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CEE â€“ 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.

The current risk normalisation process helps CEE governmentsâ€Ś bp

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

400 5Y yields 5Y CDS 300

200

100

-100

-200 TR

Source: Bloomberg, Unicredit Research

â€Ś 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

Source: Bloomberg, Unicredit Research

Better foreign demand for sovereign bondsâ€Ś 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

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

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

â€Ś has a mixed impact on the cost of domestic funding for CEE banksâ€Ś 3.5 3

Change of interest rates and yields in 2012 vs. 2010

Average deposit rate 5Y sovereign yield

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

Source: CEE central banks, Unicredit Research

â€Ś who were forced to cut lending ratesâ€Ś 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

Source: CEE central banks, Unicredit Research

â€Ś 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

Source: CEE central banks, Unicredit Research

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

EUR bn 20

4Q12 3Q12 2Q12 1Q12

-5

-10

-15 HU

Source: BIS, Unicredit Research

â€Ś hence new lending relies on domestic savings 50

yoy (%) Credit Deposits

-10 Jan-06

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 crisisâ€Ś 5000

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

4500 4000 3500 3000 2500 2000 1500 1000 500 0 EA

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

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

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

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

Source: Haver Analytics, Unicredit Research

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

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

Source: Eurostat, Unicredit Research

â€Ś that relies on the production of machinery and vehiclesâ€Ś Bulgaria

Czech Rep.

Electric devices and electronics Oil and fuels

Office machines and IT equipment

Non-ferous metals

Road vehicles

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

Pharmaceuticals

Dec-06

Dec-08

Dec-10

0 Dec-00

Dec-12

Poland

80 Furniture

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

Telecom equipment Manufactures of metals

Electric devices and electronics

Road vehicles

12M MA (%)

General industrial machinery

Road vehicles

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

Electric devices and electronics

Dec-04

Road vehicles Clothing and apparel

Clothing and apparel

0 Dec-00

Dec-02

Oil and fuels

Dec-02

Dec-12

Russia

0 Dec-00

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

0 Dec-00

12M MA (%)

Dec-02

Romania

12M MA (%)

Dec-10

Road vehicles

Dec-04

Dec-08

Dec-02

Dec-06

Electric devices and electronics

0 Dec-00

Dec-04

General industrial machinery

Dec-02

Turkey

80 70

0 Dec-00

12M MA (%)

Electric devices and electronics

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

General industrial machinery

Clothing and apparel

12M MA (%) 80

Telecom equipment

Grain 70

Hungary

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

â€Ś and on demand from Germany and other euro area trade partnersâ€Ś Bulgaria

Croatia % ot total trade

Germany

Russia

Romania

Italy

Germany

Slovenia

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

Hungary 50

Poland Germany

Austria

% ot total trade Russia

Germany

Russia

% ot total trade Italy

50 45

% ot total trade Netherlands

Germany

Italy

% ot total trade Hungary

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

Turkey Germany

Italy

% ot total trade Austria

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

Slovak Rep

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

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

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

â€Ś 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

Source: Eurostat, Unicredit Research

In the absence of strong demand from the euro areaâ€Ś

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

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

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

Source: Eurostat, Unicredit Research

â€Ś and higher productivity

100

Change of output per employee

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

-20 HU

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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