Erste Group: Fi & Fx Cee Insights

CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Czech Republic: We expect 50bp cut next week Hungary: HUF 1,000bn reshuffle in tax system revealed Poland: Central bank cut rates by 75bp Romania: Talks between Romania and EC on financial package Ukraine: Risks to public finance have increased

Overview http://global.treasury.erstebank.com

Market outlook Many CEE governments have had to take a deeper look at their budgets in recent days and analyze the consequences of weaker economic growth on the revenue and expenditure sides of their budgets. Hungary's PM came up with a tax overhaul proposal that would reduce the tax burden on the corporate sector (including contributions) and increase some indirect taxes, as well as introduce a wealth tax. The Romanian government approved the budget for 2009 with a deficit at 2% of GDP, which seems to be reasonably restrictive (especially in the area of wages in the public sector and pension increases), but which still has to be discussed with social partners before submission to Parliament for final approval. It seems that Romania has also received implicit backing from the EU/IMF on the financing side, as long as the fiscal deficit is kept under control. Sticking to a fiscal consolidation plan opens the door to further monetary easing in Hungary and Romania in the following months. After this week's 75bp rate cut in Poland, the Czech national bank is also set to cut interest rates. We expect a 50bp rate cut to 1.75% on Wednesday. Hungarian industrial production for December, which is due on Friday, should have fallen by about 15% y/y. Market sentiment was once more against CEE currencies this week. The Hungarian forint lost 2% just today, approaching the level of 299 HUF/EUR, while the Polish zloty came back to above 4.45 PLN/EUR today. Juraj Kotian, [email protected], Erste Group

Thursday's close

Czech Republic

Croatia

Hungary

Poland

Romania Slovakia

Ukraine

Instrument

Current

w/w

m/m

ytd

EUR/CZK 3Y (yield/bp) 10Y (yield/bp) 5Y CDS EUR/HRK 2Y (yield/bp) 9Y (yield/bp) 5Y CDS EUR/HUF 3Y (yield/bp) 10Y (yield/bp) 5Y CDS EUR/PLN 3Y (yield/bp) 10Y (yield/bp) 5Y CDS EUR/RON 5Y CDS 3Y (yield/bp) 11Y (yield/bp) 5Y CDS

27.69 2.91 4.43 224 7.394 8.01 7.25 414 291.4 9.95 9.09 415 4.398 4.99 5.78 265 4.249 650 3.45 4.77 170

0.8% 9 32 -10 0.8% 32 19 -10 -2.2% 56 78 -6 -0.5% 10 11 -27 2.2% -25 26 11 -31

-3.2% 0 27 39 -0.3% -54 28 -26 -8.9% 39 87 -34 -5.7% -24 87 -14 -5.2% -50 -49 1 0

-3.0% -57 27 39 -0.6% -56 27 -26 -8.9% 40 94 -34 -5.7% -24 42 -14 -5.2% -50 -46 4 0

EUR/UAH

10.18

-0.5%

7.1%

7.2%

2Y (yield/bp)

40.0

800

1500

1500

5Y CDS

3314

-151

234

234

Spreads vs. Euroland current

- 1m

02/01/2009

85 117

148 121

166 121

644 411

681 410

683 407

789 583

771 527

773 519

294 253

338 247

341 240

139 147

209 181

203 171

3845

2275

2325

Source: Reuters, Bloomberg (+ means strengthening / - means easing of the exchange rate)

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 2

Trading Ideas

Closed positions # 1 2 5 3 4 6 7 8 9 10 11 14 13 15 12 16 17 20 19 18 21 22 23 24 25

Recommendation long: PLGB10y / 4m Euribor short: CZGB15y / 6m PRIBID long: SKK/CZK short EUR/SKK EUR/PLN options SKK/CZK long FRA 9*12 short long HUGB 5y short CZGB/ long GDBR long CZK/EUR short CZGB/ long PLGB long SKKFRA 9x12, short EURFRA 9 short EUR/CZK short EUR/RON short EUR/SKK long USD/CZK long 3y HUGB / 3m Pribor short EUR/SKK long USD/CZK short EURRON Short USD/RON Buy EURFRA, sell SKKFRA Long EUR/CZK short EUR/RON short EUR/PLN

opened 16/09/2005 16/09/2005 09/11/2005 29/09/2005 21/10/2005 23/03/2006 28/07/2006 13/10/2006 09/01/2007 27/02/2007 07/03/2007 16/07/2007 07/06/2007 23/10/2007 04/06/2007 29/11/2007 05/12/2007 22/01/2008 21/01/2008 31/12/2008 02/04/2008 04/04/2008 29/04/2008 05/08/2008 09/09/2008

closed 27/10/2005 21/11/2005 20/01/2006 07/02/2006 28/07/2006 30/10/2006 08/11/2006 29/01/2006 27/02/2007 19/03/2007 10/05/2007 13/08/2007 14/09/2007 21/11/2007 04/12/2007 14/01/2008 08/02/2008 13/02/2008 18/02/2008 28/02/2008 10/04/2008 18/04/2008 19/06/2008 14/10/2008 21/10/2008

P/L inc.carry -3.0% 6.0% 1.9% 3.5% -2.7% 2.2% 8bp 5.7% 1.8% 2.3% 5.5% 30 bp 3.0% -4.9% 1.6% -3.1% -6.8% 2.9% -3.6% -0.6% 3.9% 26bp -3.8% -4.7% -3% (stop-loss)

To be included in the trading ideas mailing list, please, mail to [email protected], subject: trading ideas

