monthly 25 February 2016

CEE Debt Market Strategy monthly 25 February 2016 Historical perf. 2y LCY bond1 6% 5% 4% 3% 2% 1% 0% -1% CZ HU PL PP RO RU FX TR DE US  CE/S...
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CEE Debt Market Strategy monthly

25 February 2016

Historical perf. 2y LCY bond1 6% 5% 4% 3% 2% 1% 0% -1% CZ HU

PL

PP

RO RU FX

TR

DE

US

 CE/SEE local debt markets remain quite resilient to EM jitters and recent euro area peripheral stress  Renewed global central bank (CB) dovishness opens room for stepped-up dovish local CB rhetoric  We remain bullish on Hungary, see tighter CZGB spreads, whilst remain cautious for high-yielders RU and TR  We see more constructive outlook for CEE Eurobonds in the near-term  Eurobond primary markets are expected to see more issuance in March  We buy PL on fewer negative news, also add RU and upgrade KZ bonds

AP (PP+FX)

1) between 22-Jan-16 and 23-Feb-16

MARKET STRATEGY (horizon: Jun-16; B: Buy, H: Hold, S: Sell)1

Historical perf. 10y LCY bond1 10%

Eurobonds

8%

LCY Bonds

FX vs. EUR

Recommendation Rationale

EUR USD 2y 10y

6% 4%

--

--

--

Eurobonds: Government survived non-confidence motion but economic outlook remains challenging.

--

--

H (H)

Eurobonds: New cabinet faces tough reform path, debt overhang risk and large refinanincing needs at 19% of GDP.

B (B)

H (H)

B B H (H) (H)2 (B)

H (H)

BG

H (H)

HR

H H (H) (H)

CZ

H H H (H) (H) (H)

HU

B (H)

2%

--

Eurobonds: Stable credit rating, low-beta for diversification market.

0% -2% CZ HU PP

PL

RO RU

TR

FX

DE US

AP (PP+FX)

1) between 22-Jan-16 and 23-Feb-16

Expected perf. 2y LCY bond -> Jun-161

6%

B (B)

B (B)

H (B)

H (H)

H (H)

RO

H (H)

H (H)

H (H)

H (H)

H (B)

RU

B (B)

B (B)

H (H)

H (H)

H (H)

RS

--

H (S)

--

--

H (H)

Eurobonds: Surprise of early parliamentary elections, too tight spread relative to peers.

MK

B (B)

--

--

--

--

Eurobonds: Delay in parliamentary elections likely due to opposition demands backed by EU/USA. Still, political outlook improved.

KZ

--

B (H)

2% -2% -4% CZ HU PP

PL FX

RO RU

TR

DE US

AP (PP+FX)

1) between 23-Feb-16 and end-Jun-16

Expected perf. 10y LCY bond -> Jun161 8% 6% 4% 2%

LCY debt market should remain supported by further MP easing including bond-market-friendly measures, dovish global CB backdrop.

PL

4% 0%

Eurobonds: A notch upgrade very likely in a 6m horizon, HU trades to BBB-/positive outlook, still short-term Buy due to low supply.

Eurobonds: Looks still oversold on media headlines more than fundamentals and risk would suggest, we buy PL.

10% 8%

LCY bond yield spread over Bunds still too wide despite recent tightening. Since more local easing is in the cards, we maintain our Buy recommendation in light of long-term CZK appreciation potential.

LCY bonds recovered from surprise rating downgrade in line with zloty amidst improving global sentiment. Rate cut bets are diminishing, but more bond-market-friendly regulatory easing and global CB dovishness could anchor the curve. Eurobonds: Strong fundamentals, technocrat government but fiscal discipline slackening possible closer to elections. LCY debt market should remain fairly stable despite political headline risks. Front-end is firmly cemented on excess liquidity conditions, whilst long-end seems vulnerable, mainly due to tight pricing. Eurobonds: The possibility of removal of some western sanctions in 2016 to be credit positive, buying into stable outlook. Pricing-out of rate cut bets on oil/RUB/inflation risks to continue which should further weigh on Russian rouble debt. In H2 re-intensifying rate cut bets to lift OFZ market attractiveness.

Eurobonds: Relatively cheap pricing against rating and peers warrants a technical buy.

0%

Eurobonds: Strong fundamentals despite turbulent politics, relatively cheap to peers and vs. rating.

-2% -4%

TR

B (B)

B (B)

H (H)

H (H)

B (H)

LCY debt market could suffer from possible emergency hikes in mid2016 with a central bank being clearly behind the curve. Although performance outlook looks promising our conviction is low. Before adding exposure, we want to see MP normalisation (as early as of June) and calming local and international politics.

UA

--

S (S)

--

--

H (H)

Eurobonds: Political crisis remains unresolved, reforms delay likely, IMF loan delay likely.

BY

--

H (H)

--

--

S (S)

Eurobonds: The removal of western sanctions is credit positive but the news fully priced in.

-6% CZ HU PP

PL FX

RO RU

TR

DE US

AP (PP+FX)

1) between 23-Feb-16 and end-Jun-16 FX: currency performance (chg LCY/EUR) PP: bond performance (price chg + carry) AP: absolute performance (PP + FX) DE and US: only price performance (PP) HU: not 2y, but 3y tenor Source: Bloomberg, RBI/Raiffeisen RESEARCH

1) recommendations based on absolute expected performance: LCY bonds: absolute performance in LCY; Eurobonds: based on expected spread change. 2) HU: 3y, not 2y tenor; previous recommendations in brackets (as of 25-Jan-16 with horizon end-Mar-16; RU LCY bonds as of 11-Feb-16); Source: RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

Local bond market strategy Constructive on CE/SEE but cautious on high-yielding RU and TR MARKET STRATEGY (until Jun-16)1 LCY Bonds 2y

FX

10y

vs. EUR

B (B)

H (H)

CZ

H (H)

HU

H (H)

B (B)

S (H)

PL

H (B)

H (H)

H (H)

RO

H (H)

H (H)

H (B)

RU

H (H)

H(H)

H (H)

TR

H (H)

H (H)

B (H)

2

1) based on expected absolute performance in LCY; previous recommendations (as of 25-Jan-16; RU: 11-Feb-16) in brackets; B: Buy; H: Hold; S: Sell 2) HU: 3y, not 2y tenor Source: RBI/Raiffeisen RESEARCH

RUB weakness to stop disinflation 22%

80

18%

70

14%

60

10%

50

6%

40

2% Jan-14

Sep-14

30 Jan-16

May-15

CBR key rate CPI (yoy) 5y OFZ yield USD/RUB (rhs) Base rate: 5y high 17.00; 5y low 5.50 5y: 5y high 18.4; 5y low 6.0 USD/RUB 5y high: 85.9573; 5y low: 27.1543 Source: Bloomberg, RBI/Raiffeisen RESEARCH

CZ-DE spread to tighten further 75

28.5

50

28.0

25

27.5

0

27.0

-25 Jan-14

26.5 Sep-14

May-15

Jan-16

CZ-DE 2y spread (bp) CZ-DE 10y spread (bp) EUR/CZK (rhs) CZ-DE 2y spread 5y high: 166; 5y low: -32 CZ-DE 10y spread 5y high: 214; 5y low -23 EUR/CZK 5y high: 28.4; 5y low: 24.0 Source: Bloomberg, RBI/Raiffeisen RESEARCH

