Is Europe going to explode?

Is Europe going to explode? 3rd Budapest Business Boat 30 August 2010 Jean-Paul Betbéze Chief Economist Group Crédit Agricole S.A. +33 1 43 23 45 12 j...
Author: Darrell Eaton
2 downloads 0 Views 3MB Size
Is Europe going to explode? 3rd Budapest Business Boat 30 August 2010 Jean-Paul Betbéze Chief Economist Group Crédit Agricole S.A. +33 1 43 23 45 12 [email protected]

Guillaume TRESCA Emerging market Strategist Crédit Agricole CIB [email protected]

research.ca-cib.com Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request.

1 – 3 areas and 3 questions

2

Real GDP growth: USA, EMU & BRIC

y/y, %

Forecasts

Inflation rate: USA, EMU, BRIC 10,0

10,0

%

def lati on?

8,0

8,0

6,0

6,0

stagflation?

4,0

4,0

2,0

2,0

0,0

0,0

-2,0

-2,0

-4,0

-4,0 01

-6,0

02

03

Source : Datastream, CA

97

99

Source : Datastream, CA

30 August 2010

01

03 USA

05 EMU

07

09 11 Average BRIC

n? o i ss e r p de 04

05

06 US

07

08 EMU

09

10

Average BRIC

that stocks do not fully understand Pts

3

Pts

Stock markets

4100

1250

3900

1150

3700 1050

3500 3300

950

3100

850

2900 750

2700 2500 ja ma mai- juil.nv.- rs-09 09 09 Source : Bloomberg, CA 30 August 2010

650 se nov.- ja ma mai- juil.pt.- 09 nv.- rs-10 10 10 CAC 40

S&P500 (rhs)

2 - End of recession in 2009, thanks to emerging countries

4

Advanced countries: real GDP growth 8,0

y/y %

6,0 4,0

2,4

2,0

World: real GDP growth

2,2

0,9

8,0

0,0

y/y %

6,0

-2,0 -4,0

-3,4 2008

2009

2010

2011

4,0

4,2

4,0

2010

2011

3,2

2,0

Source : Datastream, Crédit Agricole S.A.

Emerging countries: real GDP growth 8,0

0,0

y/y %

6,8

6,1

6,3

4,0

-0,8

-2,0

6,0

-4,0

2,7

2008

2,0

2009

0,0

Source : Datastream, Crédit Agricole S.A. -2,0 -4,0 2008

2009

Source : Datastream, Crédit Agricole S.A.

30 August 2010

2010

2011

In the US: mostly inventories, export issue

5

US: Contributions to GDP growth

% points, annual rate 8 6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8

-10

-10 T4 07

T2 08

PCE res. inv. Source : BEA, CA. 30 August 2010

forecasts8

T4 08

T2 09

inv. non res.

T4 09

T2 10

inventories

stocks

T4 10 net exports

In the EMU recovery is both slow…

6

EMU: GDP growth forecast q/q, % Forecasts

2,0

pp

1,5

1,5

1,0

1,0

0,5

0,5

0,0

0,0

-0,5 -1,0

-0,5 -1,0

-1,5

-1,5

-2,0

-2,0

-2,5

-2,5

-3,0

-3,0 2007

08 Source : Insee, CA

30 August 2010

09

10

11 GDP

EMU: contributions to GDP growth

2008

2009

Investment Private consumption GDP

2010

2011

Net exports Inventories Source : Eurostat, CA

and differentiated.

7

EMU: GDP growth forecasts

Qo Q, % 2,5 2,0 1,5 1,0 0,5 0,0 -0,5 -1,0 -1,5 T4 09

T110 Germany

France

So urce : Euro stat, Crédit A grico le S.A . 30 August 2010

T2 10 EM U

Italy

T3 10 Spain

Greece

T4 10 P o rtugal

3 - Germany is in advance, thanks to exports – but for how long?