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 3

Question of the Week Question of the week Where do you see the cap for the fiscal deficit in your country, in light of the rising negative cyclical component of the deficit and proposed (if any) stimulus packages? Do you expect any difficulties in financing it on local (international) markets? Based on revised growth forecasts, we now expect Slovakia's fiscal deficit at close to 3% of GDP, even if no new major spending initiatives are carried out (the government intends to find funds by reshuffling expenditure). However, the government should have no problem raising extra funds, as in late 2008, people brought money from under their pillows to banks ahead of euro adoption. This year, demand at government auctions has been heavy, as banks sought to invest these new deposits. Michal Musak, Slovenska sporitelna Although the 2009 budget draft is very ambitious in terms of cutting public spending, postponing some wage hikes and suspending bonuses in the public sector, we see the cap for the budget deficit at around 5% (2% is the government's target). The main issue in 2009 is related to the budget revenues, which could come under strong pressures amid weakening economic activity, while increasing them by 1920% in an extremely difficult year will be a daunting task, which we now see as highly unlikely. The Romanian government has thus far only announced a stimulus package (e.g. 7% of GDP for CAPEX - mainly infrastructure, export promotion, car industry supporting measures, stimulating job creation, tax exemptions for reinvested profit as of 2010, etc.), but it remains to be seen if it this is to be included in the final 2009 budget (after it is approved by Parliament). The central bank's support in financing the budget deficit in 2009 is very important, while Eurobonds should be seen as a second option and only for smaller amounts. At the same time, securing additional funding from an international financial institution to fund the budget deficit could have positive effects on the FX rate, as well as on credibility, and improve investor sentiment towards the Romanian market. Lucian Anghel, Banka Commerciala Romania As the decline of GDP in 2009 is likely to be below the planned -1% y/y in Hungary, revenues worth around 1% of GDP could be missing from the budget. This suggests that the cap for the fiscal deficit this year is 3.5-3.6% of GDP. The case of Hungary is special, however. In exchange for IMF help and to restore market confidence, decreasing the financing needs of the state and, consequently, the financial vulnerability of the country, is a credibility question. Thus, we do not think that the government will compensate for these losses; however, the explicit impact of the currently planned measures on the deficit is very uncertain. All in all, capital markets would not tolerate a higher budget deficit than 3% of GDP, nor would the IMF. Our base forecast, however, is that the 2.6% of GDP deficit goal will remain untouched, as - by increasing its credibility - it should make it easier for the country to shift from the current non-market-type financing (IMF loan) to market-type financing, as soon as possible. Due to the IMF standby loan, we should not see financing difficulties in the short run, but as this situation is artificial, there is still no way for Hungary to significantly increase its financing needs. Orsolya Nyeste, Erste Bank Hungary There is no strict limit in the Czech Republic on the size of the deficit. The talk is still that the Maastricht criterion of 3% of GDP should be respected, but we think it will not be held sacred and, should the activity drop well below zero, it might easily

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 4

Question of the Week be exceeded (especially if fiscal stimulus is implemented). Assuming zero growth of 2009 GDP, 3% would be roughly CZK 110bn, out of which CZK 80-90bn would be a deficit, as it stands now (no fiscal stimulus included). Add the fiscal stimulus of, say, CZK 50bn, and the Maastricht criterion would easily be exceeded. As for the financing, the local bond market in the Czech Republic has fixed itself a bit since the fall (evidenced for example in narrower bid-ask spreads) and demand is improving. As for the foreign market (which is crucial for the upcoming Eurobond issue), markets are open, but come at a price. For example, Poland priced the recent 5Y euro-denominated issue at mid-swaps + 300 bps. Martin Lobotka, Ceska sporitelna The fiscal deficit for 2009 in Ukraine is projected at 3% of GDP, but we think that this is unrealistic, given the recent low figures for budget income in January. Currently, the government is unable to attract funds on the local market, although it was able to refinance some of the guaranteed state debt using external financing. We think that the budget will be reviewed soon, in order to reduce the widening gap between expenditures and revenues. Maryan Zablotskyy, Erste Bank Ukraine We expect that the Croatian fiscal deficit will not meet the targeted goal of 0.9% of GDP, given the overly optimistic planning assumptions. Hence, given the negative cyclical component, we expect the fiscal deficit in the 2.5-3% region. A forecast revision would depend on a budget rebalance, which would bring some changes on both the revenues and expenditures sides and which would hopefully show a willingness to sustain the deficit and ease possible pressure on the refinancing side. Recent weeks have brought some speculation that a stimulus package could be introduced to support the real economy. However, no details have been presented to the public. Thus, the potential size of the package is rather hard to estimate. Currently, the MoF is oriented to the domestic market and has thus far been successful in meeting financing needs. However, in the mid run, capacity limitations are likely to play a role. Therefore, the MoF announced that it would try to arrange a bond issue on international markets, which - if successful - would alleviate the pressure from the domestic market. Alen Kovac, Erste Bank Croatia

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 5

Major Markets Major markets Eurozone: ECB may pause on further rate cutting next week

Today, the CPI estimate for January fell well short of expectations, thus leaving more room for further interest rate cuts in the Eurozone. The growth of producer price indices in December should have declined, removing the upward pressure from consumer prices. On Wednesday, December retail sales are expected to have declined, due to the worsening of economic conditions. Although disinflation should support private consumption, the uncertainty over the impact from the recession on the labor markets is hindering the propensity to buy. On Thursday, we expect the ECB to keep interest rates stable at 2.0%, as they have already accounted for the speedy disinflation until June. It is more likely that the March meeting will bring further rate cuts to reduce the core rate to 1.5%, as more economic data and sentiment indicators become available and potentially indicate a further weakening of inflation pressure.

