CEE Weekly Bond Markets Outlook

Issue 2/2012 13 Januar 2012
LCY changes vs. EUR*
USD PLN HUF CZK TRY RON RUB -2 -1 0 1 2 3

Recommendations
Neutral: PLN T-bonds, HUF T-bonds, RON T-bonds, CZK T-bonds, TRY T-bonds

Highlights
 Poland – The current aggressive (re-)financing of the Polish sovereign on domestic and international markets is based on a strategy to place at least 25% of the annual issuance in January. The authorities are working under the assumption of another round of turmoil due to the Eurozone wobbles. Although such a cautionary strategy makes sense it may exert some upward pressure on long-term yields in the near term. This holds especially in combination with the recent wording from the NBP which expects inflation to remain stubbornly high in the months ahead. Nevertheless, we still foresee a tangible slowdown of the Polish economy and inflation dynamics going forward. Accordingly, the coming weeks may offer good opportunities for building up positions in the Polish bond market.  Hungary – We remain firm that Hungary will sign the agreement in the first quarter of the year, though we note that the road ahead will be bumpy. The EU/IMF has just toughened their stance, and their wish-list is full of sour pills for the government to take. Probably not so separately, the Commission decided to move the EDP procedure against Hungary closer to sanctioning. We expect difficulties to emerge at some point of the talks, as politically speaking many of the required measures would go against the government’s previous policies, and thus we see no easy agreement.  Czech Republic – CZK and Czech bonds are still under pressure from global risk aversion. Specifically, there are sensitive reactions to the developments in the Hungarian crisis. The global market mood will be decisive for Czech assets during the next weeks as well. The Czech government is working on preparing a budget amendment envisioning further expenditure cuts of about CZK 30 bn (0.8% of GDP) to keep the fiscal deficit unchanged amidst the worsening economic conditions. Key upcoming events and data releases

* in %, week-on-week Source: Thomson Reuters

Yield changes*
10YBUND 5Y-RON 10Y-RUB 10Y-PLN 10Y-CZK 10Y-TRY 10Y-HUF -60 -40 -20 0

* in bp, week-on-week Source: Thomson Reuters

Forecast
current* Mar-12 Jun-12 Poland PLN 1m-rate 5y bond 10y bond Hungary HUF 1m-rate 5y bond 10y bond Czech Rep. CZK 1m-rate 5y bond 10y bond Russia RUB** 1m-rate 5y bond 10y bond USD 4.45 4.6 5.2 5.8 310.2 7.2 9.1 9.1 25.6 0.6 2.3 3.4 31.6 6.1 8.1 8.5 1.28 4.45 4.6 5.0 5.8 305 7.1 8.4 8.6 25.2 0.5 2.4 3.8 32.6 6.5 8.4 9.1 1.30 4.30 4.3 4.9 5.6 300 7.1 7.8 8.0 24.7 0.5 2.1 3.4 32.6 6.4 8.3 8.9 1.32 4.15 4.1 4.5 5.3 295 7.1 7.6 7.8 24.4 0.5 2.2 3.4 31.9 6.5 8.5 9.1 1.35 Sep-12

Country 13 Jan PL RU 16 Jan CZ HR HR TR TR 18 Jan PL 20 Jan HU 21 Jan HR

Time

Indicator

Period Forecast Dec Nov Dec Dec Dec Oct Dec Dec Nov Dec 4.6 16.5 4.8 0.3 2.8 n.a. n.a. 2.4 5.3 n.a.

Range 4.5/4.7/4.9

Last 4.8

14:00 CPI, % yoy 07:00 Trade balance, USD bn 09:00 PPI, % yoy 11:00 CPI, % mom 11:00 CPI, % yoy 09:00 Unemployment rate, % 09:00 Consumer confidence 14:00 Employment, % yoy 09:00 Avg. gross wages, % yoy 11:00 Unemployment rate, %

13.1/16.0/17.4 16.9 4.4/4.7/4.8 n.a. n.a. n.a. n.a. 2.3/2.4/2.6 4.6/5.3/5.7 n.a. 5.6 0.2 2.6 8.8 91.0 2.5 6.1 17.9

* Prices as of 13 January 2012 11:05 a.m. CET; Currencies per 1 EUR, **RUB per 1 USD Source: Thomson Reuters. Raiffeisen RESEARCH

