South Eastern Europe and Mediterranean Emerging Market Economies

Transcription

1 South Eastern Europe and Mediterranean Emerging Market Economies Weekly Report 3 September October 1 TURKEY September inflation NBG Strategy & Economic Research Division Director: Paul Mylonas : : pmylonas@nbg.gr Emerging Markets Research Head: Michael Loufir : : mloufir@nbg.gr Analysts: Evlabia Fetsi : : efetsi@nbg.gr Konstantinos Romanos-Louizos : : romanos.louizos.k@nbg.gr Louiza Troupi : : troupi.louiza@nbg.gr ROMANIA NBR eases its monetary policy stance BULGARIA Results of parliamentary elections SERBIA August public debt FYROM M:1 balance of payments ALBANIA July-August external trade Finansbank Research Chief Economist: Inan Demir : : inan.demir@finansbank.com.tr Analyst: Gökçe Çelik : : gokce.celik@finansbank.com.tr UKRAINE M:1 balance of payments CYPRUS M:1 fiscal performance EGYPT FY:13/1 Suez Canal receipts The information in this document, being distributed by National Bank of Greece S.A., is based upon data and sources of information believed to be correct and reliable but the accuracy of which cannot be guaranteed. Accordingly, no representation or warranty, implied or expressed, is made by any member of National Bank of Greece S.A. as to its accuracy adequacy, timeliness or completeness.

2 Turkey /1 1/1 1/1 5/1 9/1 1/11 Headline & Core Inflation (y-o-y % change) 5/11 9/11 1/1 5/1 9/1 Headline Inflation Food Inflation Core-I Inflation 1/13 Interest Rates (%) CBRT O/N Lending Rate CBRTO/N Borrowing Rate CBRT1-w Repo Rate Interbank Market Overnight Rate 5/1 9/1 1/11 5/11 9/11 1/1 5/1 9/1 1/13 5/13 5/13 9/13 9/13 1/1 1/1 5/1 5/1 Core Inflation, Interest Rate & Exchange Rate CoreCPI-I (y-o-y % change, lhs) CBRT Effective Funding Rate (%, lhs) Currency Basket (.5*TRY/EUR+.5*TRY/USD, y-o-y % change, inverted, rhs) 5/1 9/1 1/11 5/11 9/11 1/1 5/1 9/1 1/13 5/13 9/13 1/1 5/1 9/1 9/1 9/ Oct. 3-M F -M F 1-M F 1-m TRIBOR (%) TRY/EUR.7... Sov. Spread (1, bps) Oct. 1-W % YTD % -Y % ISE 1 7, F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) September October 1 Headline inflation surprised on the downside, moderating to a -month low of.9% y-o-y in September, due to lower-thanexpected food inflation. Headline inflation decelerated to.9% y-o-y in September from 9.5% in August. However, the deceleration was sharper than our forecast (9.1%), mainly due to a weaker-thanexpected increase in food prices (which account for % of the CPI basket). Indeed, food inflation stood at 13.9% y-o-y in September compared with our forecast of 1.7% and the August (year-high) outcome of 1.%. Encouragingly, the CBRT s favourite core inflation measures, i.e., CPI-H (that excludes energy, unprocessed food, alcohol, tobacco and gold) and CPI-I (that also excludes processed food) eased for the first time since November, standing at 9.3% y-o-y and 1% y-o-y, respectively, in September compared with 9.7% and 1.% in August, after having been broadly unchanged during the previous 3 months. This positive development suggests that the bulk of the impact from the weakening of the TRY has already passed through to prices. Going forward, the course of the TRY will continue to be the key risk to the inflation outlook, and the depreciation of the TRY against the USD by.% and the currency basket (5%*EUR/TRY + 5%*USD/TRY) by.5% since end-august, due to a deterioration in global risk appetite, is a negative development. Therefore, the CBRT should continue to resist politicians calls for a further easing of monetary policy, in view of: i) still high underlying inflation; ii) higher-thanprojected food inflation (food inflation stood at 9.% y-t-d in September, already above the CBRT s upwardly-revised FY:1 forecast of 9%; from %); iii) the 1% rise in natural gas and electricity administrative prices on October 1 st (adding. pps to headline inflation); iv) continued pressure on the domestic currency, as markets begin to price in the Fed s first rate hike; v) a possible surge in political risk, ahead of the June 15 parliamentary elections; and vi) heightening geopolitical risks, especially in Iraq (Turkey s second largest export market). Following the recent rise in natural gas and electricity prices, we revised our end-year headline inflation forecast up to 9.% y-o-y from 9% -- above the end-13 outcome of 7.% and the CBRT s most recent forecast of 7.%. Against this backdrop, we expect the CBRT to maintain its central rate (1-week repo rate) and the ceiling of its interest rate corridor (overnight lending rate) until the end of the year, at.5% and 11.5%, respectively. Recall that the CBRT cut the 1-week repo rate by 175 bps between May and July and reduced the overnight lending rate by 75 bps in August, following the sharp rate increases implemented at end- January (55 bps and 5 bps, respectively). Should pressures on the TRY intensify, the CBRT would tighten domestic liquidity conditions further through liquidity management (by reducing the amount of auctions at the 1-week repo rate of.5%), and eventually increase the amount of daily FX sales (following the September increase to USD 3mn from USD 1mn). Note that the CBRT has tightened significantly TRY liquidity conditions during the past week, driving its effective funding rate up to the.5%-.7% range (still well below the currently allowed maximum of 11.5%) from.3% in the first half of September, and pushing the interbank market overnight rate up towards the ceiling of the corridor (the overnight lending rate currently at 11.5%) to the range % from.% in the first half of September -- and into positive territory in real terms for the first time since the January rate hikes. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 1

