Transcript Kazakhstan

Kazakhstan
Business outlook 2015-18
Quarterly update – October 2015
by Dr Daniel Thorniley
Contents
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Executive summary
What execeuitievs ares aying about the market
Influencers on the eceonomy: good and bad factors
2015 sales projections
Corporate sales and profits trends
Strategic business issues
Economic outlook
Inflation and interest rate outlook
Currency outlook
Forecast table
Executive summary (1)
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Kazakhstan recovered quickly from the Great Recession and posted enviable growth in the
7-8% range while other economies through CEE were sluggish
As a market it still ranks strongly in our Survey of 23 CEE markets
It ranks No 3 as a CEE priority market for the next 3 years behind Russia and Poland
But clearly the market has lost some of its luster this year
Executives had been concerned about a devaluation on the tenge – but authorities took
the even more drastic step of introducing a free-floating exchange rate in August
The move caused a steep and rapid depreciation of the tenge and it will stay weak in the
medium term
More companies now plan to make cuts in marketing and sales as downtrading increases
and issues with receivables also deteriorate
Compared with other CIS and CEE markets, Kazakhstan has performed very well and ranks
4 the this year for the rate of sales growth outlook behind Turkey, Romania and Bulgaria
In our least Survey it ranked No 1 for overall rate of sales growth expectations for 2016
and so executives are predicting some economic and business recovery in 2016
But the situation has deteriorated since that survey, so that may be overly optimistic
Executive summary (2)
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The economy began to lose steam in 2014 on the back of low oil and copper prices
And growth will plummet this year slowed down significantly 2015 after the
deceleration last year
There are a number of reasons for the slowdown: among them, troubles in Russia and
China; lower consumer confidence and plunging private consumption; the plunge of the
tenge
But the positive side is that the authorities are willing to stimulate the economy and
Kazakhstan is doing a better job with stimulus than Russia
After rallying in the first half of this year the Russian ruble took a nosedive, which put
extreme pressure on the tenge
In August, Kazakh authorities and the National bank abandoned the currency corridor
and moved to a freely floating exchange rate
And as a result the tenge has plunged nearly 30%
Low oil prices and turbulence in Russia and other emerging markets are putting further
downward pressure on the tenge
Inflation is trending downwards as demand and consumption slow and we expect
average inflation of 5.5% this year with some upside risk and then rising by 7.2% next
year as a result of the depreciated tenge
Executive summary (3)
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Retail sales in 2015 have been their worst in 5-6 years
Industrial output dropped in August more than 6% in August after falling through the
summer
It’s the deepest contraction in industry since 2009
And business confidence has been especially weak since the beginning of the year
But the non-oil sector still ok, backed by an increase in government spending on wages
as well as
Foreign direct investment averaged $6.0bn per quarter in recent years but in 2015 is
averaging just $4.4bn per quarter
GDP will decelerate this year to 1.5% growth after 4.3% in 2014 and we think the
economy will recover moderately to 3.0% in 2016 and 4.3% in 2017 as Russia recovers,
oil prices stabilise and presuming some resolution (or frozen conflict) for eastern
Ukraine and Chinese growth at 6-7% range
But still, overall Kazakhstan remains the top or second-top CEE market for sales growth
and Western business confidence and in comparison with other markets is one of the
strongest
What executives are saying about the market
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The CIS regional manager of a major consumer products company noted last week in
Moscow that: “Kazakhstan has been one of our best CIS markets for the last 18 months
or longer. The percentage sales growth has been better than that of Russia but of
course the volume is nothing comparable. We have seen slowing sales from levels of
10-13% in tenge. This was good or better when the tenge was stable but of course the
recent devaluation cuts into our FX earnings. No one was surprised with the recent
devaluation and it’s a fact of life across the CIS. I am still reasonably hopeful that this is
a good long-term market for us. But the next 6-9 months will be softer due to the oil
price, weaker GDP and the devaluation”.
The CIS regional manager of a major US conglomerate also noted last week in Moscow:
“The devaluation has given so some clarity. We, like many others, spent much of 2015
waiting for the devaluation and Kazakh partners were constantly fudging om timing of
contracts and such like. We supply to several sectors oft the economy and have been
growing sales at 15% until spring and since then at 8-10%. I think the coming months
will not be stronger and like many others am waiting for a steady recovery in about 6-9
months”.
