drawing strong condemnation internationally. Critics say that the adopted changes would benefit the leader of the ruling PSD party and the real power behind PM Dancila s Government, L. Dragnea, who was recently found guilty of abuse of office and was sentenced to ½ years in prison. This is not the first time the Government has attempted to relax anticorruption legislation. Similar attempts in the past had failed, leading to the departure of two PMs. The bill will be now sent to the President for promulgation. The latter, who is linked to the opposition, has already expressed his opposition to the amendments, saying that he will challenge them at the Constitutional Court. The eventual adoption of the bill would further strain the country s relations with the EU. Note that Romania has yet to comply with the benchmarks set years ago by the EU s Cooperation and Verification Mechanism (focusing on judicial reform and fight against corruption). All said, political uncertainty is unlikely to ease soon. Indeed, the Government s controversial initiatives in the aftermath of Dragnea s conviction could take their toll on the popularity of the PSD. Note that the ruling coalition s parliamentary majority has already been eroded by the defection of a number of its MPs to the newly-formed Pro Romania Party. At the same time, we expect tensions between the PSD and opposition to escalate. Against this backdrop, we expect policy implementation to be affected and economic sentiment to deteriorate, threatening macroeconomic and financial stability. The NBR maintained its key rate flat at.%. Recall that the NBR has raised its -week repo rate by 7 bps since the beginning of the year. The extent of the monetary policy tightening carried out is, however, much larger. It amounts to c. bps, considering the hike in money market rates (MMRs), following the absorption of excess liquidity in the market by the NBR, in April, through deposit taking operations and, more recently, through large FX interventions (estimated at c. EUR.bn in May-June). The latter were aimed at sustaining the RON, which has remained broadly unchanged against the EUR since the beginning of the year compared with losses of c. % for the Hungarian forint and the Polish zloty. Overall, monetary conditions still remain loose, with the ex-post real -month MMR 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:) well above its long-term potential (of c..%) for a th consecutive year, 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 set to rise to.% of GDP in FY: from.% in FY:7, abοve the EU threshold of.%). Against this backdrop, the NBR appears to be behind the curve. Our Taylor rule estimates suggest that rates should be raised to at least.% to address these challenges. 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, 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:. NBG - Emerging Markets Analysis Bi-Weekly Report

4 Q: 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: Q: Q:7 Q:7 Q: GERB BSP United Patriots MRF Volya Reformist Block Other / Undecided June July Bulgaria BB+ / Baa / BBB- (S&P / Moody s / Fitch) Election Results & Opinion Polls (%) Elections - March 7 CAMPP - December 7 Alpha Research - March Exacta - April Trend - May Chassa - June Election Threshold (.%) Retail Sales & Private Consumption (real terms, y-o-y % change) Retail Sales (lhs) Private Consumption (rhs) Gross Fixed Capital Formation & Public Investment (% of GDP, y-o-y change) Gross Fixed Capital Formation (lhs) Forecast Apr-May, aop Forecast Apr-May Public Investment (rhs) July -M F -M F -M F -m SOFIBOR (%) BGN/EUR.... Sov. Spread (, bps) July -W % YTD % -Y % SOFIX E F F Real GDP Growth (%)..... Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) United Patriots (UP): the weakest link in the ruling coalition. Tensions have been rising recently, both within the UP s ranks as well as between the latter and the leading partner in the ruling coalition, the centre-right GERB, suggesting that political uncertainty is on the rise. Indeed, the UP alliance, comprising three far-right, nationalist parties, is mired in a struggle over its leadership. At the same time, disagreements between the UP and the GERB have arisen over a series of issues, including the long-awaited reform of the electoral code (recall that a referendum in voted in favour of the replacement of the current proportional system with a majoritarian one), immigration policy and minority rights, as well as the orientation of Bulgaria s foreign policy (the UP has a pro-russian stance, which is in contrast to the GERB s firm pro-eu