US: Weak ISM data and labor market report ahead

In contrast, the Fed is following a more aggressive policy. After interest rates cuts to zero and different purchasing programs to stimulate the economy and credit markets, they indicated this week that they are prepared to buy long-term Treasury securities if such transactions would be effective in improving conditions in private credit markets. It seems that officials are close to executing such a plan, which could bear inflation risks in the mid term. In the week ahead, two important releases are due. On Monday, the ISM is expected to have bottomed out in January, while on Friday the week will close with the labor market report. Gudrun Egger, [email protected], Erste Group Rainer Singer, [email protected], Erste Group

Forecasts Intervention Rate

3m Money Market Rate

EUL

USA

EUL

Fwd

USA

Spot

2.00

0 - 0,25

2.09

Mar-09

1.50

0 - 0,25

2.30

2.28

1.00

Jun-09

1.50

0 - 0,25

2.20

2.30

0.80

Sep-09

1.50

0 - 0,25

2.10

2.28

Dec-09

1.50

0 - 0,25

2.00

2.00

10y Govt. Yield Fwd

FX

EUL

USA

EUR/USD

3.30

2.83

1.285

1.87

3.20

2.50

1.40

1.285

2.17

3.40

2.80

1.45

1.284

0.80

2.30

3.70

3.30

1.50

1.284

0.90

1.84

4.00

3.80

1.50

1.284

1.18

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Fwd

Page 6

CEE Markets Czech Republic Eurobond timing and amount not revealed

During this past week, the Ministry of Finance confirmed that there will be a Eurobond emission this year (as part of the Euro Medium TermNote program), but declined to elaborate on the size or timing. From the currency point of view, now would be a good time to do it (and thus take advantage of the weak exchange rate). However, in light of the market conditions, it does not seem an opportune moment at present. Even though the markets are open, this comes at a price. Poland issued 5Y 1bn Eurobonds last week at mid-swaps +3pp. The Czech price could be something similar.

We expect 50bp cut next week

As for next week, the Czech National Bank is to hold its first rate setting meeting of 2009. Regarding the rates, we expect a 50bp cut (weakening economy vs. weakening CZK) and a comment indicating that the weakness of the currency is a much stronger anti-inflationary risk than seen previously (last week, CNB board member Tomsik confirmed that the weakness of the CZK limits drastic cuts, which is essentially our view). The CNB will also publish (for the first time) the EURCZK trajectory implicit in its forecast. This is a positive step towards complete transparency, as one will then be able to compare the actual levels of CZK with those assumed in the prognosis and thus say whether they constitute an antiinflationary or pro-inflationary risk. A bigger cut could send the koruna lower, while dovish comments could push the currency in the other direction. Martin Lobotka, [email protected]

Hungary HUF 1,000bn reshuffle in tax system revealed

At the extraordinary meeting of Parliament held on Thursday, Prime Minister Gyurcsany announced some proposals for reshuffling about HUF 1,000bn in the tax system to boost economic growth. Possible changes should refer to the personal income tax system and employers' social contributions. The 4% extra taxation on companies and private individuals (solidarity tax), which was introduced as an element of the 2006-07 fiscal adjustment package, should be abandoned. In order to compensate for the revenue losses, the PM proposed a "modest" rise in the VAT, elimination of some tax allowances and introduction of wealth taxes. As for the expenditure side of the budget, apart from making the system of family allowance need-based, no other explicit measures have been mentioned. Gyurcsany also said that a reduction of expenditures amounting to around 1% of GDP per year could be possible. The announcements did not really come as a surprise, as the government's intentions to carry out such changes in the tax system, which would increase excise and wealth taxes and mitigates taxes on labor, have been known for some weeks now. Nevertheless, this could be the first step in the right direction, as the current tax system does not really help solve one of the most important problems in Hungary, which basically is independent of the current economic crisis - the very low rate of labor participation and high number of economically inactive people. (The employment ratio is around just 57%, well below the EU average of around 65%). The PM has not mentioned so far how the above changes would affect the 2.6% of GDP deficit target for 2009. Rumors have it that the government would like to keep it untouched, which could be seen as positive (no extra financing needs in the current difficult market environment). The second important thing is whether these reshuffles solve the problem of the earlier mentioned revenue losses of HUF 200-250bn stemming from the bigger drop in the economy (presently, the government predicts a 2.5-3% y/y decline in GDP growth). And last but not least, the timing of the measures is an uncertain factor as well, especially taking into consideration that, except for VAT, changes in the tax and contributions system

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 7

CEE Markets during the year could cause technical difficulties. More details on the changes are expected to be announced on February 16. Forint weakened further

The forint exchange rate consolidated somewhat this week, but started to weaken massively on Thursday and reached another record low, due to increased risk aversion. Intensifying global recession fears and the stronger USD and JPY hurt emerging currencies, and the forint was no exception. The planned tax changes have not had significant impacts on the markets so far. Trading is expected to remain driven by the gloomy sentiment, which does not suggest any recovery in the short run. As for the macro statistics, industrial output figures will be due next Friday. The expected double-digit drop in the y/y performance will not help to improve the overall sentiment on the markets. Orsolya.Nyeste, [email protected]

Poland Central bank cut rates by 75bp

The central bank introduced another interest rate cut. We expected a cut of 50bp, given the still weakening zloty and the toll it might take on the Polish plan to enter ERM II in the first half of 2009. However, the decision of the MPC to cut by 75bp, thus pushing the key rate to 4.25%, demonstrates that the central bankers are currently more concerned about the overall economic slowdown than about the euro plan. Therefore, we expect even more cuts to come; as the council has decided it is more important to stimulate the economy at this point, it makes sense to do it quickly. The zloty reacted to the rate cut by depreciating. This week, it has been stuck near 4.40 per euro. We do not see any reasons for significant appreciation anytime soon. Like other currencies in the region, the zloty is under pressure, resulting mainly from increased risk aversion.