Weekly outlook

 Romania – Interbank interest rates and yields on government securities have gone down substantially since the beginning of the year following an improvement in liquidity conditions in the money market and the cut in the monetary policy rate. While yields for short-term tenors (6-months and 1-year) might still fall, on a temporary basis, in the near term, the yields for longer tenors (more than 2-years mature) should see stabilisation around their current levels.  Croatia – Yields on this week’s treasury bill auction declined for the second consecutive week. In the days to come we expect that money market rates on the shortest maturities will continue to head for the minimum levels, while longer maturities, which are rarely traded, are expected to remain stable. In view of Croatian fundamentals and high Government refinancing needs, we do not expect yields on treasury bills to continue declining much more. In our opinion, there is enough liquidity in the system, especially amidst rather poor demand for debt, so we expect good interest at further T-bills auctions.  Russia – Net private capital outflow from Russia surged from USD 33.6 bn in 2010 to an estimated USD 84.2 bn in 2011. The major reasons for capital increasingly leaving the country were choppy global markets and the Eurozone debt crisis. At the same time, the bank reported current account surplus in 2011 increased to USD 101.1 bn, up from USD 70.3 bn. Notwithstanding larger capital outflows, Russia was able to sustain positive balance of payment in 2011 thanks to the high oil price. However, risks for Russia will increase in 2012 as the global economy will be heading down for recession while larger capital outflows may challenge rouble stability.  Turkey – The recent rebound in lira assets has been supported by the narrowing C/A deficit. Compared to USD 6 bn a year ago this was the first yoy-contraction in the last 26 months. However, our first and foremost worry is the weak financing picture which leaves Turkey vulnerable to any risk event in Europe over the short term. Nevertheless, the generally good C/A news and continued strong inflows of foreign money helped TRY and LCY govies in recent days. The bond market should stabilise around current levels in the very short term, but unless there is a permanent improvement on the external markets, these levels will not last. In view of next week’s bond auctions, we would prefer a more stable international environment to enter the market.

2

13 January 2012

Weekly outlook

Local currency bonds market overview
CEE local currency bond market snapshot
13/01/2012 Maturity Coupon % Ask Price Poland PLN 2y Gov. Bond PLN 5y Gov. Bond PLN 10y Gov. Bond PLN 20y Gov. Bond 25/01/2014 25/10/2016 25/10/2021 25/04/2029 0.00 4.75 5.75 5.75 90.91 97.95 99.93 98.05 Hungary HUF 3y Gov. Bond HUF 5y Gov. Bond HUF 10y Gov. Bond HUF 15y Gov. Bond 22/08/2014 24/11/2017 24/06/2022 22/10/2028 6.75 6.75 7.00 6.75 94.06 88.31 84.45 78.77 Czech Republic CZK 2y Gov. Bond CZK 5y Gov. Bond CZK 10y Gov. Bond CZK 15y Gov. Bond 16/09/2013 26/01/2016 29/09/2021 25/05/2024 2.80 6.95 3.85 5.70 102.01 117.82 103.46 120.40 Croatia HRK 5y Gov. Bond HRK 10y Gov. Bond 15/12/2015 05/03/2020 5.25 6.75 95.70 96.00 Romania RON 3y Gov. Bond RON 5y Gov. Bond 25/10/2014 30/04/2016 6.25 6.00 98.62 96.36 Russia RUB 2y Gov. Bond RUB 5y Gov. Bond RUB 10y Gov. Bond RUB 30y Gov. Bond 16/10/2013 03/08/2016 24/11/2021 06/02/2036 6.55 6.90 8.00 6.90 100.74 96.90 93.50 89.00 Turkey TRY 2y Gov. Bond TRY 5y Gov. Bond TRY 10y Gov. Bond 04/12/2013 17/06/2015 15/01/2020 10.00 10.00 10.50 98.90 99.00 105.45 10.64 10.35 9.51 1049 953 767 1.8 2.9 5.3 6.24 7.87 7.99 8.10 609 705 615 566 1.7 3.9 7.1 10.8 6.80 7.00 654 618 2.6 3.7 6.51 7.41 569 557 3.6 6.1 1.56 2.27 3.42 3.62 141 144 158 129 1.6 3.5 8.2 9.2 9.40 9.43 9.39 9.29 914 861 755 696 2.4 4.9 7.2 9.5 4.83 5.24 5.76 5.93 467 442 391 344 2.0 4.3 7.7 10.9 YTM % Spread to Bunds; bp MDur.

Prices as of 13 January 2012 ,9:50 a.m. CET Source: Thomson Thomson Reuters, Raiffeisen RESEARCH

Bond auctions
ISIN 17 Jan-12 TR TR 19 Jan-12 PL Zero-coupon bonds n.a. 0.0% n.a. up to PLN 6 bn Zero-coupon bond Floating bond n.a. n.a. 0.0% n.a. 2013 2018 n.a. n.a. Coupon Maturity Volume

13 January 2012

3

Weekly outlook

Poland: Aggressive issuance to be on the safe side
(P)review of key economic figures/events
11 Jan-12 Monetary Policy Council meeting, % 13 Jan-12 CPI, % yoy 18 Jan-12 Employment, % yoy Jan 4.5 (Dec 4.5) Dec 4.6 (4.8) Dec 2.4 (Nov 2.5) No change as expected, "neutral" bias remains We expect a somewhat lower inflation reading in December

PLN yield curve
6.0 5.8 5.5 5.3 5.0 4.8 4.5 4.3 0 1 2 3 4 5 6 7 8 9 10 actual yields swap curve yield curve last week

Market comment
Polish financial markets had a good week. The Polish sovereign managed a successful Eurobond issuance, offering EUR 750 mn EUR-benchmark bonds maturing 2017 (reopening) at a yield of 4.1%. Poland used the window of opportunity of strong issuance from the Emerging Markets in recent weeks. Moreover, the MoF tapped domestic markets in the amount of PLN 3.47 bn. The aggressive (re-)financing is based on a strategy to place at least 25% of the annual issuance target in January. The authorities are working under the assumption of another round of financial market turmoil due to the Eurozone crisis. The positive government transactions also gave some support to EUR/PLN, which inched back closer to the 4.40 level. The rate-setting meeting on Wednesday brought no surprises. The MPC maintained its “neutral bias”. It does not seem to be worried about economic growth (at least in Q4 2011) and expects only a moderate slowdown of domestic demand going forward. The NBP governor stressed that chances for a rate cut have declined as economic prospects do look better, while the PLN weakness adds to inflationary pressure. The NBP expects CPI inflation to run at elevated levels in the months ahead. Meanwhile, Fitch said that a possible outlook change or rating upgrade may follow after the fiscal consolidation has been delivered.

