Regional Economic Prospects in EBRD Countries of Operations: January 20121 EBRD Office of the Chief Economist Overview Eurozone Crisis Takes the Steam out of Emerging Europe’s Recovery In line with our October forecast, growth in the EBRD region will substantially slow from about 4.8 per cent in 2011 to 3.1 per cent in 2012 assuming that the Eurozone sovereign debt crisis does not materially deteriorate further. The projected regional slowdown in 2012 is largely due to significantly weaker growth in central and south-eastern Europe, which is particularly exposed to Eurozone stress, and where a few countries are expected to return to recession this year. Growth is also slowing down in Eastern Europe and the Caucasus. In contrast, Russia and other CIS countries, much less integrated with Western Europe, are likely to continue to enjoy respectable growth rates assuming commodity prices remain high. For the first time since 2009 the region as a whole experienced net capital outflows in Q3 2011, and Western banks appear to be deleveraging since the autumn. Substantial risks to baseline growth stem from the possibility of an escalation of the Eurozone turmoil with systemic bank risks for emerging Europe, whose banking sector is deeply integrated with Eurozone-based banks, and the ensuing slowdown in the US and elsewhere coupled with lower commodity prices. In this scenario, uncoordinated banking sector regulations in both home and host countries of cross-border bank groups would contribute to a deeper fall in growth. Growth performance of many transition economies in the third quarter of 2011 surprised on the upside as the Eurozone crisis had not yet translated into the expected substantial real slowdown, either in the single currency area as a whole or in the transition countries that have the strongest links with it (Chart 1). Most countries grew faster than we forecasted in October, with Romania leading the group with the largest positive surprise thanks to a betterthan-expected harvest. Romania was also one of the strongest overall performers in the third quarter among the new EU members, along with Latvia. The real output of the latter, however, and of its Baltic neighbours and some other transition economies, is still well below the pre2008 level. Turkey’s rapid expansion due to rising domestic demand, fuelled by an increasingly worrisome credit boom, continued largely unabated. As in the previous quarters, Central Asian economies continued to grow very strongly (especially Mongolia, the strongest performer among all transition countries in the third quarter), driven directly or indirectly by high commodity prices and in some cases ongoing expansionary fiscal policies. Finally, Georgia grew very strongly as the successful recovery in previous quarters in turn led to a sharp rise in the share of inventories in output to pre-crisis levels. However, Azerbaijan saw its real GDP shrink as the rapid expansion of its oil output seen in the previous years is over; Slovenia’s output contracted as a decline in investment joined an already stagnating consumption in a largely deteriorating economic climate; and output in Belarus decreased by almost 4 per cent relative to the previous quarter as its balance of payments crisis took a toll on the real economy. Inflation continues to moderate in most countries and, except in Turkey, is not an immediate policy concern even in countries with stronger growth. Many countries in the region, especially those further east, recorded large drops in their year-on-year inflation rates in November of 2011 relative to December of 2010 (Chart 2). Georgia saw its inflation tumble 1

This document is provided as a companion to the EBRD’s growth forecasts for its countries of operations, which are released four times a year. For more comprehensive coverage of economic policies and structural changes, the reader is referred to the EBRD’s Transition Report 2011 as well as country strategies and updates and statistical series on economic and structural reform variables, which are all available on the EBRD’s website (www.ebrd.com).

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from 11 per cent to below 2 per cent in this period, whereas in the Kyrgyz Republic it more than halved from 19 per cent to just above 7 per cent. Armenia, Ukraine, but also Romania recorded substantial decreases in inflation rates, too. In many of these and other countries lower inflation rates reflected lowering global food and energy prices. Russia’s inflation moderation by the end of 2011 was also due to a better harvest and a decrease in real effective exchange rate appreciation pressures. In contrast, Turkey’s inflation has risen substantially to double digits. Inflation also increased in Slovakia and Latvia, with a potential impact on competitiveness given the lack of exchange rate as a policy instrument. Core inflation has been on the rise in some transition economies as they continued growing through the third quarter of 2011. While the most recent available GDP and other output measures do not at this point show clear signs of a Eurozone slowdown spreading in the region, financial sector, capital flows and leading indicators paint a gloomier picture: 

Real credit has been very weak or negative in most of central and south-eastern Europe since late last summer. While in south-eastern Europe (SEE) it was negative on average in month-on-month terms for most of 2011, in central Europe and Baltics (CEB) it dropped slightly below zero in August following mildly positive growth in the first half of the year. It has been particularly weak in Croatia, Estonia, Hungary, Slovenia, Bulgaria and FYR Macedonia. Elsewhere in the region, strong monthly growth in Turkey in the earlier months of the year turned into an almost 7 per cent contraction in real credit in October, perhaps a first sign of a cooling economy. Ukrainian real credit growth has been slowing from its August peak reaching a virtual standstill by November. The International Institute of Finance’s survey of lending conditions in Emerging Europe confirms a tightening of conditions in the third quarter of 2011 across all measures, including credit standards, demand for loans, funding conditions and trade finance. To the extent that credit continued to grow, this was tended to be driven mostly by local currency lending.2



The quality of credit portfolios has not improved in most countries with a high stock of non-performing loans (NPLs). Among them, only Montenegro recorded a large drop in NPLs in the recent past, and the Kyrgyz Republic and Lithuania saw smaller reductions. On the other hand, loan-to-deposit ratios have been declining in most transition economies, albeit from sometimes very high starting levels, signalling a possible shift towards a more sustainable lending model.

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The region as a whole experienced its first significant net capital outflow in the third quarter of 2011 since the first quarter of 2009, although on a much smaller scale (Chart 3). Non-FDI capital has been flowing out of the region since last summer. FDI inflows have remained largely stable through the third quarter of 2011 and have even increased somewhat. Separate high-frequency fund flow data confirms that capital outflows from the whole EBRD region that peaked in August and September of last year continued through December, as investors flew to safety (Chart 4).

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Worryingly for the CEB and SEE regions, Western bank deleveraging appears to be underway since the autumn. The only country in this region that had positive bankrelated cross-border capital inflows in the fall was Bulgaria, where they, however, followed earlier outflows. This suggests that transmission of the Eurozone crisis to the region via bank subsidiaries may have already begun in the fall of 2011, with further negative impact on credit and possibly growth.

2

A few countries, including Kazakhstan, Serbia and Ukraine, saw a contraction in FX lending late last year on a year-on-year basis that was more than compensated by local currency credit growth. Local currency lending constituted well over 80 per cent of total credit growth in Croatia and Russia.

2

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Large losses have been recorded in equity markets across the region, similarly to other emerging markets. While equity indexes in Hungary, Poland and Turkey dropped by about a fifth since summer, the Russian market has lost closer to a third and the Ukrainian one almost two fifth of its value, possibly reflecting the additional concerns over political developments.



Various leading indicators point to an impending economic slowdown, especially in the new EU countries. In particular, both industrial and consumer confidence indicators have been weakening since August through December 2011, with both measures lower now than in the summer in each of the new EU members (Chart 5). New orders in manufacturing have dropped by almost 5 per cent in October after a full year of increases or only slight decreases, even though they seem to have recovered somewhat in November. Non-domestic new orders fell even more sharply by 7 per cent, a sign of declining demand from abroad in general and from the troubled Eurozone in particular.

Outlook and risks The transition region is projected to have grown by 4.8 per cent in 2011 and to grow by about 3.1 per cent in 2012. These figures are broadly in line with our projections from last October, which already took into account the expected impact of the Eurozone crisis by adjusting the 2012 growth forecasts substantially downwards (Chart 6). The 2011 growth rate represents a slight improvement on the earlier projection as the effect of the crisis on the transition region as a whole, and specifically on the countries most exposed to it, has been taking longer than originally expected to materialize. The better-than-expected performance in many countries in the third quarter of last year together reasonably strong higher-frequency output data for the last months of 2011 have translated into slightly higher projections for all transition sub-regions with the exception of Russia. In 2012, however, the crisis in the single currency area is expected to significantly impact economic performance in the transition region and especially in central and south-eastern Europe, where countries’ economies are the most intertwined with those of the Eurozone. The projection assumes a baseline scenario of a slow and uneven progress towards containment of the current turmoil. The Euro area’s GDP is projected to decline by 0.5 per cent in 2012, implying mild recessions in the first half of the year, due to the short-term impact of fiscal adjustments and a period of instability both for the governments on the Eurozone periphery and the financial sector across the currency union. Real activity will suffer as credit growth declines, yet avoids a crunch thanks to the more accommodative monetary policy stance of the ECB. As in 2008-09, international coordination between governments, international agencies and banks, most likely in the context of a new “Vienna 2.0” framework, is assumed to manage the deleveraging process and forestall disruptive moves by individual bank groups or governments. The turmoil in Eurozone will affect output in transition economies via both trade and financial channels. As in the 2008-09 global financial crisis, a standstill in the Eurozone translates into weaker export markets for its eastern neighbours, even though in the baseline this impact should remain modest relative to the 2008-09 experience, when global trade flows collapsed and Western Europe suffered a sharp recession. The single currency area is a very important source of foreign direct investment as well as shorter term financing for the region. Capitals flows into the region have already turned into outflows and are likely to remain so while capital is scarce and risks high in the single currency area. Most importantly in the current situation, subsidiaries of Eurozone banks form an important part of the financial system in many transition countries. As the parent banks face funding issues and higher capital requirements, their subsidiaries risk receiving considerably less support from their parents and might even be used as an auxiliary source of capital or liquidity for the latter. In addition, remittance flows from the Eurozone to CEB, SEE and a few other countries will suffer as well. 3

All these channels will particularly impact those transition countries that are the most strongly integrated with the Eurozone. Central Europe and the Baltics (CEB) and southeastern Europe (SEE) receive large shares of their FDI and other capital inflows from the Euro area, and send most of their exports to it. Large portions of their banking systems are comprised of Eurozone bank subsidiaries. Growth in both CEB and SEE is thus expected to slow markedly in 2012 relative to last year. In contrast, regions further east will be much less affected by developments in Western Europe, both thanks to their weaker links to the Eurozone and because energy prices are likely to stay high in the baseline scenario. This will help the economies of commodity producers including Russia, which will in turn support growth in other CIS countries that depend on trade with and remittances from Russia. 

The CEB and SEE regions will experience a significant slowdown in 2012 relative to last year. They are estimated to have grown by 3.4 and 2.2 per cent in 2011, respectively, a slight improvement on our October forecast. For 2012, we are now forecasting growth of 1.4 per cent and 1.1 per cent growth, somewhat below our October forecasts, based on a slightly worse outlook, compared to our October assumptions, for the Euro area and a deteriorating situation in a few individual CEB countries. In particular, Slovenia is expected to return to recession as a result of lower exports to the Eurozone on top of the ongoing stress in its banking sector. Hungary, the most exposed country to the Euro zone in the EBRD region, has amplified the impact of external shocks by a series of domestic policy mistakes that have unnerved investors, hitting the Hungarian forint and equity markets and increasing sovereign spreads. While none of the SEE countries is expected to see negative growth in our baseline scenario, they will all expand only marginally as the region is exposed to the troubled Greek economy and its financial institutions as well as to the Eurozone more broadly.