GDP growth slowed rapidly in 4Q08

New data on GDP growth was released. The growth slowed down rapidly in the fourth quarter of 2008, to 2.8%, compared to 4.8% in the third quarter. The annual growth slowed to 4.8% in 2008, compared to 6.7% in 2007. Total domestic demand growth dropped from 8.6% to 4.8%. Gross capital formation rose by just 7.9%m which is less than half of the 17.6% seen in 2007. One good piece of news came regarding individual consumption growth, which reached a nine-year high of 5.4%. In 2009, the positive effect of increasing real wages and cuts in taxes on private consumption will, however, likely be offset by the consequences of the overall economic outlook, rising unemployment and hindered access to loans.

Poland one of few countries that could avoid recession this year

Despite all of the bad news confirming the ever-deepening economic slowdown, Poland (being a relatively closed economy) remains one of the few countries with the potential to avoid a recession in 2009. The EBRD released new estimates for growth rates in the region this week. For Poland, the expected growth is 1.5%, which is the second highest in the region of Central Europe and the Baltic states. PM Tusk said this week that the government's worst-case scenario assumes growth of 1.7%. This would still be the slowest growth rate since 2002. Jana Krajcová, [email protected]

Romania Central bank could begin monetary policy easing cycle

The next monetary policy meeting on February 4 will put three options in front of the central bank. The most efficient measure to improve the liquidity of the money market and support leu lending is a cut in the minimum reserve requirements for the national currency. Another option is a 25bp cut in the key rate to 10%, which should be read more like a signal and a call for urgent strong fiscal and income policies.

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 8

CEE Markets The third option is a joint cut in the key rate and minimum reserves for the leu, a clear indication that the central bank is concerned with the economic downturn. We attach a low probability to an aggressive monetary policy easing, given that inflationary pressures are still present (due to lagging effects of the consistent excess demand from 2008) and the risks of leu depreciation for financial stability (FX-denominated retail loans account for 59% of total retail loans) and the inflation rate. The results of the latest business survey conducted by the central bank show a further deterioration of the outlook for the real economy. The restraint of productive capacities in operation will lead to payroll cuts, as reflected by the balance of answers staying deep in negative territory in both industry and construction. The investment decline should weigh on the central bank's monetary policy decision, considering that the Romanian economy has not yet reached critical mass in terms of competitive technology and better performance of exports in the long run is strongly linked to an improved supply of high-tech industrial products. Further slowdown of loans to private sector

The December figures confirmed our forecasts regarding a considerably lower growth rate in loans to private sector. Higher costs for external funding and the central bank's amendments limiting the credit risk associated with FX loans to households led to a 53.6% y/y increase in retail FX loans at the end of 2008, as compared to a hefty rate of 134.4% in 2007. Leu-denominated retail loans advanced by 22% in 2008 (from 45.4% one year ago), as the spread between the key rate and money market rates widened at the end of last year, putting more pressure on domestic funding. A further slowdown is in the pipeline, especially in the FX segment, as the labor market is weakening rapidly and consumers' irrational exuberance from the past has been replaced by a more prudent approach. Monetary policy easing might help leu lending and the central bank seems determined to offer it a significant competitive advantage over FX lending.

Talks between Romania and EC on financial package

Romania started talks with the European Commission on a package to finance its budget deficit, as an alternative to more expensive and limited private external funding, in the aftermath of the global crisis and recent rating downgrades (to below the investment grade category). The European financial aid under discussion stays at EUR 6-7bn and represents Romania's first option now, before an agreement with the IMF. However, this EC loan might be part of a joint plan together with the IMF, due to European concerns over Romania's ability to tighten its fiscal and income policies and control the budget deficit. IMF representatives also visited Romania this week, but said that financial support was not on their agenda. The latest EC economic forecast considers a budget deficit of 7.5% of GDP for 2009, compared to a very optimistic government target of 2% of GDP.

Government approved 2009 budget

Romania's coalition government approved an austere budget for 2009 aimed at reducing the budget deficit to 2% and limiting the fallout of the global crisis on the local economy. Before submitting the budget to Parliament, it will be debated and presented to the social partners. 20% of the budget (the equivalent of EUR 10bn) will be earmarked for investments. Public sector wages and pensions will increase by 5% in 2009, all bonuses will be cut, while extra time in the public sector will not be paid, but compensated for with time off. The car industry will be helped through higher financial rewards received by customers deciding to replace 10-year-old cars with new ones and the extended number of new cars involved in this program. The government is also considering raising taxes on luxury goods and gambling and hiking social insurance contributions by 3.3% in the near term. Although supportive, these decisions should produce visible effects in terms of lower and more stable monthly budget deficits before they result in improved sentiment from external markets regarding the Romanian economy. This might be the first step in the right direction, after an ambiguous mix of macroeconomic policies in the past, with a strong monetary policy but loose fiscal and income policies. Eugen Sinca [email protected]

