Transcript Diapositiva 1

Press briefing
Debora Revoltella – CEE Chief Economist, UniCredit Group
Andrzej Bratkowski – Chief Economist, Bank Pekao SA
Warsaw, 6 June 2008
CEE: weathering the international storm
Debora Revoltella – CEE Chief Economist
CEE Economic Research
EXECUTIVE SUMMARY

A new international environment, with lower US and European growth, higher uncertainty and
volatility and a general repricing of risk. In CEE, the growth cycle has peaked in 2006–2007, but
usual drivers still hold. Most countries were however relying on external savings to finance growth
and, in the context of a general repricing of risk, this might lead to some deceleration in credit
expansion

On the overall, we believe the CEE can cope with the challenge, but risks and costs are increasing

We still recognize opportunities in the residential real estate sector, even if moderation is on the
cards. The residential real estate sector is still characterized by a gap in supply. As income and
living standards improve, demand for residential real estate is strong. 2 out of 10 households plan
to buy an house in the next 10 years, mostly as an house to live in. Affordability levels have been
reducing and demand for house purchase is still mostly linked to the emerging middle class
segment or to high net worth individuals. This means that, on top of the existing demand, there
might be a "potential demand" at the moment constrained by affordability issues

Increases in house prices have been significant in the last years. We still believe that house prices
in the region are compatible with an equilibrium level, although there might be out-of-equilibrium
trends in some sub-segments

