Post-Recession CEE: Relative Potential Amid The Global Recovery

Business Monitor International

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EBRD8th Eastern European Business Information

Conference December 10th, 2009

Strand Palace Hotel, London


Post-Recession CEE:Relative Potential

Amid The Global Recovery

By: Justin PatrieHead of Emerging Europe AnalysisBusiness Monitor [email protected]


Outline1. Global Outlook

• Developed States• Emerging Markets

2. Emerging Europe• Selectivity Is Key• Where are the opportunities?• Where are the risks?

3. Persisting Risks


Global Outlook: Developed States

• Big US bounce in 2009, but rooted in base effects and restocking

• Deflation over inflation

• Protracted monetary easing

• Asset price inflation, weak US$

• Double-Dip Risks


Global Theme 1:A Bounce,

But Not A Recovery


Unprecedented Monetary Easing

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Aggregate reserves of US depositary institutions andmonetary base, US$trn

Lehman collapse

Source: United States Federal Reserve


‘Helicopter’ Ben Restores Liquidity…

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3-month LIBOR Fix,% liquidity crisisaka 'credit crunch'


…But Fails To Restore Bank Lending

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Commercial and Industrial Loans For All Commercial Banks, % y-o-y

Source: United States Federal Reserve


So… The Solvency Crisis Remains Unresolved

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Case Shiller Home Price Index(US, 10 City Composite)

Source: Case-Shiller


But Stocks And Bonds Are Benefiting…

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US 2-year treasury yield, %

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S&P 500 Equity IndexYields falling…

…and stocks are rising.


And Commodities Too…

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65% rally since end-February

Brent Crude, US$/bbl

Gold, US$/oz

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Business Monitor International2009f 2010f 2011f 2012f 2013f 2014f

Real GDP Growth, %

USA -2.5 2.4 1.8 2.3 2.3 2.3

Eurozone -3.9 0.6 1.7 1.9 1.9 1.9

China 8.4 8.8 7.5 8.6 7.6 7.1

World -1.9 2.7 3.2 3.6 3.6 3.4

Consumer Inflation (avg)

USA -0.5 1.2 1 1.9 2.2 2.3

Eurozone 0.1 0.8 1.6 1.9 1.7 1.6

China 0.3 2.8 2.5 2.2 1.7 2

World 2 2.7 3 3.2 3.1 2.8

Interest Rates (eop)

US Fed Funds 0.00 0.00 2.00 3.00 4.00 4.25

ECB Refinancing Rate 1.00 1.50 2.50 3.50 4.00 4.00

Exchange Rates/Oil (avg) .

US$/EUR 1.40 1.45 1.40 1.34 1.27 1.26

CNY/US$ 6.84 6.72 6.45 6.20 6.00 5.80

Brent Crude US$/bbl 61.00 85.00 87.00 92.00 92.00 92.00

Source: Business Monitor International


Suppressed US Demand Reflected In Current Account, Savings Rate

Source: Forecasts – Business Monitor International

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1Savings Rate As % of Disposable Income, LHSCurrent Account Balance (% of GDP), RHS


Inventory Re-Stocking: >50% Contribution To Headline Growth

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f

Real GDP excluding Inventories

Contribution of Inventories

Source: Business Monitor Forecast


Big Swing = Big Contribution To Growth

-2.0

-1.5

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Swings' In Inventories As % ofGDP

Source: Forecasts – Business Monitor International


Eurozone To Underperform• Less impact from base effects (0.4pps

versus 0.8pps in the US)

• ‘An Economic House Divided’: Aggregate growth to be weighed down by weak links in Spain, Ireland, Italy, Greece and Portugal

• Euro appreciation to limit export sector performance


The G7 Fiscal Fiasco

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BRIC Bal, % of GDP

G7 Bal, % of GDP

G7 fails to take full advantage of strongeconomic climate amid rising fiscal populism



Global Outlook: Emerging Markets

• Total decoupling is a myth, but rebalancing will occur

• EM is in a better position to take advantage of a global recovery than US, UK and Eurozone