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Recovery further east will much less be affected by the Eurozone turmoil in the baseline as commodity prices, its key driver, will remain elevated due to demand from still growing emerging markets. Growth in Russia will remain reasonably strong and will support expansion even in the non-commodity exporting countries of the CIS, which depend on Russia for exports and remittances. Expansion in Central Asia will be somewhat stronger than previously forecast. The already very fast growth in booming commodity-rich Mongolia has accelerated further, and is expected to maintain its pace in 2012 as well. At the same time, the outlook for Eastern Europe and Caucasus (EEC), the closest to Western Europe within the eastern transition regions, has somewhat worsened. The largest economy in the region, Ukraine, is likely to be quite affected by the Eurozone crisis, with the most recent industrial production data already suggesting a slowdown.

The Eurozone crisis poses serious further risks to our outlook, as any worsening of the situation beyond the baseline assumptions will have serious negative consequences for growth across the entire transition region. In a downside external scenario largely unchanged from last October, the Eurozone troubles become much worse before they are ultimately resolved. In particular, the crisis is not contained before spreading to larger single currency area members, which in turn may render several large European banks insolvent. Major parent banks would accelerate deleveraging in the region, triggering a credit crunch and recession in emerging Europe. Nation-based policies would intensify and left uncoordinated, with significant negative cross-border spillovers. This scenario implies a prolonged market turmoil and a severe western European recession with negative spillovers for the global economy, resulting in a standstill in the US and subsequent lower commodity prices. A negative Eurozone crisis scenario would affect especially CEB and SEE countries via the same channels as in the baseline, including depressed exports and FDI and financing inflows, only more severely. Separately from the Eurozone crisis impact, lower commodity prices in the downside scenario would cause a severe slowdown in Russia and other CIS commodity exporters. The 4

weaker Russian economy would in turn seriously impact the non-commodity exporting countries of the CIS.

Chart 1. EBRD region real GDP Growth1 (per cent, quarterly, year-on-year)

Chart 2. Inflation (per cent, year-on-year)

Chart 3. Capital flows (per cent of previous year’s GDP)

Chart 4. Fund flows (per cent of total allocation)

Chart 5. Confidence indicators, new EU members (Eurostat indicator, simple average)

Chart 6. Comparison of EBRD GDP growth forecast for 2012 (per cent, year-on-year)

Source: CEIC database, Eurostat, IFS, national authorities and EPFR database 1 Year-on-year growth in aggregate real GDP (2000 prices and exchange rates) of the new EU member states, Croatia, Armenia, Moldova, Georgia, Ukraine, Azerbaijan, Kazakhstan, and Russia. The fanchart is based on a Bayesian Vector Autoregression Model that is described in more detail in the Regional Economic Prospects May 2010. The baseline scenario assumes Eurozone real GDP growth of 1.6 per cent in 2011 and 0 per cent in 2012, a VIX around 30 in Q4 2011 and declining thereafter, broadly constant Euribor and Libor, and an oil price or about $100 per barrel. The downside scenario assumes a recession in the eurozone, with growth of 1.6 per cent in 2011 and -3.5 per cent in 2012 and more volatile market, with VIX averaging 40 in the first half of 2012 and then slowly declining in the second half of the year.

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Real GDP Growth in the EBRD region (In per cent; EBRD forecasts as of January 23, 2011) Current forecast

2009

2010

Czech Europe Republic 93 71states 4 33 Central and the Baltic

2011

EBRD Forecast in October 2011

2012

2011

Change OctoberJanuary

2012

Change OctoberJanuary

2 293 2 29

Croatia

-6.0

-1.2

0.3

1.0

0.5

-0.2

1.9

Estonia

-14.3

2.3

8.1

2.6

7.5

0.6

2.6

0.0

Hungary

-6.5

1.1

1.5

-1.5

1.0

0.5

0.5

-2.0

Latvia

-17.1

-1.2

5.0

2.6

3.9

1.1

2.4

0.2

Lithuania

-14.6

1.3

6.2

2.3

6.1

0.1

2.3

0.0

1.6 -4.9

3.9 4.2

4.2 3.2

2.3 1.3

3.7 3.1

0.5 0.1

2.2 1.1

0.1 0.2

-8.1 -2.8 14.5

1.3 2.8 1.5

0.4 3.4 3.2

-1.1 1.4

1.0 3.1

-0.6 0.3

0.5 1.7

-1.6 -0.3

Poland Slovak Republic Slovenia Average 1,2 Average 1,2

-0.9

South-eastern Europe Albania

3.6

3.6

1.8

1.2

1.9

-0.1

1.0

0.2

Bosnia and Herzegovina

-2.8

0.7

1.8

0.5

2.1

-0.3

2.3

-1.8

Bulgaria

-4.9

0.2

1.8

1.2

1.6

0.2

2.3

-1.1

FYR Macedonia

-1.0

1.8

3.1

1.8

3.0

0.1

2.4

-0.6

Montenegro

-5.7

2.5

2.0

1.9

2.0

0.0

2.6

-0.7

Romania

-7.1

-1.3

2.5

0.8

1.5

1.0

1.1

-0.3

Serbia Average 1

-3.5

1.0

1.9

1.1

2.1

-0.2

2.1

-1.0

-5.4

-0.3

2.2

1.0

1.7

0.5

1.6

-0.6

Eastern Europe and the Caucasus Armenia

-14.1

2.1

4.5

3.0

4.5

0.0

3.5

-0.5

Azerbaijan

9.3

5.0

0.0

3.5

0.5

-0.5

4.0

-0.5

Belarus

0.2

7.6

5.0

1.5

4.5

0.5

1.5

0.0

Georgia

-3.8

6.4

6.0

5.0

5.0

1.0

4.0

1.0

Moldova

-6.0

6.9

5.5

3.5

6.0

-0.5

4.0

-0.5

Ukraine Average 1

-14.8

4.2

5.0

2.5

4.5

0.5

3.5

-1.0

-6.3

5.1

4.0

2.6

3.8

0.2

3.2

-0.6

Turkey

-4.8

9.0

8.0

2.5

7.5

0.5

2.5

0.0

Russia

-7.8

4.0

4.0

4.2

4.0

0.0

4.2

0.0

Central Asia Kazakhstan

1.2

7.3

7.5

6.5

7.0

0.5

6.5

0.0

Kyrgyz Republic

2.9

-0.5

5.7

4.0

6.0

-0.3

4.0

0.0

-1.3 3.9

6.4 6.5

17.3 7.4

14.0 5.0

11.0 6.5

6.3 0.9

12.0 5.0

2.0 0.0

Mongolia Tajikistan Turkmenistan

6.1

9.2

14.7

10.0

10.0

4.7

8.0

2.0

Uzbekistan Average 1

8.1

8.5

8.3

7.0

7.5

0.8

6.0

1.0

2.9

7.5

8.5

7.0

7.4

1.1

6.6

0.4

-5.2

4.6

4.8

3.1

4.5

0.3

3.2

-0.1

All transition countries Average 1 1

Weighted averages. The weights used for the growth rates are WEO estimates of nominal dollar-GDP lagged by one year.

2

Weighted averages do not include the Czech Republic, for which EBRD no longer produces a forecast.

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Central Europe and the Baltic States (CEB) The CEB region has seen a better than expected year 2011, with our estimate for the year revised up to 3.4 per cent (up from 3.1 per cent forecast in October). There remains a clear division between growth laggards Slovenia and Hungary on the one hand, and the Baltic states and Poland on the other. At the same time industrial production and export figures pointed to a clear deceleration at the turn of the year, as did forward-looking confidence indicators. Ambitious further fiscal consolidation steps, most notably in Poland and Latvia, will be a further drag on growth. Bank-related balance of payments flows show a clear ebbing in Poland, and substantial outflows in the Baltic countries and in Hungary (an annual outflow of about 3 per cent of GDP), as banks normalise their funding patterns. In Hungary domestic risks will likely re-enforce this trend in the absence of international assistance and credit to both household and corporate sectors contracted by about 2 per cent of GDP last year. Spill-over effects from the deterioration in Hungary are likely to be limited, and risk spreads have not widened significantly in other countries. 

In Hungary the adoption of the new constitution, the implementing laws that potentially curtail the independence of the central bank and various other economic policy initiatives have led to a stand-off with the EU and IMF over the initiation of negotiations on a new financial programme. Meanwhile, the downgrade of sovereign risk into speculative grade and several failed domestic debt auctions have led to uncertainty over the refinancing of the considerable public debt roll-over requirements falling due over the coming months. Given the large share of foreign investment in its domestic bond market, investor uncertainty has already translated into a rapid widening in yield spreads and forint weakness. Despite an agreement with the banking industry over the restructuring of households’ foreign exchange debt the country remains highly vulnerable to forint depreciation. Attempts by the national bank to defend the currency, which has already raised policy interest rates by 100 basis points at the end of 2011, would equally further depress growth. Given the uncertainty over the timing and nature of an EU/IMF programme, the projection foresees a contraction in GDP this year by 1.5 per cent.



The growth outcome for Poland for 2011 has been revised upwards to 4.2 per cent, though the projection for this year revised down to 2.3 per cent (which is close to the government’s own projection). The country will benefit from considerable weakness in the PLN, which has fallen by over 12 per cent against the euro since the summer. At the same time, the re-elected government has announced ambitious consolidation which will target deficit close to 3 per cent of GDP, and the implementation of long-delayed reforms, importantly in pension rights, which has been welcomed by the markets.

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Slovenia has seen a renewed contraction in GDP in the third quarter of last year. While there has been a temporary acceleration in exports and industrial production between Q2 2010 and Q3 last year, stagnating consumption, and the rapid contraction in investment will continue to hold back a meaningful recovery; a recession is expected for 2012 with GDP contracting by about 1 per cent. It is unclear whether a coalition assembled under the new government could adopt the much-needed reforms to raise productivity in the corporate sector, and recapitalise the state banks sufficiently to revive lending.

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All three Baltic economies have seen surprisingly strong export-led growth in the third quarter of 2011, and growth estimates for that year have been revised upwards to between 5.0 per cent (for Latvia) and 8.1 per cent (for Estonia). Lithuania has swiftly resolved the failure of a mid-sized bank in November. Latvia successfully concluded the EU/IMF programme and now targets Maastricht compliance this year and euro adoption in 2014.



The Slovak Republic is highly exposed to the slowing industrial cycle in the core eurozone, and the concentration of cyclical industries such as cars. A change in the 7

government following elections in March may lead to revision in the government’s economic policy priorities, though continued fiscal consolidation is likely. Growth is projected to fall to between 1 and 2 per cent. 

In Croatia, the economy appears to be stuck in a rather stagnant mode, and growth in 2012 is not likely to surpass 1 per cent, with significant downside risk. However, the signing of the EU Accession Treaty at the end of last year, its anticipated ratification by the Croatian parliament following the positive referendum result on 22 January 2012 and the realistic prospect of full EU membership in mid-2013 are positive signs for the medium term and may help to revive confidence and investment.

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South-Eastern Europe (SEE) and Turkey The short-term economic prospects for the SEE region remain weak, and vulnerabilities have increased as a result of the eurozone sovereign debt crisis. Financial sector vulnerabilities are a particular concern, given that the vast majority of the banking system is foreign-owned and given the reliance in most countries on funding from abroad. While some recovery seemed evident in the first half of 2011, economic activity weakened in the second part of the year, and growth in 2012 is likely to be minimal at best. In contrast, the Turkish economy continued to boom in 2011, with growth of around 8 per cent, but signs of overheating are increasingly apparent, with inflation exceeding 10 per cent by end-year and the current account deficit also at double-digit levels as a per cent of GDP. 

Albania experienced a slowdown in economic activity in the second half of 2011 largely due to the weak performance of its key EU markets, Greece and Italy. Albania’s strong trade, investment and remittance ties to these countries are likely to continue to hold back growth in the coming year, while public debt is close to the legal maximum, limiting the room for fiscal manoeuvre.



