1 cluj, 16 june 2006 romania face – to –face with hungary
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1
Cluj, 16 June 2006
Romania face – to –face with
Hungary
2
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
8
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/
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