CEE – Looking for growth drivers

CEE – Looking for growth drivers

Dan Bucsa, EEMEA Economist UniCredit Bank AG, London

16 May 2013

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.

2

The current risk normalisation process helps CEE governments‌ bp

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

400 5Y yields 5Y CDS 300

200

100

0

-100

-200 TR

3

BG

PL

UA

SK

CZ

HR

HU

RO

LT

RU

SI

Source: Bloomberg, Unicredit Research

‌ but countries with a better risk assessment pay less in real terms 2013 average CDS and yields for local currency bonds

% 7 6

5Y nominal yield 5Y CDS 5Y real yield

5 4 3 2 1 0 -1 -2 DE

4

CZ

BG

TR

SK

RU

LT

RO

HR

PL

SI

HU

UA

Source: Bloomberg, Unicredit Research

Better foreign demand for sovereign bonds‌ Domestic debt owned by foreign investors 50

% of marketable domestic debt

45 40

Hungary Poland Turkey Romania

35 30 25 20 15 10 5 0 Jan-06

5

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

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

‌ has a mixed impact on the cost of domestic funding for CEE banks‌ 3.5 3

Change of interest rates and yields in 2012 vs. 2010

pp

Average deposit rate 5Y sovereign yield

2.5 2 1.5 1 0.5 0 -0.5 -1 -1.5 RO

6

BG

HR

CZ

SK

SI

TR

PL

HU

RU

Source: CEE central banks, Unicredit Research

‌ who were forced to cut lending rates‌ Change of interest rates and yields in 2012 vs. 2010 6 5

pp Corporate loan rate Retail loan rate 5Y sovereign yield

4 3 2 1 0 -1 -2 -3 RO

7

HR

BG

CZ

SK

SI

PL

HU

TR

Source: CEE central banks, Unicredit Research

‌ squeezing interest spreads (and profits) in most CEE countries Change of spreads between lending and deposit rates in 2012 vs. 2010

pp 0.2 Bank spreads 0

-0.2

-0.4

-0.6

-0.8

-1

-1.2 RU

8

HR

PL

SI

CZ

RO

SK

BG

TR

HU

Source: CEE central banks, Unicredit Research

2012 showed an improvement in flows, but little support for lending‌ The quarterly evolution of foreign claims of European banks in 2012

EUR bn 20

15

4Q12 3Q12 2Q12 1Q12

10

5

0

-5

-10

-15 HU

9

SI

HR

UA

RO

LT

BG

LV

CZ

EE

SR

SK

PL

TR

RU

Source: BIS, Unicredit Research

‌ hence new lending relies on domestic savings 50

yoy (%) Credit Deposits

40

30

20

10

0

-10 Jan-06

10

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Source: National central banks, Unicredit Research

The foreign claims of EU banks in CEE rose sharply before the crisis‌ 5000

%

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

4500 4000 3500 3000 2500 2000 1500 1000 500 0 EA

11

EU

RU

TR

HU

CZ

PL

EE

SK

SI

HR

LV

BG

LT

RO

UA

Source: BIS, Unicredit Research

… but corrected since 2007 in 8 out of 15 CEE countries… % 50 40

2012 vs 2010 2010 vs 2007

30 20 10 0 -10 -20 -30 EA

12

EU

UA

HU

LV

EE

SI

HR

LT

RO

RU

SK

BG

CZ

SR

PL

TR

Source: BIS, Unicredit Research

…with positive inflows over the past three years in just five countries EUR bn 60 50

2012 vs 2010 2010 vs 2007

40 30 20 10 0 -10 -20 -30 HU

13

HR

RO

UA

LV

SI

EE

LT

BG

SK

SR

RU

CZ

TR

PL

Source: BIS, Unicredit Research

Meanwhile, FDI halved from the pre-crisis peak and are not accelerating EUR bn, 12M rolling 120 CEE CEE ex Russia 100

80

60

40

20

0 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

14

Source: Haver Analytics, Unicredit Research

… affecting the long-term outlook for industry, the main growth engine in CEE… 3.5

pp

%

31.0

Industry, avg contribution to growth, 2000-12 - lhs 29.0

3.0

Industry, % of GDP - rhs 27.0

2.5 25.0 2.0 23.0 1.5 21.0 1.0 19.0 0.5

17.0

0.0

15.0 EA

15

EU

HR

HU

SI

RU

EE

TR

LT

PL

CZ

SK

LV

RO

Source: Eurostat, Unicredit Research

‌ that relies on the production of machinery and vehicles‌ Bulgaria

Czech Rep.