8

Germany: GDP growth forecast q/q, % Forecasts

2,5 2,0 1,5 1,0 0,5 0,0 -0,5 -1,0 -1,5 -2,0 -2,5 -3,0 -3,5

Germ any GDP private consumption investment change in inventories (b) net exports (b) unemployment rate inf lation (y/ y %)

08 Source : Insee, CA

30 August 2010

09

10

11 GDP

2008

2009

2010 2011

0,7 0,2 2,3 0,5 -0,5 7,8 2,8

-4,7 0,0 -8,9 -0,9 -3,2 8,2 0,2

3,1 -1,0 3,7 1,4 1,5 7,7 1,1

2,1 0,7 4,2 0,0 1,1 7,2 1,5

2010 Q1 0,5 -0,8 -1,6 1,9 -1,3 8,1 0,8

Q2 2,2 0,5 6,3 -0,1 1,8 7,7 1,0

Q3 0,2 0,1 1,5 0,0 0,0 7,5 1,1

Q4 0,5 0,2 0,4 0,0 0,2 7,5 1,4

France takes advantage of it

9

France: GDP growth forecast 2,0

Q/Q, % Forecasts

1,5

France

2008

2009

1,0 GDP private consumption investment change in inventories (b) net exports (b) unemployment rate inf lat ion (y/ y %)*

0,5 0,0 -0,5 -1,0 -1,5 -2,0 08 09 Source: Insee, Crédit Agricole S.A.

30 August 2010

10

11 GDP

0,1 0,5 0,5 -0,3 -0,3 7,4 2,8

-2,5 0,6 -7,1 -1,9 -0,2 9,1 0,1

2010

2010 2011 1,4 1,4 -2,4 0,4 0,3 9,8 1,5

1,2 1,3 0,3 0,2 0,0 9,7 1,6

Q1 0,2 0,0 -0,9 -0,2 0,6 9,5 1,3

Q2 0,6 0,4 0,8 0,6 -0,5 9,8 1,6

Q3 0,2 0,1 -0,5 0,1 0,1 9,9 1,4

Q4 0,2 0,3 -0,2 0,0 0,1 10,1 1,4

Slow too in Italy

Q/Q, %

10

Italy: GDP growth forecast Forecasts

2,0

It aly

1,0 0,0

GDP private consumption investment change in inventories (b) net exports (b) unemployment rate inf lat ion (y/ y %)

-1,0 -2,0 -3,0 -4,0 08 Source : Insee, CA

30 August 2010

2008

09

10

11 GDP

-1,3 -0,8 -4,0 -0,3 0,1 6,7 3,5

2009 -5,1 -1,8 -12,2 -0,5 -1,2 7,8 0,8

2010

2010 2011 0,9 0,4 0,1 0,6 0,2 8,7 1,7

0,9 0,5 1,0 0,0 0,4 8,8 1,7

Q1 0,4 0,1 0,6 0,0 0,4 8,6 1,3

Q2 0,4 0,1 -0,3 0,1 0,2 8,7 1,6

Q3 0,1 0,1 0,1 -0,1 0,1 8,8 2,1

Q4 0,1 0,1 0,1 0,0 0,1 8,8 1,9

And pain in Spain

11

Spain: GDP growth forecast q/q, % Forecasts

2,0 1,5

Spain

1,0 0,5

2008 GDP private consumption investment change in inventories (b) net exports (b) unemployment rate inf lat ion (y/ y %)

0,0 -0,5 -1,0 -1,5 -2,0 -2,5 -3,0 08 Source : Insee, CA

30 August 2010

09

10

11 GDP

0,9 -0,6 -4,4 -0,3 1,7 11,4 4,1

2009 -3,6 -5,0 -15,3 -0,8 3,3 18,0 -0,2

2010

2010 2011 -0,4 0,4 -7,4 -0,1 0,8 19,7 1,8

0,5 -0,2 -2,0 0,3 1,0 19,7 2,0

Q1 0,1 0,5 -2,7 -0,1 0,2 19,2 1,2

Q2 0,3 0,5 -1,3 0,1 0,1 19,7 1,6

Q3 -0,3 -0,7 -1,2 0,0 0,2 20,0 2,1

Q4 0,0 0,0 -0,8 0,0 0,1 19,9 2,2

Unemployement shows it too well

12

EMU: unemployment rates

% 20 18 16 14 12 10 8 6 4 05

06

Spain

07

EM U So urce : Euro stat, Crédit A grico le S.A . 30 August 2010

08 Germany Italy

09 France

10

Hence: four scenarios

13

Emerging countries: More of the same ?

