Press briefing

Press briefing

Debora Revoltella – CEE Chief Economist, UniCredit Group

Andrzej Bratkowski – Chief Economist, Bank Pekao SA

Warsaw, 6 June 2008

CEE: weathering the international storm

Debora Revoltella – CEE Chief Economist

CEE Economic Research

EXECUTIVE SUMMARY

A new international environment, with lower US and European growth, higher uncertainty and volatility and a general repricing of risk. In CEE, the growth cycle has peaked in 2006–2007, but usual drivers still hold. Most countries were however relying on external savings to finance growth and, in the context of a general repricing of risk, this might lead to some deceleration in credit expansion

On the overall, we believe the CEE can cope with the challenge, but risks and costs are increasing

We still recognize opportunities in the residential real estate sector, even if moderation is on the cards. The residential real estate sector is still characterized by a gap in supply. As income and living standards improve, demand for residential real estate is strong. 2 out of 10 households plan to buy an house in the next 10 years, mostly as an house to live in. Affordability levels have been reducing and demand for house purchase is still mostly linked to the emerging middle class segment or to high net worth individuals. This means that, on top of the existing demand, there might be a "potential demand" at the moment constrained by affordability issues

Increases in house prices have been significant in the last years. We still believe that house prices in the region are compatible with an equilibrium level, although there might be out-of-equilibrium trends in some sub-segments

Looking ahead, there are however a few areas to monitor which might exhibit some oversupply – i.e. the holiday home sector in Bulgaria, or some imbalances in capital cities such as Bucharest. The bursting bubble in Kazakhstan should be the a warning signal for the region.

Agenda

Facing the international challenge

Central Europe

South Eastern Europe and the Baltics

Broader Europe countries

Residential Real Estate

Slow recovery at the international level, with 2009 to be another gloomy year

Source: UniCredit Group CEE Research Network

Oil prices moderate only marginally, as well as food prices – inflationary pressures remain a key policy constrain

Growth in the US to recover only moderately in 2009, with the FED starting a tightening cycle

Growth in the Eurozone moderating further, forcing the ECB to start an easing cycle, despite strong concerns for inflation

The dollar marginally strengthening against the Euro

Repricing of risk highlights local vulnerabilities in CEE

Repricing of risk – 5Y CDS Spread1

-10

-5

0

5

10

15

20

25

30

LV

BG EE

SR

B

RO LT

BH

HR

KZ

TK

SK

HU

PL

CZ SI

UA

RU

CA deficit/GDP

FDI/GDP

External unbalances

Note: 1\ CE: Hungary, Czech Rep., Slovakia, Poland; SEE & Baltics: Croatia, Bulgaria, Romania, Serbia, Latvia; Broader Europe: Russia, Kazakhstan, Ukraine, Turkey; 2\ Latest available data: 30/05/2008Source: UniCredit Group CEE Research Network, Bloomberg

Current Account Deficit vs FDI over GDP (% 2007)

13 33

86

26

10

1 12

7

82

19

1 21

2

46

14

6

15

0

Central Europe SEE&Baltics Broader Europe

29/12/2006 31/12/2007 31/03/2008 Current2

EE

CZSK

PL

LV

KZUA

SRB

RO

RU

BG

LT

HR

HUTK

0

50

100

150

0 10 20 30

Banking sector dependency on foreign funding

ch

an

ge

in c

ost o

f ri

sk

Sensitivity to a credit squeeze1

Repricing of risk at the international level to affect the banking industry in CEE, with some possible credit squeeze

1\ Change in cost of risk is delta 5Y CDS May 2008 – Dec 2006; Banking sector dependency on foreign funding is calculated as external liabilities minus external assets, divided by banks total assets, as of Dec 2007Source: UniCredit Group CEE Research Network, Bloomberg

Banks Loans/GDP 2007

Resilient economy

Real Estate shock

Economic growth in 2008

Strong slowdown StagnationQ4 2007 Q1 2008

Slovakia 14.3 8.7

Lithuania 8.0 6.9

Ukraine 7.4 6.0

Kazakhstan 5.6 6.0

Czech Rep. 6.6 5.4

Latvia 8.0 3.6

Hungary 0.8 1.6

Estonia 4.8 0.4

Greece 3.6 3.6

Austria 3.0 3.5

Netherlands 4.5 3.1

Spain 3.5 2.7

France 2.2 2.2

Belgium 2.4 2.1

Germany 1.6 1.8

Portugal 1.8 0.9

Italy -0.4 0.4

Growth rates of real GDP (based on not seasonally adjusted data)1

Note: 1\ Based on seasonally adjusted data for PortugalSource: UniCredit Group CEE Research Network, Bloomberg, Eurostat

So far the CEE region not immune, but still showing good economic resilience

Agenda


Central Europe




A cyclical slowdown expected in 2008, with domestic demand remaining the main driver and inflationary pressures strong


-1

1

3

5

7

9

11

2005 2006 2007 2008f 2009f 2010f

Poland Hungary Czech Rep.

