CEE Insights

Fixed Income and Foreign Exchange – January 30, 2009

Czech Republic: We expect 50bp cut next week
Hungary: HUF 1,000bn reshuffle in tax system
revealed
Poland: Central bank cut rates by 75bp
Romania: Talks between Romania and EC
on financial package
Ukraine: Risks to public finance have increased
Overview
http://global.treasury.erstebank.com

Market outlook
Many CEE governments have had to take a deeper look at their budgets in recent
days and analyze the consequences of weaker economic growth on the revenue and
expenditure sides of their budgets. Hungary's PM came up with a tax overhaul
proposal that would reduce the tax burden on the corporate sector (including
contributions) and increase some indirect taxes, as well as introduce a wealth tax.
The Romanian government approved the budget for 2009 with a deficit at 2% of GDP,
which seems to be reasonably restrictive (especially in the area of wages in the public
sector and pension increases), but which still has to be discussed with social
partners before submission to Parliament for final approval. It seems that Romania has
also received implicit backing from the EU/IMF on the financing side, as long as the
fiscal deficit is kept under control. Sticking to a fiscal consolidation plan opens the
door to further monetary easing in Hungary and Romania in the following months.

After this week's 75bp rate cut in Poland, the Czech national bank is also set to cut
interest rates. We expect a 50bp rate cut to 1.75% on Wednesday. Hungarian
industrial production for December, which is due on Friday, should have fallen by
about 15% y/y. Market sentiment was once more against CEE currencies this week.
The Hungarian forint lost 2% just today, approaching the level of 299 HUF/EUR, while
the Polish zloty came back to above 4.45 PLN/EUR today.

Juraj Kotian, juraj.kotian@erstegroup.com, Erste Group

Spreads vs. Euroland

Thursday's close Instrument Current w/w m/m ytd
current - 1m 02/01/2009
EUR/CZK 27.69 0.8% -3.2% -3.0%
3Y (yield/bp) 2.91 9 0 -57 85 148 166
Czech Republic
10Y (yield/bp) 4.43 32 27 27 117 121 121
5Y CDS 224 -10 39 39
EUR/HRK 7.394 0.8% -0.3% -0.6%
2Y (yield/bp) 8.01 32 -54 -56 644 681 683
Croatia
9Y (yield/bp) 7.25 19 28 27 411 410 407
5Y CDS 414 -10 -26 -26
EUR/HUF 291.4 -2.2% -8.9% -8.9%
3Y (yield/bp) 9.95 56 39 40 789 771 773
Hungary
10Y (yield/bp) 9.09 78 87 94 583 527 519
5Y CDS 415 -6 -34 -34
EUR/PLN 4.398 -0.5% -5.7% -5.7%
3Y (yield/bp) 4.99 10 -24 -24 294 338 341
Poland
10Y (yield/bp) 5.78 11 87 42 253 247 240
5Y CDS 265 -27 -14 -14
EUR/RON 4.249 2.2% -5.2% -5.2%
Romania
5Y CDS 650 -25 -50 -50
3Y (yield/bp) 3.45 26 -49 -46 139 209 203
Slovakia 11Y (yield/bp) 4.77 11 1 4 147 181 171
5Y CDS 170 -31 0 0
EUR/UAH 10.18 -0.5% 7.1% 7.2%
Ukraine 2Y (yield/bp) 40.0 800 1500 1500 3845 2275 2325
5Y CDS 3314 -151 234 234
Source: Reuters, Bloomberg (+ means strengthening / - means easing of the exchange rate)

