Transcript Belarus

Belarus
Business outlook 2015-18
Quarterly update – July 2015
by Dr Daniel Thorniley
Contents
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Executive summary
Update on Russia-Ukraine crisis and impact on Belarus
Features of business
Business Outlook
Economic outlook
Forecast table
Executive summary (1)
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Belarus, like other CIS markets, has been contaminated by the Russian-Ukrainian crisis
The economy has been double-hit with the fall in oil prices as much Belarus export
revenue comes from oil products
The commercial links with the Russian economy are still very close
As a consequence the Belarus rouble slumped at the turn of 2014/2015 and collapsed
about 25% and has sunk further since then
Temporary emergency measures were introduced and then later rescinded
The base interest rate was jacked up to 25% on 8 January and rates will stay high as long
as an inflationary threat remains in place
After some relative stability the Belarus rouble started to fall again in May and it was at a
level we predicted in our last quarterly report
The economy was hardly buoyant in 2012-2014 and negative drivers ensure a mild
recession in 2015 which is our prediction with GDP at -1.6% with some downside risk
The World Bank forecasts -3.5% this year but this looks like a worst case but is not
impossible
Executive summary (2)
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We think enough Russian and Chinese financial support ought to prevent this worst
case
But we underline that risks are to the downside in our own estimates
Executives, as in other CIS markets, report worsening trends with downtrading, as real
wages have decelerated, and with receivables as local customers come under more
pressure
Neither feature is yet at crisis levels though
It seems the country is/was unable to avoid the Russian/Ukrainian contamination which
has filtered through via the exchange rate
Note: quite a few of the major Belarus economic indicators have swung sharply from
highs and lows within recent calendar years and so the average figures cited here do
not always reflect what was roller-coaster annual calendar period
For example retail sales year-on-year in January 2011 were + 22% and zero in November
2011 while in autumn 2014 retail sales were rising 5% but then zero in December of the
same year. Other indicators such as real wages perform similarly
Executive summary (3)
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And the industrial output roller-coaster is in full swing: posting negative numbers in
2013, positive by 2% in 2014 but sharply down this year averaging -7%
After the 25-30% devaluation at the turn of the year, companies are faced with a similar
situation as in Russia and Azerbaijan and less so than in Ukraine
The currency slump was exacerbated by previous cuts to interest rates in 2011-13 which
were designed to support consumer credit
The market was often a mixed one or a roller-coaster one for many western companies
and remains so
With recessions in Russia and Ukraine, executives had turned to other CIS markets for
growth options and until the start of this year, Belarus offered some potential for small
compensation
But even here the market is getting tough and this is reflected in the Survey results
below
As with other markets executives predict some business pick-up in 2016
Executive summary (4)
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Only 15% of companies are now forecasting rouble sales above 10% this year and if the
currency stays down by 15-25%, then the large majority of companies will see declining
FX sales in the market this year
Currently 36% of executives forecast negative sales this year with another 17%
expecting flat sales
On the upside Belarus will continue to benefit from some “transit trade” as exporters
look to avoid Russian sanctions, while it will keep receiving cheap oil from Russia as it
tries to “keep Belarus on side”. But the uncertainty around sanctions together with
falling demand from Russia and Ukraine will have an equally if not larger impact on
trade and the currency in 2015
But so far this year such transit trade has not compensated for the overall deceleration
Companies will plan for increased volatility and uncertainty
Executives are talking about more cash management and taking more care and
attention with receivables
Executive summary (5)
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2014 benefitted from a better harvest, reasonable exports and still positive (but
softening) retail growth and an industrial bounce-back in the early autumn
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However, the government has now stopped its usual policy of hiking wages in times of
crises and with inflation still around 17%, real wages are actually now falling
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After finishing quite well last year at 2% growth, industrial output this year will be minus 7% while investment will be flat at best after a fall of -8% last year
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Risks to investment are clearly to the downside and also looks set to fall this year by -7%
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The economy may benefit from some import substitution which could appear more this
year as the Belarus rouble weakens further
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But export and imports both crashed at the start of 2015 with exports having slowed
already for several months but in spring 2015 we note some recovery
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Inflation, despite the recent currency fall, stabilised this spring and actually decelerated
to 14% in May; we now expect inflation to average 16% in 2015 and again next year
Update on Russia-Ukraine crisis and
impact on Belarus (1)
