Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

CEE Insights Fixed Income and Foreign Exchange

Looking ahead this week… Monday

Tuesday

Wednesday

PL: Retail Sales, Industry RS: Current Account SK: Unemployment

HU: No Rate Change SK: Current Account

HR: Unemployment

Thursday

Friday PL: Unemployment RS: Wages

Click for: this week’s detailed releases/events, market forecasts, macro forecasts The coming week offers little in terms of new macro releases . Poland will release the most relevant data (retail sales, industry and unemployment). We are eagerly waiting to see if the fourth quarter could bring a somewhat better performance for Polish growth than the poor 3Q16 flash reading revealed last week. In Hungary, the base rate is to remain unchanged at 0.9% without much doubt on Tuesday. However, the quantitative limitation of the 3M deposit facility continues; the amount of excess liquidity currently being squeezed out of the central bank may increase on Wednesday. This should maintain the pressure on the Hungarian forint in the coming weeks.

In case you missed it last week… 0.50 0.00 -0.50 -1.00 -1.50

accrued interest

FX gain/loss

capital gain/loss

SI

SK

PL

RO

CZ

HU

HR

CEE

RO

PL

CZ

-2.00

HU

 

Eurobonds**

1.00

HR

 

Fitch affirmed Hungarian rating on late Friday, while government introduced tax cuts and hikes in minimum wage Poland lowered retirement age Flash GDP figures for 3Q16 surprised to downside in Poland, Czech Republic, Romania and Slovakia, while arriving in line with assumptions in Hungary Inflation surprised slightly to upside in Slovakia and Serbia For other events last week, please check respective countries: HR, CZ, HU, PL, RO, TR, SI, SK, SR

CEE



LCY bonds* 1.50

TOTAL RETURN

On Radar After the victory of Donald Trump, it soon became evident that our former yield forecasts for CEE for year-end 2016 cannot be maintained. We increased our forecasts by roughly 20-50 basis points for the region for end-2016 and for 1Q17 for 10Y bonds. A much bigger question mark is around our longer-term forecasts, which depend heavily on global market developments. The exact policies of Trump and the outcome of the upcoming political minefield in Europe (with the Italian referendum in December, followed by Dutch, French and German elections in 2017) will be crucial. For CEE bonds, although recent yield increases correlate much more with US yield changes, German Bunds should be much more important. It is hard to see how the ECB will react, but an increase of possible redenomination risks due to political events could possibly increase efforts by the ECB to keep bond markets under control. In addition, spreads over Bunds have also widened too much, in our view, and made a larger pool of CEE bonds attractive again. Improvements in the net international investment position put CEE countries in a much safer position, which is unaffected by the victory of Trump, even if we acknowledge an increase of geopolitical and fiscal risks. This means that spreads could slight ly narrow in the coming months. Overall, current yield levels seem rather high now, especially in Hungary and Poland. (For further details, see the next page.) Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

We expect some spread tightening, as local fundamentals of CEE countries did not change with the victory of Donald Trump

Spread widening of CEE bonds seems somewhat overdone ‘How do you see government bond yields and spreads over German Bunds in the aftermath of the Trump victory?’ Croatia: While, similar to other peers, Croatian Eurobond yields were under

significant pressure, LCY yields so far are demonstrating resilience to global market trends. The local yield curve traditionally shows more limited volatility, additionally backed by local factors, i.e. improved macro fundamentals and high LCY liquidity - an accommodative monetary policy stance. While we see some upward pressure in the near term as likely (we adjusted our near-term forecasts by 20bp), we still see spread tightening down the road, amid the mentioned improvement in the risk profile in 2017. Czech Republic: Czech bond yields are likely to see further growth until the end of 2016, albeit likely at a slower pace than that seen in the last few weeks. The yield increase is going to be supported by abundant bond issuance in November, rising domestic inflation pressures and a German Bund yield rise. The turning point could come in 1Q17, when we expect some downward correction of Czech yields, driven by the likely prolongation of the Eurozone quantitative easing program over March 2017. The spread over German Bunds could differ substantially at the short and long ends of the yield curve, as the yields of 2-year bonds are likely to be volatile, due to foreign investors’ speculation on Czech currency appreciation after the termination of the FX commitment. Hungary: The turmoil in markets triggered by the US election gave a substantial lift to HGB yields, especially to the long ones. Since Hungary was raised back to investment grade before the election, the impact on local markets was not too severe, as the spread over the US 10-year yield reflected no significant change, while the spread over the 10-year Bund somewhat widened, albeit not to a substantial extent, in our opinion. We note that the volatility on the belly and long end of the curve should remain elevated as long as negative international market sentiment persists. Due to the changed market conditions, we revised our end-2016 10-year yield forecast up from 2.75% to 3.39% and retained the decreasing trajectory throughout 2017, due to the expected narrowing of the spread over developed market yields. Poland: Since Trump’s victory, the long end of the Polish curve has been continuously rising. 10Y yields went up by roughly 70bp over the last two weeks, following the upward trend in yields on the core markets. In response to recent developments, we revised our 10Y yield forecast upward to 3.4% in 1Q17 and kept our expectation of yields close to 3.2% for 2H17, seeing the recent move as the market overshooting. Further, the spread vs. Bunds has widened visibly to above 340bp in recent days and the increase in the spread is more pronounced than in other countries in the region. While increasing geopolitical risks are most likely the main reason behind such a move (5Y CDS picked up as well in recent days), local political and fiscal risks may add to the trend we have been observing for the past year. Fitch, in reaction to the retirement age cut, warned that failure in maintaining discipline in public finance may lead to a downgrade. All in all, we expect the Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