Source: Thomson Reuters, Raiffeisen RESEARCH

Money market focus
MM rates
Actual Change (% wow) Forecast Mar-12 Forward rates 1m 4.55 -0.01 4.55 3m 4.79 0.00 4.60 3x6 4.86 Change (% wow) 0.02 6m 4.81 0.01 4.53 6x9 4.78 0.01 12m 4.81 0.01 4.45 9x12 4.72 0.01

Market outlook
We agree with Polish authorities that there are still a lot of downside risks with regards to the Eurozone crisis. So it’s a prudent strategy to finance as much as possible as soon as possible. However, the aggressive refinancing plans and the recent NBP wording may exert some upward pressure on long-term yields in the near term. Nevertheless, we still think that we will see a tangible slowdown in the Polish economy and inflation dynamics going forward. Accordingly, the coming weeks may offer good opportunities for building up positions in the Polish bond market. The recent strong buying activity of local banks also shows that they may become more active on the (local) bond market as local credit demand may become weaker going forward. ( Analyst: Gunter Deuber (+431 71707 5707) Bond market focus
2y Actual Change (% wow) 4.83 0.05 4.70 467.1 5.5 5y 5.24 -0.05 5.00 442.1 -8.1 10y 5.76 -0.14 5.80 391.2 -13.9 20y 5.93 -0.10 5.75 343.9 -6.1 EUR/PLN Change (% wow) USD/PLN Change (% wow)

Prices as of 13 January 2012 ,9:50 a.m. CET

EUR/PLN

Exchange rate focus
13-Jan Mar-12 Jun-12 4.41 1.7% 3.43 1.0% 3.42 3.26 3.07 4.45 4.30 Sep-12 4.15

Last: 4.3986 sell 4.3595 Target 4.2900 - 4.2300 08:55, 13.01.2012 CET The pattern looks like a bearish Wedge or it might turn out to be a Head & Shoulders, in each case a sell Source: Thomson Reuters, Raiffeisen RESEARCH

Forecast Mar-12 Spread to bunds Change (% wow)

Prices as of 13 January 2012 ,9:50 a.m. CET

Prices as of 13 January 2012 ,9:50 a.m. CET

4

13 January 2012

Weekly outlook

Hungary: Rough times
(P)review of key economic figures/events
13 Jan-12 13 Jan-12 20 Jan-12 Industrial output, % yoy CPI, % yoy Avg. gross wages Nov 3.5 (Oct 3.5) Dec 4.1 (Nov 4.3) Nov 5.3 (Oct 6.1)

HUF yield curve
11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 0 1 2 3 4 5 6 7 8 9 10 actual yields last week yield curve swap curve

Market comment
After the central bank governor met government officials on Friday at the governor’s request, PM Orbán has made a u-turn on his earlier stance and the wording became market-friendly. Ever since government communiqué has stressed that they want to agree with the IMF/EU as soon as possible, and that they are open and flexible on all points of the talks. Orbán even claimed that the government is ready to support the central bank and personally governor Simor and that they do not intend to limit central bank independence. The political shift resulted in a large reversal in Hungarian assets: HUF has appreciated almost 5% since, and long-end HGB yields sank back to single-digit zone from above 11%. Indeed, the fading over-pessimism helped the markets shrug off the negative impact of the Fitch downgrade.

Source: Thomson Reuters, Raiffeisen RESEARCH

Money market focus
MM rates
Actual Change (% wow) Forecast Mar-12 Forward rates 1m 7.23 0.10 7.1 1x2 7.92 Change (% wow) 0.38 3m 7.63 0.28 7.1 3x6 8.30 0.58 6m 7.92 0.42 7.3 6x9 8.48 0.57 12m 8.28 0.44 7.7 9x12 8.49 0.32

Market outlook
We remain firm that Hungary will sign the agreement with the IMF in the first quarter of the year, though we note that the road ahead will be bumpy. The EU/IMF has just toughened their stance, and their wish-list is full of sour pills for the government to take. Probably not so separately, the Commission decided to move the EDP procedure against Hungary closer to sanctioning. We expect difficulties to emerge at some point of the talks, as politically speaking many of the required measures would go against the government’s previous policies, and thus we see no easy agreement. Even though we expect lower yields and EUR/HUF at the end of this process, we remain cautious until the agreement shows up on the horizon. Analyst: Adam Keszeg (+36 1 484 4313)

Prices as of 13 January 2012 ,9:50 a.m. CET

EUR/HUF

Bond market focus
3y Actual Change (% wow)
Last : 308.20 Position: neutral 08:45, 13.01.2012 CET Bearishness would be confirmed by a break through the RSL at 304.00 -> 300.00- 296, however a rebound is not off odds, therefore place a stop at 310.60-> 317.10. Source: Thomson Reuters, Raiffeisen RESEARCH