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 9

CEE Markets Ukraine Bank auditing coming to end of first phase

One of the conditions of the IMF's USD 16.4bn loan was the development of a program for the recapitalization of the banking system. Half of the loans issued by banks were in foreign currency. As the local currency devalued by 60% and is under pressure to fall further, banks will need capital injections to keep their capital ratios at 10% of assets. Capital injections are projected to come from foreign banks to their affiliates and from the government. In the 2009 state budget, UAH 44bn (4% of GDP) is planned to be used in bank recapitalization programs. Banks that account for 60% of total banking system assets were ordered to pass special audits. The auditing was intended to determine the banks' sustainability in the economic downturn. The NBU reported that most of the foreign banks agreed to increase the capital of their affiliates in Ukraine. In January, Ukraine received USD 711mn in capital inflows, the majority of which were investments from foreign banks in their subsidiaries. External debt amortization amounted to USD 1,536mn. Banks are still reluctant to lend, as outstanding loans decreased by 1.9% m/m. Next week, the NBU will publish a list of banks that will need capital injections and pass it to the government. The auditing and recapitalization program is one of the IMF's conditions that Ukraine has more or less successfully dealt with. However, big problems remain, as large amounts of refinancing were issued by the NBU. Banking system debt to the NBU stands at UAH 61bn (6.6% of banking system assets), UAH 23bn of which was loaned to state-owned banks. The toughest times for the banking system are still ahead; the trouble should peak in 1H09.

Risks to public finance have increased

As of January 26, 2009, state budget income totaled UAH 4.23bn, which is 44.5% of January's planned income. The temporary monthly plan for budget income foresaw UAH 9.51bn in January, UAH 12.21bn in February and UAH 14.47bn in May 2009. The actual income for these months in 2008 was UAH 12.21bn, UAH 14.17bn and UAH 12.12bn, respectively. The 2009 state budget is projected with similar nominal income and expenditure terms as those in the 2008 budget. Thus, it is unlikely that the current income figures will remain the same during the whole year, as the majority of budget income consists of taxes on consumption, like custom duties and VAT. The low current income is probably a "black-out period", as trade companies and importers readjust their purchasing plans. Yet it is obvious that it will be almost impossible for the government to meet the planned expenditure figures, especially with the planned 3% of GDP deficit. The government is actively seeking additional refinancing from the NBU, which has caused a conflict between the two sides. The government already received UAH 31.5bn (3% of GDP) from the NBU (UAH 23bn via refinancing of state banks and UAH 8.5bn via the purchase of treasury bills by the NBU). Such moves are in violation of agreements with the IMF, which targeted an average 10% increase in monetary base aggregates in 2009. In December 2008, average monetary base aggregates increased by 8% m/m. The 2009 state budget does not sufficiently cover the risks for Naftogaz, which may experience additional problems after the signing of a new gas deal with Gazprom. Ukrautodor, the state road construction company, managed to negotiate purchase refinancing of its remaining debt to Morgan Stanley from Credit Suisse at 6M Libor +8%. There is a significant risk for the public finance sector stemming from the debts of Naftogaz, Ukrautodor and state-owned banks, which are not fully covered in the budget. The government's tendency to opt for refinancing and increases in the monetary base, the low budget income and the problems with state companies may put some quasipublic sectors in technical default, despite Ukraine has one of the lowest public debt to GDP ratios in the CEE region. The IMF mission is currently in Ukraine to discuss the next part of the loan of SDR 1.25bn, which was planned to be issued on February 15. The government will have a hard task reassuring the IMF of its commitment to the conditions of the loan while explaining its conflict with the NBU and the received refinancing. Maryan Zablotskyy, [email protected]

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 10

Forecasts Capital markets forecasts Spot Mar-09 Jun-09 Sept-09 Dec-09

CZK 27.9 28.0 27.4 26.7 24.7

Spot Mar-09 Jun-09 Sept-09 Dec-09

CZ 2.25 1.75 1.75 1.75 2.00

Spot Mar-09 Jun-09 Sept-09 Dec-09

Forward

27.9 27.9 27.9

HRK 7.39 7.45 7.50 7.55 7.60

Forward 7.45 7.50 7.55 7.60

Intervention Rate HR HU PL RO 6.00 9.50 4.25 10.00 6.00 8.50 4.00 9.50 6.00 7.50 3.50 9.00 6.00 7.00 3.25 8.50 6.00 7.00 3.25 8.50

CZ 4.43 4.15 3.90 3.85 3.86

HR 7.25 7.50 7.50 7.00 7.00

HUF 298.2 270.0 265.0 260.0 260.0

UA 12.00 16.00 14.00 14.00 14.00

Exchange Rate vs EUR Forward PLN Forward 4.43 301.1 4.60 305.4 4.50 4.45 309.3 4.25 4.46 312.0 3.87 4.48

CZ 2.71 2.27 1.99 1.85 2.15

Fwd

10y Govt. Yield HU 9.30 8.00 7.40 7.10 7.00

2.30 1.83 2.44

HU 9.47 8.40 7.40 7.00 7.00

RON 4.23 4.36 4.31 4.36 4.30

Forward 4.32 4.46 4.59 4.73

UAH 10.12 13.30 13.05 12.75 12.00

Forward

15.05 16.60 17.63

3M Money Market Rate Fwd PL Fwd RO Fwd UA Fwd 4.88 15.23 32.00 9.16 4.35 13.50 10.34 28.00 8.53 3.69 3.91 11.75 8.67 22.00 8.01 3.38 3.42 10.75 7.47 16.00 7.97 3.34 2.54 10.00 6.12 14.00 -

PL 5.78 5.15 5.10 5.25 5.30

SK 4.71 4.50 4.40 4.50 4.60

5y Govt. Yield 2y Govt. Yield RO UA 12.6 40.0 12.0 30.0 11.6 22.0 10.5 17.0 9.7 15.0

Long-term forecasts Real GDP growth (%) Czech Republic Croatia Hungary Poland Romania Serbia Slovakia Ukraine CEE8 weighted average

