South Eastern Europe Emerging Market Economies Weekly Report · Emerging Market Economies . Weekly Report . ... Persisting disinvestment and weaker private consumption were ... down

South Eastern Europe and Mediterranean Emerging Market Economies WWeeeekkllyy RReeppoorrtt

NBG Strategy & Economic Research Division Director: Paul Mylonas : +30 210 33 41 521 : [email protected] Emerging Markets Research Head: Michael Loufir : +30 210 33 41 211 : [email protected] Analysts:

Evlabia Fetsi : +30 210 33 41 667 : [email protected] Konstantinos Romanos-Louizos : +30 210 33 41 225 : [email protected] Louiza Troupi : +30 210 33 41 696 : [email protected] Finansbank Research Chief Economist: Inan Demir : +90 212 318 5087 : [email protected] Analyst:

Gökçe Çelik : +90 212 318 5096 : [email protected]

2 – 8 September 2014 TURKEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 August inflation ROMANIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Q2:14 real GDP growth BULGARIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Q2:14 real GDP growth SERBIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Q1:14 banking sector performance FYROM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Q2:14 balance of payments ALBANIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Q2:14 banking sector performance UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A peace deal signed on September 5th Q2:14 real GDP growth CYPRUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Next tranche of Troika’s assistance could be withheld Q2:14 real GDP growth EGYPT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

August FX reserves

The information in this document, being distributed by National Bank of Greece S.A., is based upon data and sources of information believed to be correct and reliable but the accuracy of which cannot be guaranteed. Accordingly, no representation or warranty, implied or expressed, is made by any member of National Bank of Greece S.A. as to its accuracy adequacy, timeliness or completeness.

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2 – 8 September 2014

NBG - South Eastern Europe and Mediterranean Emerging Market Economies - Weekly Report 1

Turkey

024681012141618

02468

1012141618

12/0

904

/10

08/1

012

/10

04/1

108

/11

12/1

104

/12

08/1

212

/12

04/1

308

/13

12/1

304

/14

08/1

4

Headline & Core Inflation(y-o-y % change)

Headline InflationFood Inflation Core-I Inflation

-32

-26

-20

-14

-8

-2

4

10

162

4

6

8

10

12

14

12/0

904

/10

08/1

012

/10

04/1

108

/11

12/1

104

/12

08/1

212

/12

04/1

308

/13

12/1

304

/14

08/1

4

Core Inflation, Interest Rates & Exchange Rate

Core CPI-I (y-o-y % change, lhs)Interbank Market Overnight Rate (%, lhs)CBRT Effective Funding Rate (%, lhs)

Currency Basket (0.5*TRY/EUR+0.5*TRY/USD, y-o-y % change, inverted, rhs)

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

12/0

904

/10

08/1

012

/10

04/1

108

/11

12/1

104

/12

08/1

212

/12

04/1

308

/13

12/1

304

/14

08/1

4

Interest Rates (%) CBRT O/N Lending RateCBRTO/N Borrowing RateCBRT1-w Repo RateInterbank Market Overnight Rate

5 Sep. 3-M F 6-M F 12-M F 1-m TRIBOR (%) 8.7 8.4 8.2 8.1 TRY/EUR 2.80 2.80 2.80 2.80 Sov. Spread (2014, bps) 160 158 155 150

5 Sep. 1-W % YTD % 2-Y % ISE 100 82,193 2.3 21.2 21.7

2011 2012 2013 2014F 2015F Real GDP Growth (%) 8.8 2.1 4.0 3.5 4.0 Inflation (eop, %) 10.5 6.2 7.4 9.0 7.2 Cur. Acct. Bal. (% GDP) -9.7 -6.2 -7.9 -5.6 -6.0 Fiscal Bal. (% GDP) -1.4 -2.1 -1.2 -2.2 -2.0

Headline inflation surprised on the upside, reaching 9.5% y-o-y in August, due to a further deterioration in food prices. Headline inflation accelerated to 9.5% y-o-y in August from 9.3% in July, against our estimate of a moderation to 9.2% and the consensus estimate of a stabilisation. The acceleration is due to a higher-than-expected increase in food prices (which account for 24% of the CPI basket). Indeed, due to a severe drought since the beginning of the year, food inflation reached a high of 14.4% y-o-y in August compared with our forecast of 13.3% and the July outcome of 12.6%. Encouragingly, the CBRT’s favourite core inflation measures, i.e., CPI-H (that excludes energy, unprocessed food, alcohol, tobacco and gold) and CPI-I (that also excludes processed food) remained broadly unchanged for a third month in a row at c. 10% y-o-y in August, following 4 consecutive months of increases. The latest CBRT’s “Monthly Price Developments Note” explains that the rise in food inflation has had second-round effects on services inflation, preventing core inflation from decelerating. This assessment suggests that the bulk of the impact from the Q1 weakening of the TRY has already passed through to prices. Going forward, the course of the TRY will continue to be the most important risk to the inflation outlook, and the depreciation of the TRY against the currency basket of “50%*EUR/TRY + 50%*USD/TRY” by 2.4% since June 10th, on the back of the escalation of the civil war in Iraq (Turkey’s second largest export market), is a negative development. Therefore, the CBRT should continue to resist politicians’ calls for an aggressive easing of its monetary policy stance, in view of: i) still high underlying inflation; ii) higher-than-projected food inflation (food inflation stood at 9.2% y-t-d in August, already above the CBRT’s upwardly-revised FY:14 forecast of 9%; from 8%); iii) a 10% rise in natural gas and electricity prices in Q4:14; iv) a possible surge in political risk, ahead of the June 2015 parliamentary elections; and v) heightening geopolitical risks. Projecting a slower-than-initially-expected normalization in food inflation (12.3% y-o-y against our previous forecast and CBRT’s forecast of 9%) and better-than-expected global oil prices in 9-12M:14 (average Brent price of USD 102 per barrel against USD 108 previously), we revise up our end-year headline inflation forecast to 9% y-o-y from 8.4% -- above the end-2013 outcome of 7.4% and the CBRT’s most recent forecast of 7.6%. We foresee headline inflation fluctuating within the range 8.9%-9.5% in 9-12M:14 – below the cyclical peak of 9.7% y-o-y reached in May. Note that our upwardly-revised headline inflation does not include a potential pressure on food prices, which could emanate from an increase in exports of agricultural products to Russia following sanctions from the EU (since end-July), as well as an impact on global oil prices from recent developments in the Middle East. Against this backdrop, we expect the CBRT to remain cautious and maintain its central rate (1-week repo rate) on hold (at 8.25%) until end-year, following 3 successive cuts totalling 175 bps (May-July). Nevertheless, in a bid to appease those who are arguing for lower interest rates amid rising concerns regarding the growth outlook, the CBRT is likely to reduce the ceiling of its interest rate corridor (overnight lending rate) by a further 75 bps (to 10.5%) during the remainder of the year, on the condition that the exchange rate does not weaken from its current level (around 2.50 against the basket). Recall that in an unexpected move, the CBRT cut its overnight lending rate by 75 bps to 11.25% in August, reducing its interest rate corridor to 3.75 pps and its policy buffer (the difference between the 1-week repo rate and the ceiling of the corridor) to 3 pps.