Exchange rate focus
5y 9.43 -0.86 8.4 10y 9.39 -0.93 8.6 754.6 -89.4 15y 9.29 -0.99 8.6 695.5 -95.9 EUR/HUF Change (% wow) USD/HUF Change (% wow) 13-Jan Mar-12 Jun-12 309.78 3.3% 241.01 2.5% 234.6 227.3 218.5 305.0 300.0 Sep-12 295.0

9.40 -0.60 8.3 914.3

Forecast Mar-12 Spread to bunds Change (% wow)

860.9

-55.9 208.8

Prices as of 13 January 2012 ,9:50 a.m. CET

Prices as of 13 January 2012 ,9:50 a.m. CET

13 January 2012

5

Weekly outlook

Czech Republic: Statistics confirm our view on economy
(P)review of key economic figures/events
09 Jan-12 09 Jan-12 16 Jan-12 CPI, % yoy Retail trade, % yoy PPI, % yoy Dec 2.4 (Nov 2.5) Nov 0.5 (Oct 1.5) Dec 4.7 (Nov 5.6) Effect of VAT hike already priced in Positive pre-Christmas surprise Disinflation in industrial prices to continue despite

CZK yield curve
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0 1 2 3 4 5 6 7 8 9 10 actual yields last week yield curve swap curve

Market comment
Thursday’s successful auctions of Spanish and Italian treasury notes triggered a market rally from which koruna benefited too, as CZK firmed by 30 hellers from EUR/CZK 25.85 to 25.55. The statistical data released this week confirmed our view on the Czech economy: the economy is in a downturn, the consumer price level has been pushed up by the VAT hike from 10% to 14% in the lower tax bracket (about 28% of the consumer basket). Retailers had priced the new VAT rate gradually in already in October – December to avoid big price jumps in January. However, the December unemployment and November retail sales figures were little better than what we expected; particularly the unemployment rate poses a positive risk to our 2012 forecast of a GDP decline of -1.2%.

Source: Thomson Reuters, Raiffeisen RESEARCH

Market outlook
Money market focus
MM rates
Actual Change (% wow) Forecast Mar-12 Forward rates 1m 0.95 0.01 0.5 1x2 1.18 Change (% wow) 0.01 3m 1.18 0.02 0.6 3x6 1.81 0.04 6m 1.49 0.03 0.8 6x9 1.94 -0.03 12m 1.74 0.01 1.2 9x12 2.03 0.01

Prices as of 13 January 2012 ,9:50 a.m. CET

EUR/CZK

CZK and Czech bonds are still under pressure from global risk aversion. Specifically, there are sensitive reactions to the developments in the Hungarian crisis. The global market mood will be decisive for Czech assets during the next weeks as well. The Czech government is working on preparing a budget amendment envisioning further expenditure cuts of about CZK 30 bn (0.8% of GDP) to keep the fiscal deficit unchanged amidst the worsening economic conditions (the budget assumes 2.5% GDP growth rate in 2012 while the amendment works with the assumption of a GDP decline of about -0.4%). The government strategy is clear: to maintain the credibility of Czech debt by demonstrating fiscal discipline, regardless the macroeconomic costs undermining the domestic components of aggregate demand (namely private and government consumption). In our baseline scenario, we expect a 25 bp repo rate cut in Q1 2012. The main risk to this scenario is the EUR/CZK exchange rate. We stick to our HOLD recommendation for Czech government bonds. Analyst: Pavel Mertlik (+420 221 141 800)

Bond market focus
2y Actual Change (% wow)
Last: 25.513 Position: neutral 08:33 , 13.01.2012 CET The failure close by 26.000 lead to a decrease, but bearishness would be confirmed if it crossd through the RSL, sell 25.3400-> 24.97024.800, stop 26.000-> 26.200. Source: Thomson Reuters, Raiffeisen RESEARCH

Exchange rate focus
5y 2.27 -0.09 2.4 10y 3.42 -0.06 3.8 158.0 -2.3 15y 3.62 -0.04 4.2 128.5 -1.4 EUR/CZK Change (% wow) USD/CZK Change (% wow) 13-Jan Mar-12 Jun-12 25.55 0.8% 19.88 0.1% 19.4 18.7 18.1 25.2 24.7 Sep-12 24.4

1.56 0.02 1.7 140.7 3.5

Forecast Mar-12 Spread to bunds Change (% wow)

144.4 -12.4

Prices as of 13 January 2012 ,9:50 a.m. CET

Prices as of 13 January 20122 ,9:50 a.m. CET

6

13 January 2012

Weekly outlook

Croatia: T-bills yields continue to decline
(P)review of key economic figures/events
10 Jan-12 16 Jan-12 16 Jan-12 PPI, % yoy CPI, % mom CPI, % yoy Dec 5.2 (Nov 6.8) Dec 0.3 (Nov 0.2) Dec 2.8 (Nov 2.6)

HRK yield curve
8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0 1 2 3 4 5 6 7 8 9 10 actual yields last week yield curve swap curve

Market comment
Something quite unusual is happing on the domestic money market at the moment: although the central bank drained off HRK 1.5 mn with the last FX intervention, money market rates remained almost unchanged. Even the start of the new reserve requirement maintenance period passed without any significant change. Furthermore, yields on this week’s treasury bill auction declined for the second consecutive week, by between 7 and 25 bp. In a comfortable situation, where investors’ interest was huge, the Ministry of Finance accepted only those offers which meant a further lowering of yields. Investors were mostly interested in the six-month bills. This two-week decline in yields, which –accidentally or not – coincides with the first two auctions under the new Government, probably stems from the fact that banks and institutional investors still have enough funds with only a few interesting possibilities and T-bills are a reasonably safe investment with good return (3-month HRK yield at 4.4%). On the other side, the situation is pretty lethargic on the domestic bond market, with very moderate trading volumes. But, Croatian Eurobonds are under pressure due to lack of demand and probable spill-over of the negative sentiment from Hungary. In the last few days Eurobond prices fell significantly and spreads compared to benchmark securities widened.