2

January’s market correction that was triggered by global growth concerns, bearish commodity prices and uncertainties about the pace of US rate hikes left CEE local debt markets fairly stable. Since our last CEE Debt Market Strategy has been published on 25 January, investor differentiation in favor of CE/SEE continued and most local currency (LCY) debt markets managed to recoup the moderate losses suffered during January. Global central bank dovishness and the latest stabilsation in oil prices helped global risk sentiment to improve. Russia benefitted from the latter the most in our research universe with RUB gaining almost 4% versus EUR, which, in turn, triggered also price gains mostly in longer OFZs. The other CE/SEE local debt markets tracked the outperformance in Bunds with the German and US 10y benchmark yields near historical lows currently. The recent stress in euro area (EA) peripheral names – in particular Portugal – did finally not spillover to bigger EA names, hence, leaving our region broadly unaffected. So on top of falling yield levels especially at the long end of the curves, finally, currency gains added to the favorable absolute performance in the CE/SEE space. For Russia we do not turn bullish yet despite the recent gains which we regard as temporary. The economy is likely to remaining in recession mode this year, while CPI inflation is set to reverse its latest fall that was mainly due to statistical base effects. We recently had to revise our annual GDP growth outlook for 2016 from 0% to -2% mainly on a downward revision of our oil price outlook for 2016 from USD 56 bbl to USD 39 bbl (Brent). There are several factors which will likely keep inflation above the CBR target of 7% one year from now. In our view it is mainly the latest rouble depreciation that has not yet passed fully to inflation. Also, budget deficit financing using the reserve fund leads to additional money emission, both potentially weakening the rouble and increasing price pressures. We therefore estimate CPI inflation at 9-10% in 2016. In summary, future disinflationary base effects could be offset – a view that is also shared by the CBR according to its hawkish comments recently. The ongoing rise in inflation expectations is another concern for the CBR. Against all this, we have lost conviction that the CBR will have the room to resume rate cuts in 2016 at all. As things stand we would therefore like to see CPI inflation peaking before adding exposure in OFZs. For the other high-yielder Turkey our stance is similar in light of the renewed rise in CPI inflation coupled with local/geopolitical risks. But we regard the situation in Turkey as more fragile due to lacking CB credibility with the TCMB clearly falling behind the curve. This bears the risk for emergency rate hikes in mid-2016 once the new MPC takes office in June. Our outlook for CE/SEE LCY debt markets remains broadly unchanged compared to our end-January calls. We continue to prefer long-dated HGBs with further bond-market-friendly monetary stimulus, including rate cuts, in the pipeline. Moreover, favorable developments on the fiscal front – including the latest statements by policymakers to target a balanced budget in the next few years – should fuel the already positive credit story in Hungary (return to investment grade still pending in H1). In Poland, fears of irrational political actions decreased somewhat. The likely softening of the FX loan conversion scheme as well as the increasing confidence of market participants in terms of Polish monetary policy prudence restored some confidence in local financial markets in recent weeks. While we continue to see some space left for further spread tightening in 10y CZ-DE, Romania should face increasing political risks given the approaching local/parliamentary elections in summer/autumn. Financial analyst: Stephan Imre, RBI Vienna

Please note the risk notifications and explanations at the end of this document

Local bond market strategy Rates and FX market overview1

CZ

2y LCY bond yields1

current2

Jun-16

Sep-16

Dec-16

5y low

5y avg

5y high

Key

0.05

0.05

0.05

0.05

0.05

0.27

0.75

2y

-0.18

-0.30

-0.20

-0.20

-0.36

0.56

2.12

10y

0.40

0.80

0.90

1.10

0.36

2.10

4.36

12%

CZK

27.0

27.0

27.0

27.0

24.0

26.1

28.4

9%

18% 15%

6% 3%

HU

Key

1.35

1.00

1.00

1.00

1.35

4.12

7.00

3y

1.9

1.7

1.8

1.9

1.5

4.8

10.5

10y

3.3

3.2

3.3

3.4

2.7

5.8

10.7

HUF

307

315

315

320

262

297

323

Key

1.50

1.50

1.50

1.50

1.50

3.08

4.75

18% 15%

0% Jan-14 PL

Sep-14

May-15

HU

Jan-16

TR

RU

1) HU: 3y tenor, not 2y Source: Bloomberg, RBI/Raiffeisen RESEARCH

10y LCY bond yields PL

2y

1.5

1.9

2.0

2.2

1.3

3.2

5.2

10y

2.9

3.4

3.4

3.5

2.0

4.2

6.3

PLN

4.4

4.35

4.30

4.30

3.9

4.2

4.6

12% 9% 6%

RO

Key

1.75

1.75

1.75

1.75

1.75

4.20

6.25

2y

1.2

1.6

1.7

2.0

0.9

4.2

7.3

10y

3.4

3.9

4.0

4.1

2.6

5.3

7.6

RON

4.5

4.5

4.4

4.4

4.1

4.4

3% 0% Jan-14 PL

4.6

Sep-14

May-15

HU

TR

Jan-16 RU

Source: Bloomberg, RBI/Raiffeisen RESEARCH

10y yield spread (bp)1

RU

Key

11.00

11.00

11.00

11.00

5.50

9.46

17.00

2y

9.8

10.1

10.0

10.0

5.8

8.1

18.9

10y

9.9

10.4

10.5

10.2

6.7

9.0

15.8

RUB2

83.2

82.4

75.8

70.7

38.4

49.0

89.5

1,500 1,200 900 600

TR

Key

7.50

8.50

9.50

9.50

4.50

6.59

10.00

2y

10.8

10.5

10.0

9.8

4.7

8.7

11.3

10y

10.5

10.7

10.3

10.0

6.0

8.9

11.1

TRY

3.2

3.1

3.0

3.1

2.1

2.6

3.5

300 0 Jan-14 PL

Sep-14

May-15

HU

TR

Jan-16 RU

1) PL/HU vs. DE; RU/TR vs. US Source: Bloomberg, RBI/Raiffeisen RESEARCH

DE

Key

0.05

0.05

0.05

0.05

0.05

0.55

1.50

2y

-0.5

-0.4

-0.4

-0.4

-0.54

0.17

1.91

10y

0.2

0.5

0.8

1.0

0.1

1.4

3.5

EUR

1.1

1.03

1.01

1.01

1.05

1.29

1.49

Yield curve steepness (bp)1 300 200 100 0 -100

US

Key

0.38

0.75

1.00

1.50

0.04

0.12

0.38

2y

0.8

1.2

1.4

1.7

0.15

0.43

1.09

10y

1.8

2.4

2.7

3.1

1.4

2.3

3.6

1) rates and yields in %; yields: ask yield to maturity; FX vs. EUR 2) as of 22-Feb-16, 4:32 p.m. CET Source: Bloomberg, RBI/Raiffeisen RESEARCH

-200 -300 Jan-14 PL

Sep-14

May-15

HU

Jan-16

RO

RU

1) 10y minus 2y yield Source: Bloomberg, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

3

Local bond market strategy Monetary policy overview Inflation snapshot

Key rate forecast (expected change, bp)

20

150

16

100

50

0

-50

Poland

12 Hungary

8

Romania

-4

Russia

RO

CZ

PL

TR

0 RU

Czech Rep.