spread vs. Bunds to narrow from current levels, but to remain elevated (close to 300bp) in the medium term. Romania: Since German Bund yields have risen after Trump’s victory in the US, we decided to revise upwards our forecast for 10Y RON yields to 3.35% in December 2016 (+50bp vs. the old forecast) and 3.40% in December 2017 (+55bp). Fiscal risks for 2017 are important and they are likely to prevent the spread over 10Y German Bunds from falling below 290-300bp in 2017 under the new scenario. The new yield curve is steeper than the old one because long maturities are more exposed to a sell-off due to the strong presence of non-residents in the market. On the other hand, short maturities are supported by demand from local banks, which still have plenty of liquidity to invest and yields could rise only to a small extent here. Serbia: Although to a lesser extent than in other CESEE countries, the Serbian bond market also took a hit from the ‘Trump effect’, as we saw a hike in the USD 2021 Eurobond yield of around 70bp (now standing at 4.46%) and around 10bp in the benchmark RSD 2022 LCY yield (standing at 5.62%). When looking at spread developments, after short-term volatility in the days after the election, we saw some compression of the G-spread on USD bonds, which moved from around 290bp to 270bp in the last week. Looking forward, we still see room for some compression of LCY yields, with economic, fiscal, inflationary and external factors playing a supportive role. On the other hand, USD-denominated yields are expected to continue to gradually increase, as we see the benchmark effect outweighing some potential milder spread compression. Slovakia: Slovak yields increased in the past few days, mostly fueled by the rise in Bund yields and the heightened expectations of a US Fed hike in December. US labor market and inflation data have been pointing to a hike, and this perception was strengthened by the US election result and Fed Chair Yellen’s remarks. Trump’s likely policy poses inflationary risks, warranting tighter monetary policy by the Fed. However, Slovak yields also react strongly to ECB actions and we currently expect the ECB to announce an extension of its asset purchases in the amount of EUR 60-80bn beyond March 2017. Our yield forecast takes this into account and we expect SK10 yields at 0.65% in 4Q16 and 0.75% in 2Q17. The spread against Bunds, which is currently around 60bp, should narrow somewhat in the upcoming quarters (25-45bp). Slovenia: For the time being, we keep the yield outlook unaltered, until we get more clarity on the current volatility. We still see the risk profile remaining sound, as the growth and fiscal story looks supportive and financing risks for 2017 are well under control, amid fresh issuance and an ample cash buffer. Clearly more aggressive repricing of the benchmark curve would eventually trigger a forecast revision.

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Looking ahead Date

Time

Ctry Release

Period

Erste Survey

Prior

Pre Comment

9.3%

9.4%

Unemployment rate could have decreased somewhat further in October

21. Nov.

SK

Unempl. Rate

Oct

9.3%

21. Nov.

RS

CA Balance (m)

Sep

-89.4 m

-0.9%

21. Nov.

10:30

SI

PPI y/y

Oct

21. Nov.

14:00

PL

Retail Sales y/y

Oct

3.7%

4.2%

4.8%

Retail sales to hold strong, as household spending is fueled by 500+ program

21. Nov.

14:00

PL

Ind. Prod. y/y

Oct

0.4%

1.3%

3.2%

Industry is expected to expand at slower pace, amid deteriorating market sentiment

21. Nov.

14:00

PL

PPI y/y

Oct

0.5%

0.4%

0.2%

22. Nov.

14:00

HU

Target Rate

0.9%

0.9%

0.9%

14:30

SK

CA Balance (m)

Sep

23. Nov.

11:00

HR

Unempl. Rate

Oct

14.1%

25. Nov.

10:00

PL

Unempl. Rate

Oct

8.2%

25. Nov.

12:00

RS

Wages y/y

Oct

5%

Changes in policy rate are not expected; however, quantitative limitation on 3M deposit continues and amount of excess liquidity squeezed out of central bank may increase on Wednesday

-118m

8.2%

13.1%

Reversal of seasonal pattern is pushing headline figure towards higher ground on monthly level