Romania

-10

-5

0

5

10

-10-8-6-4-202468

1012

06Q

206

Q4

07Q

207

Q4

08Q

208

Q4

09Q

209

Q4

10Q

210

Q4

11Q

211

Q4

12Q

212

Q4

13Q

213

Q4

14Q

2

Real GDP(y-o-y % change)

RomaniaRomania

(excl. agriculture output)EU-28

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

08Q

2

08Q

4

09Q

2

09Q

4

10Q

2

10Q

4

11Q

2

11Q

4

12Q

2

12Q

4

13Q

2

13Q

4

14Q

2

Contribution Rates to Real GDP Growth (pps)

Private ConsumptionPublic ConsumptionGFCFChange in StocksNet ExportsGDPGDP (excl. Agricultural Output)

-12

-9

-6

-3

0

3

6

9

12

-4

-3

-2

-1

0

1

2

3

4

2008

2009

2010

2011

2012

2013

2014

F

Real GDP Growth, Real Policy Rate& Fiscal Impulse

Real Policy Rate(%, average. right scale)

Fiscal Impulse / Contraction(pps of GDP, cyclically adjusted terms, left scale)

Real GDP(y-o-y % change, right scale)

5 Sep. 3-M F 6-M F 12-M F 1-m ROBOR (%) 2.1 2.1 2.3 2.8 RON/EUR 4.40 4.45 4.46 4.45 Sov. Spread (2018, bps) 148 148 145 140

5 Sep. 1-W % YTD % 2-Y % BET-BK 1,306 1.1 3.5 32.2


Romanian economy brakes in Q2:14. Less than 2 years after emerging from the last downturn, Romania once again slipped into (technical) recession, with real GDP posting negative sequential growth for a 2nd consecutive quarter in Q2:14 -- down 1% q-o-q. s.a following a decline of 0.2% in Q1:14. As a result, the annual pace of economic expansion decelerated sharply to 1.2% y-o-y from 3.9% in Q1:14, far lower than its H2:13 high of 4.8%. Persisting disinvestment and weaker private consumption were the main drivers behind the slump in economic activity. Indeed, fixed investment lost ground in Q2:14 (down 12.8% y-o-y following a decline of 8.4% in Q1:14), in line with a contraction in corporate lending (by 6.4% y-o-y in real terms in June) and a decline in public investment (according to budget execution data, down 0.2 pps of GDP y-o-y in Q2:14). As a result, the (4-quarter rolling) investment-to-GDP ratio fell to a low 25% in Q2:14 from 27% of GDP in H2:13 and a pre-crisis high of 34%. At the same time, private consumption continued to expand in Q2:14, albeit at a significantly slower pace (up 3.9% y-o-y against 6.5% in Q1:14, with the latter attributed to base effects from the surge in agricultural income in H2:13). The Q2:14 slowdown reflects a weak labour market and tight credit conditions (consumer lending dropped 9% y-o-y in real terms in June). Note that the replenishment of inventories continued in Q2:14 (adding 2.6 pps of GDP to overall growth), though this item also contains statistical discrepancies and could reflect stronger domestic absorption. The slowdown in activity would have been sharper in Q2:14, had the drag on overall growth from net exports not moderated (-1.6 pps of GDP in Q2:14 against -2 pps of GDP). Indeed, import growth decelerated in Q2:14 (to 8.4% y-o-y from 13% in Q1:14), in line with weaker domestic demand, more than compensating for the slowdown in export growth (to a still high 10.5% y-o-y in Q2:14 from 15.2% in Q1:14). Economic growth to pick up in H2:14, underpinned by domestic demand. Despite the projected hike in inflation (to 1.8% y-o-y in H2:14 from 1% in H1:14), private consumption is set to strengthen further in the coming quarters, reflecting the impact of the surge in agricultural income (agricultural output is projected to increase by 5% from its already high H2:13 base, adding c. 0.6 pps to overall GDP growth) and gradually improving labour market conditions. Fixed investment should also recover, supported by better absorption of EU funds (we expect the authorities to absorb structural and cohesion funds worth 3% of GDP in FY:14 against 2.3% in FY:13), stronger FDI and capital inflows and improving business confidence. On the other hand, despite slightly stronger growth in the EU economy (projected at 1.3% in 2014 against only 0.1% in 2013), the contribution of net exports to overall growth should decrease, in view of stronger domestic demand. On a positive note, a somewhat looser fiscal stance in H2:14 (a projected impulse of 0.3 pps of GDP y-o-y), combined with easier monetary policy conditions (a real policy rate forecast of 1.5% in H2:14 against 2.6% in H1:14 and a long-term average of 2%) should support economic activity. Overall, in light of the weaker-than-expected Q2:14 outcome, we revise down our FY:14 real GDP growth forecast to 2.8% (from 3.2% previously), below the FY:13 outcome of 3.5%. Importantly, growth in real GDP, excluding agriculture, is projected to accelerate to a solid 2.6% in FY:14 from 1.9% in FY:13. The growth outlook could improve in the event of higher-than-expected agricultural output or faster absorption of EU funds. Large downside risks to this forecast arise from the potential impact from deteriorating relations between Russia and the West.



Bulgaria

-10-8-6-4-20246810

-10-8-6-4-202468

10

06Q

206

Q4

07Q

207

Q4

08Q

208

Q4

09Q

209

Q4

10Q

210

Q4

11Q

211

Q4

12Q

212

Q4

13Q

213

Q4

14Q

2

Real GDP (y-o-y % change)

BulgariaEU-28

-20

-15

-10

-5

0

5

10

15

20

-20

-15

-10

-5

0

5

10

15

20

08Q

2

08Q

4

09Q

2

09Q

4

10Q

2

10Q

4

11Q

2

11Q

4

12Q

2

12Q

4

13Q

2

13Q

4

14Q

2

Contribution Rates to Real GDP Growth(pps)

Net ExportsPublic ConsumptionGFCFPrivate ConsumptionChange in StocksGDP (%, y-o-y)

-6

-4

-2

0

2

4

6

-6

-4

-2

0

2

4

6

2008

2009

2010

2011

2012

2013

2014

F

Real GDP Growth, Real Money Market Rate & Fiscal Impulse

Fiscal Impulse / Contraction(pps of GDP, cyclically adjusted terms)Real ex-post 1-M Sofibor (%)


