New Europe Weekly

02-06 March 2009 Investment research

Too much credit

Key events in the coming week

The deepening of the financial sector in central and

eastern Europe (CEE) over the past two decades has to
• Final Q4 08 GDP due for release next
a large extent been driven by western European banks’
week in Poland.
willingness to set up subsidiary banks in the region and
• We expect Turkish inflation to drop further
provide the means for a lending boom. High lending
in February to 8.9% y/y, down from
growth was accompanied by strong economic growth,
January’s 9.5% y/y (see page 5).
but also by increasingly visible bubbles in the property
• Plenty of important economic data such as
markets. Now that the bubbles are bursting and the
industrial production figures and inflation
global economic crisis is hitting the CEE countries,
due for release in Baltics (see page 4).
there is expected to be a negative spill-back effect on
• We expect Russian inflation to ease
western Europe.
moderately in February to 13.1% y/y,
down from January’s 13.4%.
Western European banks are expected to react to the
increased risk in the CEE region by withdrawing capital.
A sizeable part of the CEE region debt is short term,
which makes a major credit contraction even more
likely. This puts further pressure on the region. We
expect that credit withdrawal will be most pronounced
from the countries with the gloomiest economic
prospects. Rather than a homogeneous credit
contraction across the CEE region, it is possible that
we will see a very pronounced credit flight from the
most vulnerable countries.

We have looked at three scenarios. A mild scenario,

which is comparable to the Swedish banking crisis, in
which losses in Sweden added up to about 8% of GDP
(maybe it isn’t really fair to call this a mild scenario), a
hard scenario, in which the hardest hit CEE countries
face more substantial losses, and finally an ugly
scenario, which is more comparable to the Asian crisis.

In the ugly scenario Austrian banks lose USD49bn, or

about 11% of Austrian GDP, Swedish banks lose
USD31bn (6.1% of GDP) and Belgian banks lose
USD20bn (3.6% of GDP). Total losses to western
Banks then add up to USD275bn. This is a lot of money
– but to put it in perspective the IMF now estimates the
total losses on US-originated credit assets at
USD2.2bn.
27 FEBRUARY 2009 NEW EUROPE WEEKLY

Calendar – week 10

EMEA Data and Events in Week10

Monday, March 2, 2009 Period Danske Bank Consensus Previous
CZK - Budget balance bn. CZK Feb 0.5
HUF - PMI Index Feb 35.5 38.6
EEK 8:00 Retail trade y/y Jan -9.0%
HUF 9:00 Producer prices y/y Jan 5.8%
TRY 9:00 PMI manufacturing Index Feb 29.8 32.9
CZK 9:30 PMI manufacturing Index Feb 29.5 31.5
PLN 10:00 Gross domestic product y/y 4th quarter 2.8% 2.8% 4.8%
ZAR 10:30 Unemployment % 4th quarter 23.2%

Tuesday, March 3, 2009 Period Danske Bank Consensus Previous

ZAR 10:00 PMI Index Feb 37.6 40.7
ZAR 10:00 Naamsa vehicle sales y/y Feb -35.4%
TRY 16:00 CPI y/y Feb 8.9% 8.5% 9.5%
TRY 16:00 PPI y/y Feb 6.2% 5.7% 7.9%

Wednesday, March 4, 2009 Period Danske Bank Consensus Previous

EEK 8:00 Industrial production y/y Jan -22.3% -20.7%

Thursday, March 5, 2009 Period Danske Bank Consensus Previous

Friday, March 6, 2009 Period Danske Bank Consensus Previous

RUB - CPI y/y Feb 13.1% 13.4%
EEK 8:00 CPI y/y Feb 3.8% 4.1%
HUF 9:00 Industrial production y/y Jan -23.3%
LTL 10:00 PPI y/y Feb -8.8% -4.9%
LVL 12:00 Industrial production y/y Jan -17.7% -14.2%

The editors do not guarantee the accurateness of figures, hours or dates stated above
Note that all releases are CET.

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27 FEBRUARY 2009 NEW EUROPE WEEKLY

CEE
Will a weak CZK stop further monetary easing in the Czech Republic
Czech Republic
• Despite there being a lack of economic numbers in the past week, the Czech Republic has
nevertheless been in the spotlight, mainly due to the turbulence of the Czech koruna (CZK) and the
Czech central bank’s action while defending the Czech currency against further weakening.
• Despite, the Czech economy being sounder in many ways than other foreign credit overexposed
CEE countries, unfortunately for the Czech Republic the investors do not distinguish between
those countries in which the concerns over external financing and the banks’ health are well-
founded and countries with fairly good economic fundamentals and stable banking systems. The
weakening of the Czech koruna, among other CEE currencies, went so far that the Czech central
bank (CNB) – together with the Polish, Hungarian and Romanian central banks – coordinated the
verbal intervention to support the weakening CEE currencies. The Czech central bank governor
said that the Czech koruna’s sharp drop was overdone and it is not in line the economic
fundamentals. The same view was expressed by the Polish, Hungarian and Romanian central
banks.
• To conclude, however, the CNB said that it may reverse the interest rate cycle and deliver interest
rate hike if the koruna continues to weaken. We do not, however, expect that to happen (with the
Czech economy being in recession). Nonetheless, the CNB could halt any further monetary easing
as long as the koruna remains under pressure.