8.3%

Labor market conditions to improve further, unemployment rate to drop

5.4%

Improving labor market keeping wage growth at robust levels

Sources: Bloomberg, Reuters

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Major markets Rainer Singer [email protected]



Gerald Walek [email protected]



On November 20 and November 27, France’s Republicans are voting for their top candidate for the presidential elections in April 2017. The current mayor of Bordeaux, Alain Juppé, as well as former French president Nicolas Sarkozy are seen as favorites. At the other end of the spectrum, the socialists will vote for their top candidate in January 2017. Already last week, former economic minister Emmanuel Macron announced his candidacy. France’s presidential elections could be the most important European political decision in 2017. The relatively high approval rates for the right populist Marine LePen unsettle capital markets, because her political agenda endangers the status quo in Europe. Regardless of LePen winning the presidential elections (currently very unlikely), a good result for LePen could increase the pressure on the government to consider parts of her political program. On 23 November, a flash estimate of the industry PMI data for November for Germany, France and the Eurozone will be released. In October, the survey data rose slightly and thus points towards prolonged growth of industrial production in the Eurozone. After the substantial increase of the survey data in October, we expect for November a stabilization or slight drop. Leading indicators thus far point towards stable economic growth (1.6% y/y) of the Eurozone in 4Q16.

Croatia Alen Kovac [email protected]



Ivana Rogic [email protected]





October CPI landed a few notches above our expectations, with deflationary pressures easing up more strongly than anticipated, as the headline figure moderated to -0.5% y/y, vs. -0.9% y/y in September. On the monthly level, inflation picked up by 0.4%, as we saw seasonally higher prices in the clothing and footwear category still generating the strongest upside pressures. We see a similar pattern looking ahead, with the deflationary tone further subsiding, as the low base effect, stabilized domestic demand outlook and less supportive cost side push the figure toward higher grounds. Last week, the government adopted an updated budget for 2016, which lowered the estimated deficit to 1.7% of GDP, exactly matching our call for 2016, and, in our view, sending another strong message to rating agencies and investors. This could perhaps be sufficient for S&P to reconsider its negative outlook on Croatia in its rating assessment, which is due in December. After a three-week break, the Ministry of Finance will return to the T-bill market this week, aiming to place HRK 1.5bn ahead of the HRK 1.7bn maturing. The current favorable market environment implies no major roll-over risks. The exchange rate gradually moved towards the mid of the 7.50-7.55 band throughout the week, while yields on the LCY bond side showed limited movements and resilience to global market t rends, with the 10Y domestic curve staying around the 3.10% mark.

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Czech Republic Jiří Polanský [email protected]



David Navrátil [email protected]





According to the preliminary estimate, GDP growth arrived at 0.3% q/q and 1.9% y/y in 3Q16. This flash estimate includes no information about GDP components. Despite the slightly lower GDP growth than expected, there is no change in the economic story, in our view. The cyclical position is still favorable. GDP growth is supported by both foreign and domestic demand. In October 2016, compared with the previous month, industrial producer prices went up by 0.5%. Prices increased particularly in ‘coke, refined petroleum products’. In y/y terms, prices of industrial producers were down 1.7% (vs. -2.4% y/y in September). The negative figures reflect the strong oil price decline in 2H15, although its effect on prices is gradually diminishing. The current account surplus was CZK 4.8bn in September, owing to a surplus on the goods and services balance. The liabilities side of the primary income balance included dividends on direct investment of CZK 26.6bn. The balance of goods and services showed a surplus of CZK 33.7bn.

Hungary Gergely Ürmössy [email protected]



Orsolya Nyeste [email protected]





According to the Statistical Office, the annual GDP growth rate reached 2% in 3Q16. The pace of growth decelerated both in annual and quarterly terms. The seasonally-adjusted q/q decelerated from 1% to 0.2%, while the seasonally-adjusted y/y growth slowed to 1.4%. The Statistical Office noted that services and agriculture drove the production side of GDP growth, while industry stagnated and construction output contracted in 3Q16. Construction output volume shrank 13.2% y/y in September. The YTD performance of construction is rather disappointing; due to the significantly lower EU funds absorption, the sector’s output plummeted 20.7% y/y. PM Orban announced that corporate income tax may be uniformly cut to 9% in 2017. In addition, the social contributions paid by employers could be cut by 4ppt, while the minimum wage might be raised by 15% and the minimum wage for qualified workers might be increased by 25% in 2017. No legislation was passed so far.