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 2
Trading Ideas

Closed positions
# Recommendation opened closed P/L inc.carry
1 long: PLGB10y / 4m Euribor 16/09/2005 27/10/2005 -3.0%
2 short: CZGB15y / 6m PRIBID 16/09/2005 21/11/2005 6.0%
5 long: SKK/CZK 09/11/2005 20/01/2006 1.9%
3 short EUR/SKK 29/09/2005 07/02/2006 3.5%
4 EUR/PLN options 21/10/2005 28/07/2006 -2.7%
6 SKK/CZK long 23/03/2006 30/10/2006 2.2%
7 FRA 9*12 short 28/07/2006 08/11/2006 8bp
8 long HUGB 5y 13/10/2006 29/01/2006 5.7%
9 short CZGB/ long GDBR 09/01/2007 27/02/2007 1.8%
10 long CZK/EUR 27/02/2007 19/03/2007 2.3%
11 short CZGB/ long PLGB 07/03/2007 10/05/2007 5.5%
14 long SKKFRA 9x12, short EURFRA 9 16/07/2007 13/08/2007 30 bp
13 short EUR/CZK 07/06/2007 14/09/2007 3.0%
15 short EUR/RON 23/10/2007 21/11/2007 -4.9%
12 short EUR/SKK 04/06/2007 04/12/2007 1.6%
16 long USD/CZK 29/11/2007 14/01/2008 -3.1%
17 long 3y HUGB / 3m Pribor 05/12/2007 08/02/2008 -6.8%
20 short EUR/SKK 22/01/2008 13/02/2008 2.9%
19 long USD/CZK 21/01/2008 18/02/2008 -3.6%
18 short EURRON 31/12/2008 28/02/2008 -0.6%
21 Short USD/RON 02/04/2008 10/04/2008 3.9%
22 Buy EURFRA, sell SKKFRA 04/04/2008 18/04/2008 26bp
23 Long EUR/CZK 29/04/2008 19/06/2008 -3.8%
24 short EUR/RON 05/08/2008 14/10/2008 -4.7%
25 short EUR/PLN 09/09/2008 21/10/2008 -3% (stop-loss)

To be included in the trading ideas mailing list, please, mail to

rainer.singer@erstegroup.com, subject: trading ideas

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 3
Question of the Week

Question of the week

Where do you see the cap for the fiscal deficit in your country, in
light of the rising negative cyclical component of the deficit and
proposed (if any) stimulus packages? Do you expect any
difficulties in financing it on local (international) markets?

Based on revised growth forecasts, we now expect Slovakia's fiscal deficit at close
to 3% of GDP, even if no new major spending initiatives are carried out (the
government intends to find funds by reshuffling expenditure). However, the
government should have no problem raising extra funds, as in late 2008, people
brought money from under their pillows to banks ahead of euro adoption. This year,
demand at government auctions has been heavy, as banks sought to invest these
new deposits.
Michal Musak, Slovenska sporitelna

Although the 2009 budget draft is very ambitious in terms of cutting public spending,
postponing some wage hikes and suspending bonuses in the public sector, we see
the cap for the budget deficit at around 5% (2% is the government's target). The
main issue in 2009 is related to the budget revenues, which could come under
strong pressures amid weakening economic activity, while increasing them by 19-
20% in an extremely difficult year will be a daunting task, which we now see as
highly unlikely. The Romanian government has thus far only announced a stimulus
package (e.g. 7% of GDP for CAPEX - mainly infrastructure, export promotion, car
industry supporting measures, stimulating job creation, tax exemptions for
reinvested profit as of 2010, etc.), but it remains to be seen if it this is to be included
in the final 2009 budget (after it is approved by Parliament). The central bank's
support in financing the budget deficit in 2009 is very important, while Eurobonds
should be seen as a second option and only for smaller amounts. At the same time,
securing additional funding from an international financial institution to fund the
budget deficit could have positive effects on the FX rate, as well as on credibility,
and improve investor sentiment towards the Romanian market.
Lucian Anghel, Banka Commerciala Romania

As the decline of GDP in 2009 is likely to be below the planned -1% y/y in
Hungary, revenues worth around 1% of GDP could be missing from the budget.
This suggests that the cap for the fiscal deficit this year is 3.5-3.6% of GDP. The
case of Hungary is special, however. In exchange for IMF help and to restore market
confidence, decreasing the financing needs of the state and, consequently, the
financial vulnerability of the country, is a credibility question. Thus, we do not think
that the government will compensate for these losses; however, the explicit impact
of the currently planned measures on the deficit is very uncertain. All in all, capital
markets would not tolerate a higher budget deficit than 3% of GDP, nor would the
IMF. Our base forecast, however, is that the 2.6% of GDP deficit goal will remain
untouched, as - by increasing its credibility - it should make it easier for the country
to shift from the current non-market-type financing (IMF loan) to market-type
financing, as soon as possible. Due to the IMF standby loan, we should not see
financing difficulties in the short run, but as this situation is artificial, there is still no
way for Hungary to significantly increase its financing needs.
Orsolya Nyeste, Erste Bank Hungary

There is no strict limit in the Czech Republic on the size of the deficit. The talk is
still that the Maastricht criterion of 3% of GDP should be respected, but we think it
will not be held sacred and, should the activity drop well below zero, it might easily

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 4
Question of the Week

be exceeded (especially if fiscal stimulus is implemented). Assuming zero growth of