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The main impact is now via the exchange rate: the Belarus rouble is playing inevitable
catch-up with the collapsed Russian rouble and general weak economic outlook
surrounding Belarus
The fall in the Belarus rouble looked more inevitable after the 25% decline of the Azeri
manat
The Russia-Ukraine crisis looks likely to become a messy frozen conflict which will
continue to impact business in Belarus in 2015 and the after-effects will still be felt in
2016
However we continue to see low risk of political contagion (about 11% of the population
identify themselves as Russian). Belarus is still trying to play the neutral card, for example,
hosting the recent ceasefire talks between Moscow and Kiev
The next presidential elections are scheduled for November 2015 but we are unlikely to
see change
Update on Russia-Ukraine crisis and
impact on Belarus (2)
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The crisis ought to benefit transit trade as companies try to avoid Russian sanctions, as
well as better energy prices from Russia, which remains keen to keep Belarus “on side”
But there will still be quite a bit of downside in the form of weak exports to these two
important markets (Russia and the Eurozone) compounding already weak economic
fundamentals (currency, foreign debt, inflation, fiscal strain, falling real wages – see
later)
But just as the Russian currency and economy may be showing signs of stabilisation, so
too the Eurozone displays some signs of improvement which could in turn buttress
Belarus trade and exports: so while the East and West did look very weak just 3 months
ago, there are signs of at least marginal support now
Features of business (1)
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For corporates operating in Belarus, any bounce-back from the 2011-12 currency crisis
has now faded and companies see Belarus very much as a single-digit growth market
As we predicted 6 months ago, those companies who planned double-digit growth this
year will be more challenged to achieve those numbers now
It is a market where executives are not focusing much corporate investment in the way
of resources owing to continued concerns about long-term viability
Yes, companies have looked at alternatives to the Russian market but recent trends
across the CIS and in Belarus show that there are no easy compensations for a slower
Russia
Russia still accounts for 75%-85% of sales revenues within the CIS for most companies
and Belarus usually only accounts for1% to 1.5% while Kazakhstan represents 4-9% of
CIS business
Some companies may be looking to increase their presence while others will be
consolidating and pulling back. Some companies will try to benefit from leverage in light
of developments within the Customs Union and the Eurasian Economic Union
Features of business (2)
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It could be that companies are downsizing their distribution activities or changing the
numbers of distributors owing to the Customs Union, while equally some may be trying
to upscale as an alternative to Russia
In general though this is a mixed market where some companies will be pulling back as
others investigate openings
Due to its market size (9.5m), Belarus does not rank as a priority for most multinational
companies (but surprisingly (?) about 8% of MNCs see it is a mid-term priority among
CEE markets, according to our latest, June 2015 Survey)
Fewer companies (10%) than one year ago (20%) are now reviewing their route-tomarket which suggests that companies addressed this mostly earlier last year
The amount of companies reporting downtrading as a feature has leapt in the last 6
months from (18%) of respondents to 45% in June which ranks Belarus as No 3 in this
category behind only Russia and Ukraine
Features of business (3)
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Only about 3% of firms are planning to hire, mainly for local rep offices or small
subsidiaries – few are looking at larger investments owing to economic uncertainty
As with Kazakhstan and other CIS markets, the situation with receivables has
deteriorated with now 34% of firms referring to this as an issue compared with only
14% some 6 months ago. There is some increasing risk that payments and cash
management will become marginally more challenging and it is something to monitor
without yet being a serious threat
Business outlook (1)
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As the MD of one of the world’s top-10 consumer goods companies commented last
quarter and his remarks remain highly relevant:
“It’s been a mixed market for us in recent years, sometimes up 8-15% and then low-singles or
flat on a weakening currency. But the Russian crisis has started to impact and we sense this in
consumer confidence and spending patterns. I do not predict a major crash this year but we
have had to reforecast for a negative trend versus our budget which was set last autumn. But
as you know, in recent days the strong Russian rouble may turn some of this around but how
quickly or if at all are still questions. All our CIS markets are now uncertain and that includes
Belarus. We have started to examine more some of the smaller central Asian markets through
distributors”
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The local MD of a European conglomerate reported last week that:
“Our CIS management in Moscow and our European boss have looked at Belarus as “a small
little earner to compensate a tiny bit for Russia and Ukraine. We have been able to raise sales
in the last year by 10% but we were lucky in that several local customers had good access to
finances. Since the start of the year with increased currency volatility, sales growth is down to
3-4% but if we get some stability, I think we can grow 7-8% this year on a small volume with
ok profits”.