3 3 September October 1 Romania Policy Rate, Exchange Rate and Inflation CPI (y-o-y % change, left scale) 1-W Repo Rate (policy rate, left scale) RON/EUR (eop, right scale, inverted) 1/9 /9 7/9 1/9 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/1 1/1 Monetary Conditions Index Exchange Rate Contribution Interest Rate Contribution MCI looser monetary conditions tighter monetary conditions 1/7 7/7 1/ 7/ 1/9 7/9 1/1 7/1 1/11 7/11 1/1 7/1 1/13 7/13 1/1 7/1 1/15 Policy & Money Market Rates (%) Forecast 1-W ROBOR (-week m.a.) Policy Rate 1/9 /9 7/9 1/9 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/1 1/1,,1,,3,,5, Oct. 3-M F -M F 1-M F 1-m ROBOR (%) RON/EUR Sov. Spread (1, bps) Oct. 1-W % YTD % -Y % BET-BK 1, F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The NBR continues to ease its monetary policy stance. At its meeting on September 3 th, the NBR Board cut the 1-week repo rate by 5 bps to a recent low of 3%, bringing the total rate cuts to 5 bps since July 13. At the same time, it reduced the minimum reserve requirement (RRR) on RON liabilities by an additional pps to 1% (effective as at October th ), while maintaining that on FX liabilities at 1%. The cut in the RRR is estimated to release around RON 3.5bn (c..7% of RON deposits). Overall, the NBR has reduced its RRRs on RON and FX liabilities by a cumulative 5 pps and pps, respectively, since the beginning of the year, boosting liquidity by a significant % of GDP. Note, however, that part of this liquidity has been remitted to parent banks. The NBR s latest moves are attributed to favourable inflationary developments and the slowdown in economic activity. Indeed, headline inflation surprised on the downside in August, retreating to.% y-o-y against the NBR s target range of.5±1%. The main driver was food prices, which continued to decline, reflecting positive supply-side effects from a better-than-initially-expected summer harvest. At the same time, high-frequency data point to a slowdown in economic activity, with growth in industrial production and retail sales decelerating further, to 5.7% y-o-y and.3% y-o-y in July, respectively, from.% and % in Q:1 and 1.% and 9.1% in Q1:1. All said, although the ex-post real policy rate (estimated to have fallen to c. 1.5% in September, following a rise in inflation due to negative base effects from the cut in VAT on bread in September 13) is currently below its historical average of %, monetary conditions are broadly neutral (see our MCI), reflecting the recent appreciation of the RON (the CPI-based REER is up by c. 3.5% since end-13). At the same time, money market rates have increased (with the spread between the 1-week ROBOR and the policy rate currently at -1 bps compared with -13 bps on average in M:1), suggesting tighter liquidity conditions in the banking system. Note that, in a bid to reduce volatility in the money market, the NBR narrowed the interest rate corridor (defined by the overnight deposit rate and the Lombard rate) to ±.75 pps from ±3 pps previously. The NBR is expected to maintain its key rate at 3% at least until end-q1:15. We believe the NBR has little room to cut its key policy rate further, in view of the projected pick-up in inflation (to.% at end-1 and.% at end-15) and the anticipated gradual recovery in economic activity (note, however, that in light of the y-t-d developments, we revised down our FY:1 and FY:15 real GDP growth forecasts to.% and.%, respectively, from.% and 3.% previously). The heightened global uncertainty and the outstanding issues of the IMF programme should also prevent the central bank from additional rate cuts. Recall that, following the failure of the Government and the IMF to reach an agreement on the reduction of social security contributions for employers by 5 pps in October, the 3 rd review of Romania s SBA with the IMF was postponed until November. All said, we expect the NBR to maintain its 1-week repo rate at its current level of 3% at least until end- Q1:15, before considering a gradual rate reversal. Further reductions in RRRs are in the pipeline. In view of the need to restore credit to the private sector, which has been contracting since mid-13 (-.1% y-o-y in August), we believe the NBR will continue to provide enough liquidity to the banking system and will likely reduce further its RRRs, which still remain high compared with ECB standards (%). However, in a bid to rebalance banks portfolios towards LC loans (c % of total loans), and in view of the risk of capital outflows, we expect the central bank to apply these cuts mainly to LC liabilities. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

