CCentral & Eastern European Strategyentral & Eastern ... · This may also be seen in the form of mild increases in yields on the very popular ... BOS Bank (BOSPW) 6% due 2016 1 horizon:

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Central & Eastern European StrategyCentral & Eastern European Strategy1st quarter 2013

Economic slowdown in CEE

Dampened growth outlook for CEE

Mild correction in FX and bond yields

Equities: A solid start into 2013

Asset Allocation: Prefer stocks to bonds

2 1st quarter 2013

Content

Topical issue: Economic downturn catches up with CEE 3

Forecasts CEE incl. Austria 4

Asset allocation CEE incl. Austria 6

Special: Challenging growth outlook 10

Austria 12

CE: Poland 14

Hungary 16

Czech Republic 18

Slovakia 20

Slovenia 21

SEE: Croatia 22

Romania 24

Bulgaria 26

Serbia 27

Bosnia and Herzegovina 28

Albania 29

Kosovo 30

CIS: Belarus 31

Russia 32

Ukraine 34

Turkey 36

Sovereign Eurobonds 38

Corporate Eurobonds 40

Equity markets 42

Sectors 48

Equities - top picks 54

Equities - region overview 59

Sector weightings in comparison 63

Technical analysis 64

Quantitative analysis 66

Acknowledgements 67

Central & Eastern European Strategy

Explanation:e ... estimatef ... forecastp ... preliminary figures n.v. ... no value

AbbreviationsCurrencies and CountriesALL Albanian lekBAM Bosnian markaBGN Bulgarian levBYR Belarusian roubelCZK Czech korunaEKK Estonian kroonHUF Hungarian forintHRK Croatian kunaLTL Lithuanian litasLVL Latvian latsPLN Polish zlotyRON Romanian leuRSD Serbian dinarRUB Russian roubleSIT Slovenian tolarSKK Slovak korunaTRY Turkish liraUAH Ukrainian hryvnia

Economic abbreviations %-chg Percentage change (not in percentage points)avg averagebp basis pointsC/A Current AccountCPI Consumer Price IndexFCY Foreign CurrencyFDI Foreign Direct InvestmentsFX Foreign ExchangeFY Full yearGDP Gross Domestic ProductLCY Local Currencymmav month moving averagemom month on monthO/N overnight rate pp percentage pointsPPI Producer Price Indexqoq quarter on quarterT/B Trade BalanceULC Unit Labour Costsyoy year on yearytd year-to-date

Stock Exchange IndicesBELEX15 Serbian stock indexBET Romanian stock indexBUX Hungarian stock indexCROBEX10 Croatian stock indexPX Czech stock indexMICEX Russian stock indexSASX-10 Bosnian stock indexWIG 20 Polish stock index

Equity relatedDY Dividend yieldEG Earnings growthLTG Long term (earnings) growthP/B Price book ratioP/E Price earnings ratio

RS Recommendation suspendedUR Under Revision

Eurozone Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia, Spain

CE Central European countries - Poland, Hungary, Czech Republic, Slovakia, Slovenia

SEE South East European countries - Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Serbia

CIS European CIS (Commonwealth of Independent States) countries - Russia, Ukraine, Belarus

CEE Central and Eastern Europe (CE + SEE + CIS)

31st quarter 2013

Topical issue

During the second half of 2012, the economic doldrums finally also reached the bastions of growth in Germany and Austria, and since Q3 the downturn has been quite visible in the GDP figures from Eastern European countries as well. While the disastrous agricultural output data dragged down performance in the autumn, the contractions in GDP in the Czech Republic, Hungary, Romania and Croatia are mainly the consequence of slack domestic demand. Even the previous growth lea-ders such as Poland and Slovakia are now faced with the intensity of the recession in Europe. Consequently, we have lowered our 2013 GDP forecasts for all of the coun-tries in Central Europe (CE) and South-Eastern Europe (SEE). Although the Eurozone debt crisis has mainly impacted South-Eastern Europe so far, the cyclical downturn in core Europe is now having a massive effect on Central Europe (CE) via net exports. Along with the foreign trade channel, this is also due to a great extent to the necessity to push ahead with fiscal consolidation. Whereas in 2009 there was still enough leeway to take countermeasures, the desired return to budget deficits below the 3% mark is acting as a huge drag on domestic value added for Poland, Hungary, Slo-vakia and the Czech Republic. Nevertheless, this process of adjustment is absolutely necessary, so that these countries can restore their ability to react to external shocks in the future. During the election year in 2013, Austria will have a difficult time achie-ving its original budget target, with economic growth projected to come in at just 0.5%. Russia is feeling the impacts the least, as the exaggerated boom in consumer lending is buoying domestic consumption there. Despite this, we project GDP growth of 3% in Russia for 2013, which is a sub-average rate of increase for that country.On a positive note, consumer prices are expected to drop back lower again in most countries. We project that these declines in prices will pick-up again, especially in H1 2013. In Austria, this effect should also exert a downward pressure on prices in Q3 still, pushing the CPI to below 2%. We only expect to see opposite trends in Russia and Ukraine, after the extremely low price increases from the previous year.Impact on monetary policy and exchange ratesAs a result of the above developments, further cuts in interest rates can be expected in Poland and Hungary. In most of the other countries, stable monetary policy should provide the basis for a rebound in exchange rates as the year progresses. Neverthel-ess, there may be some mild corrections during the first quarter, as the very optimistic expectations may be disappointed.Impact on the bond and equity marketsThis may also be seen in the form of mild increases in yields on the very popular long-term government bonds, in particular on instruments from Poland and Hungary. By contrast, short-dated paper may profit from the rate cuts, and thus investment opportunities look better in that part of the maturity curve. Russia and Turkey remain attractive, and not just in terms of their bonds: we also see the strongest upside poten-tial on these equity markets during the early months of 2013. All in all, for the year as a whole we expect to see performance between 10 and 15% in CEE. Vienna and Budapest will be at the lower end of the range, with Moscow and Istanbul leading the way.

Peter Brezinschek

Economic downturn catches up with CEE

Recommendations1 – debt markets

LCY bonds

Buy PLN ≤ 2y T-bondsTRY 10y T-bonds

Sell HUF 10y T-bondsCZK ≥ 5y T-bondsCorporate bonds

Buy BOS Bank (BOSPW) 6% due 20161 horizon: end 1st quarter 20132 the indicated price is the last price as available at 6.30 a.m. (CET) on 18 December 2012Source: Raiffeisen RESEARCH

Recommendations1 - stock markets

Indices

Buy ATX, WIG 20, BUX, PX, MICEX, BET, CROBEX10, ISE National 100

Sectors

Overweight Industrials, Materials

Underweight Telecommunications, Consumer staplesEquities

Buy

RHI EUR 25.052 Target price: EUR 29.50CA Immo EUR 10.302 Target price: EUR 12.70Bogdanka PLN 138.02 Target price: PLN 170.0CiechPLN 22.752 Target price: PLN 26.00MTSUSD 18.592 Target price: USD 21.80

Forecasted GDP (% yoy)

Source: Raiffeisen RESEARCH

-2

-1

0

1

2

3

4

5

Q4 2012 Q1 2013 Q2 2013 Q3 2013

Eurozone Poland Hungary Russia

Recession in Western European countries triggers set-backs in economic activity in CEE, even in the previous powerhouse countries Interest rates heading south, thanks to falling inflation Stock markets profiting from abundant global liquidity

4 1st quarter 2013

Consumer prices (avg, % yoy)

Countries 2011 2012e 2013f 2014fPoland 4.3 3.8 2.7 2.5Hungary 3.9 5.7 3.6 3.8Czech Rep. 1.9 3.3 2.2 2.3Slovakia 3.9 3.6 2.2 2.5Slovenia 1.8 2.5 2.5 2.3CE 3.6 3.9 2.7 2.6Croatia 2.3 3.5 3.5 2.8Bulgaria 4.2 3.0 3.1 3.4Romania 5.8 3.3 4.5 3.3Serbia 11.3 7.7 13.0 9.0Bosnia a. H. 3.7 2.2 2.0 2.0Albania 3.5 2.3 2.5 3.0SEE 5.4 3.7 4.9 3.8Russia 8.5 5.0 6.2 5.8Ukraine 8.0 0.8 5.5 8.0Belarus 53.2 60.0 18.0 14.0CIS 9.6 6.1 6.5 6.2CEE 7.4 5.2 5.2 4.9Turkey 6.5 9.0 7.0 6.0Austria 3.6 2.6 2.2 2.1Germany 2.5 2.0 1.5 1.5Eurozone 2.7 2.5 1.9 1.8USA 3.2 2.1 1.5 2.0Source: Thomson Reuters, Raiffeisen RESEARCH

Current account balance (% of GDP)

Countries 2011 2012e 2013f 2014fPoland -4.9 -3.1 -2.9 -3.9Hungary 0.9 1.4 1.7 1.6Czech Rep. -2.9 -1.1 -1.5 -1.5Slovakia -2.1 1.7 2.8 2.6Slovenia 0.0 1.9 2.7 1.3CE -3.1 -1.4 -1.2 -1.8Croatia 1.0 -0.9 -1.0 -1.3Bulgaria 0.3 -1.9 -2.7 -3.0Romania -4.5 -4.2 -3.6 -3.5Serbia -9.3 -12.8 -9.6 -9.6Bosnia a. H. -9.6 -8.2 -8.2 -8.5Albania -11.3 -8.8 -9.1 -9.2SEE -4.0 -4.6 -4.2 -4.2Russia 5.5 4.5 2.8 1.9Ukraine -6.2 -7.4 -6.3 -5.9Belarus -9.3 -2.6 -6.2 -7.9CIS 4.1 3.3 1.8 1.1CEE 1.1 1.3 0.4 -0.2Turkey -10.0 -6.5 -6.7 -6.3Austria 0.6 1.1 1.0 0.9Germany 5.7 5.8 5.5 5.5Eurozone 0.1 0.6 0.7 0.8USA -3.1 -3.0 -2.8 -3.1Source: Thomson Reuters, Raiffeisen RESEARCH

Forecasts

General budget balance (% of GDP)