Poland Katarzyna Rzentarzewska [email protected]





Poland’s economic growth slowed to 2.5% y/y (0.2% q/q s.a.) in 3Q16, the lowest growth dynamics in three years. Although no details were released at this stage, we expect that investment kept weighing on the growth. Moreover, it seems that the 500+ program has had a much smaller impact on consumption growth than was expected, judging by the size of the fiscal impulse. We will be revising our FY16 growth forecast (currently 3.1%) downwards. The government lowered the retirement age to 60 for women and to 65 for men, as promised (effective as of October, 2017). The reform is expected to cost 0.1% of GDP next year and roughly 0.5% in the

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016



following year. In response, Fitch announced that fiscal slippage could result in a downgrade. Labor market conditions continued to improve in October, as the employment rate grew 3.1% y/y, while nominal wages went up 3.6% y/y.

Romania Eugen Sinca eugen.sinca @bcr.ro







Economic growth slowed down to 0.6% q/q (s.a. data) and 4.4% y/y in 3Q16, from 1.5% q/q and 6% y/y in 2Q16. No details have been released, but we think that weaker household consumption and investments stood behind this development. We maintain our full-year economic growth forecast at 4.5% in 2016 and 3.2% in 2017. The generous fiscal stimulus will wear off next year, being the main drag on Romania’s real GDP. Similar to the previous month, industrial production showed signs of recovery in September and grew by 1% m/m and 1.4% y/y (s.a. data). Before that, cumulative growth was close to zero in January-July. New orders in manufacturing posted solid gains in September, while the industrial confidence indicator released by the EC retreated in October from a five-year high reached in the previous month, but remained at high levels. We see stronger industrial production growth as positive for keeping the trade deficit under control. The current account deficit (12-month rolling sum) fell to EUR 3.5bn in September (2.1% of GDP), from EUR 3.7bn in August, due to higher transfers from abroad for private individuals. Albeit smaller than in the previous three months, EU funds recovered from a soft patch in early 2016 and contributed to the narrowing of the external imbalance. We foresee the current account deficit at 2.2% of GDP in 2016, up from 1.1% of GDP in 2015 - still a manageable level from the perspective of financial stability.

Serbia Alen Kovac [email protected]



Milan Deskar-Skrbic [email protected]



Inflation picked up in October, with the headline figure coming in at 1.5% y/y (somewhat above our 1.3% y/y forecast), from 0.6% y/y in September (agriculture related one-off). The detailed structure reveals that the figure was mostly shaped by the return of food prices to green territory (0.8% y/y vs -0.9% y/y in September) and gradual stabilization of fuel prices. We see a continuation of the upward trend ahead, with rising domestic demand and stabilizing food and oil prices playing key roles. That said, we see inflation moving around the lower bound of the new 3%+/-1.5bp target band in the coming period. On the LCY bond market, we saw the benchmark RSD 2022 yield increasing by 10bp w/w, still reflecting the effects of the US election related general sell-off. However, we have not seen such strong reactions on the FX market, as the EUR/USD continued to move around the 123.2 mark.

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Slovakia Katarina Muchova [email protected]





The flash GDP growth estimate for 3Q16 came in at 3% y/y, falling slightly short of our below-consensus forecast of 3.2%. Compared to 2Q16, GDP rose by 0.7% q/q. Employment growth reached 2.4% y/y, in line with expectations. A slowdown in the growth pace was expected, given the high base from last year's EU funds-driven growth (especially in the second half of 2015). The breakdown of the 3Q16 growth will be known in December. We expect domestic demand to have driven the growth, with net exports contributing positively as well. Overall in 2016, domestic demand (mainly household consumption) should remain a dominant driver of growth, aided by the positive contribution of net exports. Our 2016 GDP growth forecast remains at 3.3%. Consumer prices fell by 0.3% y/y in October, slightly less than our and market participants foresaw. Food and soft drink prices, together with energy prices, were still dragging the overall index down, while other items contributed positively to the y/y CPI index development. On a monthly basis, CPI reached 0.2%. Core inflation increased to 0.3% y/y in October, as deflationary pressures weakened. We expect deflation to get even milder towards the end of the year. However, the overall index is likely to average -0.6% in 2016, given the more pronounced deflationary performance earlier.

Slovenia Alen Kovac [email protected]



Ivana Rogic [email protected]



The September unemployment rate landed in line with expectations, with the headline figure standing at 10.3%, down 0.4pp on the monthly level, while also trending 1.1pp lower on an annual basis. Ongoing improvement on the labor market side, accompanied by sustained consumer sentiment, continues to back up the strengthening private consumption outlook ahead. Following the recent stress on global markets, which triggered upside pressures on bond yields, we saw a more steady performance t hroughout this week, with the 2026 EUR tenor remaining around the 1% mark, rising slightly, by 5bp w/w.