2007 6.0 5.6 1.1 6.7 6.0 7.5 10.4 7.6 6.3

2008f 4.1 3.4 0.9 5.2 7.6 6.5 7.0 2.0 4.6

2009f 1.3 1.7 -2.7 2.8 4.0 3.5 4.2 -5.0 1.2

2010f 2.3 3.0 1.2 4.4 5.4 4.0 4.5 3.0 3.6

CPI (%), eoy Czech Republic Croatia Hungary Poland Romania Serbia Slovakia Ukraine CEE8 weighted average

2007 4.9 5.8 7.4 4.0 6.6 10.1 3.4 16.6 6.8

2008f 4.6 5.2 3.5 3.8 6.3 9.4 5.0 22.3 7.1

2009f 2.5 3.3 3.0 2.8 5.4 7.0 3.9 22.0 6.0

2010f 2.2 3.5 3.0 2.2 4.4 5.4 3.9 9.0 3.8

Unemployment (%) Czech Republic Croatia Hungary Poland Romania Serbia Slovakia Ukraine CEE8 weighted average

2007 6.6 9.7 7.7 11.4 4.1 18.1 8.4 6.9 8.7

2008f 5.5 8.8 7.9 9.1 4.3 15.4 7.6 6.5 7.6

2009f 6.4 10.0 8.7 10.3 5.0 17.0 7.9 9.5 8.8

2010f 7.2 10.0 8.3 9.5 4.8 16.0 7.6 7.1 8.2

3M rates (average, %) Czech Republic Croatia Hungary Poland Romania Serbia Slovakia Ukraine CEE8 weighted average

2007 3.1 5.6 7.7 4.6 7.8 11.3 4.3 9.6 6.0

2008f 3.9 6.9 8.9 6.3 13.0 15.6 4.2 14.8 8.5

2009f 2.4 7.5 8.2 5.3 12.8 16.0 2.7 17.0 8.0

2010f 2.8 6.5 6.5 4.3 10.0 13.5 2.7 12.0 6.4

C/A (%GDP) Czech Republic Croatia Hungary Poland Romania Serbia Slovakia Ukraine CEE8 weighted average

2007 -2.5 -8.6 -6.4 -4.7 -13.7 -13.2 -5.3 -4.2 -6.1

2008f -1.9 -10.6 -7.6 -5.0 -13.6 -17.8 -5.4 -6.7 -6.8

2009f -2.2 -10.8 -6.4 -5.0 -12.0 -17.1 -4.9 -5.0 -6.3

2010f -1.9 -10.6 -5.7 -4.7 -9.8 -17.0 -4.6 -4.0 -5.6

Budget Balance (%GDP) Czech Republic Croatia Hungary Poland Romania Serbia Slovakia Ukraine CEE8 weighted average

2007 -1.9 -1.6 -5.0 -2.0 -2.3 -1.9 -2.0 -1.1 -2.2

2008f -1.9 -1.6 -3.3 -2.2 -3.2 -2.0 -2.2 -1.2 -2.2

2009f -2.3 -2.0 -2.6 -2.3 -4.0 -1.5 -2.4 -3.0 -2.6

2010f -2.1 -2.0 -2.4 -2.0 -3.3 -1.5 -2.5 -1.5 -2.2

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 11

Diaries Looking ahead Country Czech Republic Croatia Hungary Poland Romania

Date 05-Feb 5-Feb 6-Feb 3-Feb 4-Feb

Slovakia Ukraine

Release/event/figures Rate-setting meeting, % Retail trade December Industrial output No data releases scheduled IPPI - y/y December Central bank board meeting - key rate No data releases scheduled No data releases scheduled

Our expectation 1.75 -3.5% y/y -15% y/y

Consensus* 2.25

9.8% 10.0%

10.00%

-

*Sources: Bloomberg, Reuters

Auction diary Country Czech Republic Hungary Poland Romania Slovakia Ukraine

Auction-date 3-Feb 5-Feb 2-Feb 2-Feb

Pay-date Maturity No auction scheduled 11-Feb 2009-May-13 11-Feb 2010-Jan-13 No auction scheduled 4-Feb 6M 4-Feb 2017-Apr-04 No auction scheduled

Cupon

Offer

-

HUF 40bn HUF 40bn

4.2%

RON 1500 million -

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Forecast

11% 4.3%

Page 12

Appendix Charts Exchange rates and interest rates (52 weeks) Hungary

350

14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

300 250 200 150 100 HUF/EUR HUF/USD 3m interbank rate, r.s.

50 0

Jan Mar Apr May Jun 30

Jul

25

7.0

4.0 6.0 3.5 5.0

3.0 2.5

4.0

2.0

3.0

1.5 1.0 0.5

2.0

PLN/EUR PLN/USD 3m interbank rate, r.s.

1.0

0.0

0.0 Jan Mar Apr May Jun

5.00

8

4.50

7

4.00

8.0

4.5

Aug Sep Oct Nov Dec Jan

Czech Republic

Poland

5.0

Jul

Aug Sep Oct

Nov Dec Jan

Croatia

6

3.50

20 15 10

3.00

5

2.50

4

2.00

3

1.50 CZK/EUR CZK/USD 3m interbank rate, r.s.

5

0.50

0

0.00 Jan Mar Apr May Jun

Jul

11.0

Aug Sep Oct

0 Mar

Apr May

Jun

Jul

Aug Sep

Oct

Nov Dec

Romania

5.0

16.0

4.5

UAH/EUR UAH/USD 3m interbank rate, r.s.