5 Sep. 3-M F 6-M F 12-M F 1-m SOFIBOR (%) 0.2 0.2 0.2 0.3 BGN/EUR 1.96 1.96 1.96 1.96 Sov. Spread (2017, bps) 126 115 92 80

5 Sep. 1-W % YTD % 2-Y % SOFIX 556.7 1.3 13.3 74.2

2011 2012 2013 2014F 2015F Real GDP Growth (%) 1.8 0.6 0.9 1.5 2.0 Inflation (eop, %) 2.8 4.2 -1.6 0.5 1.8 Cur. Acct. Bal. (% GDP) 0.1 -0.8 1.9 0.8 -0.1 Fiscal Bal. (% GDP) -2.1 -0.4 -1.9 -3.0 -2.2

Real GDP growth improves to 2.1% y-o-y in Q2:14. On a sequential basis, real GDP expanded by 0.5% q-o-q s.a. in Q2:14 following a weak 0.3% in Q1:14. As a result, the annual pace of economic expansion accelerated to an 11-quarter high of 2.1% y-o-y in Q2:14 from 1.4% in Q1:14. Net exports improve markedly in Q2:14, more than compensating for the slowdown in domestic demand. Domestic demand weakened, mainly on the back of a milder increase in private consumption and a drawdown in inventories. Indeed, private consumption decelerated in Q2:14 (up 0.7% y-o-y against 3.7% in Q1:14), mainly reflecting the plunge in consumer sentiment on the back of heightened domestic political uncertainty and the deposit run on two domestic banks in June (Corporate Commercial Bank (CCB) and First Investment Bank), offsetting persistent deflation and the sizeable fiscal impulse (1 pp of GDP y-o-y in Q2:14, excl. capital expenditure). At the same time, inventories declined in Q2:14 (subtracting 0.2 pps of GDP from overall growth following 4 consecutive quarters of stock rebuilding). Fixed investment continued to grow in Q2:14, albeit at a slower pace (up 3.4% y-o-y following 4.6% in Q1:14), as corporate lending expanded (by 4.8% y-o-y in real terms in June) and public investment rose (by 0.2 pps of GDP y-o-y). On the other hand, the contribution of net exports to overall growth improved markedly in Q2:14 (to 0.8 pps of GDP from a negative 4.5 pps in Q1:14). Indeed, despite weak demand from outside the EU, export growth picked up in Q2:14 (to 3.4% y-o-y from a marginal 0.1% in Q1:14), due to a surge in energy exports to neighbouring countries (Serbia, Croatia and Bosnia) after the devastating floods in May. Amid a poor operating environment, the economic recovery should continue at a modest pace in H2:14. Indeed, the ongoing political crisis (note that, following the resignation of the Oresharski Government in late-July, general elections were called for October 5th) and the uncertainty surrounding the fate of the CCB and its depositors (the results of a detailed audit into the bank’s books are due in mid-October) are expected to weigh further on economic sentiment. In this context, we expect private consumption to expand sluggishly in H2:14, mainly supported by the gradually improving labour market conditions. At the same time, despite problems with the absorption of EU funds (note that payments from the EU worth 0.6% of GDP are currently on hold but they have been covered from the state budget), fixed investment should continue to grow at a modest pace, as FDI and capital inflows rise, albeit from a low base. On a negative note, the contribution of net exports to overall growth should moderate, reflecting weak economic growth outside the EU (with the latter absorbing 40% of Bulgaria’s exports) and deteriorating competitiveness (the ULC-based REER has appreciated by c. 6% since end-2012). Economic activity will receive little help from policies, with no further fiscal stimulus in sight (as we expect the authorities will not allow the budget deficit to exceed the EU threshold of 3% of GDP), though imported euro area monetary policy will remain very accommodative. All said, we expect real GDP growth to accelerate to a 3-year high of 1.5% in 2014 from 0.9% in 2013, still below Bulgaria’s long-term potential of c. 3%. Risks to our forecast remain firmly on the downside, however, reflecting the domestic political uncertainty. Indeed, in the event the October elections result in another fragmented Parliament, failing to end the political stalemate, we expect the reform drive to slow and investor and consumer sentiment to deteriorate further, thus constraining economic growth.



Serbia

-65-55-45-35-25-15-5515253545

-65-55-45-35-25-15

-55

15253545

Q1:

08Q

2:08

Q3:

08Q

4:08

Q1:

09Q

2:09

Q3:

09Q

4:09

Q1:

10Q

2:10

Q3:

10Q

4:10

Q1:

11Q

2:11

Q3:

11Q

4:11

aQ

1:12

Q2:

12b

Q3:

12c

Q4:

12b

Q1:

13Q

2:13

Q3:

13d

Q4:

13Q

1:14

Quarterly Net Banking Sector Profit (bn RSD)

Net Interest Income Net noninterest IncomeOperating Expenses Provisions

180

230

280

330

380

-2

0

2

4

6

8

10

Q4:

08Q

1:09

Q2:

09Q

3:09

Q4:

09Q

1:10

Q2:

10Q

3:10

Q4:

10Q

1:11

Q2:

11Q

3:11

Q4:

11a

Q1:

12Q

2:12

bQ

3:12

cQ

4:12

bQ

1:13

Q2:

13Q

3:13

dQ

4:13

Q1:

14

Quarterly Cost of Risk and ROAE (Annualised)

ROAE (%, 4-q m.a., left scale)

Cost of Risk (bps, 4-q m.a., right scale)

a: including Agrobanka b: including the Razvojna Banka of Vojvodine c: including Nova Agrobanka d: including KBC Banka

0

60

120

180

240

300

360

420

0

4

8

12

16

20

24

28

Q3:

08Q

4:08

Q1:

09Q

2:09

Q3:

09Q

4:09

Q1:

10Q

2:10

Q3:

10Q

4:10

Q1:

11Q

2:11

Q3:

11Q

4:11

Q1:

12Q

2:12

Q3:

12Q

4:12

Q1:

13Q

2:13

Q3:

13Q

4:13

Q1:

14

Non-Performing Loans(Non-adjusted for FX variations)

NPL ratio (%, left scale)

Household NPLs (RSD bn, right scale)

RSD bn%

Corporate NPLs (RSD bn, right scale)Other NPLs (RSD bn, right scale)