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Capital market forecasts Governm ent bond yields current 2016Q4 2017Q1 2017Q2 2017Q3 Croatia 10Y 3.09 3.20 3.00 2.90 2.80 spread (bps) 282 309 276 261 245 Czech Rep. 10Y 0.56 0.74 0.67 0.47 0.48 spread (bps) 29 63 43 18 13 Hungary 10Y 3.62 3.39 3.21 3.08 3.05 spread (bps) 336 328 297 279 270 Poland 10Y 3.63 3.55 3.40 3.25 3.20 spread (bps) 337 344 316 296 285 Rom ania10Y 3.50 3.35 3.25 3.30 3.35 spread (bps) 323 324 301 301 300 Slovakia 10Y 0.88 0.65 0.70 0.75 0.80 spread (bps) 62 54 46 46 45 Slovenia 10Y 0.99 0.70 0.70 0.80 0.90 spread (bps) 73 59 46 51 55 Serbia 7Y 5.62 5.50 5.50 5.50 5.50 DE10Y (BBG)* 0.26 0.11 0.24 0.29 0.35 3M Money Market Rate current 2016Q4 2017Q1 2017Q2 2017Q3 Croatia 0.88 0.80 0.75 0.70 0.70 3M forw ards Czech Republic 0.29 0.29 0.28 0.28 0.27 3M forw ards 0.34 0.32 0.31 0.30 Hungary 0.68 0.75 0.63 0.50 0.50 3M forw ards 0.71 0.68 0.71 0.77 Poland 1.73 1.68 1.68 1.68 1.68 3M forw ards 1.79 1.80 1.80 1.83 Rom ania 0.81 0.65 0.65 0.70 0.75 3M forw ards 0.79 0.93 1.19 1.73 Serbia 3.48 3.50 3.50 3.50 3.50 3M forw ards Eurozone -0.31 -0.25 -0.25 -0.25 -0.25

FX EURHRK forw ards EURCZK forw ards EURHUF forw ards EURPLN forw ards EURRON forw ards EURRSD forw ards EURUSD

current 2016Q4 2017Q1 2017Q2 2017Q3 7.53 7.55 7.60 7.50 7.50 7.54 7.57 7.59 7.62 27.04 27.02 27.02 27.02 27.02 27.01 26.95 26.89 26.82 309.2 314.0 315.0 315.0 315.0 309.5 310.3 311.0 311.9 4.44 4.33 4.31 4.29 4.30 4.46 4.48 4.51 4.53 4.51 4.52 4.50 4.51 4.51 4.52 4.53 4.55 4.56 123.2 123.5 123.5 124.0 124.0 1.06 1.10 1.12 1.14 1.16

Key Interest Rate current 2016Q4 2017Q1 2017Q2 2017Q3 Croatia 0.50 0.30 0.30 0.30 0.30 Czech Republic 0.05 0.05 0.05 0.05 0.05 Hungary 0.90 0.90 0.90 0.90 0.90 Poland 1.50 1.50 1.50 1.50 1.50 Rom ania 1.75 1.75 1.75 1.75 1.75 Serbia 4.00 4.00 4.00 4.00 3.75 Eurozone 0.00 0.00 0.00 0.00 0.00

Macro forecasts Real GDP grow th (%) 2015 2016f 2017f 2018f Average inflation (%) Croatia 1.6 2.7 2.5 2.5 Croatia Czech Republic 4.6 2.6 2.6 3.0 Czech Republic Hungary 2.9 2.1 2.8 2.6 Hungary Poland 3.6 3.1 3.3 3.4 Poland Romania 3.8 4.5 3.2 3.3 Romania Serbia 0.8 2.6 2.9 3.2 Serbia Slovakia 3.8 3.3 3.1 3.5 Slovakia Slovenia 2.3 2.1 2.3 2.6 Slovenia CEE8 average 3.5 3.1 3.0 3.2 CEE8 average

2015 2016f 2017f 2018f Unem ploym ent (%) -0.5 -1.0 0.7 1.2 Croatia 0.3 0.6 2.0 1.9 Czech Republic -0.1 0.4 1.9 2.7 Hungary -0.9 -0.6 0.9 1.4 Poland -0.6 -1.6 1.2 2.0 Romania 1.7 1.1 2.4 3.1 Serbia -0.3 -0.6 0.7 2.0 Slovakia -0.5 -0.1 1.3 1.9 Slovenia -0.4 -0.4 1.3 1.8 CEE8 average

Public debt (% of GDP)2015 Croatia 86.7 Czech Republic 40.3 Hungary 75.3 Poland 51.5 Romania 38.4 Serbia 75.9 Slovakia 52.5 Slovenia 83.4 CEE8 average 53.8

2015 2016f 2017f 5.1 2.9 2.0 0.9 1.9 1.4 4.4 5.8 4.9 -0.2 -0.3 -0.7 -1.1 -2.2 -2.5 -4.8 -4.6 -4.8 -1.3 0.6 1.2 5.2 6.5 6.0 0.5 0.7 0.3