Source: Thomson Reuters, Raiffeisen RESEARCH

Money market focus
MM rates
Actual Change (% wow) Forecast Mar-12 Forward rates 1m 1.80 -0.03 4.6 3m 4.58 -0.02 4.9 3x6 5.88 Change (% wow) -0.08 6m 5.20 -0.05 5.6 6x9 5.77 0.13 12m 5.57 0.01 6.0 9x12 5.97 0.01

Market outlook
In the days to come we expect that money market rates on the shortest maturities will continue to head for the minimum levels, while longer maturities, which are rarely traded, are expected to remain stable. In view of Croatian fundamentals and high Government refinancing needs, we do not expect yields on treasury bills to continue declining much more. In our opinion, there is enough liquidity in the system, especially amidst rather poor demand for debt, so we expect good interest at further T-bills auctions. Analysts: Ivana Juric (+385 1 61 74 349) Zrinka Zivkovic-Matijevic (+385 1 61-74338)

Prices as of 13 January 2012 ,9:50 a.m. CET

EUR/HRK

Bond market focus
2y Actual Change (% wow)
Last: 7.5430 buy 7.5440 Target 7.5640 8:36, 13.01.2012 CET The increase should continue within the bullish trendchannel, buy 7.5440 -> 7.5640, stop 7.5200 -> 7.4635. Source: Thomson Reuters, Raiffeisen RESEARCH

Exchange rate focus
5y 7.05 0.26 7.65 622.7 12.8 10y 7.41 0.13 7.75 556.8 16.4 EUR/HRK Change (% wow) USD/HRK Change (% wow) 13-Jan Mar-12 Jun-12 7.55 0.0% 5.19 0.0% 5.77 5.67 5.56 7.50 7.48 Sep-12 7.50 4.63 -1.41 6.30

Forecast Mar-12 Spread to bunds Change (% wow)

447.9

Prices as of 13 January 2012 ,9:50 a.m. CET

Prices as of 13 January 2012 ,9:50 a.m. CET

13 January 2012

7

Weekly outlook

Romania: Very good inflation data
(P)review of key economic figures/events
10 Jan-12 11 Jan-12 13 Jan-12 Industrial output, % yoy CPI, % yoy Current account balance, EUR mn Nov 3.1 (Oct 4.8) Dec 3.1 (Nov 3.4) Nov-11 -4.23 (Nov-10 -4.53)

RON yield curve
8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 0 1 2 3 4 5 6 7 8 9 10 actual yields last week yield curve swap curve

Market comment
The monthly inflation rate came in at 0.23% mom in December, slightly below our and market expectations. The annual inflation rate fell to 3.14% yoy from 3.4% yoy in November. Underlying inflation pressures remained low, while the appreciation of the leu in the second half of December was also beneficial. Looking forward, monthly inflation rates should remain at a low level in Q1. Administered prices (tariffs for electricity and natural gas) remained unchanged in January and most likely will stay that way until the end of March, while underlying inflationary pressures remain low. Increase in excises will make some contribution to the monthly inflation rate in January, but this is not worrisome. The strong statistical base effect (high monthly inflation rates in Q1 2011, low monthly inflation rates in Q1 2012) would help the annual inflation rate to decrease rapidly by March, to 2% yoy or even below. The annual inflation rate will start on an upward trend again in June due to the negative base effect, but we expect it not to breach the 4% threshold. The central bank’s forecast and market consensus are that inflation should remain below the central bank’s inflation target of 3% with a variation band of +/-1% in the next 12-18 months. The favourable inflation outlook (both in the short and medium term) creates room for the central bank to continue the prudent easing cycle. Chances that the key rate will be cut to below 5.5% in H1 (our initial target) are increasing.

Source: Thomson Reuters, Bloomberg, Raiffeisen RESEARCH

Money market focus
MM rates
Actual Change (% wow) Forecast Mar-12 Forward rates 1m 4.81 -0.46 5.0 3m 5.23 -0.50 5.3 3x6 6.40 Change (% wow) -0.12 6m 5.78 -0.31 5.3 6x9 6.07 -0.24 12m 5.97 -0.27 6.1 9x12 6.08 -0.20