position). All said, although political noise is set to persist, we do not see elections taking place soon. The latest opinion polls imply no changes in the relative positions of the parties compared with the March 7 elections, except for a large increase in the undecided vote, suggesting that no party would benefit from snap elections. In any case, even if the UP alliance (holding 7 seats in the -seat Parliament) were to withdraw its support to the Government or collapse, the GERB ( seats) could still remain in power with backing from the Turkish minority party (MRF, seats) and the Volya ( seats), both of which have supported the Government in the past. Leading indicators point to stronger economic growth in Q:. Retail sales strengthened in April-May (up.% y-o-y in real terms against a rise of.% in Q:), pointing to increased private consumption. In view of the slowdown in employment and wage growth (up.% and.% y-o-y in real terms in Q: against rises of.% and.% in H:7), this improvement should be attributed to stronger consumer confidence (the relevant index hit a high of -. in Q: against -. in Q: and a -year average of -.) and wealth effects (housing prices and the stock market have gained % and % in real terms, respectively, over the past years). At the same time, we estimate investment activity to have strengthened, driven by the public sector (according to budget data, public investment was up. pps of GDP y-o-y in April-May). Public investment would have been higher had it not been for the poor absorption of EU funds (down. pp of GDP y-o-y in M:). Although no data on private investment is available yet, we expect it to have improved in Q:, due to solid demand for residential property and improved business confidence (the relevant index rose to. in Q: from 7. in Q: and a -year average of.). All said, we estimate increased domestic demand has more than offset the deterioration in net exports, due, inter alia, to weaker demand from non-eu trade partners (especially Turkey and Egypt). As a result, we see GDP growth firming to.% y-o-y in Q: from.% in Q:. Economic activity to maintain its momentum in H:, driven by investment. Looking ahead, we expect fixed investment to strengthen further, in line with favourable domestic liquidity conditions (the loan-todeposit ratio stands at 7%) and better absorption of EU funds. This improvement should more than compensate for the slowdown in private consumption, due to structural problems in the labour market (high long-term unemployment, skills mismatches, migration). Importantly, net exports should sustain overall growth, reflecting favourable terms of trade (total hourly costs in Bulgaria are / of the EU average). Overall, we see FY: GDP growth at.%, slightly higher than in FY:7 (up.%) and still above its long-term potential of c..%. NBG - Emerging Markets Analysis Bi-Weekly Report

5 Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. 7 May Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. 7 May Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. 7 May June July FX-adjusted customer deposit growth accelerated in M:, Serbia reaching.% y-o-y in May, on the back of strengthening BB / Ba / BB (S&P / Moody s / Fitch) confidence in the domestic economy. Adjusted for FX variations, deposits reached.7% y-o-y in May up from.% in December. The Credit to the Private Sector acceleration reflects strengthening consumer and business confidence, (y-o-y % change) on the back of progress on EU membership talks, continued Contribution of write-offs (pps) engagement with the IMF, and political stability. Contribution of other factors (pps) Credit to the Private Sector (FX-Adjusted) From a segment perspective, the acceleration in overall (FX-adjusted) Credit to the Private Sector deposits was driven by the continued rebound in both retail and corporate deposits. Corporate deposits (accounting for % of total deposits) rose by a -year high of.% y-o-y (FX adjusted) in May compared with an increase of.% in December, likely reflecting strong exports and rising corporate profits. - - * NBG estimates before ** FX loans include FX denominated and linked Loans Moreover, retail deposits rose by.% y-o-y in May against an -*** write-offs in - include loan transfer of banks after their bankruptcy - increase of.% in December, on the back of stronger real disposable income, as labour market conditions tightened (the unemployment rate eased to.% in Q: from a peak of.% in FY:, while net wages increased by.% y-o-y in M: following a robust rise by Customer Deposits.% in M:7) and inflation eased (standing at.