The drop in Czech economic activity is sharp CZK rebounds after the verbal interventions

3
27 FEBRUARY 2009 NEW EUROPE WEEKLY

Baltic States
Industrial production: slipping into a record free-fall
Estonia
• We expect Estonian industrial production to fall further, by as much as 22.3% y/y in February from
18% y/y in January. Contraction of external demand coupled with extremely poor domestic demand
dynamics will play a major role in pushing down all the economic activities. The positive news is a sig-
nificant easing of cost pressure.

• Estonian wage growth slowed to about 7% y/y in Q4 08 from almost 15% y/y in Q3 09. We had ex-
pected to see adjustments in the economy through the labour market, mainly wages channel. The la-
bour market in all three Baltics states is more flexible compared with the Old Europe economies. How-
ever, the issue is still whether this is enough with regard to competitiveness. Over the medium term
we expect to see a continuation of wage disinflation – this is expected to be negative for 2009-10,
probably more then 5% in nominal terms.

• We expect consumer prices to decelerate further as well to 3.8% y/y in February from 4.1% y/y in
January. It looks like Estonian inflation has been decreasing at a much faster pace than we have ex-
pected and in the event of a much steeper decline in growth CPI could fall well below 2% y/y on average
in 2009.
Lithuania
• Industrial production in Lithuania fell by 5.6% y/y in January from 4.4% y/y in December. This was
a significantly better result then our forecast of a drop of 10% y/y. Industrial sector in Lithuania is
still healthier in comparison with other Baltic states. On the other hand, only energy sectors that are
in a relatively preferential situation showed a positive result while manufacturing – excluding oil
production – fell by more then 20% y/y. Thus, all risk to our GDP forecast for the 2009 is on the
downside.

• We expect industrial production prices to drop further to almost 9% y/y in January from 4.9% y/y
in December, mainly due to decline in the global oil price. PPI decelerated as well, but at slower
speed. At the end of 2008 wage growth decelerated to 8% y/y from unsustainably high figures
which were observed over the past couple of the years and we expect the continuation of this
trend further.
Latvia
• We do not expect any positive news for the Latvian economy in the coming week. On industrial
production, we expect a further decline of 17.7% y/y in February from a drop of 14.2 % y/y in
January. Labour market conditions deteriorated further, the unemployment level in Q4 08 reached
a10% level and there is a high probability of it reaching 13-15% this year.

Free falling manufacturing PPI trend

Industrial Production 30 % y/y 30
% y/y
% y/y % y/y 25 25
13 13 20 20
3 3 15 Estonia 15
Latvia
percent
percent

percent

10 10
-7 -7
5 5
-17 -17 0 0
-27 -27 -5 -5
Lithuania
00 01 02 03 04 05 06 07 08 09 -10 -10
01 02 03 04 05 06 07 08
Estonia Lithuania Latvia
Source: Reuters EcoWin Source: Reuters EcoWi

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27 FEBRUARY 2009 NEW EUROPE WEEKLY

EMEA
Will the SARB call for emergency MPC meeting?
Turkey
• Next week data on Turkish inflation in February is scheduled to be released. We expect the fast
decline in Turkish consumer price inflation to have eased a little in February and thus only expect
Turkish consumer price inflation to have declined to 8.9% y/y from 9.5% y/y in January – the con-
sensus forecast is 8.5% y/y. Furthermore, we expect Turkish producer price inflation to have de-
clined to 6.2% y/y in February from 7.9% y/y in January – the consensus forecast is 5.7% y/y. We
continue to expect further monetary easing from the Turkish central bank (TCMB) although the
decline in inflation is a little slower than previous expected.

South Africa
• Statistics South Africa released CPI inflation figures for January this week. As expected, the new
reweighted and rebased CPI index (effective from January this year), dropped further in January –
to 8.1% y/y, down from December’s 9.5% y/y albeit less than consensus expectations of 7.5% y/y.
The new CPI index uses new weightings – in particular it has less weight on food prices – one of the
main inflation drivers.
• Although inflation decelerated less than expected, given the GDP numbers for Q4 08 published
this week, which showed that the economic slowdown in South Africa is more pronounced than
expected (the economy contracted by 1.8% q/q in Q4), the possibility of an emergency Monetary
Policy Committee (MPC) meeting is still in game. While speaking this week, the South African cen-
tral bank’s Governor Tito Mboweni said that “there’s no meeting that has been called but the MPC
can meet any time” leavening the market participants guessing whether the SARB will deliver an
emergency rate cut, or whether the central bank will wait for its regular MPC meeting scheduled
for April 16.