HU

4

Turkey CPI, % yoy (52w high)

CPI, % yoy (52w low) 3m horizon (bp)

CPI, % yoy (current) Source: Bloomberg, RBI/Raiffeisen RESEARCH

6m horizon (bp)

Source: Bloomberg, RBI/Raiffeisen RESEARCH

CENTRAL BANK WATCH (%) Curr.1 Czech National Bank (CNB) 2w repo rate

Hungarian National Bank (MNB) 3m deposit rate

National Bank of Poland (NBP) 2w repo rate

National Bank of Romania (BNR) Key policy rate

Bank of Russia (CBR) 1w repo rate

0.05

1.35

1.50

1.75

11.00

Last change

Forecast (%)

Next meeting

Comment

Jun-16 Sep-16 Dec-16

0.05

1.00

1.50

1.75

11.00

0.05

Exit from FX intervention regime – introduced for keeping CZK above the floor of EUR/CZK 27.00 – is likely to be delayed beyond Nov 2012 Q4 2016. Speculations on negative base/deposit rate increased 0.05 31/03/2016 (-20bp) after dissapointing reflation dynamics prompted CNB to discuss this option at last meeting (not our base case). MP tightening via interest rate channel only if inflationary dynamics prove sufficiently forceful.

1.00

1.00

MNB remains in easing mood given extension of its FGS cheap loan program. In parallel, another growth-supporting scheme (GSP) has been launched in Jan-16 flanked by additional MP tools which should incentivize SME lending (LTRO, new MNB deposit and IRS 22/03/2016 facilities). Tailwinds from global CB dovishness come on top of disappointing local CPI inflation dynamics and make us expect another downward adjustment to the base rate. In case of ongoing HUF strength, our call would receive another boost.

1.50

NBP remains neutral balancing between promising economic activity and stuttering reflation dynamics. Since the CPI inflation target is likely to remain out of reach, market pricing is for more rate cuts, Mar 2015 09/03/2016 especially in light of a reshuffled MPC. Since new MPC seems not 1.50 (-50bp) that dovish as feared, we foresee stable base rate and expect NBP liftoff in Q3 2017. However, we do not exclude unconventional MP easing measures including further bond-market-friendly measures.

1.75

Rate cutting cycle is over despite dramatic tax-cut-induced fall in CPI this year. Additional easing through further RRR cuts remains May 2015 1.75 31/03/2016 likely whilst fiscal risks warrant cautiousness on the MP front. Exit (-25bp) from ultra-loose liquidity conditions is a major challenge as 2016 progresses, only afterwards rate hikes could be expected.

11.00 11.00

Jul 2015 (-15bp)

Jul 2015 (-50bp)

CBR delays the rate cuts due to RUB weakness and inflationary risks, an assessment we share. Room to re-start rate cuts only in Q1 17 in our view with latest RUB volatility/CB communication incre18/03/2016 asingly softening aggressive market pricing. Excess money market liquidity, at the same time, is already easing monetary conditions which could intensify going forward.

Central Bank of Turkey (TCMB) 1w repo rate

7.50

8.50

9.50

TCMB dropped its phrase of simplification of MP toolkit, i.e. in fact via base rate tightening, from its latest wording, but keeps weighted Feb 2015 average funding costs close to 9%. Until the new MPC is formed by 9.50 24/03/2016 (-25bp) June, we do not expect MP thightening/simplification which fortunately coincides with likely pause in Fed tightening in March. In H2 new MPC should finally bow to selling pressure and adjust 1w repo.

European Central Bank (ECB) Main refinancing rate

0.05

0.05

0.05

0.05

1.00

Basically our Western Economists believe in continutaion of rate Dec 2015 normalisation process following December's liftoff. Nevertheless, 1.50 16/03/2016 (+25bp) the likelihood of a pause in March increased as rate trajectory remains highly dependent on oil price/stock markets/global growth.

Federal Reserve Bank (Fed) Fed funds rate

0.38

0.75

Ultra-loose monetary conditions to prevail, QE program until at Sep 2014 least end-Mar-17. With regards ECB deflation fighting credibility, 10/03/2016 (-10bp) speculation on more ECB easing as of March intensified with another 10bp deposit cut to -40bp already priced-in.

1) as of 22-Feb-16, 6:10 p.m. CET; Source: Bloomberg, RBI/Raiffeisen RESEARCH

4

Please note the risk notifications and explanations at the end of this document

Local bond market strategy 10y LCY yields and swaps 10y CZK yield and swap

10y HUF yield and swap

3.0%

60

2.5%

40

2.0%

20

1.5%

0

1.0%

-20

0.5%

-40

0.0% Jan-13

-60 Oct-13

Jul-14

Apr-15

Jan-16

7%

120

6%

100

5%

80

4%

60

3%

40

2% Jan-13

20 Oct-13

Swap Spread (bp, r.h.scale) 10y LCY bond yield 10y IRS Rate

Jul-14

Apr-15

Jan-16

Swap Spread (bp, r.h.scale) 10y LCY bond yield 10y IRS Rate

Source: Bloomberg, RBI/Raiffeisen RESEARCH

Source: Bloomberg, RBI/Raiffeisen RESEARCH

10y PLN yield and swap

10y RON yield and swap

6%

80

7%

200

5%

60

6%

150

4%

40

5%

100

3%

20

4%

50

2%

0

3%

0

-20

2% Jan-13

1% Jan-13

Oct-13

Jul-14

Apr-15

Jan-16

-50 Oct-13

Jul-14

Source: Bloomberg, RBI/Raiffeisen RESEARCH

Source: Bloomberg, RBI/Raiffeisen RESEARCH

10y RUB yield and swap

10y TRY yield and swap

18%

300

16%

200

14%

100

12%

0

10%

-100

8%

-200

6% Jan-13

-300 Jul-14

Apr-15

Swap Spread (bp, r.h.scale) 10y LCY bond yield 10y IRS Rate Source: Bloomberg, RBI/Raiffeisen RESEARCH

Jan-16

Swap Spread (bp, r.h.scale) 10y LCY bond yield 10y IRS Rate

Swap Spread (bp, r.h.scale) 10y LCY bond yield 10y IRS Rate

Oct-13

Apr-15

Jan-16

14%

100

12%

0

10%

-100

8%

-200

6% Jan-13

-300 Oct-13

Jul-14

Apr-15

Jan-16

Swap Spread (bp, r.h.scale) 10y LCY bond yield 10y IRS Rate Source: Bloomberg, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

5

Eurobond market strategy The Revenant1 CEE spread vs. UST yield2 500

5.0

400

4.0

300

3.0

200

2.0 1.0

100 Feb-11

Feb-13

Feb-15

CEE spread 10Y UST yield (r.h.scale) 2) USD segment, spread in basis points (bp), yield - % p.a. Source: Thomson Reuters, JP Morgan, RBI/Raiffeisen RESEARCH

CEE EMBIG price change vs. other EM3 Africa Mid.East Asia LATAM CEE 0

5

10

3) USD segment, price index net change %, mom = -1M Source: Thomson Reuters, JP Morgan, RBI/Raiffeisen RESEARCH

CEE rating spread4 -300 -200 -100

0

100 200

LT (A-) PL (BBB+) KZ (BBB-) RO (BBB-) TR* (BBB-) HU (BB+) RU (BB+) HR (BB) RS (BB-) BY (B-) UA (B-) 4) rating spread in basis points, sovereign spread minus respective rating aggregated spread (EMBIG USD) Source: Thomson Reuters, JP Morgan, RBI/Raiffeisen RESEARCH

1) The Revenant is a 2015 American historical action adventure film directed by Alejandro G. Iñárritu. A frontiersman Hugh Glass (Leonardo DiCaprio) on a fur trading expedition in the 1820s fights for survival after being mauled by a bear and left for dead by members of his own hunting team.