Countries 2011 2012e 2013f 2014fPoland -5.0 -3.5 -3.3 -2.8Hungary 4.3 -2.7 -3.0 -3.3Czech Rep. -3.1 -4.7 -2.9 -2.6Slovakia -4.9 -4.6 -2.9 -2.4Slovenia -6.4 -4.5 -3.5 -3.2CE -3.4 -3.8 -3.2 -2.8Croatia -5.0 -4.1 -4.5 -4.0Bulgaria -2.1 -1.4 -2.0 -1.7Romania -5.7 -3.0 -2.8 -2.5Serbia -4.5 -6.6 -4.5 -4.0Bosnia a. H. -1.3 -2.0 -2.0 -1.0Albania -3.5 -3.5 -3.0 -3.0SEE -4.7 -3.3 -3.1 -2.8Russia 0.8 0.0 -1.0 -1.6Ukraine -4.3 -4.5 -3.0 -2.0Belarus 2.4 -0.5 -1.0 0.0CIS 0.4 -0.4 -1.2 -1.6CEE -1.2 -1.7 -2.0 -2.1Turkey -1.4 -2.4 -2.2 -2.5Austria -2.5 -3.2 -2.6 -1.8Germany -0.8 -0.2 -0.5 0.0Eurozone -4.1 -3.3 -2.6 -2.5USA -8.7 -7.6 -3.8 -2.3Source: Thomson Reuters, Raiffeisen RESEARCH

Public debt (% of GDP)

Countries 2011 2012e 2013f 2014fPoland 56.4 56.6 55.5 53.2Hungary 80.6 80.0 80.0 79.5Czech Rep. 41.2 44.9 46.8 47.6Slovakia 43.3 52.2 54.9 55.8Slovenia 46.9 51.0 53.0 54.0CE 54.8 56.7 56.8 56.0Croatia 46.7 53.8 57.1 59.5Bulgaria 16.3 18.3 16.6 19.6Romania 34.7 36.6 37.5 37.6Serbia 45.8 59.0 58.0 56.0Bosnia a. H. 39.2 42.0 42.1 39.6Albania 59.4 60.4 62.6 62.0SEE 36.5 40.6 41.3 41.8Russia 10.2 10.0 10.5 11.0Ukraine 36.0 37.5 37.0 37.0Belarus 52.5 35.0 34.0 33.2CIS 13.4 12.9 13.2 13.7CEE 28.0 28.7 29.1 29.1Turkey 39.1 36.8 35.0 33.0Austria 72.4 74.8 76.3 75.8Germany 80.5 81.7 81.0 78.7Eurozone 87.3 91.1 92.1 92.0USA 98.7 103.7 106.2 105.5Source: Thomson Reuters, Raiffeisen RESEARCH

Gross foreign debt (% of GDP)

Countries 2011 2012e 2013f 2014fPoland 67.4 70.1 69.7 68.7Hungary 130.2 125.6 118.3 107.6Czech Rep. 49.2 49.6 50.2 49.8Slovakia 75.7 68.7 71.8 73.8Slovenia 111.0 112.3 113.8 115.8CE 75.2 75.3 74.4 72.7Croatia 101.7 103.9 101.5 98.0Bulgaria 93.1 91.4 84.0 78.7Romania 75.2 76.0 72.8 69.9Serbia 77.6 88.5 80.4 74.3Bosnia a. H. 67.6 63.4 62.5 61.0Albania 23.6 24.5 24.1 26.1SEE 80.2 81.7 77.7 74.2Russia 29.1 28.8 28.1 28.9Ukraine 76.6 73.6 74.1 73.4Belarus 66.2 56.1 50.9 51.5CIS 34.3 33.0 32.3 33.1CEE 51.3 49.4 48.1 47.7Turkey 42.6 42.5 42.8 44.5Austria n.v. n.v. n.v. n.v.Germany n.v. n.v. n.v. n.v.Eurozone n.v. n.v. n.v. n.v.USA n.v. n.v. n.v. n.v.Source: Thomson Reuters, Raiffeisen RESEARCH

Exchange rate EUR/LCY (avg)

Countries 2011 2012e 2013f 2014fPoland 4.12 4.19 4.07 4.00Hungary 279.3 291.9 293.8 290.0Czech Rep. 24.6 25.0 24.8 24.0Slovakia euro euro euro euroSlovenia euro euro euro euro

Croatia 7.43 7.53 7.55 7.50Bulgaria 1.96 1.96 1.96 1.96Romania 4.24 4.46 4.53 4.53Serbia 102.0 113.2 113.9 114.8Bosnia a. H. 1.96 1.96 1.96 1.96Albania 140.3 139.7 138.5 138.3

Russia 40.9 40.0 41.0 41.7Ukraine 11.09 10.54 11.37 12.19Belarus 6900 10800 12200 13600

Turkey 2.34 2.34 2.36 2.33Austria euro euro euro euroGermany euro euro euro euroEurozone euro euro euro euroUSA 1.39 1.30 1.32 1.33Source: Thomson Reuters, Raiffeisen RESEARCH

Ratings1

Countries S&P Moody's FitchPoland A- A2 A-Hungary BB Ba1 BB+Czech Rep. AA- A1 A+Slovakia A A2 A+Slovenia A Baa2 A-

Croatia BB+ Baa3 BBB-Bulgaria BBB Baa2 BBB-Romania BB+ Baa3 BBB-Serbia BB- not rated BB-Bosnia a. H. B B3 not ratedAlbania B+ B1 not rated

Russia BBB Baa1 BBBUkraine B+ B2 BBelarus B- B3 not rated

Turkey BB Ba1 BBB-Austria AA+ Aaa AAAGermany AAA Aaa AAAEurozoneUSA AA+ Aaa AAA1 for FCY, long-term debtSource: Bloomberg, Raiffeisen RESEARCH

Real GDP (% yoy)

Countries 2011 2012e Consensus 2013f Consensus 2014f ConsensusPoland 4.3 2.1 2.3 1.2 2.0 2.7 2.9Hungary 1.6 -1.0 -1.3 -0.5 0.3 1.5 1.7Czech Rep. 1.7 -0.9 -1.0 -0.2 0.6 1.8 2.1Slovakia 3.2 2.4 2.4 0.9 1.9 2.5 3.1Slovenia 0.6 -1.8 -2.0 -1.0 -0.5 1.0 1.0CE 3.1 0.9 0.9 0.5 1.3 2.2 2.5Croatia 0.0 -1.8 -1.7 0.5 0.4 1.5 1.6Bulgaria 1.7 1.5 0.8 1.5 1.5 3.5 2.8Romania 2.2 0.1 0.9 1.5 2.1 3.0 2.9Serbia 1.6 -2.0 -1.2 1.0 1.4 2.0 n.v.Bosnia a. H. 1.3 -1.0 -0.6 0.5 0.9 2.0 n.v.Albania 3.1 2.0 1.1 3.0 2.2 4.0 n.v.SEE 1.7 -0.2 0.1 1.3 1.6 2.7 n.v.Russia 4.3 3.5 3.7 3.0 3.5 3.0 3.8Ukraine 5.2 0.5 0.8 2.5 2.3 3.0 3.8Belarus 5.3 2.0 3.5 3.0 3.3 4.0 n.v.CIS 4.4 3.2 3.5 3.0 3.4 3.0 n.v.CEE 3.7 2.2 2.3 2.1 2.4 2.8 n.v.Turkey 8.5 3.0 2.9 3.5 4.0 4.5 4.7Austria 2.7 0.5 0.6 0.5 0.8 1.5 1.5Germany 3.1 0.9 0.8 0.5 0.8 1.8 1.4Eurozone 1.5 -0.5 -0.5 -0.1 0.0 1.5 1.2USA 1.8 2.2 2.2 1.5 1.9 2.5 2.8Source: wiiw, Raiffeisen RESEARCH

51st quarter 2013

Exchange rate forecast

Countries 18-Dec1 Mar-13 Jun-13 Dec-13vs EURPoland 4.08 4.15 4.15 3.95Hungary 287.96 300.0 295.0 290.0Czech R. 25.18 25.1 24.8 24.5Croatia 7.54 7.55 7.50 7.60Romania 4.47 4.55 4.50 4.55Serbia 113.05 115.0 113.0 115.0Albania 140.23 139.5 139.0 138.9

vs USDRussia 30.7 30.3 30.8 31.1Ukraine 8.10 8.40 8.60 9.00Belarus 8610 8975 9250 9800Turkey 1.78 1.80 1.75 1.80

EUR/USD 1.32 1.30 1.31 1.351 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

2y LCY yield forecast

Countries 18-Dec1 Mar-13 Jun-13 Dec-13Poland 3.27 3.33 3.44 3.96Hungary 5.33 6.95 6.75 6.30Czech R. 0.12 0.20 0.20 0.50Croatia 3.56 2.80 3.00 3.40Romania 6.24 5.88 5.85 5.65Russia 6.31 6.37 6.30 6.00Turkey 5.67 6.00 6.00 6.10

Austria 0.02 0.20 0.25 0.45Eurozone -0.01 0.10 0.20 0.40USA 0.28 0.25 0.30 0.40

1 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Key interest rate forecast

Countries 18-Dec1 Mar-13 Jun-13 Dec-13Poland 4.25 3.75 3.50 3.50Hungary 5.75 5.50 5.00 5.00Czech R. 0.05 0.05 0.05 0.05Romania 5.25 5.25 5.25 5.25Russia 8.25 8.25 8.25 8.25Turkey 5.50 5.25 5.25 5.25

Eurozone 0.75 0.75 0.75 0.75USA 0.25 0.25 0.25 0.251 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Forecasts

3m money market rate forecast


Eurozone 0.18 0.25 0.30 0.30USA 0.31 0.25 0.25 0.301 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH


Countries 18-Dec1 Mar-13 Jun-13 Dec-13Poland 3.38 3.62 3.74 4.20Hungary 6.01 7.60 7.30 7.00Czech R. 0.70 0.90 1.00 1.40Croatia 4.26 4.50 4.70 5.10Romania 6.25 6.10 6.10 6.00Russia 6.49 6.45 6.65 6.40Turkey n.v. 6.20 6.20 6.30

Austria 0.60 0.85 1.00 1.40Eurozone 0.39 0.60 0.80 1.20USA 0.76 0.80 1.00 1.00




Austria 1.80 1.95 2.10 2.50Eurozone 1.41 1.60 1.80 2.20USA 1.82 1.80 2.00 2.30


Yield structure

Bp-spread between 10y and 3m maturitySource: Bloomberg, Raiffeisen RESEARCH

-50

0

50

100

150

200

Pola

nd

Hun

gary

Cze

ch R

ep.