% y-o-y in M: (y-o-y % change) down from.% in M:7). The strengthening of retail deposits was also supported by higher remittances (up.% y-o-y, in EUR terms, in Q: compared with.% in Q:7) and tourism inflows (up.% y-o-y, in EUR terms, in Q: compared with.% in Q:7). Credit growth (adjusted for FX movements) accelerated in Μ:, reaching a -year high of.% y-o-y in May, despite continued large write-offs. Adjusted for FX variations, the loan book expanded - Total Deposits by a -year high of.% y-o-y in May compared with rises of.% at Total Deposits (FX adjusted) - Corporate Deposits (FX adjusted) end-7 and.7% at end-. Importantly, the acceleration in credit - Retail Deposits (FX adjusted) - activity occurred despite continued sizeable write-offs. In fact, writeoffs amounted to an estimated RSD bn in M: (or.7% of the stock of loans at end-7) -- exceeding their level of RSD.bn in H:7. Adjusting for write-offs, the loan book expanded at an even NPL and Liquidity Ratios faster pace, by an estimated 7.% y-o-y in May -- only slightly below an estimated 7.% at end-7 (adjusted for FX movements). The strong lending activity was underpinned by the increase in loan demand (by both corporates and households), supported by low lending interest rates, on the back of increasing bank competition for market shares. Indeed, the average blended lending rate on new loans fell to.% in M: from.% in -7 and.7% in -. The robust lending activity could also be attributed to easing credit conditions by banks, on the back of: i) the improving economic outlook; ii) a strong capital base; iii) ample liquidity (see below); as well as iv) improving asset quality (the NPL ratio declined to.% in Q: FX-Denominated and Linked Loans / Total Loans (%, lhs) from a peak of.% in Q:, falling below the pre-crisis level of Loans/ Deposits (%, lhs) NPL (%, rhs).% in Q:). Recall that the sharp drop in the NPL ratio in - reflects: i) sizeable write-offs, amounting to RSD bn since (or July -M F -M F -M F.% of the 7 GDP), of which the largest part occurred in 7 -m BELIBOR (%).... (RSD bn or.% of GDP), following the NBS regulation obliging RSD/EUR banks to transfer the NPLs that are % provisioned to off-balance Sov. Spread (, bps) sheets by end-q:7; ii) the sale of NPLs to non-banking sector entities; as well as iii) improved collection and restructuring. BELEX- July -W % YTD % -Y % With deposits increasing at a faster pace than loans (since ), the loan-to-deposit ratio continued to decline, reaching.% in M: -- 7 F F down from a peak of.% in Q:. Moreover, the dinarisation has Real GDP Growth (%)..... gradually increased (with the ratio of FC loans-to-total loans Inflation (eop, %)..... moderating to 7.% in May from its pre-crisis high of 7.% and the Cur. Acct. Bal. (% GDP) ratio of FC deposits-to-total deposits easing to.% in May from a Fiscal Bal. (% GDP) peak of 7.% in FY:). NBG - Emerging Markets Analysis Bi-Weekly Report

6 7 f June July F.Y.R.O.M. BB- / NR / BB (S&P / Moody s / Fitch) FYROM to receive a starting date for EU accession talks in June, conditional on further progress on reforms and the implementation of the name agreement with Greece. On June th, the European Council endorsed a recommendation, issued earlier by EU foreign affairs ministers, to grant FYROM a starting date for EU Consolidated Budget (% of GDP) membership talks in June, conditional on further tangible and 7 M:7 M: sustainable progress on the judicial and rule of law, as well as on NBG Budget Fcst intelligence and security services and public administration. The implementation of the name agreement with Greece and the cultivation of good neighbourliness with Bulgaria were also underlined Personal Inc as key factors for securing a starting date. Note that, so far, the name Corporate Inc agreement, signed in mid-june, has been ratified by FYROM s VAT (Net) Parliament for a second time, following President Ivanov s refusal to Excises sign the accord, paving the way for a referendum at end-september or Import Duties..... early-october and constitutional revision in FYROM before the Other Taxes..... agreement is ratified by the Greek Parliament by early-. Soc. Contrib The -month rolling fiscal deficit narrowed to.% of GDP in May from.