1. N ATIONAL B ANK SEE-5 & Turkey: Macro Challenges Paul Mylonas Chief Economist, General Manager of Strategy and Governance, National Bank Group N ATIONAL B ANK BANK OF GREECE - UNIVERSITY OF OXFORD (SEESOX) CONFERENCE ATHENS, 11 February 2011 Strategy & Economic Research Division

2. N ATIONAL B ANK A narrowing of sovereign spreads suggests that markets are more sanguine regarding economic prospects Strategy & Economic Research Division p.2 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Turkey European Periphery

3. N ATIONAL B ANK Output growth recovering weakly in SEE Strategy & Economic Research Division p.3 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

4. N ATIONAL B ANK What is the level of potential growth post crisis? Strategy & Economic Research Division p.4 SEE-5 & Turkey: Macro Challenges 2003-2008 CAGR (%, A) 2010 Growth (%, F) 2011 Growth (%, F) Potential Growth (%) 2010 Output Gap (%, E) 2009 Per capita GDP in PPS (EU27=100) Romania6.6-2.21.53.0-4.0-3.345 Bulgaria6.3-0.22.32.5-3.5-2.541 Serbia5.72.13.53.0-4.0-1.937 FYROM4.40.72.82.5-3.5-1.335 Albania6.04.45.53.5-4.5-0.527 Turkey6.010.05.03.5-4.5-0.746

5. N ATIONAL B ANK Main macroeconomic challenges Strategy & Economic Research Division p.5 SEE-5 & Turkey: Macro Challenges Balanced output growth Sufficient financing Monetary and fiscal policy nexus Progress on structural reforms

6. N ATIONAL B ANK Large external imbalances corrected rapidly … but is it permanent or temporary? Strategy & Economic Research Division p.6 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

7. N ATIONAL B ANK Exports, the main engine of growth, have recovered markedly and suggest competitive and open economies Strategy & Economic Research Division p.7 SEE-5 & Turkey: Macro Challenges Exports of G&S/GDP = 27.2% (2010E) Romania Bulgaria Serbia FYROM Albania Turkey Exports of G&S/GDP = 35.0% (2010E) Exports of G&S/GDP = 56.1% (2010E) Exports of G&S/GDP = 32.9% (2010E) Exports of G&S/GDP = 44.0% (2010E) Exports of G&S/GDP = 31.2% (2010E)

8. N ATIONAL B ANK Large output gaps reflected in high unemployment rates, creating political pressures Strategy & Economic Research Division p.8 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

9. N ATIONAL B ANK Weak recovery in output and external account correction mainly due to a shortage of external financing Strategy & Economic Research Division p.9 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

10. N ATIONAL B ANK Domestic financing also tight, reflecting both demand and supply factors Strategy & Economic Research Division p.10 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey 2002-2010 CAGR = 30.5% 2010 Loans/GDP = 43.3% 2002-2010 CAGR = 22.8% 2010 Loans/ GDP = 52.0% 2002-2010 CAGR = 31.5% 2010 Loans/GDP = 72.3% 2002-2010 CAGR = 39.3% 2010 Loans/GDP = 40.2% 2002-2010 CAGR = 36.3% 2010 Loans/GDP = 36.8% 2002-2010 CAGR = 19.3% 2010 Loans/GDP = 45.5%

11. N ATIONAL B ANK FX-denominated loans continue to be the preferred credit instrument, raising banking sector vulnerabilities Strategy & Economic Research Division p.11 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

12. N ATIONAL B ANK Indeed, non-performing loans continue to rise, lagging the recovery Strategy & Economic Research Division p.12 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

13. N ATIONAL B ANK Liquidity conditions, although improving as deposit growth is strong, remain tight Strategy & Economic Research Division p.13 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey Deposits: Dec. 10 y-o-y % change = 8.7%Deposits: Dec. 10 y-o-y % change = 18.0% Deposits: Nov. 10 y-o-y % change = 13.2% Deposits: Dec. 10 y-o-y % change = 7.0% Deposits: Dec. 10 y-o-y % change = 20.3% Deposits: Dec. 10 y-o-y % change = 13.9%

14. N ATIONAL B ANK Strong profitability buffers have kept capital ratios at high levels Strategy & Economic Research Division p.14 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

15. N ATIONAL B ANK No further room for fiscal policy support, reflecting weak initial conditions, lack of financing and credibility concerns Strategy & Economic Research Division p.15 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

16. N ATIONAL B ANK Fiscal policy has the capacity to further reduce budget deficits Strategy & Economic Research Division p.16 SEE-5 & Turkey: Macro Challenges 2009 Fiscal Deficit (% of GDP, A) 2010 Fiscal Deficit (% of GDP, E) 2011 Fiscal Deficit (% of GDP, F) 2010 Public Debt (% of GDP, E) PIT Rate (%) Corp. Tax Rate (%) VAT Rate (%) 2010 Revenue (% of GDP, E) Romania7.46.64.336.616.0 24.032.8 Bulgaria0.83.93.018.410.0 20.034.2 Serbia4.34.54.143.512.010.018.039.6 FYROM2.72.5 27.510.0 18.031.6 Albania7.43.34.259.010.0 20.025.6 Turkey5.53.53.444.015 - 3520.018.022.7

17. N ATIONAL B ANK Monetary Policy has been the main source of policy accommodation Strategy & Economic Research Division p.17 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

18. N ATIONAL B ANK MP has had to keep an eye on the exchange rate Strategy & Economic Research Division p.18 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

19. N ATIONAL B ANK Monetary policy will face the dilemma of closing a large output gap, while commodity price inflation is on the upswing Strategy & Economic Research Division p.19 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania Turkey

20. N ATIONAL B ANK Further progress on structural reforms, key to a high growth rate, stable macroeconomic and financial environment, and resilience to external shocks Strategy & Economic Research Division p.20 SEE-5 & Turkey: Macro Challenges Romania Bulgaria Serbia FYROM Albania

21. N ATIONAL B ANK EU membership process acts as a catalyst and provides a much-needed anchor for policy and reform -- efficient absorption of EU funds, another macroeconomic challenge Strategy & Economic Research Division p.21 SEE-5 & Turkey: Macro Challenges EU Membership Turkey o Candidate country o Formal opening of Accession negotiations in October 2005 Romania o Member country since January 2007 2009-2013 EU Funds = EUR 31.5bn Bulgaria o Member country since January 2007 2009-2013 EU Funds = EUR 12.8bn Serbia o Potential candidate country o Signed a Stabilisation and Association Agreement (SAA) in April 2008 o EU member States agreed to start ratification of the SAA in June 2010 o EU Foreign Ministers asked the European Commission to assess the country’s eligibility for candidacy status in October 2010 FYROM o Candidate country o Signed a SAA in April 2001 o EU Commission recommended entry talks with FYROM (14 October 2009) Albania o Potential candidate country o Signed a SAA in June 2006 o The European Commission denied Tirana the status of EU candidate in November 2010, considering that accession negotiations should start as soon as the country meets a number of key priorities

22. N ATIONAL B ANK Strategy & Economic Research Division