Rom

ania

Ger

man

y

USA

LCY changes vs. EUR (% qoq)1

1 20-Dec in comparison to 01-Oct 2012Source: Bloomberg

RON

PLN

CZK

HUF

RUB

TRY

USD

-6 -4 -2 0 2 4 6

Expected yield change

Bp-change of gov. bond yield in next 3 monthsSource: Bloomberg, Raiffeisen RESEARCH

-200

20406080

100120140160

Pola

nd

Hun

gary

Cze

ch R

ep.

Rom

ania

Ger

man

y

USA

Expected index performance

Source: Raiffeisen RESEARCH

0%

2%

4%

6%

8%

10%

12%

14%

ATX

WIG

20

BUX PX

MIC

EX BET

CRO

BEX1

0

ISE

Nat

. 100

Mar-13 Jun-13

Stock market indicators

Earnings growth

Price/ear-nings ratio

12e 13f 12e 13f

ATX 12.5% 10.5% 12.3 11.1WIG 20 -6.9% -11.2% 10.8 12.1BUX -15.4% 11.5% 9.2 8.2PX1 20.8% 15.2% 13.0 11.2MICEX -0.4% 1.5% 5.3 5.2BET 0.9% 13.2% 5.9 5.2CROBEX10 47.5% 5.8% 7.3 6.9ISE Nat.100 15.7% 11.1% 12.2 11.01 Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

Stock market forecasts

Index estimates

18-Dec1 Mar-13 Jun-13 Dec-13

ATX 2,405 2,570 2,600 2,650WIG 20 2,576 2,800 2,820 2,850BUX 17,800 19,200 19,400 19,700PX 1,031 1,120 1,130 1,150MICEX 1,479 1,620 1,650 1,700BET 4,887 5,330 5,380 5,600CROBEX10 948 1,025 1,030 1,070ISE Nat. 100 77,299 85,000 86,000 91,0001 11:59 p.m. (CET)In local currencySource: Bloomberg, Raiffeisen RESEARCH

6 1st quarter 2013

Asset allocation - performance

Sum of last quarter1

RBI portfolio (in EUR) 2.15%Benchmark (in EUR) 2.19%RBI outperformance (in EUR) -0.04%by weighting of equities vs. bonds -0.11%

regional equity weightings 0.03%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.04%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

1 17 Sep 2012 - 18 Dec 2012EB...EurobondsSource: Raiffeisen RESEARCH

Compared to the benchmark, the CEE portfolio recorded mild underperformance of 3 basis points (bp) in Q4 2012. The underperformance from the first period was almost completely offset in the final period, following a brief phase of per-formance similar to the benchmark. During the first period, it was mainly the overweight position in equities versus bonds which failed to generate returns, leading to underperformance. Maintain-ing this weighting in the last period resulted in robust outperformance of 11bp. In the equities segment, due to the expectations of falling risk, lower interest rates and a positive reporting season, there was an emphasis on Russia and Poland during two of the periods, with the underperformance by Russia later recouped by outperformance in Poland. The confidence in the ability of Hungarian equi-ties to make up lost ground paid off with outperformance of 2bp during the first period, but this was evened out by the underperformance due to financing with Czech equities. As the Czech Republic was obviously able to profit more over the long term from the higher level of liquidity, the equity market was overweighted, which resulted in an outperformance of 1bp. During all of the periods, there was an underweight position in Romania, which generated outperformance of 2bp on the whole. In the bond segment, during the first two periods the overweight in Turkey was maintained, which led to outperformance of 3bp on the whole. There was financ-ing from Hungary for all of the periods due to the anticipated depreciation of HUF and – following the initial underperformance – this ultimately resulted in per-formance just about 1bp over the benchmark. The low confidence in the rather weak CZK prompted an underweight during the first two periods and resulted in outperformance of almost 2bp.

Mario Annau

Ups and downs in CEE

Period 1: 17 Sep 2012 - 24 Oct 2012

RBI portfolio (in EUR) -1.26%Benchmark (in EUR) -1.09%RBI outperformance (in EUR) -0.17%by weighting of equities vs. bonds -0.16%

regional equity weightings -0.01%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.00%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

EB...Eurobonds Source: Raiffeisen RESEARCH

Period 2: 24 Oct 2012 - 27 Nov 2012

RBI portfolio (in EUR) 0.79%Benchmark (in EUR) 0.83%RBI outperformance (in EUR) -0.04%by weighting of equities vs. bonds -0.07%

regional equity weightings -0.01%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.03%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

EB...Eurobonds Source: Raiffeisen RESEARCH

Period 3: 27 Nov 2012 - 10 Dec 2012

RBI portfolio (in EUR) 2.64%Benchmark (in EUR) 2.47%RBI outperformance (in EUR) 0.17%by weighting of equities vs. bonds 0.11%

regional equity weightings 0.05%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.01%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

EB...Eurobonds Source: Thomson Reuters, Raiffeisen RESEARCH

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

95

100

105

110

115

120

125

Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12

in p

erce

ntag

e po

ints

RBI-Portfolio Outperformance (r.h.s.)

Performance 2012

Source: Thomson Reuters, Raiffeisen RESEARCH

In the last period, the overweighting of equities versus bonds produced outperformance Overweight in Polish equities and Turkish bonds was successful Underweight in Romanian equities and Czech bonds was successful

71st quarter 2013

Asset allocation - total portfolio

The lacklustre performance of the Eurozone economy is having an impact on the markets in CEE. For most of the larger economies, such as Russia and Poland, growth forecasts have been revised downwards. We thus expect to see rather weak growth of 2.1% in 2013 in the CEE region. Starting from 2014, we pro-ject a stronger recovery, with growth of 2.8%. Compared to the outlook for the Eurozone -0.1% in 2013 and 1.5% in 2014, however, the CEE region still looks relatively good. Within the region, developments will be varied, just as in the Eurozone. Hungary will see more negative growth in 2013 and then only slowly start to get back on track. Nevertheless, the legislative regulation for energy prices should help contain inflation at 3.6% in 2013. After growth of 1.2% in 2013, Poland should bounce back faster, with GDP growth moving towards 3%. A similar case is expected for Turkey: in 2013 the economy will not be able to move ahead seam-lessly with the previous performance, but growth rates of over 3% are easily within reach. The rating upgrade by Fitch has mostly been priced in positively by the markets.Romania should also surprise on the upside. Following the slump in 2012, the election of Ponta’s political alliance “Social Liberal Union” could provide new impetus. The markets took a quite positive view on Ponta’s appointment, and the leu has already appreciated significantly versus the euro (EUR/RON). In Russia, growth is forecast to remain robust, albeit somewhat less so than previously. Growth rates around 3% are anticipated in the coming years. It remains to be seen to what extent the quite upbeat outlooks will be priced in on the various equity and bond markets. Markets in the Eurozone kept up a brisk pace in November, and now one can expect to see increasingly strong momentum in CEE as well. Accordingly, in our CEE portfolio, we opt for a more aggressive overweighting of equities versus bonds by 5 pp.

Mario Annau

Expectations of subdued growth – positive outlook

Historical volatility & performance (in %)

Equities1 BondsVolatility Performance Volatility Performance

Countries EUR LCY EUR LCY EUR LCY EUR LCY

Czech Republic 15.6 14.2 -6.6 -7.7 4.6 2.8 14.4 12.9

Hungary 17.7 16.0 15.3 5.5 9.4 3.5 31.9 20.8

Poland 14.2 11.7 29.6 18.8 5.7 2.7 23.8 13.5

Romania 12.2 11.5 11.5 15.1 3.5 0.7 0.4 3.7

Russia 15.2 14.2 7.0 5.2 6.6 1.9 16.4 13.5

Turkey 14.9 14.6 56.4 50.1 6.1 2.6 25.7 20.6

Croatia 12.1 11.4 -10.3 -10.1 2.6 2.6 15.7 15.7

CEE 11.3 - 20.4 - 3.2 - 22.0 -1 MSCI indicesVolatility in EUR; 3 months volatility annualised; ytd performance in EURLCY…local currencySource: Thomson Reuters, Raiffeisen RESEARCH

CEE portfolio weightings Q1 2013

LCY…local currency[-] , [+] = Over-/underweight versus benchmarkSource: Raiffeisen RESEARCH

Risk-return (in %)

In local currencySource: Thomson Reuters, Raiffeisen RESEARCH

GDP growth expectations for CEE are reserved Poland: modest growth in 2013, moderate recovery in 2014 Overweighting of equities versus bonds

Equities: 55% [+5 pp]

LCY-bonds: 37% [-3 pp]

EB USD: 4% [-1 pp]

EB EUR: 4% [-1 pp]

RTS-Index

WIG 20

CTXHTX

DJ Euro-stoxx

CEE

BET 10

-10

-8

-6

-4

-2

0

2

4

6

8

15 25 35

His

toric

ytd

per

form

ance

in %

Historic 1y volatility in %

8 1st quarter 2013

Asset allocation - bonds

Varied development in the CEE bond portfolio

Expected bond market performance

3m 6m 9m 12m


Czech Republic 0.9 0.6 1.5 -0.1 3.3 0.9 0.2 -2.6

Hungary -11.5 -7.6 -5.9 -3.5 -2.0 -1.2 1.0 1.9

Poland -2.8 -1.0 -2.4 -0.6 1.5 -0.6 2.2 -0.9

Romania -9.0 -7.2 -6.6 -5.9 -5.7 -3.9 -4.2 -2.4

Russia 6.6 3.3 4.9 4.1 5.7 6.9 5.4 8.8

Turkey 1.5 0.9 5.5 2.8 2.9 4.6 2.3 5.6

Croatia 0.9 1.1 1.9 1.4 1.7 1.8 0.4 1.2 Not annualised; 10y treasury bond, LCY…local currencySource: Raiffeisen RESEARCH

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Cze

ch R

ep.