% in December, mainly due to under-executed capital spending. The fiscal deficit narrowed by. pps y-o-y to.7% of GDP in M:, due exclusively to lower primary spending. The Personnel latter was mainly driven by weaker capital spending (down. pps of G. & Services GDP y-o-y), primarily reflecting delays in the clearance of Transfers administrative obstacles to the resumption of country s key Int. Payments..... infrastructure projects, originated in the past year s political crisis. The wage bill and public consumption (each down. pp of GDP y-o-y) also contributed to the containment in primary expenditure in M:. The decline in primary outlays would have been sharper had it not been for higher transfers (up. pps of GDP y-o-y), reflecting not only base effects from the postponement of payments of social transfers and subsidies during the political vacuum in M:7, but also higher farm subsidies, including payments of.% of GDP to tobacco Fiscal Balance (% of GDP) producers. On the other hand, revenue collection was flat on an annual basis in M:, as a broad-based improvement in tax revenue (up. pps of - - GDP y-o-y) was offset by a decline in non-tax revenue. The increase in tax revenue was driven by improved tax collection efficiency and - - would have been stronger had it not been for weaker (net) VAT collection (down. pps y-o-y), stemming from the clearance of VAT - - refund arrears. The poor performance of non-tax revenue was due to - - lower income from special revenue accounts, reflecting postponed revenue of the Ministry of Transport and Telecommunications. - - A broadly neutral fiscal stance is in sight this year. The Budget envisages a deficit of.% of GDP, against an outcome of Fiscal Deficit Fiscal Deficit (Cyclically-Adjusted).7% of GDP in FY:7. In our view, despite the positive y-t-d performance, attaining this year s deficit target will not be possible unless the FY: expenditure growth target is revised down to July -M F -M F -M F compensate for lower-than-targeted revenue. Indeed, with no new measures and weaker-than-projected nominal GDP growth, we see a revenue shortfall of. pps of GDP. To make up for this shortfall, a downward revision in the FY: expenditure growth target by c.. pps to.% is required. To this end, the IMF recommended a policy July -W % YTD % -Y % mix of subsidy rationalization and better targeting of social spending. Overall, we expect the ruling pro-reform Government to proceed with 7 F F spending cuts so as to achieve the FY: fiscal deficit target of.% of GDP, providing a stimulus of. pps of GDP in cyclically-adjusted terms. In the event, the public debt-to-gdp ratio would maintain its downward path, moderating for a nd consecutive year to c. 7.% at end-, from 7.% at end-7 and a peak of.% at end-. NBG - Emerging Markets Analysis Bi-Weekly Report Revenue..... Tax Revenue Non-Tax revenue Expenditure Cur. Expenditure..... Capital Expend Fiscal Balance Primary Balance m SKIBOR (%).... MKD/EUR.... Sov. Spread (. bps) MBI, Real GDP Growth (%)..... Inflation (eop. %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP)

7 7 F FY: FY: FY: FY: FY: FY: FY:7 FY: FY: FY: FY: FY: FY: FY: FY: FY: FY:7 FY: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q: June July Albania B+ / B / NR (S&P / Moody s / Fitch) A starting date for EU accession talks to be granted in June, conditional on continued progress in reforms. The European Council is set to grant Albania -- a candidate country since mid- -- a starting date for EU membership negotiations in June, provided pps Contribution Rates to Real GDP Growth that progress continues in the following areas: pps i) judicial reform, by completing the vetting process and finalising the establishment of the independent judicial structures; and ii) the fight against corruption and organised crime, by creating the specialised institutions (including the Special Anti-Corruption and Organised Crime Structures), and by strengthening the track record of investigations, prosecutions and convictions. - - Progress on these reforms will be assessed by the European - Commission s annual progress report -- to be published in April. If - Real GDP (y-o-y % change) progress is deemed adequate, the European Council will set a date for - Real GDP excluding Agriculture (y-o-y % change) - the start of talks in June. Note that, although Albania has a long way to go before joining the EU, the accession process should provide an important policy anchor and strengthen the reform drive. Agriculture Industry Construction Services Taxes & Subsidies Economic growth strengthened in Q: (up.% y-o-y), mainly Contributions to Actual Real GDP Growth (pps) due to buoyant electricity production. GDP growth accelerated to Actual GDP - CAGR.% y-o-y in Q: from.% in Q:7 and.% in FY:7. Change in Output Gap (Boom) Potential GDP Growth The robust performance in Q: mainly reflects the strengthening in Actual GDP Growth industrial output, expanding by (a -quarter high of).