6

Our prediction of a small rebound in the Eurobond market in February has fully materialised whereas the dovishness of major global central banks helped to keep the CEE markets on an upward path. In particular the ECB easing policy outlook helped EUR-based CEE sovereigns including euro area members, i.e. Lithuania. Prior rally in the EU peripherals also helped to cut their appeal going forward which could have helped to bring some funds back to CE sovereigns. The softening of US Fed wording implying a slower pace of action in 2016 also contributed to bettering of the market sentiment resulting in Eurobond yields’ decline for nearly all CEE sovereigns except Ukraine. In the USD segment we rightly predicted partial tactical recovery of CIS markets which were somewhat oversold. Our strategy in the USD segment to sell Ukraine (-2.9% EMBIG price) and buy Russia (+2.6% EMBIG price) yielded positive gains while putting Kazakhstan on hold was also a correct idea sparing us from lacklustre performance. On the other hand Turkey only partially met our expectations despite it remains among relatively cheaper valued sovereigns spread-wise. Meanwhile S&P’s decision to downgrade Kazakhstan’s rating from BBB to BBB- with negative outlook caught us completely out of guard. We tend to blame that partially on the multiple downgrade carried for oil producing countries by S&P while the decision of the agency to leave Russia’s rating unchanged at BB+ reflects RU strong fiscal position despite oil price declines. In CEE primary markets the issuing activity returned with Romania adding EUR 1.25 bn to the EUR outstanding 2025s and 2035s. Bulgaria also cited plans to sell up to EUR 2 bn while Lithuania and Hungary potentially could follow too. Despite this the year-to-date volumes remain low reaching only EUR 4 bn or a 40% of Q1 2015 issuance. As easing market concerns could contribute to better risk appetite we would expect March to bring more sovereign placements. Among the most interesting ones could be Russia’s return to Eurobond markets. Despite earlier promises not to issue until Western sanctions would be lifted it appears that Russia already holds active investor consultations and could be ready to issue any time soon. Taking into account relatively expensive OFZ borrowing, sticky inflation and scarcity of long-term domestic capital Russia could place up to USD 3-5 bn on international markets in near future. We take cautiously constructive outlook on CEE expecting accommodative ECB policies and slower US Fed push to bring positive stimulus for Eurobond investors. As volatility could be receding we see a possibility of relative spread tightening for Eurobonds vs. UST and Bunds taking into account the already wider spreads caused by the underlying yield declines in euro area and USA. Among low risk profile countries we continue to favour Poland which remains relatively oversold due to old negative headlines despite performing relatively well in February. We believe that CHF law draft will be positively revised while fiscal discipline will not suffer in the interim and the other two rating agencies will not follow S&P. In Hungary the upgrade news is long overdue while new supply would not be enough to compensate for smaller issuance in the past. Additionally we could see both Hungary and Lithuania opting for swapping USD Eurobonds into new EUR issues as technically that would be possible since both markets are not large. In riskier markets we stick to Russia and Turkey as CDS for both countries trade with a 1-notch rating discount while fundamentals would suggest slightly stronger rating. At the same time we reinstate buy call for Kazakhstan believing its Eurobonds were unduly punished while historical pattern suggests KZ spread should be some 30-40bp lower. On the other hand lifting of Western sanctions was already priced into Belarus spreads while Ukraine’s Eurobonds will continue to suffer from political instability affecting the IMF loan disbursement and trimming economic prospects. Financial analyst: Gintaras Shlizhyus, RBI Vienna

Please note the risk notifications and explanations at the end of this document

Eurobond market strategy Primary market overview EM primary market issuance history1

CEE sovereign issuers, USD bn1

120

8

90

6

60

CEE sub-regional division, USD bn1 45

30

4

30

15

2

CEEMEA

LATAM

0 PL KZ BG SI TR SK RO LT HR LV UA ME AL AM MK

2016

2015

2014

2013

2012

2011

2010

0

ASIA

1) USD bn, 2016 - year-to-date, CEEMEA - Central Eastern Europe, Middle East and Africa Source: Bloomberg, BondRadar, RBI/Raiffeisen RESEARCH

2015

0 2015

2016 (YTD)

CE

1) a sum of country issues, only CEE sovereigns which issued bonds during 2015 and 2016 year-to-date Source: Bloomberg, BondRadar, Raiffeisen RESEARCH

2016 (YTD) SEE

EE

1) CE includes Baltic countries, SEE includes Turkey Source: Bloomberg, BondRadar, RBI/Raiffeisen RESEARCH

CEE sovereign Eurobond pipeline 20161 Issuer

Rating

Currency

Date

Lead managers

Bulgaria

Baa2/BB+/BBB-

EUR 2 bn

Q1 2016

TBA

Hungary

Ba1/BB+/BB+

EUR 1 bn

Q1 2016

TBA

Hungary

Ba1/BB+/BB+

RMB

2016

Bank of China

Lithuania

A3/A-/A-

EUR 500 mn

Q1 2016

TBA

Romania

Baa3/BBB-/BBB-

EUR 1.75 bn

H1 2016

TBA

Russia

Ba1/BB+/BBB-

EUR/USD/CNY

2016

TBA

Belarus

Caa1/B-

USD 500 mn

2016

TBA

Czech Rep

A1/AA/AA-

EUR 2 bn

2016

TBA

Ukraine2

USA guaranteed

USD 1 bn

2016

TBA, USAID

1) TBA - to be announced, Ratings - S&P, Moody's, Fitch, based on incoming information, pipeline is not fixed and subject to change 2) Ukraine issue - full faith guarantee from USAID (USA government agency) Source: Bloomberg, BondRadar, RBI/Raiffeisen RESEARCH

ISSUANCE CHRONOLOGY, CEE Q4 2015 AND 2016 YEAR-TO-DATE Price1

Equivalent, mn Date

Issuer

ISIN

7-Oct-15

Poland

XS1306382364

15-Oct-15

Lithuania

15-Oct-15 21-Oct-15

FX

CCY

USD

EUR

1,750

XS1310032187

EUR

Lithuania

XS1310032260

Romania

21-Oct-15 5-Nov-15 24-Nov-15 8-Dec-15 11-Jan-16

Poland

Re-offer

Spread/Yield1

Coupon %

Maturity

Market

At issue

1,953

0.875

14-Oct-21

99.623

101.400 MS+45

52

750

846

1.25

22-Oct-25

98.923

104.710 MS+43

22

EUR

750

850

2.125

22-Oct-35

99.469

111.353 MS+69

XS1312891549

EUR

1,250

1,401

2.75

29-Oct-25

99.183

101.975 MS+190

Romania

XS1313004928

EUR

750

841

3.875

29-Oct-35

99.248

100.125 MS+245

Albania

XS1300502041

EUR

450

488

5.75

12-Nov-20

99.472

104.545 5.875%

Macedonia

XS1318363766

EUR

270

283

4.875

1-Dec-20

98.921

Latvia

XS1333704713

EUR

550

593

0.50

15-Dec-20

99.843

XS1346201889

EUR

750

805

2.375

18-Jan-36

98.499

99.804 MS+493 101.597 MS+28 99.063 MS+100

Current

49 198 281 4.65% 483 15 139

11-Jan-16

Poland

XS1346201616

EUR

1,000

1,086

1.50

19-Jan-26

99.613

100.225 MS+65

91

14-Jan-16

Slovakia

SK4120011420

EUR

1,000

1,089

1.625

21-Jan-31

99.894

105.812 MS+38

30

18-Feb-16

Romania

XS1312891549

EUR

750

854

2.75

29-Oct-25

101.688

101.975 2.55%

2.52%

18-Feb-16

Romania

XS1313004928

EUR

500

558

3.875

29-Oct-35

99.645

100.125 3.90%

3.86%

1) CCY - issue currency, re-offer - placement price, market - current price and current spread/yield, at issue - pricing yield or spread, for comparison reason yield or spread is used dependent on reference pricing measure Source: Bloomberg, BondRadar, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