2009 GDP, 3% would be roughly CZK 110bn, out of which CZK 80-90bn would be a
deficit, as it stands now (no fiscal stimulus included). Add the fiscal stimulus of,
say, CZK 50bn, and the Maastricht criterion would easily be exceeded. As for the
financing, the local bond market in the Czech Republic has fixed itself a bit since
the fall (evidenced for example in narrower bid-ask spreads) and demand is
improving. As for the foreign market (which is crucial for the upcoming Eurobond
issue), markets are open, but come at a price. For example, Poland priced the
recent 5Y euro-denominated issue at mid-swaps + 300 bps.
Martin Lobotka, Ceska sporitelna

The fiscal deficit for 2009 in Ukraine is projected at 3% of GDP, but we think that
this is unrealistic, given the recent low figures for budget income in January.
Currently, the government is unable to attract funds on the local market, although it
was able to refinance some of the guaranteed state debt using external financing.
We think that the budget will be reviewed soon, in order to reduce the widening gap
between expenditures and revenues.
Maryan Zablotskyy, Erste Bank Ukraine

We expect that the Croatian fiscal deficit will not meet the targeted goal of 0.9% of
GDP, given the overly optimistic planning assumptions. Hence, given the negative
cyclical component, we expect the fiscal deficit in the 2.5-3% region. A forecast
revision would depend on a budget rebalance, which would bring some changes on
both the revenues and expenditures sides and which would hopefully show a
willingness to sustain the deficit and ease possible pressure on the refinancing
side. Recent weeks have brought some speculation that a stimulus package could
be introduced to support the real economy. However, no details have been
presented to the public. Thus, the potential size of the package is rather hard to
estimate. Currently, the MoF is oriented to the domestic market and has thus far
been successful in meeting financing needs. However, in the mid run, capacity
limitations are likely to play a role. Therefore, the MoF announced that it would try
to arrange a bond issue on international markets, which - if successful - would
alleviate the pressure from the domestic market.
Alen Kovac, Erste Bank Croatia

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 5
Major Markets

Major markets
Eurozone: ECB may
pause on further
rate cutting next
week
Today, the CPI estimate for January fell well short of expectations, thus leaving
more room for further interest rate cuts in the Eurozone. The growth of producer
price indices in December should have declined, removing the upward pressure from
consumer prices. On Wednesday, December retail sales are expected to have
declined, due to the worsening of economic conditions. Although disinflation should
support private consumption, the uncertainty over the impact from the recession on
the labor markets is hindering the propensity to buy. On Thursday, we expect the
ECB to keep interest rates stable at 2.0%, as they have already accounted for the
speedy disinflation until June. It is more likely that the March meeting will bring
further rate cuts to reduce the core rate to 1.5%, as more economic data and
sentiment indicators become available and potentially indicate a further weakening
of inflation pressure.

US: Weak ISM data
and labor market
report ahead
In contrast, the Fed is following a more aggressive policy. After interest rates cuts
to zero and different purchasing programs to stimulate the economy and credit
markets, they indicated this week that they are prepared to buy long-term Treasury
securities if such transactions would be effective in improving conditions in private
credit markets. It seems that officials are close to executing such a plan, which
could bear inflation risks in the mid term. In the week ahead, two important releases
are due. On Monday, the ISM is expected to have bottomed out in January, while on
Friday the week will close with the labor market report.

Gudrun Egger, gudrun.egger@erstegroup.com, Erste Group

Rainer Singer, rainer.singer@erstegroup.com, Erste Group

Forecasts
Intervention Rate 3m Money Market Rate 10y Govt. Yield FX
EUL USA EUL Fwd USA Fwd EUL USA EUR/USD Fwd
Spot 2.00 0 - 0,25 2.09 1.18 3.30 2.83 1.285
Mar-09 1.50 0 - 0,25 2.30 2.28 1.00 1.87 3.20 2.50 1.40 1.285
Jun-09 1.50 0 - 0,25 2.20 2.30 0.80 2.17 3.40 2.80 1.45 1.284
Sep-09 1.50 0 - 0,25 2.10 2.28 0.80 2.30 3.70 3.30 1.50 1.284
Dec-09 1.50 0 - 0,25 2.00 2.00 0.90 1.84 4.00 3.80 1.50 1.284

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 6
CEE Markets

Czech Republic
Eurobond timing During this past week, the Ministry of Finance confirmed that there will be a
and amount not Eurobond emission this year (as part of the Euro Medium TermNote program), but
revealed declined to elaborate on the size or timing. From the currency point of view, now
would be a good time to do it (and thus take advantage of the weak exchange rate).
However, in light of the market conditions, it does not seem an opportune moment
at present. Even though the markets are open, this comes at a price. Poland issued
5Y 1bn Eurobonds last week at mid-swaps +3pp. The Czech price could be
something similar.

