Europe Weekly With Charts

New Europe Weekly 02-06 March 2009

Key events in the coming week

• •

•

•

Final Q4 08 GDP due for release next week in Poland. We expect Turkish inflation to drop further in February to 8.9% y/y, down from January’s 9.5% y/y (see page 5). Plenty of important economic data such as industrial production figures and inflation due for release in Baltics (see page 4). We expect Russian inflation to ease moderately in February to 13.1% y/y, down from January’s 13.4%.

Investment research

Too much credit The deepening of the financial sector in central and eastern Europe (CEE) over the past two decades has to a large extent been driven by western European banks’ willingness to set up subsidiary banks in the region and provide the means for a lending boom. High lending growth was accompanied by strong economic growth, but also by increasingly visible bubbles in the property markets. Now that the bubbles are bursting and the global economic crisis is hitting the CEE countries, there is expected to be a negative spill-back effect on western Europe. Western European banks are expected to react to the increased risk in the CEE region by withdrawing capital. A sizeable part of the CEE region debt is short term, which makes a major credit contraction even more likely. This puts further pressure on the region. We expect that credit withdrawal will be most pronounced from the countries with the gloomiest economic prospects. Rather than a homogeneous credit contraction across the CEE region, it is possible that we will see a very pronounced credit flight from the most vulnerable countries. We have looked at three scenarios. A mild scenario, which is comparable to the Swedish banking crisis, in which losses in Sweden added up to about 8% of GDP (maybe it isn’t really fair to call this a mild scenario), a hard scenario, in which the hardest hit CEE countries face more substantial losses, and finally an ugly scenario, which is more comparable to the Asian crisis. In the ugly scenario Austrian banks lose USD49bn, or about 11% of Austrian GDP, Swedish banks lose USD31bn (6.1% of GDP) and Belgian banks lose USD20bn (3.6% of GDP). Total losses to western Banks then add up to USD275bn. This is a lot of money – but to put it in perspective the IMF now estimates the total losses on US-originated credit assets at USD2.2bn.

27 FEBRUARY 2009

NEW EUROPE WEEKLY

Calendar – week 10 EMEA Data and Events in Week10 Monday, March 2, 2009 Budget balance

Period bn. CZK

Feb

Index y/y

Feb Jan

Danske Bank

CZK

-

HUF EEK

8:00

PMI Retail trade

HUF

9:00

Producer prices

y/y

Jan

TRY CZK

9:00 9:30

PMI manufacturing PMI manufacturing

Index Index

Feb Feb

29.8 29.5

PLN

10:00 Gross domestic product

y/y

4th quarter

2.8%

ZAR

10:30 Unemployment

%

4th quarter

Tuesday, March 3, 2009

5.8% 32.9 31.5

2.8%

4.8% 23.2%

37.6

16:00 CPI

y/y

Feb

8.9%

8.5%

9.5%

16:00 PPI

y/y

Feb

6.2%

5.7%

7.9%

Period

Danske Bank

Consensus

Previous

Jan

-22.3%

Period

Danske Bank

Consensus

Previous

Consensus

Previous

Wednesday, March 4, 2009 8:00

Industrial production

y/y

Thursday, March 5, 2009

Friday, March 6, 2009

Period

Danske Bank

CPI 8:00 CPI

y/y y/y

Feb Feb

13.1% 3.8%

9:00

Industrial production

y/y

Jan

10:00 PPI 12:00 Industrial production

y/y y/y

Feb Jan

Consensus

Previous

Danske Bank

TRY

LTL LVL

38.6 -9.0%

Feb Feb

TRY

HUF

0.5 35.5

Period

10:00 PMI 10:00 Naamsa vehicle sales

RUB EEK

Previous

Index y/y

ZAR ZAR

EEK

Consensus

40.7 -35.4%

-20.7%

13.4% 4.1% -23.3%

-8.8% -17.7%

-4.9% -14.2%

The editors do not guarantee the accurateness of figures, hours or dates stated above Note that all releases are CET.

2

27 FEBRUARY 2009

NEW EUROPE WEEKLY

CEE Will a weak CZK stop further monetary easing in the Czech Republic Czech Republic •

Despite there being a lack of economic numbers in the past week, the Czech Republic has nevertheless been in the spotlight, mainly due to the turbulence of the Czech koruna (CZK) and the Czech central bank’s action while defending the Czech currency against further weakening.