• Convergence should continue at a rapid pace

• EM can no longer be treated as a single asset class


Global Theme 2:EM Over

Developed States


BMI’s Emerging Markets Checklist1. Less leveraged and well-

capitalised banking system2. Limited levels of private sector

debt3. Strong demographics with growing

middle class consumer potential4. Resource rich 5. Market friendly policy commitment

with healthy fiscal position


The ‘EM Story’ In 2 Charts

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EmergingDeveloped

EM and Developed World GDP, US$bn

EM GDP, % of World TotalSource: Business Monitor International


EM Leads The Way…





CEE Core Theme:Selectivity

is Key


2009: Not A Good Year…


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Uzb

ekis

tan

Aze

rba

ijan

Tu

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ista

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jikis

tan

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lan

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do

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laru

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za

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sta

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an

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sn

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Real GDP Growth Forecast, 2009

Emerging Europe Aggregate (-5.7%)


2010: Recovery Highlights Relative Value


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ua

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Esto

nia

La

tvia

2010 Real GDP Growth, %

Emerging Europe Aggregate (2.9%)


CEE Outlook: • High degrees of economic, capital market and

political differentiation will create wide disparities in performance post-recession

• We continue to favour Turkey, Poland and Czech. We remain very concerned about Baltics, Ukraine and Bulgaria.

• Broadly speaking, convergence will continue• Ongoing macro rebalancing should constrain

growth in 2010• Trend growth over long-term will settle well below

pre-crisis average


From Outperformer To Underperformer

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Emerging Europe

Latin America

Sub-Saharan Africa

MENA

Asia (ex. Japan)



Rebalancing To Be Key...

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ijan

20082009f

Source:Historic Data – Respective Central BanksForecasts – Business Monitor International

Current Accounts, % of GDP


But External Debt Levels Remain High

Source:Historical Data – Respective Central BanksForecasts – Business Monitor International

Total External Debt, % of GDP

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2008

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100% ofGDP


…CEE Will Still Outperform Developed

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Emerging EuropeWorldEurozoneUnited StatesG7



Why Turkey Will Be A Strategic Outperformer…

1. Stable, well-capitalised and low leveraged banking sector

2. Structural shift downward in interest rate and inflationary environment

3. Relatively limited external asymmetries and low foreign indebtedness

4. Favourable demographics5. Strategic location between EU, MENA and CIS6. Perceptual gap among foreign investors


Less Leverage = More Stable

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Georg

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negro

Hungary

Bulg

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enia

Russia

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ia

Bosnia

Cro

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nd

Macedonia

Slo

vakia

Czech

Rom

ania

Turk

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Alb

ania

Source: Respective Central Banks, end-2008

Banking Sectors: Loans To Deposits Ratio, %


Turkey: Conservative Bank Asset Allocations

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Other Assets

Securities To Be Held to Maturity

Credits

Trading Securities

Claims on Banks

Banking Sector: Asset Breakdown, TRYbn

Source: Central Bank of the Republic of Turkey


Turkey: Single-Digit Inflation For The First Time In Modern History

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CPI, % y-o-y

Source: Turkish Statistical Institute


Turkey: Single Digit Rates For The First Time In Modern History

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CBRT Overnight Borrowing Rate, %

Record low 6.50% hit on November 20



Fitch/S&P C/A Pub Ext Debt Ext Debt Fis Balance CDS Peak Floating FX? EU?

Slovenia AA/AA -0.7 64.5 183.6 -7.8 258 Yes (EUR) Yes

Czech A+/A -1.1 7.7 40.6 -5.2 350 Yes Yes

Slovakia A+/A+ -3.1 14.1 55.4 -7.5 262 Yes (EUR) Yes

Poland A-/A- -0.8 21.3 65.3 -2.1 415 Yes Yes

Estonia BBB+/A- 3.2 3.8 111.7 -5.5 737 No Yes

Lithuania BBB/BBB 0.3 13.4 85.8 -11.0 850 No Yes

Bulgaria BBB-/BBB -11.4 6.3 112.6 -1.5 698 No Yes

Croatia BBB-/BBB -5.2 9.6 88.5 -2.4 601 Managed Cand.

Hungary BBB/BBB- -1.1 22.0 111.3 -4.4 638 Yes Yes

Kazakh. BBB-/BBB- -4.2 1.8 84.5 -1.8 1,646 No No

Romania BBB/BBB -3.0 6.8 72.3 -6.7 769 Managed Yes

Russia BBB/BBB 3.6 3.1 36.1 -9.1 1,117 Managed No

Latvia BB+/BB 7.5 9.0 133.2 -8.2 1,193 No Yes

Turkey BB+/BB- -2.0 15.8 43.6 -6.9 849 Yes Cand.