Inflation in Turkey continue to decline Sharp drop in Q4 GDP

Source: EcoWin, Reuters

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27 FEBRUARY 2009 NEW EUROPE WEEKLY

FX update

Verbal intervention brings moderate relief into

CEE markets

At the beginning of this week the CEE currencies

CEE currencies rebounds slightly after the ver- weakening went so far that the central bank
bal interventions governors of Poland, Hungary, the Czech Republic
10 FX performance vs EUR in % since August 1, 2008 10 and Romania issued a statement that was clearly
5 5
0 0 aimed at propping up the beaten currencies of
-5 -5 the region. Intention of the verbal intervention did
-10 -10
percent

percent
-15
CZK
-15
the trick and the CEE currencies rebounded.
RON
-20 -20
RUB
-25 -25
HUF The statements from the governors were released
-30 -30
PLN separately – but were clearly coordinated all say-
-35 -35
Jan Mar May Jul Sep Nov Jan Mar ing more or less the same thing: The sell-off in the
08 09
currencies in the region recently have been over-
.

done and do not reflect fundamentals.

TRY could weaken more The currencies of the four countries all strength-
5 FX performance vs USD in % since August 1, 2008 5
0 0 ened on the back of the comments. However, it
-5 -5 was only verbal intervention, it is nonetheless a
-10 -10
-15 -15 pretty clear signal that we are beginning to see
percent

percent

-20 -20 some coordination. This should be read as being

-25 -25
-30 ZAR -30
positive for the markets in the region – at least in
TRY
-35 -35 the short term. That said we doubt that verbal in-
-40 -40
tervention is enough and the central banks in the
Aug Sep Oct Nov Dec Jan Feb Mar
08 09 .
region might need to take some other action – or
get outside help for example from the ECB. We
would therefore be looking for possible comments
RUB heading towards weak end of the band from the ECB on this issue.
25.0 25.0
27.5 Stronger RUB 27.5 The markets might try to test whether this is just
30.0 30.0 verbal intervention or whether the central banks
32.5 32.5 of the CEE will be willing, for example, to hike
percent

percent

35.0 35.0
rates to defend their currencies. We could also
37.5 37.5
Weaker RUB Basket/RUB see more direct intervention in the CEE FX in the
40.0 40.0
form of coordinated intervention and/or rate
42.5 42.5
Jan Apr Jul Oct Jan Apr Jul Oct Jan hikes. If not the markets might decided that this is
07 08 09 . only talk and nothing else and the weakening of
the CEE currencies could resume.
Source: Ecowin, Reuters – updated 26 February 2009

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27 FEBRUARY 2009 NEW EUROPE WEEKLY

FX forecasts
Currency Forecast, New Europe/EMEA
Feb - 27 , 2009 EUR USD SEK NOK DKK
Actual 1.27 - 898.4 691.4 584.4
+3m 1.24 - 887 685 601
USD
+6m 1.26 - 841 659 591
+12m 1.30 - 754 631 574
Actual 4.74 3.71 241.8 186.1 157.3
+3m 4.80 3.87 229 177 155
PLN
+6m 4.90 3.89 216 169 152
+12m 4.95 3.81 198 166 151
Actual 302.2 237.1 3.79 2.92 2.46
+3m 315 254 3.49 2.70 2.37
HUF
+6m 325 258 3.26 2.55 2.29
+12m 330 254 2.97 2.48 2.26
Actual 28.2 22.1 40.6 31.3 26.4
+3m 29.5 23.8 37.3 28.8 25.3
CZK
+6m 30.0 23.8 35.3 27.7 24.8
+12m 30.5 23.5 32.1 26.9 24.5
Actual 15.6 12.3 73.2 56.3 47.61
+3m 15.7 12.6 70.3 54.3 47.6
EEK
+6m 15.7 12.4 67.7 53.0 47.6
+12m 15.7 12.0 62.6 52.4 47.7
Actual 0.71 0.56 1614.4 1242.3 1050.1
+3m 0.70 0.56 1571 1214 1064
LVL
+6m 0.70 0.56 1514 1186 1064
+12m 0.70 0.54 1400 1171 1066
Actual 3.45 2.71 331.7 255.2 215.8
+3m 3.45 2.78 319 246 216
LTL
+6m 3.45 2.74 307 241 216
+12m 3.45 2.65 284 238 216
Actual 4.29 3.37 267.0 205.5 173.7
+3m 4.80 3.87 229 177 155
RON
+6m 5.00 3.97 212 166 149
+12m 5.10 3.92 192 161 146
Actual 1.96 1.53 585.5 450.6 380.9
+3m 1.96 1.58 563 435 381
BGN
+6m 1.96 1.55 542 425 381
+12m 1.96 1.50 501 419 382
Actual 2.16 1.69 531.1 408.7 345.5
+3m 2.25 1.81 489 378 331
TRY
+6m 2.35 1.87 451 353 317
+12m 2.40 1.85 408 342 311
Actual 45.5 35.7 25.2 19.4 16.4
+3m 50.3 40.6 21.8 16.9 14.8
RUB
+6m 53.4 42.4 19.8 15.5 13.9
+12m 57.2 44.0 17.1 14.3 13.0
Actual 10.84 8.50 105.7 81.3 68.8
+3m 11.78 9.50 93 72 63
UAH
+6m 12.60 10.00 84 66 59
+12m 13.00 10.00 75 63 57
Actual 12.65 9.92 90.6 69.7 58.9
+3m 13.64 11.00 81 62 54.6
ZAR
+6m 14.18 11.25 75 59 52.6
+12m 14.95 11.50 66 55 49.9

