fixed income and foreign exchange 0.50 0.00 -0.50 -1.00 -1.50 … · 2016-12-05 · erste group...

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 5 December 2016

CEE Insights

Fixed Income and Foreign Exchange

Looking ahead this week…

Monday Tuesday Wednesday Thursday Friday

RO, HU, SK: Retail Sales CZ: Wages

RO, SK, HU: Detailed 3Q16 GDP

PL: No rate change HR: Detailed 3Q16 GDP CZ: Industry, Trade Bal.

RS: No rate change HR: PPI, Trade Bal. HU: Inflation

SK, SI: Trade Bal, Industry CZ: Inflation RO: Wages

Click for: this week’s detailed releases/events, market forecasts, macro forecasts

Like last week, the week ahead is packed with macro releases. We will see several important short -term indicators that could tell us how good a fourth quarter could follow the somewhat disappointing 3Q16. Last week’s

PMI data and sentiment indicators, although showing some slowdown, can still be regarded as quite healthy. Retail sales could continue to show a robust increase amid continued increases in wages and improvements in the labor market. The Polish and Serbian central banks are not expected to surprise the markets with any change

in their base rates, especially given that international sentiment has recently deteriorated and the outcome of Italian referendum is bond negative.

In case you missed it last week…

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-2.00

-1.50

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0.00

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1.00

CE

E

HR

CZ

HU

PL

RO

CE

E

HR

CZ

HU

PL

RO

SK SI

accrued interest FX gain/loss capital gain/loss TOTAL RETURN

LCY bonds* Eurobonds**

-100-80-60-40-20020406080100

0

10

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30

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60

J-1

5

M-1

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y/y change (%,rhs) Oil prices (in EUR per barrel)

Source: Bloomberg

S&P upgraded the rating outlook of Poland from negative to stable

PMIs, other sentiment indicators show expansion of

economies, albeit with slight easing in most countries

Slovenian and Serbian 3Q16 GDP outstripped expectations

Croatian 3Q16 GDP came in lower than expected

For other events last week, please check respective

countries: HR, CZ, HU, PL, RO, TR, SI, SK, SR

Chart of the Week: Upward effects on inflation stemming from the oil price should reverse in 2Q17. Even after the OPEC meeting, it remains

questionable whether we will see a continuous increase in the oil price.

On Radar

Inflation had already started going up in recent months and we expect it to continue to increase. This is not surprising if one considers how much the oil price had pulled down inflation thus far – but the direction is changing.

Until end-1Q17, the oil price is likely to exert increasingly strong upward pressure on inflation, especially considering the result of the OPEC sitting last week, which ended with an agreement to cut production. However, the oil price (unless there is a longer-run upward trend starting) is not very likely to cause a similar effect later next

year. As for other factors, increasing wage pressures and hefty household demand are also exerting upward pressure on prices. This also means that growth of inflation will be more gradual in some countries, and will not peak until around end-1Q17. Imported prices should continue to remain mostly disinflationary. We see inflation

Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe

5 December 2016


averaging 1.3% next year for CEE, vs. -0.4% this year. (For further details, see the next page.)

Base effects coming from the oil price are the main cause of bumper inflation in 1Q17; inflation may only grow more muted thereafter next year

The main upward move in 2017 inflation is seen early next

year ‘Do you expect y/y inflation to grow after March, stay flat or roll back?’

Croatia: After pronounced deflationary tone in majority of the year, negative pressures started to gradually ease up towards the end of 3Q16, though we see average CPI in 2016 still remaining in red. However, 2017 should mark

the turning point as inflation is expected to pick up towards green area after three negative years. Besides the stronger domestic demand profile and low base effect, we see less supportive supply-side factors also playing in favor

of gradual CPI recovery, resulting in average inflation slightly below 1% in 2017.

Czech Republic: We expect headline inflation to gradually approach the

inflation target in 1H17. However, the main upward move in inflation will take place at the end of this year and in 1Q17, due to increased prices of oil and food. From 2Q onward, there will be two factors behind the positive

development in prices. First, negative contributions associated with decreases in food and gas prices (from 1H16) will fade from y/y inflation. Second, we expect domestic demand and wage growth to continue to affect

price developments. However, imported prices will remain anti-inflationary.

Hungary: Our CPI forecast for 2017 is relatively benign, as our point estimate for the average annual headline CPI inflation is 1.9%. Inflation rate should peak in March around 2.4% y/y as the effect of fuel prices run out of

the base. After that, we do not expect further acceleration in the headline figure throughout 2H17, as the targeted VAT cuts on several items, such as poultry meat, catering services and internet services, should temporarily

help to cover up any additional upward inflationary pressure. Further gains in oil prices pose upward risks to our forecast, especially if we take into account the facts that more than 8% is the weight of fuel within the

consumer basket, and further weakening of the forint against both the euro and the dollar is likely.