% y-o-y Actual GDP (contributing a sizeable.7 pps to GDP growth in Q:) compared - CAGR (Post Global Crisis) with rises of.% in Q:7 and.% in FY:7). The improvement is estimated to have been largely driven by the strong rebound in electricity generation (which is fully based on hydroelectric production), following a drought-induced decline throughout FY:7. In fact, electricity production reached a record high.gwh in Q: -- more than double its level in Q:7 -- after having declined sharply by.% y-o-y in - - Q:7 and.% in FY:7 (it is estimated to have contributed. pps to overall GDP growth in Q: after subtracting. pps in Q:7). Moreover, industrial output has also been supported by the Real GDP Growth in SEE- and EU- (%) manufacturing sub-sector (contributing. pps to overall GDP growth in Romania Bulgaria Q:7 against. pps in Q:7), on the back of: i) strong exports of Serbia FYROM goods (recording double-digit growth of.% y-o-y in Q:, Albania EU- according to BoP data); and ii) the rebound in re-exports of textiles and footwear (up.% y-o-y in Q:, according to BoP data). The expansion in activity in Q: was, however, held back by the slowdown in the construction sector (up.% y-o-y in Q: against a rise of.% in Q:7, contributing. pps to overall GDP growth in - - Q: compared with. pps in Q:7). This occurred due to: i) the - - completion of the largest part of two major energy projects (i.e. TAP - - and the Statkraft/Devoll hydropower plant) in FY:7; and ii) lower - - capital expenditure (up just.% y-o-y in Q: against a pre-election sharp rise of.% in Q:7). Growth to moderate slightly to.% in FY: from a post-global July -M F -M F -M F crisis high of.% in FY:7, as large energy projects come to an -m TRIBOR (mid, %).... end. The temporary slowdown in FY: should be driven by the large ALL/EUR.... energy-related projects, as they approach their completion. This impact Sov. Spread (bps) should by partly offset by: i) stronger agricultural output, following a weather-related weak performance in FY:7; and ii) a continued July -W % YTD % -Y % rebound in electricity production, following a drought-induced sharp Stock Market drop in FY:7. Activity in FY: should also be underpinned by the 7 F F improved confidence in the domestic economy, political stability, the Real GDP Growth (%)..... expected acceleration in structural reforms and strong commitment to Inflation (eop, %)..... economic reforms, in view of both the expected launch of EU accession Cur. Acct. Bal. (% GDP) talks by end- and the continued engagement with the IMF under Fiscal Bal. (% GDP) the Post-Programme Monitoring process. NBG - Emerging Markets Analysis Bi-Weekly Report

8 Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q:7 Q:7 Q: Q: Q: Q: Q: Q: Q: Q: Q: Q:7 Q:7 Q:7 Q:7 Q: June July Cyprus BB+ / Ba / BB+ (S&P / Moody s / Fitch) Headline inflation rose temporarily to a ¾-year high of.% y-o-y in June from -.% at end-7. The acceleration was driven by an across-the-board deterioration in its main components. Core inflation (which excludes fruit & vegetables and energy prices) rose to.% Contributions to Headline Inflation (pps) y-o-y in June from -.% y-o-y in December (contributing pp to the,, overall increase between end-7 and June), reflecting, inter alia,,, elevated prices of tourism-related services, higher imported inflation,, and accelerating wages. The latter increased by.% y-o-y in nominal,, terms in Q: compared with a subdued rise of.% y-o-y in Q:7,,, mainly driven by the public sector. Headline inflation was also pushed,, up by a significant upward correction in the volatile prices of fruit & -, -, vegetables and higher energy prices (contributing. pps and.7 pps, -, -, respectively, to the overall increase). -, -, Looking ahead, we expect inflationary pressures to ease by end-year. -, -, The deceleration should mainly be driven by lower energy inflation, in -, -, / / / / /7 / line with developments in global oil price markets (we project the F&V Energy Core Headline (y-o-y %) increase in the price of Brent to ease to c..% y-o-y by December from c..% y-o-y in June in EUR terms). End-year headline inflation Current Account Balance should also be tempered by a reversal in prices of fruit & vegetables (-Quarter Rolling Sum, as % of GDP) and softer core inflation, in line with milder demand-side pressures. The latter will be driven by weaker private consumption, reflecting increased household debt servicing, as a result of more aggressive loan restructuring by banks, which will, however, be attenuated by a further rise in the public sector wage bill and its spillover to the private sector. Note that the Government recently agreed with labour unions to - - a gradual reversal of public sector payroll cuts imposed in the wake of - - the crisis, starting this month. Overall, we foresee end-year headline inflation turning positive for the first time in six years, reaching.