Developed countries: back to “normal”, lower, worse?

30 August 2010

4 - Some fiscal consolidation is not enough

14

Debt-to-GDP paths 200 % of GDP

(primary balance improves by 0,2 points a year)

180 160 140 120 100 80 60 40 20 08 09 10 11 12 13 EMU Germany Spain Netherlands Greece Portugal Sources : EC, CA simulations 30 August 2010

14

15 16 France Belgium

17

18

19 20 Italy Ireland

And more has to be explained… and organized

15

Debt-to-GDP paths 200 % of GD P

(primary balance improves by 1 point a year)

180 160 140 120 100 80 60 40 20 08 09 10 11 12 13 EMU Germany Spain Netherlands Greece Portugal Sources : EC, CA simulations 30 August 2010

14

15 16 France Belgium

17

18

19 20 Italy Ireland

Markets know it, but the game is complex bp 1000 900

16

Long-term Government Bond Yields Spreads vis-à-vis Germany

800 700 600 500 400 300 200 100 0 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10

Source : Bloomberg, CA 30 August 2010

Portugal

Ireland

Italy

Greece

Spain

France

5 - Zero bound is near everywhere %

17

Fed: open-market operations

6,0 5,0 4,0 3,0 2,0 1,0 0,0 janv.-07

avr.-07

juil.-07

oct.-07

janv.-08

avr.-08

juil.-08

oct.-08

Fed funds

Source : Bloomberg, CA

%

janv.-09

avr.-09

juil.-09

effective Fed funds

oct.-09

janv.-10

avr.-10

juil.-10

3-month rate (Libor)

ECB: short-term interest rates

6,0 5,0 4,0 3,0 2,0 1,0 0,0 Jan-07

Apr-07

Source : Bloomberg, CA

30 August 2010

Jul-07

Oct-07

Jan-08

Apr-08 Refi

Jul-08

Oct-08 Eonia

Jan-09

Apr-09 Euribor 3M

Jul-09

Oct-09

Jan-10 deposit facility

Apr-10

Jul-10

But Non Standard policies still differ

$bn 2 500 2 250 2 000 1 750 1 500 1 250 1 000

18

Fed: assets composition A B CP & M M FF TA F Other credit extensio ns Other Fed A ssets P rimary Dealers Credit M isc. Go ld Sto ck Repo RM B S A gency securities Treasury securities

EURbn 2 250 1 750 1 250

500

250

250

Source : Fed, CA

juil.-08

Claims o n residents (TA F)

1 000

500

janv.-08

OM O

1 500

750

juil.-07

LTRO

2 000

750

0 janv.-07

ECB: assets composition

janv.-09 juil.-09

janv.-10 juil.-10

0 Jan07

Other assets

Jul07

Source : ECB, CA

30 August 2010

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Claims o n no nresidents Go ld

And the ECB halts its program in favour or Greece

19

ECB securities purchase programmes 70

EURbn

EURbn

60 50 40 30 20 10 0

18 16 14 12 10 8 6 4 2 0

14 21 28 4 juin 11 18 25 2 9 16 23 30 6 13 20 mai mai mai juin juin juin juillet juillet juillet juillet juillet août août août amount of w eekly purchases (rhs) Source : BCE, Crédit Agricole S.A

30 August 2010

cumulated govt bond purchases

6 - The US asks the Yuan to appreciate

20

Dollar constellation: "Asia Currencies"

(1999=100)

(China, India, Thailand, Hong Kong, Korea; index 100 in 1999)

140 130 120 110 100 90 80 70 99

00

01

Source : Datastream, CA 30 August 2010

02

03

04 CNY

05 INR

06

07 THB

08 HKD

09

10 KORW

And the euro does the rest of the job

21

euro - dollar exchange rate 1,70 euro/usd

1,60

1,50

1,40

1,30

1,20

1,10 Jan-07

Jul-07

Jan-08

Source : Datastream, CA 30 August 2010

Jul-08

Jan-09

Jul-09

Jan-10

euro - dollar

Jul-10

A huge deficit in the US, after all…

22

US: Fiscal deficit

% of GDP 3 3 2 2 CBO 1 forecasts 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 -6 -7 -7 -8 -8 -9 -9 -10 -10 1956 1964 1972 1980 1988 1996 2004 2012 2020 Source : CBO (January 2010 baseline, CA. grey areas: US recessions