Poland: After two and half years, deflation ended in Poland. So far,

however, we tend to think the inflationary pressure should remain subdued as we see average inflation at 0.9% next year. Over next couple of months we expect sharp increase of headline inflation toward 1% y/y. After reaching

a pick at the end of 1Q17, at this point, we expect inflation rate to stay mostly flat around 1% through the reminder of the year. However, if the commodity prices pick up more strongly due to OPEC deal to curb

production, there are risks to the upside to our current forecast. Such development would enhance the MPC members to talk about rate hikes, especially if economic growth picks up in 2H17. We would not see tightening

coming before 2018 though.

Romania: The fiscal policy of the new government formed after December elections is surrounded by uncertainties, and so is the outlook for the inflation rate in 2017 in Romania. According to our current scenario, inflation

will rise to 1.7% y/y in December 2017 from -0.6% y/y in December 2016. The primary reason for this increase in inflation is government’s fiscal policy, namely a base effect once the cut in the VAT rate from January 2016 (-4pp

to 20%) is dropped from the calculation formula. However, the inflationary effect will be dampened by a fresh cut in the VAT rate in January 2017 (-1pp to 19%) and the removal of an additional excise on car fuels according to



the new Fiscal Code. So far, we have not changed our inflation forecast due to recent developments in oil market, but if oil price remains close to current

levels in 2017, it could add 0.1-0.2pp to inflation rate.

Serbia: Despite the fact that markets see fading effects of oil prices increse after 1Q17 we expect that inflation in Serbia will keep gradual upward trend

in the upcoming period. As the main factors we see stronger domestic demand, accelerating lending activity, expected rise in food prices on global commodity prices and increase in public sector wages and pensions. All that

said, we see inflation moving towards the mid of the new NBS 3%+/-1.5bp target interval.The biggest risk to our forecast lay in the agricultural seasoin as primary food prices on the local market have strong effect on CPI

trajectory in Serbia (as we could see in Sep16 when the figure fell sharply to 0.6% y/y amid a strong crop season).

Slovakia: In light of the recent OPEC deal, if honoured by its members, oil

price may inch somewhat higher (50-55 USD/bbl). Furthermore, given base effects, inflation should gradually increase next year, despite lukewarm inflationary pressures in some parts of the index, such as food prices. Yet,

the recent announcement of the Slovak utilities regulator poses a downward risk for our 2017 forecast. From January, power prices should be lower by 4.3%, gas prices by 2.6% and heat prices should fall by 6%. The planned

price cut mostly reflects lower transport and distribution fees resulting from a summer audit of the distributors‘ assets. The changes are likely to result in lower inflation profile in 2017 than initially expected (0.2% in 2017 rather

than 0.7%). Slovenia: Following two years in negative, CPI took a different turn in 2H16, with inflation developments following modest, but positive trend. While

average 2016 CPI is seen remaining around zero, 2017 should bring more vivid recovery, with base effect, stabilized food and oil prices, alongside stronger domestic demand related pressures, ensuring steady inflation pick -

up towards modest positive levels.



Looking ahead Date Time Ctry Release Period Erste Survey Prior Pre Comment

5-Dec 8:00 RO PPI y/y Oct -1.5%

5-Dec 8:00 RO Retail Sales y/y Oct 9.6% 11.1%Retail sales slowing due to base effect on food segment (VAT rate

cut to 9% in June 2015, boosting sales in subsequent months).

5-Dec 9:00 CZ Wages y/y 3Q 3.5% 3.7% 3.7%Favorable economic developments and low unemployment behind

real wage growth.

5-Dec 9:00 HU Retail Sales y/y Oct 4.4% 5.1%Strong net real wage growth should help sustain retail sales

growth.

9:00 SK Retail Sales y/y Oct 1.6% 1.5%Retail sales growth unlikely to pick up substantially, despite good

labor market development.

6-Dec 8:00 RO GDP y/y 3Q P 4.4% 4.4%Household consumption probably main contributor to Romania’s

real GDP in 3Q16.

6-Dec 8:00 RO GDP q/q 3Q P 0.6% 0.6%

9:00 SK GDP y/y 3Q F 3.0% 3.0% 3.0%Flash GDP growth should be confirmed, driven by domestic and

foreign demand.

6-Dec 9:00 CZ Retail Sales y/y Oct 4.6% 3.5% 4.7424640%High growth primarily driven by strong labor market and positive

household sentiment.

6-Dec 9:00 HU Ind. Prod. y/y Oct 1.4% -3.7%Some moderate expansion of industrial output expected after

substantial drop in September.

9:00 HU GDP y/y 3QF 2.0%

7-Dec PL Target Rate Dec 7 1.5% 1.5% 1.5%Policy rate to remain flat. Although growth disappointed in 3Q16,

inflation rate has been rising.

7-Dec RS PPI y/y Nov 1.6%

7-Dec 9:00 CZ Trade Balance Oct 19.8 mTrade surplus driven by surplus in machinery and decreased by

deficit in mineral fuels.