Hun

gary

Pola

nd

Rum

ania

Russ

ia

Turk

ey

Cro

atia

EUR LCY

Historical relative performance1

1 in percentage points, since 17 September 2012, local currency bonds versus portfolio bond benchmarkSource: Thomson Reuters, Raiffeisen RESEARCH

RUB appreciation – overweight Russia Strong fundamentals support overweight Turkish LCY bonds Political uncertainty in Hungary - underweight HUF bonds

Portfolio weightings: bonds1

Portfolio Benchmark Difference

EB USD 9.0% 10.0% -1.0%

EB EUR 9.0% 10.0% -1.0%

LCY 82.0% 80.0% 2.0%

Czech Republic 18.0% 20.0% -2.0%

Hungary 18.0% 20.0% -2.0%

Poland 45.0% 45.0% 0.0%

Romania 5.0% 5.0% 0.0%

Russia 7.0% 5.0% 2.0%

Turkey 7.0% 5.0% 2.0%

Croatia 0.0% 0.0% 0.0%1 share in percentage pointsSource: Raiffeisen RESEARCH

Stable key interest rates and a slight rouble appreciation in addition to relatively high yields draw an at-tractive picture on the Russian bond market. We are also positive on the Turkish government bond market. Ro-bust growth dynamics and the recent upgrade should support the market, which was rather subdued in the last quarter.By contrast, the bond performance out-look for Romania and Croatia involve more uncertainty. Volatility on the government bond market increased sharply following the elections in Romania. In Croatia, the future path of the country’s sub-average growth dy-namics also remains unclear. The outlook for Hungary is still nega-tive, marked by the many populist legislative amendments. In the Czech Republic, the market’s sub-average performance will likely continue, due to the already very tight spreads com-pared to Germany.Consequently, in the CEE bond portfo-lio we overweight Russia and Turkey by 2 percentage points (pp) each. In return, we reduce the weighting of Hun-gary and the Czech Republic by 2 pp each compared to the benchmark.

Mario Annau

91st quarter 2013

Asset allocation - equities

A cyclical start to the new year

Positive stance on CEE markets, due to the general upward trend Russia profiting from higher oil prices Hungary and Croatia as the biggest uncertainty factors right now

Expected stock market performance (in %)

3m 6m 9m 12m


Poland 6.7 8.7 7.5 9.5 8.7 6.8 14.1 10.6

Hungary 3.4 7.9 6.2 9.0 5.3 6.2 9.7 10.7

Czech Republic 9.0 8.6 11.4 9.6 9.3 6.7 14.7 11.5

Russia 12.8 9.3 12.2 11.3 5.1 6.3 11.1 14.7

Romania 7.1 9.1 9.3 10.1 4.4 6.4 12.5 14.6

Croatia 7.4 7.6 9.2 8.6 5.3 5.5 11.9 12.9Not annualised, LCY…local currencySource: Raiffeisen RESEARCH

-10%

-5%

0%

5%

10%

Pola

nd

Hun

gary

Cze

ch R

epub

lic

Russ

ia

Rom

ania

Cro

atia

EUR Local currency

Historical relative performance1

1 to MSCI CEE, in percentage points, since 17 September 2012Source: Thomson Reuters, Raiffeisen RESEARCH

Despite the slightly more gloomy growth expectations, economic activity should continue to recover next year. As a result, there are few obstacles to good performance for equities over the medium term, especially since the CEE markets should profit from the general uptrend on the equity markets and the high level of liquidity. In the current phase, cyclical stocks are preferred.The market in Russia should benefit the most from this, thanks to strong mo-mentum from the energy sector and the oil price. In Hungary, the measures adopted by the country’s political decision-makers are having a negative impact on busi-ness (see e.g. the recent 10% cut in en-ergy prices) and this is preventing the economy from returning to its potential growth rate. We are rather nonplussed about the development of the Croatian market. On the one hand, it may suf-fer from a period of higher uncertainty due to the loss of the investment grade rating. On the other hand, there is cer-tain potential for a rebound thanks to the upcoming accession to the EU at mid-year.We thus overweight Russia and Poland (the larger markets) by two percentage points (pp) each and underweight Cro-atia and Hungary by 2 pp each.

Stefan Theussl

Portfolio weightings: stocks1

Portfolio Benchmark Difference

Czech Republic 15.0% 15.0% 0.0%

Hungary 10.0% 12.0% -2.0%

Poland 27.0% 25.0% 2.0%

Russia 42.0% 40.0% 2.0%

Croatia 1.0% 3.0% -2.0%

Romania 5.0% 5.0% 0.0%1 share in percentage pointsSource: Raiffeisen RESEARCH

10 1st quarter 2013

Special

The CEE recovery is at risk, as the global economic cycle is showing a clear slowdown. Recently, the IMF again lowered its 2012 global growth outlook from 3.5% at the middle of this year to just 3.3% in October. The fund also cut its global growth estimate for 2013 by about 0.3% to 3.6%. In particular, the IMF noted that fortifying domestic demand will be all the more important, given the weakening trade trends. The Fund expects growth in the world trade volume 2012 to slump to 3.2%, down from 5.8% in 2011 and 12.6% in 2010.Economic growth patterns in CEE can be characterised by smoother cyclicality and a more elastic response to the broader EU business cycle. The Economic Sen-timent Indicator (ESI) calculated by the European Commission shows that, over the last ten years, CEE economies have closely followed the EU business cycle. This has been especially true for the first wave of accession countries such as Poland, Hungary, et.al, whose ESIs display a significant correlation to the EU. However, even South-Eastern European (SEE) countries such as Romania have shown a marked increase in correlation to the EU business cycle over the last five years.Needless to say, the latest debt crisis and the ensuing economic recession in the EU will take its toll on the CEE economies. Negative growth outlook revisions go hand in hand with downgrades for all of the major world economies. Conse-quently, the consensus forecast for EU and US economic growth in 2013 dropped by 0.9% and 0.5%, respectively, in the course of 2012. Unsurprisingly, the same forecasting patterns hit the growth outlook for Eastern Europe. As a matter of fact, the 2013 growth outlook for the CEE region has lost about 1% on average during the last eleven months, while the 2012 outlook has been cut by about 0.4%. The sub-region of Central Europe has experienced the strongest loss, with its growth forecast dropping by 1.2% compared to the start of the year, followed by a 0.8% loss for SEE and 0.5% for CIS. Incidentally, the growth outlook for the Eurozone also suffered a 1% loss, while the US outlook deteriorated by only 0.5%. These findings confirm our earlier hypothesis that growth outlooks for CE and SEE are more closely correlated to Western Europe, while growth in the CIS displays a stronger link to US growth and the commodity markets.However, the main question is not the economic slowdown per se, but rather the magnitude of the slowdown that will hit CEE in 2013. We see a sustainable dete-rioration of the growth outlook for the CEE region. The longer period over which negative revisions are taking place also speaks against a quick reversal in market expectations. With regard to the amount of growth loss expected for the specific CEE region, this will remain close to the growth loss in the respective anchor econ-omy such as the Eurozone or the US. That said, CEE growth is likely to outperform both the developed EU and the USA in absolute terms. Consequently, in 2013, growth in CEE (excluding CIS) may still exceed growth in the Eurozone by about 0.4% and the CIS economies might even grow 1.5% faster than the US economy. Among the specific factors benefiting CEE growth, we see fairly good progress on structural issues, higher per capita wealth levels, stronger growth in productivity and lower labour costs.

CEE: Challenging growth outlook

Growth outlook loss, % net change1

CEE vs. Eurozone correlation (ESI)*

1 % net = difference between October 2012 and January 2012 Consensus forecast Source: Consensus Economics, Raiffeisen RESEARCH

* The Economic Sentiment Indicator is a composite meas-ure (average = 100) of industrial, consumer, services, retail trade and construction confidence indicesSource: European Commission (Financial & Economic Affairs)

GDP at PPP per capita**

* 2003-2012 average GDP at PPP per capita change over the 2002 level** (Euro, EU-27=100)Source: Eurostat

-2.0-1.5-1.0-0.50.00.5

PolandHungary

CzechSlovakiaSloveniaCroatia

BulgariaRomania

SerbiaRussia

UkraineBelarus

0.00

0.20

0.40

0.60

0.80

1.00

Pola

nd

Cze

ch

Esto

nia

Latv

ia

Lithu

ania

Hun

gary

Slov

akia

Slov

enia

Bulg

aria

Rom

ania

last 10 years last 5 years

0

25

50

75

0

30

60

90

Cze

ch

Hun

gary

Pola

nd

Slov

akia

Slov

enia

Bulg

aria

Rom

ania

Cro

atia

Serb

ia

Russ

ia

Ukr

aine

GDP at PPP per capita (Euro, EU-27=100)% change GDP at PPP p.c. (r.h. scale)*

''safety pass'' (GDP at PPP per capita)

CEE economies highly correlate with EU business cycle Negative forecast revisions dampen CEE growth outlook CEE better prepared to withstand economic slowdown but will not escape it Downward growth revisions reflect weaker economic drivers in the region