Bosnia and Herzegovina’s economy has been relatively stable in the past couple of years, domestic consumption has remained subdued, largely due to fiscal austerity measures and to falling remittances. In the short-term the country could benefit from a continued strong demand for certain export products such as metals and timber, which may compensate for weaknesses elsewhere in the economy. The formation of a government at state level may help to enable the resumption of IFI funding in 2012. However, a downturn in the eurozone, Bosnia’s key trading partner, will continue to threaten the country’s economic outlook.



Recovery is expected to continue to be modest in Bulgaria into 2012, in contrast to earlier projections of vigorous growth, due the projected downturn in export demand and the impact of the ongoing Greek crisis. Measures to reduce the fiscal deficit will continue to be implemented and the government is committed to the currency board and entry in due course into the ERM-II mechanism. The main risk the country faces is that its close links to Greece could lead to negative spill-over effects in terms of trade, investment and the financial sector.



FYR Macedonia experienced a surprisingly strong growth in the first half of 2011 spurred by high exports and FDI, but growth is estimated to have slowed down for the remainder of the year. Growth should continue into 2012 if there is strong demand for the country’s metal exports. The precautionary credit line that the country received from the IMF in January 2011 will also help maintain macroeconomic stability. The country is highly vulnerable to a eurozone recession, and turbulence in neighbouring Greece.



Montenegro’s recovery has continued in 2011, but the country’s current account deficit remains high and industrial production is volatile. Positive growth is expected to continue as measures to improve the business environment continue. However, this outlook could be worsened if the regional and global economic prospects deteriorate substantially. The continued uncertainty over the future of the aluminium complex KAP, which has been making significant losses, is another source of concern



Until recently, Romania’s economy was on track to record robust growth in 2012, after a modest recovery in 2011. However, the slowdown in the eurozone is already having a significant dampening effect on Romania’s exports, and further weakening is likely in the coming months. The Greek crisis has a dampening effect mainly through crossborder banking relationships. Continued IMF support provides an important buffer.



Serbia’s economy has stabilised but growth remains low. Growth is estimated at around 2 per cent in 2011 but is likely to be lower in 2012, while inflation has dropped to 7 per cent by end-2011. Pre-election spending may support short-term economic growth, but 9

major risks remain, mainly from exposure to the eurozone, while inflation remains above levels in regional peers. Continued IMF support provides an important buffer for Serbia too. 

Turkey's economy shows increasing signs of overheating. The economy grew by more than 10 per cent in the first half of the year, but signs of a cooling-off are now apparent, and the economy is likely to slow down sharply in 2012 due to a downturn of external demand and declining capital inflows.

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Eastern Europe and the Caucasus (EEC) After growing strongly over the first nine months of 2011, the pace of the region’s recovery from the effects of the 2008-9 crisis has slowed down recently in response to the deteriorating external environment and, in several countries, unfavourable domestic factors. Ukraine has suffered from lower external demand and tightening financial conditions. Azerbaijan’s oil sector contracted and economic activity in Belarus slowed down as the authorities tightened monetary and fiscal policies to contain the balance of payments crisis. The economies of Armenia, Georgia and Moldova have demonstrated some resilience so far, in part due to their lower integration in the European market. The region's vulnerabilities remain significant due to the reliance on external demand to support growth (in particular in the EU and Russia), terms of trade pressures (as all countries except for Azerbaijan are net energy importers, and the Caucasus countries depend on import of foodstuffs), and volatility of remittances (Armenia, Georgia and Moldova). Risks to the outlook are related to developments in external demand, commodity prices, and stability of the domestic and, in some cases, broader European financial sectors, as well as domestic policy slippages, which may in some cases threaten needed international support. 

Before the latest bout of global instability, Ukraine’s economy had been recovering at a healthy pace stimulated by external and, more recently, domestic demand. However, output growth slowed down in the fourth quarter and risk aversion in the financial markets has increased. Although the authorities implemented some of the conditions under the 2010 IMF programme (including parametric pension reform), critical measures necessary to stabilise the gas sector, including household tariff increases, continue to face political resistance. As financial conditions deteriorated and international capital markets became effectively closed, the authorities tightened monetary and fiscal policies. As Ukraine’s economy is very much exposed to the eurozone, developments in the EU would remain an important factor for the country’s growth and economic stability for the months to come.



Armenia’s recovery from an exceptionally sharp crisis-related output contraction has been slow. The authorities are pursuing fiscal consolidation and structural reforms under an IMF-supported programme. The economy continues to benefit from large remittance inflows and substantial official financing. Immediate risks are related to the uncertain external environment, in light of the country’s dependence on remittances and export of few commodities.



The economy of Belarus has been stabilising after a deep, policy-induced balance of payments crisis. The foreign exchange market was largely normalised after the central bank unified the exchange rates in October, tightened monetary policy and curbed directed lending. Soft loans from a CIS stabilization fund and bilateral loans from Russia have been used to replenish critically low external reserves. However, a credible and consistent stabilisation programme is yet to be unveiled and it remains to be seen whether the authorities would be able to maintain fiscal and monetary discipline needed to prevent another bout of instability.



Moldova’s robust growth has been supported by rising remittances, exports and investment as sentiment about the country’s prospects has improved. However, there are recent signs of output slowdown in response to the weakening external environment. The economy remains vulnerable to weak growth in the main trading partners and uncertain remittance inflows. The immediate growth prospects are also limited by continuing political uncertainty.



The economy of Georgia has continued to recover from the twin security and financial crises of 2008-9, with output expanding by 6 per cent in 2011. As the external financing package mobilised by a range of donors has largely been exhausted, the authorities adopted fiscal responsibility legislation and have pursued private sources of financing. 11

Uncertainty about the external environment and large stock of non-performing loans in the financial sector are among the key vulnerabilities. 

Economic growth in Azerbaijan has slowed down as oil and gas production declined and is expected to remain subdued over the next year. The diversification of the economy remains important as risks associated with high oil dependence became apparent during the crisis, when oil prices declined. FDI inflows into the non-oil sector remain low, and much of the non-oil sector growth is related to fiscal activities of the state. Immediate macroeconomic risks continue to be mitigated by a very strong fiscal position.

12

Russia and Central Asia Russia and most Central Asian economies continued their recoveries from the 2009 global crisis through 2011, but growth and inflation are likely to slow down somewhat in 2012. In Russia and Kazakhstan, the recovery had mostly been driven by higher oil prices, large-scale fiscal stimulus packages and banking-system support. These countries’ recovery in turn helped the economies of the Kyrgyz Republic, Tajikistan, and Uzbekistan, which benefited directly from higher commodity export prices and indirectly from higher oil prices through their positive link with remittances, FDI and export demand from Russia and Kazakhstan. However, growth in most countries is expected to decline in 2012 and risks slowing down further unless global developments are offset by increased domestic government support or major new reforms. An additional risk is that state ownership and interference in the region’s banking sectors remain high. Together with incomplete restructuring efforts, this is contributing to an inefficient allocation of credit and continued high levels of nonperforming loans (NPLs), particularly in Kazakhstan and Tajikistan. 

In Russia, growth accelerated in the third quarter of 2011, largely due to poor performance in the third quarter of 2010 when Central Russia was engulfed by forest fires. Growth stood at 4.1 per cent year-on-year during the first nine months of 2011 and is estimated at 4 per cent for the year as a whole. It is projected to reach 4.2 per cent in 2012 and 4.3 per cent in 2013. The turmoil in Europe had an impact on capital markets, where capital outflows persisted, stock markets experienced a correction, and the rouble depreciated somewhat against the dollar-euro basket. While depletion of the fiscal reserve fund has been postponed and the budget deficit is expected to be contained below 3 per cent of GDP in 2012, the implicit budget-balancing oil price has increased significantly. This could make the economy and the currency more volatile in response to swings in commodity prices.



In Kazakhstan, GDP growth remained strong in 2011 at 7.5 per cent, and is expected to slow down slightly to 6.5 per cent in 2012. Bank credit growth, which had remained flat until early 2011, finally picked up during 2011, reaching 14 per cent year-on-year in November, but this appears to have been driven mostly by state-sponsored subsidised loan programmes. Otherwise, the banking sector remains weak, with non-performing loans (NPLs) now exceeding 30 per cent of total loans, provisioning for NPLs remaining insufficient, and the third largest bank, BTA, seeking a second debt restructuring in less than two years. Despite formally abolishing the exchange rate corridor in late February 2011, the National Bank of Kazakhstan (NBK) has continued to intervene heavily to keep the exchange rate stable. Inflation, after having risen above 9 percent in August, decelerated to 7.4 per cent in December, thus remaining within the NBK’s 6-8 per cent target range.



The Kyrgyz Republic’s economy grew by 5.7 per cent in 2011, reflecting the recovery from the 2010 domestic crisis, increasing reconstruction and social expenditure by the government and good performance in manufacturing, transport and telecoms sectors. GDP growth is expected to slow down to 4 per cent in 2012. Inflation decelerated rapidly from a high of 23 per cent in June to 7.1 per cent in December, and is expected to remain at around 5 per cent on average in 2012, as international commodity and food prices stabilise.



In Tajikistan, GDP growth was stronger than expected at an estimated 7.4 per cent in 2011, but is expected to slow down to 5 per cent in 2012. Inflation has decelerated from 15 per cent in mid-2011 to around 9 per cent in December.



Turkmenistan continues to experience a buoyant economic expansion with GDP growth in 2011 estimated at 14.7 per cent, driven by large public construction projects and increased gas exports to China and Iran. Given that many prices remain administered, inflation has remained low.

13



Uzbekistan’s GDP growth remained strong at 8.3 per cent in 2011, driven by public spending, but is expected to slow to 7 per cent in 2012 given the deteriorated commodity price outlook. Reliable data on inflation are not yet available.



Mongolia continued to benefit from a mining boom, with GDP growth accelerating to 17.3 per cent in 2011. Growth is projected to reach 14 per cent in 2012, reflecting high copper prices and substantial mining-related FDI inflows, which exceeded 25 per cent of GDP in 2010 and 30 per cent of GDP in 2011, and are expected to continue for a number of years. Inflation picked up again to 10 per cent at end-2011 and is likely to stay high as fiscal policy remains highly procyclical.

14

Tables Table 1. Transition Region: Vulnerability Indicators 1/ Domestic FX loan stocks (latest)

Public and External Debt /2

(% GDP)

Gross reserves /2

(% of GDP)

of which Total pvt sector Corp. HH

% FX credit in total loan stock

Government (end 2010)

Bank dep.

Banking system (end of 2010)/3

in percent of

External

Private Short term Total (end (end (remaining 2010) 2010) maturity)

billions US$ (latest)

Loans/ dep.

Total assets as share of GDP

Stateowned banks

Nonperforming loans

Unemployment

latest 16-Jan-12

Share in total assets:

month Short of GDP term debt prosp. Imports

Country risk

Foreign owned banks

% of GDP

Private sector, in %

(CDS spread, bps)

NPL in % Dec 2010 /4

NPL in % latest

% (latest avail.)