Serbia BB-/BB- -8.7 23.5 75.5 -4.8 650 Managed No

Ukraine B-/CCC+ 0.3 16.1 79.1 -9.2 4,986 No No

*All macroeconomic data in % of GDP, 2009 Business Monitor Forecasts** ‘CDS Peak’ refers to widest point in benchmark 5-year sovereign credit default swap spread betweenSeptember to December 2008

Business Monitor InternationalRating at Mid-2008 Current Rating Rating Move

Bulgaria BBB BBB- ↓1

Croatia BBB- BBB- –

Czech A+ A+ –

Estonia A+ BBB+ ↓2

Hungary A- BBB ↓2

Kazakhstan BBB BBB- ↓1

Latvia BBB- BB+ ↓1

Lithuania A BBB ↓3

Poland A- A- –

Romania BBB BB+ ↓1

Russia BBB+ BBB ↓1

Serbia BB- BB- –

Turkey BB- BB+ ↑2

Ukraine BB- B- ↓3

Source: Fitch Ratings, as of December 7, 2009


Turkey: Healthy Market Performance During Crisis


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3-month weighted averagedeposit rates, %

1994 recession2001 financial crisis

no dramatic spikeduring this recession


A Re-pricing Of Relative Value:Spread: Russia 5-year CDS – Turkish 5-year CDS, bps

Source: Bloomberg, Business Monitor International Calculation

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Oct-

09

2. BMI says spreadwill compress substantially.

1. Russian default protectioncosts move higher than Turkey'sduring Q408-Q109 financial crisis.

3. Spread normalises on back of recovery, but not all the way.


Russia: Illiquidity Crisis Is Over

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c-0

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p-0

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c-0

9

MOSPRIME Interest Rate, 3-month (%)


Russia: BoP Dynamics Stabilising

-40

-20

0

20

40

60

80

Q10

4

Q30

4

Q10

5

Q30

5

Q10

6

Q30

6

Q10

7

Q30

7

Q10

8

Q30

8

Q10

9

Q30

9*

Current TransfersIncomeServicesGoodsCurrent Account

Financial Account, US$bn Current Account, US$bn

Source: Central Bank of Russia

-150

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-50

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50

100

Q10

4

Q30

4

Q10

5

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Q10

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Q30

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Q10

7

Q30

7

Q10

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Q30

8

Q10

9

Q30

9*

Other

Portfolio

FDI

Financial Account


Russia: Reserves Rebuilding

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US$bn (LHS)

% y-o-y (RHS)

Central Bank of Russia International Reserves



2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

GDP, US$bn 1,247 1,607 1,328 1,671 1,962 2,236 2,526 2,839

GDP, RUBbn 31,880 39,954 41,171 46,368 52,480 58,701 65,039 71,674

Real GDP, % y-o-y 8.1 5.6 -8.1 3.4 4.4 4.6 4.5 4.5

GDP per capita, US$ 8,768 11,327 9,406 11,894 14,035 16,078 18,251 20,615

Exports, US$bn 354.4 471.6 273.5 341.9 403.5 468.0 514.8 566.3

Imports, US$bn 223.5 291.9 175.1 201.4 237.6 275.7 308.7 358.1

Trade Balance, US$bn 130.9 179.7 98.4 140.5 165.8 192.4 206.1 208.2

Current Account, US$bn 78.3 102.4 47.2 78.3 94.5 108.4 114.2 113.9

Current Account, % GDP 6.3 6.4 3.6 4.7 4.8 4.8 4.5 4.0

Budget Balance, RUBbn 1,782 1,697 -3,734 -3,473 -2,893 -1,853 -1,028 -851

Budget Balance, % GDP 5.6 4.2 -9.1 -7.5 -5.5 -3.2 -1.6 -1.2

Inflation, % y-o-y eop 11.9 13.3 9.0 9.5 8.0 6.5 6.0 5.5

RUB/US$, eop 24.6 29.4 28.5 27.0 26.5 26.0 25.5 25.0

RUB/basket, eop 29.6 35.4 34.9 32.3 31.2 29.7 28.6 27.8

FX Reserves, US$bn 477.9 438.2 447.0 469.3 469.3 506.9 567.7 624.4



Russia: Labour Market Still Looks Weak

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Real Wage Growth, % y-o-y

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Unemployment Rate, %

Source: Federal State Statistics Service


Russia: Asset Quality Will Be A Drag

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Loans to Individuals, % overdue