Looking ahead, there are however a few areas to monitor which might exhibit some oversupply –
i.e. the holiday home sector in Bulgaria, or some imbalances in capital cities such as Bucharest.
The bursting bubble in Kazakhstan should be the a warning signal for the region.
Agenda
Facing the international challenge
Central Europe
South Eastern Europe and the Baltics
Broader Europe countries
Residential Real Estate
Slow recovery at the international level, with 2009 to be another
gloomy year
 Oil prices moderate only
marginally, as well as food
prices – inflationary pressures
remain a key policy constrain
 Growth in the US to recover
only moderately in 2009, with
the FED starting a tightening
cycle
 Growth in the Eurozone
moderating further, forcing the
ECB to start an easing cycle,
despite strong concerns for
inflation
 The dollar marginally
strengthening against the
Euro
Source: UniCredit Group CEE Research Network
Repricing of risk highlights local vulnerabilities in CEE
Repricing of risk – 5Y CDS Spread1
External unbalances
Current Account Deficit vs FDI over GDP
(% 2007)
CA deficit/GDP
FDI/GDP
30
25
Central Europe
150
10
86
127
15
5
33
46
26
13
82
101
146
191
212
20
SEE&Baltics
Broader Europe
0
Note: 1\ CE: Hungary, Czech Rep., Slovakia, Poland; SEE & Baltics: Croatia, Bulgaria, Romania, Serbia, Latvia; Broader Europe: Russia,
Kazakhstan, Ukraine, Turkey; 2\ Latest available data: 30/05/2008
Source: UniCredit Group CEE Research Network, Bloomberg
RU
UA
SI
CZ
PL
HU
TK
SK
KZ
HR
BH
-10
LT
2
RO
Current
SRB
31/03/2008
EE
31/12/2007
LV
29/12/2006
BG
-5
Repricing of risk at the international level to affect the banking
industry in CEE, with some possible credit squeeze
Sensitivity to a credit squeeze1
150
change in cost of risk
LV
LT
UA
RO
BG
100
KZ
SRB
EE
TK
HU
HR
50
CZ
RU
PL
SK
0
0
10
20
30
Banking sector dependency on foreign funding
Banks Loans/GDP 2007
1\ Change in cost of risk is delta 5Y CDS May 2008 – Dec 2006; Banking sector dependency on foreign funding is calculated as
external liabilities minus external assets, divided by banks total assets, as of Dec 2007
Source: UniCredit Group CEE Research Network, Bloomberg
So far the CEE region not immune, but still showing good
economic resilience
Growth rates of real GDP
(based on not seasonally adjusted data)1
Economic growth in 2008
Strong slowdown
Stagnation
Real Estate shock
Note: 1\ Based on seasonally adjusted data for Portugal
Source: UniCredit Group CEE Research Network, Bloomberg, Eurostat
Resilient economy
Q4 2007
Q1 2008
Slovakia
14.3
8.7
Lithuania
8.0
6.9
Ukraine
7.4
6.0
Kazakhstan
5.6
6.0
Czech Rep.
6.6
5.4
Latvia
8.0
3.6
Hungary
0.8
1.6
Estonia
4.8
0.4
Greece
3.6
3.6
Austria
3.0
3.5
Netherlands
4.5
3.1
Spain
3.5
2.7
France
2.2
2.2
Belgium
2.4
2.1
Germany
1.6
1.8
Portugal
1.8
0.9
Italy
-0.4
0.4
Agenda
Facing the international challenge
Central Europe
South Eastern Europe and the Baltics
Broader Europe countries
Residential Real Estate
A cyclical slowdown expected in 2008, with domestic demand
remaining the main driver and inflationary pressures strong
 GDP growth to decelerate to 4.7% in 2008
in Central Europe, after the 6% peak
reached in 2006/2007
Real GDP
(% yoy)
11
9
7
5
3
1
-1
2005
2006
2007
2008f
Poland
Hungary
Slovakia
Slovenia
2009f
2010f
Czech Rep.
Inflation
(% yoy)
2007
2008f
2009f
2010f
Poland
2.5
4.6
2.6
2.3
Czech R.
2.8
6.7
3.2
2.7
Slovakia
2.8
4.3
4.4
3.7
Hungary
8.0
6.0
3.6
3.1
Slovenia
3.6
6.4
3.8
2.7
Source: UniCredit Group CEE Research Network
 Hungary to recover this year, after the
bottom touched in 2007, due to the
austerity package implemented by the
government (Q1 2008 GDP growth: 1.6%
vs 0.8% Q4 2007)
 Investment expenditure, despite
moderating, continues to support
economic growth all over the region
 Personal consumption, slightly subdued in
2008 because of higher interest rates and
high inflation, will again gain momentum in
2009 and 2010
 Net exports to have positive contribution
to GDP growth by 2010 as the global