7-Dec 9:00 CZ Ind. Prod. y/y Oct 1.2% 0.5% 2.7%Industrial output positively affected by domestic and foreign

demand.

7-Dec 11:00 HR GDP y/y 3Q F 2.9%

8-Dec 9:00 HU CPI m/m Nov 0.3% 0.6%

8-Dec 9:00 HU CPI y/y Nov 1.3% 1.0%Inflation may continue to accelerate thanks to fading base effect of

fuel prices.

9:00 CZ Unemployment rate Nov 5.0% 5.0%

8-Dec 11:00 HR PPI y/y Nov -2.3%

8-Dec 11:00 HR Trade Balance Sep -3973.713 m -4795.4 mPreliminary results for September pointing to mild negative

performance on both imports and exports side.

8-Dec 12:00 RS Target Rate Dec 8 4% 4.0% Stabilizing inflation and expected FED hike suggest NBS on hold.

9-Dec 8:00 RO Wages y/y Oct 14.5% 14.2%Important pay hikes in public sector in recent months along with

higher wages in some segments of private labor market.

9:00 SK Ind. Prod. y/y Oct 4.2% 3.9% Industrial production growth should continue at good pace.

9:00 SK Trade Balance Oct 371 m 456.6mForeign trade dynamics should pick up, both on exports as well as

imports side.

9-Dec 9:00 CZ CPI m/m Nov 0.2% 0.2% 0.3% Growth caused by rising food prices.

9-Dec 9:00 CZ CPI y/y Nov 1.3% 1.3% 0.8%Increase in inflation in y/y terms driven by diminishing effect of low

oil and food prices.

9-Dec 10:30 SI Trade Balance Oct 125 m 0.173b Trade balance maintaining positive trends

9-Dec 10:30 SI Ind. Prod. y/y Oct 7% 7.4% Industrial production seen as maintaining strong pace in October

Sources: Bloomberg, Reuters



Major markets If resignation of Italy’s PM Renzi leads to new elections, they could be

held next year in spring or summer, this would of course increase the political risk for Italy. The toughest opponent in this election would be the 5-star movement, which seeks a referendum on Italy’s membership

in the Euro Area. We consider Italy exiting the Euro Area a tail risk. The main reasons are that, legally, this would only be possible if a country exits the EU, which, for the time being, no political party in Italy

supports. On top of that, substantial economic disruption could be expected, because a looming exit from the Euro Area would probably trigger capital controls and banks would be under pressure

Gains in non-farm payrolls were reported at 178,000, marginally below market expectations. This constitutes a considerable improvement compared to the previous month’s revised increase of 142,000. Wages

disappointed. Average hourly earnings fell by 0.1% m/m, whereas the market had expected an increase of 0.2% m/m. However, the strong decline in unemployment from 4.9% to 4.6% in our view more than

compensated for the shortfall in wages.

Croatia

The week behind us was packed with macro releases, with the 3Q GDP release attracting the most interest – headline figure growth accelerated to 2.9% y/y, which makes it the strongest rate since 2Q08, while the

detailed structure shows that both domestic and external demand positively contributed to GDP growth (for more info, see Short Note). The outlook remains comfortable, where we keep our FY16 forecast

unchanged at 2.7%.

October’s short-term data painted a positive picture, with industrial production increasing by 1.8% y/y, i.e. posting a similar growth rate as in September. The first release for retail trade also aligned with the

positive footprint, as the figure brought further strong growth of 5.3% y/y, where stabilization of the labor market and improving consumer sentiment continue to positively reflect on the consumption pattern.

The markets showed steady performance, where the exchange rate edged towards the upper part of the 7.50-7.55 band, while yields on the bond market stayed practically flat w/w.

Czech Republic Overall business conditions in the Czech manufacturing sector

continued to improve in November, albeit at a slower pace than in October, according to the latest Czech PMI data release. The indicator

fell to 52.2 in November, compared to 53.3 in October, but remained well above the 50 threshold.

The central government budget reached a CZK 56bn surplus in November. In November 2015, there was a deficit of CZK 30bn. The

favorable development in 2016 was driven by higher tax income, due to the current cyclical position of the Czech economy and lower capital expenditures.

Rainer Singer [email protected]

Gerald Walek

[email protected]

Alen Kovac [email protected]

Ivana Rogic [email protected]

Jiří Polanský [email protected]

David Navrátil [email protected]

mailto:[email protected]




According to the refined estimate, GDP growth arrived at 0.2% q/q and

1.9% y/y in 3Q16. Although the current figure is slightly lower than previously expected (before the flash estimate release), the cyclical position is still solid, in our view.

Hungary The unemployment rate dropped to 4.7% in the period between August-

October. Labor force participation rate edged up to a new high of 61.6%. There was no significant change in the number of workers in the

public work program, at 220,000 in the observed period.

Investments volume plummeted by 9.3% y/y in 3Q16 due to the lack of EU funds. Private sector investment activity seems lackluster.