Slovakia Slovenia

GDP growth to decelerate to 4.7% in

2008 in Central Europe, after the 6% peak

reached in 2006/2007

Hungary to recover this year, after the

bottom touched in 2007, due to the

austerity package implemented by the

government (Q1 2008 GDP growth: 1.6%

vs 0.8% Q4 2007)

Investment expenditure, despite

moderating, continues to support

economic growth all over the region

Personal consumption, slightly subdued in

2008 because of higher interest rates and

high inflation, will again gain momentum

in 2009 and 2010

Net exports to have positive contribution

to GDP growth by 2010 as the global

economy accelerates again

Tightened fiscal policies curb government

expenditure, but 2010 is an election year

(2011 in Poland)

Real GDP(% yoy)

2007 2008f 2009f 2010f

Poland 2.5 4.6 2.6 2.3

Czech R. 2.8 6.7 3.2 2.7

Slovakia 2.8 4.3 4.4 3.7

Hungary 8.0 6.0 3.6 3.1

Slovenia 3.6 6.4 3.8 2.7

Inflation(% yoy)

2.5

3

3.5

4

4.5

Strong growth and rising inflation lead to monetary policy tightening, with markets betting on an even tighter stance

3.5

4

4.5

5

5.5

6

6.5

7

4.1

4.2

4.3

4.4

4.5

7.1

7.4

7.7

8

8.3

8.6

2007 Current1 2008f 2009f 2010f

HU 7.50 8.50 7.50 6.50 5.25

PL 5.00 5.75 6.25 5.00 4.75

SK 4.25 4.25 3.50 3.00 3.25

CZ 3.50 3.75 3.75 4.00 4.00

Reference Rate

May-07 Aug-07 Nov-07 Feb-08 May-08 May-07 Aug-07 Nov-07 Feb-08 May-08

May-07 Aug-07 Nov-07 Feb-08 May-08 May-07 Aug-07 Nov-07 Feb-08 May-08

Reference rate, eop.

Note: 1\ Latest available data: 30/05/2008

Source: UniCredit Group CEE Research Network, Bloomberg

Reference rates to further

increase in Poland during

the summer period

The National Bank of

Hungary, after raising

interest rates by 100 bps

since March, expected to

come back to 7.50% by

year end

Poland Czech Republic

Slovakia Hungary

Interbank Rate

After Slovenia joining the EMU in 2007, only Slovakia is outrunning

After Slovenia joined the EMU in Jan. 2007, Slovakia is the only country in Central Europe that will join

Euro zone in the next months.

o The European Commission recommended, in early May 2008, accession of Slovakia to Eurozone.

Thus, the process got the most important “green light” and moved to the final phase. The

European Parliament, the Ecofin (3rd June) and the European Council (consisting of prime

ministers and presidents of the EU – 19th - 20th June) have to take a stand of the EC

recommendation. Euro adoption will be finally confirmed by the Ecofin on July, 8th. By this date, the

convergence rate will be also determined

o On May 29th, the central rate of the Slovak koruna in the ERM II has been revalued by 17.6% and

set at 30.1260 versus euro, on ongoing improvements in underlying fundamentals

No EMU accession data set for Poland, Czech Republic and Hungary yet

We foresee 2012 as the first possible EMU entry date for Poland, while for the Czech Republic and

Hungary 2013 looks more likely


Agenda


Central Europe




The Baltics are now facing a pronounced slow-down, with some cooling on the cards also in SEE


11.2

2.9

14.1

5.97.1

4.4 4.16.0

4.6 4.1

7.5

10.4

Lithuania Latvia Estonia Romania Bulgaria Croatia

Investment Consumption

Main drivers of GDP growth (% avg 2008-2010)

Real GDP Growth (% yoy)

0

4

8

12

2005 2006 2007 2008 2009 2010

Baltics RO&BG HR SRB&BH

A pronounced slow-down in the Baltics, with lowering capital inflows, reduced credit growth and cooling real estate markets

Further cooling is anticipated in the Baltics, with growth to bottom out between 2008 and 2009 in Estonia and Latvia, respectively

SEE countries still show good dynamics, with lively consumption and a booming investment activity

Tighter liquidity conditions in the context of high external disequilibria are however expected to drive some slowdown