7

Eurobond market strategy Secondary market overview CEE Eurobond z-scores & spreads1

CEE price performance net of Composite index1

2

1000

104

1

750

102

0

500

-1

250

100 98 96

0

Z-score 1m

94

UA (B-)

BY (B-)

RS (BB-)

HR (BB)

RU (BB+)

HU (BB+)

TR* (BBB-)

RO (BBB-)

KZ (BBB-)

PL (BBB+)

LT (A-)

-2

92 Feb-11

actual spread, bp

1) z-score - actual less 1-month mean normalised by 1-m standard deviation, Turkey - Fitch rating Source: Thomson Reuters, JP Morgan, RBI/Raiffeisen RESEARCH

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

1) CEE EMBIG price index gain minus Composite EMBIG gain Source: Thomson Reuters, JP Morgan, RBI/Raiffeisen RESEARCH

CEE EUROBONDS EXPIRING IN 1 YEAR1 Market Price Issuer/rate/due

Bid

Ask

TURKEY 5 03/01/16

100.1

100.4

MONTEN 7 1/4 04/08/16

100.7

101.4

ROMANI 5 1/4 06/17/16

101.6

REPHUN 3 1/2 07/18/16 SLOVEN 4.7 11/01/16

m/m %

YTM mid.

Spread vs.

Mdur.

ISIN

% p. a.

Bmk, bp

years

---

5y max

5y min

-0.40

109.6

100.1

-8.59

-819

0.0 XS0245387450

-0.36

107.0

90.2

-1.25

-85

0.1 XS0614700424

101.8

-0.29

108.7

95.8

-0.20

-11

0.3 XS0638742485

101.2

101.5

-0.25

104.6

76.8

0.21

61

0.4 XS0240732114

103.2

103.3

-0.31

109.3

102.7

0.00

41

0.7 XS0982712795

TURKEY 7 09/26/16

103.1

103.3

-0.07

118.1

103.1

1.49

102

0.6 US900123AZ36

LATVIA 5 1/4 02/22/17

103.9

104.3

-0.31

112.8

99.6

1.12

60

1.0 XS0747927746

EUR

USD

1) yield/spread - mid market, expiring Eurobonds except the already paidback, m/m - month on month, 5-year min and 5-year max, YTM mid - yield to maturity based on mid market price, Bmk - benchmark, Mdur - modified duration, ISIN - international security identification number Source: Bloomberg, Raiffeisen RESEARCH

CEE EMBIG expected spread change (bp)1 -50

0

50

5y CDS CEE sample history (bp)1 100

660

LT (A-) PL (BBB+) KZ (BBB-)

440

RO (BBB-) TR* (BBB-) HU (BB+) RU (BB+)

220

HR (BB) RS (BB-) BY (B-)

0 Feb-11

UA (B-) spread change (mom)

expected spread change (+1-month)

1) USD segment, 1-month spread change net, +3 months spead forecast, ratings S&P, TR rating - Fitch Source: Thomson Reuters, JP Morgan, RBI/Raiffeisen RESEARCH

8

Feb-12 PL

Feb-13

Feb-14

Feb-15

RO

Feb-16

RU

1) CEE sample includes one country from each of CEE sub-regions, i.e. Poland from CE, Romania from SEE and Russia from EE Source: Bloomberg, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

Eurobond market strategy Secondary market overview (continued) CEE EUROBOND MARKET1 Market Price Issuer/rate/due

Bid

Ask

m/m %

5y max

5y min

YTM mid.

Spread vs.

Mdur.

ISIN

% p. a.