80

80

Electric devices and electronics Oil and fuels

50

Office machines and IT equipment

60

Non-ferous metals

Road vehicles

50

40

40

40

30

30

30

20

20

20

10

10

10

0 Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

0 Dec-00

Dec-12

Slovakia

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

Slovenia

General industrial machinery Electric devices and electronics Iron and steel Telecom equipment Road vehicles

60 50

80 Iron and steel

70

Pharmaceuticals

50

40

30

30

20

20

20

10

10

10

Dec-06

Dec-08

Dec-10

0 Dec-00

Dec-12

Poland

80 Furniture

50

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

70

Telecom equipment Manufactures of metals

60

Electric devices and electronics

50

Road vehicles

12M MA (%)

General industrial machinery

Road vehicles

30

20

20

20

10

10

10

Dec-08

Dec-10

Dec-12

Dec-02

Dec-06

Dec-08

Dec-10

Dec-12

Oil Natural gas Ferrous Metals

Fuels Machinery and equipment

50 40

Dec-06

Dec-04

60

Electric devices and electronics

30

Dec-04

Road vehicles Clothing and apparel

70

Clothing and apparel

30

0 Dec-00

Dec-02

80

Oil and fuels

40

Dec-02

Dec-12

Russia

40

0 Dec-00

12M MA (%) Manufacture of basic metals Textiles Machinery and equipment

0 Dec-00

12M MA (%)

80

60

Dec-02

Romania

12M MA (%)

70

Dec-10

50

Road vehicles

30

Dec-04

Dec-08

60

40

Dec-02

Dec-06

Electric devices and electronics

40

0 Dec-00

Dec-04

70

General industrial machinery

60

Dec-02

Turkey

80

80 70

0 Dec-00

12M MA (%)

12M MA (%)

16

60

Electric devices and electronics

50

Pharmaceuticals Power-generating machinery Road vehicles Electric devices and electronics Telecom equipment

70

General industrial machinery

70

Clothing and apparel

60

12M MA (%) 80

Telecom equipment

Grain 70

Hungary

12M MA (%)

12M MA (%)

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

0 Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

Source: Eurostat, Unicredit Research

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

Croatia % ot total trade

50

Germany

Russia

Romania

50

Italy

Germany

Slovenia

50

45

45

45

40

40

40

35

35

35

30

30

30

25

25

25

20

20

20

15

15

15

10

10

10

5

5

5

0

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Hungary 50

Poland Germany

Austria

% ot total trade Russia

50

Germany

Russia

% ot total trade Italy

50 45

40

40

40

35

35

35

30

30

30

25

25

25

20

20

20

15

15

15

10

10

10

5

5

5

0

0

% ot total trade Netherlands

Germany

50

Italy

% ot total trade Hungary

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

Turkey Germany

Italy

% ot total trade Austria

50

45

45

45

40

40

40

35

35

35

30

30

30

25

25

25

20

20

20

15

15

15

10

10

10

5

5

5

0

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Slovakia China

% ot total trade Poland

Romania

45

50

Slovak Rep

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

45

Russia

Germany

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

17

Czech Rep. % ot total trade

Germany

Russia

% ot total trade China

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

Source: Eurostat, Unicredit Research

‌ although demand constraints remain in place for the moment The evolution of industrial production for trading partners (trade weighted)

yoy (%) 10 avg. 2002-11

2012

Feb-13 3M/3M ann.

8 6 4 2 0 -2 -4 -6 BG

18

RO

PL

SK

LT

SR

EE

HU

LV

HR

TR

UA

KZ

RU

Source: Eurostat, Unicredit Research

In the absence of strong demand from the euro area‌

8

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

pp 2012 vs 2009 2009 vs 2007 2012 vs 2007

6 4 2 0 -2 -4 -6 -8 -10 -12 TR

19

EE

LV

HU

SK

PL

BG

LT

RO

RU

CZ

SI

Source: Eurostat, Unicredit Research

… CEE countries found export markets outside the EU… Change of share of exports outside the EU in total exports

pp 10 2012 vs 2009 2009 vs 2007 2012 vs 2007

8 6 4 2 0 -2 -4 -6 SI

20

RO

BG

SK

PL

HU

LT

EE

CZ

RU

TR

LV

Source: Eurostat, Unicredit Research

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

140 120 100

Change of unit labour costs in EUR

%

2008 vs 2000 2009 vs 2008 2012 vs 2009 Min post 2009 - max 2012 vs 2000

80 60 40 20 0 -20 -40 RU

21

PL

SI

LT

HU

LV

EE

BG

SK

CZ

RO

Source: Eurostat, Unicredit Research

‌ and higher productivity

100

Change of output per employee

% 2008 vs 2000 2009 vs 2008 2012 vs 2009 2012 vs 2000

80

60

40

20

0

-20 HU

22

SI

LT

CZ

TR

PL

BG

EE

SK

RU

RO

LV

Source: Eurostat, Unicredit Research

Conclusions

The crisis forced CEE countries to adjust imbalances: ď Žhigh loan to deposit ratios ď Žlabour costs ďƒ°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.

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