Central Europe and Baltics Croatia Estonia* Hungary Latvia Lithuania Poland Slovak Republic* Slovenia*

55.4 1.4 37.7 76.3 43.7 19.7 9.7 4.2

32.6 1.4 16.6 38.5 23.0 4.6 9.3 0.9

38.4 0.0 21.1 37.8 20.8 15.2 0.5 3.3

76.0 1.6 62.5 89.2 73.4 35.8 0.7 5.0

40.6 6.6 80.2 39.9 38.7 55.0 42.0 38.0

102.1 117.6 143.3 165.0 85.7 73.0 75.4 115.2

73.5 111.5 86.0 131.9 55.9 67.0 37.6 65.7

34.5 57.9 55.2 75.0 40.4 20.2 47.5 23.5

15.0 2.7 48.1 7.6 7.2 91.2 0.7 0.9

24.7 13.9 34.5 31.7 19.7 19.6 0.9 2.3

71.5 24.1 66.8 42.2 48.8 96.4 1.1 8.5

… 1.8 4.5 5.3 2.5 4.6 0.1 0.3

116.8 135.0 103.7 172.5 86.3 76.8 83.1 139.9

4.3 0.0 0.0 15.5 0.0 22.9 0.9 18.9

90.3 97.9 0.0 69.0 90.8 70.5 91.8 28.7

62.1 66.7 43.9 35.9 41.0 46.7 … 52.9

117.3 137.0 137.6 239.3 145.2 115.8 … 158.3

555.3 … 686.3 361.3 … 284.0 304.0 …

11.2 6.5 9.1 19.0 19.7 8.8 5.8 2.2

11.5 3.2 10.2 18.7 17.8 8.3 5.5 6.9

12.7 11.3 10.7 14.8 15.3 10.0 13.5 8.2

South-Eastern Europe Albania Bosnia and Herzegovina Bulgaria FYR Macedonia Montenegro Romania Serbia

27.2 2.7 46.5 25.2 … 27.1 36.6

20.4 6.8 … … 35.9 10.6 17.6 7.6 … … 13.7 13.4 22.6 14.0

66.5 72.3 63.1 52.2 … 63.8 71.3

58.2 39.7 17.4 24.6 44.1 31.7 44.9

36.6 56.9 101.6 59.0 100.2 74.6 83.1

11.0 30.9 93.7 42.8 … 52.1 59.1

6.3 10.5 39.7 21.6 … 25.0 19.4

2.7 3.4 16.7 1.9 0.6 45.5 13.6

22.7 20.5 35.0 21.0 14.8 28.1 35.7

362.0 196.5 88.1 97.3 … 112.6 184.1

4.5 3.5 6.1 3.2 2.6 6.8 6.8

77.0 86.7 104.6 65.4 97.4 61.8 65.3

0.0 0.8 3.2 1.4 0.0 7.9 16.0

92.4 94.5 80.7 93.3 88.4 84.1 75.3

70.0 35.8 61.6 50.6 52.5 33.0 …

58.5 158.3 118.8 94.8 116.6 128.7 …

… … 413.7 … … 454.0 …

13.9 11.4 11.9 9.0 21.0 11.9 16.9

14.4 11.7 13.5 9.1 19.7 13.4 18.6

13.3 43.3 9.6 … 11.5 7.5 23.7

Eastern Europe and the Caucasus Armenia Azerbaijan Belarus Georgia Moldova Ukraine

20.0 8.3 24.6 20.2 16.2 29.8

16.0 4.0 … … 23.2 1.4 … … 15.0 1.2 18.9 10.9

60.7 37.1 36.8 74.3 43.4 41.9

39.2 10.8 26.5 39.1 26.6 40.1

45.0 20.0 52.1 61.6 68.1 85.1

16.6 … 30.0 27.8 45.2 61.5

1.0 … 25.2 17.8 34.3 34.2

1.9 6.9 4.1 2.3 1.8 34.1

19.9 12.7 9.2 20.5 31.0 25.0

1931.9 … 29.4 111.5 89.0 72.2

4.7 5.0 1.0 3.7 3.6 4.6

44.6 30.4 51.6 50.8 58.9 86.1

0.0 41.6 77.9 0.0 12.5 16.9

67.5 9.1 20.6 89.3 41.5 47.8

18.1 14.1 47.5 32.4 41.5 41.1

177.3 … 142.3 112.2 90.8 174.3

… … … … … 921.8

... 5.4 3.8 12.5 13.3 16.4

... 6.5 4.7 9.3 11.2 16.4

5.9 … 0.7 16.3 5.3 …

Turkey Russia Central Asia Kazakhstan Kyrgyz Republic Mongolia Tajikistan Turkmenistan Uzbekistan

17.7 10.6

… 9.9

… 0.7

28.9 20.4

42.2 11.7

39.5 33.3

27.4 29.9

15.7 9.3

83.9 454.5

11.4 30.3

72.6 331.0

4.0 13.4

91.1 75.9

31.6 39.2

16.6 18.3

47.7 41.6

112.9 121.3

323.4 260.3

3.5 5.5

2.6 4.9

9.1 6.4

14.0 … … 10.4 … …

10.9 … … … … …

3.1 … … … … …

36.3 55.8 … 57.1 … …

10.7 62.6 … 36.7 11.8 10.0

80.5 68.3 65.8 34.4 11.8 14.8

79.4 28.0 7.2 … 0.0 5.4

9.2 8.1 … 0.6 0.3 0.9

28.3 1.7 2.6 0.4 … 11.3

17.3 34.9 37.3 9.1 … 29.1

187.1 432.2 … 1593.7 … 3257.9

6.1 4.2 4.4 1.4 … 9.7

68.0 29.3 73.9 23.9 85.0 …

0.6 9.9 38.3 … 96.3 …

17.2 72.0 27.1 … 1.2 …

21.3 17.2 … 16.7 … …

181.6 77.4 … 113.1 … …

290.8 … … … … …

25.2 15.8 11.5 7.5 … …

31.0 11.4 6.3 11.1 … …

5.4 2.5 … 2.6 … …

1/ National sources based on CEIC and IFS, unless stated otherwise. 2/ WEO October 2011 3/ End of 2009 for Albania, Bosnia and Herzegovina, FYR Macedonia, Kazakhstan, Russia, Tajikistan. End of 2008 for Belarus, Kyrgyz Republic, Serbia, Turkmenistan 4/ Dec 2009 for Slovenia. Serbia: data according to the National Bank of Serbia * Euro adoption

15

ca2

Table 2. Transition Region: Annual indicators and projections 1/ GDP Growth (average) (year over year percent change)

GDP Growth (end year)

Inflation (average)

(Q4 over Q4 percent change)

(year over year percent change)

Forecast 2/

Fiscal Balance

Primary fiscal GG balance to Debt/reven GDP ues (Gen. gov; % of GDP)

Net FDI

(% of GDP)

(% of GDP)

Forecast 4/

3/

3/

2009

2010

2011

2012

2009

2010

2011

2012

2010

2011

2010

2011

2010

2010

2010

2011

2010

2011

Croatia

-6.0

-1.2

0.3

1.0

-4.6

-0.6

1.8

0.5

1.0

2.1

-5.0

-5.7

-3.0

109.0

-1.1

-1.8

0.7

1.5

Estonia

-14.3

2.3

8.1

2.6

-8.7

6.2

5.4

3.0

3.0

5.1

0.1

0.0

0.4

14.4

3.6

2.4

6.2

4.0

Hungary

-6.5

1.1

1.5

-1.5

-5.1

2.5

0.8

0.5

4.9

3.9

-4.2

1.0

-0.1

179.8

3.6

3.0

0.6

-1.4

Latvia

-17.1

-1.2

5.0

2.6

-15.8

3.1

3.4

4.1

-1.1

4.2

-7.7

-6.5

-6.4

110.3

3.0

-1.5

1.4

3.7

Lithuania

-14.6

1.3

6.2

2.3

-14.7

4.4

4.9

2.5

1.3

4.1

-7.1

-5.5

-5.3

111.9

1.8

-1.9

1.3

2.6

Forecast 2/

Forecast 2/

Current Account

Forecast 4/

Forecast 3/

Central Europe and Baltics

Poland

1.6

3.9

4.2

2.3

2.8

4.1

2.6

3.0

2.7

3.9

-7.9

-5.7

-5.2

145.3

-4.5

-4.8

0.7

1.6

Slovak Republic

-4.9

4.2

3.2

1.3

-4.7

3.4

2.3

1.3

0.9

4.1

-7.9

-5.5

-6.5

126.2

-3.0

-1.5

0.2

0.9

Slovenia

-8.1

1.3

0.4

-1.1

-5.9

2.2

0.2

1.1

1.8

2.1

-5.6

-6.0

-3.9

90.6

-0.8

1.1

0.9

0.9

South-Eastern Europe Albania

3.6

3.6

1.8

1.2

-0.6

5.6

2.1

3.5

3.5

3.5

-4.2

-3.7

-0.8

225.5

-11.8

-10.9

9.2

6.9

Bosnia and Herzegovina

-2.8

-3.0

1.8

0.5

…

…

…

…

2.1

3.7

-4.5

-3.5

-3.9

86.5

-5.6

-6.2

0.1

1.2

Bulgaria

-4.9

0.2

1.8

1.2

-7.6

3.1

1.4

3.9

3.0

3.4

-3.9

-2.5

-3.3

53.1

-1.0

1.6

4.1

1.5

FYR Macedonia

-1.0

1.8

3.1

1.8

2.0

3.8

-0.9

6.3

1.6

4.1

-2.5

-2.5

-1.7

81.9

-2.8

-5.5

3.2

4.9

Montenegro

-5.7

2.5

2.0

1.9

…

…

…

…

0.5

3.0

-3.4

-3.4

-2.8

104.5

-25.6

-24.5

17.9

15.4

Romania

-7.1

-1.3

2.5

0.8

-6.5

-0.6

1.4

3.6

6.1

5.8

-6.5

-4.4

-5.1

96.7

-4.3

-4.5

2.2

2.2

Serbia

-3.5

1.0

1.9

1.1

-2.6

1.4

2.4

4.4

5.9

11.2

-4.6

-4.6

-2.5

109.4

-7.2

-7.7

3.0

4.6

Eastern Europe and the Caucasus Armenia

-14.1

2.1

4.5

3.0

-7.8

2.4

5.4

3.9

8.2

7.6

-4.5

-3.6

-4.1

186.8

-14.7

-12.2

6.0

6.4

9.3

5.0

0.0

3.5

12.3

3.1

-0.8

6.1

5.7

8.5

15.0

8.5

13.7

24.4

29.1

24.2

0.2

0.2

Belarus

0.2

7.6

5.0

1.5

1.0

10.2

-2.5

7.4

7.7

52.9

-4.3

-3.3

-1.2

63.2

-15.5

-13.4

2.4

3.2

Georgia

-3.8

6.4

6.0

5.0

0.0

6.1

3.7

4.3

7.1

8.5

-6.6

-3.9

-3.8

138.5

-9.6

-10.8

4.2

5.5

Moldova

-6.0

6.9

5.5

3.5

-6.5

9.0

2.9

4.8

7.5

7.2

-2.5

-1.9

-1.7

69.5

-8.3

-9.9

3.3

3.7

Ukraine

-14.8

4.2

5.0

2.5

-6.7

3.3

2.6

7.0

9.4

7.7

-9.9

-4.0

-4.1

93.7

-2.1

-3.9

4.2

3.9

Turkey

-4.8

9.0

8.0

2.5

5.9

9.2

2.5

6.1

8.6

6.5

-2.9

-0.9

1.6

129.0

-6.6

-10.3

1.0

1.6

Russia

-7.8

4.0

4.0

4.2

-2.6

4.5

3.6

2.9

6.9

6.1

-3.6

-1.2

-2.9

33.6

4.9

4.6

-0.7

0.3

4.5

Azerbaijan

Central Asia Kazakhstan

1.2

7.3

7.5

6.5

10.3

7.1

6.2

5.1

7.1

8.4

1.5

1.8

1.9

44.6

2.9

5.9

1.5

Kyrgyz Republic

2.9

-0.5

5.7

4.0

5.2

1.0

0.8

5.1

8.0

16.6

-6.1

-8.0

-5.2

197.5

-7.2

-7.7

9.5

4.6

Mongolia

-1.3

6.4

17.3

14.0

0.3

5.4

7.2

22.1

10.1

9.1

0.0

-2.0

1.7

...