We expect 50bp cut As for next week, the Czech National Bank is to hold its first rate setting meeting of
next week 2009. Regarding the rates, we expect a 50bp cut (weakening economy vs.
weakening CZK) and a comment indicating that the weakness of the currency is a
much stronger anti-inflationary risk than seen previously (last week, CNB board
member Tomsik confirmed that the weakness of the CZK limits drastic cuts, which
is essentially our view). The CNB will also publish (for the first time) the EURCZK
trajectory implicit in its forecast. This is a positive step towards complete
transparency, as one will then be able to compare the actual levels of CZK with
those assumed in the prognosis and thus say whether they constitute an anti-
inflationary or pro-inflationary risk. A bigger cut could send the koruna lower, while
dovish comments could push the currency in the other direction.

Martin Lobotka, mlobotka@csas.cz

HUF 1,000bn
reshuffle in tax
system revealed
Hungary
At the extraordinary meeting of Parliament held on Thursday, Prime Minister
Gyurcsany announced some proposals for reshuffling about HUF 1,000bn in the tax
system to boost economic growth. Possible changes should refer to the personal
income tax system and employers' social contributions. The 4% extra taxation on
companies and private individuals (solidarity tax), which was introduced as an
element of the 2006-07 fiscal adjustment package, should be abandoned. In order to
compensate for the revenue losses, the PM proposed a "modest" rise in the VAT,
elimination of some tax allowances and introduction of wealth taxes. As for the
expenditure side of the budget, apart from making the system of family allowance
need-based, no other explicit measures have been mentioned. Gyurcsany also said
that a reduction of expenditures amounting to around 1% of GDP per year could be
possible. The announcements did not really come as a surprise, as the
government's intentions to carry out such changes in the tax system, which would
increase excise and wealth taxes and mitigates taxes on labor, have been known
for some weeks now. Nevertheless, this could be the first step in the right direction,
as the current tax system does not really help solve one of the most important
problems in Hungary, which basically is independent of the current economic crisis
- the very low rate of labor participation and high number of economically inactive
people. (The employment ratio is around just 57%, well below the EU average of
around 65%). The PM has not mentioned so far how the above changes would affect
the 2.6% of GDP deficit target for 2009. Rumors have it that the government would
like to keep it untouched, which could be seen as positive (no extra financing needs
in the current difficult market environment). The second important thing is whether
these reshuffles solve the problem of the earlier mentioned revenue losses of HUF
200-250bn stemming from the bigger drop in the economy (presently, the
government predicts a 2.5-3% y/y decline in GDP growth). And last but not least,
the timing of the measures is an uncertain factor as well, especially taking into
consideration that, except for VAT, changes in the tax and contributions system