% y-o-y. The current account deficit (CAD) narrowed sharply to.% of Services Balance Trade Balance GDP on a -quarter rolling basis in Q: from a 7-year high of Income & Transf. Balances Current Acc. Balance.7% in Q:7, mainly due to an improvement in the ship trade Trade Balance balance. The CAD moderated by a sizeable. pps y-o-y to.% of (-Quarter Rolling Sum, as % of GDP) GDP in Q:. The improvement was mainly driven by the volatile ship trade balance, which turned into a surplus of.% of GDP in Q: from a deficit of.% of GDP in Q:7, exclusively on the back of - - larger exports of ships. - - The positive CAD performance in Q: was also underpinned by: i) a smaller energy deficit (down. pps of GDP y-o-y), mainly due to - - lower imports of energy; ii) a narrower underlying (core) trade deficit - - (excluding ship transactions and energy -- down. pp of GDP y-o-y), - - driven by stronger exports; and iii) a larger services surplus (up. pps of GDP y-o-y), reflecting higher receipts from tourism and other business services. Note that both tourist arrivals and receipts posted Core TB (excl. Ships & Energy) Energy Balance double-digit growth in Q: (up.% y-o-y and.% y-o-y, Ship Balance Trade Balance respectively), despite strong base effects and increasing competition July -M F -M F -M F from neighbouring Turkey and Egypt. -m EURIBOR (%) The Q: CAD would have been lower had the primary deficit not EUR/USD.7... widened (up. pps of GDP y-o-y), on the back of higher profits and Sov. Spread (. bps) dividend outflows. With the Q: outturn, the -quarter rolling CAD slowed to.% of GDP from a 7-year high of.7% of GDP in Q:7. CSE Index July -W % YTD % -Y % However, excluding ships and energy, the -quarter rolling current account balance remained flat at a surplus of.7% of GDP in Q:. 7 F F Looking ahead, we expect a small improvement in the core current Real GDP Growth (%)..... account balance during the remainder of the year, stemming mainly Inflation (eop. %) from the core trade balance, in line with softer domestic demand. Cur. Acct. Bal. (% GDP) Overall, we see the core current account balance improving by. pps Fiscal Bal. (% GDP) to a surplus of.% of GDP in FY:. NBG - Emerging Markets Analysis Bi-Weekly Report 7

9 Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/7 Q:/7 Q:7/ Q:7/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/7 Q:/7 Q:7/ Q:7/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/ Q:/7 Q:/7 Q:7/ Q:7/ June July Egypt B / B / B (S&P / Moody s / Fitch) Current Account Balance (-Quarter Rolling Sum, % of GDP) Trade Balance Services & Income Balance Transfers Current Account Balance Capital & Financial Account Balance (-Quarter Rolling Sum, % of GDP) Other Investments Portfolio Investments FDI (Net) Capital & Financial Acc. Bal. Overall Balance (-Quarter Rolling Sum, % of GDP) IFI Support Capital & Fin. Account Bal. Overall Balance Current Account Balance Errors & Omissions Overall Bal. plus IFI Support July -M F -M F -M F O/N Interbank Rate (%) EGP/USD Sov. Spread (. bps) July -W % YTD % -Y % HERMES, / / /7 7/E /F Real GDP Growth (%)..... Inflation (eop. %)..... Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The current account deficit (CAD) is estimated to have narrowed sharply to.% of GDP in FY:7/ (July 7-June ) from a ½-decade high of.% of GDP a year earlier. The CAD declined significantly, by. pps y-o-y to.% of GDP in M:7/ (July 7- March ), largely supported by the flotation of the domestic currency in mid-q:/7 ahead of the signing of the IMF-supported -year economic programme. The significant improvement in the current account in M:7/ was mainly driven by tourist receipts and workers remittances from abroad. Indeed, tourist receipts rose by.7 pps y-o-y to a post-january Revolution high of.% of GDP in M:7/, due not only to more competitive prices (the EGP had depreciated against the USD by c..% y-o-y in M:7/ and c..% since the flotation), but also to the removal of travel bans and/or warnings by key source countries with the exception of Russia and the UK -- following a significant improvement in security conditions. The tourism balance improved further on the back of a decline in Egyptian tourists spending abroad (down. pps of GDP y-o-y), due to the sharp depreciation of the EGP and restricted e-card payments abroad. Moreover, workers remittances increased by. pps y-o-y to an alltime high of 7.