-15.3

-21.6

25.2

15.6

Tajikistan

3.9

6.5

7.4

5.0

4.7

7.1

4.5

5.0

6.4

12.5

-3.0

-4.9

-2.5

158.3

2.1

-3.6

0.3

1.6

Turkmenistan

6.1

9.2

14.7

10.0

…

…

…

…

4.8

6.0

2.3

0.5

...

66.0

-11.7

-2.9

18.2

13.2

Uzbekistan

8.1

8.5

8.3

7.0

8.3

9.6

6.8

5.7

9.4

13.0

2.7

3.3

2.8

26.8

6.7

8.0

4.2

3.2

1/ EBRD data and projections unless otherwise stated 2/ As of January 23, 2012. 3/ WEO October 2011. 4/ EBRD staff estimates for: Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, Slovenia, Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine, Mongolia. WEO October 2011 for the rest of the countries

16

Table 3. Transition Region: Quarterly GDP actuals and projections, Q1 2009- Q3 2011 1/ Quarterly GDP Growth

Quarterly GDP Growth

GDP Growth (average)

(seasonally adjusted, quarter-on-quarter percent change)

(year-on-year percent change)

(year over year percent change)

2010

2009

2011

Q1

Q2

Q3

Q4

Q1

Q2

Q3 Est.

Central Europe and Baltics Croatia Estonia Hungary Latvia Lithuania Poland Slovak Republic Slovenia

-1.0 -0.1 1.1 1.2 1.2 0.7 0.8 0.2

-0.5 2.8 0.4 0.0 0.7 1.0 0.9 1.2

1.1 1.3 0.7 0.9 0.7 1.4 0.9 0.5

-0.4 2.1 0.2 0.9 1.8 0.9 0.8 0.3

-0.6 3.1 0.3 1.1 2.1 1.1 0.9 0.1

0.8 1.8 0.2 2.1 1.8 1.2 0.8 0.0

0.6 1.2 0.5 1.7 1.4 1.0 0.8 -0.2

South-Eastern Europe Albania Bosnia and Herzegovina Bulgaria FYR Macedonia Montenegro Romania Serbia

1.6 … 0.9 -1.4 … -0.1 0.9

1.9 … 1.6 1.2 … 0.3 0.3

1.3 … 0.7 1.9 … -0.6 1.8

0.7 … 0.5 1.7 … 0.5 -1.4

1.4 … 0.5 0.4 … 1.2 2.5

-1.7 … 0.3 1.1 … 0.9 -0.5

Eastern Europe and the Caucasus Armenia Azerbaijan Belarus Georgia Moldova Ukraine

7.4 -0.4 1.5 1.3 0.9 0.3

-2.5 2.5 3.6 2.4 2.7 2.6

-3.7 0.5 0.4 -0.6 2.4 -0.4

1.9 0.1 3.9 2.7 2.3 0.9

4.0 -0.9 2.6 1.1 0.9 1.9

Turkey

0.7

3.8

1.3

3.6

Russia

1.2

1.1

1.1

0.2

Central Asia Kazakhstan Kyrgyz Republic Mongolia Tajikistan Turkmenistan Uzbekistan

-0.8 2.5 3.4 1.0 … 2.7

3.8 -10.8 -1.4 2.4 … 2.4

2.2 2.7 1.9 0.6 … 1.9

1.1 4.2 1.7 2.4 … 2.1

Q1

Q2

2010

Forecast 1/

Q2

Q3

Q4

Q1

Q2

Q3 est.

2009

2010

2011

2012

-6.7 -6.9 -5.7 -4.6 -13.0 -17.3 -17.5 -8.7 -6.6 -7.5 -7.4 -5.1 -16.7 -17.6 -18.2 -15.8 -13.4 -15.8 -14.3 -14.7 1.5 1.3 0.9 2.8 -5.0 -5.0 -5.0 -4.7 -7.9 -9.4 -9.3 -5.9

-2.3 -4.3 -0.8 -5.8 -1.1 3.2 5.0 -0.3

-2.3 2.5 0.9 -4.6 0.9 3.7 4.5 1.5

0.3 5.1 2.5 3.3 1.2 4.8 4.1 1.6

-0.6 6.2 2.5 3.1 4.4 4.1 3.4 2.2

-0.8 9.5 1.9 3.1 5.4 4.5 3.4 1.9

0.8 8.4 1.7 5.3 6.5 4.6 3.4 0.7

0.7 8.3 1.5 6.1 7.3 4.2 3.2 -0.1

-6.0 -14.3 -6.5 -17.1 -14.6 1.6 -4.9 -8.1

-1.2 2.3 1.1 -1.2 1.3 3.9 4.2 1.3

0.3 8.1 1.5 5.0 6.2 4.2 3.2 0.4

1.0 2.6 -1.5 2.6 2.3 2.3 1.3 -1.1

1.0 … 0.3 -0.7 … 1.8 0.1

3.5 … -4.9 -1.4 … -6.1 -3.9

-0.6 … -7.6 2.0 … -6.5 -2.6

2.0 … -4.8 -0.5 … -2.2 -0.6

2.7 … 1.0 1.5 … -0.4 0.8

4.7 … 0.3 2.1 … -2.2 2.0

5.6 … 3.1 3.8 … -0.6 1.4

3.4 … 1.5 5.1 … 1.6 3.7

0.5 … 2.2 5.3 … 1.4 2.4

0.5 … 2.3 2.3 … 4.4 0.7

3.6 -2.8 -4.9 -1.0 -5.7 -7.1 -3.5

3.6 0.7 0.2 1.8 2.5 -1.3 1.0

1.8 1.8 1.8 3.1 2.0 2.5 1.9

1.2 0.5 1.2 1.8 1.9 0.8 1.1

1.0 0.8 3.6 1.5 1.2 0.9

0.7 -0.1 -7.7 2.3 1.6 0.5

-6.3 -18.6 -19.7 -7.8 4.1 8.4 9.7 12.3 1.1 -0.4 -0.8 1.0 -4.8 -9.0 -1.5 0.0 -6.9 -7.8 -7.7 -6.5 -19.6 -17.3 -15.7 -6.7

3.4 5.4 4.0 3.7 4.7 4.8

8.2 8.0 8.9 8.3 5.6 5.5

-2.9 5.0 6.7 6.7 6.5 3.6

2.4 3.1 10.2 6.1 9.0 3.3

1.2 1.6 10.9 5.8 8.4 5.3

3.9 0.3 11.4 4.7 6.7 3.8

6.5 -0.1 1.9 7.5 6.0 6.6

-14.1 9.3 0.2 -3.8 -6.0 -14.8

2.1 5.0 7.6 6.4 6.9 4.2

4.5 0.0 5.0 6.0 5.5 5.0

3.0 3.5 1.5 5.0 3.5 2.5

1.9

1.1

1.7

-14.7

-7.8

-2.8

5.9

12.0

10.3

5.2

9.2

12.0

8.8

8.2

-4.8

9.0

8.0

2.5

1.0

0.8

1.6

-9.2

-11.1

-8.6

-2.6

3.5

5.0

3.1

4.5

4.1

3.4

4.8

-7.8

4.0

4.0

4.2

0.4 4.5 7.2 1.4 … 1.4

3.4 -2.7 5.6 2.5 … 2.6

1.9 1.6 4.8 1.8 … 2.1

-4.5 -1.4 -2.3 3.5 … 7.9

-2.6 -0.1 -0.6 2.3 … 8.4

-0.3 4.8 -2.9 2.6 … 7.8

10.3 5.2 0.3 4.7 … 8.3

5.8 17.9 8.7 6.8 … 8.0

8.5 -4.4 5.0 7.8 … 8.0

7.7 -7.5 7.5 4.9 … 8.0

7.1 1.0 5.4 7.1 … 9.6

6.8 -1.8 9.7 6.5 … 7.6

7.4 7.9 17.5 7.2 … 8.3

6.8 9.6 20.9 8.1 … 8.4

1.2 2.9 -1.3 3.9 6.1 8.1

7.3 -0.5 6.4 6.5 9.2 8.5

7.5 5.7 17.3 7.4 14.7 8.3

6.5 4.0 14.0 5.0 10.0 7.0

3.9 … -5.0 -2.1 … -7.1 -3.1

Q4

2011

Q1

7.5 … -4.1 -2.4 … -8.7 -4.6

Q3

1/ As of January 23, 2012.

17

Table 4. Transition Region: Financial Market Indicators updated 16 Jan 12

Country Risk

Interbank rates

Equities

CDS spread (bps)

(three month)

(index, July 1, 2008 = 100)

Mar 1 2009

week ago

latest

Mar1 2009

week ago

latest

Mar 1 2009

week ago

Currencies

latest

(national currency per € or US$) 1/

Mar 1 2009

week ago

latest

Central Europe and Baltics Croatia

527.4

568.3

555.3

11.8

4.6

4.6

39.4

49.6

48.9

7.4

7.5

7.6

Hungary

563.6

690.0

686.3

9.5

7.6

7.6

50.7

82.9

86.4

299.4

315.6

311.9

Latvia

1050.0

369.4

361.3

8.1

1.2

1.1

41.5

73.2

72.9

0.7

0.7

0.7

Poland

366.0

294.6

284.0

4.4

4.9

4.9

53.6

83.1

85.3

4.6

4.5

4.4

Slovak Republic

211.7

310.1

304.0

...

...

...

76.4

49.6

49.0

...

...

...

Bulgaria

597.4

421.9

413.7

6.8

3.4

3.3

23.4

27.8

27.7

1.5

1.5

1.5

Romania

723.6

465.0

454.0

14.7

5.4

5.2

30.1

69.4

69.6

4.3

4.4

4.3

South-Eastern Europe

CIS Russia

761.1

275.8

260.3

22.8

7.2

7.0

24.3

63.8

64.9

35.9

31.9

31.7

Kazakhstan

1494.2

309.3

290.8

15.0

2.0

2.0

24.1

44.0

44.1

150.6

148.6

148.4

Ukraine

3741.0

874.8

921.8

34.8

20.8

16.1

28.9

74.9

73.1

8.6

8.0

8.0

487.4

341.0

323.4

12.6

11.4

11.5

72.4

150.1

159.0

1.7

1.9

1.9

Turkey

1/ For CEB and SEE countries: reference currency is Euro; for CIS and Turkey reference currency is US dollar

18

Figure 1. External environment Export volumes, y-o-y, %

Current account (annualized), % of GDP

40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40 -45

20 10 0 -10 -20 -30 -40

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Es t

H

C

ia

ro at

ul ga r

C

B

Source: National authorities via CEIC data service.

Mar-2008 Jun-2009 Sep-2010

15%

Jun-2008 Sep-2009 Dec-2010

2009

2010

9m '11

Source: National authorities via CEIC data service.