111st quarter 2013

Special

Wages & price levels (EU-27=100)1

Cross-border claims*

1 gross average monthly wages and CPI Source: Eurostat

* index, 2007=100Source: BIS, Raiffeisen RESEARCH

Successful economic development and sustainable growth over the last decade has allowed the majority of CEE countries to increase per capita wealth levels. High per capita wealth is especially important for the creation of a strong domes-tic market and in increasing investment strength.Productivity levels in CEE reach 32% of the EU-27 average, which is not an overly high level. However, the incredibly fast pace of productivity growth in CEE com-pensates for lower productivity levels in comparison. At the same time, labour costs in CEE remain largely in check as CEE wage levels (as a percentage of the EU-27 average) remain fairly low at 34%, and even richer CEE countries have wage levels below the 50% mark. Another advantage CEE has is the relatively higher level of national saving which stands at 22% of GDP. A higher level of saving is important for the ability of the economy to allocate more funds to capital spending and development.On the contrary, the higher dependence of many CEE countries on intra-EU trade can be both a blessing and a problem at the same time. We find it logical for CEE to have a higher share of intra-EU trade and see it as an advantage rather than a risk. Even for the largest and most developed EU countries such as Germany or France, intra-EU trade accounts for over 60% of their overall external trade. One problem we see in CEE is not the high intra-EU trade, but a high share of exports in the overall CEE economy which reaches more than 55% of GDP. Obviously, such a large proportion of foreign trade in the economy increases the vulnerability of CEE countries in times of crisis.Another issue without which the CEE growth outlook would not be complete is its funding position and access to bank financing and capital markets. Today, the CEE countries have lower current account deficits on average and their govern-ments demonstrate strong fiscal responsibility. Still, the funding needs of the region are not small. However, in many CEE countries, the funding needs also include financing received from foreign parent banks and inter-company loans, which are easier to refinance. We also see no unusual drop in cross-border activity in the rest of CEE. In fact, the high share of foreign ownership in the CEE banking sectors partly counteracts the risk of abrupt withdrawal of foreign banks from the region as foreign bank commitments to CEE remain pretty strong. Finally, we find fiscal policies in the region to be better aligned since many CEE governments have achieved about 70% of the fiscal consolidation target over the last two years. As a result, CEE public debt-to-GDP ratios remain largely in check and are almost all below 60%.However, the global economic environment is still not conducive to higher growth, with both global trade and demand falling. As a result, we do not expect the CEE economies to be able to return to their long-term growth potential until at least 2015. At this point, we feel compelled to reflect this in our own growth outlook for 2013. The loss of economic growth in the EU and a clear deceleration of the global business cycle allow us to conclude that the CEE economies will lose an ad-ditional 0.8% in terms of GDP growth in 2013-14 compared to our initial forecast for the region at the end of Q3. Consequently we see the core of Central Europe experiencing a 1.2% growth loss in 2013 and 0.7% in 2014. Meanwhile, the SEE growth outlook suffered only a 0.3% loss as a few SEE economies were already slowing down through 2011-12. Finally, we downgrade our CIS growth outlook by 0.8% for 2013 and by 1.1% for 2014, reducing our overly optimistic expectations for the region.

Gintaras Shlizhyus

0

20

40

60

80

100

Cze

ch

Hun

gary

Pola

nd

Slov

akia

Slov

enia

Bulg

aria

Rom

ania

Cro

atia

Serb

ia

Russ

ia

Ukr

aine

Gross wage (EU-27=100)Price level (PPP/FX, EU-27=100)

20

50

80

110

140

Dec-07 Jun-09 Dec-10 Jun-12

CE+SEE Spain Italy

Poland Hungary

High export share in economy*

* export goods + services Source: World Bank database, Raiffeisen RESEARCH

-20

-10

0

10

20

0

25

50

75

100

PL HU CZ SK SI HR BG RO RS RU UA

CE SEE CISExports % GDP *export/GDP ratio change through the cycle (r.h.scale)

General government balance*

* cumulative fiscal saving is a sum of net balance change over a respective period Source: World Bank database, RBI

-6

-3

0

3

6

9

-8

-6

-4

-2

0

2

PL HU CZ EE LV LT SK SI

BG HR

RO RS BY RU UA

CE SEE CIS

Structural balance % GDP

Net lending/borrowing % GDP

cumulative fiscal saving % GDP 2010-12 (r.h. scale)*

12 1st quarter 2013

Austria

During recent months, economic conditions have deteriorated in Austria. Al-though real GDP expanded mildly in Q3 2012, the weak growth of 0.1% qoq does nothing to alter the fact that the Austrian economy has essentially been treading water since H2 2011. Despite the positive (albeit modest) increases in real wages, private consumption has stagnated in recent quarters, which was reflected by a small rise in the saving rate during the first half of 2012. Since early 2012, equipment investment has fallen each quarter (in qoq terms). In Q2 and Q3 2012, however, the decline in overall gross fixed capital formation was lower, thanks to an uptick in construction investment. By contrast, the perfor-mance of exports was relatively robust (Q3 2012: +1.0% qoq).

Hence, Austria has managed to avoid a quarter-on-quarter decline in GDP for now. At the same time, however, both leading indicators and “hard” data such as industrial production and retail sales are pointing to further deceleration in economic activity in Q4 2012 (forecast: -0.1% qoq), although this will probably be the low point. Following the disappointing development in the past quarters, private consumption should pick up again modestly during the second half of 2013. Although employment growth will weaken tangibly in 2013, the projected increase of just over 0.5% in real wages should have a supportive effect. Dur-ing the course of the year, investment activity is also expected to liven up again. While exports have held up relatively well in the past quarters, the very weak economic performance in the Eurozone during the final quarter of 2012 will probably weigh on exports, but without pushing them into negative territory. Dur-ing the second half of this year, however, exports should begin to gain momen-tum again. All in all, this should result in a real GDP growth rate of 0.5%, similar to that expected for 2012. Growth is only expected to accelerate modestly again in 2014 (forecast: +1.5%).

So far, the economic developments have had almost no impact on the Austrian unemployment rate (inter-national definition). By contrast, ac-cording to the national definition the unemployment rate has risen in recent months (along with the absolute num-ber of unemployed persons) accompa-nied by a decline in the number of job vacancies. This, however, is mainly due to the sustained increase in the labour force, along with stagnating employment. In 2012, we project a mild increase in the unemployment rate (international definition), but this should mark the peak in this trend.

Austria: Significant slowdown in economic activity

Labour market is weakening

Austrian real estate market*

*seasonally adjustedSource: Thomson Reuters, Raiffeisen RESEARCH

* condominiums and single family homesSource: Residential Property Price Index (Austrian central bank), Thomson Reuters, Raiffeisen RESEARCH

Key economic figures and forecasts

2011 2012e 2013f 2014f

Real GDP (% yoy) 2.7 0.5 0.5 1.5

Private consumption (% yoy) 0.7 0.3 0.7 1.4

Gross fixed capital formation (% yoy) 7.3 1.2 0.8 3.3

Nominal exports (% yoy) 11.0 4.5 5.0 8.1

Nominal imports (% yoy) 11.0 3.8 5.2 7.7

Trade balance (EUR bn) 10.0 11.5 11.7 13.3

Current account balance (EUR bn) 5.9 3.4 3.1 2.9

General budget balance (EUR bn)1 -7.5 -9.9 -8.2 -5.9

General budget balance (% of GDP)1 -2.5 -3.2 -2.6 -1.8

Unemployment rate (avg, %, EU definition) 4.2 4.3 4.6 4.4

Consumer prices (avg, % yoy) 3.6 2.6 2.2 2.1

Real wages (% yoy) -1.0 0.6 0.5 0.3

Unit labour costs (% yoy) 0.8 4.0 2.6 2.01 state, provinces, municipalities and social security authoritiesSource: Statistics Austria, Thomson Reuters, Raiffeisen RESEARCH

15

20

25

30

35

40

45

170

190

210

230

250

270

290

Jan-02 Jul-04 Jan-07 Jul-09 Jan-12

Unemployed persons* (thsd., national statistics)

Vacancies* (thsd., national statistics, r.h.s.)

80

100

120

140

160

180

200

Q1 00 Q1 02 Q1 04 Q1 06 Q1 08 Q1 10 Q1 12

Real estate price index Austria (ex. Vienna)Real estate price index ViennaCPIConstruction cost index

Weak performance in winter months, but no recession Mild upswing in economic activity expected in 2013 Employment growth loses steam Rising real estate prices, particularly in Vienna, entail potential for set-backs over the long term

131st quarter 2013

Austria

Inflation (HICP) should steadily fall over the forecast horizon, but the av-erage annual rate will likely remain (slightly) above 2% in 2014.

Two different trends have been seen on the Austrian real estate market in recent years. Whilst the cumula-tive increase in real estate prices in Austria excluding Vienna recorded since 2000 exceeded the one of the consumer price index in early 2012 for the first time, real estate prices in Vienna have decoupled from the rest of the country since 2005. In the period between Q1 2009 and Q3 2012 alone, the increase in Vienna amounted to 42.5%. Due to extremely low interest rates and the general un-certainty, it is possible that rapid price increases may continue in the coming one or two years, but over the longer term there is a risk of significant set-backs in prices, when interest rates begin to rise again (especially if this occurs after further price increases in the coming years).

Nonetheless, despite sharp price in-creases, which have mainly been a phenomenon seen in Vienna recently, from an international perspective the increase in real estate prices in Austria still appears to be moderate. Although growth in mortgage lending has been stronger in recent years compared to other lending to the household sector, the increase in prices seen primarily in Vienna since the beginning of the crisis has not been accompanied by an above average expansion of lend-ing, and is thus less dangerous from a broader macro-economic perspective.

Matthias Reith

GDP: expenditure composition

Change (% yoy, in real terms) 2011 2012e 2013f 2014f

Private consumption 0.7 0.3 0.7 1.4

Public consumption 0.1 1.1 1.0 0.7

Gross fixed capital formation 7.3 1.2 0.8 3.3

Equipment 12.1 -0.9 0.5 4.5

Construction 4.4 3.1 1.1 2.2

Exports (broad definition) 7.2 1.9 2.7 5.8

Imports (broad definition) 7.2 1.2 2.9 5.5

Gross domestic product 2.7 0.5 0.5 1.5Source: Statistics Austria, Raiffeisen RESEARCH

GDP: value added by sector

Change (% yoy, in real terms) 2011 2012e 2013f 2014f

Agriculture & forestry 15.3 -9.3 0.0 0.0

Prod. of goods/mining 8.2 1.3 1.2 3.0

Energy/water supply 8.2 14.0 0.7 1.0

Construction 3.5 2.0 1.0 1.5

Wholesale and retail trade 1.3 -1.2 -0.5 1.5

Transportation 1.0 -1.2 0.5 0.7

Accom. & restaurant trade 1.3 0.6 0.4 1.0

Information and communication -0.9 -2.1 0.0 1.0

Credit and insurance 1.4 -6.6 0.3 2.0

Property & business services 2.6 1.8 1.0 1.5

Other economic services 2.2 2.2 1.5 2.5

Public sector -0.7 0.2 0.3 -0.1

Healthcare, social services 1.4 1.1 0.6 1.4

Other services 0.0 0.6 0.5 0.8

Gross domestic product 2.7 0.5 0.5 1.5Source: Statistics Austria, Raiffeisen RESEARCH

Contributions1 to real GDP growth (qoq)

1 in percentage pointsSource: Thomson Reuters, Raiffeisen RESEARCH

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13

Private Consumption Public Consumption Investment Stocks External Trade Real GDP

Forecast

14 1st quarter 2013

-6

-4

-2

0

2

4

6

8

10

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)

