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Morgan Stanley - Macro Monitor _Party Over_

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					 May 31, 2013

 CEEMEA

                                                                                                                                    MORGAN STANLEY RESEARCH
 CEEMEA Economics
 Macro Monitor (Party Over?)                                                                                                        CEEMEA Economics Team
                                                                                                                                    Morgan Stanley & Co. International plc

 Highlights
                                                                                                                                    Tevfik Aksoy 
 This week’s highlight was the continuation of the volatility that started last week in the wake of the Fed’s announcement on       +44 (0) 20 7677-6917
 potential tapering off and eventual exit from QE. Our markets were hit hard (both rates and FX), and our strategy
 colleagues note that the sell-off in fixed income has taken yields 70-80bp higher in Hungary, Turkey and South Africa since        Pasquale Diana 
 Bernanke’s testimony. This has almost erased (or in some cases reversed) the fall in yields seen since the BoJ’s more              +44 (0) 20 7677-4183
 aggressive-than-expected policy announcement in early April. The question now from a macro and policy standpoint is
 whether this will have an impact on policy-makers. After all, we have argued for a long time that the abundant liquidity and       Michael Kafe 
                                                                                                                                    +27 11 587-0981
 risk appetite were an important driver of monetary easing. Will central banks remain unfazed by this abrupt change in
 liquidity conditions?                                                                                                              Andrea Masia 
 In Turkey, our view is that the CBT will at this stage not be overly concerned by the FX weakness we have seen (though             RMB Morgan Stanley (Proprietary) Limited
 Governor Basci indicated today that the CBT may take some short-term tightening measures if needed), but at the very               +27 11 282-1593
 least it will refrain from more monetary easing, in line with our view following the last rate cut. In South Africa, the SARB is   Jacob Nell 
 unlikely to respond to ZAR weakness unless it is convinced that the move will result in a sustained breach of target or a          OOO Morgan Stanley Bank
 sharp rise in core CPI. Elsewhere, in Hungary the NBH cut rates to 4.50% this week and signalled that more is on the way.          +7 495 287-2134
 While the NBH has historically been very influenced by the risk picture, the recent changes in NBH leadership and the clear
 desire to lower funding costs are probably too strong at this stage for the NBH to stop the easing cycle. In Poland, we            Alina Slyusarchuk 
 expect a poor GDP print and continued softness in CPI to trigger more easing, as early as next Wednesday (25bp cut).               +44 (0) 20 7677-6869
 However, we would not be surprised to see some reference to recent market weakness and potential financial instability as
 reasons to tread cautiously, but at this stage we think that weak macro data will trump financial stability concerns.
 Elsewhere, in this Macro Monitor we look in detail at the Russian consumer, and lay out a case for a robust outlook in
 2013 and beyond, on the back of the tight labour market, falling inflation and looser policy. We also look at Hungary and
 the consequences of the recent successful exit from the EDP, while in South Africa, we analyse the weaker-than-expected
 1Q GDP release and conclude that it is not enough to revise our view on unchanged interest rates going forward. We also
 look at the recent rate moves in Israel (25bp cut) and Ghana (100bp hike), and the improvement in the BoP in Ukraine.




For important disclosures, refer to the Disclosures Section, located at the end of this report.
                                                                                                     MORGAN STANLEY RESEARCH
                                                                                                 CEEMEA Economics: Weekly Macro Monitor
                                                                                                                            May 31, 2013




Table of Contents

 Quick Country View                                               3   Ratings                                                 18

 Next Week’s Focus                                                4   CEEMEA Inflation Monitor                                19

 Turkey – What’s Next?                                            5   CEEMEA Real Exchange Rate Monitor                       20

 Russia – The Resilient Consumer                                  7   Global Monetary Policy Rate Forecasts                   21

 South Africa – Primary Sector Drives GDP to Multi-Year Low      10   Structural Indicators                                   22

 Poland – On the New Growth Paradigm and Fiscal Challenges       11   CEEMEA Vulnerability Watch                              23