The banking sector returned to profitability in Q1:14, on the back of higher pre-provision earnings and lower provisions. Pre-tax profits reached (a 4-quarter high of) RSD 8.1bn (0.2% of GDP), compared with a cumulative FY:13 loss of RSD 2.1bn. As a result, (annualised) ROAE and ROAA turned positive, reaching a 4-quarter high of 5.4% and 1.2%, respectively, in Q1:14, compared with (a 9-year low of) -0.4% and -0.1% in FY:13. Pre-provision earnings rebounded in Q1:14, due to lower operating expenses and higher net non-interest income (NNII). Pre-provision earnings rose by 5.8% y-o-y in Q1:14, following a decline of 7.3% in FY:13, largely supported by a drop in operating costs, by 2.9% y-o-y in Q1:14 compared with a marginal decline of 0.7% in FY:13. The decline in operating expenses was supported by the continued downsizing of the banking sector, following the revocation of the licence of three banks (Razvojna-Vojvodine, Privredna, and Univerzal) since early-2013, and the withdrawal from Serbia of the Belgian KBC Banka in 2013. This has prompted a 9% decline in banking sector employees and a 15% drop in their units since end-Q1:13. That being said, the sector remains highly fragmented, with the top 5 banks holding only a 53% market share (assets based). Pre-provision earnings were also underpinned by the easing in the decline in NNII growth, to -4.4% y-o-y in Q1:14 from -14% in FY:13 -- that reflected sizeable extraordinary losses in H2:13 (from the sale by KBC of its investment portfolio,with a loss of RSD 5bn). Even excluding KBC’s once-off, pre-provision earnings strengthened in Q1:14. On a positive note, top line revenue was also boosted by the rise in net interest income (NII), accelerating to 2.5% y-o-y in Q1:14 from 1.6% in FY:13. This improvement occurred despite the continued decline in average interest earning assets (down by 1.2% y-o-y in Q1:14), as NIM rebounded (increasing by 16 bps y-o-y to 442 bps annualised, against a decline of 9 bps in FY:13). On the back of the decline in operating expenses and the rebound in top line revenue in Q1:14, banking sector efficiency improved, with the cost-to-income ratio decreasing by 5.6 pps y-o-y to (a still high level of) 56.2% in Q1:14 -- well below the FY:13 outcome of 63.6%. Provisions declined markedly in Q1:14. P/L provisions in Q1:14 were 44% below their quarterly average in FY:13, due to the deceleration in NPL formation (the NPL ratio rose by 240 bps y-o-y in Q1:14, to 22.2% of total gross loans, following a rise by 280 bps in FY:13). Note that the increase in the NPL ratio has been exclusively driven by the sharp drop in loans (they contracted by 6.1% y-o-y in Q1:14 following a decline of 4.4% in 2013 partly due to the above-mentioned resolution of banks). This brought the cost of risk to 188 bps in Q1:14, well below the FY:13 outcome of 323 bps. The banking sector is set to return to profitability this year. We expect profitability in Q2-Q4:14 to be supported by continued lower provisioning, reflecting a slowdown in NPL creation (the NPL ratio is set to increase by an estimated 60 bps y-o-y to 22% of total gross loans at end-2014), due to the NBS’s measures aimed at reducing the stock of NPLs (including the removal of limitations for the transfer of NPLs to third parties and incentives for voluntary corporate debt restructuring) and, more importantly, the past 2 years’ cleaning-up of the banking sector’s balance sheet. Moreover, profitability is set to be underpinned by: i) the continued rise in NII, due to the expected increase in credit activity (following a decline in 2013), largely due to the resumption of state-subsidised loans in July (RSD 140bn, or 7.5% of the end-2013 stock of loans); and ii) the continued drop in operating expenditure. Overall, we expect ROAE at c. 6% in FY:14.

5 Sep. 3-M F 6-M F 12-M F 1-m BELIBOR (%) 7.2 7.2 6.2 6.0 RSD/EUR 118.9 117.2 117.6 117.8 Sov. Spread (2021, bps) 258 250 230 200

5 Sep. 1-W % YTD % 2-Y % BELEX-15 633 0.5 13.4 43.9

2011 2012 2013 2014F 2015F Real GDP Growth (%) 1.6 -1.5 2.5 -0.5 2.0 Inflation (eop, %) 7.0 12.2 2.2 5.4 4.0 Cur. Acct. Bal. (% GDP) -9.1 -10.7 -5.0 -4.5 -4.9 Fiscal Bal. (% GDP) -4.9 -6.5 -5.0 -6.5 -5.5



F.Y.R.O.M.

3

4

5

6

7

8

9

-40

-20

0

20

40

60

Q2:

07Q

4:07

Q2:

08Q

4:08

Q2:

09Q

4:09

Q2:

10Q

4:10

Q2:

11Q

4:11

Q2:

12Q

4:12

Q2:

13Q

4:13

Q2:

14

Quarterly External Trade Exports (EUR terms, y-o-y % change, lhs)Imports (EUR terms, y-o-y % change, lhs)Trade dficit (% of GDP, rhs)

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

Q4:

06Q

2:07

Q4:

07Q

2:08

Q4:

08Q

2:09

Q4:

09Q

2:10

Q4:

10Q

2:11

Q4:

11Q

2:12

Q4:

12Q

2:13

Q4:

13Q

2:14

Current Account Balance(4-Q Rolling Sum, as % of GDP)

Trade Balance Transfers Services+Income CAB

-20-16-12-8-40481216

-20-16-12-8-4048

1216

Q4:

06Q

2:07

Q4:

07Q

2:08

Q4:

08Q

2:09

Q4:

09Q

2:10

Q4:

10Q

2:11

Q4:

11Q

2:12

Q4:

12Q

2:13

Q4:

13Q

2:14

Balance of Payments (4-Q Rolling Sum, as % of GDP)

Current Account BalanceCapital & Financial Account Balance and E&OIMF disbursements Overall Balance (excl. IMF)Overall Balance (incl. IMF)

5 Sep. 3-M F 6-M F 12-M F 1-m SKIBOR (%) 2.6 2.6 2.6 2.6 MKD

61.3 61.3 61.3 61.3 Sov. Spread (2015, bps) 238 225 220 215

5 Sep. 1-W % YTD % 2-Y %

MBI 100 1,703 -0.7 -2.1 -7.4

2011 2012 2013 2014F 2015F

Real GDP Growth (%) 2.8 -0.4 3.1 3.5 3.5 Inflation (eop, %) 2.8 4.7 1.4 2.0 2.2 Cur. Acct. Bal. (% GDP) -2.5 -3.0 -1.9 -3.8 -4.4 Fiscal Bal. (% GDP) -2.5 -3.9 -4.1 -3.7 -3.0