4 Bulgaria Results of the 1 Parliamentary Elections Number of Seats, % of the vote ABV 11 seats,.% Ataka 11 seats,.5% GERB seats, 3.7% BSP 39 seats, 15.% BBT 15 seats, 5.7% MRF 3 seats, 1.% Results of the 13 Parliamentary Elections Number of Seats, % of the vote GERB 97 seats, 3.5% Fiscal Balance (% of GDP) 1 Domestic Deficit Threshold 11 EU Deficit Threshold 1 Patriotic Front 19 seats, 7.3% Reformist Bloc 3 seats,.9% Ataka 3 seats, 7.3% MRF 3 seats, 11.3% Coalition for Bulgaria (led by the BSP) seats,.% 13 1F Oct. 3-M F -M F 1-M F 1-m SOFIBOR (%).... BGN/EUR Sov. Spread (17, bps) Oct. 1-W % YTD % -Y % SOFIX F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) September October 1 Parliamentary elections will result in a potentially weak coalition Government. According to the final results of the parliamentary elections, held on October 5 th, the main opposition party, the centreright Citizens for European Development of Bulgaria (GERB) won 3.7% of the vote, far surpassing the senior party of the outgoing Government coalition, the Bulgarian Socialist party (BSP), which suffered a huge defeat, with just 15.% of the vote. The Turkish minority party Movement of Rights and Freedom (MRF) followed with 1.% of the vote. Recall that the GERB was in power until early-13, when it fell following mass protests over high utility prices and lower living standards. In the May 13 elections, the GERB won the most seats, but failed to form a Government, due to a lack of majority in Parliament. A technocrat Cabinet, supported by the BSP and the MRF, faced strong criticism and massive anti-corruption protests, and was forced to step down only 1 months after its formation. Another five parties managed to pass the % election barrier and enter Parliament, i.e., the Reformist Block (RB), a coalition of small centreright and right-wing parties, with.9% of the vote, the nationalist Patriotic Front (PF) with 7.3%, the populist Bulgaria without Censorship party (BBT) with 5.7%, the ultra-nationalist Ataka party with.5%, and the left-wing ABV party, with.% of the vote. In view of Bulgaria s proportional electoral system, again no party managed to obtain an outright majority in the -seat assembly. The election winner, GERB, is 37 seats short of a majority, and will therefore need to be joined by more than one partner to form a coalition Government, after it ruled out working with the BSP or the MRF. In this context, a GERB-led coalition with the RB and the PF appears to be the most likely scenario. Worryingly, such an outcome could mean another shaky coalition, struggling with the country s challenges. Fresh elections -- likely in December -- are also a possibility. The next Government will face major challenges. Despite the economy s relatively weak growth prospects, the next Government will need to tighten the fiscal stance. Note that the budget deficit is projected to widen to % of GDP this year from 1.9% in 13, breaching by a wide margin the EU threshold for the deficit and the domestic fiscal rule (3% and % of GDP, respectively). Moreover, the Government will need to restore investor confidence, which has been shaken significantly by the deposit run on two domestic banks at end-june. Although the situation in the banking system has stabilised since then, the fate of the Corporate Commercial Bank (CCB) remains unknown. The exact size of the capital hole in the CCB will be determined following a detailed audit into the bank s books, due at end- October. In the meantime, deposits with the CCB remain frozen, even though the EU has been pressing the authorities to give customers access to deposits of up to EUR 1k. At the same time, the new Government should accelerate structural reforms, especially in the energy system, which is plagued by large deficits. Indeed, the state-owned power company, NEK, has already accumulated a sizeable debt of % of GDP. The October 1 st hike in electricity prices by 1% is enough to plug just a fraction of NEK s deficit. The new Government will also have to walk a tightrope over the proposed construction of the Russian-backed South Stream gas pipeline. Recall that Bulgaria suspended work on the project in June under heavy pressure from the EU and the US. Lastly, the new Government will need to restore the flow of EU funds (recall that payments worth c..5% of GDP are currently on hold) and improve the country s absorption rate of EU funds, which is among the lowest in the Union (just 5% in the period 7-13). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 3

5 Serbia Gross Public Debt Gross Public Debt (% of GDP, lhs) Change in Gross Pulic Debt (pps of GDP, rhs) debt ceiling: 5% End-1 Forecast Q3: Q1:7 Q3:7 Q1: Q3: Q1:9 Q3:9 Q1:1 Q3:1 Q1:11 Q3:11 Q1:1 Q3:1 Q1:13 Q3:13 Q1:1 Aug 1 Wage Bill and Pension Expenditure in SEE-5 (13, % of GDP) Personnel Expenditure Pension Expenditure Albania Romania Bulgaria Serbia FYROM Gross Public Debt in SEE-5 (% of GDP) Romania Bulgaria FYROM Serbia Albania F 3 Oct. 3-M F -M F 1-M F 1-m BELIBOR (%) RSD/EUR Sov. Spread (1, bps) Oct. 1-W % YTD % -Y % BELEX F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) n.a Fiscal Bal. (% GDP) September October 1 Public debt reached a worrying level of 9% of GDP in August. Public debt rose to 9% of GDP in August (its highest level since mid-) from 3% at end-december. The significant y-t-d rise was driven by: i) a primary deficit of 1.% of GDP in M:1; ii) a significantly higher funding cost than nominal GDP growth (estimated at 5% and 1.%, respectively, in M:1); and iii) RSD depreciation (by 7.