2016f 86.0 37.2 75.1 51.9 40.4 74.5 52.3 80.6 53.4

2017f 84.6 36.0 74.3 52.4 41.8 73.8 52.1 80.0 53.3

2018f 83.3 36.4 72.8 52.1 42.3 72.3 51.4 78.6 53.0

C/A (%GDP) Croatia Czech Republic Hungary Poland Romania Serbia Slovakia Slovenia CEE8 average

2018f 1.0 1.1 4.2 -0.9 -2.7 -5.0 2.3 5.4 0.1

2015 16.3 5.1 6.8 10.6 6.8 17.7 11.5 9.0 9.3

2016f 2017f 2018f 15.3 14.1 13.4 4.2 4.3 4.2 5.3 4.8 4.5 9.3 8.7 8.5 6.7 6.8 6.7 16.6 16.0 15.6 10.0 9.3 8.4 8.0 7.5 6.9 8.2 7.7 7.5

Budget Balance (%GDP) 2015 2016f 2017f Croatia -3.2 -1.7 -2.2 Czech Republic -0.4 0.5 0.2 Hungary -2.0 -2.2 -2.7 Poland -2.5 -2.7 -3.0 Romania -0.7 -2.9 -3.0 Serbia -3.8 -2.3 -2.1 Slovakia -2.7 -2.2 -1.5 Slovenia -2.9 -2.5 -2.2 CEE8 average -2.0 -2.1 -2.2

2018f -2.0 -0.2 -2.5 -2.8 -3.0 -1.8 -1.2 -1.8 -2.2

Note:*Information on past performance is not a reliable indicator for future performance. Forecasts are not a reliable indicator for future performance.

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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-1

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

EUR003M

BUBR3 M

Slovakia 10Y Hung ary 1 0Y WIBO3 M

6

5

4

3

2

1

0

Roman ia 5Y

BE LI3M

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange Oct-16

Jul-16

Apr-16

Jan-16

Oct-15

Jul-15

Jan-15 Apr-15

0 Jul-14

PRIB03 M

Oct-14

2

Jan-14 Apr-14

6

Jul-13

5

Oct-13

Croa tia 5Y

Jan-13 Apr-13

8

Jul-12

6

Oct-12

10

Apr-12

12

Oct-11

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

8 7 6 5 4 3 2 1 0

Jan-12

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

9

Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16

Nov-16

Aug-16

May-16

Feb-16

Nov-15

Aug-15

BUBO R03M

May-15

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 ZIB OR3M

Feb-15

Nov-14

Aug-14

May-14

Feb-14

Nov-13

Aug-13

May-13

Feb-13

Nov-12

Aug-12

Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Appendix

4.5

5

3.5

4

2.5

3

1.5

2

0.5

1

0

Czech Re p. 10 Y

7

4

4 3

2

1

0

Po land 10 Y

7 14

12

10

8

6

4

2

0

Se rbia 10 Y

8

7

6

5

4

3

2

1

0

Note:*Inf ormation on past perf ormance is not a reliable indicator f or f uture perf ormance. Forecasts are not a reliable indica tor f or f uture perf ormance.