Bmk. bp

years

---

EUR BGARIA 4 1/4 07/09/17

106.2

106.5

0.28

111.8

100.3

-0.36

10

1.3 XS0802005289

BGARIA 2 03/26/22

101.6

102.4

-0.75

102.7

95.8

1.66

192

5.6 XS1208855616

BGARIA 2 5/8 03/26/27

97.8

98.8

0.00

100.6

90.8

2.81

255

9.3 XS1208855889

CROATI 5 7/8 07/09/18

109.5

109.8

-0.01

112.2

87.7

1.69

221

2.2 XS0645940288

CROATI 3 7/8 05/30/22

101.2

101.7

-0.91

107.1

96.4

3.61

386

5.3 XS1028953989

92.2

92.8

-1.22

98.2

89.6

4.00

391

7.5 XS1117298916

REPHUN 4 3/8 07/04/17

105.2

105.7

-0.49

108.0

77.3

0.34

80

1.3 XS0284810719

REPHUN 3 7/8 02/24/20

111.1

111.7

-0.08

113.1

69.3

0.95

138

3.8 XS0212993678

LITHUN 4.85 02/07/18

109.6

109.9

-0.30

114.3

94.5

-0.15

38

1.9 XS0327304001

LITHUN 2 1/8 10/29/26

112.7

113.2

1.90

116.9

98.6

0.85

61

9.6 XS1130139667

POLAND 5 5/8 06/20/18

112.9

113.1

-0.02

122.6

102.1

0.02

54

2.2 XS0371500611

POLAND 4 03/23/21

116.7

117.0

0.36

121.5

87.8

0.62

95

4.6 XS0543882095

POLAND 3 01/15/24

CROATI 3 03/11/25

112.7

113.3

0.73

122.2

100.0

1.26

134

7.1 XS1015428821

POLAND 0 7/8 05/10/27

91.3

91.7

0.41

99.2

86.1

1.71

145

10.4 XS1209947271

ROMANI 6 1/2 06/18/18

113.9

114.3

-0.38

119.0

95.9

0.36

88

2.1 XS0371163600

ROMANI 4 5/8 09/18/20

116.5

116.9

-0.54

117.8

99.7

0.88

126

4.1 XS0972758741

ROMANI 2 7/8 10/28/24

104.0

104.8

-0.26

109.5

98.9

2.31

228

7.6 XS1129788524

MACEDO 3.975 07/24/21

95.0

96.0

0.26

103.3

94.8

4.93

524

4.6 XS1087984164

MONTEN 5 3/8 05/20/19

102.8

103.5

-0.09

106.7

101.0

4.29

476

2.8 XS1069342407

MONTEN 3 7/8 03/18/20

95.2

96.1

0.25

99.3

92.1

5.08

551

3.5 XS1205717702

TURKEY 5 7/8 04/02/19

111.8

112.6

-0.85

119.4

101.2

1.78

225

2.8 XS0285127329

TURKEY 4.35 11/12/21

106.7

107.6

-0.71

112.7

104.6

2.97

326

5.0 XS0993155398

TURKEY 4 1/8 04/11/23

104.5

105.3

-1.11

112.0

102.6

3.33

349

5.9 XS1057340009

BELRUS 8.95 01/26/18

103.1

104.0

1.04

111.2

70.0

6.94

620

1.7 XS0583616239

SERBIA 5 1/4 11/21/17

103.6

104.1

0.06

107.1

96.8

2.96

226

1.6 XS0856951263

SERBIA 7 1/4 09/28/21

112.2

112.9

0.05

119.6

89.6

4.67

335

4.5 XS0680231908

CROATI 6 1/4 04/27/17

104.1

104.5

0.26

112.3

96.0

2.53

197

1.1 XS0776179656

CROATI 6 3/8 03/24/21

108.1

108.7

-0.10

117.8

86.7

4.50

326

4.3 XS0607904264

CROATI 6 01/26/24

107.4

108.0

0.37

112.0

97.4

4.82

323

6.3 XS0997000251

REPHUN 4 1/8 02/19/18

103.8

104.0

-0.24

105.4

95.9

2.11

134

1.9 US445545AG19

REPHUN 6 3/8 03/29/21

113.5

113.8

0.09

118.2

82.5

3.43

216

4.3 US445545AE60

REPHUN 5 3/8 03/25/24

110.8

111.4

1.20

114.7

98.7

3.76

214

6.5 US445545AL04

REPHUN 7 5/8 03/29/41

137.4

138.4

1.15

150.3

79.5

4.96

255

12.8 US445545AF36

LITHUN 5 1/8 09/14/17

105.9

106.2

-0.32

113.2

95.1

1.16

51

1.5 XS0541528682

LITHUN 6 1/8 03/09/21

115.6

116.2

0.13

123.9

96.3

2.72

148

4.3 XS0602546136

LITHUN 6 5/8 02/01/22

120.6

121.2

0.38

128.6

101.0

2.78

141

5.0 XS0739988086

LATVIA 5 1/4 02/22/17

103.9

104.3

-0.31

112.8

99.6

1.12

60

1.0 XS0747927746

LATVIA 5 1/4 06/16/21

113.3

113.9

0.09

117.2

90.9

2.50

122

4.7 XS0638326263

POLAND 5 1/8 04/21/21

112.0

112.4

1.40

119.5

97.5

2.58

129

4.5 US857524AA08

POLAND 3 03/17/23

100.1

100.5

2.23

103.6

87.6

2.95

140

6.2 US731011AT95

POLAND 4 01/22/24

6.8 US857524AC63

USD

106.8

107.2

2.68

110.6

98.0

3.00

139

KAZAKS 3 7/8 10/14/24

94.5

95.3

1.05

99.0

84.1

4.60

295

7.1 XS1120709669

KAZAKS 4 7/8 10/14/44

81.6

82.6

-0.36

97.2

75.9

6.22

367

13.7 XS1120709826

RUSSIA 3 1/4 04/04/17

100.4

100.9

0.45

106.9

92.2

2.64

210

1.1 XS0767469827

RUSSIA 4 1/2 04/04/22

100.8

101.4

1.42

114.7

82.0

4.29

290

5.2 XS0767472458

RUSSIA 5 7/8 09/16/43

96.6

97.6

2.06

109.5

76.6

6.09

359

13.0 XS0971721963

TURKEY 7 1/2 07/14/17

107.1

107.5

0.41

123.1

106.5

2.14

150

1.3 US900123BE97

TURKEY 5 1/8 03/25/22

102.7

103.3

0.31

117.5

92.3

4.55

313

5.1 US900123BY51

TURKEY 6 7/8 03/17/36

111.6

112.2

0.92

139.6

99.2

5.86

366

11.0 US900123AY60

TURKEY 4 7/8 04/16/43

87.4

87.9

0.89

105.7

76.6

5.78

329

13.8 US900123CB40

UKRAIN 7 3/4 09/01/21

89.5

90.5

-2.32

98.3

85.7

10.16

885

4.1 XS1303920083

UKRAIN 7 3/4 09/01/27

84.8

85.7

-4.35

97.0

81.2

9.93

812

6.8 XS1303927179

1) Yield/spread - mid market, m/m - month on month, 5-year min and 5-year max, YTM mid - yield to maturity based on mid market price, Bmk - benchmark, Mdur - modified duration, ISIN - international security identification number Source: Bloomberg, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

9

Eurobond market strategy CEE Rating & relative value summary CEE RATINGS DIRECTION S&P

Moody's

Fitch

RBI View2

AA-/stab A+/stab BBB+/neg A-/pos BB+/stab

A1/stab A2/stab A2/stab Baa3/stab Ba1/pos

A+/stab A+/stab A-/stab BBB+/pos BB+/pos

    

BBB-/stab BB+/stab BB+u/neg BB-/stab BB/neg BB-/stab B+/stab B+/stab B/stab

Baa3/pos Baa2/stab Baa3/neg n.r. Ba1/neg B1/stab Ba3/neg B1/stab B3/stab

BBB-/stab BBB-/stab BBB-/stab BB+/neg BB/neg B+/pos n.r. n.r. n.r.

        

BBB-/neg BB+/neg B-/stab B-/stab

Baa2/stab Ba1/stab Caa1/neg Caa3/stab

BBB+/stab BBB-/neg n.r. CCC/n.a.

   

Rating/Outlook CE: CZ SK PL SI HU SEE: RO BG TR1 MK HR RS ME AL BH EE: KZ RU BY UA1

1) Turkey - S&P unsolicited rating, Ukraine - Fitch outlook not applicable, n.r. - not rated, n.a. - not applicable 2) RBI View - possible direction of Outlook and/or Rating change in 3 to 12 months; ;  no change;  upgrade possible;  downgrade possible Source: rating agencies, RBI/Raiffeisen RESEARCH

CE CDS implied rating scale (bp)1

SEE CDS implied rating scale (bp)1 500

300

400 200 300

HU

BBB- upgrade possibility priced in SI

200

BG

100 RO

PL expensive relative to rating

SK

CZ

RS

HR

100

expensive relative to rating

0

0 AA-

A+

A

A-

BBB+

BBB

BBB-

BBB-

BB+

BB+

BB

BB-

1) CE - Central Europe, 5y CDS country spread, 5y CDS spread average for a particular sovereign rating bracket calculated by S&P, country spread above rating spread average relative cheapness, below - relative expensive Source: Standard & Poor's, RBI/Raiffeisen RESEARCH

1) SEE - South East Europe, 5y CDS country spread, 5y CDS spread average for a particular sovereign rating bracket calculated by S&P, country spread above rating spread average - relative cheapness, below - relative expensive Source: Standard & Poor's, RBI/Raiffeisen RESEARCH

EE CDS implied rating scale (bp)1

Local yield premium vs. CDS market (bp)1

1,250

1,200

1,000

800

UA expensive relative to rating 750

400 cheap relative to rating

BY

500

250

0

RU TR

KZ

-400 CZ

0 BBB

BBB-

BB+

BB

BB-

B+

B

B-

1) EE - East Europe (formerly CIS + Turkey), 5y CDS country spread, 5y CDS spread average for a particular sovereign rating bracket calculated by S&P, country spread above rating spread average - relative cheapness, below - relative expensive, Belarus - EMBIG USD spread; Source: Standard & Poor's, RBI/Raiffeisen RESEARCH

10

SK

PL

actual

SI

RO

BG

max

HU

HR

TR

RU

min

1) LCY 5y yield minus 5y UST yield and minus 5y CDS (USD) spread, a lower spread indicates expensiveness of LCY bond vs. same maturity CDS (Eurobond), min/max - 5-year Source: Bloomberg, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

Appendix Summary: Macro data MAIN MACRO DATA & FORECASTS GDP, % avg. yoy Croatia

Czech Rep.