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 7
CEE Markets
Forint weakened
further
Central bank cut
rates by 75bp
GDP growth slowed
rapidly in 4Q08
Poland one of few
countries that could
avoid recession this
year
Central bank could
begin monetary
policy easing cycle
Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009
during the year could cause technical difficulties. More details on the changes are
expected to be announced on February 16.
The forint exchange rate consolidated somewhat this week, but started to weaken
massively on Thursday and reached another record low, due to increased risk
aversion. Intensifying global recession fears and the stronger USD and JPY hurt
emerging currencies, and the forint was no exception. The planned tax changes
have not had significant impacts on the markets so far. Trading is expected to
remain driven by the gloomy sentiment, which does not suggest any recovery in the
short run. As for the macro statistics, industrial output figures will be due next
Friday. The expected double-digit drop in the y/y performance will not help to
improve the overall sentiment on the markets.
Orsolya.Nyeste, orsolya.nyeste@erstebank.hu
Poland
The central bank introduced another interest rate cut. We expected a cut of 50bp,
given the still weakening zloty and the toll it might take on the Polish plan to enter
ERM II in the first half of 2009. However, the decision of the MPC to cut by 75bp,
thus pushing the key rate to 4.25%, demonstrates that the central bankers are
currently more concerned about the overall economic slowdown than about the euro
plan. Therefore, we expect even more cuts to come; as the council has decided it is
more important to stimulate the economy at this point, it makes sense to do it
quickly. The zloty reacted to the rate cut by depreciating. This week, it has been
stuck near 4.40 per euro. We do not see any reasons for significant appreciation
anytime soon. Like other currencies in the region, the zloty is under pressure,
resulting mainly from increased risk aversion.
New data on GDP growth was released. The growth slowed down rapidly in the
fourth quarter of 2008, to 2.8%, compared to 4.8% in the third quarter. The annual
growth slowed to 4.8% in 2008, compared to 6.7% in 2007. Total domestic demand
growth dropped from 8.6% to 4.8%. Gross capital formation rose by just 7.9%m
which is less than half of the 17.6% seen in 2007. One good piece of news came
regarding individual consumption growth, which reached a nine-year high of 5.4%. In
2009, the positive effect of increasing real wages and cuts in taxes on private
consumption will, however, likely be offset by the consequences of the overall
economic outlook, rising unemployment and hindered access to loans.
Despite all of the bad news confirming the ever-deepening economic slowdown,
Poland (being a relatively closed economy) remains one of the few countries with
the potential to avoid a recession in 2009. The EBRD released new estimates for
growth rates in the region this week. For Poland, the expected growth is 1.5%,
which is the second highest in the region of Central Europe and the Baltic states.
PM Tusk said this week that the government's worst-case scenario assumes growth
of 1.7%. This would still be the slowest growth rate since 2002.
Jana Krajcová, jkrajcova@csas.cz
Romania
The next monetary policy meeting on February 4 will put three options in front of the
central bank. The most efficient measure to improve the liquidity of the money
market and support leu lending is a cut in the minimum reserve requirements for the
national currency. Another option is a 25bp cut in the key rate to 10%, which should
be read more like a signal and a call for urgent strong fiscal and income policies.
Page 8
CEE Markets
Further slowdown of
loans to private sector
Talks between
Romania and EC on
financial package
Government approved
2009 budget
Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009
The third option is a joint cut in the key rate and minimum reserves for the leu, a
clear indication that the central bank is concerned with the economic downturn. We
attach a low probability to an aggressive monetary policy easing, given that
inflationary pressures are still present (due to lagging effects of the consistent
excess demand from 2008) and the risks of leu depreciation for financial stability
(FX-denominated retail loans account for 59% of total retail loans) and the inflation
rate. The results of the latest business survey conducted by the central bank show
a further deterioration of the outlook for the real economy. The restraint of productive
capacities in operation will lead to payroll cuts, as reflected by the balance of
answers staying deep in negative territory in both industry and construction. The
investment decline should weigh on the central bank's monetary policy decision,
considering that the Romanian economy has not yet reached critical mass in terms
of competitive technology and better performance of exports in the long run is
strongly linked to an improved supply of high-tech industrial products.
The December figures confirmed our forecasts regarding a considerably lower
growth rate in loans to private sector. Higher costs for external funding and the
central bank's amendments limiting the credit risk associated with FX loans to
households led to a 53.6% y/y increase in retail FX loans at the end of 2008, as
compared to a hefty rate of 134.4% in 2007. Leu-denominated retail loans advanced
by 22% in 2008 (from 45.4% one year ago), as the spread between the key rate and
money market rates widened at the end of last year, putting more pressure on
domestic funding. A further slowdown is in the pipeline, especially in the FX
segment, as the labor market is weakening rapidly and consumers' irrational
exuberance from the past has been replaced by a more prudent approach. Monetary
policy easing might help leu lending and the central bank seems determined to offer
it a significant competitive advantage over FX lending.
Romania started talks with the European Commission on a package to finance its
budget deficit, as an alternative to more expensive and limited private external
funding, in the aftermath of the global crisis and recent rating downgrades (to below
the investment grade category). The European financial aid under discussion stays
at EUR 6-7bn and represents Romania's first option now, before an agreement with
the IMF. However, this EC loan might be part of a joint plan together with the IMF,
due to European concerns over Romania's ability to tighten its fiscal and income
policies and control the budget deficit. IMF representatives also visited Romania this
week, but said that financial support was not on their agenda. The latest EC
economic forecast considers a budget deficit of 7.5% of GDP for 2009, compared to
a very optimistic government target of 2% of GDP.
Romania's coalition government approved an austere budget for 2009 aimed at
reducing the budget deficit to 2% and limiting the fallout of the global crisis on the
local economy. Before submitting the budget to Parliament, it will be debated and
presented to the social partners. 20% of the budget (the equivalent of EUR 10bn)
will be earmarked for investments. Public sector wages and pensions will increase
by 5% in 2009, all bonuses will be cut, while extra time in the public sector will not
be paid, but compensated for with time off. The car industry will be helped through
higher financial rewards received by customers deciding to replace 10-year-old cars
with new ones and the extended number of new cars involved in this program. The
government is also considering raising taxes on luxury goods and gambling and
hiking social insurance contributions by 3.3% in the near term. Although supportive,
these decisions should produce visible effects in terms of lower and more stable
monthly budget deficits before they result in improved sentiment from external
markets regarding the Romanian economy. This might be the first step in the right
direction, after an ambiguous mix of macroeconomic policies in the past, with a
strong monetary policy but loose fiscal and income policies.
Eugen Sinca eugen.sinca@bcr.ro
Page 9
CEE Markets