Source: Bloomberg and Danske research forecasts

7
27 FEBRUARY 2009 NEW EUROPE WEEKLY

Contacts

New Europe/EMEA Research

Lars Christensen, Chief Analyst +45 45 12 85 30 larch@danskebank.dk
Violeta Klyviene, Senior Baltic Analyst +370 521 56992 vkly@danskebank.com
Lars Tranberg Rasmussen, Analyst +45 45 12 85 34 laras@danskebank.dk
Stanislava Pravdova, Analyst +45 45 12 80 71 spra@danskebank.dk
Jens Nærvig Pedersen, Assistant Analyst +45 45 12 84 98 jenpe@danskebank.dk

Emerging Markets Sales, Danske Markets

Stephen A. Ryan, Head of EM Sales +45 45 14 68 98 sry@danskebank.dk
Ulf Rafstedt, Chief Dealer +45 45 14 61 43 ulra@danskebank.dk
Michael Nedergaard Larsen, Senior Dealer +45 45 14 60 78 mnl@danskebank.dk
Erik Rasmussen, Senior Dealer +45 45 14 32 47 eras@danskebank.dk

Emerging Markets Trading, Danske Markets

Frank Sandbæk Vig, Chief Dealer, FX +45 45 14 61 20 fsv@danskebank.dk
Thomas Manthorpe, Chief Dealer, Rates +45 45 14 69 68 tman@danskebank.dk
Markku Anttila, FX Trading, Russia +358 10 513 8705 markku.anttila@sampopankki.fi
Perttu Tuomi, Derivatives Trader, Russia +358 10 513 8738 perttu.tuomi@sampopankki.fi

Danske Bank Poland, Warsaw Treasury Department

Maciej Semeniuk. Treasurer +48 22 33 77 114 msem@pl.danskebank.com
Bartlomiej Dzieniecki, Senior Corporate Dealer +48 22 33 77 112 bdz@pl.danskebank.com

Danske Markets Baltics

Howard Wilkinson, Head of Baltics & Russian Sales +358 50 374 5559 howard.wilkinson@danskebank.com
Martins Strazds, Head of Latvian Sales +371 6707 2245 martins.strazds@danskebanka.lv
Giedre Geciauskiene, Head of Lithuanian Sales +370 620 89301 giedre.geciauskiene@danskebankas.lt
Lauri Palmaru, Head of Estonian Sales +372 630 2464 lauri.palmaru@sampopank.ee

ZAO Danske Bank Russia, Saint-Petersburg Treasury Department

Antti Urvas, Head of Corporate Banking & Treasury +7 812 332 73 06 antti.urvas@sampopankki.fi
Vladimir Biserov, Deputy Head of Treasury +7 812 332 73 04 vladimir.biserov@danskebank.ru
Darja Kounina, Treasury Specialist +7 812 332 73 04 darja.kounina@danskebank.ru

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27 FEBRUARY 2009 NEW EUROPE WEEKLY

Disclosure
This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank. Danske Bank is under
supervision by the Danish Financial Supervisory Authority. The author of the report is Lars Christensen, Chief Analyst

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Financial models and/or methodology used in this report

Calculations and presentations in this report are based on standard econometric tools and methodology. Documentation can be
obtained from the above named authors upon request.

Risk warning
Major risks connected with recommendations or opinions in this report, including a sensitivity analysis of relevant assumptions, are
stated throughout the text.

First date of publication

Please see the front page of this research report.

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