cee – looking for growth drivers

CEE – Looking for growth drivers

Dan Bucsa, EEMEA Economist

UniCredit Bank AG, London

16 May 2013

2

CEE – Looking for growth drivers

CEE countries include former communist new EU members, CIS, Turkey, the

Balkans

The crisis hit CEE economies through two main channels:

Financial flows

Sovereign borrowing

Funding for banks

Foreign direct investment

External demand

The two constraints have subsided over the past couple of years, but remain in

place.

3

The current risk normalisation process helps CEE governments…

Source: Bloomberg, Unicredit Research

Change in 5Y yields and 5Y CDS between 2010 and 2013

-200

-100

0

100

200

300

400

TR BG PL UA SK CZ HR HU RO LT RU SI

5Y yields

5Y CDS

bp

4

… but countries with a better risk assessment pay less in real terms

Source: Bloomberg, Unicredit Research

2013 average CDS and yields for local currency bonds

-2

-1

0

1

2

3

4

5

6

7

DE CZ BG TR SK RU LT RO HR PL SI HU UA

5Y nominal yield

5Y CDS

5Y real yield

%

5

0

5

10

15

20

25

30

35

40

45

50

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Hungary

Poland

Turkey

Romania

% of marketable domestic debt

Better foreign demand for sovereign bonds…

Source: NBH, National Ministries of Finance, Bloomberg, Unicredit Research

Domestic debt owned by foreign investors

6

… has a mixed impact on the cost of domestic funding for CEE banks…

Source: CEE central banks, Unicredit Research

Change of interest rates and yields in 2012 vs. 2010

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

RO BG HR CZ SK SI TR PL HU RU

Average deposit rate

5Y sovereign yield

pp

7

… who were forced to cut lending rates…


Change of interest rates and yields in 2012 vs. 2010

-3

-2

-1

0

1

2

3

4

5

6

RO HR BG CZ SK SI PL HU TR

Corporate loan rate

Retail loan rate

5Y sovereign yield

pp

8

pp

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

RU HR PL SI CZ RO SK BG TR HU

Bank spreads

… squeezing interest spreads (and profits) in most CEE countries


Change of spreads between lending and deposit rates in 2012 vs. 2010

9

2012 showed an improvement in flows, but little support for lending…

Source: BIS, Unicredit Research

The quarterly evolution of foreign claims of European banks in 2012

-15

-10

-5

0

5

10

15

20

HU SI HR UA RO LT BG LV CZ EE SR SK PL TR RU

4Q12

3Q12

2Q12

1Q12

EUR bn

10

-10

0

10

20

30

40

50

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

yoy (%)

Credit

Deposits

10

… hence new lending relies on domestic savings

Source: National central banks, Unicredit Research

11 11

The foreign claims of EU banks in CEE rose sharply before the crisis…

Foreign claims of European banks in December 2007 vs. December 1999


0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

EA EU RU TR HU CZ PL EE SK SI HR LV BG LT RO UA

%

12 12

… but corrected since 2007 in 8 out of 15 CEE countries…


-30

-20

-10

0

10

20

30

40

50

EA EU UA HU LV EE SI HR LT RO RU SK BG CZ SR PL TR

2012 vs 2010

2010 vs 2007

%

13

…with positive inflows over the past three years in just five countries


-30

-20

-10

0

10

20

30

40

50

60

HU HR RO UA LV SI EE LT BG SK SR RU CZ TR PL

2012 vs 2010

2010 vs 2007

EUR bn

14

Meanwhile, FDI halved from the pre-crisis peak and are not accelerating

Source: Haver Analytics, Unicredit Research

0

20

40

60

80

100

120

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

CEE

CEE ex Russia

EUR bn, 12M rolling

15 15

… affecting the long-term outlook for industry, the main growth

engine in CEE…

Source: Eurostat, Unicredit Research

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

EA EU HR HU SI RU EE TR LT PL CZ SK LV RO

15.0

17.0

19.0

21.0

23.0

25.0

27.0

29.0

31.0

Industry, avg contribution to growth, 2000-12 - lhs

Industry, % of GDP - rhs

pp %

16 16

… that relies on the production of machinery and vehicles…


Bulgaria Czech Rep. Hungary

0

10

20

30

40

50

60

70

80

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

Grain

Clothing and apparel

Electric devices and electronics

Non-ferous metals

Oil and fuels

12M MA (%)

0

10

20

30

40

50

60

70

80


Telecom equipment

General industrial machinery

Office machines and IT equipment


Road vehicles

12M MA (%)

0

10

20

30

40

50

60

70

80


Pharmaceuticals

Power-generating machinery

Road vehicles


Telecom equipment

12M MA (%)