30 August 2010

US: public debt and debt service % of GDP 70 65 60 55 50 45 40 35 30 25 20

% of receipts 21 19 17 15 13 11 9 7 5

1956 1963 1970 1977 1984 1991 1998 2005 2012 2019 grey areas: debt debt service (RHS) US recessions Source : CBO (January 2010 baseline), BEA,

10Y yields may say different stories: deflation?

US: S&P500 & 10Y yield

1941-43 = 10 1 250 1 200 1 150 1 100 1 050 1 000 950 900 850 800 750 S&P500 US T-bond (RHS) 700 650 Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul09 09 09 09 09 09 10 10 10 10

% 4,2 4,0 3,8 3,6 3,4 3,2 3,0 2,8 2,6 2,4 2,2 2,0

Euroland: Eurostoxx 50 & 10Y yields % 3 100

3,6

2 900

3,4

2 700

3,2

2 500

3,0 2,8

2 300

2,6

2 100

2,4

1 900

2,2

1 700 janv.-09 avr.-09 juil.-09 oct.-09 janv.-10 avr.-10 juil.-10

2,0

Source : Federal Reserve, IHS Global Insight, CA.

Source : Datastream, CA.

30 August 2010

23

Eurostoxx 50

German Bund (rhs)

7 – Recession strikes Western Europe, Hungary is affected

24

10 years of GDP growth

y/y, % 15,0 10,0 5,0 0,0 -5,0 -10,0 -15,0 2000

2001

2002

Czech Rep

2003

2004

Estonia

Source: Datastream, Crédit Agricole S.A. 30 August 2010

2005

2006

Hungary

2007

2008

Poland

2009

2010

Slovakia

Convergence is still in process – Hungary is in a relative good position

GDP per Capita in PPP

USD 30 000 25 000 20 000 15 000 10 000 5 000 2000

2001

2002

Czech Rep

2003

2004

Estonia

Source: Datastream, Crédit Agricole S.A.

30 August 2010

2005

2006

Hungary

2007

2008

Poland

2009

2010

Slovakia

25

Public debt: a key issue for Hungary

26

Public debt to GDP ratio

% 90 80

Maastricht

70 60 50 40 30 20 10 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Czech Rep

Estonia

Hungary

Poland

Slovakia

Maastricht Cr.

2009

Source: Datastream, Crédit Agricole S.A.

A public finance slippage in Hungary compared to other Central Europe neighbours 30 August 2010

Rating agencies are not far away

27

Sovereign Rating LT S&P A ABBB+ BBB BBB-

Czech Rep

Estonia

Source: Datastream, Crédit Agricole S.A. 30 August 2010

Hungary

Poland

09 dé c-

08 dé c-

07 dé c-

dé c-

06

05 dé c-

04 dé c-

03 dé c-

02 dé c-

01 dé c-

00 dé c-

dé c-

99

BB+

Slovakia

Investment Grade

Hungary: is the weakest link in Europe?

28

Weak economic rebound… After 6.3% negative growth in 2009, the economy will not come out of recession in 2010, likely posting meagre -0.3%.

…As the domestic demand has been hurt hard The fiscal austerity and hammered banking sector are curtailing domestic demand; recovery will be very gradual.

Sensitive to a European slowdown. Any ‘double dip’ in the wake of the European sovereign crisis will weigh on growth.