Industrial output (% yoy)

Real GDP (% yoy)


Poland

Full-blown slowdown has arrived

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

Consumer prices (% yoy)

Inflation outlook


Forecast


2008 2009 2010 2011 2012e 2013f 2014fNominal GDP (EUR bn) 362.9 311.1 354.7 369.3 382.3 409.1 436.4

Real GDP (% yoy) 5.1 1.7 3.9 4.3 2.1 1.2 2.7

Industrial output (% yoy) 3.6 -4.5 9.0 7.7 2.0 0.5 4.0

Unemployment rate (avg, %) 9.8 11.0 12.1 12.4 12.8 14.0 12.8

Nominal industrial wages (% yoy) 10.3 4.4 3.3 5.0 3.3 2.8 3.3

Producer prices (avg, % yoy) 2.2 3.4 2.1 7.6 3.3 2.0 3.0

Consumer prices (avg, % yoy) 4.2 3.5 2.6 4.3 3.8 2.7 2.5

Consumer prices (eop, % yoy) 3.3 3.5 3.1 4.6 2.8 2.5 2.5

General budget balance (% of GDP) -3.7 -7.4 -7.9 -5.0 -3.5 -3.3 -2.8

Public debt (% of GDP) 47.1 50.9 54.8 56.4 56.6 55.5 53.2

Current account balance (% of GDP) -6.6 -3.9 -5.1 -4.9 -3.1 -2.9 -3.9

Official FX reserves (EUR bn) 44.1 55.2 70.0 75.7 82.0 87.0 91.0

Gross foreign debt (% of GDP) 48.0 62.7 65.9 67.4 70.1 69.7 68.7

EUR/PLN (avg) 3.52 4.33 3.99 4.12 4.19 4.07 4.00

USD/PLN (avg) 2.39 3.10 3.01 2.96 3.22 3.07 3.02


Forecast

Economic outlookEconomic growth in Q3 2012 disappointed, coming in with the lowest dynamics since mid-2009. Private consumption growth was particularly weak. The weakest ever growth in this category resulted not only from the anaemic growth in real wages, but also from households’ lower marginal propensity to consume. Go-ing forward, it is hard to expect any quick recovery in domestic demand. Fiscal consolidation will continue and a quick improvement in real wage growth and households’ willingness to spend does not appear to be on the horizon. Thus, in 2013 private spending might set a new inglorious record of the slowest ever an-nual growth below 1% and we expect overall GDP growth at 1.2% yoy in 2013 – the weakest growth reading since 2001 (1.2% yoy). On the investment side, an upturn seems even more remote. With falling external and internal demand companies are refraining from investments in capital and human resources. The most important pro-growth factors for 2013 will be an improvement in Western economies and the effects of strong monetary loosening. However, both factors should take effect later in 2013. Hence, H1 2013 will be the most critical phase for the Polish economy. The Monetary Policy Council (MPC) started cutting rates in November when both a tangible slowdown and decelerating inflation kicked in. In Q4 2012, the MPC cut rates twice by 25bp and further cuts are in the pipeline. Moreover, the MPC seems to be aware that monetary policy has lesser impact on the real economy when banks are unwilling to extend credit. Thus, some MPC members would like to cut rates very fast. However, MPC members are split in their assessment of the scale of the downturn. On the back of recent weak data from the real economy, it seems however, that hawkish MPC members are in the minority. Currently, we expect that the total monetary loosening (since Nov 2012) will amount to 125bp, i.e. the base rate will return to its historical low at 3.5% set in 2009. Swift and substantial rate cuts also seem reasonable as

Slowdown has arrived, as quarterly real GDP growth rates will drop well below 1% yoy in Q1 and Q2 2013 Rate cuts to continue (to at least 3.50%) as monetary policy remains only counter-cyclical tool available EUR/PLN unlikely to drop below 4.0 in H1; negative newsflow capping appreciation, but not causing EUR/PLN losses Short-end of the curve looks more attractive on the LCY-bond markets than the tightly priced long-end

151st quarter 2013

3.3

3.5

3.8

4.0

4.3

4.5

4.8

5.0

0 1 2 3 4 5 6 7 8 9 10

Yields as of Dec-12Yield curve Dec-12Yield curve Sep-12Forecast Mar-13

2.52.72.93.13.33.53.73.94.14.34.54.7


EUR/PLN (eop) USD/PLN (eop)

Poland

Exchange rate development

Source: Bloomberg, Raiffeisen RESEARCH

PLN yield curve (%)


Forecast

Exchange rate forecasts

18-Dec1Mar-13 Jun-13 Sep-13Dec-13

EUR/PLN 4.08 4.15 4.15 4.00 3.95

Cons. 4.15 4.13 4.09 4.03

USD/PLN 3.09 3.19 3.17 3.01 2.93

Cons. 3.26 3.24 3.24 3.241 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Interest rate forecasts

18-Dec1 Mar-13 Jun-13 Sep-13 Dec-13

Key rate 4.25 3.75 3.50 3.50 3.50

Consensus 3.88 3.63 3.63 3.63

1 month2 4.11 3.98 3.65 3.65 3.65

3 month2 4.00 4.05 3.85 3.85 3.85

Consensus 4.06 3.87 3.80 3.85

6 month2 3.96 4.03 3.95 4.00 4.00

12 month2 3.90 4.30 4.20 4.25 4.301 5:00 p.m. (CET) 2 Bid rateSource: Bloomberg, Raiffeisen RESEARCH

Yield forecasts

18-Dec1Mar-13 Jun-13 Sep-13 Dec-13

2y T-bond2 3.27 3.33 3.44 3.65 3.96

Cons. 3.64 3.77 3.91 3.95

5y T-bond2 3.38 3.62 3.74 3.93 4.20

10y T-bond2 3.88 4.16 4.23 4.35 4.55

Cons. 4.24 4.32 4.44 4.581 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH

fiscal policy will not turn accommodative and monetary policy remains the only counter-cyclical tool available. Although late 2013 should bring some revival of the economy, GDP growth will remain below its mid-term trend. It is therefore likely that historically low interest rates will be prolonged into 2014.

Financial markets outlookEUR/PLN traded in a fairly narrow range of 4.06-4.16 in Q4 2012. We expect this trading range to prevail in H1 2013, but see some risk that EUR/PLN may trade at the weaker end of this guidance. This holds especially true in Q1 2013. Negative newsflow from the domestic real economy and swift rate cuts may add to PLN weakness, while the currency also remains vulnerable to negative news-flow from the Eurozone economy (where we expect the weakest point to come in Q4 2012-Q1 2013) as well as the Eurozone debt crisis management. Moreover, EUR/PLN swings in recent months have clearly shown that EUR/PLN seems to be less correlated with the domestic rates environment and more driven by overall risk or market sentiment, i.e. the recent months of strong yield compression on the domestic market were not per se supportive for the zloty. Long-term yields on Polish bonds decreased substantially in Q4 2012, dropping from some 4.5% in October to around 3.7% at the end of Q4 2012. The 3.7% level marks a new low in the current rates cycle. For the time being, Polish yields should be well supported by the present bets on aggressive rate cuts in Q1 2013. It seems that some market participants are betting on the base rate coming down to 3.25% or 3%, which we consider as very ambitious in a market where the central bank is (still) targeting real interest rates. Given this assumption, we see the short-end of the curve better supported than the long-end, where the current pricing looks very tight. Although we neither see any material downside risks on the fiscal side (only some minor fiscal slippage may take place in 2013) nor do we expect any downside pressure on the Polish sovereign ratings in 2013 (the current down-turn comes after years of economic outperformance!), some selling pressure on the LCY bond market could emerge later in 2013. The substantial increase of non-resident holdings in 2012 could still induce some selling pressure going for-ward. Although conventional wisdom on the risks of high non-resident holdings in Emerging Markets may have to be rethought – as not all money that went into the A-rated Polish market in recent years can be considered as “hot money” – there remains a risk of selling pressure from more speculative non-resident investors when the domestic rate cut cycle ends, and we may also see some increasing confidence on the broader Western European bond market. Thus, in 2013 Po-land could see the flip side of its “safe haven” status, which it acquired last year.

Pawel Radwanski, Gunter Deuber

16 1st quarter 2013

-20-16-12-8-404812

-10-8-6-4-20246

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)

Industrial output (% yoy, r.h.s.)

020406080

100120140160

2008

2009

2010

2011

2012

e

2013

f

2014

f

Public debt (% of GDP)


Real GDP (% yoy)


Hungary

Unorthodox fiscal policy clouds the economic outlook

Public and external debt


Forecast

Forecast



Real GDP (% yoy) 0.9 -6.8 1.3 1.6 -1.0 -0.5 1.5

Industrial output (% yoy) 0.0 -17.8 10.6 5.4 -0.2 1.5 4.0



Producer prices (avg, % yoy) 5.1 4.9 4.5 4.3 4.5 4.0 3.6



General budget balance (% of GDP) -3.7 -4.6 -4.2 4.3 -2.7 -3.0 -3.3


Current account balance (% of GDP) -7.1 -0.2 1.0 0.9 1.4 1.7 1.6



EUR/HUF (avg) 250.75 280.10 275.50 279.32 291.90 293.75 290.00

USD/HUF (avg) 170.48 200.91 207.69 200.69 224.36 222.12 218.87


Economic outlookAfter GDP contracting by at least 1% in 2012, we expect a negative growth rate in 2013 as well, as the recent trends are expected to carry over into the new year. This means further contraction in consumption (both household and public) and investments, along with improvement in net exports. Fiscal austerity keeps biting into domestic demand. Unorthodox policy measures have severely impacted an in-creasingly wide range of service sector providers (banks, utilities, telecoms). Bank-ing sector deleveraging will not slow down, and new lending activity is expected to remain low and selective. Only some subsectors of the manufacturing industry are able to provide economic dynamics, thanks to the improving export potential (especially thanks to recent automotive industry investments of Mercedes, Audi and GM/Opel). The construction industry has been in freefall for more than half a dec-ade now and while the bottom might not be far away, weak demand will not allow for any turnaround just yet. The government’s efforts to arrest the negative labour market trends (private sector job cuts) by reducing taxes on low skilled jobs may be able to simply slow the deterioration, but they will not reverse it. Our message is clear: the current economic policies are futile for igniting growth and bringing much-needed investments and job creation.2013 is already a pre-election year (next general elections will be in Q2 2014). The government has not been able to please voters with the fruits of a growing economy. Therefore, it is looking for some other sweeteners. One is the flat per-sonal tax system, the other was the early repayment scheme of FX mortgages (only the rich benefited from these) and the new one is the 10% price cut on household energy bill (from January 2013). Politicians’ desire for more sweeteners will grow as the date of the elections grows near, and therefore additional measures are expected. In accordance with the populist practices, the source of financing these