Slovakia Slovenia Turkey

0

10

20

30

40

50

60

70

80




Iron and steel

Telecom equipment

Road vehicles

12M MA (%)

0

10

20

30

40

50

60

70

80


Iron and steel


Pharmaceuticals


Road vehicles

12M MA (%)

0

10

20

30

40

50

60

70

80


Manufacture of basic metals Road vehicles

Textiles Clothing and apparel

Machinery and equipment

12M MA (%)

Poland Romania Russia

0

10

20

30

40

50

60

70

80


Furniture

Telecom equipment

Manufactures of metals


Road vehicles

12M MA (%)

0

10

20

30

40

50

60

70

80


Oil and fuels


Clothing and apparel


Road vehicles

12M MA (%)

0

10

20

30

40

50

60

70

80

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

Oil FuelsNatural gas Machinery and equipmentFerrous Metals

12M MA (%)

17 17

… and on demand from Germany and other euro area trade partners…


Bulgaria Croatia Czech Rep.

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany Russia Romania

% ot total trade

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Italy Germany Slovenia

% ot total trade

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany Slovak Rep Poland

% ot total trade

Hungary Poland Romania

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany Austria Russia

% ot total trade

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany Russia Italy

% ot total trade

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany Italy Hungary

% ot total trade

Russia Slovakia Turkey

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

China Netherlands Germany

% ot total trade

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany Italy Austria

% ot total trade

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany Russia China

% ot total trade

18 18

… although demand constraints remain in place for the moment


-6

-4

-2

0

2

4

6

8

10

BG RO PL SK LT SR EE HU LV HR TR UA KZ RU

avg. 2002-11 2012 Feb-13 3M/3M ann.

yoy (%)The evolution of industrial production for trading partners (trade weighted)

19

-12

-10

-8

-6

-4

-2

0

2

4

6

8

TR EE LV HU SK PL BG LT RO RU CZ SI

2012 vs 2009

2009 vs 2007

2012 vs 2007

pp

19

In the absence of strong demand from the euro area…

Change of share of exports towards the euro area in total exports


20

-6

-4

-2

0

2

4

6

8

10

SI RO BG SK PL HU LT EE CZ RU TR LV

2012 vs 2009

2009 vs 2007

2012 vs 2007

pp

20

… CEE countries found export markets outside the EU…

Change of share of exports outside the EU in total exports


21 21

… and this was possible due to lower unit labour costs…

Change of unit labour costs in EUR


-40

-20

0

20

40

60

80

100

120

140

RU PL SI LT HU LV EE BG SK CZ RO

2008 vs 2000

2009 vs 2008

2012 vs 2009

Min post 2009 - max

2012 vs 2000

%

22

-20

0

20

40

60

80

100

HU SI LT CZ TR PL BG EE SK RU RO LV

2008 vs 2000

2009 vs 2008

2012 vs 2009

2012 vs 2000

%

22

… and higher productivity

Change of output per employee


23

Conclusions

The crisis forced CEE countries to adjust imbalances:

high loan to deposit ratios

labour costs

domestic demand, budget and current account deficits

The adjustment was needed in order to compete on non-EU markets, the new

growth driver for CEE.

There is great differentiation among CEE countries in coping with constraints,

recovering after the crisis and accessing foreign financing.

Going forward, gaps are likely to widen.

24

Disclaimer

This publication is presented to you by:

UniCredit Corporate & Investment Banking

UniCredit Bank AG, Milan Branch

Via Tommaso Grossi, 10 – 20121 Milan – Italy

The information in this publication is based on carefully selected sources believed to be reliable. However we do not make any representation as to its accuracy or completeness. Any opinions herein reflect our judgement at the date hereof and are subject to change without notice. Any investments presented in this report may be unsuitable for the investor depending on his or her specific investment objectives and financial position. Any reports provided herein are provided for

general information purposes only and cannot substitute the obtaining of independent financial advice. Private investors should obtain the advice of their banker/broker about any investments concerned prior to making them. Nothing in this

publication is intended to create contractual obligations. UniCredit Corporate & Investment Banking consists of Bank Name, UniCredit Bank AG, Munich, UniCredit Bank Austria AG, Vienna, UniCredit CAIB Securities UK Ltd. London,

UniCredit S.p.A., Rome and other members of the UniCredit Group. UniCredit Bank AG is regulated by the German Financial Supervisory Authority (BaFin), UniCredit Bank Austria AG is regulated by the Austrian Financial Market Authority

(FMA), UniCredit CAIB Securtities UK Ltd. is regulated by the Financial Services Authority (FSA), UniCredit Bank AG, Milan Branch, and UniCredit S.p.A. are regulated by both the Banca d'Italia and the Commissione Nazionale per le Società e la Borsa (CONSOB).

