1. The Great Deleveraging and CEE: The Crisis and the Recovery By: Justin Patrie Head of Emerging Europe Analysis Country Risk & Financial Markets Business Monitor International [email_address]

2. CEE: The Outperformer Source: Statistical Agencies, BMI Real GDP Growth, % 3. Presentation Outline

Global Outlook

The Crisis In Emerging Europe

Opportunities Amid The Storm

The Recovery: Key Views for CE and SEE

4. Global Outlook Key Forecasts Source: Business Monitor International 85.00 75.00 60.00 52.00 49.00 97.06 Brent Crude 81.50 71.50 56.50 48.50 45.50 95.40 Opec basket Oil prices (average) 0.80 0.78 0.75 0.78 0.78 0.68 EUR/US$ 1.25 1.29 1.34 1.29 1.28 1.47 US$/EUR Exchange rates (average) 4.00 4.00 3.50 2.00 1.00 2.50 ECB refinancing rate 4.25 4.25 3.00 1.00 0.00 0.00 Fed funds rate Interest rates (year-end) 1.6 1.5 1.4 0.9 0.2 2.8 Eurozone 2.3 2.4 2.4 1.5 -0.9 3.8 USA Consumer inflation (average) 3.7 3.7 3.4 1.7 -2.5 2.3 World 7.6 7.6 7.9 6.8 5.6 9.0 China 2.0 2.3 1.9 0.7 -6.1 -0.7 Japan 2.2 2.2 1.7 0.2 -4.2 0.9 Eurozone 3.0 3.3 3.0 1.2 -3.3 1.1 USA Real GDP growth (%) 2013f 2012f 2011f 2010f 2009f 2008 5. The Great Deleveraging: Developed Markets Real GDP Growth, % Source: Business Monitor International, Statistics Agencies 6. Global Crisis: The Process

Real Estate Bubble Bursts in US, Destabilising Banks

Credit Constriction in US and Eurozone

Global Deleveraging

Wealth/Capital Destruction

Demand Destruction

7. The Global Outlook: Key Views

Its all aboutdeleveraging

There is no avoiding aprotracted and deep recession , this is unprecedented

The global recession begins and ends with theUnited States

Arestructuringof both the capital market and global economic systems will prolonguncertainty

8. Global Outlook: Quantitative Easing Reserves Held By US Depositary Institutions, % y-o-y Source: United States Federal Reserve 9. US Economy: Outlook Becoming Clearer

The Banks:systemic nationalisation now looking unlikely. Market is pricing this out.

10. Global Outlook: Signs of a Bounce S&P Financials Index 11. US Economy: Outlook Becoming Clearer

The Banks:systemic nationalisation unlikely

Housing Market:Further downside ahead, but the majority of the downturn has run its course

12. US Housing Downturn To Slow PHOENIX LAS VEGAS 13. US Economy: Outlook Becoming Clearer

The Banks:systemic nationalisation unlikely

Housing Market:Further downside ahead, but the majority of the downturn has run its course

Inventories : Sharp drop in Q1 signals potential for H2

14. Inventory Drawdown Positive for H209 United States Trade and Manufacturing Inventories, % y-o-y 15. The Global Outlook: H109 Will Be The Trough US Real GDP Growth, % Annualized Source: Business Monitor International, BEA 16. Global Outlook: Uncertainty Remains

Will the US fiscal stimulus be effective in establishing a sustainable growth pattern?

How will the Fed end quantitative easing?

The known unknowns

Shape of the recovery remains uncertain: double dip recession?

17. Emerging Europe: The Underperformer Source: Business Monitor International Real GDP Growth, % 18. Emerging Europe Outlook: 4 Key Effects

Foreign lending into CEE banking systems will dry up further and reverse

Exports to contract

Foreign investment inflows to decline, especially in the portfolio component

Assets in the banking sector to contract

19. Why Is CEE So Vulnerable?

External deficits are much wider than in previous EM crises

20. The Crisis in CEE: Current Account Deficits Source: Central Banks 21. The Crisis In CEE: Financial Accounts 2007 Financial Account Breakdown, % of GDP Source: Central Banks 22. The Crisis in CEE: External Debt Source: Central Banks 23. The Crisis in CEE: Loans to Deposits 24. IMF/EU Financing Agreements

Latvia (EUR7.5bn)

Belarus (US$2.5bn)

Ukraine (US$16.4bn)

Romania (EUR20.0bn)

Serbia (US$3.0bn)

Hungary (EUR20.0bn)

Poland (EUR20.6bn)

Georgia (US$750mn)

Armenia (US$540mn)

Mongolia (US$229mn)

Turkey

Bosnia-Herzegovina

Macedonia

Kazakhstan

Lithuania

Estonia

Bulgaria

Already Signed : In Negotiation: Likely to Sign Eventually : 25. Why CEE Is So Vulnerable?