Net lending from BIS-reporting banks, exch. rate adjusted, US$ bn 20%

2008

-50

Al b Ar an m ia Be enia la ru s Bu Bi lg H C aria ro Es atia t G oni eo a r Ka Hun gia z g Ky ak ary rg hst yz an R e L p Li atv . t h ia ua F Y ni a M RO o M M ldo on va g P olia R ola om nd a R nia us Sl S sia ov er ak bi a Sl Re o p Ta ve . jik nia is Tu tan U rke kr y ai ne

Q4 2009

La tv ia Li th ua ni a M ol do va Po la nd R om an ia R us si a Sl ov ak ia Sl ov en ia Tu rk ey U kr ai ne

Q3 2009

on ia un ga ry

Q2 2009

ia

Q1 2009

ze ch

Q4 2008

Sep-2008 Dec-2009 Mar-2011

Dec-2008 Mar-2010 Jun-2011

Mar-2009 Jun-2010

FDI gross inflows, y-o-y, % Q4 Q3 Q2 Q1

500 865.72

Q1 Q4 Q3 Q2

2009 2009 2010 2011

Q2 Q1 Q4 Q3

2009 2010 2010 2011

400

13% 10%

8.1%

7.7%

7%

9% 5%

2008 2009 2010 2011

300

2.4% 1.1%

200

0% -1.5%

100

-5% -6.29%

-7.75%

0

1/ Emerging Europe excludes Russia and Ukraine. 2/ Emerging Asia excludes China, Central Asia and Caucasus. Source: BIS via CEIC data service.

in e

y

kr a U

Tu rk e

Se rb ia

an ia

us si a R

hs t

an

on ia

Reserves, end of period, % of GDP

Bulgaria Georgia Croatia Macedonia, FYR

120

ze ch

Source: National authorities via CEIC data service.

Real effective exchange rate, July 2008=100 130

om

Emerging Asia

R

Latin America

Po la nd

CA and Caucasus

Li th ua ni a

Russia

az ak

Ukraine

K

Emerging Europe

Es t

Advanced Europe

-100 C

-15.16%

-15.81% -20%

ul ga ria

-9.71%

-15%

B

-10%

Ukraine Armenia Slovak Republic

40

Q3 2009

End 2010

Most recent

35 30

110 25 20

100

15

90

10 5

80 A rm e A ze nia rb ai ja n B el ar B us ul ga ria C ro C ze atia ch R ep Es . to ni a G eo rg ia H un ga K az ak ry h K yr sta n gy z R ep . La tv Li i th a ua ni M a ol do v Po a la n R om d an ia R us si a Tu rk ey U kr ai ne

0

ct O

De

-0 8 c0 Fe 8 b09 A pr -0 Ju 9 n0 Au 9 g09 O ct -0 De 9 c0 Fe 9 b10 Ap r-1 0 Ju n1 Au 0 g10 O ct -1 De 0 c1 Fe 0 b11 A pr -1 Ju 1 n1 A 1 ug -1 1 O ct -1 1

70

Source: IMF International Financial Statistics.

Source: IMF International Financial Statistics. Global risk

Parent banks CDS spreads

60

1000 900

50

800

U.S. high-yield b d d

40

500

VIX

300

10

EMBIG Europe

200

12 Ja n-

ct -1 1

1

EMBIG

O

Ju l-1

pr -1 1 A

11 Ja n-

ct -1 0

0

EMBIG Europe

Source: Bloomberg.

350 Societe 250 150

US high-yield

Citigroup Raiffeisen

100

O

Ju l-1

pr -1 0 A

10 Ja n-

0

EMBI G

VIX

450

400

20

0

UniCredit Intesa Sanpaolo SpA

550

700 600

30

650

50

ING Groep NV

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12

Societe Generale Citigroup Inc UniCredit SpA

Intesa Sanpaolo SpA Raiffeisen Zentralbank Oeste ING Groep NV

Source: Bloomberg.

19

106

400

140

110 Bulgaria EMBI

10

8 Hungary 10yr

600

200

MSCI EM Russian RTS

120 EMEA

70

Ap r11 M ay -1 Ju 1 n11 Ju l-1 Au 1 g1 Se 1 p11 O ct -1 N 1 ov -1 De 1 c1 Ja 1 n12

292

322

Serbian dinar/EUR

100

104

RON/EUR

108

Poland 10yr

0

Latvia

Hungary

A pr -1 1 M ay -1 1 Ju n11 Ju l-1 A 1 ug -1 1 S ep -1 1 O ct -1 No 1 v1 D 1 ec -1 Ja 1 n12

3.2

272 3.6

A pr -1 0 Ju n10 A ug -1 0 O ct -1 0 D ec -1 0 Fe b11 A pr -1 1 Ju n11 A ug -1 1 O ct -1 1 D ec -1 1

800

PLN / EUR

Ju A l- 1 0 ug Se -10 p O -10 c N t-10 ov D -10 ec Ja -10 n F e -11 b M -11 ar A -11 p M r-11 ay Ju -11 nJu 11 A l- 1 1 ug Se -11 p O -11 c N t-11 ov D -11 ec Ja -11 n12

Ap r11 M ay -1 1 Ju n11 Ju l-1 1 A ug -1 1 S ep -1 1 O ct -1 1 N ov -1 1 De c11 Ja n12

282

O ct -1 1 D ec -1 1

98

1 Ap r11 Ju n11 Au g11

A pr -1 1 M ay -1 Ju 1 n11 Ju l-1 Au 1 g1 Se 1 p11 O ct -1 No 1 v1 D 1 ec -1 1 Ja n12

96

Fe b1

Ju Au l-10 g Se - 10 p O -10 c No t -10 v De -10 c Ja -10 n Fe - 11 b M -1 ar 1 Ap 1 1 M r- 1 ay 1 Ju - 11 nJu 1 1 Au l-11 g Se - 11 p O -11 ct No -11 v De -11 c Ja -11 n12

302

D ec -1 0

A pr -1 0 Ju n10 Au g10 O ct -1 0

262

O ct -1 No 0 v1 De 0 c10 Ja n1 Fe 1 b1 M 1 ar -1 Ap 1 r1 M 1 ay -1 Ju 1 n11 Ju l-1 Au 1 g1 Se 1 p11 O ct -1 No 1 v1 De 1 c11 Ja n12

Au g Se - 10 pO 10 ct No -10 v De -10 cJa 10 n Fe - 11 bM 11 ar Ap 1 1 r M - 11 ay Ju 11 n1 Ju 1 l Au -11 g Se - 11 pO 11 ct No -11 v De -11 cJa 11 n12

Figure 2. Currencies and financial market indicators (daily frequency) Currencies

4.0

4.4

HUF/EUR 4.8

5.2

312 5.6

6.0

32.5 33.0 33.5 34.0 34.5 35.0 35.5 36.0 36.5 37.0 37.5 38.0

4.0

4.1

4.2

102

4.3

4.4

4.5

1.50 1.55 1.60 1.65 1.70 1.75 1.80 1.85 1.90 1.95 2.00

Bg

MSCI EMEA Czech PX

130 130

120

Ru 110

100 EM

90 80

80 70

60 Cz

25

20

6

15

4

10

2

5

0

0

RUB vs EUR/USD basket

Turkish lira/USD

Hu

Ru

Hungary BUX Ukraine PFTS Romania Bet Bulgaria SOFIX

90

140

142

144

146

KZT/USD 148

150

7.8

UAH/USD

8.0

8.2

8.4

Source: Bloomberg. Sovereign risk (bond spreads)

1500 Russia EMBI Ukraine EMBI

1000 Kazakhstan Turkey EMBI

Pol Ukr

500 Kaz

0 Tur

Source: Bloomberg. Stock markets (April 2010=100)

Ukr

100

Hu Bul

Ro

60

50

Source: Bloomberg. Interbank rates

Mosprime 3m

Lithuania

Kazprime

Kievprime 3m

Source: Bloomberg.

20

160

150

30

20

30

20

us

Estonia Lithuania Hungary

Bulgaria Serbia

Croatia

Hungary

Latvia Czech Republic Poland

Romania Slovenia

-10

170

160

140

150

130

120

140

110

100

90

70

Czech R.

Poland

10

-10 40

30

-20 -20

-30 -30

-40 -40

30

-20

-20

-30

-30

-40

-40 Belarus Russia Ukraine

ua n

ia

ia

Bulgaria Romania

Croatia Slovakia

Estonia Latvia

Lithuania Slovakia

Q1 2009 Q1 2010 Q1 2011

ve ni a

ak ia

Q4 2008 Q4 2009 Q4 2010

Sl o

-20

Sl ov

-16

Po la nd

Li th

La tv

ry

-12

a

8

on i

12

8

Hu ng a

-24

ia

12

Es t

Q3 2009 Q3 2010 Q3 2011

C ro at

a Uk ra in e

Q2 2009 Q2 2010 Q2 2011

si a

Q1 2009 Q1 2010 Q1 2011

Se rb i

Q4 2008 Q4 2009 Q4 2010

Ru s

eo rg ia Ka za kh FY st R an M ac ed on ia M ol do va Ro m an ia

ga ria

-20

G

Bu l

Be la r

-16

ay Ju - 08 Se l-0 p 8 No -0 8 Ja v -0 8 M n- 0 a 9 M r-0 ay 9 Ju - 09 Se l-0 p 9 No -0 9 Ja v -0 9 M n- 1 a 0 M r-1 ay 0 Ju - 10 Se l-1 p 0 No -1 0 Ja v -1 0 M n- 1 a 1 M r-1 ay 1 Ju - 11 Se l-1 p 1 No -1 v- 1 11

M

ay Ju - 08 Se l-0 p 8 No -0 8 Ja v -0 8 n M 0 a 9 M r-0 ay 9 Ju - 09 Se l-0 p 9 No -0 9 Ja v -0 9 M n- 1 a 0 M r-1 ay 0 Ju - 10 Se l-1 p 0 No -1 0 Ja v -1 0 M n- 1 a 1 M r-1 ay 1 Ju - 11 Se l-1 p 1 No -1 v- 1 11

M

-8

Ju Se l-0 p 8 No -0 v 8 Ja -08 nM 09 a M r-0 ay 9 Ju -09 Se l-09 p No -0 v 9 Ja -09 nM 10 a M r-1 ay 0 Ju -10 Se l-1 p 0 No -10 v Ja -10 M n-1 ar 1 M -1 ay 1 Ju -11 Se l-1 p 1 No -1 v- 1 11

Ju Se l-0 p 8 N -08 ov Ja -08 n M -09 a M r-0 ay 9 Ju - 09 S l-09 ep No -09 v Ja -09 n M -10 a M r-1 ay 0 Ju - 10 Se l-1 p 0 N -10 ov Ja -10 n M -1 a 1 M r-1 1 ay Ju -11 S l-1 ep 1 N -11 ov -1 1 4

Ju Se l-0 p 8 No -0 v 8 Ja -08 n M -0 a 9 M r-0 ay 9 Ju - 09 Se l-09 p No -0 v 9 Ja -09 M n- 1 a 0 M r-1 ay 0 Ju - 10 Se l-1 p 0 No -10 v Ja -10 n M - 11 a M r-1 ay 1 Ju - 11 Se l-1 p 1 No -1 v- 1 11

Ju S l-0 ep 8 N -0 ov 8 Ja -08 n M - 09 a M r-0 ay 9 Ju - 09 S l-09 ep N -0 ov 9 Ja -09 n M - 10 a M r-1 ay 0 Ju - 10 S l-1 ep 0 N -10 ov Ja -10 n M -1 a 1 M r-1 1 ay Ju - 11 S l-1 ep 1 No -11 v11

Figure 3. Indicators of real activity: GDP and industrial production Real GDP, y-o-y change, %

0 4

-4 0

-4

-8

-12 Q2 2009 Q2 2010 Q2 2011 Q3 2009 Q3 2010 Q3 2011

Source: National authorities via CEIC data service.