Hungary

Poland

Romania

Russia

Ukraine

Turkey

CPI, Unem% avg. ployment, yoy %

Nominal wages, EUR

Fiscal balance, % GDP

Public debt, % GDP

Export1, % GDP

C/A, % GDP

Ext. debt, % GDP

FXR2 % ext. debt

Import cover, months

2015e

1.5

-0.5

16.2

1058

-5.0

89.9

24.9

4.7

108.9

29.0

9.6

2016f

1.0

1.1

16.0

1061

-4.5

93.1

26.0

1.5

109.5

27.0

8.8

2017f

1.5

1.5

15.8

1070

-4.1

94.9

26.6

1.5

109.8

25.8

8.5

2015e

4.3

0.4

6.5

972

-1.5

40.7

75.0

1.0

65.6

55.4

6.1

2016f

2.4

1.3

6.1

1023

-1.5

40.1

77.4

1.1

63.6

82.0

8.5

2017f

2.4

2.0

5.9

1104

-1.7

40.2

78.9

-0.4

63.4

79.2

8.0

2015e

2.8

0.0

7.0

795

-2.3

75.8

80.3

3.7

104.6

26.5

4.5

2016f

2.2

1.93

6.2

818

-2.23

75.03

81.3

3.7

96.9

26.1

4.0

2017f

2.9

2.73

5.7

833

-2.43

71.53

82.5

3.6

89.8

24.6

3.4

2015e

3.5

-0.9

10.5

939

-3.1

51.9

39.1

-0.1

70.3

29.1

6.1

2016f

3.6

1.3

9.4

950

-3.2

52.9

41.3

-1.2

73.2

24.7

5.1

2017f

3.4

2.0

9.0

1016

-3.2

52.9

40.4

-1.7

73.1

23.5

4.8

2015e

3.7

-0.6

6.8

566

-1.2

38.9

31.6

-1.0

59.3

37.9

7.4

2016f

4.0

-0.3

6.5

619

-3.0

39.7

32.2

-2.5

57.8

33.7

6.1

2017f

3.6

2.7

6.5

668

-3.2

40.4

32.4

-3.3

56.1

33.2

5.7

2015e

-3.7

15.6

5.6

499

-3.6

12.7

25.9

5.0

39.3

73.0

23.3

2016f

-2.0

9.5

6.5

444

-5.5

13.5

27.0

4.6

44.0

80.2

25.9

2017f

1.5

8.0

6.0

522

-3.9

14.0

25.9

4.6

32.2

84.5

21.7

2015e

-10.0

48.5

11.5

172

-4.0

87.0

37.4

-0.8

128.7

11.3

4.3

2016f

1.5

16.0

11.0

n.a.

-3.5

94.0

42.7

-1.0

133.3

13.9

4.7

2017f

3.0

10.0

10.0

n.a.

-2.5

93.0

46.4

-1.2

134.0

14.7

4.6

2015e

3.5

7.6

10.5

n.a.

-1.5

34.0

21.6

-5.0

59.9

26.6

6.5

2016f

2.5

8.1

10.0

n.a.

-1.5

32.0

22.9

-5.7

62.6

24.9

6.0

2017f

3.5

7.0

10.0

n.a.

-1.5

33.0

22.1

-5.6

58.2

25.0

5.7

1) export of goods only 2) FXR - foreign exchange reserves 3) under revision Source: Thomson Reuters, National Statistics, RBI/Raiffeisen RESEARCH

CPI growth forecasts (% average yoy)1

GDP growth forecasts (% yoy) 5

18

4

16 14

3

12

2

10

1

8

0

6 4

-1

2

-2

0 -2

-3 HR

CZ

HU

PL

RO

2016f Source: Thomson Reuters, RBI/Raiffeisen RESEARCH

RU 2017f

UA

TR

HR

CZ

HU

PL

RO

2016f

RU

UA

TR

2017f

1) HU under revision Source: Thomson Reuters, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

11

Appendix Capital flows monitor

 The IIF estimates that EMs saw net non-resident portfolio outflows of USD 3.6 bn in January, marking an unprecedented seventh consecutive month of outflows.  Renewed concerns about China’s growth outlook seem to have fueled a period of elevated global risk aversion that has weighed on portfolio flows to EMs.  The recent reversal has been dominated by equities, while EM bond markets experienced modest inflows for the last three months.  The IIF estimates suggest that all EM regions except Latin America have faced outflows in January for the third consecutive month.  In Emerging Europe flows are still in the red. However, whilst debt inflows to Poland moderated again, withdrawals from Hungary and Turkey seem to have stopped after a year of outlflows. Source: IIF, RBI/Raiffeisen RESEARCH

Portfolio Debt Inflows to EM (USD bn)1 90

Portfolio Debt Flows (USD bn)1 40

Actual (BoP)

75

30

60

20

45

10

30

0

15

-10

IIF Portfolio Debt Flows

-20 Jan-13

0 -15 2010

2011

2012

2013

2014

2015

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Emerging Europe

Emerging Asia

Latin America

Africa & Middle East

1) net non-resident purchases of EM bonds; EM: IIF group of 30 emerging economies; monthly data Source: IIF, RBI/Raiffeisen RESEARCH

1) net non-resident purchases of EM bonds; EM: IIF group of 30 emerging economies; monthly data Source: IIF, RBI/Raiffeisen RESEARCH

Net non-resident purchases of bonds (USD bn)1

Net non-resident purchases of bonds (USD bn)1

3 9 2

7

1

5 3

0

1

-1

-1 -2 -3 Jan-13

-3 Jul-13

Jan-14

Poland 1) monthly data Source: IIF, RBI/Raiffeisen RESEARCH

12

Jul-14

Jan-15

Czech Republic

Jul-15

Jan-16

Hungary

-5 Jan-13

Jul-13

Jan-14

Turkey

Jul-14 Mexico

Jan-15

Jul-15

Jan-16

South Africa

1) monthly data Source: IIF, RBI/Raiffeisen RESEARCH

Please note the risk notifications and explanations at the end of this document

Risk notifications and explanations Risk notifications and explanations Kindly note that research is done and recommendations are given only in respect of financial instruments which are not affected by the sanctions under EU regulation no 833/2014 as amended, i.e. financial instruments which have been issued before 1 August 2014. We may remind you that the acquisition of financial instruments with a term exceeding 30 days issued after 31 July 2014 is prohibited under EU regulation no 833/2014 as amended. No opinion is given with respect to such prohibited financial instruments.

Warnings  Figures on performance refer to the past. Past performance is not a reliable indicator of the future results and development of a financial instrument, a financial index or a securities service. This is particularly true in cases when the financial instrument, financial index or securities service has been offered for less than 12 months. In particular, this very short comparison period is not a reliable indicator for future results.  Performance of a financial instrument, a financial index or a securities service is reduced by commissions, fees and other charges, which depend on the individual circumstances of the investor.  The return on an investment can rise or fall due to exchange rate fluctuations.  Forecasts of future performance are based purely on estimates and assumptions. Actual future performance may deviate from the forecast. Consequently, forecasts are not a reliable indicator for the future results and development of a financial instrument, a financial index or a securities service. Raiffeisen Bank International AG is responsible for the information and recommendations in this publication which are prepared by analysts from subsidiary banks who are listed in this publication or from Raiffeisen Centrobank. A description of the concepts and methods which are used in the preparation of financial analyses can be found at: www.raiffeisenresearch.com/concept_and_methods Detailed information on sensitivity analyses (procedure for checking the stability of potential assumptions made in the context of financial analysis) can be found at: www.raiffeisenresearch.com/sensitivity_analysis The distribution of all recommendations relating to the calendar quarter prior to the publications date, and distribution of recommendations, in the context of which investmentbanking services within the meaning of § 48f (6) Z 6 Stock Exchange Act (BörseG) have been provided in the last 12 months, is available under: www.raiffeisenresearch.com/distribution_of_recommendation Disclosure of circumstances and interests which may jeopardise the objectivity of RBI (as per Sec 48f [5] and [6] of the Stock Exchange Act): www.raiffeisenresearch.com/disclosuresobjectivity