The cut in the reserve requirement ratio from 2% to 1% came into effect on December 1. This means that roughly an additional amount of HUF 170bn worth of liquidity may flood the domestic money market in

December.

Poland

Flash CPI arrived at 0.0% y/y (0.1% m/m) in November, finishing a two

and half year period of deflation. We expect the inflation rate to increase sharply towards 1% at the beginning of next year due to base effects.

The 3Q16 GDP structure confirmed that investment continued to

contract (-7.7% y/y), while private consumption sustained robust growth (3.9% y/y). Although the PMI rebounded in November to 51.9, economic growth is expected to slow further towards 2% in 4Q16, bringing FY16

growth down towards 2.5%.

The 10Y yield surged to 3.80% and the zloty weakened to 4.49, driven mostly by global sentiment; however, local factors such as the worsening growth outlook also support high EURPLN levels.

S&P upgraded the rating outlook of Poland from negative to stable, while still leaving the rating at BBB+. Although S&P noticed the weaker economic growth, it underlined that the fiscal position has not

deteriorated. Moreover, the agency's stable outlook (in a two-year horizon) balances the risks stemming from expansionary fiscal policy, the statement reads.

Romania

The consolidated state budget had a cumulative deficit of 0.2% of GDP after the first ten months (cash standards). The results are better than

expected due to an increase in corporate income tax and savings on goods, services and some categories of investments. The budget deficit is expected to increase significantly in November and December. The

full-year budget deficit could be below our forecast of 2.9% of GDP in 2016. Next year’s budget deficit is estimated at 3% of GDP, in line with modest fiscal consolidation efforts.

Confidence in the Romanian economy measured by the Economic Sentiment Indicator improved in November to 105 points (October: 104). Developments in industry and construction were seen as slightly better

by managers, while consumers were significantly more upbeat in

Gergely Ürmössy [email protected]

Orsolya Nyeste

[email protected]

Katarzyna Rzentarzewska

[email protected]

Eugen Sinca eugen.sinca @bcr.ro



November in anticipation of pay hikes in the public sector and bonuses in some areas of the private labor market. In spite of the increase in

Economic Sentiment Indicator, we foresee slower economic growth in the following quarters as the fiscal stimulus wears off.

Serbia

The final 3Q16 GDP figure came in slightly above the flash estimate, with

the figure landing at 2.6% y/y. The detailed structure shows that investments and net exports played the most supportive role, while consumption was somewhat more modest than expected (0.5% y/y vs.

1% y/y in 2Q). Short-term indicators for October came in slightly below expectations, with industrial production landing at 3.2% y/y, retail at 5.2% y/y and the trade balance deficit widening to EUR -345mn. However,

these figures fit well with our expectation of a more modest (seasonal) growth figure in 4Q16

The Serbian government adopted the 2017 budget bill. The projected deficit is RSD 52bn smaller that the deficit planned for this year, and is

aimed at 1.7% of GDP, despite the fact that project loans and highway construction management company Koridori Srbije’s expenditures are for the first time being included in the budget and that the government plans

a 1.5% increase in pensions. Our forecast is slightly more conservative, standing at 2.1% of GDP.

After somewhat more pronounced volatility on the LCY bond market last

week, we could see stabilization of the benchmark RSD 2022 yield below 5.70%. On the FX market, we could see the return of appreciation pressures, which pulled the EUR/RSD down to the 123.1 mark.

Slovakia

The utilities regulator announced a planned cut to the maximum energy prices for households. From January 2017, power prices should be lower

by 4.3%, gas prices by 2.6% and heat prices should decrease by 6%. The planned changes are likely to result in a lower inflation profile in 2017 than initially expected.

The parliament approved the state budget for 2017-19. The fiscal deficit is projected to decrease to 1.3% of GDP next year (vs. our forecast of 1.5% of GDP), before reaching a small surplus in 2019. However, the

2019 projection seems rather optimistic, given that surplus projections or balanced budget expectations have been moved a number of times before.

Economic sentiment worsened somewhat in November, as the monthly composite index decreased by 1.7 points to 101.6. This can be attributed to a fall in all parts of the composite index, apart from construction (+3

points). Industrial sector confidence fell only marginally, whereas service sector confidence fell by 4 points in November. Due to a very good September, the three-month moving average stands 0.4 points higher, at

103.3.

Producer prices decreased by 2.8% y/y in October, in line with our expectations. Compared to the previous month, producer prices rose by 0.3% m/m.


Milan Deskar-Skrbic

[email protected]

Katarina Muchova [email protected]





Slovenia

3Q16 GDP once again delivered strong output, as the headline figure increased by 2.7% y/y, i.e. remained at a similar growth level as in 2Q16.

The detailed structure revealed that the supportive role of private consumption continued, while investment delivered further negative performance. A positive surprise also came from the exports side, as its

resilient growth outweighed the imports increase, thus resulting in a 1.1pp net exports contribution to GDP growth in 3Q.