Activity better but demand still languishing 20 YoY%

60

15

55

10 5

50

0

45

-5 -10

Retail sales

-15

Industrial production

-20

Hungarian PMI (rhs)

-25 Jun-05

40 35 30

Jun-06

Jun-07

Jun-08

Source: MarkIt, HSO, Crédit Agricole CIB

30 August 2010

Jun-09

Jun-10

Hungary is lagging the recovery

29

Sharp recession 2009 GDP Qatar China India Lebanon Vietnam Morocco Egypt Indonesia Tunisia Algeria Poland Australia Philippines Brazil Korea Saudi Arabia Norway Malaysia South Africa Switzerland Taiwan New Zealand Singapore Greece Thailand France Canada USA Kuwait Hong Kong Argentina United Arab Emirates Spain Czech Republic Turkey Germany United Kingdom Sweden Italy Japan Hungary Mexico Romania Russia

-10

Qatar Singapore China India Philippines Brazil Vietnam Malaysia Taiwan Lebanon Indonesia Turk ey Korea Hong Kong Egypt Russia Algeria Mexico Morocco Argentina Thailand Saudi Arabia Sweden Tunisia Australia Canada Kuwait New Zealand Germany JAPAN Poland USA South Africa United Arab Emirates Switzerland Czech Republic United Kingdom France Norway Italy Romania Hungary Spain Greece

here

-5

Source: Crédit Agricole CIB

30 August 2010

Weak rebound 2010 CACIB forecasts

0

5

10

15

-10

here

-5

0

5

10

15

20

Where are the risks? Hungary is vulnerable

30

Assessing emerging vulnerability by measuring financial, sovereign, and European exposure fragilities. Final vulnerability index: we aggregate those three vulnerability indicators. We assign the same weigh to sovereign and financial vulnerability, but we underweight the trade exposure to Europe.

Financial fragility

Vulnerability index

Indicator risk from 1 to 5 (5 = fear)

Sovereign fragility

Europe exposure

Eastern Europe ahead: Hungary at the top 3.7 Arithmetic average EM average Asia Latam Central Europe MEA EM members of G20 BRICs

30 August 2010

2.46 2.20 2.28 3.44 2.23 2.29 2.29

Who’s next on the list? Central Europe in the eye of the storm (1) Vulnerability index

Eastern Europe looks like the most vulnerable region, only partly due to the trade exposure to Europe.

Vulnerability ranking (from riskiest to safest)

Asia and LatAm are safer with strong economic recovery based on domestic demand. Hungary Czech rep.

Eastern Europe ahead

Romania Poland Vietnam

Arithmetic average EM average Asia Latam Central Europe MEA EM members of G20 BRICs

30 August 2010

2.46 2.20 2.28 3.44 2.23 2.29 2.29

Ukraine South Africa Turkey India

3.68 3.45 3.41 3.21 3.21 3 2.89 2.87

Morocco

2.55 2.53

Brazil

2.52

Kazakhstan Mexico

2.47 2.44

Russia

2.41

Israel

2.31

Malaysia

2.27

Egypt

2.21

Philippines

2.2

Indonesia

2.17

Korea

2.15

Thailand

2.13

Taiwan

2.03

Singapore

2

Argentina

1.88

Hong Kong

1.85

UAE

1.84

China

1.69

Saudi Arabia

1.57

31

Who’s next on the list? Central Europe in the eye of the storm (2)

Exports to EU as % of GDP 20%

32

Share of government debt in FX 45%

Hungary 47%

18%

Hungary: 38%

40%

16%

35%

14%

30%

12% 10%

25%

8%

20%

6% 4%

15%

2%

5%

10%

0% E Europe

Asia

MEA

Latam

Credit-to-deposit ratio 140%

Hungary: 133%

120% 100% 80% 60% 40% 20% 0% E Europe

MEA

Asia

Source: Bloomberg, DataStream, Crédit Agricole CIB

30 August 2010

Latam

0% E Europe

Latam

Asia

MEA

Budgeting for success (1)

33

Hungary is not Greece The IMF plan has been a success in 2008-2009. Hungary did not draw the last IMF tranche. Debt path is sustainable, primary surplus Debt and budget deficits in 2010 are highly achievable Better budget situation than most of the EM countries

But it is not so rosy everywhere Markets are worried, HUF under pressure which refrains the CB to cut rates and hamper the economic recovery Budget goals are achievable only if the government implements further fiscal austerity measures Imperative in such a context to have a monetary and fiscal cooperation