% and.% y-t-d against the USD and the EUR, respectively) -- in view of the fact that a respective 3% and 3% of public debt is USD and EURdenominated. Public debt was also boosted by an (undisclosed) provision for new Government guarantees to local Government and public enterprise loans as well as support for bank recapitalisation. Note that the public debt-to-gdp ratio has soared by pps since end-1 -- more than double the average rise in SEE-5 countries. It is important to note that the eventual payment of the restitution debt (for confiscated assets during World War II) will add another pps of GDP to the public debt -- probably in Looking ahead, the public debt-to-gdp ratio is set to rise even further in 9-1M:1, reaching a high level of 75% at end-1, exceeding its ceiling of 5% of GDP (agreed with the IMF at end-1), and double its pre-crisis level (of 33% of GDP at end-). The reversal of the negative public debt trends necessitates the introduction of additional corrective fiscal measures, particularly on the expenditure side. Note that over the past years, bold steps have been taken to contain the deterioration of the debt dynamics. A series of measures were implemented in 13 (with a positive impact of % of GDP in FY:13), including: i) a pp hike in non-food VAT to %; ii) excise tax increases; iii) a 5 pp rise in the tax levy on interest, dividends and capital gains to 15%; and iv) a 5 pp hike in the corporate tax rate to 15%; as well as v) caps on increases in public sector wages and pensions. Additional measures were introduced in 1 (saving 1.7 pps of GDP in FY:1), that included: i) a hike in the lowest VAT rate to 1% from %; ii) the broadening of the tax base; as well as iii) a respective % and 5% cut in public sector wages that exceed RSD k and 1k. However, more aggressive corrective fiscal measures are currently needed to reverse the worsening public debt dynamics and resume talks with the IMF on a new agreement. These measures should focus on expenditure, as the latest measures targeted the revenue side. It is important to note that tax revenue-to-gdp in Serbia is the highest in SEE-5 countries (35.%) ahead of Bulgaria (.), Romania (7.3), FYROM (.), and Albania (1.9) in 13. The Fiscal Council -- an independent supervisory body -- has proposed a medium-term strategy, envisaging spending-saving measures of EUR bn ( pps of 15 GDP) in 15-17, aimed to put debt on a downward path from 17. It has urged for a 15% cut in pensions and public sector salaries (total savings of. pps of GDP). The cut is necessary in view of Serbia s high share of pensions and public sector salaries in total expenditure -- at 55%, more than 5% above the SEE- 5 average, highlighting Serbia s structural fiscal challenges. The Fiscal Council also urged for: i) the restructuring and resolving of state-owned companies (currently burdening the fiscal deficit by a sizeable 3.% of GDP per year), with a cumulative impact of 1.5 pps of GDP by 17; and ii) deep structural reforms (yielding pps of GDP in 15-17), including pension reform, a cut in public sector employment (accounting for 3% of registered employment in 11, or % of employment if the informal sector is included, according to the IMF), and the reduction of the shadow economy. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

6 - - F.Y.R.O.M External Trade (EUR terms) Exports (y-o-y % change, lhs) Imports (y-o-y % change, lhs) Trade Deficit (% of GDP, rhs) 1/ / 7/ 1/ 1/9 /9 7/9 1/9 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/1 Current Account Balance (1-M Rolling Sum, as % of GDP) Trade Balance Services+Income Transfers CAB 1/ / 7/ 1/ 1/9 /9 7/9 1/9 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/1 Balance of Payments (1-M Rolling Sum, as % of GDP) Current Account Balance Cap. & Fin. Acc. Balance and E&O IMF disbursements Overall Balance (excl. IMF) Overall Balance (incl. IMF) 1/ / 7/ 1/ 1/9 /9 7/9 1/9 1/1 /1 7/1 1/1 1/11 /11 7/11 1/11 1/1 /1 7/1 1/1 1/13 /13 7/13 1/13 1/1 /1 7/ Oct. 3-M F -M F 1-M F 1-m SKIBOR (%) MKD Sov. Spread (15, bps) Oct. 1-W % YTD % -Y % MBI 1 1, F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) September October 1 The current account (CAD) widened to % of GDP on a 1-month rolling basis in July, due to higher services and income outflows. The CAD widened by. pps y-o-y to.% of GDP in 7M:1, due to a significant deterioration in the balances of services and income. The services surplus narrowed by. pps y-o-y to 1.9% of GDP in 7M:1, due to a sharp increase in payments to foreign construction companies in the context of the Skopje 1 project and significant investments in road and railway infrastructure. The income deficit also widened in 7M:1 (by. pps y-o-y to 1.% of GDP), mainly due to increased outflows related to the compensation of foreign employees linked to the above-mentioned projects. The bulk of these negative developments was partly offset, however, by the narrowing in the trade deficit (by.5 pps y-o-y to 13% of GDP in 7M:1), mainly due to an increase in exports. Indeed, exports rose by 1.7 pps y-o-y to 1.1% of GDP, mainly on the back of higher capacity in the technological industrial development zones (TDIZ), more than compensating for a rise in imports (by 1. pps y-o-y to 31.1% of GDP). Eurobond proceeds boost FX reserves in 7M:1. The capital and financial account improved significantly in 7M:1 (by 5.1 pps y-o-y to.