November CPI closely matched our view, with inflation increasing by 0.6% y/y. On the monthly level, we saw a 0.1% uptick, still driven by the

seasonal push from higher clothing prices. On the other hand, preliminary results for October retail trade outstripped expectations, as growth surged to 8.7% y/y, being mostly affected by higher turnover in specialized stores

for motor fuels.

We saw no major developments on the bonds market, with the 2026 EUR tenor still remaining around the 1% mark throughout the week.


Ivana Rogic

[email protected]



Capital market forecasts

Government bond yields

current 2017Q1 2017Q2 2017Q3 2017Q4

Croatia 10Y 3.04 3.00 2.90 2.80 2.80

spread (bps) 269 275 260 244 255

Czech Rep. 10Y 0.52 0.67 0.47 0.48 0.49

spread (bps) 16 42 17 12 24

Hungary 10Y 3.48 3.21 3.08 3.05 3.05

spread (bps) 312 296 278 269 280

Poland 10Y 3.77 3.40 3.25 3.20 3.25

spread (bps) 341 315 295 284 300

Romania10Y 3.48 3.25 3.30 3.35 3.40

spread (bps) 312 300 300 299 315

Slovakia 10Y 1.04 0.70 0.75 0.80 0.85

spread (bps) 68 45 45 44 60

Slovenia 10Y 1.00 0.70 0.80 0.90 1.00

spread (bps) 65 45 50 54 75

Serbia 7Y 5.68 5.50 5.50 5.50 5.50

DE10Y (BBG)* 0.36 0.25 0.30 0.36 0.25

3M Money Market Rate

current 2017Q1 2017Q2 2017Q3 2017Q4

Croatia 0.87 0.75 0.70 0.70 0.70

3M forw ards - - - -

Czech Republic 0.29 0.28 0.28 0.27 0.27

3M forw ards 0.29 0.28 0.28 0.28

Hungary 0.54 0.63 0.50 0.50 0.50

3M forw ards 0.53 0.56 0.61 0.66

Poland 1.73 1.70 1.73 1.73 1.75

3M forw ards 1.79 1.81 1.87 1.95

Romania 0.80 0.65 0.70 0.75 0.80

3M forw ards 0.94 0.99 1.41 2.19

Serbia 3.45 3.50 3.50 3.50 3.50

3M forw ards - - - -

Eurozone -0.31 -0.25 -0.25 -0.25 -0.25

FX

current 2017Q1 2017Q2 2017Q3 2017Q4

EURHRK 7.55 7.60 7.50 7.50 7.60

forw ards 7.58 7.60 7.61 7.64

EURCZK 27.06 27.02 27.02 27.02 26.43

forw ards 26.96 26.89 26.81 26.75

EURHUF 314.3 315.0 315.0 315.0 315.0

forw ards 315.2 315.7 316.3 317.1

EURPLN 4.49 4.43 4.40 4.41 4.39

forw ards 4.52 4.55 4.57 4.59

EURRON 4.51 4.50 4.51 4.51 4.51

forw ards 4.53 4.55 4.56 4.58

EURRSD 123.2 123.5 123.5 124.0 124.0

forw ards - - - -

EURUSD 1.07 1.06 1.08 1.10 FALSCH

Key Interest Rate

current 2017Q1 2017Q2 2017Q3 2017Q4

Croatia 0.50 0.30 0.30 0.30 0.30

Czech Republic 0.05 0.05 0.05 0.05 0.05

Hungary 0.90 0.90 0.90 0.90 0.90

Poland 1.50 1.50 1.50 1.50 1.50

Romania 1.75 1.75 1.75 1.75 1.75

Serbia 4.00 4.00 4.00 4.00 3.75

Eurozone 0.00 0.00 0.00 0.00 0.00

Macro forecasts

Real GDP growth (%) 2015 2016f 2017f 2018f

Croatia 1.6 2.7 2.5 2.5

Czech Republic 4.6 2.6 2.6 3.0

Hungary 2.9 2.1 2.8 2.6

Poland 3.6 3.1 3.3 3.4

Romania 3.8 4.5 3.2 3.3

Serbia 0.8 2.6 2.9 3.2

Slovakia 3.8 3.3 3.1 3.5

Slovenia 2.3 2.1 2.3 2.6