Influencers on the economy:
good and bad factors (1)
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There is little direct impact on Kazakhstan from the Ukraine/Russia crisis but the indirect
linkages are many: loss of confidence, weaker regional growth, less local or foreign direct
investment
• The Russia-Ukraine crisis has turned into a messy frozen conflict which will continue to
blight growth in the region and marginally in Kazakhstan until and if it is resolved
Negative factors:
1. The Ukraine conflict will impact growth across the CIS this year but less so later as the
situation normalises and as Kazakhstan continues to diversify forging closer ties with China,
Iran, the EU
2. Global economic trends such as the sluggish Eurozone, decelerating China and weak
average oil price will be the big influencers in the next 2-3 years
3. The government is pump-priming infrastructure spending but other sectors will face
budget cut-backs of up to 10% this year
4. And any future devaluation will push prices upwards and consumer spending and
confidence downwards
5. The banking sector and non-performing loans of at least 20% of the total loans remain a
drag on bank lending and there has been little improvement in the last 6-9 months
Influencers on the economy:
good and bad factors (2)
But there are at least 4 positives for Kazakhstan to suggest that the slowdown will be
moderated:
1. Kazakhstan ought to be become self-sufficient in oil from around 2017 when the
Kashagan oil field should come fully and finally on stream in that year after a false start
in 2013
2. The global economy will recover moderately in the next 2-3 years and Russia ought to
climb out of its recession
3. The authorities will ensure that they pump-prime the economy (see notes on economy
below) and the National Bank is keeping the key refinancing interest rate at low 5.5%
4. This involves the National Bank drawing from its sizeable forex reserves and the oil fund
– which together total $104bn
2015 sales projections
Latest 2015 sales projections main CIS markets (in local currencies)
Growth of 10%+
Growth of 5-10%
Growth of 1-5%
Zero growth
Decline 1-10%
Decline of 10%+
Russia
35%
20%
14%
9%
11%
9%
Ukraine
18%
8%
7%
14%
31%
22%
Kazakhstan
27%
28%
11%
23%
11%
0%
Belarus
27%
16%
11%
28%
16%
1%
Source: Business Russia/CIS Group Surveys
Corporate sales and profit trends (1)
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We conduct two Surveys of the Kazakh market: one which compares another 23 CEE
and CIS markets and one which compares it with just CIS markets
The results show Kazakhstan ranks 4th for sales growth this year and executives expect it
to be their number 1 market for sales growth in 2016
These figures relate to rate of sales growth and not volume: for most Western
manufacturers, Russia accounts for up to 85% of CIS volume
But as Ukraine collapsed earlier this year, Kazakhstan has seen its proportion of the CIS
market rise from 3-4% to up to 10% (admittedly of a now smaller CIS cake)
Given the tenge’s depreciation and turbulence in the region and other emerging
markets, the sales outlook for 2015 is relatively strong
Though it is weaker than in our previous Survey
40% of respondents forecast single-digit sales growth this year, with most of those
predicting lower-single digits
But still a solid 26% are forecasting double-digit sales this year
On the other end of the spectrum, 17% of respondents expect sales to fall in 2015 while
another 14% forecast flat sales
Corporate sales and profit trends (2)
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Profit forecasts for both 2015 and 2016 mirror very closely those of sales
For 2016 Kazakhstan rises to No 1 spot regionally for sales growth
Fully 65% of respondents aim for single-digit sales growth and these are spread evenly
over low-single and high-single digit sales
Once again more than 20% of firms plan for double-digit growth next year
Meanwhile, only 4% of respondents predict negative sales trends in 2016 with 7%
forecasting flat growth
The outlook is best for the food and beverages sector, where all companies expect to
grow this year, and healthcare and pharmaceuticals
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Consumer product companies have typically done well in Kazakhstan on the back of
ever-increasing wages, but the recent steep depreciation of the tenge and slower real
wages this year are dampening their outlook
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Companies should consider affordable innovation and less of a push of top-end
premium products
Corporate sales and profit trends (3)
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17% of CP firms predict negative sales trends and 11% look to flat sales with 50%
forecasting single-digit sales
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This still means that 22% are budgeting for double-digit sales
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As with sales forecast overall, these predictions in this sector for 2015 are somewhat
softer than those in our previous Survey
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But executives do then expect an economic rally to push sales trends faster: in the CP
sector Kazakhstan ranks No 1 in 2016 for sales growth with no companies expecting
negative or flat sales.