•

Despite, the Czech economy being sounder in many ways than other foreign credit overexposed CEE countries, unfortunately for the Czech Republic the investors do not distinguish between those countries in which the concerns over external financing and the banks’ health are wellfounded and countries with fairly good economic fundamentals and stable banking systems. The weakening of the Czech koruna, among other CEE currencies, went so far that the Czech central bank (CNB) – together with the Polish, Hungarian and Romanian central banks – coordinated the verbal intervention to support the weakening CEE currencies. The Czech central bank governor said that the Czech koruna’s sharp drop was overdone and it is not in line the economic fundamentals. The same view was expressed by the Polish, Hungarian and Romanian central banks.

•

To conclude, however, the CNB said that it may reverse the interest rate cycle and deliver interest rate hike if the koruna continues to weaken. We do not, however, expect that to happen (with the Czech economy being in recession). Nonetheless, the CNB could halt any further monetary easing as long as the koruna remains under pressure.

The drop in Czech economic activity is sharp

CZK rebounds after the verbal interventions

3

27 FEBRUARY 2009

NEW EUROPE WEEKLY

Baltic States Industrial production: slipping into a record free-fall Estonia •

We expect Estonian industrial production to fall further, by as much as 22.3% y/y in February from 18% y/y in January. Contraction of external demand coupled with extremely poor domestic demand dynamics will play a major role in pushing down all the economic activities. The positive news is a significant easing of cost pressure.

•

Estonian wage growth slowed to about 7% y/y in Q4 08 from almost 15% y/y in Q3 09. We had expected to see adjustments in the economy through the labour market, mainly wages channel. The labour market in all three Baltics states is more flexible compared with the Old Europe economies. However, the issue is still whether this is enough with regard to competitiveness. Over the medium term we expect to see a continuation of wage disinflation – this is expected to be negative for 2009-10, probably more then 5% in nominal terms.

•

We expect consumer prices to decelerate further as well to 3.8% y/y in February from 4.1% y/y in January. It looks like Estonian inflation has been decreasing at a much faster pace than we have expected and in the event of a much steeper decline in growth CPI could fall well below 2% y/y on average in 2009.

Lithuania •

Industrial production in Lithuania fell by 5.6% y/y in January from 4.4% y/y in December. This was a significantly better result then our forecast of a drop of 10% y/y. Industrial sector in Lithuania is still healthier in comparison with other Baltic states. On the other hand, only energy sectors that are in a relatively preferential situation showed a positive result while manufacturing – excluding oil production – fell by more then 20% y/y. Thus, all risk to our GDP forecast for the 2009 is on the downside.

•

We expect industrial production prices to drop further to almost 9% y/y in January from 4.9% y/y in December, mainly due to decline in the global oil price. PPI decelerated as well, but at slower speed. At the end of 2008 wage growth decelerated to 8% y/y from unsustainably high figures which were observed over the past couple of the years and we expect the continuation of this trend further.

Latvia •

We do not expect any positive news for the Latvian economy in the coming week. On industrial production, we expect a further decline of 17.7% y/y in February from a drop of 14.2 % y/y in January. Labour market conditions deteriorated further, the unemployment level in Q4 08 reached a10% level and there is a high probability of it reaching 13-15% this year.

Free falling manufacturing

PPI trend

Industrial Production

percent

13

13

3

3

-7

-7

-17

-17

-27

00

01

Estonia

02

03

04

Lithuania

05

06

07

08

09

-27

Latvia Source: Reuters EcoWin

percent

% y/y

percent

% y/y

30 25 20 15 10 5 0 -5 -10

% y/y

% y/y

Estonia

Latvia

Lithuania 01

02

03

04

05

06

07

08

30 25 20 15 10 5 0 -5 -10

Source: Reuters EcoWi

4

27 FEBRUARY 2009

NEW EUROPE WEEKLY

EMEA Will the SARB call for emergency MPC meeting? Turkey •

Next week data on Turkish inflation in February is scheduled to be released. We expect the fast decline in Turkish consumer price inflation to have eased a little in February and thus only expect Turkish consumer price inflation to have declined to 8.9% y/y from 9.5% y/y in January – the consensus forecast is 8.5% y/y. Furthermore, we expect Turkish producer price inflation to have declined to 6.2% y/y in February from 7.9% y/y in January – the consensus forecast is 5.7% y/y. We continue to expect further monetary easing from the Turkish central bank (TCMB) although the decline in inflation is a little slower than previous expected.

South Africa •

Statistics South Africa released CPI inflation figures for January this week. As expected, the new reweighted and rebased CPI index (effective from January this year), dropped further in January – to 8.1% y/y, down from December’s 9.5% y/y albeit less than consensus expectations of 7.5% y/y. The new CPI index uses new weightings – in particular it has less weight on food prices – one of the main inflation drivers.

