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Cluj, 16 June 2006

Romania face – to –face with

Hungary

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Contents

COUNTRY RATINGS

MACROECONOMIC STATISTICS

ECONOMIC OUTLOOK 2005 - 2009

COUNTRY RISKS & OPPORTUNITIES

COMPANIES PERFORMANCE IN 2005

COMPANIES OUTLOOK 2006

SIMILARITIES

CONCLUSIONS

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COUNTRY KEY DATA

KEY DATA ROMANIA HUNGARY

AREA sq. km 238.391 93.033

POPULATION 21.6 mn 10.1 mn

GDP (2005) 79.3 bn 87.8 bn

PER CAPITA GDP (2005)

EUR 3.660 EUR 8.700

Coface Short term Rating

A4 A2-

Coface Medium Rating

Moderately High Risk

Low risk

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COUNTRY RATING

Dec2005

June2005

Dec. 2004

June 2004

Dec.2003

June 2003

ROMANIA B B B B

HUNGARY A2 A2 A2 A2

@rating 2006

A2: Default probability is still weak even in the case when one country's political and economic environment or the payment record of companies is not as good as in A1-rated countries.

B+

A4 : An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable.

A4

A2-A2-

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COFACE COUNTRY RATINGS

Country Rating

April2006

June 2005

Dec. 2004

June 2004

Dec.2003

June 2003

Hungary A2- A2- A2 A2 A2 A2

Romania A4 B + B B B BAustria A1 A1 A1 A1 A1 A1

France A1 A1 A1 A2 A2 A2

Czech R. A2 A2 A2 A2 A2 A3

Slovenia A2 A2 A2 A2 A2 A2

Poland A3 A3 A3 A4 + A4 A4-

Slovakia A3 A3 A3 A3 A3 A4

Croatia A4 A4 A4 A4 A4 A4

Bulgaria A4 B + B + B B B

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Economic outlook ROMANIA (1)

Growth has been good in 2004-05

But GDP fell from 8% to 4% in 2005 as government consumption decreased

Private consumption and investment both held up well At 9% and 13% growth respectively

Consumption was kept up by credits, low interest rates and the 16% flat tax

Consumer goods sector will fall in 2006 With consumption likely falling from 9.0% growth to 5% this year

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Economic outlook ROMANIA (2)

Industrial production and fixed investment will keep the economy growing at 4.5-5.3% range for next three years

The current-account deficit is a problem and widened to 9% last year As import demand stayed high, fuelled by credit

growth of 45% And nominal wage rises of 20% (real rises of 10%) The good news is that 75% of the deficit is

covered by FDI flows

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Economic outlook ROMANIA (3)

FDI will pick at about $9bn this year

FX reserves stand short of $20bn, some 6 months of import coverage

EU: Romania is committed to spending some 25bn Euros in the next 10 years on EU related projects and programmes

Flat tax of 16% on incomes and profits hurt government revenues

Inflation is coming down from 9% in 2004 to 8.6% last year

NBR raised interest rate sharply in January this year by 1% to 8.5%

Rates will stay high this year and could fall a bit in 2007

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Economic outlook ROMANIA (4)

Minimum reserve requirement on FX-denominated liabilities was also raised This combined with recent sharp leu appreciation

Is/will ensure a tightening up of economy And ensure reduced consumer goods sales and perhaps lower industrial sales

As a result we expect inflation to fall to 6.8% this year and 5% next year The downside is that a stronger currency will curb exports

The strong leu, rising wages and weak productivity have all hurt Romanian competitiveness

The leu will remain very strong at 3.6 – 3.7 to Euro this year

The leu has appreciated 16% in 2005 and by another 7-8% this year

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Economic Outlook HUNGARY(1)

GDP outlook is average annual growth of 4.3% for next 4 years

Driven by: Buoyant exports (up 10%) Private sector investment Minimum wage rise EU expenditure Personal incomes up thanks to falling VAT (from 25% to 20%) Continued credit expansion

Inflation trend is extremely positive

Lower inflation means the National Bank less worried about weakening forint

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Economic Outlook HUNGARY(2)

National Bank has been very relaxed in face of recent falling forint Central rate has stayed at 6% since September 2005 With top line inflation at 2.5%, this means that real rates about 3.5% - still high

Inflation low due to: Strong forint until spring 2006 Plus strong productivity gains Tight, competitive markets Discount retailers Falling nominal wages Unemployment stuck at 6.5% for next 3 years