economy accelerates again
 Tightened fiscal policies curb government
expenditure, but 2010 is an election year
(2011 in Poland)
Strong growth and rising inflation lead to monetary policy
tightening, with markets betting on an even tighter stance
Poland
Czech Republic
Reference rate, eop.
May-07
Aug-07
Nov-07
Feb-08
May-08
May-07
Slovakia
Aug-07
Nov-07
Feb-08
May-08
2007
Current1
2008f
2009f
2010f
HU
7.50
8.50
7.50
6.50
5.25
PL
5.00
5.75
6.25
5.00
4.75
SK
4.25
4.25
3.50
3.00
3.25
CZ
3.50
3.75
3.75
4.00
4.00
Hungary
 Reference rates to further
increase in Poland during
the summer period
May-07
Aug-07
Nov-07
Feb-08
May-08
May-07
Aug-07
Reference
Rate
Note: 1\ Latest available data: 30/05/2008
Source: UniCredit Group CEE Research Network, Bloomberg
Nov-07
Interbank
Rate
Feb-08
May-08
 The National Bank of
Hungary, after raising
interest rates by 100 bps
since March, expected to
come back to 7.50% by
year end
After Slovenia joining the EMU in 2007, only Slovakia is outrunning
 After Slovenia joined the EMU in Jan. 2007, Slovakia is the only country in Central Europe that will join
Euro zone in the next months.
o The European Commission recommended, in early May 2008, accession of Slovakia to Eurozone.
Thus, the process got the most important “green light” and moved to the final phase. The
European Parliament, the Ecofin (3rd June) and the European Council (consisting of prime
ministers and presidents of the EU – 19th - 20th June) have to take a stand of the EC
recommendation. Euro adoption will be finally confirmed by the Ecofin on July, 8th. By this date,
the convergence rate will be also determined
o On May 29th, the central rate of the Slovak koruna in the ERM II has been revalued by 17.6% and
set at 30.1260 versus euro, on ongoing improvements in underlying fundamentals
 No EMU accession data set for Poland, Czech Republic and Hungary yet
 We foresee 2012 as the first possible EMU entry date for Poland, while for the Czech Republic and
Hungary 2013 looks more likely
Source: UniCredit Group CEE Research Network
Agenda
Facing the international challenge
Central Europe
South Eastern Europe and the Baltics
Broader Europe countries
Residential Real Estate
The Baltics are now facing a pronounced slow-down, with some
cooling on the cards also in SEE
Real GDP Growth (% yoy)
 A pronounced slow-down in the
Baltics, with lowering capital
inflows, reduced credit growth
and cooling real estate markets
12
8
4
0
2005
2006
Baltics
2007
2008
RO&BG
2009
HR
2010
SRB&BH
 SEE countries still show good
dynamics, with lively
consumption and a booming
investment activity
Main drivers of GDP growth (% avg 2008-2010)
14.1
11.2
7.1
10.4
7.5
4.4
Lithuania
Latvia
6.0
2.9
4.6
4.1
Estonia
Investment
Romania
Bulgaria
Consumption
Source: UniCredit Group CEE Research Network
 Further cooling is anticipated in
the Baltics, with growth to
bottom out between 2008 and
2009 in Estonia and Latvia,
respectively
5.9
4.1
Croatia
 Tighter liquidity conditions in the
context of high external
disequilibria are however
expected to drive some
slowdown
Some potential credit squeeze, which in some cases works in line
with Central Banks aspirations
Sensitivity to a credit squeeze1
Total loans
(% yoy growth)2
80%
change in cost of risk
LV
LT
150
60%
KZ
UA
RO
BG
100
Romania
Batlics
SRB
EE
TK
40%
Bulgaria
HU
Bosnia
HR
50
RU
CZ
20%
PL
SK
Croatia
Serbia
0
0
10
20
30
M
ar
-0
8
-0
7
D
ec
Se
p07
Ju
n07
M
ar
-0
7
D
ec
Banking sector dependency on foreign funding
-0
6
0%
Banks Loans/GDP 2007
1\ Change in cost of risk is delta 5Y CDS May 2008 – Dec 2006; Banking sector dependency on foreign funding is calculated as external liabilities minus
external assets, divided by banks total assets, as of Dec 2007; 2\ Total loans include general govt, non-financial corporations and retail and where available
NPISHs and Non-MFIs
Source: UniCredit Group CEE Research Network, Bloomberg
Agenda
Facing the international challenge
Central Europe