% of GDP), due to a sharp increase in portfolio investment (to a sizeable 5.% of GDP from -1.7% in 7M:13), with the former, however, including the proceeds from the placement of a sovereign Eurobond worth EUR 5mn (.% of GDP) in July (the country s largest ever Eurobond issue, at a favourable spread of 3 bps over mid-swaps) and the latter including the repayment of a Eurobond worth EUR 15mn (.3% of GDP) in January 13. Excluding the Eurobond, net portfolio investment flows turned negative to -.% of GDP in 7M:1 from.% of GDP in 7M:13. Moreover, other net capital flows deteriorated significantly in 7M:1 (with outflows reaching 1.% of GDP against inflows of 1.% in 7M:13), reflecting a decrease in net lending to the non-financial sector. On the other hand, non-debt generating (net) FDI inflows remained robust in 7M:1 (at 1.9% of GDP similar to its 7M:13 level), reflecting inter-company lending and greenfield investments (c. 3% of total inflows), in the flourishing subsector of automotive spare parts and the manufacturing sub-sectors of chemicals and medical products. Importantly, on a 1-month rolling basis, the FDI cover ratio almost tripled, to 1% in July from % in the corresponding month of the previous year, reflecting, inter alia, the successful reforms of the business environment in recent years. All said, the overall balance improved by 5 pps y-o-y to a surplus of.% of GDP in 7M:1, with FX reserves rising to EUR.bn in July from EUR bn at end-13, thus covering 5. months of imports of GNFS. The CAD is set to widen to 3.% of GDP in 1 (from 1.% in 13), but its financing is not a cause for concern. Looking ahead, we expect private transfers to continue to moderate towards historical levels (17%-1% of GDP at end-1 from 19% in July on a 1-month rolling basis), continuing the trend of normalization in unrecorded remittances initiated in late-1. Moreover, we see the trade deficit widening gradually, in line with the expected recovery in domestic demand. Overall, the CAD should widen to 3.% of GDP in 1 from 1.% in 13. Filling the external financing gap should not be a problem. Indeed, with broadly stable net FDI inflows (3.3% of GDP in FY:1 compared with 1.9% y-t-d, and the FY:13 outcome of 3.%) and the July Eurobond, we foresee an overall balance surplus of EUR mn this year, which will allow the repayment of EUR 57.mn to the IMF and increase FX reserves by EUR 1mn to EUR.1bn, covering 5 months of GNFS imports (following a decline of EUR mn in 13). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 5

7 Albania Contribution Rates to Export Growth (pps) Q1: Q: Q3: Q: Q1:9 Q:9 Q3:9 Q:9 Q1:1 Q:1 Q3:1 Q:1 Q1:11 Q:11 Q3:11 Q:11 Q1:1 Q:1 Q3:1 Q:1 Q1:13 Q:13 Q3:13 Q:13 Q1:1 Q:1 Q3:1* Minerals, fuels, electricity Construction materials and metals Other Textile and footwear Food, beverages, tobacco Total (y-o-y % change) Contribution Rates to Import Growth (pps) Q1: Q: Q3: Q: Q1:9 Q:9 Q3:9 Q:9 Q1:1 Q:1 Q3:1 Q:1 Q1:11 Q:11 Q3:11 Q:11 Q1:1 Q:1 Q3:1 Q:1 Q1:13 Q:13 Q3:13 Q:13 Q1:1 Q:1 Q3:1* Minerals, fuels, electricity Construction materials and metals Other Textile and footwear Food, beverages, tobacco Total (y-o-y % change) Q1: Q: Q3: Q: Q1:9 Q:9 Q3:9 Q:9 Q1:1 Q:1 Q3:1 Q:1 Q1:11 Q:11 Q3:11 Q:11 Q1:1 Q:1 Q3:1 Q:1 Q1:13 Q:13 Q3:13 Q:13 Q1:1 Q:1 Q3:1* *: July-August External Trade (-quarter rolling sum) Trade Deficit(FOB/CIF, % of GDP, rhs) Imports (CIF, y-o-y % change, lhs) Exports (FOB, y-o-y % change, lhs) Oct. 3-M F -M F 1-M F 1-m TRIBOR (mid, %) ALL/EUR Sov. Spread (bps) Oct. 1-W % YTD % -Y % Stock Market F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) September October 1 A temporary stabilisation of the trade balance on a y-o-y basis in 7-M:1. The trade gap (FOB/CIF) stood at 3.5% of GDP in 7-M:1 -- unchanged from the same period a year ago after having widened by a cumulative. pps of GDP y-o-y during the past 3 quarters. This stabilisation was driven by a temporary deceleration in imports. With the 7-M:1 outcome, the 1-month rolling trade deficit remained unchanged for a second month in a row, at.% of GDP in August but was above the December outcome of 19.7%. Export growth turned negative, for the first time in recent years, in 7-M:1, due to a sharp decline in exports of electricity. Exports contracted by.3% y-o-y in ALL terms in 7-M:1, following rises of 1.% y-o-y in H1:1 and 15.% in FY:13, reflecting a sharp decline in the category minerals, fuels, and electricity (down.5% y-o-y and shaving 9 pps off overall export growth, following a decrease of 3.5% y-o-y in H1:1 and a rise of 3.% in FY:13). The plunge in the category minerals, fuels, and electricity (representing.% of total exports in FY:13) is attributed to a sharp drop in exports of electricity, reflecting the fact that domestic production highly dependent on hydropower plants (9%) -- was insufficient to meet domestic consumption, due to limited rainfall since the beginning of the year, in contrast to 13. Available figures show that electricity production declined sharply by 7% y-o-y to. GWh in H1:1, leading to a sharp drop in exports by 91% y-o-y to.1 GWh and a surge in imports by 1% y-o-y to 1. GWh in the same period. Import growth eased temporarily in 7-M:1, following a surge during the past 3 quarters linked to the dissipation of political and economic uncertainty. Import growth moderated to.9% y-o-y in ALL terms in 7-M:1 from 9.