Weak HUF Hurt economy

Higher real rates

30 August 2010

Poor gov’ communication

Worried markets

J apan US Ireland Spain Greece UK Latvia France Lithuania Portugal Poland India Malasia Nigeria Netherland Australia Singapore Belgium Austria Kenya Finaland Canada Denmark Slovak Rep Italy S lovenia Germany Honk Kong Czech South China Chile Israel Thailand Sweden Ukraine Romania Saudi Rus sia Argentina Pak istan Peru Colombia New Iceland Phlippines Mexico Turkey Indonesia Norway Estonia Switzerland Bulgaria Hungary Brazil Korea

Here 20%

India Turkey Philip Egypt Brazil Indonesia Israel Malaysia Morocco Mexico Thailand Hungary Vietnam Saudi Arab Poland Argentina Taiwan Romania Ukraine Czech Rep. Korea Russia China Saudi Arab Kazak UAE Singapore HK

30 August 2010

%

Emerging average: 2.7% Developped: 5.0% Hungary here 12 10 8 6 4 2 0 -2 -4

34

Budgeting for success (2)

Lower fiscal adjustment is needed

Required adjustment in 2010-20 of cyclically adjusted primary balance to achieve debt target in 2030

Low interest payments/ Gov revenue 30%

25%

15%

10%

5%

0%

Source: IMF, Moody’s,CACIB

Hungary: it is not 2008

35

Better liquidity context FX reserves are now EUR29.1bn, much higher than before the IMF programme (up by +90%). This looks ample, and appropriate to face any new liquidity crisis. Deleveraging has already started

The German boost: Hungary exports drag higher by Germany

FX reserves at comfortable levels 35

bn

%

more confortable level

30

%

30

15

20

10 5

10 25

0

0

FX reserves

-5 -10

20

Export YoY%

German IP

-10

-20

-15

15 -30 10 Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Source: Bloomberg, NBH, Crédit Agricole CIB

30 August 2010

Jan-09

Jul-09

Jan-10

Jul-10

-40 Jul-02

-20 Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

-25 Jul-10

Hungary: it is getting better

36

It is not the old good days but it is getting better GDP rebound

Lower external debt (% GDP) %

120

IP rebound

YoY % 8

YoY % 20

110

6

15

100

4

10

90

2

5

80

0

0

-2

-5

70

-10

-4 60

-15

-6

50

-20

-8

40

-25

-10 2005 2006 2007 2008 2009 2010 2011

-30 00 01 02 03 04 05 06 07 08 09

Unemployment has peaked '000s 550

10

02

03

04

05

06

07

08

09

10

Export rebound YoY % 40

500 20 450 400

0

350 -20

300 250

-40

200 99 00 01 02 03 04 05 06 07 08 09 10

02

03

04

05

06

07

08

09

10

Source: Bloomberg, NBH, HSO, Crédit Agricole CIB

30 August 2010

The German boost

37

Hungary may benefit the fantastic German rebound

%

%

30

15

20

10 5

10

0

0

Hungarian exports drag higher by the German economy

-5 -10

Export YoY%

-10

German IP

-20

-15

-30

-20

-40 Jul-02 115

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

%

-25 Jul-10 %

50 40

110

30

105

20

100

10 95

0

90 85 80 Jul-02

Jul-03

IFO headline (rhs)

-10

Export YoY% 3m average (rhs)

-20

Jul-04

Jul-05

Jul-06

Jul-07

Source: Bloomberg, HSO, IFO Crédit Agricole CIB

30 August 2010

Jul-08

Jul-09

-30 Jul-10

The strong IFO bodes well for the Hungarian exports and so the economy

HUF: oversold?

38

HUF is driving by fears Should renewed worries materialise, we would not rule out NBH intervention to cap the upside in EUR/HUF. Past experience shows that the speed of moves matters as much as the level. 300 seems to be an appropriate level. HUF should rebound help by the CA surplus and better risk appetite

FX oversold?