South Eastern Europe and the Baltics
Broader Europe countries
Residential Real Estate
Strong growth but booming inflation
Inflation (CPI, yoy %, April)
GDP Growth
CPI > 12%
%, real
9,6
7,4
7,4
6,2
5,7
4,9
5,2
Turkey
Ukraine
avg 2006-07
Russia
avg 2008-10
Source: UniCredit CEE Research
6,2
Kazakstan
12% > CPI > 7%
7% > CPI > 4%
Some credit squeeze
Banking sector dependency on foreign funding
(Ext. Liabilities – Ext. Assets)/Tot. Assets (%)
Lending Growth
(Monthly, yoy)
80%
30%
2003
2007
23%
60%
19%
16%
9%
20%
8
ar
-0
M
08
nJa
7
l-0
ov
-0
7
N
Kazakhstan
p07
Russia
Se
Ukraine
Ja
Turkey
n-
07
0%
Ju
0%
ay
2%
M
1%
7
4%
-0
7
Russia
Turkey
Ukraine
6%
ar
-0
10%
40%
M
20%
 Banks need of foreign funding and strong increase in the of cost of risk point to a significant
vulnerability of the Kazakh banking sector. The global liquidity crunch has translated into
stalled credit growth
 Some funding problems might emerge, most probably affecting only a few players, with no
systemic consequences, in Russia. For Ukraine refinancing costs have increased but the large
share of foreign ownership should protect the banking sector from a sever downturn.
 While remaining very sensitive to capital market volatility, Turkey is relatively less likely to face
constraints to lending growth; however the tighter monetary policy will have some effects
Source: UniCredit Group CEE Research Network
Agenda
Facing a new global environment
Central Europe
South Eastern Europe and the Baltics
Broader Europe countries
Residential Real Estate
The transition process throughout the region resulted in very high
home ownership rates, still in the context of a gap in supply
Home ownership in CEE and Western Europe1,2,3
Dwelling stock per ‘000 inhabitants1,4
435
441
444
471
486
Czech Rep.
Croatia
Latvia
Estonia
Bulgaria
472
424
Hungary
EU
408
Ukraine
413
395
Lithuania
CEE
381
338
Poland
Romania
323
EU
Slovakia
96
Romania
77
92
Croatia
CEE
91
Bulgaria
64
91
74
Slovakia
Lithuania
71
Latvia
87
68
Estonia
Hungary
67
Russia
59
Poland
Czech Rep.
47
17
27
Cooperative
 The privatization in the early 1990s led to widespread private ownership, with around
77% of the housing stock being currently owner-occupied vs 64% in the older EU states
 Still the CEE region residential market is characterized by an housing gap
Notes: 1\ EU: AT, DK, FI, FR, IT, NL and ES; last available Census for EU countries; 2\ Data as of 2001 for BG, CZ, HR, LV, LT and SK; as of 2005 for HU
and RUS; as of 2006 for EST, PL and RO; 3\ Calculated as ratio between owner-occupied dwellings over total occupied dwellings measures in physical units,
except for Russia (sqm); 4\ As of 2001 for LT, 2006 for BG, HR, EST, LV, PL, RO and UKR and as of 2007 for CZ, HU and SK
Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland), UNECE
Construction activity has been strong in the last years, especially in
the capital cities and urban areas, but well below western standards
Dwelling unit completion per ‘000 inhabitants1,2
IRELAN
20
Average 2000-2004
Column 2
Average 2005-2007
15
SPA
10
E
3,9
1,6
4,0
2,7 3,4
1,2
2,8
Ukraine
1,4 1,8
Slovakia
2,4 2,8
Russia
1,3 1,8
3,9
Romania
2,2
2,8
Poland
0,5
1,4
2,9 3,2
Lithuania
Estonia
Czech Rep.
Croatia
0
Bulgaria
3,2 3,7
Latvia
0,9
4,7
Hungary
5
11.1
n.a.
7.1
12.9
11.5
n.a.
6.9
n.a.
% of dwellings built after 19903
7.2
8.8
8.3
5.3
Notes: 1\ EU proxy including AT, DK, FI, FR, IE, IT, NL and ES; 2\ BG, HR and RUS (no. of apartments): 2000-2006; 3\Census data (last available year)
Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)
The housing gap is enhanced when quality standards are considered
Average usable area per dwelling1,2
Average number of rooms per dwelling1,2
4,2
87
3,2
 The communist regime left the CEE region with a unique housing stock of relatively
recent, but often rundown homes
 Quality and maintenance issues are particularly relevant in some CIS countries
 In Central European countries, like Hungary and the Czech Republic, quality