1\ Change in cost of risk is delta 5Y CDS May 2008 – Dec 2006; Banking sector dependency on foreign funding is calculated as external liabilities minus external assets, divided by banks total assets, as of Dec 2007; 2\ Total loans include general govt, non-financial corporations and retail and where available NPISHs and Non-MFIsSource: UniCredit Group CEE Research Network, Bloomberg

Some potential credit squeeze, which in some cases works in line with Central Banks aspirations

0%

20%

40%

60%

80%

Dec-0

6

Mar

-07

Jun-

07

Sep-0

7

Dec-0

7

Mar

-08

Total loans

(% yoy growth)2

Romania

BulgariaBosnia

CroatiaSerbia

Sensitivity to a credit squeeze1

Batlics

Banks Loans/GDP 2007

EE

CZSK

PL

LV

KZUA

SRB

RO

RU

BG

LT

HR

HU

TK

0

50

100

150

0 10 20 30


chan

ge in

cos

t of r

isk

Agenda


Central Europe




Strong growth but booming inflation

Source: UniCredit CEE Research

5,7

7,4 7,4

9,6

4,9 5,2

6,2 6,2

Turkey Ukraine Russia Kazakstan

avg 2006-07 avg 2008-10

GDP Growth

%, real 7% > CPI > 4%

Inflation (CPI, yoy %, April)

CPI > 12% 12% > CPI > 7%


4%

1% 2%

16%

6%

19%

9%

23%

0%

10%

20%

30%

Turkey Ukraine Russia Kazakhstan

20032007

Some credit squeeze

Banks need of foreign funding and strong increase in the of cost of risk point to a significant vulnerability of the Kazakh banking sector. The global liquidity crunch has translated into stalled credit growth

Some funding problems might emerge, most probably affecting only a few players, with no systemic consequences, in Russia. For Ukraine refinancing costs have increased but the large share of foreign ownership should protect the banking sector from a sever downturn.

While remaining very sensitive to capital market volatility, Turkey is relatively less likely to face constraints to lending growth; however the tighter monetary policy will have some effects

0%

20%

40%

60%

80%

Jan-0

7

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-07

Jan-0

8

Mar

-08

RussiaTurkeyUkraine


(Ext. Liabilities – Ext. Assets)/Tot.

Assets (%)

Lending Growth

(Monthly, yoy)

Agenda

Facing a new global environment

Central Europe




Notes: 1\ EU: AT, DK, FI, FR, IT, NL and ES; last available Census for EU countries; 2\ Data as of 2001 for BG, CZ, HR, LV, LT and SK; as of 2005 for HU and RUS; as of 2006 for EST, PL and RO; 3\ Calculated as ratio between owner-occupied dwellings over total occupied dwellings measures in physical units, except for Russia (sqm); 4\ As of 2001 for LT, 2006 for BG, HR, EST, LV, PL, RO and UKR and as of 2007 for CZ, HU and SKSources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland), UNECE

The transition process throughout the region resulted in very high home ownership rates, still in the context of a gap in supply

The privatization in the early 1990s led to widespread private ownership, with around 77% of the housing stock being currently owner-occupied vs 64% in the older EU states

Still the CEE region residential market is characterized by an housing gap

Dwelling stock per ‘000 inhabitants1,4

32

3

33

8

38

1

39

5

40

8

42

4

43

5

44

1

44

4

47

1

48

6

41

3 47

2

Slo

vaki

a

Po

lan

d

Ro

ma

nia

Lith

ua

nia

Ukr

ain

e

Hu

ng

ary

Cze

ch R

ep

.

Cro

atia

La

tvia

Est

on

ia

Bu

lga

ria

CE

E

EU

47 5

9 67 68 71 74 8

7 91

91

92 96

64 7

7

17

27

Cze

ch R

ep

.

Po

lan

d

Ru

ssia

Est

on

ia

La

tvia

Slo

vaki

a

Hu

ng

ary

Lith

ua

nia

Bu

lga

ria

Cro

atia

Ro

ma

nia

EU

CE

E

Home ownership in CEE and Western Europe1,2,3

Coo-perative

Notes: 1\ EU proxy including AT, DK, FI, FR, IE, IT, NL and ES; 2\ BG, HR and RUS (no. of apartments): 2000-2006; 3\Census data (last available year)Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)

0,9

3,92,7

1,2

3,2

0,51,4

2,91,3

2,8 2,41,41,6

4,73,4 4,0 3,7

2,8 2,23,2

1,8

3,92,8

1,8

0

5

10

15

20B

ulg

ari

a

Cro

atia

Cze

ch R

ep

.