CEE8 average 3.5 3.1 3.0 3.2

Average inflation (%) 2015 2016f 2017f 2018f

Croatia -0.5 -1.0 0.7 1.2


Hungary -0.1 0.4 1.9 2.7

Poland -0.9 -0.6 0.9 1.4

Romania -0.6 -1.6 1.2 2.0

Serbia 1.7 1.1 2.4 3.1

Slovakia -0.3 -0.6 0.7 2.0

Slovenia -0.5 -0.1 1.3 1.9

CEE8 average -0.4 -0.4 1.3 1.8

Unemployment (%) 2015 2016f 2017f 2018f

Croatia 16.3 15.3 14.1 13.4


Hungary 6.8 5.3 4.8 4.5

Poland 10.6 9.3 8.7 8.5

Romania 6.8 6.7 6.8 6.7

Serbia 17.7 16.6 16.0 15.6

Slovakia 11.5 10.0 9.3 8.4

Slovenia 9.0 8.0 7.5 6.9

CEE8 average 9.3 8.2 7.7 7.5

Public debt (% of GDP)2015 2016f 2017f 2018f

Croatia 86.7 86.0 84.6 83.3

Czech Republic 40.3 37.2 36.0 36.4

Hungary 75.3 75.1 74.3 72.8

Poland 51.5 51.9 52.4 52.1

Romania 38.4 40.4 41.8 42.3

Serbia 75.9 74.5 73.8 72.3

Slovakia 52.5 52.3 52.1 51.4

Slovenia 83.4 80.6 80.0 78.6

CEE8 average 53.8 53.4 53.3 53.0

C/A (%GDP) 2015 2016f 2017f 2018f

Croatia 5.1 2.9 2.0 1.0


Hungary 4.4 5.8 4.9 4.2

Poland -0.2 -0.3 -0.7 -0.9

Romania -1.1 -2.2 -2.5 -2.7

Serbia -4.8 -4.6 -4.8 -5.0

Slovakia -1.3 0.6 1.2 2.3

Slovenia 5.2 6.5 6.0 5.4

CEE8 average 0.5 0.7 0.3 0.1

Budget Balance (%GDP)2015 2016f 2017f 2018f

Croatia -3.2 -1.7 -2.2 -2.0

Czech Republic -0.4 0.5 0.2 -0.2

Hungary -2.0 -2.2 -2.7 -2.5

Poland -2.5 -2.7 -3.0 -2.8

Romania -0.7 -2.9 -3.0 -3.0

Serbia -3.8 -2.3 -2.1 -1.8

Slovakia -2.7 -2.2 -1.5 -1.2

Slovenia -2.9 -2.5 -2.2 -1.8

CEE8 average -2.0 -2.1 -2.2 -2.2 Note:*Information on past performance is not a reliable indicator for future performance. Forecasts are not a reliable indicator for future performance.



Appendix

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2

Fe

b-1

3

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

Aug

-16

Nov-1

6

BUBOR03M Hungary 10Y

0

1

2

3

4

5

6

7

Nov-1

1

Fe

b-1

2

Ma

y-12

Aug

-12

Nov-1

2

Fe

b-1

3

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

Aug

-16

Nov-1

6

WIBO3M Poland 10Y

0

1

2

3

4

5

6

7

Aug

-12

Nov-1

2

Fe

b-1

3

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

Aug

-16

Nov-1

6

BUBR3M Romania 5Y

0

2

4

6

8

10

12

14

Oct-

12

Dec-1

2

Fe

b-1

3

Apr-

13

Jun-1

3

Aug

-13

Oct-

13

Dec-1

3

Fe

b-1

4

Apr-

14

Jun-1

4

Aug

-14

Oct-

14

Dec-1

4

Fe

b-1

5

Apr-

15

Jun-1

5

Aug

-15

Oct-

15

Dec-1

5

Fe

b-1

6

Apr-

16

Jun-1

6

Aug

-16

Oct-

16

BELI3M Serbia 10Y

-1

0

1

2

3

4

5

6

7

8

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

Nov-14

Feb-15

May-15

Aug-15

Nov-15

Feb-16

May-16

Aug-16

Nov-16

EUR003M Slovakia 10Y Slovenia 10Y

Note:*Inf ormation on past perf ormance is not a reliable indicator f or f uture perf ormance. Forecasts are not a reliable indicator f or f uture perf ormance.