Business outlook (2)
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We conduct two Surveys of the Belarus market: one which compares another 23 CEE and
CIS markets and the charts and figures below refer to the most recent June 2015 Survey
We underline that these figure refer to the rate of sales growth and not the volume of
business
For 2015 fully 36% predict negative sales growth which puts the market towards the
bottom of our Survey table at No 19
Another 17% look to flat sales this year while 30% estimate single digit sales
Some 17% expect to obtain double digit growth this year
The outlook for overall sales improves quite a bit in corporate budgets for 2016 and
Belarus rises to No 8 (from 19) in our rankings
Next year those predicting negative sales fall to just 7% with 20% estimating flat sales
As in other markets there is a solid clustering in single digits next year with 54% of
companies planning for such numbers and almost 20% forecast low-double digit recovery
The rate of Belarus rouble depreciation will define whether these results turn out to be
not so bad in FX terms or very weak ; given the Belarus rouble is down about 50% on one
year ago and 10% on January versus the US dollar, then most FX results will be either
weak or possibly worse if any further deterioration occurs
Business outlook (3)
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Given that budgets were set in September/October for 2015, most companies will be
reforecasting their targets downwards
Companies are also cautious about profit growth in Belarus owing to high inflation as well
as a typically small level of resources dedicated to the mark
Consumer goods companies are adapting to a changing and volatile market and this is
reflected in wide spread of forecast for this year: some 27% of companies forecast negative
sales and with falls of more than 10%
Almost 20% predict flat sales and 28% forecast single digit sales
But another 25% of firms budget for double digit sales this year
Such figures rank Belarus No 12 (mid-table) in the region for the rate of sales’ growth in B2C
Given weaker wages, a mild recession, falling confidence and downtrading, we think the
targets above for 2015 could be a stretch, especially for those companies aiming for doubledigit growth and we did highlight this risk in our last quarterly report
Next year there is more clustering “in the middle”: 13% plan for negative sales but less deep
than in 2015; fully 38% predict flat sales and almost have aim for single digits spread evenly
over low and high-single digits
SO CP companies are not planning for any solid bounce-back next year, just steady
consolidation
Business outlook (4)
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As usual, the B2B sector is expected to perform weakly as financing remains an issue and
cross border trade softens and the currency could come under more pressure
Fully 42% of firms in this sector predict negative growth this year, one fight predict flat sales
with the remaining 28% looking for single digit sales
Some companies, as in Ukraine, report that some local companies do have access to “grey
funds” or some off-shore FX funds or are generating cash though exports and can finance
purchases from their cash-flow, but this is a minority clearly
Most companies trade eastwards and denominate their business in a shrinking (Russian)
rouble and such companies may soon be benefitting from the Russian rouble revival
In 2016 there is some consolidation in this sector with 30% planning flat sales and almost
50% aiming for single digits with few forecasting negative of double digits
For pharmaceutical and health companies sales are spread widely and wildly (!): 45%
forecast negative trends, 20% see flat sales, 18% look to low-single digits and 17% predict
high double-digit sales
Next year, once again there is clustering around flat sales (19%) and with fully 63%
budgeting for single digit growth
Much will depend on whether firms are selling to government or “across-the-counter”
retail and the latter tends to perform better these days across markets as governments
tighten the purse strings
Belarus
Latest forecasts: revenue and profit results by sector, 2015
From our June 2015 survey
Belarus
Latest forecasts: revenue and profit results by sector, 2016
From our June 2015 survey
Economic outlook (1)
GDP and growth drivers
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Opening note: quite few of the major Belarus economic indicators have swung sharply
within recent calendar years and so the average figures cited here do not always reflect
what may have been a roller-coaster calendar year
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As we predicted in our last two quarterly reports, the risks for the GDP outlook this year
were all to the downside and that has taking place
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The economy stuttered along at 1.4% growth in 2014, after a weak number in 2013
(0.9%)
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The first quarter 2015 results reflects this with the quarter down on this 2014
equivalent by minus -2.1% and was mostly due to weak industrial output at -7.3% which
was not compensated by increases in agriculture, retail sales and construction
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But even retail sales started to soften further in the second quarter (see below)
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Given regional pressures and a slow Eurozone (until start of 2015), the 2014 figures
were not bad but with the depreciating currency and mixed news out of Russia, we
expect a small recession this year of minus -1.6% (close to the consensus view) and with
some possible downside risk to -2.5% (while the World Bank predicts – 3.5%)