Slovenia 10Y

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Contacts Group Research

Treasury - Erste Bank Vienna

Head of Group Research Friedrich Mostböck, CEFA +43 (0)5 0100 11902 Major Markets & Credit Research Head: Gudrun Egger, CEFA +43 (0)5 0100 11909 Ralf Burchert, CEFA (Agency Analyst) +43 (0)5 0100 16314 Hans Engel (Senior Analyst Global Equities) +43 (0)5 0100 19835 Christian Enger, CFA (Covered Bonds) +43 (0)5 0100 84052 Margarita Grushanina (Economist AT, CHF) +43 (0)5 0100 11957 Peter Kaufmann, CFA (Corporate Bonds) +43 (0)5 0100 11183 Stephan Lingnau (Global Equities) +43 (0)5 0100 16574 Carmen Riefler-Kowarsch (Covered Bonds) +43 (0)5 0100 19632 Rainer Singer (Senior Economist Euro, US) +43 (0)5 0100 17331 Bernadett Povazsai-Römhild (Corporate Bonds) +43 (0)5 0100 17203 Elena Statelov, CIIA (Corporate Bonds) +43 (0)5 0100 19641 Gerald Walek, CFA (Economist Euro) +43 (0)5 0100 16360 Katharina Böhm-Klamt (Quantitative Analyst Euro) +43 (0)5 0100 19632 Macro/Fixed Income Research CEE Head CEE: Juraj Kotian (Macro/FI) +43 (0)5 0100 17357 Zoltan Arokszallasi, CFA (Fixed income) +43 (0)5 0100 18781 Katarzyna Rzentarzewska (Fixed income) +43 (0)5 0100 17356 CEE Equity Research Head: Henning Eßkuchen +43 (0)5 0100 19634 Daniel Lion, CIIA (Technology, Ind. Goods&Services) +43 (0)5 0100 17420 Christoph Schultes, MBA, CIIA (Real Estate) +43 (0)5 0100 11523 Vera Sutedja, CFA, MBA (Telecom) +43 (0)5 0100 11905 Thomas Unger, CFA (Banks, Insurance) +43 (0)5 0100 17344 Vladimira Urbankova, MBA (Pharma) +43 (0)5 0100 17343 Martina Valenta, MBA (Real Estate) +43 (0)5 0100 11913 Editor Research CEE Brett Aarons +420 956 711 014 Research Croatia/Serbia Head: Mladen Dodig (Equity) +381 11 22 09178 Head: Alen Kovac (Fixed income) +385 72 37 1383 Anto Augustinovic (Equity) +385 72 37 2833 Milan Deskar-Skrbic (Fixed income) +385 72 37 1349 Magdalena Dolenec (Equity) +385 72 37 1407 Ivana Rogic (Fixed income) +385 72 37 2419 Davor Spoljar, CFA (Equity) +385 72 37 2825 Research Czech Republic Head: David Navratil (Fixed income) +420 956 765 439 Head: Petr Bartek (Equity) +420 956 765 227 Jiri Polansky (Fixed income) +420 956 765 192 Pavel Smolik (Equity) +420 956 765 434 Jan Sumbera (Equity) +420 956 765 218 Roman Sedmera (Fixed income) +420 956 765 391 Jana Urbankova (Fixed income) +420 956 765 456 Research Hungary Head: József Miró (Equity) +361 235 5131 Gergely Ürmössy (Fixed income) +361 373 2830 András Nagy (Equity) +361 235 5132 Orsolya Nyeste (Fixed income) +361 268 4428 Tamás Pletser, CFA (Oil&Gas) +361 235 5135 Research Poland Head: Magdalena Komaracka, CFA (Equity) +48 22 330 6256 Marek Czachor (Equity) +48 22 330 6254 Tomasz Duda (Equity) +48 22 330 6253 Mateusz Krupa (Equity) +48 22 330 6251 Karol Brodziński (Equity) +48 22 330 6252 Research Romania Head: Mihai Caruntu (Equity) +40 3735 10427 Head: Dumitru Dulgheru (Fixed income) +40 3735 10433 Chief Analyst: Eugen Sinca (Fixed income) +40 3735 10435 Dorina Ilasco (Fixed Income) +40 3735 10436 Research Slovakia Head: Maria Valachyova, (Fixed income) +421 2 4862 4185 Katarina Muchova (Fixed income) +421 2 4862 4762 Research Turkey Umut Ozturk (Equity) +90 212 371 25 30 Oguzhan Evranos (Equity) +90 212 371 25 42

Group Markets Retail Sales Head: Christian Reiss Markets Retail a. Sparkassen Sales AT Head: Markus Kaller Equity a. Fund Retail Sales Head: Kurt Gerhold Fixed Income a. Certificate Sales Head: Uwe Kolar Markets Corporate Sales AT Head: Christian Skopek

+43 (0)5 0100 84012 +43 (0)5 0100 84239 +43 (0)5 0100 84232 +43 (0)5 0100 83214 +43 (0)5 0100 84146

Fixed Income Institutional Sales Group Markets Financial Institutions Head: Manfred Neuwirth +43 (0)5 0100 84250 Bank and Institutional Sales Head: Jürgen Niemeier +49 (0)30 8105800 5503 Institutional Sales Western Europe AT, GER, FRA, BENELUX Head: Thomas Almen +43 (0)5 0100 84323 Charles-Henry de Fontenilles +43 (0)5 0100 84115 Marc Pichler +43 (0)5 0100 84118 Rene Klasen +49 (0)30 8105800 5521 Dirk Seefeld +49 (0)30 8105800 5523 Bernd Bollhof +49 (0)30 8105800 5525 Bank and Savingsbanks Sales Head: Marc Friebertshäuser +49 (0)711 810400 5540 Sven Kienzle +49 (0)711 810400 5541 Michael Schmotz +43 (0)5 0100 85542 Ulrich Inhofner +43 (0)5 0100 85544 Martina Fux +43 (0)5 0100 84113 Michael Konczer +43 (0)5 0100 84121 Klaus Vosseler +49 (0)711 810400 5560 Andreas Goll +49 (0)711 810400 5561 Mathias Gindele +49 (0)711 810400 5562 Institutional Sales CEE and International Head: Jaromir Malak +43 (0)5 0100 84254 Central Bank and International Sales Head: Margit Hraschek +43 (0)5 0100 84117 Christian Kössler +43 (0)5 0100 84116 Bernd Thaler +43 (0)5 0100 84119 Institutional Sales PL and CIS Pawel Kielek +48 22 538 6223 Michal Jarmakowicz (Fixed Income) +43 50100 85611 Institutional Sales Slovakia Head: Peter Kniz +421 2 4862 5624 Monika Smelikova +421 2 4862 5629 Institutional Sales Czech Republic Head: Ondrej Cech +420 2 2499 5577 Milan Bartos +420 2 2499 5562 Barbara Suvadova +420 2 2499 5590 Institutional Asset Management Sales Czech Republic Head: Petr Holecek +420 956 765 453 Martin Perina +420 956 765 106 Petr Valenta +420 956 765 140 David Petracek +420 956 765 809 Institutional Sales Croatia Head: Antun Buric +385 (0)7237 2439 Željko Pavičić +385 (0)7237 1494 Ivan Jelavic +385 (0)7237 1638 Institutional Sales Hungary Attila Hollo +36 1 237 8209 Borbala Csizmadia +36 1 237 8205 Institutional Sales Romania Head: Ciprian Mitu +43 (0)50100 85612 Stefan Racovita +40 373 516 531 Business Support Tamara Fodera +43 (0)50100 12614 Bettina Mahoric +43 (0)50100 86441

