1. Impact of economic crises on CEE economies ERES Industry Seminar UniCredit Bank Slovakia Jan Toth Chief Economist 26 March 2010

2. 2  Key Western European markets  Price pressures vs. economic cycle  Interest rates  Soft indicators Global pictures

3. 3 Zdroj: Eurostat (2008) % z HDP Openness of the economy (export+import as % of GDP) Slovakia is extremely small open economy, depended on foreign demand

4. 4 Economic growth in European biggest economies Germany in deepest recession (share of industry is the biggest)

5. 5 Cash for clunkers – mostly gone by 1H10

6. 6 (Core) inflationary pressures should remain low Eurozone Core CPI vs. Output Gap Less important energy and food prices could increase. Source: Capital Economics

7. 7 Broader Money does not grow despite printing press Source: Capital Economics

8. 8 Short-term interest rates, forecasts ECB - Later to cut rates, later to increase rates Source: UniCredit

9. 9 Long-term interest rates in eurozone German 10-yr government bonds, yield curve should become less steep Source: UniCredit

10. 10 “Soft” indicators point to stronger 2Q10 Eurozone (esp. Germany) enjoys industrial production revival Source: Capital Economics

11. 11 Slovak example - zoomed on recent data

12. 12 “Soft” indicators point to still low levels of stocks compared to orders The ratio signals that “recovery” is not over yet Source: UniCredit

13. 13  Living standards  Growth forecasts and investments  Euro adoption had negative short-term impact  Polish and Hungarian labour force cheap vis-à-vis neighbours  Recession was the deepest in Slovakia, but recovery swift  Large fiscal deficits could push tax rates higher after elections CEE economies

14. 14 Living standards in historical perspective ( EU15=100% ) Living standards catch-up stalled during global crisis Source: Eurostat. February 2010.

15. 15 CEE growth Poland was best off in 2009 due to smaller export share

16. 16 Czech Republic - Y-o-YCzech Republic - 2008=1 Slovakia - Y-o-YSlovakia - 2008=1 CE4 growth and investments – Czech R & Slovakia

17. 17 Poland - Y-o-YPoland - 2008=1 Hungary - Y-o-YHungary - 2008=1 CE4 growth and investments – Poland & Hungary

18. 18 Interest rate premium ( vs. German government, 10 yrs, in % ) Slovakia benefits due to euro adoption, but Czech R is close second

19. 19 Hourly (total) labour costs in manufacturing (EUR) Note: Labour costs include all costs borne by an employer. CE exports mainly consist of industrial goods. The average annual increase for CE costs was 8.5% in 1996-2006 period while it was 3% for EU15 and 1.7% for Germany. Source: 1996 -2008 is EUROSTAT data, the rest is an estimate. The latest data based on present exchange rates. 19962008Mar-10% of CE4 avg% of EU15 avg Czech Republic2.68,68,9119,129,9 Hungary2.77,06,890,822,8 Poland2.77,06,789,222,4 Slovakia2.37,37,5100,925,3 CE4 average2.67,5 100,025,1 Old EU15 avg.19.429,429,728,9100,0 Germany24.832,732,633,1109,8 Slovakia got sharply more expensive in relative terms

20. 20 % premium/discount to CE4 average Slovakia cannot react to slowdown via exchange rate, becomes more expensive

21. 21 Industry (manufacturing, s.a., July 2008 = 100) Slovakia was hit the hardest, but stronger recovery Source: Eurostat, UniCredit calculation

22. 22 Construction (sept 2008 = 100, seas. adjusted, 3M MA) Slovakia was the most hit, Hungary 2nd worst Source: Eurostat, UniCredit calculation

23. 23 Real estate construction (sept 2008 = 100, seas. adjusted, 3M MA) Slovakia and Hungary was the most hit Source: Eurostat, UniCredit calculation

24. 24 Construction - survey on current orders (s.a.) Orders still very low Source: Eurostat

25. 25 Retail sales (w/o cars, 2008 average = 100) Slovakia was hit the hardest, 10% below average 2008 level Source: Eurostat, UniCredit calculation

26. 26 GDP output (pre-crisis level 100%, quarterly development, s.a.) Slovakia was the most hit, but strongly rebounds Source: Eurostat

27. 27 Unemployment (an increase since the start of the crisis, s.a.) Slovakia was the most hit Source: Eurostat

28. 28 EUR race, no quick euro candidate in CE3 Source: UniCredit, Barclays Pre-euro ERMII entryEuro adoption date Slovakia2H05-20082009 Estonia2004-20102011 Latvia2004-20132014 Lithuania2004-20132014 BulgariaCurrency board to 20132014 Hungary2012-20142015 Poland2013-20152016 Czech Republic2015-20172018 Slovak neighbors will continue to have floating exchange rate

29. 29  Faced with a short-term deflationary/disinflationary environment, global corporations will lack pricing power and will have to work aggressively on costs to support the bottom line. This will continue to have important implications for CEE markets that have benefited from off-shoring.  In terms of the geographic location of production such pressures could end up producing more not less off-shoring  Potential threat: due to high fiscal deficit numbers, taxes could be increased in the future On-going hope for CEE

30. 30 Contacts  Jaroslav HaboLarge and multinationals Tel: +421 2 4950 4319 E-mail: jaroslav.habo@unicreditgroup.skjaroslav.habo@unicreditgroup.sk  František DoležalMid segment Tel: +421 2 4950 2272 E-mail: frantisek.dolezal@unicreditgroup.sk  Marian Burian SME clients Tel: +421 2 4950 3207 E-mail: marian.burian@unicreditgroup.skmarian.burian@unicreditgroup.sk  Margita Slaninková Real Estate Financing Tel: +421 2 4950 2271 E-mail: greta.slaninkova@unicreditgroup.skgreta.slaninkova@unicreditgroup.sk  Ján Tóth Research Tel: +421 2 4950 2267 E-mail: jan.toth@unicreditgroup.skjan.toth@unicreditgroup.sk  David Derenik Research – Real Estate Tel: +421 2 4950 2368 E-mail: david.derenik@unicreditgroup.skdavid.derenik@unicreditgroup.sk