Hungarian productivity has massively improved Unit labour costs in 2003 were rising 23% in $ and 10% in forints In 2005 this was down to 5% and will be 2-3% this year

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Economic Outlook HUNGARY(3)

Invested more in IT and brought down nominal wage rises

Risks to low inflation are weaker income policies or booming oil price

Central Bank would probably look to monetary intervention on the markets…

If and when forint reaches 270-273 to euro

Main issue remains the double deficits: budget (6.5% this year) and current account (8%)

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Economic statistics (1)

Key data (% change)2002 2003 2004 2005

2006 f

2007 f

GDP (real)5.1 5.2 8.4 4.1 5.6 5.5

3.8 3.4 4.6 4.1 4.2 3.8

CONSUMER PRICES (yearly average)

22.5 15.3 11.9 9.0 7.5 6.2

5.3 4.7 6.8 3.6 2.1 2.7

FDI (inflow, net in EUR

mn)

1.194

1.910

5.127

5.208 8.000 5.000

2.889 424

2.860

4.271 4.000 3.500

Unemployement (yearly average)

10.2 7.6 6.8 5.8 5.7 5.5

5.8 5.9 6.1 7.2 7.1 6.8

Budget deficit (in % of GDP)

-2.5 -2.2 -1.2 -0.8 -1.0 -1.5

-8.4 -6.4 -5.4 -6.1 -5.5 -4.1ROMANIA HUNGARY

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Economic statistics (2)

Key data (Million EUR)

2002 2003 2004 20052006

f2007

f

Merchandise exports

14.675 15.614 18.935 22.25526.00

030.000

36.821 38.377 45.083 49.79455.99

061.800

Merchandise imports

17.427 19.569 24.258 30.06136.00

042.000

39.024 41.275 47.536 51.34357.22

062.920

Current account -1.623 -3.060 -5.099 -6.891

-9.000

-10.000

-4.929 -6.382 -6.976 -6.405-

6.150-6.130

Current account (in % of GDP)

-3.4 -5.8 -8.4 -8.7 -9.6 -9.3

-7.1 -8.7 -8.6 -7.3 -7.0 -6.5

Import cover (in months)

3.5 3.4 4.8 5.9 6.4 6.2

2.8 2.9 3.1 3.2 3.2 3.1

Gross Foreign Debt (in % of GDP)

33.4 33.9 35.8 38.5 39.0 41.3

56.0 64.7 70.2 77.4 82.4 79.4

ROMANIA HUNGARY

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Economic Outlook 2005 – 2009 (1)

Key data 2005 2006 2007 2008 2009

GDP 4.1 4.6 5.2 4.6 3.9

GDP 4.2 4.4 4.4 4 3.8

Private consumption 9 4.9 4.9 5.2 5.8

Private consumption 2.4 3.8 3 3 3.6

Fixed investment 13 12 11 10 9

Fixed investment 5 7.5 7 6 5.8

Inflation year-end 8.6 6.8 5 4.1 3.6

Inflation (year-end) 3.3 2 2.6 2.3 2.2

Budget deficit (% of GDP) -0.8 -0.7 -0.7 -0.7 -0.7

Budget deficit -6.3 -6.8 -5.4 -4.8 -4.2

Leu:Euro – year-end 3.68 3.85 3.75 3.5 3.4

Forint:Euro (year-end) 252 262 258 249 240ROMANIA HUNGARY

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Business Outlook (1)

HUNGARY•     Currently low performer

in the CEE region•     Companies in IT,

apparel, consumer goods and packaging among others all report a tough environment

•     Many companies hoped that 2005 would be a pick up year but this proved wrong

ROMANIA•       Excellent business outlook

but new risks•       Romania has been a

booming market for western MNCs

•       Results in 2004 were excellent and 2005 was good

•       Rated third most promising market (after Russia and Turkey) for 2006-07

•       Along with Russia & Ukraine, it is one of fastest growing markets in CEE

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Business Outlook (2)

HUNGARY An important CEE market and

accounts for 12% of total CEE regional sales

80% of companies anticipate single or double digit sales growth in 2006

25% of all companies saw falling or flat sales in 2005 and some 20% think this will be repeated in 2006

This is much more sober an outlook than 12 months ago

 

ROMANIA 60% of companies expect

double-digit sales growth in 2006

This is down from 65% achieved in 2005

Only 12% of companies saw flat or falling sales in 2005-06

Industrial companies are more cautious than consumer goods

Although consumer goods appear to face more pressures

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Business Outlook (3)

HUNGARY 75% of companies saw sales

below double digit growth

In 2005 a quarter of companies recorded double digit sales growth

A huge 55% of companies reported falling or flat profits in 2005

And 25% expect the same this year

Overall industrials perform better than consumer goods companies

Most companies still rate it as one of their top 5 priority markets over the next 3-5 years (!)