Ukraine
Bank auditing One of the conditions of the IMF's USD 16.4bn loan was the development of a program
coming to end of for the recapitalization of the banking system. Half of the loans issued by banks were in
first phase foreign currency. As the local currency devalued by 60% and is under pressure to fall
further, banks will need capital injections to keep their capital ratios at 10% of assets.
Capital injections are projected to come from foreign banks to their affiliates and from
the government. In the 2009 state budget, UAH 44bn (4% of GDP) is planned to be
used in bank recapitalization programs. Banks that account for 60% of total banking
system assets were ordered to pass special audits. The auditing was intended to
determine the banks' sustainability in the economic downturn. The NBU reported that
most of the foreign banks agreed to increase the capital of their affiliates in Ukraine. In
January, Ukraine received USD 711mn in capital inflows, the majority of which were
investments from foreign banks in their subsidiaries. External debt amortization
amounted to USD 1,536mn. Banks are still reluctant to lend, as outstanding loans
decreased by 1.9% m/m. Next week, the NBU will publish a list of banks that will need
capital injections and pass it to the government. The auditing and recapitalization
program is one of the IMF's conditions that Ukraine has more or less successfully dealt
with. However, big problems remain, as large amounts of refinancing were issued by the
NBU. Banking system debt to the NBU stands at UAH 61bn (6.6% of banking system
assets), UAH 23bn of which was loaned to state-owned banks. The toughest times for
the banking system are still ahead; the trouble should peak in 1H09.

Risks to public As of January 26, 2009, state budget income totaled UAH 4.23bn, which is 44.5% of
finance have January's planned income. The temporary monthly plan for budget income foresaw UAH
increased 9.51bn in January, UAH 12.21bn in February and UAH 14.47bn in May 2009. The actual
income for these months in 2008 was UAH 12.21bn, UAH 14.17bn and UAH 12.12bn,
respectively. The 2009 state budget is projected with similar nominal income and
expenditure terms as those in the 2008 budget. Thus, it is unlikely that the current
income figures will remain the same during the whole year, as the majority of budget
income consists of taxes on consumption, like custom duties and VAT. The low current
income is probably a "black-out period", as trade companies and importers readjust
their purchasing plans. Yet it is obvious that it will be almost impossible for the
government to meet the planned expenditure figures, especially with the planned 3% of
GDP deficit. The government is actively seeking additional refinancing from the NBU,
which has caused a conflict between the two sides. The government already received
UAH 31.5bn (3% of GDP) from the NBU (UAH 23bn via refinancing of state banks and
UAH 8.5bn via the purchase of treasury bills by the NBU). Such moves are in violation of
agreements with the IMF, which targeted an average 10% increase in monetary base
aggregates in 2009. In December 2008, average monetary base aggregates increased
by 8% m/m.

The 2009 state budget does not sufficiently cover the risks for Naftogaz, which may
experience additional problems after the signing of a new gas deal with Gazprom.
Ukrautodor, the state road construction company, managed to negotiate purchase
refinancing of its remaining debt to Morgan Stanley from Credit Suisse at 6M Libor
+8%. There is a significant risk for the public finance sector stemming from the debts of
Naftogaz, Ukrautodor and state-owned banks, which are not fully covered in the budget.
The government's tendency to opt for refinancing and increases in the monetary base,
the low budget income and the problems with state companies may put some quasi-
public sectors in technical default, despite Ukraine has one of the lowest public debt to
GDP ratios in the CEE region. The IMF mission is currently in Ukraine to discuss the
next part of the loan of SDR 1.25bn, which was planned to be issued on February 15.
The government will have a hard task reassuring the IMF of its commitment to the
conditions of the loan while explaining its conflict with the NBU and the received
refinancing. Maryan Zablotskyy, Maryan.Zablotskyy@erstebank.ua

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 10
Forecasts

Capital markets forecasts

Exchange Rate vs EUR
CZK Forward HRK Forward HUF Forward PLN Forward RON Forward UAH Forward
Spot 27.9 7.39 298.2 4.43 4.23 10.12
Mar-09 28.0 7.45 7.45 270.0 301.1 4.60 4.36 4.32 13.30
Jun-09 27.4 27.9 7.50 7.50 265.0 305.4 4.50 4.45 4.31 4.46 13.05 15.05
Sept-09 26.7 27.9 7.55 7.55 260.0 309.3 4.25 4.46 4.36 4.59 12.75 16.60
Dec-09 24.7 27.9 7.60 7.60 260.0 312.0 3.87 4.48 4.30 4.73 12.00 17.63