•

Although inflation decelerated less than expected, given the GDP numbers for Q4 08 published this week, which showed that the economic slowdown in South Africa is more pronounced than expected (the economy contracted by 1.8% q/q in Q4), the possibility of an emergency Monetary Policy Committee (MPC) meeting is still in game. While speaking this week, the South African central bank’s Governor Tito Mboweni said that “there’s no meeting that has been called but the MPC can meet any time” leavening the market participants guessing whether the SARB will deliver an emergency rate cut, or whether the central bank will wait for its regular MPC meeting scheduled for April 16.

Inflation in Turkey continue to decline

Sharp drop in Q4 GDP

Source: EcoWin, Reuters

5

27 FEBRUARY 2009

NEW EUROPE WEEKLY

FX update Verbal intervention brings moderate relief into CEE markets

10 FX performance vs EUR in % since August 1, 2008 5 0 -5 -10 CZK -15 RON -20 RUB -25 HUF -30 PLN -35 Jan Mar May Jul Sep Nov Jan Mar 08 09

10 5 0 -5 -10 -15 -20 -25 -30 -35

percent

percent

CEE currencies rebounds slightly after the verbal interventions

.

5 0 -5 -10 -15 -20 -25 -30 -35 -40

percent

percent

TRY could weaken more 5 FX performance vs USD in % since August 1, 2008 0 -5 -10 -15 -20 -25 ZAR -30 TRY -35 -40 Aug Sep Oct Nov Dec Jan Feb Mar 08 09

.

25.0

27.5 Stronger RUB

27.5

30.0

30.0

32.5

32.5

35.0

35.0

37.5 40.0 42.5 Jan

Basket/RUB

Weaker RUB

percent

percent

RUB heading towards weak end of the band 25.0

37.5 40.0 42.5

Apr

Jul 07

Oct

Jan

Apr

Jul 08

Oct

Jan 09

.

At the beginning of this week the CEE currencies weakening went so far that the central bank governors of Poland, Hungary, the Czech Republic and Romania issued a statement that was clearly aimed at propping up the beaten currencies of the region. Intention of the verbal intervention did the trick and the CEE currencies rebounded. The statements from the governors were released separately – but were clearly coordinated all saying more or less the same thing: The sell-off in the currencies in the region recently have been overdone and do not reflect fundamentals. The currencies of the four countries all strengthened on the back of the comments. However, it was only verbal intervention, it is nonetheless a pretty clear signal that we are beginning to see some coordination. This should be read as being positive for the markets in the region – at least in the short term. That said we doubt that verbal intervention is enough and the central banks in the region might need to take some other action – or get outside help for example from the ECB. We would therefore be looking for possible comments from the ECB on this issue. The markets might try to test whether this is just verbal intervention or whether the central banks of the CEE will be willing, for example, to hike rates to defend their currencies. We could also see more direct intervention in the CEE FX in the form of coordinated intervention and/or rate hikes. If not the markets might decided that this is only talk and nothing else and the weakening of the CEE currencies could resume.

Source: Ecowin, Reuters – updated 26 February 2009

6

27 FEBRUARY 2009

NEW EUROPE WEEKLY

FX forecasts Currency Forecast, New Europe/EMEA Feb - 27 , 2009

USD

PLN

HUF

CZK

EEK

LVL

LTL

RON

BGN

TRY

RUB

UAH

ZAR

Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m Actual +3m +6m +12m

EUR 1.27 1.24 1.26 1.30 4.74 4.80 4.90 4.95 302.2 315 325 330 28.2 29.5 30.0 30.5 15.6 15.7 15.7 15.7 0.71 0.70 0.70 0.70 3.45 3.45 3.45 3.45 4.29 4.80 5.00 5.10 1.96 1.96 1.96 1.96 2.16 2.25 2.35 2.40 45.5 50.3 53.4 57.2 10.84 11.78 12.60 13.00 12.65 13.64 14.18 14.95

USD 3.71 3.87 3.89 3.81 237.1 254 258 254 22.1 23.8 23.8 23.5 12.3 12.6 12.4 12.0 0.56 0.56 0.56 0.54 2.71 2.78 2.74 2.65 3.37 3.87 3.97 3.92 1.53 1.58 1.55 1.50 1.69 1.81 1.87 1.85 35.7 40.6 42.4 44.0 8.50 9.50 10.00 10.00 9.92 11.00 11.25 11.50