Industrial production, index, 2005=100, seasonally adjusted Slovenia

130

120

110

80

100

90

80

Source: Eurostat. Industrial production, y-o-y change, %

20

0 10

-10 0

Kazakhstan Turkey

20

10

10

0

0

-10

Source: National authorities via CEIC data service.

21

Figure 4. Indicators of real activity: retail sales and confidence indexes Retail sales, y-o-y change, % 40

Croatia

30

Czech R.

Hungary

Poland

40

Estonia

Latvia

30

Slovakia

Slovenia

20

20

10

10

-10 -20

-20

-30

-30

-40

-40

M

M

ay Au - 08 g No - 08 v Fe -08 bM 09 ay Au - 09 g No - 09 v Fe -09 bM 10 ay Au - 10 g No - 10 v Fe -10 bM 11 ay Au - 11 g No - 11 v11

0 -10

ay Au - 08 g No - 08 vFe 08 b M -0 9 ay Au - 09 g No - 09 v Fe -09 bM 10 ay Au - 10 g No - 10 v Fe -10 bM 11 ay Au - 11 g No - 11 v11

0

Lithuania

40

40

Kazakhstan

30

Russia

Ukraine

30

20

20

10

10

-10

-20

-20

-30

-30

-40

-40

Serbia

M

M

Romania

ay Au - 08 g No - 08 v Fe -08 bM 09 ay Au - 09 g No - 09 vFe 09 b M -1 0 ay Au - 10 g No - 10 vFe 10 b M -1 1 ay Au - 11 g No - 11 v11

0

-10

ay A -08 ug N -08 ov Fe -08 b M -09 ay A -09 ug N -09 ov Fe -09 b M -10 ay Au -10 g N -10 ov Fe -10 b M -11 ay A -11 ug N -11 ov -1 1

0

Bulgaria

Source: National authorities via CEIC data service. Consumer confidence, seasonally adjusted balances, defined as the difference (in percentage points of total answers) between positive and negative answers 10.0

10.0 0.0

0.0

-10.0

-10.0 -20.0

-20.0

-30.0

-30.0

-40.0

-40.0

-50.0

-60.0

Fe bM 08 ay A 08 ug -0 N 8 ov Fe 08 bM 09 ay A 09 ug -0 N 9 ov Fe 09 bM 10 ay A 10 ug N 10 ov Fe 10 b1 M 1 ay -1 A 1 ug N 11 ov -1 1

-70.0

-60.0 -70.0 -80.0

Poland Slovakia Bulgaria

Slovenia Rom ania

Fe bM 08 ay A 08 ug -0 N 8 ov Fe 08 b M -09 ay A 09 ug N 09 ov Fe 09 bM 10 ay A 10 ug -1 N 0 ov Fe 10 bM 11 ay A 11 ug N 11 ov -1 1

Estonia Latvia Lithuania Czech Republic Hungary

-50.0

. Source: Eurostat. Industrial confidence, seasonally adjusted balances, defined as the difference (in percentage points of total answers) between positive and negative answers 25 15

Estonia Lithuania Czech Republic

Latvia Hungary

5 -5

15

Slovenia Rom ania

5 -5 -15

-25

-25

-35

-35

-45

-45

Fe bM 08 ay A 08 ug N 08 ov Fe 08 bM 09 ay A 09 ug N 09 ov Fe 09 bM 10 ay A 10 ug N 10 ov Fe 10 bM 11 ay A 11 ug N 11 ov -1 1

-15

Fe bM 08 ay A 08 ug N 08 ov Fe 08 bM 09 ay A 09 ug N 09 ov Fe 09 bM 10 ay A 10 ug N 10 ov Fe 10 bM 11 ay A 11 ug N 11 ov -1 1

Poland Slovakia Bulgaria

Source: Eurostat.

22

4

2

-5

15

-5

-5

5

0 M ay -0 8 ug -0 N 8 ov Fe 08 b0 M 9 ay A 09 ug -0 N 9 ov -0 Fe 9 b1 M 0 ay -1 A 0 ug -1 N 0 ov -1 Fe 0 b1 M 1 ay -1 A 1 ug -1 N 1 ov -1 1

5

A

20

Croatia Estonia

Slovakia

Latvia Lithuania 15

Poland Slovenia

10

0

40

Kazakhstan Russia 30

35

Ukraine Turkey 25

30

25

20

20

15

Armenia Azerbaijan Georgia

10

10

-5

18 18

16 16

14 14

12 12

10 10

8 8

6 6

Bulgaria Czech R. Estonia

Hungary

Romania Latvia Poland

0 M ay -0 8 ug -0 N 8 ov Fe 08 b0 M 9 ay A 09 ug -0 N 9 ov -0 Fe 9 b1 M 0 ay -1 A 0 ug -1 N 0 ov -1 Fe 0 b1 M 1 ay -1 A 1 ug -1 N 1 ov -1 1

Czech R. Hungary

A

10

M ay -0 8 ug -0 N 8 ov Fe 08 b0 M 9 ay -0 A 9 ug -0 N 9 ov -0 Fe 9 b1 M 0 ay -1 A 0 ug -1 N 0 ov -1 Fe 0 b1 M 1 ay -1 A 1 ug -1 N 1 ov -1 1 A

M ay A 08 ug -0 N 8 ov Fe 08 b0 M 9 ay A 09 ug -0 N 9 ov -0 Fe 9 b1 M 0 ay -1 A 0 ug -1 N 0 ov -1 Fe 0 b1 M 1 ay -1 A 1 ug -1 N 1 ov -1 1

15

M ay -0 8 ug -0 N 8 ov Fe 08 b0 M 9 ay -0 A 9 ug -0 N 9 ov -0 Fe 9 b1 M 0 ay -1 A 0 ug -1 N 0 ov -1 Fe 0 b1 M 1 ay -1 A 1 ug -1 N 1 ov -1 1 A

M ay A 08 ug -0 N 8 ov Fe 08 b0 M 9 ay A 09 ug -0 N 9 ov -0 Fe 9 b1 M 0 ay -1 A 0 ug -1 N 0 ov -1 Fe 0 b1 M 1 ay -1 A 1 ug -1 N 1 ov -1 1

20

M ay -0 A 8 ug -0 8 N ov -0 Fe 8 b09 M ay -0 9 A ug -0 9 N ov -0 9 Fe b10 M ay -1 A 0 ug -1 0 N ov -1 0 Fe b11 M ay -1 1 A ug -1 1 N ov -1 1

M ay -0 A 8 ug -0 8 N ov -0 8 Fe b09 M ay -0 A 9 ug -0 9 N ov -0 9 Fe b10 M ay -1 0 A ug -1 0 N ov -1 0 Fe b11 M ay -1 1 A ug -1 1 N ov -1 1

Figure 5. Indicators of real activity: CPI and unemployment CPI, y-o-y change, % 20

15

Albania Bulgaria Romania BiH Montenegro Serbia

10

5 5

0 0

-5

110

Belarus

90

Moldova

70

Tajikistan

50

5 30

0 10

-10

Source: National authorities via CEIC data service. Unemployment rate, %

Armenia Belarus Kazakhstan

Russia Tajikistan Turkey

4

2

0

Source: National authorities via CEIC data service.

23

130

80

200

180

160

290

120 260

110 230

100

Albania BiH

FYR Macedonia Serbia

Estonia Latvia Lithuania

60

Albania BiH

FYR Macedonia Serbia

80

60

200

180 180

160 160

140 140

120 120

100 100

80 80

320

140

280

240

120

200

100

160 Croatia Hungary

Czech Republic Poland

60

Armenia Azerbaijan Georgia Belarus Tajikistan

80

50

60

Armenia Azerbaijan Georgia Belarus Tajikistan

120

Fe b M -0 ay 8 A -08 ug N -08 ov Fe -08 b M -09 ay A -0 ug 9 N -09 ov Fe -09 b M -1 a 0 A y-1 ug 0 N -10 ov Fe -10 b M -1 ay 1 A -11 ug N -11 ov -1 1

Croatia Hungary

Fe b M -08 ay A -08 ug N -08 ov Fe -08 b M -09 ay A -09 ug N -09 ov Fe -09 b M -10 ay A -10 ug N -10 ov Fe -10 b M -11 ay A -11 ug N -11 ov -1 1

80

Fe M b-0 ay 8 A -0 8 ug N -0 8 ov Fe -08 b M -0 a 9 A y-0 ug 9 N -0 9 ov Fe -09 M b-1 a 0 A y-1 ug 0 N -1 0 ov Fe -10 M b-1 ay 1 A -1 1 ug N -1 1 ov -1 1

90 Lithuania Bulgaria

160 160

140 140

Fe M b-0 ay 8 A u -0 8 g N o -0 8 v Fe -08 M b-0 ay 9 A u -0 9 g N o -0 9 v Fe -09 M b-1 ay 0 A u -1 0 g N o -1 0 v Fe -10 M b-1 ay 1 A u -1 1 g N o -1 1 v11

60

Fe M b-0 ay 8 A -08 ug N -08 ov Fe -08 b M -09 a A y-09 ug N -09 ov Fe -09 M b-1 a 0 A y-1 ug 0 N -10 ov Fe -10 b M -1 ay 1 A -11 ug N -11 ov -1 1

Fe b M -0 ay 8 A -08 ug N -08 ov Fe -08 b M -09 a A y-0 ug 9 N -09 ov Fe -09 b M -1 a 0 A y-10 ug N -10 ov Fe -10 b M -1 ay 1 A -11 ug N -11 ov -1 1

80

Fe b M -0 ay 8 A -0 8 ug N -0 8 ov Fe -08 b M -09 ay A -0 ug 9 N -0 9 ov Fe -09 b M -1 a 0 A y-1 ug 0 N -1 0 ov Fe -10 b M -1 ay 1 A -1 1 ug N -1 1 ov -1 1

Fe b M -0 ay 8 A -0 8 ug N -0 8 ov Fe -08 b M -0 9 a A y-0 ug 9 N -0 9 ov Fe -09 b M -1 a 0 A y-1 ug 0 N -1 0 ov Fe -10 b M -1 ay 1 A -1 1 ug N -1 1 ov -1 1 Latvia

Fe M b-0 ay 8 A -0 8 ug N -0 8 ov Fe -08 b M -0 9 a A y-0 ug 9 N -0 9 ov Fe -09 M b-1 a 0 A y-1 ug 0 N -1 0 ov Fe -10 M b-1 ay 1 A -1 1 ug N -1 1 ov -1 1

Fe M b-0 ay 8 A -0 8 ug N -0 8 ov Fe -08 b M -0 9 a A y-0 ug 9 N -0 9 ov Fe -09 M b-1 a 0 A y-1 ug 0 N -1 0 ov Fe -10 M b-1 ay 1 A -1 1 ug N -1 1 ov -1 1 120

Fe M b-0 ay 8 A -0 8 ug N -0 8 ov Fe -08 b M -0 9 a A y-0 ug 9 N -0 9 ov Fe -09 M b-1 a 0 A y-1 ug 0 N -1 0 ov Fe -10 M b-1 ay 1 A -1 1 ug N -1 1 ov -1 1

Fe b M -0 ay 8 A -0 8 ug N -0 8 ov Fe -08 b M -0 a 9 A y-0 ug 9 N -0 9 ov Fe -09 b M -10 a A y-1 ug 0 N -1 0 ov Fe -10 b M -1 ay 1 A -1 1 ug N -1 1 ov -1 1

Figure 6. Financial sector indicators: deposits by currency Local currency total deposits, stocks. January 2008 = 100

210

190

200 150

170 130

140 110

110 90

80 80

60

Romania

Czech Republic 180 Poland Bulgaria

160 Slovenia

Kazakhstan Russia Ukraine

Slovenia

100 120

100 120

100

80

Kazakhstan Russia

Turkey

170

Ukraine

70

Source: National authorities via CEIC data service.