GDP expected to contract by 0.5% in 2013 Structure remains unchanged: domestic demand declines, net exports rise 2013 is a pre-election year with further populist measures expected Current government policies are incompatible with an IMF loan agreement

171st quarter 2013

Hungary

150

200

250

300

350


EUR/HUF (eop) USD/HUF (eop)



5.0

5.5

6.0

6.5

7.0

7.5

8.0

0 1 2 3 4 5 6 7 8 9 10


HUF yield curve (%)


Forecast



EUR/HUF 287.96 300.0 295.0 290.0 290.0

Cons. 287.0 284.0 286.0 280.0

USD/HUF 217.66 230.8 225.2 218.0 214.8




Key rate 5.75 5.50 5.00 5.00 5.00

Consensus 5.63 5.50 5.50 5.38

1 month2 6.00 5.60 5.20 5.10 5.10

3 month2 6.00 5.60 5.20 5.10 5.10

Consensus 5.92 5.78 5.71 5.66

6 month2 6.00 6.00 5.63 5.50 5.43


Yield forecasts


2y T-bond2 5.33 6.95 6.75 6.50 6.30

Cons. n.v. n.v. n.v. n.v.

5y T-bond2 6.01 7.60 7.30 7.20 7.00

10y T-bond2 6.29 7.90 7.50 7.40 7.20


sweeteners is likely to remain the same: the corporate sector (especially service sector companies) – in yet another step away from a market economy.

Financial market outlookIn 2012, EUR/HUF profited from an improvement in global risk sentiment and managed to stabilise at close to 280. Neither an aggressive reduction in interest rates (125bp since August 2012) despite elevated inflation rates and weak funda-mentals, nor the unorthodox political measures (continuation of taxation of specific sectors of the economy) were able to undercut EUR/HUF. Even the more and more obvious strategy of not wanting an IMF agreement was not able to change investor sentiment in a major way. But this strategy of lowering rates in a scenario of very weak fundamentals and relying on low external risk aversion involves considerable risk, in our view. If global market risk aversion increases Hungary will come under severe pressure. But even without an external trigger, the picture looks challenging to us. With elections in 2014 the government is likely (PM Orbán already indicated such moves) to push through further populist measures to gain voter support (as shown by the 10% cut in gas and electricity prices for households starting 2013). The cut in interest rates and therefore the decline on the short-end of the yield curve was followed by a decline on the longer-end of the curve as well. In Q4, 10-year yields dropped by some 100bp and on a year-to-date basis yields even dropped from highs of close to 11% in January 2012 to below 6.5% in December. How-ever, this strong reduction was driven by external risk sentiment and not by any promising developments in Hungary. On the contrary, the domestic picture contin-ued to disappoint throughout 2012 and is likely to do so in 2013 as well. We are most cautious about the current yield levels and see the rising probability of a sig-nificant correction as soon as investors start differentiating on fundamentals again.Market-moving topics in Q1 will definitely include the expiration of the term’s of central bank governor Simor and another internal Monetary Council member in March 2013 (the third internal Monetary Council member’s term will expire in June 2013). The three internal members have voted against the interest rate cuts, but were overruled by the external council members which were appointed March 2011 by parliament. Depending on who will be appointed as new governor and the new internal member(s), the political influence on monetary decisions could rise further. Apart from this, the IMF negotiations could come back into the spotlight as a Eurobond (probably in USD) could be issued in Q1 2013. For us, it seems certain that the politicians are not really interested in an IMF agreement (this would involve imposing additional conditions by the IMF which would cost voter support).

Zoltan Török, Wolfgang Ernst

18 1st quarter 2013

-15

-10

-5

0

5

10

15

-6

-4

-2

0

2

4

6

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


Czech Republic

05101520253035404550-10

-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f

General budget balance (% of GDP)

Public debt (% of GDP, r.h.s.)

Real GDP (% yoy)


Stuck in recession

Budget balance and public debt


Forecast

Forecast



Real GDP (% yoy) 2.9 -4.7 2.7 1.7 -0.9 -0.2 1.8

Industrial output (% yoy) 0.4 -13.4 10.1 6.9 -0.8 0.2 3.2



Producer prices (avg, % yoy) 4.5 -3.1 1.2 5.6 2.1 1.8 1.8





Current account balance (% of GDP) -2.1 -2.4 -3.9 -2.9 -1.1 -1.5 -1.5



EUR/CZK (avg) 24.90 26.40 25.28 24.59 25.00 24.80 24.00

USD/CZK (avg) 16.93 18.94 19.06 17.67 19.22 18.75 18.11


Czech economy in recession again Government remains weak We expect a stable EUR/CZK in the near future and only a slow appreciation from H2 2013 Czech central bank likely to keep interest rate at 0.05% until mid-2014

Economic outlookThe recession in the Czech economy continued in Q3 as GDP fell by 0.3% qoq and 1.3% yoy. The revision of previous quarters led to a year-on-year decline that is somewhat milder and to a recession that has “only” lasted 3 quarters, whilst the flash estimate indicated that the Czech economy was in recession for an entire year. But this does not change the overall story. Surpluses from net exports are not able to compensate for the decline in internal demand. The main cause of the downturn is still falling personal consumption which declined by 0.4% qoq in Q3. Investment was also weak and declined by 5.0% qoq, with investment in fixed capital falling by 1.9% qoq. The last quarter of this year should also be weak (we estimate -0.2% qoq), as industrial output and retail sales point to continued weakness even in Q4. There may be a one-off rise in personal con-sumption before year-end, due to expected VAT hike at the beginning of 2013, but that would be compensated by a fall in personal consumption in Q1, when we expect a decline in GDP by 0.3% qoq. Thereafter, the Czech economy should gradually recover during 2013. The recovery is expected to be driven by export growth. However, given the relatively low level of production at the end of Q1, the growth will probably not be sufficient to ensure GDP growth at the annual level. Hence, we forecast an annual decline of GDP by 0.2%. Due to church restitution, the general government deficit should rise to 4.5% of GDP for 2012, but this is only a one-off effect.In the parliament, the Czech government managed to pass the tax bill, which raises VAT by 1 pp to 21% and 15%, and the president is expected to sign the law so that it should come into effect starting from 1 January 2013. However, the Czech government remains weak after a series of scandals, with limited ability to enforce further reforms. On the other hand the government has more or less already enforced the key reforms (tax, pension reform and church restitutions),

191st quarter 2013

Czech Republic

14

16

18

20

22

24

26

28


EUR/CZK (eop) USD/CZK (eop)



0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 1 2 3 4 5 6 7 8 9 10


CZK yield curve (%)


Forecast



Key rate 0.05 0.05 0.05 0.05 0.05

Consensus 0.13 0.13 0.25 0.25

1 month2 0.06 0.05 0.05 0.05 0.05

3 month2 0.18 0.15 0.15 0.20 0.20

Consensus 0.48 0.49 0.50 0.60

6 month2 0.28 0.25 0.25 0.30 0.33


Yield forecasts


2y T-bond2 0.12 0.20 0.20 0.30 0.50

Cons. 0.58 0.74 0.86 0.96

5y T-bond2 0.70 0.90 1.00 1.20 1.40

10y T-bond2 1.87 2.00 2.20 2.20 2.60




EUR/CZK 25.18 25.10 24.80 24.60 24.50

Cons. 25.20 25.10 24.90 24.90

USD/CZK 19.04 19.31 18.93 18.50 18.15


hence, possible loss of majority is not a tragedy. On 11-12 January 2013 there will be the first direct presidential election in the Czech Republic. If necessary the second round will be held two weeks later. We do not expect any explicit market reaction to that event.

Financial market outlookAt the beginning of Q4 2012, the Czech koruna almost reached our bullish targets against EUR, but the policy of the Czech National Bank (CNB) then weak-ened CZK back to above EUR/CZK 25.10. Firstly, the key interest rate was cut by two steps to 0.05%. Secondly, and more interestingly, the CNB started to express its readiness to undertake direct FX intervention if needed. This position and verbal intervention makes any significant appreciation of CZK unlikely in the near future. We therefore expect that CZK will stay close to current levels until the end of Q1 2013. Given the fact that the final quarter of 2012 and the beginning of 2013 will probably not provide a lot of positive news on the economy, the central bankers may actually decide to use interventions in the EUR/CZK market. Nevertheless, that is not our baseline scenario, as we expect a stable EUR/CZK in the near future and only slow appreciation from H2 2013. We project that the relative economic performance of the Czech economy will tend to be supportive for CZK in 2014, but that CZK could partially anticipate such an outlook already in 2013. Although there is a chance that the fiscal policy might even be slightly expansionary in 2014, we expect that the CNB will keep the key interest rate at the effective level of zero until mid-2014.In Q4 2012, the key variables behind the further fall of the Czech government bond yields are the CNB interest rate cut, the fact that the financial market does not expect a rate hike in the near future, a decline in risk aversion and also an-other slight rise in German Bund prices. We do not expect Q1 2013 to be a turn-ing point on the bond market, even though the development of the risk aversion in the Eurozone could play an important role. The domestic variables will probably remain supportive for the bond market. The gross financing need of the state budget is planned at about CZK 231 bn for 2013 by the Ministry of Finance and to us this seems reasonable and easy to finance. The Czech economy will probably continue contracting in Q1 and the recovery is generally expected to be slow. Given such circumstances, it is very likely that solid domestic demand for government bonds will prevail. On the other hand, we think that bond yields have probably reached a bottom and do not expect any further declines. How-ever, estimating the turning point for bond yields is tricky. Given our outlook for the Czech economy and the forecasts for German Bunds, we expect that the Czech bond yields will rise slightly in the second half of 2013.