% y-o-y in the past 3 quarters, following successive quarters of decline (averaging 7% y-o-y). The latter reflected weaker consumer and business confidence, on the back of prolonged political and economic uncertainty, which ended in mid- September 13, when a strong coalition government was formed and talks were initiated with the IMF on a programme aimed at economic recovery and medium-term growth (real GDP growth has been on a downward trend since 9), as well as putting public finances on a strong footing (the public debt-to-gdp ratio reached 7% in 13). The current account deficit (CAD) is set to widen this year to 1.% of GDP, but its funding is not a cause for concern. Looking ahead, we expect the trade deficit to deteriorate at a faster pace in 9-1M:1 (by.15 pps of GDP y-o-y per month, on average) compared with M:1 (. pps of GDP y-o-y per month, on average), as an improvement in the electricity balance, following recent heavy rainfall, should be largely offset by a pick-up in non-energy imports, on the back of a rebound in domestic demand. The latter should be underpinned by a large liquidity injection in the economy, through the clearance of government unpaid bills and VAT refunds (EUR 5mn or.5% of GDP this year, out of which EUR 15mn or 1.% of GDP was repaid between March and August). As a result, the CAD should widen to 1.% of GDP in FY:1 from 1.% of GDP in FY:13. Importantly, the bulk of the CAD should continue to be covered by large non-debt generating FDI inflows. Note that Albania has been the main investment destination in the region -- in relative terms -- since (c. % of GDP per year, especially in the flourishing oil and gas sector). According to our baseline scenario, projecting, inter alia: i) almost unchanged net FDI inflows (9.% of GDP against an all-time high of 9.5% in FY:13); and ii) large IFI support (.% of GDP against % in FY:13), we see FX reserves rising by EUR mn to EUR.1bn in 1 (.7 months of imports of GNFS), following a rise of EUR 3mn in 13. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

8 3 September October Ukraine Current Account Balance (1-month rolling, % of GDP) Current Account Balance Trade Balance Transfers Balance Services Balance Income Balance 1/9 5/9 9/9 1/1 5/1 9/1 1/11 5/11 9/11 1/1 5/1 9/1 1/13 5/13 9/13 1/1 5/1 9/1 Capital & Financial Account Balance (1-month rolling, % of GDP) Capital & Financial Account (incl. Net IMF Disbursements) Capital & Financial Account (excl. Net IMF Disbursements) FDI Loans (excl. IMF) Other (net) Capital Inflows /9 9/9 1/9 3/1 /1 9/1 1/1 3/11 /11 9/11 1/11 3/1 /1 9/1 1/1 3/13 /13 9/13 1/13 3/1 /1 9/1 External Financing (USD bn) Financing Needs Current Account Deficit Amortisations + Others Financing Sources FDI.1.. Loans & Other External Financing Balance IMF* Other Official Financing EU.1.. World Bank EBRD, EIB & others Change in FX Reserves * Assuming the disbursement of USD 7.bn from the IMF this year, and USD.bn in 15 3 Oct. 3-M F -M F 1-M F m KIUAH (%) UAH/USD Sov. Spread (1, bps) Oct. 1-W % YTD % -Y % PFTS F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal.* (% GDP) *Consolidated budget, including Naftogaz The current account deficit (CAD) narrowed in 7-M:1, due to the sharp decline in activity and the constraints to trade with Russia. The CAD shrank by a cumulative 1.7 pps of GDP y-o-y in July-August, after having narrowed by a cumulative 1. pps y-o-y in H1:1. This performance was driven by the sharper compression of imports (down 37.% y-o-y in M:1, in USD terms, more than double the decline of 1.% in H1:1), as Russia cut gas deliveries to Ukraine in mid-june (due to unpaid gas bills and price disputes). As a result, Ukraine imported just USD.1bn of gas per month in July-August (on the back of reverse flows from Europe) against gas purchases of USD.7bn (c..5% of GDP) per month in H1:1. Excluding energy imports, the decline in imports was still impressive, with the drop in non-energy imports accelerating (to 35% y-o-y in July-August from % in H1:1), in line with a sharper contraction in domestic demand, combined with financing constraints and a stronger depreciation of the UAH. On the other hand, export growth slipped deeper in negative territory, down by 1.5% y-o-y in July-August against.7% in H1:1, driven by the sharper drop in exports in the country s industrialised east, Donetsk and Luhansk (together accounting for ¼ of total exports) due to the intensification of fighting against pro-russian separatists, the resultant drop in production, and deteriorating relations with Russia (the decline in exports in Donetsk and Luhansk worsened to 3% y-o-y in July from 15.% in H1:1, against a significantly milder decline of.9% in the rest of Ukraine in 7M:1). The drop in exports was contained by the increase in exports to the EU (by 15% y-o-y in 7M:1), following the unilateral removal of duties on Ukraine s exports in late-april. The crisis has led to a sharp decline in private capital, only offset by multilateral assistance. The CFA deteriorated by. pps of GDP y-o-y per month in July-August, as in the first half of the year, due to weaker (net) FDI flows, as well as curtailed access of the private sector to foreign loans. As a result, the cumulative CFA turned into a deficit of 1.