Market outlook
Interbank interest rates and yields on government securities have gone down substantially since the beginning of the year following an improvement in liquidity conditions in the money market and the cut in the monetary policy rate. The speed and the amplitude of the downward move outpaced our expectations. The context was beneficial for the Finance Ministry which borrowed more than planned and at lower costs. While yields for short-term tenors (6-months and 1-year) might still fall, on a temporary basis, in the near term, the yields for longer tenors (more than 2-years mature) should see stabilisation around their current levels. Analyst: Nicolae Covrig (+40 21 306 1262) Bond market focus
2y Actual Change (% wow) 6.50 -0.15 6.50 634.5 -13.1 3y 6.80 -0.15 6.90 654.3 -23.2 5y 7.00 -0.20 7.10 617.9 -40.0 10y 7.00 -0.40 7.20 515.6 -36.4 EUR/RON Change (% wow) USD/RON Change (% wow)

Prices as of 13 January 2012 ,9:50 a.m. CET

EUR/RON

Exchange rate focus
13-Jan Mar-12 Jun-12 4.33 -0.2% 3.37 -1.0% 3.38 3.30 3.19 4.40 4.35 Sep-12 4.30

Last: 31.6180 Position: neutral 09:11,13.01.2012 CET If the RSL gets crossed through, the pattern will turn out to be a Double-Top reversal indicating a decline, sell 31.2600 -> 30.6640- 29.6410, stop 32.2300-> 32.9150. Source: Thomson Reuters, Raiffeisen RESEARCH

Forecast Mar-12 Spread to bunds Change (% wow)

Prices as of 13 January 2012 ,9:50 a.m. CET

Prices as of 13 January 2012 ,9:50 a.m. CET

8

13 January 2012

Weekly outlook

Turkey: Yield hunters shrug off weak CAD financing quality
(P)review of key economic figures/events
11 Jan-12
16 Jan-12 16 Jan-12 Current account, USD bn Unemployment, % Consumer confidence Nov 5.2 (Oct -4.2) Oct n.a. (Sep 8.8) Dec n.a. (Nov. 91.0)

First yoy contraction in 2 years; Oct. Data revised down from 4.1 Last 2 years' downward trend to come to a halt Slight deterioration expected

TRY yield curve
13.00 12.50 12.00 11.50 11.00 10.50 10.00 9.50 0 2 4 6 8 Maturity (years) actual yields yields a week ago yield curve a week ago actual yield curve 10

Market comment
From a fundamental perspective, the recent rebound in lira assets has been supported by the narrowing current account deficit (CAD). Turkey’s external gap widened to USD 5.2 bn in November 2011 which was in line with our estimation, but slightly below the consensus call. Compared to USD 6 bn a year ago, this was the first year-on-year contraction in the last 26 months. With moderately strengthening exports and slightly declining imports as well as a solid contribution from the services account (mainly tourism), the 12m rolling cumulative deficit currently stands at 10.2% of GDP. Although our baseline scenario envisages ongoing narrowing towards 8% of GDP by the end of this year, the level still remains excessively high. In addition, our first and foremost worry is the weak financing picture, which leaves Turkey vulnerable to any risk event in Europe over the short term. However, as the generally good C/A news and continued strong inflows of foreign money looking for the high yields offered by EM bonds, the local currency and government bonds extended their gains in recent days. during the preceding days, support was also provided by the central bank (TCMB) which conducted aggressive direct FX intervention to support TRY, in addition to USD selling auctions, and monetary tightening via open market operations.

Source: Thomson Reuters, Raiffeisen RESEARCH

Money market focus
MM rates
Actual Change (% wow) Forecast Mar-12 Implied forward rates 1m 11.15 0.09 10.00 1x2 3m 11.18 0.08 10.00 3x6 6m 11.20 0.10 10.00 6x9 12m 11.25 0.10 n.a. 9x12

Market outlook
The bond market should stabilise around current levels in the very short term, but unless there is a permanent improvement on the external markets, these levels will not last in our view. Also, governor Basci has already signalled that the TCMB’s goal is to fund the market at the 5.75% repo rate as soon as possible – a much looser policy than that seen over the past week – and this suggests that the current TRY levels may not be sustainable. On a very short horizon, we would not assume further rallies ahead of this month’s auctions with the 2018 floating and the new 2013 zero coupon bonds on the auction calendar next Tuesday. We expect keen demand, but would prefer a more stable international environment to enter the market. Analyst: Stephan Imre (+43 1 71707 6757)

11.05 10.92 10.71 10.42 Change (% wow) 0.03 0.12 0.11 0.07

Prices as of 13 January 2012 ,11:17 a.m. CET

EUR/TRY

Bond market focus
3m Actual
Last :2.3776 Position: neutral 09:19, 13.01.2012 CET It seems that the RSL is proving firm, therefore a pullback into the Rectangle is not excluded, buy 2.4160 ->2.4450, sell 2.3400-> 2.2630. Source: Thomson Reuters, Raiffeisen RESEARCH

Exchange rate focus
1y 2y 10.96 -0.66 11.0 5y 10.59 -0.19 10.1 EUR/TYR Change (% wow) USD/TYR Change (% wow) actual Mar-11 Jun-11 Sep-11 2.38 -1.8% 1.86 -1.4% 1.90 1.90 1.85 2.47 2.51 2.50

11.17 -0.77 n.a.