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A massive 69% are banking on single digits in sales growth and 31% are forecasting lowdouble digits
Corporate sales and profit trends (4)
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The IT sector is very mixed depending on sub-sector and customers, but overall last year
the vast majority of companies expected to see growth in 2015 and 2016 on the back of
some government spending plans
Industrial B2B companies as usual have the lowest expectations, in-line with regional
trends, but still Kazakhstan sticks out positively here as well: for 2015 some 52% of
respondents forecast single digits with 25% planning for low double
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This ought to rank Kazakhstan very highly for this sector in the region but the market is
weighed down by the the fact that almost 20% forecast negative sales and 6% budget
for flat sales
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Still, Kazakhstan does rank in the top 3 markets regionally for B2B firms predicting
double-digit sales
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As with other sectors, the picture improves for 2016 and Kazakhstan ranks 3rd in B2B
sales for 2016 behind Russia and Turkey
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Next year no firm in B2B plans for negative growth, only 7% forecast flat sales and once
again there is a huge clustering in single digits where a whopping 86% of respondents
expect to find themselves
Corporate sales and profit trends (5)
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After ranking 10th regionally for sales in the pharmaceuticals and health sector in our
previous survey, improvements in the Kazakhstan market and relative declines in other
markets have pushed Kazakhstan to No 1 slot for 2015 and 2016
This year, one-third of firms predict single-digit sales growth and almost the same
number expect hit the double digits
Not a single company forecasts negative sales and one quarter forecast flat sales and
The trend looks similar next year with no negative sales and 17% forecasting flat growth
and then fully 58% aiming for single digits (mostly high-single digits) and then another
quarter of firms expecting double digits
So for all sectors, business is steady to good this year with most companies planning for
an improved outlook in 2016
In comparison with most other markets, Kazakhstan remains a solid/steady market for
now
Many sectors this year and next are clustered largely in single digits but with often a
solid portion forecasting low-double digit sales
Kazakhstan
Latest forecasts: revenue and profit results by sector, 2015
From our June 2015 survey
Kazakhstan
Latest forecasts: revenue and profit results by sector, 2016
From our June 2015 survey
Strategic business issues (1)
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The operating environment is generally good by CIS standards and executives often
speak warmly of operating trends compared to neighbouring countries
Perceptions of corruption are lower than in Ukraine and companies say the amount of
red tape is less burdensome than in Russia
Given current economic and political trends, more companies will be turning to
Kazakhstan rather than Ukraine for growth prospects
For most Western companies, Kazakhstan is now a larger volume market than Ukraine
That means, for most companies it will be the biggest market in the CIS behind Russia in
2014-16
Kazakhstan ranks third (behind Russia and Poland) for companies’ hiring plans, with 17%
of companies raising headcount this year
This number is slightly down from 2014, suggesting that firms are worried about some
turbulence in the market or that they’ve already hired the staff the need
Few companies (7%) report plans to cut headcount as the market remains quite strong and
this number probably reflects churn and re-allocation of posts
Strategic business issues (2)
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Executives cite supply and demand for local or expatriate staff as one of the key
challenges they face
Some companies employ young expats who want some exotic excitement early in their
careers but the balance with experience is then hard to find
Kazakhstan ranks 6th for companies modifying their route to market (17%)
That’s down from previous Surveys but that’s probably because firms have
implemented those changes
The number of companies planning to cut their marketing and sales activity Kazakhstan
has risen from 8% some in our previous Survey 21%
That’s a reflection of the slowdown in the market
This may look a bit like knee-jerk response given that most companies do except a rally
next year
But trends in downtrading is becoming more pervasive this year. 36% of companies
report downtrading compared with 20% in our previous Survey
And similarly with receivables, now 33% report some issues compared with 19%
previously
Economic outlook (1)
GDP and growth drivers
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Kazakhstan’s economy had survived recent global and regional headwinds reasonably
well but finally succumbed to the turbulence and the drop in commodity prices this
year
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After growth of 4.3% last year, GDP will slow to just 1.5% this year and before climbing