% of GDP in M:7/, continuing on the upward trend started in Q:/7, when the Central Bank decided to float the EGP. In fact, before the flotation, remittances through the banking sector had been hindered by the attractive rates offered in the flourishing parallel FX market (where the USD was traded at a premium of c..% over its official rate of EGP. in early-q:/7). On another positive note, the trade deficit narrowed by. pps y-o-y to.% of GDP in M:7/, as exports rose (up 7.%) at a faster pace than imports (up.%). For Q:7/, we estimate the external adjustment continued, albeit at a slower pace, due to the gradual normalization of workers remittances, tourism receipts and merchandise exports, as well as higher repatriation of profits by both oil and non-oil foreign companies operating in Egypt. Overall, we estimate the CAD to have eased to.% of GDP in FY:7/ from a ½-decade high of.% in FY:/7. The capital and financial account (CFA), excluding IFI support, is estimated to have comfortably covered the CAD and boosted FX reserves in FY:7/. The CFA balance, excluding IFI support, posted a surplus of.% of GDP in M:7/, underpinned by the return of foreign investor confidence in the Egyptian economy following the solid implementation of the loan agreement with the IMF. The bulk of the surplus resulted from net portfolio investment inflows, which rose by. pps y-o-y to.% of GDP in M:7/, due almost exclusively to large investment by foreigners in the very attractive domestic debt market. As a result and accounting for (negative) net errors & omissions (NEO, -.% of GDP), the overall balance recorded a surplus of.% of GDP in M:7/. This, combined with IFI support (USD.bn from the IMF and USD.bn from the WB) and valuation effects, brought FX reserves to an all-time high of USD.bn at end-q:7/ (7. months of imports of GNFS) well above the pre-revolution high of USD.bn (in December ). For Q:7/, June FX reserves released to date indicate that the CFA was in surplus and more than covered the CAD. As a result, FX reserves rose by USD.bn to an all-time high of USD.bn (. months of imports of GNFS) in FY:7/. Importantly, the sound level of FX reserves and the flexible exchange rate regime in place since Q:/7 should help the authorities well manage the increasingly less-friendly global environment for emerging markets. NBG - Emerging Markets Analysis Bi-Weekly Report

10 June July FOREIGN EXCHANGE MARKETS, JULY 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 (July th ) ALL BRL BGL CNY EGP -week % change -month % change YTD % change MKD INR RON RUB RSD ZAR TRY UAH USD JPY GBP Depreciation Appreciation NBG - Emerging Market Research Bi-Weekly Report

11 June July MONEY MARKETS, JULY 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, JULY 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, JULY TH Currency Rating S&P / Moody s Maturity Amount Outstanding (in million) Bid Yield Gov. Spread Asset Swap Spread Bulgaria Bulgaria Energy Hld.7% ' EUR NA/NA //. South Africa FirstRand Bank Ltd.% ' USD BBB-/Baa //. 7 FirstRand Bank Ltd.% ' EUR NA/NA //. Arcelik AS.7% ' EUR BB+/NA //. 7 Garanti Bank.% ' USD NA/Ba // 7. 7 Turkiye Is Bankasi % ' USD NA/Ba //,. Turkey Vakifbank.7% ' USD NA/Ba // TSKB.% ' USD NA/Ba //. 7 Petkim.7% ' USD NA/B //. KOC Holding.% ' USD BBB-/Baa // 7. CREDIT DEFAULT SWAP SPREADS, JULY TH Albania Brazil Bulgaria China Cyprus Egypt FYROM India Romania Russia Serbia Turkey S. Africa Ukraine -Year Year NBG - Emerging Market Research Bi-Weekly Report

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

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

14 June July Level -week % change STOCK MARKETS PERFORMANCE, JULY 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), ,, F.Y.R.O.M (MBI), ,, India (SENSEX),....,, Romania (BET-BK), ,7, Russia (RTS),....,7, Serbia (BELEX-) South Africa (FTSE/JSE),.. -..,7, Turkey (ISE ), ,, Ukraine (PFTS) MSCI EMF, ,, MSCI EAFE, ,, Greece (ASE-General) Germany (XETRA DAX), ,77, UK (FTSE-) 7,....,7 7, USA (DJ INDUSTRIALS), ,7, USA (S&P ),7....7,, Brazil (IBOV) Bulgaria (SOFIX) Equity Indices (July th ) China (SHCOMP) Cyprus (CSE GI) Egypt (HERMES) F.Y.R.O.M (MBI-) -week % change -month % change YTD % change India (SENSEX) Romania (BET-BK) Russia (MICEX) Serbia (BELEX ) South Africa (FTSE/JSE) Turkey (ISE-) Ukraine (PFTS) MSCI EMF MSCI EAFE Greece (ASE-General) Germany (DAX) UK (FTSE-) USA (DJ INDUSTRIALS) USA (S&P ) - - Loss Gain NBG - Emerging Market Research Bi-Weekly Report

15 June July 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