HUF driven by fears 1.5 0% 320

80

310

EUR/HUF

300

VIX (rhs)

70

290

60

280

50

2.0

UAE CNYHKD ARP SAR

-2% SGD TWD PH P

-4%

270 260

40

250

30

240 220 Jun-08

-6%

3.0 KZT

UAH

3.5 VND

MXN

IN R

Jun-09

Dec-09

BRL MAD

KRW

Jun-10

CZK

-12%

Source: Bloomberg, Crédit Agricole CIB

FX depreciation over the last 6 month

RO N

PLN

4.5

Overal vulnerability index (the higher, the riskier)

ZAR

10 Dec-08

4.0

ILS MYR

-8%

-10%

30 August 2010

THB EG IDRP

RUB

20

230

2.5

HUF

HUF: Private flows will likely keep on coming back

39

As suggested by past data, private flows should come back further in 2010 Abundant global liquidity also supports flow prospects Bank flows will likely come back further in 2010, targeting Asia’s medium term potential, even if portfolio flows may moderate

Private capital flows to EM: welcome back in 2010

Capital flows: after portfolio, welcome to bank flows

300%

500

250%

400

800

200%

300

600

150%

200

400

100%

100

200

50%

1200

Y oY change in private capital f low s to EMs (RHS) Total private f low s to EMs (LHS, USD bn)

1000

0 -200 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Sources: Bloomberg, CEIC, Credit Agricole CIB

30 August 2010

Foreign direct investment Portf olio investment Banks Other USD Bn

0

0%

-100

-50%

-200 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Rates outlook: ready to act

40

Renewed worries may prevent the NBH from implementing a final cut as the recovery is losing some traction. The inflationary environment has changed and limits the scope for a cut. CB projections revised higher. As risk aversion may remain high, the NBH has dropped its easing bias leaving the door open for an emergency hike.

Real rates still high

FX levels and monetary policy %

320

12 Poland

310

11

accomodative

300 290

10

280

9

Hungary

270 8

260 250

7

240

EUR/HUF

230

Base rate (rhs)

220 Jun-08

6

Czech

%

5 Dec-08

Jun-09

Sources: Bloomberg, NBH, HSO, Credit Agricole CIB

30 August 2010

restrictive

Romania

Dec-09

Jun-10

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Forecasts

41 Macro forecasts 09 Emerging Europe Czech Republic Hungary Poland Russia Romania Turkey

Real GDP (YoY. %) 10 11

09

CPI (YoY. %) 10

11

Current Account (% GDP) 09 10 11

-5.2

3.9

4.1

7.9

6.3

6.1

1.0

0.3

0.0

-4.2 -6.3 1.8 -7.9 -7.1 -4.7

1.5 -0.3 2.8 4.7 0.7 5.5

3.0 2.6 3.4 4.6 2.0 4.5

0.5 5.4 3.5 11.7 5.6 6.3

1.5 3.5 2.9 7.5 5.0 9.5

2.0 3.5 2.8 8.0 5.5 7.0

-1.1 1.2 -1.7 4.0 -4.4 -2.3

-2.5 -1.0 -2.5 4.0 -5.0 -4.2

-2.8 -2.0 -3.0 4.0 -6.0 -4.5

FX forecasts Central Europe

26-Aug

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

EUR/CZK EUR/HUF

24.84 283

25.20 285

25.00 260

24.00 255

24.00 250

23.50 245

23.00 240

Poland

EUR/PLN

3.98

4.05

3.90

3.70

3.50

3.50

3.30

Romania

EUR/RON

4.25

4.30

4.40

4.45

4.50

4.50

4.50

Czech Rep. Hungary

Rate forecasts Emerging Europe Czech Rep. Hungary Poland

30 August 2010

14D repo 2W repo 7D repo

26-Aug 0.75 5.25 3.50

Sep-10 0.75 5.00 3.50

Dec-10 0.75 5.00 3.50

Mar-11 1.00 5.00 3.75

Jun-11 1.25 5.00 4.25

Sep-11 1.50 5.50 4.25

Dec-11 1.75 5.50 4.25

Romania Russia

2W repo Refinancing rate

6.25 7.75

6.00 7.75

6.00 7.75

6.50 8.00

6.75 8.50

7.25 9.00

7.25 9.25

Turkey

Overnight

6.50

7.00

8.25

9.00

9.50

10.25

10.50

Disclaimer Certification The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jean Paul BETBEZE, Guillaume TRESCA