Contacts Group Research Head of Group Research

Friedrich Mostböck, CEFA +43 (0)5 0100 11902 Major Markets & Credit Research Head: Gudrun Egger, CEFA +43 (0)5 0100 11909 Ralf Burchert, CEFA (Agency Analyst) +43 (0)5 0100 16314 Hans Engel (Senior Analyst Global Equities) +43 (0)5 0100 19835 Christian Enger, CFA (Covered Bonds) +43 (0)5 0100 84052 Margarita Grushanina (Economist AT, CHF) +43 (0)5 0100 11957 Peter Kaufmann, CFA (Corporate Bonds) +43 (0)5 0100 11183 Stephan Lingnau (Global Equities) +43 (0)5 0100 16574 Carmen Riefler-Kowarsch (Covered Bonds) +43 (0)5 0100 19632 Rainer Singer (Senior Economist Euro, US) +43 (0)5 0100 17331 Bernadett Povazsai-Römhild (Corporate Bonds) +43 (0)5 0100 17203 Elena Statelov, CIIA (Corporate Bonds) +43 (0)5 0100 19641 Gerald Walek, CFA (Economist Euro) +43 (0)5 0100 16360 Katharina Böhm-Klamt (Quantitative Analyst Euro) +43 (0)5 0100 19632 Macro/Fixed Income Research CEE Head CEE: Juraj Kotian (Macro/FI) +43 (0)5 0100 17357 Zoltan Arokszallasi, CFA (Fixed income) +43 (0)5 0100 18781 Katarzyna Rzentarzewska (Fixed income) +43 (0)5 0100 17356 CEE Equity Research Head: Henning Eßkuchen +43 (0)5 0100 19634 Daniel Lion, CIIA (Technology, Ind. Goods&Services) +43 (0)5 0100 17420 Christoph Schultes, MBA, CIIA (Real Estate) +43 (0)5 0100 11523 Vera Sutedja, CFA, MBA (Telecom) +43 (0)5 0100 11905 Thomas Unger, CFA (Banks, Insurance) +43 (0)5 0100 17344 Vladimira Urbankova, MBA (Pharma) +43 (0)5 0100 17343 Martina Valenta, MBA (Real Estate) +43 (0)5 0100 11913 Editor Research CEE Brett Aarons +420 956 711 014 Research Croatia/Serbia Head: Mladen Dodig (Equity) +381 11 22 09178 Head: Alen Kovac (Fixed income) +385 72 37 1383 Anto Augustinovic (Equity) +385 72 37 2833 Milan Deskar-Skrbic (Fixed income) +385 72 37 1349 Magdalena Dolenec (Equity) +385 72 37 1407 Ivana Rogic (Fixed income) +385 72 37 2419 Davor Spoljar, CFA (Equity) +385 72 37 2825 Research Czech Republic

Head: David Navratil (Fixed income) +420 956 765 439 Head: Petr Bartek (Equity) +420 956 765 227 Jiri Polansky (Fixed income) +420 956 765 192 Pavel Smolik (Equity) +420 956 765 434 Jan Sumbera (Equity) +420 956 765 218 Roman Sedmera (Fixed income) +420 956 765 391 Jana Urbankova (Fixed income) +420 956 765 456 Research Hungary Head: József Miró (Equity) +361 235 5131 Gergely Ürmössy (Fixed income) +361 373 2830 András Nagy (Equity) +361 235 5132 Orsolya Nyeste (Fixed income) +361 268 4428 Tamás Pletser, CFA (Oil&Gas) +361 235 5135 Research Poland Head: Magdalena Komaracka, CFA (Equity) +48 22 330 6256 Marek Czachor (Equity) +48 22 330 6254 Tomasz Duda (Equity) +48 22 330 6253 Mateusz Krupa (Equity) +48 22 330 6251 Karol Brodziński (Equity) +48 22 330 6252 Research Romania Head: Mihai Caruntu (Equity) +40 3735 10427 Head: Dumitru Dulgheru (Fixed income) +40 3735 10433 Chief Analyst: Eugen Sinca (Fixed income) +40 3735 10435 Dorina Ilasco (Fixed Income) +40 3735 10436 Research Slovakia Head: Maria Valachyova, (Fixed income) +421 2 4862 4185 Katarina Muchova (Fixed income) +421 2 4862 4762 Research Turkey Umut Ozturk (Equity) +90 212 371 25 30 Oguzhan Evranos (Equity) +90 212 371 25 42

Treasury - Erste Bank Vienna

Group Markets Retail Sales Head: Christian Reiss +43 (0)5 0100 84012 Markets Retail a. Sparkassen Sales AT Head: Markus Kaller +43 (0)5 0100 84239 Equity a. Fund Retail Sales Head: Kurt Gerhold +43 (0)5 0100 84232 Fixed Income a. Certificate Sales Head: Uwe Kolar +43 (0)5 0100 83214 Markets Corporate Sales AT Head: Christian Skopek +43 (0)5 0100 84146

Fixed Income Institutional Sales

Group Markets Financial Institutions Head: Manfred Neuwirth +43 (0)5 0100 84250 Bank and Institutional Sales Head: Jürgen Niemeier +49 (0)30 8105800 5503 Institutional Sales Western Europe AT, GER, FRA, BENELUX Head: Thomas Almen +43 (0)5 0100 84323 Charles-Henry de Fontenilles +43 (0)5 0100 84115 Marc Pichler +43 (0)5 0100 84118 Rene Klasen +49 (0)30 8105800 5521 Dirk Seefeld +49 (0)30 8105800 5523 Bernd Bollhof +49 (0)30 8105800 5525 Bank and Savingsbanks Sales Head: Marc Friebertshäuser +49 (0)711 810400 5540

Sven Kienzle +49 (0)711 810400 5541 Michael Schmotz +43 (0)5 0100 85542 Ulrich Inhofner +43 (0)5 0100 85544 Martina Fux +43 (0)5 0100 84113 Michael Konczer +43 (0)5 0100 84121 Klaus Vosseler +49 (0)711 810400 5560 Andreas Goll +49 (0)711 810400 5561 Mathias Gindele +49 (0)711 810400 5562 Institutional Sales CEE and International Head: Jaromir Malak +43 (0)5 0100 84254 Central Bank and International Sales