The current account deficit (CAD) narrowed slightly to 1.8% of GDP in Q2:14, on a 4-quarter rolling basis, on the back of a temporary increase in official transfers. The CAD narrowed by 0.2 pps y-o-y to 1.3% of GDP in Q2:14 due to an equivalent increase in official transfers. As a result, the 12-month rolling CAD narrowed to 1.8 of GDP in Q2:14 from 2% of GDP in Q1:14 and 1.9% at end-2013. Exports accelerated for a fourth successive quarter (up 0.8 pps y-o-y in Q2:14 to 8.6% of GDP), on the back of higher capacity in the technological industrial development zones (TDIZ). The increase mainly reflected higher exports of machinery and transport equipment (up 102.5% y-o-y in Q2:14 and representing 20.9% of total exports) and chemical products (up 27.2% y-o-y in Q2:14 and representing 21.2% of total exports). As a result, the trade deficit narrowed by 0.6 pps y-o-y in Q2:14). The balance of services deteriorated (by 0.6 pps y-o-y in Q2:14), mainly reflecting an increase in payments to foreign construction companies in the context of the Skopje 2014 project and significant investment in road and railway infrastructure. Although improving in Q2:14, the capital and financial account surplus fell short of the CAD. The CFA surplus increased by 0.2 pps y-o-y to 0.4% of GDP in Q2:14, due to an improvement in “other net capital” inflows (up 0.2 pps y-o-y in Q2:14), reflecting an increase in net lending to the non-financial sector. Non-debt generating (net) FDI inflows were unchanged compared with Q2:13 (at a robust level of 0.4% of GDP), reflecting inter-company lending and greenfield investments (c. 30% of total inflows), in the flourishing sub-sector of automotive spare parts and the manufacturing sub-sectors of chemicals and medical products. Importantly, on a 4-quarter rolling basis, the FDI cover ratio almost tripled, to 184% in Q2:14 from 63% in Q2:13, reflecting, inter alia, the successful reforms of the business environment in recent years. Note that FYROM improved its ranking in the World Bank’s Doing Business index for 2014 to 25th from 69th in 2009. Reflecting current account and CFA developments in Q2:14, the overall balance deteriorated in Q2:14 (by 0.4 pps y-o-y to a deficit of 0.9% of GDP), with FX reserves declining to a still comfortable level of EUR 1.9bn at end-Q2:14 (covering 4.3 months of imports of GNFS). The CAD is set to widen to 3.8% of GDP in 2014 (from 1.9% in 2013), but its financing is not a cause for concern. Looking ahead, we expect private transfers to moderate further towards historical levels (18% of GDP at end-2014 from 19% currently on a 12-month rolling basis), continuing the trend of normalization initiated in late-2012. Moreover, we see the trade deficit widening from Q3:14, in line with the expected recovery in domestic demand. Overall, the CAD should widen to 3.8% of GDP in 2014 from 1.9% in 2013. This year’s external financing needs should, however, be comfortably covered, mainly in view of the anticipated stronger FDI inflows (4.2% of GDP against 3.6% in FY:13), in line with a pipeline of new projects, and the issuance of a EUR 500mn Eurobond (6.2% of GDP) last July (the country’s largest ever Eurobond issue, at a favourable spread of 362 bps over mid-swaps). We expect an overall balance surplus of EUR 200mn this year, which will allow the repayment of EUR 57.8mn to the IMF and increase FX reserves by EUR 140mn to EUR 2.1bn, covering 4.5 months of GNFS imports (following a decline of EUR 44mn in 2013).



Albania

-14-12-10-8-6-4-20246810121416

-14-12-10-8-6-4-202468

10121416

Q1:

08Q

2:08

Q3:

08Q

4:08

Q1:

09Q

2:09

Q3:

09Q

4:09

Q1:

10Q

2:10

Q3:

10Q

4:10

Q1:

11Q

2:11

Q3:

11Q

4:11

Q1:

12Q

2:12

Q3:

12Q

4:12

Q1:

13Q

2:13

Q3:

13Q

4:13

Q1:

14Q

2:14

Quarterly Net Profit (bn ALL)

Profit tax & Other Total ProvisionsOperating expenses Net non-interest incomeNet interest income Net income after tax

050100150200250300350400450500

02468

10121416182022242628

Q1:

08Q

2:08

Q3:

08Q

4:08

Q1:

09Q

2:09

Q3:

09Q

4:09

Q1:

10Q

2:10

Q3:

10Q

4:10

Q1:

11Q

2:11

Q3:

11Q

4:11

Q1:

12Q

2:12

Q3:

12Q

4:12

Q1:

13Q

2:13

Q3:

13Q

4:13

Q1:

14Q

2:14

Cost of Risk & NPL RatioLoss Loans Rate (%, left scale)Doubtful Loans Rate (%, left scale)Substandard Loans Rate (%, left scale)Overall NPL Ratio (%, left scale)Quarterly Cost of Risk (bps, annualised, 4-q m.a., right scale)

14

15

16

17

18

19

-3

0

3

6

9

12

15

18

21

Q1:

08Q

2:08

Q3:

08Q

4:08

Q1:

09Q

2:09

Q3:

09Q

4:09

Q1:

10Q

2:10

Q3:

10Q

4:10

Q1:

11Q

2:11

Q3:

11Q

4:11

Q1:

12Q

2:12

Q3:

12Q

4:12

Q1:

13Q

2:13

Q3:

13Q

4:13

Q1:

14Q

2:14

Return on Average Equity & Capital Adequacy Ratio

Quarterly ROAE (%, annualised, 4-q m.a., left scale)CAD (%, right scale)

5 Sep. 3-M F 6-M F 12-M F 1-m TRIBOR (mid, %) 2.8 3.0 3.1 3.2 ALL/EUR 139.5 141.0 140.2 140.8 Sov. Spread (bps) 282 270 260 240