Est

on

ia

Hu

ng

ary

La

tvia

Lith

ua

nia

Po

lan

d

Ro

ma

nia

Ru

ssia

Slo

vaki

a

Ukr

ain

e

Average 2000-2004 Column 2 Average 2005-2007

Dwelling unit completion per ‘000 inhabitants1,2

% of dwellings built after 19903

Construction activity has been strong in the last years, especially in the capital cities and urban areas, but well below western standards

7.2 8.8 8.3 5.3 11.1 n.a. 7.1 12.9 11.5 n.a. 6.9 n.a.

EU=Ø 7.4

SPAIN= 12.6

IRELAND= 19.0

Notes:1\ EU proxy including AT, DK, FI, FR, IT, NL and ES; 2\ EU: Census data (last available year). As of 2001 for BG, CZ, HR, LV, LT and SK; as of 2005 for RUS and UKR, as of 2006 for EST, HU, PL and ROSources: UniCredit Group CEE Research Network, Department of the Heritage and Local Government (Ireland)

The housing gap is enhanced when quality standards are considered

The communist regime left the CEE region with a unique housing stock of relatively recent, but often rundown homes

Quality and maintenance issues are particularly relevant in some CIS countries

In Central European countries, like Hungary and the Czech Republic, quality standards are much more similar to western ones

Average number of rooms per dwelling1,2

2,3 2,4 2,5 2,6 2,6 2,7 2,8 2,83,2

3,6 3,7

2,8

4,2

Ukr

ain

e

La

tvia

Lith

ua

nia

Hu

ng

ary

Ro

ma

nia

Cze

ch R

ep

.

Bu

lga

ria

Cro

atia

Slo

vaki

a

Est

on

ia

Po

lan

d

CE

E

EU

5055 55 56 59 61 62 64

7074 76 77

63

87

Ru

ssia

Ukr

ain

e

La

tvia

Slo

vaki

a

Est

on

ia

Lith

ua

nia

Ro

ma

nia

Bu

lga

ria

Po

lan

d

Cro

atia

Cze

ch R

ep

.

Hu

ng

ary

CE

E

EU

Average usable area per dwelling1,2

88 86 91 90 9481

96 9182 87 86 88 88

5 45 4

4

8

2 46

9 7 3 44 6 1 5 2 8 1 5

43 6 6 72 4 2 1 0 3 1 0 7 0 1 3 1

Main place to live Investment (to rent) Secondary house Other

Survey data show strong potential demand, mostly as primary house

6 5 5 4 7 7 4 511

6 4 72

7 9 8 78 10

7 7

9

8

45

3

69

65

67

68

5

5

74

5

Yes in next 3 yrs Yes in next 10 yrs Maybe after 10 yrs

RO BGSKSI SRB BIHCZ HR RUSPLHU UKR

Notes:1\ Survey involving 1,000 individuals (more than 2,000 in RUS) aged >15 and living in the largest cities of the country; all interviews were conducted as personal face-to-face interviews by Bank Austria’s long term partner agencies (GfK, RmPlus, TNS); 2\Countries are ranked by level of per capita GDP; 3\ Sample represented only by those willing to buy new house/flatSources: UniCredit Group CEE Research Network, Bank Austria Market Research.

General likelihood to buy new house/flat (%)1,2

RO BGSKSI SRB BIHCZ HR RUSPLHU

General likelihood to buy new house/flat, by purposes1,2,3

Avg

2 out of 10 households intend to buy real estate property

9 out of 10 potential buyers are seeking for an house to live in

Some rising demand associated to investment or vacation purposes, particularly in Croatia, Bulgaria and Romania

Avg UKR

Growth in house prices has been persistently high, …

Residential property prices in the enlarged Europe

(yearly average increases 2002-2007)1,2

Notes:1\ Growth rates calculated in local currency (nominal terms). All data used are from NCBs and local Statistical Offices and refer to non-harmonised national sources, thus any comparison on the dynamic of house prices across countries should be taken with care; 2\ BE, DE, IT: 2002-2005; NL, PT, LV, LT: 2002-2006. House prices for Latvia and Ukraine refer to capital citiesSources: UniCredit Group CEE Research Network based on National Statistical Offices, NCBs, Department of the Environment Heritage and local Government (Ireland)

0 20 40 60 80 100 120

Bulgaria

Croatia

Czech R.

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Russia

Slovakia

167

1.129

393

433

527

461

366

766

407

430

418

558

1.693

787

1.404

1.009

1.372

952

1.968

2.177

1.605

1.104

0 500 1.000 1.500 2.000 2.500 3.000

Bulgaria

Croatia

Czech Rep.