Head: Margit Hraschek +43 (0)5 0100 84117 Christian Kössler +43 (0)5 0100 84116 Bernd Thaler +43 (0)5 0100 84119 Institutional Sales PL and CIS Pawel Kielek +48 22 538 6223 Michal Jarmakowicz (Fixed Income) +43 50100 85611 Institutional Sales Slovakia Head: Peter Kniz +421 2 4862 5624 Monika Smelikova +421 2 4862 5629 Institutional Sales Czech Republic Head: Ondrej Cech +420 2 2499 5577 Milan Bartos +420 2 2499 5562 Barbara Suvadova +420 2 2499 5590 Institutional Asset Management Sales Czech Republic Head: Petr Holecek +420 956 765 453 Martin Perina +420 956 765 106 Petr Valenta +420 956 765 140 David Petracek +420 956 765 809 Institutional Sales Croatia Head: Antun Buric +385 (0)7237 2439 Željko Pavičić +385 (0)7237 1494 Ivan Jelavic +385 (0)7237 1638 Institutional Sales Hungary Attila Hollo +36 1 237 8209 Borbala Csizmadia +36 1 237 8205 Institutional Sales Romania Head: Ciprian Mitu +43 (0)50100 85612 Stefan Racovita +40 373 516 531 Business Support Tamara Fodera +43 (0)50100 12614 Bettina Mahoric +43 (0)50100 86441



Disclaimer This publication was prepared by Erste Group Bank AG or any of its consolidated subsidiaries (together with consolidated subsidiaries "Erste Group") independently and objectively as other information pursuant to the Circular of the Austrian Finan cial Market Authority regarding information including marketing communication pursuant to the Austrian Securities Supervision Act. This publication serves interested investors as additional source of information and provides general information, informatio n about product features or macroeconomic information without emphasizing product selling marketing statements. This publication does not constitute marketing communication pursuant to Art. 36 (2) Austrian Securities Supervision Act as no direct buying incentives were included in this publication, which is of information character. This publication does not constitute investment research pursuant to § 36 (1) Austrian Securities Supervision Act. It has not been prepared in accordance with legal requirem ents designed to promote the independence of investment research and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. The information only serves as non-binding and additional information and is based on the level of knowledge of the person in charge of drawing up the information on the respective date of its preparation. The content of the publication can be changed at any time without notice. This publication does not constitute or form part of, and should n ot be construed as, an offer, recommendation or invitation to subscribe for or purchase any securities, and neither this publication nor anything contained herein shall form the basis of or be relied on in connection with or act as an inducement to enter into an y contract or inclusion of a security or financial product in a trading strategy. Information provided in this publication are based on publicly available sources which Erste Group considers as reliable, however, without verifying any such information by independent third persons. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable, Erste Group (including its representatives and employees) neither expressly nor tacitly makes any guarantee as to or assumes any liability for the up-to-dateness, completeness and correctness of the content of this publication. Erste Group may provide hyperlinks to websites of entities mentioned in t his document, however the inclusion of a link does not imply that Erste Group endorses, recommends or approves any material on the linked page or accessible from it. Neither a company of Erste Group nor any of its respective managing directors, supervi sory board members, executive board members, directors, officers of other employees shall be in any way liable for any costs, losses or damages (including subsequent damages, indirect damages and loss of profit) howsoever arising from the use of or reliance on this publication. Any opinion, estimate or projection expressed in this publication reflects the current judgment of the author(s) on the date of publication of this document and do not necessarily reflect the opinions of Erste Group. They are subject to chan ge without prior notice. Erste Group has no obligation to update, modify or amend this publication or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, change s or subsequently becomes inaccurate. The past performance of securities or financial instruments is not indicative for future results. No assurance can be given that any financial instrument or issuer described herein would yield favorable investment results o r that particular price levels may be reached. Forecasts in this publication are based on assumptions which are supported by objective data. However, the used forecasts are not indicative for future performance of securities or financial instrument. Erste Group, its affiliates, principals or employees may have a long or short position or may transact in the financial instrument(s) referred to herein or may trade in such financial instruments with other customers on a principal basis. Erste Group may act as a market maker in the financial instruments or companies discussed herein and may also perform or seek to perform investment services for those companies. Erste Group may act upon or use the information or conclusion contained in this publication before it is distributed to other persons. This publication is subject to the copyright of Erste Group and may not be copied, distributed or partially or in total provided or transmitted to unauthorized recipients. By accepting this publication, a recipient hereof a grees to be bound by the foregoing limitations. © Erste Group Bank AG 2016. All rights reserved. Published by: Erste Group Bank AG Group Research 1100 Vienna, Austria, Am Belvedere 1 Head Office: Wien Commercial Register No: FN 33209m Commercial Court of Vienna Erste Group Homepage: www.erstegroup.com

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