Loans to Organizations, % overdue


Banking Sector Overdue Loans, % of Total


Central Europe: Poland On Top, Hungary At Bottom

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Poland

Czech Republic

Hungary

Slovakia

Source:Historical Data – Respective National Statistical OfficesForecasts – Business Monitor International


2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Poland

Real GDP, % y-o-y 6.6 4.9 1.2 3.4 3.8 4.0 4.3 4.1

Inflation, % ave 2.5 4.3 3.0 2.7 2.6 2.5 2.5 2.5

PLN/EUR, eop 3.60 4.15 4.45 4.38 4.30 4.00 3.80 3.30

Czech

Real GDP, % y-o-y 6.0 3.2 -3.8 1.8 3.1 3.9 3.6 3.5

Inflation, % ave 5.49 3.30 1.00 2.30 2.50 2.40 2.40 2.40

CZK/EUR, eop 26.38 26.76 24.00 23.00 23.00 23.00 22.00 22.00

Hungary

Real GDP, % y-o-y 1.1 0.5 -6.4 0.1 2.6 3.1 3.9 3.5

Inflatino, % ave 7.4 3.5 4.3 3.5 3.0 2.7 2.5 2.5

HUF/EUR, eop 252.10 263.62 311.81 272.00 251.81 255.81 248.92 245.00

Slovakia

Real GDP, % y-o-y 10.4 6.4 -4.9 1.5 3.0 3.4 3.7 3.2

Inflation, % ave 1.9 3.0 1.5 0.8 2.2 2.4 2.4 2.4



Baltics: Core Forecasts2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Estonia

Real GDP, % y-o-y 6.4 -3.6 -14.0 -1.1 4.6 4.1 4.2 3.6

Inflation, % y-o-y eop 9.6 7.0 -1.5 0.5 2.5 2.5 2.5 2.5

EEK/EUR, eop 15.65 15.65 15.65 15.65 15.65 15.65 15.65 15.65

Current Account, % GDP -18.0 -9.3 3.2 2.4 1.5 0.7 0.0 -0.2

Latvia

Real GDP, % y-o-y 10.2 -2.0 -18.4 -2.3 3.9 4.3 4.6 4.0

Inflation, % y-o-y eop 14.1 11.2 -2.0 2.0 4.3 3.8 3.4 3.2

LVL/EUR, eop 0.7023 0.7130 0.7065 0.9598 0.9384 0.9029 0.8887 0.8887

Current Account, % GDP -23.8 -10.9 7.5 9.1 9.0 8.1 7.4 6.7

Lithuania

Real GDP, % y-o-y 8.9 3.2 -15.2 -1.2 3.7 4.0 4.3 3.9

Inflation, % y-o-y eop 8.1 8.5 0.1 2.0 2.5 3.0 3.5 4.0

LTL/EUR, eop 3.4528 3.4528 3.4528 4.1400 4.1400 4.1400 4.1400 4.1400

Current Account, % GDP -14.6 -12.4 0.3 2.1 1.8 -0.4 -0.9 -0.8

Source: Historical Data – Respective Central Banks and Statistics OfficesForecasts – Business Monitor International


Frontier Market SelectionRussia/CIS – Mongolia*• Huge mineral resources• Democratic government with no major geo-political disputes• Despite hiccoughs, very much in favour of Western investment

Western Balkans – Macedonia• Impressive improvements to business environment in recent years• Broad consensus towards EU convergence• Limited leverage and stable banking sector

Wild Card – Armenia• Breakthrough in relations with Turkey and resolution of Nagorno-Karabakh

would be a ‘game changer’• Banking sector has proven remarkably resilient despite massive real GDP

contraction in 2009

*Mongolia is not a member of the CIS, though for historic and structural economic reasons, we classify the country broadly under the scope of this region.


Core Risks To Outlook:1. EM Investment Bubble

– Does EM have the capacity to absorb the expected rise in capital inflows going forward?

2. Global Double-Dip– How will EM cope in the event of another US recession

in 2011-2013?3. Economic Policy Risks

– Will EM governments be able to unwind the 2009 budget deficits quickly and remain committed to market reforms?

4. Geopolitical Risks– Where are there risks of sustained military conflict?


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