5 Sep. 1-W % YTD % 2-Y %

Stock Market - - - - - - - - - - - -


The profitability of the banking sector improved on a y-o-y basis to ALL 0.9bn (EUR 6.6mn or 0.1% of GDP) in Q2:14. The banking sector’s net profit (after tax) increased by ALL 0.7bn to ALL 0.9bn (EUR 6.6mn or 0.1% of GDP) in Q2:14, following record gains of ALL 4.5bn (EUR 56mn) in Q4:13 and ALL 7.8bn (EUR 56mn) in Q4:13, reflecting mainly once-off factors (a large reversal of provisions). The strong performance in Q2:14 was driven by higher pre-provision earnings and, to a lesser extent, by lower provisioning (in contrast to the previous 2 quarters). As a result, cumulative ROAE and ROAA (annualised) stood at 10.4% and 0.9%, respectively, in H1:14 -- well above their corresponding levels of 2.9% and 0.3% in H1:13 and 6.4% and 0.5% in FY:13. Recall that according to market sources, the sharp decline in provisions in Q1:14 (by 78% y-o-y to ALL 1bn or EUR 6.9mn) was the result of a significant reversal of provisions in one major bank, reflecting inter alia the settlement of two large loans (restructuring and sale of collateral), minus ALL 2.7bn (EUR 19.7mn) or 41.3% of the banking sector’s pre-tax profit in Q1:14. Moreover, in Q4:13 there had also been a significant reversal (write-back) of provisions (minus ALL 2.8bn or EUR 19.9mn) resulting from NPL sales by two banks (one sold around EUR 25mn in a single transaction) and, to a lesser extent, large loan restructuring encouraged by the Central Bank. Pre-provision earnings strengthened in Q2:14, mainly due to improved net interest income (NII). Pre-provision earnings strengthened for the second consecutive quarter since Q1:12, increasing by 17.4% y-o-y to ALL 6.2bn or EUR 44mn in Q2:14 compared with a small rise of 2.7% y-o-y in Q1:14 and a decline 0.6% in FY:13. This positive performance was driven by higher net interest income (NII, up 11% y-o-y), reflecting improved net interest margin (up 28 bps y-o-y in Q1:14 to 383 (annualised) against an increase of 20 bps in Q1:14 and a decline of 14 bps y-o-y in FY:13) and larger average interest earning assets (up 3% y-o-y in Q2:14 from 2.7% y-o-y in Q1:14 and 2.1% y-o-y in FY:13). Note that BoA figures show that the 12-month local currency deposit interest rate and the average local currency lending interest rate (for all maturities) moderated by 2.9 pps y-o-y and 1.9 pps y-o-y, respectively, to 2.1% and 8.9% in H1:14. Importantly, in line with large accumulated profits and significant capital injections in the past 4 quarters, the banking sector’s capital adequacy ratio rose by 52 bps y-o-y, to 17.5%, far above the minimum regulatory level of 12%. The cost of risk moderated at a slower pace in Q2:14, contributing modestly to profitability. The cost of risk eased by 11 bps y-o-y to 338 bps in Q2:14 compared with impressive declines of 236 bps y-o-y in Q1:14 and 521 bps y-o-y in Q4:13, reflecting a non-recurrent large reversal of provisions. Importantly, the NPL ratio (the share of substandard, doubtful and loss loans in total loans) declined for the first time in 7 years in Q2:14 (by 33 bps y-o-y from a high of 24.4% in Q2:13). Banking sector profitability is set to strengthen significantly this year, primarily reflecting stronger NII and improved bank asset quality. On the one hand, we see the NPL ratio declining to c. 20% at end-2014 from 23.2% at end-2013, in line with: i) the Government’s clearance of the bulk of its unpaid bills to businesses and VAT refunds, which started in April; ii) continued loan restructuring; and iii) reviving economic activity. On the other hand, profitability should also be underpinned by stronger NII, reflecting stronger NIM and a pick-up in credit activity, on the back of the expected improvement in bank asset quality. Overall, ROAE should reach a 7-year high of around 12% in 2014, up from 6.4% in 2013 and 3.8% in 2012.



Ukraine

-10

-8

-6

-4

-2

0

2

4

6

-10

-8

-6

-4

-2

0

2

4

6

Q2

04Q

4 04

Q2

05Q

4 05

Q2

06Q

4 06

Q2

07Q

4 07

Q2

08Q

4 08

Q2

09Q

4 09

Q2

10Q

4 10

Q2

11Q

4 11

Q2:

12Q

4:12

Q2:

13Q

4:13

Q2:

14

Real GDP(q-o-q % change, s.a.)

RomaniaUkraine

Euro Area

-20-16-12-8-40481216

-20-16-12-8-4048

1216

Q2:

02Q

4:02

Q2:

03Q

4:03

Q2:

04Q

4:04

Q2:

05Q

4:05

Q2:

06Q

4:06

Q2:

07Q

4:07

Q2:

08Q

4:08

Q2:

09Q

4:09

Q2:

10Q

4:10

Q2:

11Q

4:11

Q2:

12Q

4:12

Q2:

13Q

4:13

Q2:

14


RussiaEuro Area

Ukraine

-20

-15

-10

-5

0

5

10

-20

-15

-10

-5

0

5

10

Q1

08Q

2 08

Q3

08Q

4 08

Q1

09Q

2 09

Q3

09Q

4 09

Q1

10Q

2 10

Q3

10Q

4 10

Q1

11Q

2 11

Q3

11Q

4 11

Q1

12Q

2 12

Q3

12Q

4 12

Q1

13Q

2 13

Q3

13Q

4 13

Q1

14Q

2 14

Contribution to Real GDP Growth

services construction industry agriculture

GDP (y-o-y, % change)

pps pps

GDP excluding agriculture (y-o-y, % change)

NBGForecast

5 Sep. 3-M F 6-M F 12-M F 1-m KIUAH (%) 11.1 9.8 9.6 9.0 UAH/USD 12.7 12.0 12.0 12.0 Sov. Spread (2021, bps) 759 700 600 500

5 Sep. 1-W % YTD % 2-Y %

PFTS 443 -1.0 47.3 20.0

2011 2012 2013 2014F 2015F

Real GDP Growth (%) 5.2 0.3 0.0 -6.5 2.8 Inflation (eop, %) 4.6 -0.2 0.5 16.5 8.0 Cur. Acct. Bal. (% GDP) -6.3 -8.2 -9.2 -5.5 -6.4 Fiscal Bal.* (% GDP) -4.3 -6.6 -6.7 -8.9 -5.8

*Consolidated budget, including Naftogaz

The September 5th peace deal between Kiev and pro-Russian separatists could be the start to the end of the 5 month deadlock in eastern Ukraine. The fragile truce -- threatened by periodic violations -- is part of a 12-point peace plan that also foresees: i) the withdrawal of illegal armed groups and military equipment from the territory of Ukraine; ii) a buffer zone along the borders with Russia; and iii) the release of prisoners. It also contains political concessions on a decentralisation of powers via provision of a special status to the Donetsk and Luhansk regions, and an amnesty as well as an economic rehabilitation programme. The decline in economic activity accelerated to 4.7% y-o-y in Q2:14. According to our estimates, the quarterly seasonally-adjusted (s.a.) real GDP declined in Q2:14, for a 2nd successive quarter, by a sharp 3.2% q-o-q, broadly unchanged from a decline of 3.6% in Q1:14, due to the significant geopolitical tensions. On an annual basis, the pace of real GDP contraction accelerated, to -4.7% y-o-y in Q2:14, according to the flash estimate, from -1.1% in Q1:14. The conflict in the country’s eastern regions hurt all sectors of the economy in Q2:14. Though the composition of Q2:14 GDP is not due until end-September, we estimate that the marked weakening in economic activity in Q2:14 was attributed to an across-the-board deterioration, reflecting the intensification of fighting against pro-Russian separatists in the country’s heavily industrialised eastern regions (Donetsk and Luhansk, together accounting for 16% of GDP). In fact, damages in infrastructure and the displacement of residents have resulted in a large drop in production in these regions, including disruptions in coal production needed for electricity production and the steel industry. Indeed, the decline in industrial production in Donetsk and Luhansk (accounting for ¼ of industrial production and exports) accelerated to 10.8% y-o-y in Q2:14, following a plunge of 10.2% y-o-y in Q1:14, against a significantly milder decline of 2.3% in Q2:14 and 3.5% in the rest of Ukraine in Q1:14. Moreover, agricultural production in Donetsk and Luhansk (c. 10% of the country’s agricultural output) fell deep into negative territory, contracting by 23.5% y-o-y in Q2:14 against a rise of 0.4% in Q1:14, double the fall in agricultural output in the rest of Ukraine (down 12.9% y-o-y in Q2:14 against a rise of 6.3% in Q1:14). As a result, we estimate that growth in Ukraine’s primary sector turned negative in Q2:14, reflecting not only the disruption in activity in eastern Ukraine, but also a bumper harvest in 2013. Moreover, the industrial, construction and services sectors are estimated to have slipped deeper into negative territory, reflecting: i) the direct impact of the weaker performance in the east; ii) deteriorating relations with Russia -- Ukraine’s main (single) trading partner, accounting for 25% of exports; and iii) the further weakening of consumer and business confidence. Activity to deteriorate further in H2:14, leading to a contraction of 6.5% in FY:14. Activity is set to slip deeper into negative territory in H2:14, due, inter alia, to: i) larger disruptions of economic activity in eastern regions and massive outflow of the population (note that the decline in industrial production in the two easternmost regions accelerated to a sharp -35% y-o-y in July against -10.5% in H1:14), while damages in infrastructure are not expected to be restored by end-year; ii) the introduction of (non-military) expenditure cuts and the imposition of a series of taxes in H2:14 (including a 1.5% tax on all incomes); and iii) the negative impact from heightened inflationary pressures (reaching 15% y-o-y in H2:14 from 5.7% in H1:14) and a higher UAH depreciation in H2:14 (UAH depreciated by 29.8% against the USD in H1:14, and by a further 7.7% since end-June).