standards are much more similar to western ones
Notes:1\ EU proxy including AT, DK, FI, FR, IT, NL and ES; 2\ EU: Census data (last available year). As of 2001 for BG, CZ, HR, LV, LT and SK;
as of 2005 for RUS and UKR, as of 2006 for EST, HU, PL and RO
Sources: UniCredit Group CEE Research Network, Department of the Heritage and Local Government (Ireland)
EU
CEE
Poland
Estonia
2,8
Slovakia
Croatia
Bulgaria
Czech Rep.
Romania
Hungary
Lithuania
Latvia
EU
CEE
Hungary
Ukraine
2,8 2,8
2,6 2,6 2,7
2,5
2,3 2,4
63
Croatia
Czech Rep.
Bulgaria
Poland
Lithuania
Romania
Estonia
Latvia
Slovakia
Ukraine
Russia
50
64
59 61 62
55 55 56
70
3,6 3,7
74 76 77
Survey data show strong potential demand, mostly as primary house
General likelihood to buy new house/flat (%)1,2
Yes in next 3 yrs
6
9
6
6
7
9
8
6
5
5
Avg
SI
CZ
5
8
Yes in next 10 yrs
7
4
HU
Maybe after 10 yrs
5
7
10
 2 out of 10
households
intend to buy
real estate
property
8
6
7
7
9
11
7
7
4
5
SK
HR
PL
RUS
RO
5
8
7
6
4
4
SRB
BG
4
5
5
3
2
7
BIH UKR
General likelihood to buy new house/flat, by purposes1,2,3
2
4
5
4
6
4
2
1
5
1
5
4
2
0
4
88
86
91
90
94
Avg
SI
CZ
HU
SK
Main place to live
3
8
8
2
1
0
5
4
96
91
81
HR
PL
RUS
Investment (to rent)
7
4
6
0
3
9
1
6
7
3
6
3
1
7
4
82
87
86
88
88
SRB BG
BIH
RO
Secondary house
UKR
Other
 9 out of 10
potential buyers
are seeking for
an house to live
in
 Some rising
demand
associated to
investment or
vacation
purposes,
particularly in
Croatia,
Bulgaria and
Romania
Notes:1\ Survey involving 1,000 individuals (more than 2,000 in RUS) aged >15 and living in the largest cities of the country; all interviews
were conducted as personal face-to-face interviews by Bank Austria’s long term partner agencies (GfK, RmPlus, TNS); 2\Countries are
ranked by level of per capita GDP; 3\ Sample represented only by those willing to buy new house/flat
Sources: UniCredit Group CEE Research Network, Bank Austria Market Research.
Growth in house prices has been persistently high, …
Residential property prices in the enlarged Europe
(yearly average increases 2002-2007)1,2
Notes:1\ Growth rates calculated in local currency (nominal terms). All data used are from NCBs and local Statistical Offices and refer to non-harmonised national
sources, thus any comparison on the dynamic of house prices across countries should be taken with care; 2\ BE, DE, IT: 2002-2005; NL, PT, LV, LT: 2002-2006.
House prices for Latvia and Ukraine refer to capital cities
Sources: UniCredit Group CEE Research Network based on National Statistical Offices, NCBs, Department of the Environment Heritage and local Government
(Ireland)
…still no major deviations from equilibrium trends
Ratio of real estate prices over
equilibrium prices in 20072,3,4
Real estate prices, country avarage
(EUR per sqm)1,3
1.104
Slovakia
1.605
Russia
Lithuania
Latvia
Hungary
Estonia
Czech Rep.
Croatia
Bulgaria
Russia
430
2.177
Romania
Poland
Slovakia
418
Romania
407
1.968
766
952
366
1.372
461
1.009
527
1.404
433
787
393
1.693
1.129
558
167
0
500
1.000
2002
Poland
Lithuania
Latvia
Hungary
Estonia
Czech R.
Croatia
Bulgaria
1.500
2.000
2.500
3.000
0
20
40
60
80
2007
Notes: 1\ LV, LT: 2006; 2\ LV, LT, RUS: 2006; 3\ Prices for Latvia refer to Riga suburbs, while for Romania to Bucharest; 4\ Equilibrium house
prices are calculated based on out-of-sample estimation by regressing house prices (expressed in real terms) on GDP per capita in PPS and
mortgage rates using Eurozone countries as a benchmark
Source: UniCredit Group CEE Economic Research Network
100
120
Housing investment affordability has significantly decreased over
the last years
1,9
2,5
France
Italy
4,8
Ukraine
Finland 0,6
4,1
Russia
0,5
3,2
Latvia
Austria
2,8
Poland
7,0
2,6
Bulgaria
Romania
2,5
1,9
Estonia
Kazakhstan
1,9
Slovakia
Lithuania 2,1
1,8
Croatia
Hungary 1,4
Czech R. 1,0
Affordability Index (2007)1,2
Affordability of housing investment3
(percentage of households over total)
48,0
10,0
3,3
 Low affordability implies that