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Erste Group Research CEE Insights | Fixed Income | Central and Eastern Europe 21 November 2016

Disclaimer This publication was prepared by Erste Group Bank AG or any of its consolidated subsidiaries (together with consolidated subsidiaries "Erste Group") independently and objectively as other information pursuant to the Circular of the Austrian Finan cial Market Authority regarding information including marketing communication pursuant to the Austrian Securities Supervision Act. This publication serves interested investors as additional source of information and provides general information, informatio n about product features or macroeconomic information without emphasizing product selling marketing statements. This publication does not constitute marketing communication pursuant to Art. 36 (2) Austrian Securities Supervision Act as no direct buying incentives were included in this publication, which is of information character. This publication does not constitute investment research pursuant to § 36 (1) Austrian Securities Supervision Act. It has not been prepared in accordance with legal requirem ents designed to promote the independence of investment research and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. The information only serves as non -binding and additional information and is based on the level of knowledge of the person in charge of drawing up the information on the respective date of its preparation. The content of the publication can be changed at any time without notice. This publication does not constitute or form part of, and should n ot be construed as, an offer, recommendation or invitation to subscribe for or purchase any securities, and neither this publication nor anything contained herein shall form the basis of or be relied on in connection with or act as an inducement to enter into an y contract or inclusion of a security or financial product in a trading strategy. Information provided in this publication are based on publicly available sources which Erste Group considers as reliable, however, without verifying any such information by independent third persons. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable, Erste Group (including its representatives and employees) neither expressly nor tacitly makes any guarantee as to or assumes any liability for the up -to-dateness, completeness and correctness of the content of this publication. Erste Group may provide hyperlinks to websites of entities mentioned in t his document, however the inclusion of a link does not imply that Erste Group endorses, recommends or approves any material on the linked page or accessible from it. Neither a company of Erste Group nor any of its respective managing directors, supervi sory board members, executive board members, directors, officers of other employees shall be in any way liable for any costs, losses or damages (including subsequent damages, indirect damages and loss of profit) howsoever arising from the use of or reliance on this publication. Any opinion, estimate or projection expressed in this publication reflects the current judgment of the author(s) on the date of publication of this document and do not necessarily reflect the opinions of Erste Group. They are subject to chan ge without prior notice. Erste Group has no obligation to update, modify or amend this publication or to otherwise notify a read er thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, change s or subsequently becomes inaccurate. The past performance of securities or financial instruments is not indicative for future res ults. No assurance can be given that any financial instrument or issuer described herein would yield favorable investment results or that particular price levels may be reached. Forecasts in this publication are based on assumptions which are supported by objective data. However, the used forecasts are not indicative for future performance of securities or financial instrument. Erste Group, its affiliates, principals or employees may have a long or short position or may transact in the financial instrument( s) referred to herein or may trade in such financial instruments with other customers on a principal basis. Erste Group may act as a market maker in the financial instruments or companies discussed herein and may also perform or seek to perform investment services for those companies. Erste Group may act upon or use the information or conclusion contained in this publication bef ore it is distributed to other persons. This publication is subject to the copyright of Erste Group and may not be copied, distri buted or partially or in total provided or transmitted to unauthorized recipients. By accepting this publication, a recipient hereo f agrees to be bound by the foregoing limitations. © Erste Group Bank AG 2016. All rights reserved.

Published by: Erste Group Bank AG Group Research 1100 Vienna, Austria, Am Belvedere 1 Head Office: Wien Commercial Register No: FN 33209m Commercial Court of Vienna Erste Group Homepage: www.erstegroup.com

Erste Group Research – CEE Insights Fixed Income and Foreign Exchange

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