back to 3.0% as global and regional demand recovers and the shock of the oil price
collapse is absorbed
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In 2017-2020 GDP growth will average 4.8% with some small upside risk
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A major drag has been the steep depreciation of the tenge after authorities introduced
the free-floating exchange rate in August
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It was not unexpected but many had hoped to avoid the depreciation as the rouble
rallied earlier this year until it took a nosedive, leaving Kazakh authorities with no
choice
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Further expected depreciation will dampen prospects for consumption and investment
this year and next
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But fiscal stimulus will continue despite lower revenues
Economic outlook (2)
GDP and growth drivers
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The economy would have been in a much worse state without these stimulus measures
1) Two stimulus packages are in full swing, both financed from the National Fund: in
early 2014 a 2-year program was introduced worth $5.4bn intended to support
SMEs and to buttress bank balance sheets; the second package worth a further
$3bn annually during 2015-17 is targeted at infrastructure spending (1.4% of 2014
GDP). Combined spending from both these funds in 2015 could add up to $5.7bn
which comes to almost 2.6% of GDP
2) Investment will also be aided by spending on the 2017 Expo
As a result the National Oil fund has shrunk from $77bn in August 2014 to just below
$69 billion - still a healthy supporting amount
But foreign investment (aside perhaps from China) is plummeting due to the on-going
regional turbulence and won’t pick up in the near term
FDI is down to a about $4.4bn a quarter this year compared with $6.0bn quarterly in
2013-2014
Economic outlook (3)
GDP and growth drivers
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The weak tenge will support export volumes, as happened in 2014, but again with the
low oil price we expect a significant drop in exports (in dollar terms) this year
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In US dollar terms exports exports more than 6% last year and this year they’ll fall more
than 40%
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Monthly exports averaged $6.5bn to $7.5bn in the last two years and were at the lower
end of this range in the final months of 2014. That’s dropped to between $3.3 and
$4.4bn through 2015
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The reduced oil revenues and hence why the current account will dip into sizeable
negative territory as a portion of GDP at more than 6% this year
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Imports have also slumped from their monthly average of $3.6bn in 2013-14 to just a
monthly average of $2.5bn through 2015
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It now looks as though trade will be a net negative contributing factor to GDP
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Thus the current account surplus will turn into deficit on the back of weaker trade and
softer revenues from services and investment and will remain in negative territory
through 2017
Economic outlook (4)
GDP and growth drivers
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Business confidence was holding up so far and the indicator has averaged about 10-12 in
the last year but fell to 3 in December last year
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That figure picked up through the first half of the year, peaking at 7 in July but we expect
it to drop through the year
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The danger is that poor business confidence sets in for the long-term on the back of low
oil prices, higher inflation and tenge devaluation as well as falling exports and retail sales
(butt the good news here is that inflation is decelerating at least temporarily)
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Industrial production took a nosedive in August of 6.4% from the August 2014 and that
follows a contraction in July
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It’s the sharpest drop since early 2009 and is the result of decreased activity in the mining
sector
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We expect industrial output to be fall 0.4% this year and pick up only tepidly to 1.2% next
year
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And it will be 2017 at the earliest before the massive Kashagan oil field comes on stream
(which should double output but has been beset by delays and massive cost overruns) –
until then earnings will mainly fluctuate in-line with oil prices
Economic outlook (5)
government spending
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Government budget spending is down by -7% to -9% this year
However much of the spending will be off-budget, including investments via loans
financed by the $69bn national oil fund
After the devaluation of February 2014, the government went into more stimulus mode to
combat falling growth and this is remaining as the trend as oil prices continue to slump
As the government spends more and revenues decline, then the budget deficit will widen