Cyprus

-10-8-6-4-202468

-10-8-6-4-202468

Q2:

04Q

4:04

Q2:

05Q

4:05

Q2:

06Q

4:06

Q2:

07Q

4:07

Q2:

08Q

4:08

Q2:

09Q

4:09

Q2:

10Q

4:10

Q2:

11Q

4:11

Q2:

12Q

4:12

Q2:

13Q

4:13

Q2:

14

Real GDP(q-o-q % change, saar)

CyprusEuro Area

United Kingdom

-6

-4

-2

0

2

4

6

-6

-4

-2

0

2

4

6

Q2:

04Q

4:04

Q2:

05Q

4:05

Q2:

06Q

4:06

Q2:

07Q

4:07

Q2:

08Q

4:08

Q2:

09Q

4:09

Q2:

10Q

4:10

Q2:

11Q

4:11

Q2:

12Q

4:12

Q2:

13Q

4:13

Q2:

14


CyprusEuro area

United Kingdom

-16-12-8-40481216

-16-12

-8-4048

1216

Q2:

08Q

3:08

Q4:

08Q

1:09

Q2:

09Q

3:09

Q4:

09Q

1:10

Q2:

10Q

3:10

Q4:

10Q

1:11

Q2:

11Q

3:11

Q4:

11Q

1:12

Q2:

12Q

3:12

Q4:

12Q

1:13

Q2:

13Q

3:13

Q4:

13Q

1:14

Q2:

14

Change in Stocks GFCFGovernment Consumption Private ConsumptionNet Exports GDP (y-o-y %)

Contribution Rates to Real GDP Growth (pps)Demand side

5 Sep. 3-M F 6-M F 12-M F 1-m EURIBOR (%) 0.02 0.07 0.07 0.07 EUR/USD 1.30 1.30 1.28 1.25 Sov. Spread (2020, bps) 438 395 360 300

5 Sep. 1-W % YTD % 2-Y %

CSE Index 116 -2.3 11.8 25.7

2011 2012 2013 2014F 2015F

Real GDP Growth (%) 0.5 -2.4 -5.4 -2.8 0.3 Inflation (eop, %) 3.9 1.1 -2.3 0.0 0.8 Cur. Acct. Bal. (% GDP) -3.4 -6.9 -1.9 0.8 1.2 Fiscal Bal. (% GDP) -6.0 -5.0 -5.1 -4.6 -4.0

The next tranche of the Troika’s financial assistance could be withheld, as the post-vote amendments of the foreclosure bill are not compatible with the requirements of the adjustment programme. Both the EU and the IMF have stated that “parts of the legislation voted through last Saturday, together with the foreclosures bill, are not compatible with the requirements of the Memorandum of understanding (MoU)”. Indeed, after the passing of the foreclosures law – a prior action for the approval of the fifth review – Cypriot lawmakers approved several amendments to this law through six bills, limiting its scope. These include: i) the linking of the implementation of the foreclosures law to an insolvency framework, which is not expected to come into effect before end-year; ii) the right of borrowers to report a bank to the Central Bank governor if they believe the lender violates the code on loan restructuring; and iii) granting the Central Bank the authority to step in and stop mass foreclosures. As a result, the disbursement of the sixth tranche of the financial aid, worth EUR 485mn (EUR 5.1bn received so far out of a total of EUR 10bn) at the end of this month, is at risk. We believe that Parliament will bring the foreclosures legislation back into line with the requirements of the MoU, in view of the dire need for continued financial support from the Troika and the implied negative impact on the results of the mid-October EU-wide banking sector stress tests. The pace of recession slowed to a lower-than-expected -2.2% in Q2:14. Albeit remaining in negative territory for a 12th consecutive quarter, on a sequential seasonally-adjusted basis, real GDP posted the mildest quarterly contraction since Q2:12, declining by 0.3% q-o-q in Q2:14 compared with decreases of 0.6% in Q1:14 and 0.7% in Q4:13. As a result, the annual pace of economic contraction moderated to -2.2% y-o-y in Q2:14, from an upwardly revised -3.8% y-o-y in Q1:14 and -5.1% in Q4:13. This performance brought real GDP growth to -3% y-o-y in H1:14, compared with the Troika’s revised forecast of -4.2% (from -4.8%) for FY:14. The better-than-expected economic activity reflects the performance of domestic demand. Private consumption stabilised in Q2:14 (-0.1% y-o-y against -2.7% in Q1:14 and -5% in Q4:13). At the same time, the contraction in private investment moderated further in Q2:14 (-9.4% y-o-y versus -12.4% in Q1:14 and -22.6% y-o-y in Q4:13). Unsurprisingly, the negative contribution of net exports to growth widened (-1.5 pps of GDP in Q2:14 compared with -0.6 pps in Q1:14), as the recovery in exports, reflecting strong tourism activity, was more than offset by a higher increase in imports, in line with domestic demandNote that despite the escalation of the Ukrainian crisis, tourist arrivals from Russia (the second largest source country) were the main driver of the improved tourist performance in Q2:14 (contributing more than half of the rise in tourist arrivals). The recession is likely to ease to a lower-than-projected -2.8% in 2014 from -5.4% in 2013. For H2:14, we expect the recession to ease slightly with respect to H1:14. Specifically, the contraction in domestic demand should accelerate, driven by heightened household concerns about the prospects of their mortgaged properties and the need to repay their bank loans, in view of the implementation of the new foreclosure law. On the other hand, the contribution of net exports should turn positive in view of stronger exports, reflecting a further strengthening in tourism activity and weaker imports, in line with domestic demand. We foresee H2:14 real GDP contraction moderating slightly to -2.6% y-o-y from -3% in H1:14. This should bring the FY:14 contraction to -2.8% -- 1.4 pps milder than the Troika’s forecast of -4.2% and 2.6 pps weaker than the 2013 outcome of -5.1%.