22

14.0

4.0

12.0

3.5

10.0

17

9.0 8.0

12

7.0

3.0

10.0

2.5

8.0

2.0

6.0

1.5

6.0

7

1.0 0.5

5.0 4.0 Feb Mar Apr May Jun

HRK/EUR HRK/USD

1

Jan Feb

Nov Dec Jan

Ukraine

13.0 12.0

2

1.00

2 Jul Aug Sep Oct Nov Dec Jan

0.0

4.0

RON/EUR RON/USD 3m interbank rate, r.s.

2.0 0.0

Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Source: Bloomberg

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 13

Appendix Forwards Benchmarks Czech Republic

Hungary

5 4.5

1.4

10.2

9.0

1.2

10.0

8.0

4

3

7.0

9.8

1

3.5

6.0

9.6

0.8

5.0

2.5

9.4

0.6

2

4.0 9.2

1.5

0.4

1 0.2

0.5 0 1yr

3yr

5yr

Spread to Euroland, r.s.

2.0

8.8

0 3m

3.0

9.0

1.0

8.6

0.0

10yr

3m

1yr

3yr

5yr

Spread to Euroland, r.s.

Yields

Poland

10yr Yields

Slovakia

7.0

4.0

6.0

3.5

6.0

2.5

5.0

2.0

3.0

5.0

4.0

2.5 4.0

1.5

2.0

3.0

1.5

2.0

1.0

3.0 2.0

1.0

1.0

0.5

0.0

0.0

0.5

1.0 0.0

3m

1yr

3yr

Spread to Euroland, r.s.

5yr

0.0 3m

1yr

3yr

5yr

11yr

10yr Yields

Spread to Euroland, r.s.

Yields

Published by Erste Group Bank AG, Neutorgasse 17, 1010 Vienna, Austria. Phone +43 (0)5 0100 - ext.

Erste Group Homepage: www.erstegroup.com On Bloomberg please type: ERBK . This research report was prepared by Erste Group Bank AG (”Erste Group”) or its affiliate named herein. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgement on the date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may from time to time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Further information on the securities referred to herein may be obtained from Erste Group upon request. Past performance is not necessarily indicative for future results and transactions in securities, options or futures can be considered risky. Not all transaction are suitable for every investor. Investors should consult their advisor, to make sure that the planned investment fits into their needs and preferences and that the involved risks are fully understood. This document may not be reproduced, distributed or published without the prior consent of Erste Group. Erste Group Bank AG confirms that it has approved any investment advertisements contained in this material. Erste Group Bank AG is regulated by the Financial Services Authority for the conduct of investment business in the UK. Please refer to www.erstegroup.com for the current list of specific disclosures and the breakdown of Erste Group’s investment recommendations.

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

Page 14

Contacts Group Research Head of Group Research Friedrich Mostböck, CEFA +43 (0)5 0100 - 11902 CEE Equity Research Co-Head: Günther Artner, CFA +43 (0)5 0100 - 11523 Co-Head: Henning Eßkuchen +43 (0)5 0100 - 19634 Günter Hohberger (Banks) +43 (0)5 0100 - 17354 Franz Hörl, CFA (Steel, Construction) +43 (0)5 0100 - 18506 Gernot Jany, CFA (Banks, Real Estate) +43 (0)5 0100 - 11903 Daniel Lion (IT) +43 (0)5 0100 - 17420 Martina Valenta, MBA (Transp., Paper) +43 (0)5 0100 - 11913 Christoph Schultes, CIIA (Ins., Util.) +43 (0)5 0100 - 16314 Vera Sutedja, CFA (Telecom) +43 (0)5 0100 - 11905 Thomas Unger (Telecom) +43 (0)5 0100 - 17344 Vladimira Urbankova (Pharma) +43 (0)5 0100 - 17343 Gerald Walek, CFA (Machinery) +43 (0)5 0100 - 16360 International Equities Hans Engel (Market strategist) +43 (0)5 0100 - 19835 Ronald Stöferle (Asia) +43 (0)5 0100 - 11723 Stephan Lingnau (Europe) +43 (0)5 0100 - 16574 Macro/Fixed Income Research Head: Gudrun Egger (Euroland) +43 (0)5 0100 - 11909 Alihan Karadagoglu (Corporates) +43 (0)5 0100 - 19633 Rainer Singer (US) +43 (0)5 0100 - 11185 Elena Statelov, CIIA (Corporates) +43 (0)5 0100 - 19641 Mildred Hager (SW, Japan) +43 (0)5 0100 - 17331 Macro/Fixed Income Research CEE Co-Head CEE: Juraj Kotian (Macro/FI) +43 (0)5 0100 - 17357 Co-Head CEE: Rainer Singer (Macro/FI) +43 (0)5 0100 - 11185 Editor Research CEE Brett Aarons +420 2 33005 - 904 Research, Croatia/Serbia Head:Mladen Dodig +38 1 112200 - 866 Damir Cukman (Equity) +38 5 6237 - 2820 Iva Cerovsky (Fixed Income) +38 5 6237 - 1716 Alen Kovac (Fixed income) +38 5 6237 - 1383 Davor Spoljar (Equity) +38 5 6237 - 2825 Research, Czech Republic Head: David Navratil (Fixed income) +420 2 24995 - 439 Petr Bartek (Real estate) +420 2 24995 - 227 Jana Krajcova (Fixed income) +420 2 24995 - 232 Radim Kramule (Media) +420 2 24995 - 213 Martin Lobotka (Fixed income) +420 2 24995 - 192 Lubos Mokras (Fixed income) +420 2 24995 - 456 Jakub Zidon (Oil and Gas) +420 2 24995 - 340 Research, Hungary Head: József Miró (Equity) +36 1 235 - 5131 Bernadett Papp (Equity) +36 1 235 - 5135 Gergely Gabler (Equity) +36 1 235 - 5133 Orsolya Nyeste (Fixed income) +36 1 373 - 2830 Research, Poland Head: Artur Iwanski (Equity) +48 2 23306 - 253 Marek Czachor (Equity) +48 2 23306 - 254 Marcelina Hawryluk (Equity) +48 2 23306 - 255 Magda Jagodzinska (Equity) +48 2 23306 - 250 Tomasz Kasowicz (Equity) +48 2 23306 - 251 Piotr Lopaciuk (Equity) +48 2 23306 - 252 Wiktor Tymochowicz (Equity) +48 2 23306 - 253 Research, Romania Head: Lucian Claudiu Anghel +40 2 1312 - 6773 Mihai Caruntu (Equity) +40 2 1311 - 2754 Dumitru Dulgheru (Fixed income) +40 2 1312 6773 - 1028