this year from -3% in 2014 to minus -3.3% this year and staying at about -3% for 1-2 years
Large infrastructure investment projects should benefit from the increase in government
spending, with several major transport and logistics
Targets to increase the total of the National Oil Fund will now fall by the wayside due to
low oil prices
Chinese investment will also keep pouring in – Chinese representatives signed $30bn
worth of investments last September and another $24bn in investments early this year
China is now estimated to own half of Kazakhstan’s oil assets
The government is also trying to increase the competitiveness of its state-owned
enterprises (SOEs) and Samruk Kazyna, the state holding company which manages $100bn
of SOEs, is planning to spin off certain assets and using the funds to invest in new sectors
Economic outlook (6)
consumer spending
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Consumer spending in recent years was aided by wage hikes and new bank credits
Public sector wages were hiked 10.7% in 2014 and we expect a rise of about 6-7% this year
and next in overall wages (before inflation)
Slower nominal wages will mean a reduction in real wage growth: from +3% last year to
just 1% in 2015 and 1.5% in 2016 as inflation remains sticky at 5.5% to 8.5% range
Consumer prices are now beginning to reflect the devaluation of the tenge, rising from
about 3.8% in August (the lowest level in years) to close to 4.5% in September
But overall inflation will be about 5.5% in 2015 which will have marginally positive effect on
real wages but then we expect prices to rise again next year
Under the new monetary policy regime the National Bank set an inflation target corridor of
6% to 8%
But low unemployment (about 5.2%) in recent years, healthy credit emission and
consumers eating into savings all combined in keeping retail spending at a very healthy
12% average in 2014 matching similar numbers in 2013 and 2012
That is not the case this year
Consumers are feeling the pinch of the cooled economy and this year retail sales have
been growing closer to between 2-4%
Inflation and interest rate outlook
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Just as the February 2014 devaluation pushed inflation from 4.4% in January 2014 to 7.4%
in January this year
Inflation will be down in 2015 compared to last as a result of low oil prices (Kazakhstan still
imports about one third of fuel needs, mainly from Russia), along with softer food prices
We Kazakhstan to post inflation of about 5.5% this year versus 6.6% in 2014
Weak domestic demand, slower wage increases and rising retail competition via
downtrading also add to the trend in slower inflation
But the depreciation of the tenge will push prices in 2016 and there were already signs of
that trend in September
In addition to abandoning the currency peg in August, officials also introduced a new oneday repo rate as its main monetary policy interest rate
The move was meant to keep inflation between 6% and 8% in the coming years
The interest rate was hiked from 5.5%, where it had been steady since 2012 to 12% with
immediate effect
But the interest policy changes will be slow to filter into the economy
Currency outlook
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Falling oil prices and sanctions against Russia, Kazakhstan’s main trading partner, proved to
be too much pressure on the tenge’s stability
After much speculation over another devaluation, the National Bank took an even bolder
step than expected by abandoning the currency band and moving to a free float on August
20th
The tenge lost almost 30% of its value from the previous day
In annual terms, the Kazakh currency has lost nearly 40% of its value
The move will give the tenge more flexibility as commodity prices remain low and the
economies of Russia and China continue to disappoint
Officials say the new monetary policy is intended to target inflation
In short term (over the next year) it will have the effect of boosting inflation, and have a
negative impact on consumer confidence and the country’s financial assets
However in the medium to longer term the new monetary policy will prove to be a wise
move
We expect the tenge to average about 217 versus the dollar this year compared to about
180 last year and continue to depreciate steadily from 2016 through 2018
It will likely be closer to 300 versus the dollar during that timeframe
Kazakhstan - economic outlook: statistics
GDP
Fixed investment
Industrial output
Household spending
Government spending
Real wages
Retail sales (average)
Consumer prices (average)
Budget balance (% GDP)
Current account (% GDP)
Tenge/euro (average)
Tenge/dollar (average)
Unemployment (%)
Note: Real annual % change unless stated
2012
2013
2014
2015
2016
2017
2018
5.0
3.7
0.5
11.0
13.2
6.9
14.1
5.1
-3.0
4.6
192
149
5.4
6.0
7.0
1.3
9.0
2.0
1.2
14.2
5.8
-2.5
0.0
197
152
5.2
4.3
5.0
0.2
5.6
2.6
3.0
12.0
6.8
-3.0
2.2
230
182
5.0
1.5
5.3
0.5
1.2
3.2
1.0
2.0
5.5
-3.4
-6.5
258
217
5.2
3.0
4.5
1.9
3.3
2.9
1.5
3.6
7.2
-3.1
-5.8
305
285
4.8
4.3
5.4
3.2
4.3
2.7
3.0
4.4
6.0
-3.0
-3.1
330
310
4.7
5.0
5.5
4.2
4.5
2.5
3.3
4.5
5.8
-2.8
-2.0
340
315
4.7
© 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 1, 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 DT-Global 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