Egypt

2

3

4

5

6

7

8

9

-4,2-3,5-2,8-2,1-1,4-0,70,00,71,42,12,83,54,2

12/0

804

/09

08/0

912

/09

04/1

008

/10

12/1

004

/11

08/1

112

/11

04/1

208

/12

12/1

204

/13

08/1

312

/13

04/1

408

/14

FX Reserves & Months of Imports of GNFS

FX Reserves (monthly change,USD bn, lhs)Months of imports of GNFS (rhs) Critical level

2

3

4

5

6

7

8

9

10

15

20

25

30

35

40

12/0

804

/09

08/0

912

/09

04/1

008

/10

12/1

004

/11

08/1

112

/11

04/1

208

/12

12/1

204

/13

08/1

312

/13

04/1

408

/14

FX Reserves FX Reserves (USD bn, left scale)Months of import of GNFS (right scale)

5,45,65,86,06,26,46,66,87,07,2

10

14

18

22

26

30

34

38

12/0

804

/09

08/0

912

/09

04/1

008

/10

12/1

004

/11

08/1

112

/11

04/1

208

/12

12/1

204

/13

08/1

312

/13

04/1

408

/14

FX Reserves & Foreign Exchange Rate FX Reserves (USD bn, lhs)EGP : USD 1 (rhs)

5 Sep. 3-M F 6-M F 12-M F 1-m CAIBOR (%) 9.3 10.2 11.2 11.2 EGP/USD 7.15 7.15 7.30 7.50 Sov. Spread (2020. bps) 218 225 238 250

5 Sep. 1-W % YTD % 2-Y %

HERMES 100 940 1.7 39.2 67.7

10/11 11/12 12/13 13/14F 14/15F Real GDP Growth (%) 1.8 2.2 2.1 2.1 2.8 Inflation (eop. %) 11.8 7.3 9.8 8.2 13.8 Cur. Acct. Bal. (% GDP) -2.6 -4.0 -2.1 -1.4 -2.0 Fiscal Bal. (% GDP) -9.8 -10.8 -13.7 -11.3 -11.8

FX reserves rose to 16.8bn in August from USD 16.7bn in July. FX reserves increased by USD 0.1bn m-o-m in August to USD 16.8bn after having remained broadly flat in July. These developments likely reflect lower imports, on the back of foreign currency shortages, and increasing exposure of foreign investors in the domestic debt market. As a result, the import coverage of FX reserves remained unchanged, for a third successive month, at 3.5 months of imports – well above the all-time low of 2.7 months in March 2013. Note that, since the beginning of the political turmoil in January 2011, FX reserves have declined by USD 19.2bn from a high of USD 36bn (7.8 months of imports), despite the large external assistance of c. USD 27bn from oil-rich Arab countries (Kuwait, Qatar, Saudi Arabia, the UAE and Libya) and Turkey. Indeed, without such assistance, FX reserves would have been depleted long ago. FX reserves to end the fiscal year (2014/15) at a comfortable USD 16-17bn, on the back of renewed assistance from oil-rich Arab countries. Going forward, we expect FX reserves to experience strong downward pressures in Q2:14/15, especially when Egypt will return USD 3bn of maturing debt to Qatar (USD 0.5bn in October and USD 2.5bn in November), and in Q3:14/15, when an instalment of USD 0.7bn will be paid to the Paris Club (in January 2015). Recall that Qatar had been a strong supporter of former Islamist President Mursi -- granting Egypt a total of USD 7.5bn – until his removal from power in July 2013. Since then, Egypt has returned USD 3bn of deposits at the CBE to Qatar (USD 2bn in September 2013 after the breakdown of talks to convert the funds into 3-year bonds, USD 0.5bn in November 2013 and a further USD 0.5bn in December 2013 after the Gulf country refused to renew the deposits upon maturity). The downside pressure on FX reserves until the end of the fiscal year (June 2015) should, however, be dampened by renewed bilateral assistance from Saudi Arabia, Kuwait and the UAE, which regard Egypt as a stong ally in the region-wide struggle against political Islam. Recall that following Mursi’s removal from power, these countries granted the Interim Government two assistance packages (July 2013 and January 2014), totalling USD 18bn (6.1% of GDP) -- USD 8bn in the form of interest-free deposits in the CBE, USD 8bn worth of energy products, and USD 2bn in cash grants. This assistance had not only covered the 2013/14 external financing gap (around 16bn), but also led to the first annual increase in FX reserves in 3 years (up USD 2bn). According to our baseline scenario, FX reserves should stand at a comfortable USD 16-17bn (or 3.6 months of imports above the critical 3 months-threshold) at end-2014/15 – broadly unchanged from their end-2013/14 level, on the back of the coverage of this year’s external gap (USD 12bn against USD 16bn in 2013/14) by renewed assistance from oil-rich Arab countries. Encouragingly, so far: i) The King of Saudi Arabia has requested countries to attend a donor conference for Egypt, following the election of el-Sissi in May, expected to take place in Q2:14/15 (October-December 2014); and ii) the UAE has pledged that an unspecified part of petroleum products to be exported to Egypt over a 1-year period starting this month (worth USD 8.7bn) will be in the form of grants. The continued support from oil-rich Arab countries should help the central bank stabilize the currency close to current levels at least until the parliamentary elections. Note that the EGP has remained around 7.15 against the USD since end-May presidential elections.

Strategy and Economic Research Division 86 Eolou Street 102 32 Athens, Greece

Publications

available at https://www.nbg.gr/en/the-group/press-office/e-spot/reports

South Eastern Europe & Mediterranean Emerging Market Economies - Weekly Report

South Eastern Europe & Mediterranean Emerging Market Economies - Quarterly Chartbook

South Eastern Europe & Mediterranean Emerging Market Economies - Macroeconomic & Financial Indicators Update

Greece: Greek Macro View

Sectoral Studies - Sectoral Reports

Sectoral Studies - Survey of Greek Small and Medium Enterprises

Global Economy & Markets - Weekly Roundup

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South Eastern Europe Emerging Market Economies Weekly Report · Emerging Market Economies . Weekly Report . ... Persisting disinvestment and weaker private consumption were ... down