Michal Brozka, Vaclav France

20 1st quarter 2013

Slovakia

0

15

30

45

60

75-10-9-8-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

e

2013

f

2014

f

General budget balance (% of GDP)Public debt (% of GDP, r.h.s.)




Forecast

-15

-10

-5

0

5

10

15

20

-6

-4

-2

0

2

4

6

8

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)Industrial output (% yoy, r.h.s.)

Economy slowing – tax revenues diminishing

Forecast

Real GDP (% yoy)

An exceptional year of industrial production increases cannot be repeated in 2013 The Slovak economy is in a recession with downside risks in the next quarters Expected 2013 GDP growth of 0.9% yoy is one of the lowest in Slovak history Adjustments needed to achieve budget targets and secure tight “core” Eurozone pricing on sovereign bonds



Real GDP (% yoy) 5.8 -4.9 4.4 3.2 2.4 0.9 2.5

Industrial output (% yoy) 2.0 -14.5 18.9 7.3 11.4 1.4 3.0



Producer prices (avg, % yoy) 5.0 -2.5 -2.8 2.6 3.9 2.3 3.4





Current account balance (% of GDP) -6.0 -2.6 -3.7 -2.1 1.7 2.8 2.6


EUR/SKK (avg)1 31.29 Eurozone membership at EUR/SKK 30.1261 Eurozone entry on 1 January 2009Source: Thomson Reuters, Raiffeisen RESEARCH

Economic outlookEconomic growth in Q3 2012 came in at +2.2% yoy and thus continued to exceed the data from other Eurozone members by far due to the extraordinary strong performance of the automotive sector (+75% yoy increase in production volumes in Q3 2012). However, the rest of the economy (ex automotives) is, according to our calculation, already in a shallow recession. Growth is solely boosted by exports, whilst domestic demand is stagnating and the last unemploy-ment rate release of 13.7% confirms a trend increase, which can be also partially attributed to the new, less flexible labour code. We expect GDP growth dynam-ics to decelerate further. The base effect of the strong increase in car production should come to an end beginning of 2013 and, therefore, GDP growth will be more or less in line with the development in more solid Eurozone economies such as Austria or Germany (where we expect GDP growth of 0.5% in 2013). For the Slovak economy, we expect GDP growth at 0.9% in 2013, which is one of the worst readings in Slovak history (after 0.4% in 1999 and -4.9% yoy in the ex-ceptional year 2009). The Ministry of Finance already announced revenue loop-holes against initial plans for 2012 and 2013 due to weak developments in the main trading partner economies and persistent problems with VAT and corporate income tax collection. If no measures are taken, the final 2012 deficit may come in close to 5% of GDP instead of 4.6%. However, we expect some adjustment on the expenditure side to partly mitigate this shortfall. Deteriorating economic prospects also pose a risk for the 2013 budget, but once the government shows sufficient flexibility on the expenditure side, it can achieve a deficit of below 3% of GDP. Achieving fiscal targets would help to keep the current tight pricing of Slovak government bonds (yields at roughly 2.2-2.3% in the 10-year segment), which are trading with a “risk premium” of some 100-110bp vs. German Bunds.

Juraj Valachy, Gunter Deuber

211st quarter 2013



Real GDP (% yoy) 3.5 -7.6 1.2 0.6 -1.8 -1.0 1.0

Industrial output (% yoy) -1.6 -16.5 6.9 3.7 1.0 1.5 3.0








Current account balance (% of GDP) -6.2 -0.7 -0.6 0.0 1.9 2.7 1.3



EUR/SIT (avg)1 Eurozone membership at EUR/SIT 139.641 Eurozone entry on 1 January 2007Source: Thomson Reuters, Raiffeisen RESEARCH

Slovenia

First steps have been taken

The economy continued to disappoint in 2012 Pension reform, creation of bad bank as well as state holding started Court rejection of referendum on bad bank and state holding Delay in further reform efforts, higher state guarantees or capital injections into state-owned banks as major concerns

-20

-15

-10

-5

0

5

10

-8

-6

-4

-2

0

2

4

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)


0

20

40

60

80

100

120

140

2008

2009

2010

2011

2012

e

2013

f

2014

fPublic debt (% of GDP)


Real GDP (% yoy)


Public and external debt


Forecast

Forecast

Economic outlookSlovenia’s Q3 GDP figures were disappointing at -3.3% yoy, underpinning the extremely weak economic situation. Consequently, the economy slipped into re-cession in Q3 again, with gross capital formation in particular seeing a strong setback in 2012. The structure of weak domestic demand, in particular gross capital formation, will prevail in 2013 according to our estimates. Although we expect to see some first signs of improvement, especially from exports in the sec-ond half of 2013, we still project a GDP decline of 1% yoy in 2013.The Parliament recently adopting a pension reform under which the retirement age was raised to 65 or 40 years of national insurance contribution before quali-fying for a pension. A court has ruled against the possibility for referendums on the creation of a bad bank and on the establishment of a state holding to manage publicly owned companies and take care of privatisations, paving the way for their implementation.Meanwhile, Slovenian lawmakers have also passed the budget for the next two years, aiming for a deficit below 3% of GDP in 2013 and a balanced budget by 2015. The plan includes austerity as well as revenue-boosting measures and is based on conservative GDP estimates. Nevertheless, a possible delay in reform efforts or higher state guarantees or capital injections at state-owned banks could – in our view – still lead to the deficit goals being missed. For 2013, Slovenia plans to issue two bonds with a volume of about EUR 4 bn in order to recapital-ise its banks, according to Finance Minister Sustersic. In particular, the banking sector contains risk potentials which could still make application for a bailout by the EU/EMS necessary during 2013. Pressure from the rating agencies is likely to persist in the coming months and especially S&P, but also Fitch, is likely to cut Slovenia’s rating in the coming months.

Wolfgang Ernst

22 1st quarter 2013

-10

-8

-6

-4

-2

0

2

4

2008

2009

2010

2011

2012

e

2013

f

2014

f

Real GDP (% yoy)

Industrial output (% yoy)

25

30

35

40

45

50

55

60-7

-6

-5

-4

-3

-2

-1

0

2008

2009

2010

2011

2012

e

2013

f

2014

f

General budget balance (% of GDP)Public debt (% of GDP, r.h.s.)

Real GDP (% yoy)


Economic outlookFour years of crisis resulted in a cumulative real drop of GDP by nearly 10%. And what is even more discouraging there are still no prerequisites for a sustainable recovery. Therefore the reasoning behind the S&P decision to downgrade Croa-tian credit ratings to the highest non-investment grade category is not surprising at all. Furthermore, the downgrading also reopened the debate about a possible arrangement with the IMF even though Croatia still does not have an immediate liquidity problem. It is clear cut that an IMF-sponsored reform programme can help to overcome the domestic reform blockage.

The 2013 budget featured some unpleasant surprises as it represents a shift away from the previously proclaimed goal of consolidation on the expenditure side. Despite the expected revenue growth (+3% yoy), due to the increase in planned budget expenditures (+3.5% yoy) the deficit will widen, thus delaying the possibility of achieving a primary surplus and at the same time calling into question public debt sustainability. The budget undermines the credibility of fiscal policy and the ability to comply with the provisions of the Fiscal Responsibility Act. In 2013, the Government will continue to transfer the tax burden from the corporate sector to households, clearly revealing that the state’s adjustment on the expenditure side has not started yet. On the other hand, fighting tax fraud and evasion remain top priorities. The feasibility of expenditures is quite doubtful, because the spending depends on the ability to revoke privileges of various state and public employees.

Higher tax pressure, lower disposable income, low employment and high unem-ployment as in last year will constrain household spending. Moreover, private investments are highly unlikely in 2013 due to the fact that companies are ex-

Still no prerequisites for a sustainable recovery



Forecast

Forecast



Real GDP (% yoy) 2.1 -6.9 -1.4 0.0 -1.8 0.5 1.5

Industrial output (% yoy) 1.2 -9.2 -1.4 -1.2 -5.6 -1.8 2.0


Nominal industrial wages (% yoy) 6.2 1.4 -0.5 1.0 0.2 0.5 1.0






Current account balance (% of GDP) -9.0 -5.1 -1.1 1.0 -0.9 -1.0 -1.3



EUR/HRK (avg) 7.22 7.34 7.29 7.43 7.53 7.55 7.50

USD/HRK (avg) 4.91 5.26 5.49 5.34 5.79 5.71 5.66


One more year of recession Loss of the investment grade rating just before EU accession Fiscal adjustment and structural reforms slow but inevitable Commitment to EUR/HRK stability

Croatia

231st quarter 2013

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0


EUR/HRK (eop) USD/HRK (eop)

0

1

2

3

4

5

6

0 1 2 3 4 5 6 7 8 9 10Yields as of Dec-12Yield curve Dec-12Yield curve Sep-12Forecast Mar-13

Croatia



HRK yield curve (%)


Forecast



Key rate 6.25 6.00 6.00 6.00 6.00

Consensus 6.50 6.50 6.50 5.50

1 month2 0.46 1.40 1.60 1.80 2.30

3 month2 1.19 2.20 2.50 2.70 2.70

Consensus 3.47 3.17 3.47 3.03

6 month2 2.11 2.85 2.90 2.90 2.90


Yield forecasts


2y T-bond2 3.56 2.80 3.00 3.10 3.40

Cons. n.v. n.v. n.v. n.v.

5y T-bond2 4.26 4.50 4.70 4.80 5.10

10y T-bond2 4.74 4.80 4.95 5.10 5.30

Cons. n.v. n.v. n.v. n.v.1 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH



EUR/HRK 7.54 7.55 7.50 7.55 7.60

Cons. 7.50 7.49 7.53 7.51

USD/HRK 5.70 5.81 5.73 5.68 5.63


hausted by the prolonged recession, access to financing is more limited and un-certainties as well as high administrative barriers are still present. Some momen-tum for the lean GDP growth (up to 0.5%) could come from rising income from tourism and a recovery in net exports after the restructuring of large industrial capacities (petro-chemical, oil refinery). Finally the agricultural sector is hoped to not face a drought again in 2013.

Financial market outlookLow capital inflows and private sector FCY deleveraging were the main factors due to which EUR

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