External deficits are much wider than in previous EM crises

The global outlook will not be conducive to a quick recovery

26. CEE Crisis Will Be Deeper Than Asia 1998 Real GDP Growth, CEE (LHS) and Asia (RHS) Source: Business Monitor International, Statistical Agencies 27. The Crisis in CEE: Key Macro Outcomes For 2009 and 2010

Sharp economic contraction

External asymmetries will unwind

Fiscal deficits will balloon

Deflation likely in many economies

Risks weighted to devaluation in Baltics and Bulgaria

28. CEE: Wheres The Risk? Source: Business Monitor International 29. Baltics: Double-Digit Contractions in 2009 Source: Statistical Agencies, Business Monitor International 30. Hungary: The CE Outlier Fiscal Deficits Source: Hungarian Ministry of Finance 31. Bulgaria/Romania: Crisis Risks Remain -3.8 -3.8 -4.1 -5.1 -4.6 -2.4 -1.5 -0.8 -1.5 Fiscal Deficit, % GDP 50.4 57.2 61.2 56.2 42.4 40.3 37.5 35.5 31.6 External Debt, % GDP -4.9 -7.0 -7.9 -11.0 -12.4 -15.2 -11.0 -8.4 -9.1 Current Account, % GDP 4.7 3.7 4.0 4.5 7.9 4.8 6.7 9.0 11.9 Inflation, % ave 6,984 5,571 5,195 5,534 6,057 5,554 4,516 3,632 2,826 GDP per capita, EUR 2.3 2.5 0.0 -4.2 7.1 4.9 6.2 3.3 8.4 Real GDP, % y-o-y 2012f 2011f 2010f 2009f 2008 2007 2006 2005 2004 Romania 0.5 -1.2 -2.9 -2.9 3.0 4.5 3.5 2.3 1.7 Fiscal Deficit, % GDP 76.1 78.3 90.9 104.2 107.1 97.5 79.8 68.9 64.5 External Debt, % GDP -5.4 -9.2 -12.1 -15.5 -25.2 -25.2 -18.5 -12.4 -6.7 Current Account, % GDP 5.0 6.0 3.0 7.6 12.5 7.6 7.4 6.0 6.2 Inflation, % ave 5,924 5,481 5,128 5,359 6,424 5,187 4,125 3,530 3,145 GDP per capita, EUR 3.0 2.4 -1.5 -3.1 5.9 6.2 6.3 6.9 5.7 Real GDP, % y-o-y 2012f 2011f 2010f 2009f 2008 2007 2006 2005 2004 Bulgaria 32. Czech/Poland/Slovakia: Better Positioned Source: Statistics Agencies, Central Banks, Business Monitor International -3.6 -4.1 -4.2 -2.9 -6.6 -5.3 -7.1 -8.6 -7.8 C/A, % of GDP 2.4 2.2 2.0 2.8 3.0 1.9 4.3 2.8 7.5 Inflation, % ave 14,396 13,580 12,886 12,479 11,770 10,142 8,165 7,077 6,287 GDP per capita, EUR 3.5 3.0 1.3 -2.5 6.4 10.4 8.8 6.0 5.4 Real GDP, % y-o-y 2012f 2011f 2010f 2009f 2008 2007 2006 2005 2004 Slovakia -0.1 -0.5 -2.0 -3.5 -6.0 -4.8 -2.8 -1.2 -4.0 C/A, % of GDP 2.3 2.0 1.6 2.2 4.3 2.5 1.5 2.8 4.4 Inflation, % ave 10,806 9,553 7,940 7,477 8,614 8,085 7,123 6,392 5,320 GDP per capita, EUR 3.6 4.3 2.8 -2.7 4.9 6.6 6.2 3.6 5.3 Real GDP, % y-o-y 2012f 2011f 2010f 2009f 2008 2007 2006 2005 2004 Poland -0.8 -0.6 -0.6 -1.1 -3.0 -2.3 -3.0 -1.6 -4.7 C/A, % of GDP 2.5 2.4 1.9 1.5 4.4 3.0 2.1 1.6 2.6 Inflation, % ave 15,586 13,680 12,372 12,514 14,289 13,830 11,860 9,587 9,694 GDP per capita, EUR 4.0 3.3 1.1 -2.1 3.2 6.0 6.8 6.3 4.5 Real GDP, % y-o-y 2012f 2011f 2010f 2009f 2008 2007 2006 2005 2004 Czech Republic 33. The Crisis in CEE: Current Account Deficits Source: Central Banks 34. The Crisis in CEE: Loans to Deposits 35. Western Balkans: A Mixed Bag Source: Statistical Agencies, Central Banks, Business Monitor International -3.1 -3.4 -5.3 -3.6 1.2 0.0 5.7 3.6 1.0 -5.0 3.5 6.8 Slovenia -6.4 -9.2 -18.4 -16.9 4.3 5.7 10.7 6.5 0.1 -3.8 5.4 7.5 Serbia -9.4 -13.9 -27.8 -29.4 1.3 4.0 7.3 4.2 0.7 -5.8 8.1 10.7 Monten. -3.5 -4.5 -13.1 -3.0 1.7 0.2 8.3 2.3 1.5 -0.7 5.0 5.9 FYROM -6.3 -6.3 -10.9 -8.5 1.5 1.4 5.6 2.9 1.1 -3.2 2.4 5.6 Croatia -6.5 -9.0 -14.4 -10.4 2.5 2.7 7.9 1.8 1.5 -3.0 5.5 5.9 Bosnia -12.2 -13.3 -15.7 -10.3 2.4 2.1 3.2 2.9 2.0 -2.0 5.5 6.2 Albania 2010f 2009f 2008 2007 2010f 2009f 2008 2007 2010f 2009f 2008 2007 Current Account (% of GDP) Inflation (average) Real GDP Growth 36. The Sub-Regions Compared Source: Business Monitor International 37. Implications for the Strategic Investor

2009 will be a traders market not an investors market

Volatility will not end until we see a normalisation of credit markets (2010)

The low risk economies will be better positioned to take advantage of the global recovery

38. The Recovery: 2011 and Beyond

Trend growthwill settlelowerat around 4%

TheLow Risk economies will be better positionedto take advantage of the recovery

Convergencewill remain a key dynamic, though it will come at a slower pace

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