Foreign currency total deposits, stocks (FX adjusted) /1. January 2008 = 100 Romania

140

120

100

80

60

180

160

140

120

100

Moldova Turkey

40

/1Composition of assumed FX Baskets (€ : $ weights): 100:0 for Bulgaria, Latvia, Lithuania, Poland, Serbia; 90:10 for Croatia and Romania;

50:50 for Albania, Armenia, Bosnia, Czech Republic, Estonia, FYR Macedonia, Georgia, Hungary, Moldova and Turkey; 20:80 for Ukraine;

15:85 for Russia, 10:90 for Kazakhstan, 0:100 for Azerbaijan and Tajikistan and 30:40:30 as a €-$-RUB basket for Belarus.

Source: National authorities via CEIC data service.

24

Figure 7a. Financial sector indicators: foreign and local currency lending Contribution to private sector growth (year-on-year, in %)

Per cent 60 40 20 0 -20 -40 091011091011091011091011091011091011091011091011091011091011091011091011091011 ALB

BIH

FYR

SRB

FX

ARM

AZE

BEL

LC

GEO MDV

UKR

RUS

KAZ

TJK

TOTAL

Per cent 40 30 20 10 0 -10 -20 091011091011091011091011091011091011091011091011091011091011 LAT

LIT

HUN POL SVN CZE BGR ROM HRV TUR

FX

LC

TOTAL

Source: National authorities via CEIC service.

25

Figure 7b. Financial sector indicators: new credit to private sector Croatia (HRK mln)

Net new credit (corporate) 4000

2 50 0 2000

Net new credit (household)

LCU

FX (adj.)

T otal

LCU

FX (adj.)

T otal

3000

150 0

2000

10 0 0

10 0 0

50 0

0

0

-10 0 0

-50 0

-2 0 0 0

-10 0 0 -3 0 0 0

-150 0

Czech Republic (CZK mln) 30000 2 50 0 0 20000

Net new credit (corporate) LCU

FX (adj.)

T otal

Net new credit (household) 2 50 0 0

LCU

FX (adj.)

T otal

20000

150 0 0

150 0 0

10 0 0 0 50 0 0 0 -50 0 0

10 0 0 0 50 0 0

-10 0 0 0 -150 0 0 -2 0 0 0 0

0

-2 50 0 0

-50 0 0

Estonia (EEK mln) January 2009 is excluded

Net new credit (corporate)

Net new credit (household) January 2009 is excluded 150

200

LCU

150

FX (adj.)

T otal

LCU

FX (adj.)

T otal

10 0

10 0 50

50

0

0

-50 -10 0

`

-50

-150

-10 0

-2 0 0 -2 50

-150

Latvia (mln LVL) 200 150

Net new credit (corporate) LCU

FX (adj.)

T otal

Net new credit (household) 12 0 10 0

20 0

-50 -10 0

-2 0

-150

-4 0

-2 0 0

-6 0

-2 50

-8 0

Lithuania (mln LTL)

10 0 0

T otal

40

0

150 0

FX (adj.)

60

50

2000

LCU

80

10 0

Net new credit (corporate) LCU

FX (adj.)

T otal

Net new credit (household) 10 0 0

LCU

FX (adj.)

T otal

800 600 400

50 0 200

0

0

-50 0

-2 0 0

-10 0 0

-4 0 0

-150 0

-6 0 0

26

Hungary (bn HUF)

Net new credit (corporate)

LCU

400

FX (adj.)

T otal

Net new credit (household)

200

200 150

10 0

10 0

0

50

T otal

0

-10 0

-50 -10 0

-2 0 0 -3 0 0

-150

-4 0 0

-2 0 0

Poland (mln PLN)

Net new credit (corporate)

LCU

FX (adj.)

T otal

Net new credit (household) 2 50 0 0

LCU

FX (adj.)

T otal

20000 150 0 0 10 0 0 0 50 0 0 0 -50 0 0 -10 0 0 0 -150 0 0

Albania (mln ALL) 150 0 0

FX (adj.)

2 50

300

12 0 0 0 10 0 0 0 8000 6000 4000 2000 0 -2 0 0 0 -4 0 0 0 -6 0 0 0 -8 0 0 0 -10 0 0 0

LCU

300

Net new credit (corporate) LCU

FX (adj.)

T otal

Net new credit (household) 50 0 0

LCU

FX (adj.)

T otal

4000

10 0 0 0

3000 2000

50 0 0

10 0 0

0

0 -10 0 0

-50 0 0

-2 0 0 0 -3 0 0 0

-10 0 0 0

Bulgaria (mln BGN) 14 0 0

Net new credit (corporate) LCU

FX (adj.)

T otal

Net new credit (household)

10 0 0

50 0

800

400

600

300

400

200

200

10 0

0

0

-2 0 0

-10 0

-4 0 0

-2 0 0

FYR Macedonia (mln MKD) 6000 50 0 0 4000

Net new credit (corporate)

FX (adj.)

T otal

LCU

FX (adj.)

T otal

Net new credit (household) 2 50 0

LCU

FX (adj.)

T otal

2000

3000

150 0

2000 10 0 0

10 0 0

0

LCU

70 0 600

12 0 0

50 0

-10 0 0

0

-2 0 0 0 -3 0 0 0

-50 0

-4 0 0 0

-10 0 0

27

Romania (mln RON) 4000

Net new credit (corporate) LCU

FX (adj.)

Net new credit (household) LCU

50 0 0

T otal

FX (adj.)

T otal

4000

3000

3000

2000

2000 10 0 0

10 0 0 0

0

-10 0 0

-10 0 0

-2 0 0 0

-2 0 0 0

-3 0 0 0

-3 0 0 0

Serbia (mln RSD)

Net new credit (corporate) LCU

50 0 0 0

FX (adj.)

T otal

Net new credit (household) 50 0 0 0

40000

40000

30000

30000

20000

20000

10 0 0 0

10 0 0 0

0

0

-10 0 0 0

-10 0 0 0

-2 0 0 0 0

-2 0 0 0 0

Kazakhstan (mln KZT) 300000 2 50 0 0 0 200000 150 0 0 0 10 0 0 0 0 50 0 0 0 0 -50 0 0 0 -10 0 0 0 0 -150 0 0 0 -2 0 0 0 0 0 -2 50 0 0 0

Net new credit (corporate) LCU

FX (adj.)

T otal

LCU

FX (adj.)

T otal

z

Net new credit (household) 80000

LCU

FX (adj.)

T otal

60000 40000 20000 0 -2 0 0 0 0 -4 0 0 0 0 -6 0 0 0 0

Russia (bn RUB)

Net new credit (corporate) LCU

600

FX (adj.)

T otal

Net new credit (household) LCU

200

FX (adj.)

T otal

50 0

150

400 300

10 0

200

50

10 0 0

0

-10 0

-50

-2 0 0 -3 0 0

-10 0

Ukraine (mln UAH) 2 50 0 0

Net new credit (corporate) LCU

FX (adj.)

T otal

20000 150 0 0 10 0 0 0 50 0 0 0 -50 0 0

Net new credit (household) 12 0 0 0

LCU

FX (adj.)

T otal

10 0 0 0 8000 6000 4000 2000 0 -2 0 0 0 -4 0 0 0

-10 0 0 0

-6 0 0 0

-150 0 0

-8 0 0 0

Source: National authorities via CEIC data service.

28

140

220

180

Albania BiH FYR Macedonia

120

100

80

60

160

Latvia Lithuania

150

140

130

100

90

140

100 Fe bM 08 ay A 08 ug No 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gN 10 ov Fe 10 bM 11 ay Au 11 gNo 11 v11

160

180

220

160 200

180

140 160

80 90

70 70

200

Albania

180

BiH 190

160

FYR Macedonia

80

110

60

90

Poland

210

Poland

190

Hungary

Czech Hungary

240 260

Kazakhstan Ukraine Russia Turkey

140

Czech

110

120

130

40

70 Fe bM 08 ay A 08 ug No 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gN 10 ov Fe 10 bM 11 ay Au 11 gNo 11 v11

200

Lithuania 200

Fe bM 08 ay A 08 ug No 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gN 10 ov Fe 10 bM 11 ay Au 11 gNo 11 v11

220

Fe bM 08 ay Au 08 gNo 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gNo 10 vFe 10 bM 11 ay Au 11 gNo 11 v11

Latvia

Fe bM 08 ay Au 08 gNo 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gNo 10 vFe 10 bM 11 ay Au 11 gNo 11 v11

Fe bM 08 ay Au 08 gNo 08 v Fe -08 bM 09 ay Au 09 g No - 09 vFe 09 bM 10 ay Au 10 gNo 10 v Fe -10 bM 11 ay Au 11 gNo 11 v11

180

Fe bM 08 ay Au 08 gNo 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gNo 10 vFe 10 bM 11 ay Au 11 gNo 11 v11

Fe bM 08 ay A 08 ug No 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gN 10 ov Fe 10 bM 11 ay Au 11 gNo 11 v11

200

Fe bM 08 ay Au 08 gNo 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gNo 10 vFe 10 bM 11 ay Au 11 gNo 11 v11

Fe bM 08 ay Au 08 gNo 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gNo 10 vFe 10 bM 11 ay Au 11 gNo 11 v11 220

Fe bM 08 ay Au 08 gNo 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gNo 10 vFe 10 bM 11 ay Au 11 gNo 11 v11

Fe bM 08 ay Au 08 gNo 08 vFe 08 bM 09 ay Au 09 gNo 09 vFe 09 bM 10 ay Au 10 gNo 10 vFe 10 bM 11 ay Au 11 gNo 11 v11

Figure 8. Financial sector indicators: private sector credit by currency components Local currency private sector credit, amounts outstanding. January 2008 = 100 220

200

Bulgaria Serbia

180

Croatia Romania

160 160

120

140 140

100

120 120

80

100 100

60

80 80

40

60 60

240

220

120 120

100 100

80 80

60 60

170

210

190

170 170

120 150 150

110 130

Armenia

Azerbaijan

200

180 160

Moldova

140

Source: National authorities via CEIC data service.

Foreign currency private sector credit, amounts outstanding (FX adjusted). January 2008 = 100 Bulgaria Serbia

Croatia Romania

130

110

90

70

Kazakhstan Ukraine 390

Russia Turkey 350

Armenia Azerbaijan

170 310

Moldova

150 270

230

190

150

110

70

/1Composition of assumed FX Baskets (€ :$ weights): 100:0 for Bulgaria, Latvia, Lithuania, Poland, Serbia; 90:10 for Croatia and Romania;

15:85 for Russia, 10:90 for Kazakhstan, 0:100 for Azerbaijan and Tajikistan and 30:40:30 as a €-$-RUB basket for Belarus.

50:50 for Albania, Armenia, BiH, Czech Republic, Estonia, FYR Macedonia, Georgia, Hungary, Moldova and Turkey; 20:80 for Ukraine;

Source: National authorities via CEIC data service.

29