11.16 -0.81 11.5

Change (% wow) Forecast Mar-12

Prices as of 13 January 2012 11:17 a.m. CET

Prices as of 13 January 2012 ,11:17 a.m. CET

13 January 2012

9

Weekly outlook

Russia: Larger capital outflow in 2011
(P)review of key economic figures/events
13 Jan-12 Trade balance, USD bn Nov 16.5 (Oct 16.9)

RUB yield curve
9.0

Market strategy
We see the rouble holding stronger at 35.50 vs. the dual currency basket. However any further rally to 35.20 looks problematic in the absence of strongly positive market news from Europe or the USA.

8.0

7.0

Market comment
1 2 3 4 5 6 7 Duration (years) actual yields yield curve a week ago yield curve 8

6.0

Source: Thomson Reuters, Raiffeisen RESEARCH

Money market focus
MM rates
Actual Change (% wow) Forecast Mar-12 Forward rates 1m 6.21 -0.09 6.45 1x2 7.37 Change (% wow) -0.06 3m 7.17 -0.08 6.90 3x6 8.19 -0.10 6m 7.63 -0.06 7.05 6x9 n.a. n.a. 12m 8.45 -0.08 n.a. 9x12 n.a. n.a.

Prices as of 13 January 2012 ,10:14 a.m. CET

Net private capital outflow from Russia surged from USD 33.6 bn in 2010 to an estimated USD 84.2 bn in 2011. Net capital outflow accelerated especially in Q4 reaching USD 37.8 bn compared to just USD 19 bn in Q3 of 2011. Curiously enough, in the beginning of 2011 the central bank estimated capital outflows to top USD 40 bn for the whole year while the bank had to revise its estimate several times during the year. The major reasons for capital increasingly leaving the country were choppy global markets and the Eurozone debt crisis. Additionally, negative political expectations ahead of the elections may have also prompted a larger exit from Russia financial markets. At the same time, the bank reported current account surplus in 2011 increased to USD 101.1 bn, up from USD 70.3 bn. The first estimate beat analysts’ estimates and our own expectations of USD 85 bn for 2011. We attribute stronger current account result to the slowing down of import growth as opposed to robust exports. Russia international reserves added USD 31.5 bn in Jan-Nov 2011 –December data still missing – with overall FX/gold reserves climbing to USD 511 bn as of November ending. Notwithstanding larger capital outflows, Russia was able to sustain positive balance of payment in 2011 thanks to the high oil price. However, risks for Russia will increase in 2012 as the global economy will be heading down for recession while larger capital outflows may challenge rouble stability.

EUR/RUB

Market outlook
Lower inflation in 2011 at 6.1% yoy and dismal 0.1% price increase in January for the first ten days lay good ground for relaxing monetary policy in coming months. We predict that the bank will cut both REPO and deposit rates while keeping key refinance rate unchanged at 8%. Analyst: Gintaras Shlizhyus (+43 1 71707 1343) Bond market focus
1y Actual 6.30 -0.41 6.45 2y 7.14 -0.16 7.40 5y 8.13 -0.23 8.40 15y 8.83 0.00 n.a. EUR/HRK Change (% wow) USD/HRK Change (% wow)

Exchange rate focus
actual Mar-12 Jun-12 40.62 0.5% 31.63 1.5% 32.60 32.60 31.88 42.38 43.04 Sep-12 43.04

Last: 31.6180 Position: neutral 09:11,13.01.2012 CET If the RSL gets crossed through, the pattern will turn out to be a Double-Top reversal indicating a decline, sell 31.2600 -> 30.6640- 29.6410, stop 32.2300-> 32.9150. Source: Thomson Reuters, Raiffeisen RESEARCH

Change (% wow) Forecast Mar-12

Prices as of 13 January 2012 ,10:14 a.m. CET

Prices as of 13 January 2012 ,8:50 a.m. CET

10

13 January 2012

Weekly outlook

Summary: Ratings & macro data
Country ratings: CEE, SEE, CIS
S&P LCY CEE Poland Czech Hungary Slovakia * Slovenia * SEE Bulgaria Croatia Romania Serbia CIS Belarus Kazakhstan Russia Ukraine Turkey BBBB+ BBB+ B+ BBBBBBB+ BBB B+ BB negative stable stable stable positive B3 Baa2 Baa1 B2 Ba2 B3 Baa2 Baa1 B2 Ba2 negative stable stable negative positive nr BBB+ BBB B BB+ nr BBB BBB B BB+ positive positive stable stable BBB BBBBB+ BB BBB BBBBB+ BB stable negative stable stable Baa2 Baa3 Baa3 nr Baa2 Baa3 Baa3 nr stable stable stable BBB BBB BBB BBBBBBBBBBBBBstable negative stable stable A AA BB+ A+ AAAAABB+ A+ AAstable stable negative negative negative A2 A1 Ba1 A1 A1 A2 A1 Ba1 A1 A1 stable stable negative stable negative A AABBB A+ AAAA+ BBBA+ AAstable stable negative stable negative FCY Outlook LCY Moody's FCY Outlook LCY Fitch FCY Outlook