Note to UK Residents:

In the United Kingdom, this publication is being communicated on a confidential basis only to clients of UniCredit Corporate & Investment Banking Division (acting through UniCredit Bank AG, London Branch ("HVB London") and/or UniCredit

CAIB Securities UK Ltd. who (i) have professional experience in matters relating to investments being investment professionals as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ("FPO"); and/or (ii) are falling within Article 49(2) (a) – (d) ("high net worth companies, unincorporated associations etc.") of the FPO (or, to the extent that this publication relates to an unregulated collective scheme, to professional investors

as defined in Article 14(5) of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 and/or (iii) to whom it may be lawful to communicate it, other than private investors (all such

persons being referred to as "Relevant Persons"). This publication is only directed at Relevant Persons and any investment or investment activity to which this publication relates is only available to Relevant Persons or will be engaged in only

with Relevant Persons. Solicitations resulting from this publication will only be responded to if the person concerned is a Relevant Person. Other persons should not rely or act upon this publication or any of its contents.

The information provided herein (including any report set out herein) does not constitute a solicitation to buy or an offer to sell any securities. The information in this publication is based on carefully selected sources believed to be reliable but we do not make any representation as to its accuracy or completeness. Any opinions herein reflect our judgement at the date hereof and are subject to change without notice. 9

We and/or any other entity of UniCredit Corporate & Investment Banking may from time to time with respect to securities mentioned in this publication (i) take a long or short position and buy or sell such securities; (ii) act as investment

bankers and/or commercial bankers for issuers of such securities; (iii) be represented on the board of any issuers of such securities; (iv) engage in "market making" of such securities; (v) have a consulting relationship with any issuer. Any

investments discussed or recommended in any report provided herein may be unsuitable for investors depending on their specific investment objectives and financial position. Any information provided herein is provided for general

information purposes only and cannot substitute the obtaining of independent financial advice. HVB London is regulated by the Financial Services Authority for the conduct of business in the UK as well as by BaFIN, Germany. UniCredit CAIB Securities UK Ltd., London, a subsidiary of UniCredit Bank Austria AG, is authorised and

regulated by the Financial Services Authority.

Notwithstanding the above, if this publication relates to securities subject to the Prospectus Directive (2005) it is sent to you on the basis that you are a Qualified Investor for the purposes of the directive or any relevant implementing legislation

of a European Economic Area ("EEA") Member State which has implemented the Prospectus Directive and it must not be given to any person who is not a Qualified Investor. By being in receipt of this publication you undertake that you will

only offer or sell the securities described in this publication in circumstances which do not require the production of a prospectus under Article 3 of the Prospectus Directive or any relevant implementing legislation of an EEA Member State which has implemented the Prospectus Directive.

Note to US Residents:

The information provided herein or contained in any report provided herein is intended solely for institutional clients of UniCredit Corporate & Investment Banking acting through UniCredit Bank AG, New York Branch and UniCredit Capital

Markets, Inc. (together "HVB") in the United States, and may not be used or relied upon by any other person for any purpose. It does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as

amended, or under any other US federal or state securities laws, rules or regulations. Investments in securities discussed herein may be unsuitable for investors, depending on their specific investment objectives, risk tolerance and financial position.

In jurisdictions where HVB is not registered or licensed to trade in securities, commodities or other financial products, any transaction may be effected only in accordance with applicable laws and legislation, which may vary from jurisdiction to

jurisdiction and may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements.

All information contained herein is based on carefully selected sources believed to be reliable, but HVB makes no representations as to its accuracy or completeness. Any opinions contained herein reflect HVB's judgement as of the original date of publication, without regard to the date on which you may receive such information, and are subject to change without notice.

HVB may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in any report provided herein. Those reports reflect the different assumptions, views and analytical methods of the

analysts who prepared them. Past performance should not be taken as an indication or guarantee of further performance, and no representation or warranty, express or implied, is made regarding future performance.

HVB and/or any other entity of UniCredit Corporate & Investment Banking may from time to time, with respect to any securities discussed herein: (i) take a long or short position and buy or sell such securities; (ii) act as investment and/or

commercial bankers for issuers of such securities; (iii) be represented on the board of such issuers; (iv) engage in "market-making" of such securities; and (v) act as a paid consultant or adviser to any issuer. The information contained in any report provided herein may include forward-looking statements within the meaning of US federal securities laws that are subject to risks and uncertainties. Factors that could cause a company's actual results

and financial condition to differ from its expectations include, without limitation: Political uncertainty, changes in economic conditions that adversely affect the level of demand for the company‘s products or services, changes in foreign

exchange markets, changes in international and domestic financial markets, competitive environments and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this

cautionary statement.

UniCredit Corporate & Investment Banking

as of 20 May 2013

cee – looking for growth drivers

Documents