% of GDP in M:1, despite: i) increased official inflows since May (including the disbursement of a USD 1bn US guaranteed Eurobond, USD.bn from the WB, EUR.bn from the EU and USD.1bn from Japan in M:1) that more than covered the repayment of a USD 1bn loan from VTB in June; and ii) the imposition of capital controls. Reflecting the current account and CFA developments, the overall balance turned negative, at minus USD.bn (-3.5% of GDP) in M:1. However, the drawdown in FX reserves was contained at USD.5bn in M:1, due to IMF support (the 1 st tranche of USD 3.bn disbursed in May, following the signing of a new SBA, was larger than the repayment of USD 3.1bn in M:1), bringing FX reserves to (a 7-year low of) USD 15.9bn (. months of imports) in August. Despite an expected narrowing in 9-1M:1, the CAD should reach a -year low of 5.5% of GDP in FY:1. We expect the CAD to narrow modestly by.7 pps of GDP y-o-y during the remainder of this year (compared with.9 pps in M:1), ending 1 at 5.5% of GDP against 9.% in FY:13. The adjustment should moderate significantly, on the back inter alia of: i) the resumption of gas imports in Q:1 (assuming the implementation of the EU-brokered interim gas agreement with Russia, implying gas imports of USD 1.9bn, or 1.5% of GDP, by March) and higher coal imports during the winter; as well as ii) higher nonenergy imports reflecting the normalization of the situation in the east. Regarding the financing in 9-1M:1, assuming continued official external financial support from the IMF (USD 3.bn, excluding repayments of USD.bn, in 9-1M:1) and other IFIs (USD 3.7bn in 9-1M:1), the drawdown in FX reserves should be contained to USD.bn in 9-1M:1 and 5.1bn in FY:1. NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 7

9 3 September October Cyprus Consolidated Fiscal Balance (% of GDP) M:1 13 Govt. Outcome Proj. M:1 Outcome 1 Govt. Proj. Tax Revenue, Primary Expenditure & Fiscal Balance (1-M Rolling Sum) Tax Revenue (y-o-y % change, left scale) Primary Expenditure (y-o-y % change, left scale) Fiscal Balance (% of GDP, right scale) / 5/ / 11/ /9 5/9 /9 11/9 /1 5/1 /1 11/1 /11 5/11 /11 11/11 /1 5/1 /1 11/1 /13 5/13 /13 11/13 /1 5/1 /1 1 NBG Forecast Revenue Tax Revenue Direct Taxes Indirect Taxes V.A.T Soc. Contrib Non-Tax Revenue Grants Expenditure Current Expenditure Personnel Goods & Services Subsidies Interest Payments Soc.Sec.Payments Pension & Grat Transfers Unallocable Capital Expenditure Fiscal Balance Primary Balance Oct. 3-M F -M F 1-M F 1-m EURIBOR (%) EUR/USD Sov. Spread (, bps) Oct. 1-W % YTD % -Y % CSE Index F 15F Real GDP Growth (%) Inflation (eop, %) Cur. Acct. Bal. (% GDP) Fiscal Bal. (% GDP) The fiscal performance continues to outperform by a wide margin in M:1. The general government budget balance was much better than the government s projection for M:1. Specifically, the M:1 primary balance posted a surplus of 3.% of GDP, compared with a government projection of % of GDP, mainly due to primary expenditure restraint (3.7% of GDP against a government projection of 5.% of GDP). This overperformance was largely due to lower transfers and spending on wages & salaries and goods & services (5.% of GDP,.7% of GDP and 1.5% of GDP, respectively, compared with a Government projection of.3%,.9% and 1.%). The M:1 expenditure overperformance also benefited from lowerthan-projected interest spending (.% of GDP against a government projection of.7%), mainly reflecting lower-than-initially-projected interest rates on ESM loans (around 1% currently). Encouragingly, the positive outcome was also supported by a significant revenue overperformance (.9% of GDP compared with a government projection of 5.% of GDP). This resulted mostly from higher-than-anticipated direct and indirect tax collection (.7% of GDP and 9.% of GDP, respectively, compared with a projection of.% of GDP and 9.%), reflecting, inter alia, a better-than-expected macroeconomic outturn (the pace of economic contraction moderated to -3% y-o-y in H1:1 compared with the Troika s downwardly revised forecast of -.% for FY:1 from -.% previously) and, to a lesser extent, higher-than-planned grants (.5% of GDP compared with a government projection of.1% of GDP), and non-tax revenue (% of GDP versus a target of 3.% of GDP). As a result of the continued fiscal adjustment in M:1, the 1-month rolling primary and overall fiscal balance eased further to 1% of GDP and -% of GDP, respectively, in August, from -1.% and -5.1% in December, well below the corresponding revised FY:1 targets of -1.3% and -.%. The FY:1 fiscal deficit is on track to far exceed its target of.% of GDP. In view of the better-than-projected M:1 performance (a surplus of.9% of GDP against a government projection of -.7%) and a weaker-than-expected GDP contraction (we see FY:1 real GDP growth at -.%, 1. pps lower than the Troika s recently-revised forecast), we expect the FY:1 fiscal deficit to stand at 3.1% of GDP, significantly below the Troika s revised target of.