*Eurozone (Euro currency) members Source: rating agencies websites

Main macro data & forecasts*
Country Year GDP, % avg. yoy 3.8 3.9 2.2 1.3 1.5 -2.0 2.7 1.9 -1.2 -1.9 2.5 0.5 -1.2 0.5 -1.0 4.0 3.8 3.2 8.9 8.0 1.5 CPI, Unem% avg. ployment, yoy % 2.6 4.2 2.5 4.9 4.0 5.0 1.5 1.9 2.6 6.1 5.9 3.5 1.1 2.3 2.0 6.9 8.6 6.2 8.6 6.4 9.5 12.1 12.4 12.4 11.2 11.1 11.7 9.0 8.6 9.0 7.6 5.3 5.0 17.4 18.0 18.5 7.2 6.7 7.0 11.7 10.0 10.5 Nominal wages, EUR 808 822 809 735 759 745 947 995 1021 452 470 481 1054 1048 1062 538 600 625 366 342 340 Fiscal balance, % GDP -7.9 -5.4 -5.0 -4.2 0.0 -3.5 -4.8 -4.3 -4.9 -6.9 -4.6 -3.0 -4.9 -5.5 -4.5 -4.1 0.5 -1.5 -3.7 -1.5 -3.0 Public debt, % GDP 53.4 55.9 56.5 81.0 74.6 77.2 37.6 40.3 44.8 31.0 32.9 34.1 41.2 45.0 52.4 9.4 10.2 12.0 45.9 41.2 40.6 Export**, % GDP 34.5 36.2 37.5 73.5 79.7 83.5 63.9 68.8 67.6 30.6 33.9 35.9 19.8 20.3 20.5 26.4 29.4 27.5 16.5 18.4 21.3 C/A, % GDP -4.1 -3.9 -4.0 1.1 0.9 1.3 -3.1 -1.8 -2.9 -4.1 -3.8 -4.0 -1.1 -0.5 0.0 6.1 4.8 2.3 -6.6 -9.9 -8.3 Ext. debt, % GDP 66.4 70.1 76.0 139.4 133.9 139.1 47.8 45.9 47.3 75.8 74.1 75.7 101.3 102.6 104.1 32.8 33.3 32.8 39.1 45.3 45.1 FXR*** % ext. debt 29.7 30.0 29.8 24.9 25.8 27.0 44.8 41.2 41.4 35.1 32.7 30.4 22.9 24.5 24.8 92.8 94.5 84.7 27.9 25.5 20.3 Import cover, months 6.5 6.5 6.8 6.1 5.7 6.1 4.1 3.5 3.6 9.0 7.6 6.9 8.5 9.4 9.9 22.6 19.6 17.2 5.4 4.6 3.3

Poland

2010 2011e 2012f

Hungary

2010 2011e 2012f

Czech Rep.

2010 2011e 2012f

Romania

2010 2011e 2012f

Croatia

2010 2011e 2012f

Russia

2010 2011e 2012f

Turkey

2010 2011e 2012f

* only for countries included in CEE bond market weekly (under revision), ** Export of Goods only, *** FXR - Foreign exchange reserves Source: Thomson Financial Datastream, National Statistics

13 January 2012

11

Weekly outlook Raiffeisen Bank International AG
Raiffeisen Bank International AG, Vienna Global Markets Raiffeisen Bank International London Branch
Sales: Lorna Robertson Head: Nicolaus Hagleitner Tel: +43 1 71707 1467 Head of International Sales: Luca Scalzini Tel: +43 1 71707 3981 Head FI Sales (AUT/GE/LIE): Hans Rettl Tel: +43 1 71707 3300 Corporate Sales: Wolfgang Kalinka Tel: +43 1 71707 3959 Tel: +44 20 7933 8113

Raiffeisen Centrobank AG, Vienna Equity Capital Markets
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Belgrade: Raiffeisenbank a.d. Serbia
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Tel: +381 11 2207 131

Prague: Raiffeisenbank a.s.
Treasury: Vit Brdlik Sales: Michal Michalov

Bratislava: Tatra banka, a.s.

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Pristina: Raiffeisen Bank Kosovo JSC
Treasury: Berat Isa

Tel: +381 38 226400 129 Tel: +387 33 287 144 Tel +387 33 287 127 Tel. +65 6305 6108

Bucharest: Raiffeisen Bank S.A.

Sarajevo: Raiffeisen BANK d.d. Bosna i Hercegovina
Treasury: Lejla Kurtovic Sales: Haris Mustafic

Budapest: Raiffeisen Bank Zrt.

Raiffeisen International Bank Singapore Branch
Sales: Thomas Neidhardt

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Treasury: Evelina Miltenova Treasury: Joan Canaj

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Tel: +359 2 91985 441

Maribor: Raiffeisen banka d.d. Slovenia Minsk: Priorbank JSC Belarus
Treasury: Andrey Filazafivich Sales: Arsen Manoukian

Tirana: Raiffeisen Bank Sh.a. Albania Warsaw: Raiffeisen Bank Polska S.A.

Tel: +355 42 275 510 1122 Tel: +48 22 585 26 00 Tel: +48 22 585 26 26 Tel: +385 1 46 95 076

Tel: +375 17 289 9312 Tel: +7 495 721 9978

Treasury: Miroslaw Winiarczyk Sales: Adam Pers Treasury: Ivan Zizic

Moscow: ZAO Raiffeisenbank Austria

Zagreb: Raiffeisenbank Austria d.d.

Editor:

Raiffeisen RESEARCH GmbH A-1030 Vienna, Am Stadtpark 9 Tel.: +43 1 717 07-1521 This report was completed on 13 January 2012.

Head of Raiffeisen RESEARCH:
Peter Brezinschek (1517)

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