13

Disclosure Bonds

Financial instruments/Company Eurobonds LCY bonds

Date of the first publication 01/01/2001 01/01/1997

Recommendations history: Local currency government bonds (I: no change)* Date of change 09/02/2015

CZ CZK 5y 10y 2y

2y

HU HUF 5y 10y 2y

PL 5y

10y

PLN

RO RU** RON RUB 5y 10y 2y 5y 10y 2y

2y

TR 5y

10y

TRY

Hold Hold Hold Hold Buy Buy Buy Sell Hold Hold Hold Hold Buy Buy Buy Hold Sell Sell Sell Sell Buy Buy Buy Buy

24/03/2015

I

I

I

I

I

I

I

I

I

Sell

28/04/2015

I

I

I

I

I

Hold Hold I

I

I

I

I

I

Hold Hold Hold Hold Hold Buy Hold Hold

15/05/2015

I

Buy Buy

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

02/06/2015

I

Hold Hold

I

Hold

I

I

Hold

I

I

I

I

I

I

I

I

I

I

24/06/2015

I

I

Buy

I

I

I

Sell

I

I

I

Sell

I

I

I

Sell

I

06/08/2015

I

I

Hold

I

I

Sell

I

I

I

Sell

I

I

I

Sell

I

I

03/09/2015

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

22/09/2015

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

04/11/2015

I

I

I

I

I

I

I

I

I

I

17/12/2015

I

I

I

I

I

I

I

Buy Buy Buy

I

I

25/01/2016

I

--

Buy

I

Hold

--

I

Hold

I

--

I

I

--

Hold

I

--

--

11/02/2016

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

Hold

--

23/02/2016

I

--

I

I

I

--

I

I

Hold

--

I

I

I

--

I

Hold

I

--

Buy Buy Buy

Hold Hold

I

I

I

I

Hold

I

I

I

I

I

Hold Hold Sell I

I

Hold

I

I

I

I

I

I

I

Hold

I

Buy Buy Buy

Buy Buy

I

Sell Sell Sell Sell

Hold Hold Hold

I

Hold

I

I

Hold

I

Buy

I

I

I

Buy

I

I

I

Sell

I

I

I

I

I

Hold Hold Hold Hold Hold

Buy Buy Buy Buy Buy Buy

I

Buy

I

I

I

Hold

--

--

I

--

I

I

I

I

I

I

I

--

I

Buy

Hold Hold

I

I

Hold Hold I

I

I

* recommendations based on absolute expected performance in LCY; FX vs EUR; 5y segment not covered anymore; ** RU under revision; Source: RBI/Raiffeisen RESEARCH

Recommendations history: Sovereign Eurobonds (I: no change)* BG Date of change 09/02/2015 05/03/2015 24/03/2015 17/04/2015 28/04/2015 02/06/2015 24/06/2015 06/08/2015 03/09/2015 22/09/2015 07/10/2015 04/11/2015 03/12/2015 17/12/2015 18/01/2016 25/01/2016 23/02/2016

EUR Hold I I I I Sell Hold I I I I I I I I I I

HR USD -----------------

EUR Sell Hold I I I I I Sell I I I I I I I Hold I

CZ USD Sell Hold I I I I I Sell I I I I I I I Hold I

EUR Hold I I I I I I I I I I I I I I I I

HU USD Hold I I I I I I I I I I I I I I I I

EUR Buy I Hold I I I I I I I Buy I I I I Hold Buy

KZ USD Hold I I I I I I I I I Buy I I I I Hold Buy

EUR -----------------

LT USD -------Buy I I Hold I Buy I I Hold Buy

EUR Hold I Buy I I Hold I Buy Hold I I Buy Hold I I I

PL USD Hold I Buy I I Hold I I I I I I I I I I I

EUR Hold I Buy I I I I Hold I Buy I I I I Hold I I

RO USD Hold I Hold I I Buy Hold I I I I Buy

EUR Buy I I I I Hold I I I Buy I I

USD Hold I Buy I I Hold I I I Buy I I

I Hold I I

I I Hold I

I I Hold I

* recommendations based on absolute expected performance, i.e. expected spread change; Source: RBI/Raiffeisen RESEARCH

Recommendations history: Sovereign Eurobonds (I: no change)* RU Date of change 09/02/2015 05/03/2015 24/03/2015 17/04/2015 28/04/2015 02/06/2015 24/06/2015 06/08/2015 03/09/2015 22/09/2015 07/10/2015 04/11/2015 03/12/2015 17/12/2015 18/01/2016 25/01/2016 23/02/2016

EUR Sell Hold Buy Hold I I I I I I I Buy Hold I I Buy I

RS USD Sell Hold Buy Hold I I I I I I I Buy Hold I I Buy I

EUR -– – – – – – – – – – – – – – –

SK USD Sell Hold Hold I I Sell I I I I I I I I I I Hold

EUR ----Hold I I I I I I I I I I I I

SI USD -----------------

EUR ----Buy I I Hold I I I I I I I Buy I

TR USD -----------------

EUR Hold I I I Buy I I Hold I Sell I Hold I Buy I I I

UA USD Hold I I I Buy I Hold I I Sell I Hold I Hold I Buy I

EUR Sell I I I Hold I I Sell Hold I I ------

* recommendations based on absolute expected performance, i.e. expected spread change, under revision; Source: RBI/Raiffeisen RESEARCH

14

BY USD Sell I I I Hold I I Sell Hold I I I Sell I I I I

EUR – – – – – – – – – – – – – -

USD Sell I Hold I Buy I I Sell I I I Hold I I I I I

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16

Elena

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Tel: +356 21 320 942

RBI Beijing Branch Terence Lee RBI Singapore Branch Klaus Krombass

Tel: +86 10 8531-9007 Tel: +65 6305 6024

International Desk Vienna: Raiffeisen Bank International AG Rudolf Lercher Tel: +43 1 71707 3537

Moscow: ZAO Raiffeisenbank Austria Maria Maevskaya Tel: +7 495 775 5230

Belgrade: Raiffeisen banka a.d. Sofija Davidovic

Tel: +381 11 220 7807

Prague: Raiffeisenbank a.s. Roman Lagler

Bratislava: Tatra banka, a.s. Henrieta Hudecova

Tel: +421 2 5919 1849

Pristina: Raiffeisen Bank Kosovo J.S.C. Anita Sopi Tel: +381 38 22 22 22 184

Bucharest: Raiffeisen Bank S.A. Reinhard Zeitlberger

Tel: +40 21 306 1564

Sofia: Raiffeisenbank (Bulgaria) EAD Yavor Russinov Tel: +3592 9198 5136

Budapest: Raiffeisen Bank Zrt. László Volosinovsky

Tel: +36 1 484 4639

Sarajevo: Raiffeisen Bank d.d. Bosna i Hercegovina Vildana Sijamhodzic Tel: +387 33 287 283

Kiev: Raiffeisen Bank Aval Oksana Volchko

Tel: +38 044 230 0348

Tirana: Raiffeisen Bank Sh.a. Jorida Zaimi

Maribor: Raiffeisen Banka d.d. Simona Vizintin

Tel: +386 2 22 93 159

Warsaw: Raiffeisen Bank Polska S.A. Zuzanna Szatkowska Tel: +48 22 585 2431

Minsk: Priorbank JSC Anna Hmaruk

Tel: +375 17 289 9321

Zagreb: Raiffeisenbank Austria d.d. Wolfgang Wöhry Tel: +385 1 4566 462

Tel: +420 234 40 1728

Tel: +355 4 2381 445 2865

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