Intervention Rate 3M Money Market Rate

CZ HR HU PL RO UA CZ Fwd HU Fwd PL Fwd RO Fwd UA Fwd
Spot 2.25 6.00 9.50 4.25 10.00 12.00 2.71 9.47 4.88 15.23 32.00 -
Mar-09 1.75 6.00 8.50 4.00 9.50 16.00 2.27 8.40 9.16 4.35 13.50 10.34 28.00 -
Jun-09 1.75 6.00 7.50 3.50 9.00 14.00 1.99 2.30 7.40 8.53 3.69 3.91 11.75 8.67 22.00 -
Sept-09 1.75 6.00 7.00 3.25 8.50 14.00 1.85 1.83 7.00 8.01 3.38 3.42 10.75 7.47 16.00 -
Dec-09 2.00 6.00 7.00 3.25 8.50 14.00 2.15 2.44 7.00 7.97 3.34 2.54 10.00 6.12 14.00 -

10y Govt. Yield 5y Govt. Yield 2y Govt. Yield

CZ HR HU PL SK RO UA
Spot 4.43 7.25 9.30 5.78 4.71 12.6 40.0
Mar-09 4.15 7.50 8.00 5.15 4.50 12.0 30.0
Jun-09 3.90 7.50 7.40 5.10 4.40 11.6 22.0
Sept-09 3.85 7.00 7.10 5.25 4.50 10.5 17.0
Dec-09 3.86 7.00 7.00 5.30 4.60 9.7 15.0

Long-term forecasts
Real GDP growth (%) 2007 2008f 2009f 2010f CPI (%), eoy 2007 2008f 2009f 2010f
Czech Republic 6.0 4.1 1.3 2.3 Czech Republic 4.9 4.6 2.5 2.2
Croatia 5.6 3.4 1.7 3.0 Croatia 5.8 5.2 3.3 3.5
Hungary 1.1 0.9 -2.7 1.2 Hungary 7.4 3.5 3.0 3.0
Poland 6.7 5.2 2.8 4.4 Poland 4.0 3.8 2.8 2.2
Romania 6.0 7.6 4.0 5.4 Romania 6.6 6.3 5.4 4.4
Serbia 7.5 6.5 3.5 4.0 Serbia 10.1 9.4 7.0 5.4
Slovakia 10.4 7.0 4.2 4.5 Slovakia 3.4 5.0 3.9 3.9
Ukraine 7.6 2.0 -5.0 3.0 Ukraine 16.6 22.3 22.0 9.0
CEE8 weighted average 6.3 4.6 1.2 3.6 CEE8 weighted average 6.8 7.1 6.0 3.8
Unemployment (%) 2007 2008f 2009f 2010f 3M rates (average, %) 2007 2008f 2009f 2010f
Czech Republic 6.6 5.5 6.4 7.2 Czech Republic 3.1 3.9 2.4 2.8
Croatia 9.7 8.8 10.0 10.0 Croatia 5.6 6.9 7.5 6.5
Hungary 7.7 7.9 8.7 8.3 Hungary 7.7 8.9 8.2 6.5
Poland 11.4 9.1 10.3 9.5 Poland 4.6 6.3 5.3 4.3
Romania 4.1 4.3 5.0 4.8 Romania 7.8 13.0 12.8 10.0
Serbia 18.1 15.4 17.0 16.0 Serbia 11.3 15.6 16.0 13.5
Slovakia 8.4 7.6 7.9 7.6 Slovakia 4.3 4.2 2.7 2.7
Ukraine 6.9 6.5 9.5 7.1 Ukraine 9.6 14.8 17.0 12.0
CEE8 weighted average 8.7 7.6 8.8 8.2 CEE8 weighted average 6.0 8.5 8.0 6.4
C/A (%GDP) 2007 2008f 2009f 2010f Budget Balance (%GDP) 2007 2008f 2009f 2010f
Czech Republic -2.5 -1.9 -2.2 -1.9 Czech Republic -1.9 -1.9 -2.3 -2.1
Croatia -8.6 -10.6 -10.8 -10.6 Croatia -1.6 -1.6 -2.0 -2.0
Hungary -6.4 -7.6 -6.4 -5.7 Hungary -5.0 -3.3 -2.6 -2.4
Poland -4.7 -5.0 -5.0 -4.7 Poland -2.0 -2.2 -2.3 -2.0
Romania -13.7 -13.6 -12.0 -9.8 Romania -2.3 -3.2 -4.0 -3.3
Serbia -13.2 -17.8 -17.1 -17.0 Serbia -1.9 -2.0 -1.5 -1.5
Slovakia -5.3 -5.4 -4.9 -4.6 Slovakia -2.0 -2.2 -2.4 -2.5
Ukraine -4.2 -6.7 -5.0 -4.0 Ukraine -1.1 -1.2 -3.0 -1.5
CEE8 weighted average -6.1 -6.8 -6.3 -5.6 CEE8 weighted average -2.2 -2.2 -2.6 -2.2