Disclaimer © 2010, CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK All rights reserved. This research report or summary has been prepared by Crédit Agricole Corporate and Investment Bank or one of its affiliates (collectively “Crédit Agricole CIB”) from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is a commercial communication provided for information purposes only. Nothing in this report should be considered to constitute investment, legal, accounting or taxation advice and you are advised to contact independent advisors in order to evaluate this report. It is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy, subscribe for or sell any of the financial instruments described herein, nor is it intended to form the basis for any credit, advice, recommendation or other evaluation with respect to such financial instruments and is intended for use only by those professional investors to whom it is made available by Crédit Agricole CIB. Crédit Agricole CIB does not act in a fiduciary capacity to you in respect of this report. Crédit Agricole CIB may at any time stop producing or updating this report. Not all strategies are appropriate at all times. Past performance is not necessarily a guide to future performance. The price, value of and income from any of the financial instruments mentioned in this report can fall as well as rise and you may make losses if you invest in them. Independent advice should be sought. In any case, investors are invited to make their own independent decision as to whether a financial instrument or whether investment in the financial instruments described herein is proper, suitable or appropriate based on their own judgement and upon the advice of any relevant advisors they have consulted. Crédit Agricole CIB has not taken any steps to ensure that any financial instruments referred to in this report are suitable for any investor. Crédit Agricole CIB will not treat recipients of this report as its customers by virtue of their receiving this report. Crédit Agricole CIB, its directors, officers and employees may effect transactions (whether long or short) in the financial instruments described herein for their own accounts or for the account of others, may have positions relating to other financial instruments of the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. Crédit Agricole CIB may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Crédit Agricole CIB is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without the prior express written permission of Crédit Agricole CIB. To the extent permitted by applicable securities laws and regulations, Crédit Agricole CIB accepts no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents. United States of America: This research report is distributed solely to persons who qualify as “Major U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934 and who deal with Crédit Agricole Corporate and Investment Bank. Recipients of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Crédit Agricole Securities (USA), Inc. (a brokerdealer registered with the Securities and Exchange Commission). The delivery of this research report to any person in the United States shall not be deemed a recommendation of Crédit Agricole Securities (USA), Inc. to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. United Kingdom: Approved and/or distributed by Crédit Agricole Corporate and Investment Bank, London branch. Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. Italy: This research report can only be distributed to, and circulated among, professional investors (operatori qualificati), as defined by the relevant Italian securities legislation. Spain: Distributed by Crédit Agricole Corporate and Investment Bank, Madrid branch and may only be distributed to institutional investors (as defined in article 7.1 of Royal Decree 291/1992 on Issues and Public Offers of Securities) and cannot be distributed to other investors that do not fall within the category of institutional investors. Hong Kong: Distributed by Crédit Agricole Corporate and Investment Bank, Hong Kong branch. This research report can only be distributed to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571) and any rule made there under. Japan: Distributed by Crédit Agricole Securities Asia B.V. which is registered for securities business in Japan pursuant to the Law Concerning Foreign Securities Firms (Law n°5 of 1971, as amended), and is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. This report is not intended, and should not be considered, as advice on investments in securities which is subject to the Securities Investment Advisory Business Law (Law n°74 of 1986, as amended). Luxembourg: Distributed by Crédit Agricole Corporate and Investment Bank, Luxembourg branch. It is only intended for circulation and/or distribution to institutional investors and investments mentioned in this report will not be available to the public but only to institutional investors. Singapore: Distributed by Crédit Agricole Corporate and Investment Bank, Singapore branch. It is not intended for distribution to any persons other than accredited investors, as defined in the Securities and Futures Act (Chapter 289 of Singapore), and persons whose business involves the acquisition or disposal of, or the holding of capital markets products (as defined in the Securities and Futures Act (Chapter 289 of Singapore)). Switzerland: Distributed by Crédit Agricole (Suisse) S.A. This report is not subject to the SBA Directive of January 24, 2003 as they are produced by a non-Swiss entity. Germany: Distributed by Crédit Agricole Corporate and Investment Bank, Frankfurt branch and may only be distributed to institutional investors. Australia: Distributed to wholesale investors only. This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act. THE DISTRIBUTION OF THIS DOCUMENT IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS DOCUMENT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. BY ACCEPTING THIS REPORT YOU AGREE TO BE BOUND BY THE FOREGOING. Information on the management of conflicts of interests policy available at www.ca-cib.com/tools/mifid.html.

30 August 2010

42