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Russia

Slovakia

2002 2007

Notes: 1\ LV, LT: 2006; 2\ LV, LT, RUS: 2006; 3\ Prices for Latvia refer to Riga suburbs, while for Romania to Bucharest; 4\ Equilibrium house prices are calculated based on out-of-sample estimation by regressing house prices (expressed in real terms) on GDP per capita in PPS and mortgage rates using Eurozone countries as a benchmarkSource: UniCredit Group CEE Economic Research Network

…still no major deviations from equilibrium trends

Real estate prices, country avarage (EUR per sqm)1,3

Ratio of real estate prices over equilibrium prices in 20072,3,4

Housing investment affordability has significantly decreased over the last years

2,5

1,9

0,6

0,5

7,0

4,8

4,1

3,2

2,8

2,6

2,5

2,1

1,9

1,9

1,8

1,4

1,0

Italy

Fra

nce

Fin

lan

d

Au

stri

a

Ro

ma

nia

Ukr

ain

e

Ru

ssia

La

tvia

Po

lan

d

Bu

lga

ria

Ka

zakh

sta

n

Lith

ua

nia

Est

on

ia

Slo

vaki

a

Cro

atia

Hu

ng

ary

Cze

ch R

.Affordability Index (2007)1,2

Notes: 1\ The affordability index is calculated as house prices (€ per sqm)/ average gross monthly wages; 2\ As of 2006 for Latvia, Lithuania and Ukraine; 2005 for Italy, Finland and Austria and as of 2003 for France. Prices for old EU Countries (except Finland), Latvia and Romania refer to the capital cities; 3\ Share estimated using an affordability index benchmark of 2 (measured as house prices per sqm over gross monthly wages) and official statistics on households’ income distributionSources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)

Over the last years, growth in real estate property prices much higher than in wages resulting in a sharp deterioration in housing affordability

Low affordability implies that in many countries demand for house purchases remains mostly related to the emerging middle class segment or to high net worth individuals

Affordability of housing investment3

(percentage of households over total)

50,6 48,0

16,3 14,5 13,0 10,03,3

Slo

vaki

a

Cro

atia

Hu

ng

ary

Po

lan

d

Cze

ch R

.

Ro

ma

nia

Bu

lga

ria

19

13

26

14 14

32

11

21

17

Bu

lga

ria

Cro

ati

a

Cze

ch

R.

Hu

ng

ary

Po

lan

d

Ro

ma

nia

Ru

ss

ia

Slo

va

kia

Uk

rain

e

Note: 1\The number of years before saturation in the residential property market is calculated as the ratio between the estimated market potential (total number of households willing to buy a new house/flat) and the current level of construction activity (based on last available data) under the extreme assumption that all potential buyers will look for new housingSources: UniCredit Group CEE Research Network, Eurostat

Bulgaria: more selection to come on the holiday home segment

Croatia: monetary tightening is expected to slow otherwise solid growth

Czech Republic: no housing bubble on the horizon (yet)

Hungary: some oversupply, but no evidence of price bubble

Kazakhstan: bubbles do burst

Poland: first signs of stabilization, but housing gap remains

Romania: some cooling but still with high potential in the mid term

Slovakia: still healthy growth potential on the horizon

Turkey: still a market for few people

Ukraine: untapped potential in the medium-high segment, with some cooling on the luxury one

Gap in supply matched to continuously lively demand to remain a clear driver for long term sustainability

Years to saturation1

EXECUTIVE SUMMARY

A new international environment, with lower US and European growth, higher uncertainty and volatility and a general repricing of risk. In CEE, the growth cycle has peaked in 2006–2007, but usual drivers still hold. Most countries were however relying on external savings to finance growth and, in the context of a general repricing of risk, this might lead to some deceleration in credit expansion

On the overall, we believe the CEE can cope with the challenge, but risks and costs are increasing

We recognize still opportunities in the residential real estate sector, even if moderation is on the cards. The residential real estate sector is still characterized by a gap in supply. As income and living standards improve, demand for residential real estate is strong. 2 out of 10 households plan to buy an house in the next 10 years, mostly as an house to live in. Affordability levels have been reducing and demand for house purchase is still mostly linked to the emerging middle class segment or to high net worth individuals. This means that, on top of the existing demand, there might be a "potential demand" at the moment constrained by affordability issues

Increases in house prices have been significant in the last years. We still believe that house prices in the region are compatible with an equilibrium level, although there might be out-of-equilibrium trends in some sub-segments

Looking ahead, There are however a few areas to monitor which might exhibit some oversupply – i.e. the holiday home sector in Bulgaria, or some imbalances in capital cities such as Bucharest. The bursting bubble is Kazakhstan should be the warning signal for the region

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