in many countries demand
for house purchases
remains mostly related to
the emerging middle class
segment or to high net worth
individuals
Bulgaria
13,0
Romania
14,5
Czech R.
Hungary
Croatia
Slovakia
16,3
Poland
50,6
 Over the last years, growth
in real estate property prices
much higher than in wages
resulting in a sharp
deterioration in housing
affordability
Notes: 1\ The affordability index is calculated as house prices (€ per sqm)/ average gross monthly wages; 2\ As of 2006 for Latvia, Lithuania and Ukraine; 2005 for
Italy, Finland and Austria and as of 2003 for France. Prices for old EU Countries (except Finland), Latvia and Romania refer to the capital cities; 3\ Share estimated
using an affordability index benchmark of 2 (measured as house prices per sqm over gross monthly wages) and official statistics on households’ income distribution
Sources: UniCredit Group CEE Research Network, Department of the Environment Heritage and Local Government (Ireland)
Gap in supply matched to continuously lively demand to remain a
clear driver for long term sustainability
 Bulgaria: more selection to come on the holiday
home segment
Years to saturation1
 Croatia: monetary tightening is expected to slow
otherwise solid growth
32
 Czech Republic: no housing bubble on the
horizon (yet)
26
 Hungary: some oversupply, but no evidence of
price bubble
21
19
17
14
13
 Kazakhstan: bubbles do burst
14
 Poland: first signs of stabilization, but housing gap
remains
11
Ukraine
Slovakia
Russia
Romania
Poland
Hungary
Czech R.
Croatia
Bulgaria
 Romania: some cooling but still with high potential
in the mid term
 Slovakia: still healthy growth potential on the
horizon
 Turkey: still a market for few people
 Ukraine: untapped potential in the medium-high
segment, with some cooling on the luxury one
Note: 1\The number of years before saturation in the residential property market is calculated as the ratio between the estimated market potential (total
number of households willing to buy a new house/flat) and the current level of construction activity (based on last available data) under the extreme
assumption that all potential buyers will look for new housing
Sources: UniCredit Group CEE Research Network, Eurostat
EXECUTIVE SUMMARY

A new international environment, with lower US and European growth, higher uncertainty and
volatility and a general repricing of risk. In CEE, the growth cycle has peaked in 2006–2007, but
usual drivers still hold. Most countries were however relying on external savings to finance growth
and, in the context of a general repricing of risk, this might lead to some deceleration in credit
expansion

On the overall, we believe the CEE can cope with the challenge, but risks and costs are increasing

We recognize still opportunities in the residential real estate sector, even if moderation is on the
cards. The residential real estate sector is still characterized by a gap in supply. As income and
living standards improve, demand for residential real estate is strong. 2 out of 10 households plan
to buy an house in the next 10 years, mostly as an house to live in. Affordability levels have been
reducing and demand for house purchase is still mostly linked to the emerging middle class
segment or to high net worth individuals. This means that, on top of the existing demand, there
might be a "potential demand" at the moment constrained by affordability issues

Increases in house prices have been significant in the last years. We still believe that house prices
in the region are compatible with an equilibrium level, although there might be out-of-equilibrium
trends in some sub-segments

Looking ahead, There are however a few areas to monitor which might exhibit some oversupply –
i.e. the holiday home sector in Bulgaria, or some imbalances in capital cities such as Bucharest.
The bursting bubble is Kazakhstan should be the warning signal for the region
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