ROMANIA Profits are a bit tougher

With 20% reporting flat or falling profits in 2005

But, still, 55% expect profits to grow double digit in 2006

While only 5% anticipate a profit slowdown

But profit growth did slow already in 2005

And we anticipate 2007 will be slower year for sales

As for profits

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Business Outlook (4)

HUNGARY

2007-08 ought to be quite tough for business

Business to government sales will be very tough

Government spending growth will stay below 1% for next three years

Companies already complain of late payment from government sources

B2B ought to hold up as fixed investment will rise over 5% per annum next 3 years

ROMANIA 2005 was the year when

competition really took off in Romania

Outlook will be quite good, but risks are growing

  Political risk is mounting

and hiccups in reforms   This may see

postponement for EU entry from 2007 to 2008 (less than 25% chance)

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Business Outlook (5)

HUNGARY Growth in IT spending will be worst

in region after Slovenia

Major IT companies already complain of very poor market

Overall IT market will grow 6% per annum in 2006-07 driven by EU

Most of shortfall could be in hardware rather than software and services

But software struggling as well

Indian and Chinese competition is growing in IT

ROMANIA Picture looks good for consumer

goods, pharma and industrials

Surge in FDI in 2005 up to $5bn and EU entry upgrades will ensure good equipment and tooling sales in 2006-08

But for FMCGs days of easy money are disappearing

Bucharest is a strong market, but rural population lives on 30 Euro per month

The IT market is a $1bn, growing at 10% per annum in next three years

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Business outlook (6)

HUNGARY

Hungary has been reluctant to spending changes by the government at election times

This has created market of boom and bust

But the bust has settled in now

With the the socialist party in power…

Some degree of tightening will occur – but how much?

Companies should prepare themselves for further slow down

  ROMANIA Business environment is far

from perfect, though, but is improving

Corporate flat tax of 16% (though this may hurt government revenues)

  Changes needed to

customs and trading laws

  Implementation of laws is

as usual the main headache

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Business outlook (7)

HUNGARY Other CEE countries, except

Hungary, have brought their deficits down already quite quickly

Hungary expects a budget deficit of almost 7% this year

Falling to 4.5% in 2008 However it seems that all

parties have postponed Euro entry to 2011 or even 2012

This probably means government spending cuts will be less savage than otherwise

  ROMANIA Also watch out: economic

risk is rising

2006 will be a year of business consolidation after boom of 2004 and mini-boom of 2005

  And that consolidation will

continue in 2007

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General market conclusions

HUNGARY It’s a very mature market

which has transitioned

Strong western competition

Rising local competition

Price pressures

Volatile consumer behaviour

Consumers looking for cheap prices

Brands under pressure

More distributors coming into manufacturing sectors

ROMANIA Clear limits to business

growth

Rural areas may not be so attractive as core CEE…

Food & beverages account for 40% of consumer spending (similar to Russia & Bulgaria)

These are “pre-modern” consumption patterns compared with mid- 20% figures in core CEE

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MULTUMESC ! KÖSZÖNÖM !

References:•COFACE COUNTRY REPORTS http://www.cofacecentraleurope.com•AUSTRIA CREDITANSTALT BANK http://www.ba-ca.com / CEE-Report •NATIONAL INSTITUTE OF STATISTICS FROM ROMANIA http://www.insse.ro •The European Union in the World http://europa.eu.int/comm/world/ •Competition Authority http://www.gvh.hu •Hungarian National Bank http://english.mnb.hu•Hungarian Statistical Office http://www.ksh.hu •International Chamber of Commerce http://www.icc.co.hu •Banca Nationala A Romaniei http://www.bnro.ro/ •http://www.usaid.gov/pl/financia.htm•http://www.marketresearch.com/map/prod/1068326.html •IMF http://www.imf.org/external/index.htm •WORLD BANK http://www.worldbank.org/