% of GDP (from 5.3% previously) and the 13 outcome of 5.1% of GDP. This implies a fiscal contraction of.5 pps in cyclically-adjusted terms. Should our deficit forecast materialise, the general government debt is set to rise to 117% of GDP at end-1 from 111.5% of GDP at end below the Troika s revised forecast of 119.9% of GDP. Public sector borrowing requirements are likely to reach EUR 3.bn (.% of GDP) this year -- the bulk of which will be covered by the ESM and the IMF. The financing requirements comprise: i) the fiscal deficit (EUR.5bn); ii) amortisations of maturing government debt (EUR 1.7bn); and iii) a buffer to accommodate increased needs in case of a deeper-than-initially-expected recession (EUR 1bn). The ESM and the IMF are expected to provide the bulk of financing (EUR.5bn or 15.% of GDP). The residual financing, comprising the rollover of maturing debt, will be filled by domestic banks. Note that the disbursement of the sixth tranche of ESM-IMF assistance, worth EUR 3mn (.% of GDP) and initially planned for mid-september, hinges on the resolution of the mortgage foreclosures issue, likely to take place on October th (see our previous bulletin). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report

10 3 September October 1 Egypt 5, 5, 5, 5,,,,,, 3, 3, 3, / /7 Suez Canal Receipts (USD bn) 7/ Level (left scale) y-o-y % change (right scale) /9 9/1 1/11 11/1 1/13 Receipts from Major Foreign Currency Earners (USD bn) Oil & Gas Exports Suez Canal Receipts /5 5/ /7 Level (left scale) /5 5/ /7 7/ Tourism Receipts Workers' Remittances /9 9/1 1/11 FX Reserves (USD bn) 7/ /9 11/1 1/13 13/1 y-o-y change (right scale) 9/1 1/11 11/1 1/13 13/1 13/ Oct. 3-M F -M F 1-M F 1-m CAIBOR (%) EGP/USD Sov. Spread (. bps) Oct. 1-W % YTD % -Y % HERMES /1 1/13 13/1E 1/15F 15/1F Real GDP Growth (%) Inflation (eop. %) Cur. Acct. Bal. (% GDP) x -. Fiscal Bal. (% GDP) Suez Canal receipts (SCR) rebounded to an all-time high of USD 5.bn in FY:13/1 (July 13/June 1), on the back of higher toll charges and stronger global activity. Suez Canal revenue, one of Egypt's main foreign currency earners -- along with tourism, oil & gas exports, and workers remittances -- posted a 3-year high of.7% in FY:13/1, reaching USD 5.bn (1.% of GDP) -- its highest level since the opening of the Canal in following a decline of 3.% in FY:1/13. This improvement is attributed to a rise in toll fees at the beginning of May by 5% for oil tankers and petrochemical products and % for container ships and car carriers -- and an acceleration in the world trade volume (up.%, 3%, and % respectively, in 1, 13, and 1, according to the latest IMF estimates -- October 1 WEO). The relatively strong performance of SCR is estimated to have contributed.1 pp to overall GDP growth in FY:13/1 (after having dragged it down by a similar amount in FY:1/13). An ambitious canal expansion project is underway, aimed at raising SCR to USD 1-13bn by 3, from USD 5.bn currently. Work began on August th on a new 7 km artificial waterway. The expansion project also includes the digging of six tunnels for cars and trains to link the east and west banks of the Suez Canal. The new canal should boost traffic, reducing the waiting time from an average of 11 hours to just 3 hours and allowing more vessels to use the Canal. It is estimated that the number of ships that will be able to navigate the Canal simultaneously will increase from 3 to 97. The expansion of the Canal is expected to increase annual revenue to USD 1-13bn by 3 from an all-time high of USD 5.bn in FY:13/1. Importantly, the cost of the project, estimated at EGP bn (USD.bn), will be fully financed by Egypt. The Government collected EGP bn or.% of GDP (EGP bn more than needed) through the sale of attractive tax-free investment certificates to Egyptian individuals, corporations and legal entities. The certificates were issued by stateowned banks (National Bank of Egypt, Bank Misr, Banque du Caire and the Suez Canal Bank) from which other banks were able to order for their customers. The certificates were issued at a value of EGP 1, EGP 1, EGP 1,, with a maturity of 5 years at a 1% interest rate -- the highest offered on any instruments by Egyptian banks. The low value certificates, worth EGP 1 and EGP 1, will be redeemable with cumulative interest, at the end of the 5 years, while holders of certificates worth EGP 1, will reap a 1% interest rate on a quarterly basis. To make the Suez certificates more attractive, the holders of the certificates were granted the right to a loan from the issuant bank worth up to 9% of their certificates value. It is worth noting that, according to the Central Bank Governor, H. Ramez: i) % of buyers of Suez certificates were individuals; ii) investment certificates attracted EGP 7bn (.1% of end-13/1 total stock of deposits) to the Egyptian banking system; iii) more than USD bn were converted to EGP inside the banking system for purchasing the certificates; and iv) Egyptian expatriates bought EGP.35bn worth of certificates. The ongoing work on the additional lane should help the Government attain its FY:1/15 real GDP growth target of 3.5% (up from an estimated outcome of.1% for FY:13/1) and reduce the unemployment rate, which posted the lowest increase in years in FY:13/1 (up.1 pp y-o-y to 13.1% against a cumulative rise of pps since the start of the Revolution in January 11). NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 9

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