SEK 898.4 887 841 754 241.8 229 216 198 3.79 3.49 3.26 2.97 40.6 37.3 35.3 32.1 73.2 70.3 67.7 62.6 1614.4 1571 1514 1400 331.7 319 307 284 267.0 229 212 192 585.5 563 542 501 531.1 489 451 408 25.2 21.8 19.8 17.1 105.7 93 84 75 90.6 81 75 66

NOK 691.4 685 659 631 186.1 177 169 166 2.92 2.70 2.55 2.48 31.3 28.8 27.7 26.9 56.3 54.3 53.0 52.4 1242.3 1214 1186 1171 255.2 246 241 238 205.5 177 166 161 450.6 435 425 419 408.7 378 353 342 19.4 16.9 15.5 14.3 81.3 72 66 63 69.7 62 59 55

DKK 584.4 601 591 574 157.3 155 152 151 2.46 2.37 2.29 2.26 26.4 25.3 24.8 24.5 47.61 47.6 47.6 47.7 1050.1 1064 1064 1066 215.8 216 216 216 173.7 155 149 146 380.9 381 381 382 345.5 331 317 311 16.4 14.8 13.9 13.0 68.8 63 59 57 58.9 54.6 52.6 49.9

Source: Bloomberg and Danske research forecasts

7

27 FEBRUARY 2009

NEW EUROPE WEEKLY

Contacts New Europe/EMEA Research Lars Christensen, Chief Analyst Violeta Klyviene, Senior Baltic Analyst Lars Tranberg Rasmussen, Analyst Stanislava Pravdova, Analyst Jens Nærvig Pedersen, Assistant Analyst

+45 45 12 85 30 +370 521 56992 +45 45 12 85 34 +45 45 12 80 71 +45 45 12 84 98

[email protected] [email protected] [email protected] [email protected] [email protected]

Emerging Markets Sales, Danske Markets Stephen A. Ryan, Head of EM Sales Ulf Rafstedt, Chief Dealer Michael Nedergaard Larsen, Senior Dealer Erik Rasmussen, Senior Dealer

+45 45 14 68 98 +45 45 14 61 43 +45 45 14 60 78 +45 45 14 32 47

[email protected] [email protected] [email protected] [email protected]

Emerging Markets Trading, Danske Markets Frank Sandbæk Vig, Chief Dealer, FX Thomas Manthorpe, Chief Dealer, Rates Markku Anttila, FX Trading, Russia Perttu Tuomi, Derivatives Trader, Russia

+45 45 14 61 20 +45 45 14 69 68 +358 10 513 8705 +358 10 513 8738

[email protected] [email protected] [email protected] [email protected]

Danske Bank Poland, Warsaw Treasury Department Maciej Semeniuk. Treasurer Bartlomiej Dzieniecki, Senior Corporate Dealer

+48 22 33 77 114 +48 22 33 77 112

[email protected] [email protected]

+358 50 374 5559 +371 6707 2245 +370 620 89301 +372 630 2464

[email protected] [email protected]

Danske Markets Baltics Howard Wilkinson, Head of Baltics & Russian Sales Martins Strazds, Head of Latvian Sales Giedre Geciauskiene, Head of Lithuanian Sales Lauri Palmaru, Head of Estonian Sales

[email protected]

[email protected]

ZAO Danske Bank Russia, Saint-Petersburg Treasury Department Antti Urvas, Head of Corporate Banking & Treasury Vladimir Biserov, Deputy Head of Treasury Darja Kounina, Treasury Specialist

+7 812 332 73 06 +7 812 332 73 04 +7 812 332 73 04

[email protected] [email protected] [email protected]

8

27 FEBRUARY 2009

NEW EUROPE WEEKLY

Disclosure This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The author of the report is Lars Christensen, Chief Analyst Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the Danske Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not report to other Danske Bank business areas. Research analysts are remunerated in part based on the over-all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or dept capital transactions. Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals’ Ethical rules and the Recommendations of the Danish Securities Dealers Associations. Financial models and/or methodology used in this report Calculations and presentations in this report are based on standard econometric tools and methodology. Documentation can be obtained from the above named authors upon request. Risk warning Major risks connected with recommendations or opinions in this report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. First date of publication Please see the front page of this research report.

Disclaimer This publication has been prepared by Danske Markets for information purposes only. It has been prepared independently, solely from publicly available information and does not take into account the views of Danske Bank’s internal credit department. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. The Equity and Corporate Bonds analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for retail customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S. Danske Bank A/S is authorized by the Danish Financial Supervisory Authority and subject to limited regulation by the Financial Services Authority (UK). Details on the extent of our regulation by the Financial Services Authority are available from us on request. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

9