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 11
Diaries

Looking ahead
Country Date Release/event/figures Our expectation Consensus*
Czech Republic 05-Feb Rate-setting meeting, % 1.75 2.25
Croatia 5-Feb Retail trade -3.5% y/y
Hungary 6-Feb December Industrial output -15% y/y -
Poland No data releases scheduled
Romania 3-Feb IPPI - y/y December 9.8% -
4-Feb Central bank board meeting - key rate 10.0% 10.00%
Slovakia No data releases scheduled
Ukraine No data releases scheduled
*Sources: Bloomberg, Reuters

Auction diary
Country Auction-date Pay-date Maturity Cupon Offer Forecast
Czech Republic No auction scheduled
Hungary 3-Feb 11-Feb 2009-May-13 - HUF 40bn
5-Feb 11-Feb 2010-Jan-13 - HUF 40bn
Poland No auction scheduled
Romania 2-Feb 4-Feb 6M - RON 1500 million 11%
Slovakia 2-Feb 4-Feb 2017-Apr-04 4.2% - 4.3%
Ukraine No auction scheduled

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 12
Appendix Charts

Exchange rates and interest rates (52 weeks)

350 Hungary 14.0 5.0 Poland 8.0
13.0
4.5
300 12.0 7.0
11.0 4.0
6.0
250 10.0 3.5
9.0 5.0
200 8.0 3.0
7.0 2.5 4.0
150 6.0
2.0 3.0
5.0
100 4.0 1.5
2.0
HUF/EUR 3.0 1.0 PLN/EUR
50 HUF/USD 2.0 PLN/USD 1.0
0.5
3m interbank rate, r.s. 1.0 3m interbank rate, r.s.
0 0.0 0.0 0.0
Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
30 Czech Republic 5.00 8 Croatia
4.50 7
25
4.00
6
3.50
20
3.00 5

15 2.50 4
2.00 3
10
1.50
2
CZK/EUR 1.00
5 CZK/USD HRK/EUR
1
0.50
3m interbank rate, r.s. HRK/USD
0 0.00 0
Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

13.0 Ukraine 5.0 Romania 16.0

UAH/EUR 4.5
12.0 22 14.0
UAH/USD 4.0
11.0 12.0
3m interbank rate, r.s. 3.5
10.0 17 10.0
3.0
9.0
2.5 8.0
8.0 12 2.0
6.0
7.0 1.5
4.0
6.0 7 1.0 RON/EUR
RON/USD 2.0
5.0 0.5
3m interbank rate, r.s.
0.0 0.0
4.0 2
Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Source: Bloomberg

Erste Group Research - CEE Insights Fixed Income and Foreign Exchange – January 30, 2009 Page 13
Appendix Forwards

Benchmarks
Czech Republic Hungary
5 1.4 10.2 9.0
4.5 8.0
1.2 10.0
4
7.0
1 9.8
3.5
6.0
3 9.6
0.8
5.0
2.5 9.4
0.6 4.0
2
9.2
1.5 3.0
0.4
9.0
1 2.0
0.2
0.5 8.8 1.0
0 0 8.6 0.0
3m 1yr 3yr 5yr 10yr 3m 1yr 3yr 5yr 10yr
Spread to Euroland, r.s. Yields Spread to Euroland, r.s. Yields

Poland Slovakia
7.0 4.0 6.0 2.5

6.0 3.5
5.0
2.0
3.0
5.0
4.0
2.5 1.5
4.0
2.0 3.0
3.0 1.0
1.5 2.0
2.0
1.0 0.5
1.0
1.0 0.5
0.0 0.0
0.0 0.0 3m 1yr 3yr 5yr 11yr
3m 1yr 3yr 5yr 10yr
Spread to Euroland, r.s. Yields
Spread to Euroland, r.s. Yields

Published by Erste Group Bank AG, Neutorgasse 17, 1010 Vienna, Austria.
Phone +43 (0)5 0100 - ext.
Erste Group Homepage: www.erstegroup.com On Bloomberg please type: ERBK <GO>.

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