Economic outlook (2)
investment, industry and trade
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GDP is then expected to average around 2% or slightly higher in subsequent years with
some chance of a stronger bounce-back to 3%+ if the Russian economy rallies better
than expected
The on-going recovery in the Eurozone will allow for some trade switching to that
market helped by the weaker rouble and improving relations with the West thanks to
acting as an intermediary in the Minsk talks)
But the industrial output roller-coaster is in full swing: posting negative numbers in
2013, positive by 2% in 2014 but sharply down this year averaging -7%
Industrial output was as bad as -10.3% in march and still -8.7% in May
We predict an average fall this year of -7% with a slow recovery next year
These trends underline the tough environment for B2B firms operating in Belarus
Exports averaged $3.6bn per month in 2012-13 and averaged $3.2bn monthly in most
of 2014 but on falling scale to $2.7bn in December. But the year-end turmoil took its
toll: exports crashed to just $2.3bn average in the earlier months but have rallied a bit
to $2.5bn in May
Economic outlook (3)
investment, industry and trade
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Imports saw a similar picture at an average last year of $3.3bn per month and this was
maintained to the end of the year but then imports too slumped by 50% through the
first half of 2015
Repeated devaluations in recent years have prompted large agricultural and industrial
exporters to price in US dollars and the rising dollar will help them this year as will
lower energy prices
We will see in the coming months whether traders can bounce back quickly from the
devaluation effects and the news in the first 5 months of the year is mixed with some
mild positives
Belarussian firms (75-80% of which are still in state ownership) remain unproductive
and Belarus is still reliant on cheap Russian oil and loans
On-going Russian loans form part of the deal struck when Russia bailed out Belarus
from its currency crisis in 2011 – in return Belarus is supposed to sell a number of state
assets to Russia, but many of these sales are now in doubt amid worries about the
impact of sanctions on any businesses with Russian ties
Economic outlook (4)
investment, industry and trade
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Construction activity was still negative through most of 2014 at -6% but at the turn
of the year construction and investment figures surged according to official data as
new housing construction rose by more than 20% and this is still in double figures
in May
This also contradicts the sharp downward trend seen in fixed investment: this fell
by -8% last year and after an upward spurt in January, fixed investment is now
running at -10% in May
Productivity, though low, has also improved thanks to the weaker currency and
less rampant wage growth, and Belarus is starting to attract some investment
interest that may perhaps have gone to Russia (particularly from China)
But we still think investment will disappoint this year at an average of -7% before
recovering by 1.8% in 2016
Economic outlook (5)
household consumption and wages
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Nominal wages rose 40% (16% in real terms) in 2013 but during 2014 nominal wages only
matched the 18% inflation level which entailed that real wages were exactly zero
The government has responded to the current crisis with a together fiscals response and
thus public wages are no longer matching inflation and local companies are following the
CIS trend of paying average wages below inflation
Thus each month this year real wages have been negative by -4.5% and we expect the
average for the year to be close to -4.0%, one of the very worst figures in recent years
This is certainly a major factor why downtrading is increasing and we note that consumer
product companies need to manage expectations downwards and look at more value
products
Retail sales were surging at the start of 2014 averaging 12.5% growth in the first quarter of
that year but had slumped to just 0.4% in December averaging 8% for the whole year.
At the start of 2015 retail sales held up at 4.7% in January but then slowed to 1.2% in
February and since then have trending weak at -0.4% in April and back up to +1.0% in May.
Retail sales could slow to about an average of 1% growth this year before recovering to
2.5% next year and getting close to 3% growth in subsequent years
Officially unemployment is artificially low at 1-2% as the government and public sector
companies hold on to employees
But real unemployment is probably creeping up against this weakening backdrop
Economic outlook (6)
budget and external accounts
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Government spending was quite tight last year but we expect pre-election spending this
year ahead of October presidential elections and we could see the budget deficit
increase from +0.1% in 2014 to -3.4% this year
Russia has agreed to relieve Belarus of proposed oil duties from 2015, and it will
doubtless keep providing cheap oil in return for political support or at least neutrality
vis a vis Ukraine and the EU
Export and import weakness will probably balance out this year but with imports down
more than exports and thus we see the trade balance improving marginally along with
the current account deficit decreasing from -8.0% last year to about -3.7% this year
We do not expect the need or desire for any IMF funding and a $1bn Eurobond is likely
to be postponed until 2016
Russia will disburse another $760mn this year from existing facilities and to roll over
existing debt by approving another $3bn credit; China has also approved up to $3.5bn
of credits linked to industrial, mining and infrastructure projects