Cristian Mladin (Fixed income) Loredana Oancea (Equity) Eugen Sinca (Fixed income) Raluca Ungureanu (Equity) Research, Slovakia Head: Juraj Barta (Fixed income) Michal Musak (Fixed income) Maria Valachyova (Fixed income) Research, Ukraine Viktor Stefanyshyn (Equity) Svitlana Bazilevich (Equity) Maryan Zablotskyy (Fixed income)

+40 2 1312 6773 - 1028 +40 2 1311 - 2754 +40 2 1312 6773 - 1028 +40 2 1311 - 2754 +42 1 24862 - 4166 +42 1 24862 - 4512 +42 1 24862 - 4185 +38 044 593 - 1784 +38 044 593 - 9286 +38 044 593 - 9188

Institutional Sales Head of Sales Equities & Derivatives Michal Rizek +44 207 623 - 4154 Brigitte Zeitlberger-Schmid +43 (0)5 0100 - 83123 Equity Sales Vienna XETRA & CEE Hind Al Jassani +43 (0)5 0100 - 83111 Werner Fuerst +43 (0)5 0100 - 83121 Josef Kerekes +43 (0)5 0100 - 83125 Cormac Lyden +43 (0)5 0100 - 83127 Stefan Raidl +43 (0)5 0100 - 83113 Simone Rentschler +43 (0)5 0100 - 83124 Sales Derivatives Christian Luig +43 (0)5 0100 - 83181 Manuel Kessler +43 (0)5 0100 - 83182 Sabine Kircher +43 (0)5 0100 - 83161 Christian Klikovich +43 (0)5 0100 - 83162 Armin Pfingstl +43 (0)5 0100 - 83171 Roman Rafeiner +43 (0)5 0100 - 83172 Equity Sales, London Dieter Benesch +44 207 623 - 4154 Tatyana Dachyshyn +44 207 623 - 4154 Jarek Dudko, CFA +44 207 623 - 4154 Federica Gessi-Castelli +44 207 623 - 4154 Declan Wooloughan +44 207 623 - 4154 Sales, Croatia Zeljka Kajkut (Equity) +38 5 6237 - 2811 Damir Eror (Equity) +38 5 6237 - 2813 Sales, Czech Republic Michal Brezna (Equity) +420 2 24995 - 523 Ondrej Cech (Fixed income) +420 2 24995 - 577 Michal Rizek +420 2 24995 - 537 Jiri Smehlik (Equity) +420 2 24995 - 510 Pavel Zdichynec (Fixed income) +420 2 24995 - 590 Sales, Hungary Gregor Glatzer (Equity) +36 1 235 - 5144 Krisztián Kandik (Equity) +36 1 235 - 5140 Istvan Kovacs (Fixed income) +36 1 235 - 5846 Sales, Poland Head: Andrzej Tabor +48 2 23306 - 203 Pawel Czuprynski (Equity) +48 2 23306 - 212 Lukasz Mitan (Equity) +48 2 23306 - 213 Jacek Krysinski (Equity) +48 2 23306 - 218 Sales, Slovakia Head: Dusan Svitek +42 1 24862 - 5620 Rado Stopiak (Derivatives) +42 1 24862 - 5601 Andrea Slesarova (Client sales) +42 1 24862 - 5627

Treasury - Erste Bank Vienna Sales Retail & Sparkassen Head: Manfred Neuwirth Equity Retail Sales Head: Kurt Gerhold Domestic Sales Fixed Income Head: Thomas Schaufler Treasury Domestic Sales Head: Gottfried Huscava Corporate Desk Head: Leopold Sokolicek Alexandra Blach Roman Friesacher

+43 (0)5 0100 - 84250 +43 (0)5 0100 - 84232 +43 (0)5 0100 - 84225 +43 (0)5 0100 - 84130 +43 (0)5 0100 - 84601 +43 (0)5 0100 - 84141 +43 (0)5 0100 - 84143

Helmut Kirchner Christian Skopek Markus Pistracher Fixed Income Institutional Desk Head: Thomas Almen Martina Fux Michael Konczer Ingo Lusch Lukas Linsbichler Karin Rauscher Michael Schmotz

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009

+43 (0)5 0100 - 84144 +43 (0)5 0100 - 84146 +43 (0)5 0100 - 84100 +43 (0)5 0100 - 84323 +43 (0)5 0100 - 84113 +43 (0)5 0100 - 84121 +43 (0)5 0100 - 84111 +43 (0)5 0100 - 84345 +43 (0)5 0100 - 84112 +43 (0)5 0100 - 84114

Page 15