Government debt is rising on the back of Russia financing – it is now about 39% of GDP
and Belarus spends 10% of GDP servicing its debts
Such assistance is needed when FX reserves shrank to a mere $2.86bn in march which
was just one month import coverage
Inflation outlook
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After rising just over 18% in both 2013 and 2014, inflation ought to average 16% this
year level which is the consensus outlook
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Inflation averaged 16% in the first quarter 2015 and then dipped to 13.7% in May
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Food and transport price increases are currently ranging between 15-18% as an
annualised average while utility prices are at a higher end of +26%
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This moderation/stabilisation in inflation comes despite the currency collapse at the
start of the year followed by a further dip this late spring
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This control over inflation is due to some government fiscal tightening and weaker
demand, softer wages and downtrading in the market as well as lower energy prices
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Nearly all will depend on the strength/weakness of the currency and intended
government spending in 2015 (an election year)
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Bank credits were rising at 7% last year but in this more depressed climate we except
new bank credit emission to stay close to zero or even dip into negative territory
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Looking forward over the next 2-3 years we see some downside and upside risks (no
further energy spike but still soft domestic demand) with inflation averaging again 16%
in 2016 and at 15% in 2017
Currency outlook (1)
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During last December and January the Belarus rouble started to fall and by April had
slumped about 25-28% versus the US dollar
In mid-December the National Bank introduced emergency measures including a 30% tax
on foreign currency purchases and temporarily banned “over the counter” foreign
currency purchases. However, these measures were then rescinded, a few weeks later
The key refinancing rate was bumped up (for the first time since 2011) to 25% with
immediate effect and this is likely to stay at his level until the rouble and inflation start to
show better trends
In spring the rouble again came under pressure and shrank from 14,000 in mid-May to
15.380 in mid-July
It is now in the average range for this year which we predicted some 4-6 months ago
Presuming that there is stabilisation in eastern Ukraine and that the Russian rouble
stabilises close to current levels, then the Belarus rouble ought to mange some relative
stability for the rest of this year, especially with tight fiscal policy and with inflation under
control
The currency could then again come under downward pressure, along with most other
emerging markets, currencies when the US federal reserve raise interest rates towards the
end of his year
Currency outlook (2)
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For reference the National bank of Belarus has posted the following record of the
exchange rate versus the US dollar and Euro which shows the extent of the recent
currency collapse (in thousand roubles)
1 December 2014
8 January 2015
13 January 2015
8 February 2015
31 May 2015
14 July 2015
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US dollar
10.81
12.80
14.00
15.30
14.85
15.38
Euro
13.47
15.30
16.50
17.10
16.33
16.90
We do presume that at whatever rate the Belarus settles this year, it will then
depreciate at an annual average rate of about 3-6% in subsequent years again
presuming stabilisation in Russia and Ukraine
The Belarus rouble has already achieved some degree of competitiveness but further
steady depreciations at these levels would probably benefit the growth outlook without
damaging inflation too much
Economic forecast table 2012 - 2018
GDP
Fixed investment
Industrial output
Household spending
Government spending
Real wages
Retail sales
Consumer prices (average)
Budget balance (% GDP)
Current account (% GDP)
Rouble/euro (average)*
Rouble/dollar (average)*
2012
1.5
-9.8
5.9
7.8
-1.0
22.0
14.0
59.2
0.5
-6.1
10,762
8,336
2013
0.9
7.5
-6.0
14.3
-2.5
15.8
18.2
18.3
0.2
-10.2
11,834
8,971
2014
1.6
-8.0
4.0
2.0
-0.5
0.0
8.0
18.1
-0.5
-8.0
13,800
10,300
2015
2016
2017
2018
-1.6
1.0
1.9
2.6
-7.0
2.8
3.4
4.2
-7.0
1.8
3.1
3.3
-0.5
2.0
2.5
2.9
2.6
0.5
1.0
1.5
-4.0
1.3
2.4
2.6
1.0
2.5
2.9
3.2
16.0
16.0
15.0
12.8
-3.4
-2.8
-1.8
-1.7
-3.7
-3.5
-4.2
-4.1
17.200 17,400 18,000 18,700
15,700 16.400 17.200 17,900
Note: Real annual % change unless stated
*base-case, see our earlier notes on depreciation/devaluation risks
Disclaimer
© 2015 CEEMEA Business Group*
*a joint venture between
DT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,
Company registration: FN 331137t
and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, Austria
Company registration: FN 331082k
Source: DT-Global Business Consulting GmbH and CEEMEA Business Group research
Basic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey,
governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by DTGlobal Business Consulting GmbH and CEEMEA Business Group.
This material is provided for information purposes only. It is not a recommendation or advice of any investment or
commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any commercial losses incurred by
any party acting on information in these materials.
Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbH
M: +43 676 534 6852 / E: [email protected] / W: www.ceemeabusinessgroup.com