 Hungary – What Will Life Outside the EDP Look Like?             12   Annual Economic Forecasts                               24

 Israel – The Cut Is Delivered; Now Waiting for a New Governor   13   Calendar                                                25

 Ukraine – Short-Term BoP Improvement, Challenges Ahead          14

 Kazakhstan – Revised 2013 Budget Increases Oil Dependency       15

 Ghana – Will the BoG’s 100bp Shock Therapy Suffice?             16




                                                                                                                                           2
                                                                                                                                          MORGAN STANLEY RESEARCH
                                                                                                                                     CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                   May 31, 2013




Quick Country View
Russia                                                                                       Poland
  •   The outcome of Putin’s ‘reforms for growth’ programme has been mixed so                  •   Growth was weaker than expected in 1Q13 (+0.1%Q and +0.5%Y) and was
      far. As a result, we now see GDP growth at 2.9%Y in 2013 and 3.4%Y in                        entirely driven by net exports. We think that the risks to our 1.3%Y GDP
      2014, and we see trend growth at 3%Y, down from our previous estimate of                     growth forecast for 2013 are clearly skewed to the downside. On inflation,
      3.5%Y. We now think that the CBR has an easing bias, given the growth                        we believe that CPI will remain at or slightly below 1%Y for the coming
      slowdown and higher confidence that inflation will return to target. But we                  couple of months, and remain subdued (albeit on a slight upward trend
      think it will be cautious until inflation starts to fall. We expect the next move to         thereafter). For these reasons, we see another two cuts (25bp in both June
      be a cut in the autumn under new Governor Nabiullina.                                        and July), and rates reaching 2.50%.
Turkey
                                                                                             Hungary
  •   Moody’s upgrade makes Turkey a full investment grade credit. Growth
      dynamics are improving but very slowly. The CBT’s recent policy action was a             •   Hungary continues to be stuck in a low-growth rut, though the 1Q13 GDP
      net easing, mostly to address the appreciation in the currency, and we believe               data begin to show tentative signs of improvement (+0.7%Q). Inflation is
      that the 15% reference rate for credit growth will be very difficult to achieve,             falling due to regulated price changes, and the MPC has cut rates to 4.50%,
      which might call for supplementary action from the BRSA. Inflation is likely to              with more on the way. We think that a better risk profile and tame CPI
      remain elevated, and we think that the target will be missed. We are not                     indicate that rates have room to fall all the way to 3.50% by the end of 3Q.
      concerned about the current account, but quality of financing is very low.                   On the fiscal side, we think that Hungary will leave the EDP in June. This
                                                                                                   means that the chances of further unorthodox fiscal moves will fall
South Africa
  •   The recent downswing in commodity prices has helped to attenuate inflation             Czech Republic
      pressures globally. However, its impact on the external position and currency            •   FX interventions remain part of the CNB’s toolkit, but we think that the
      of commodity exporters such as South Africa is likely to be negative, thereby                economy and inflation have to surprise to the downside in a meaningful way
      capping the inflation benefit.
                                                                                                   in order for the CNB to pull the trigger on actual FX purchases. That said,
Ukraine                                                                                            we still believe that most on the board have an implicit ‘soft CZK’ bias.

  •   Ukraine GDP growth was down 1.3%Y in 1Q13, but FX pressures have                       Israel
      subsided and the government has managed to raise US$4.7 billion YTD,
                                                                                               •   Growth has been losing momentum but in 1Q13 there has been a mild
      securing external financing until July. We see the IMF deal as conditional on
                                                                                                   improvement. Exports remain weak. The strengthening in the currency has
      further pressure on reserves as well as Ukraine’s ability to issue externally.
                                                                                                   been a factor as most of the recent gains in competitiveness have been lost.
      We think that FX pressure will rise in the autumn, with seasonal enhanced FX
                                                                                                   Inflation is tame and unlikely to pose a problem for the BoI. The BoI cut
      purchases in September-November, and will likely force the government to
                                                                                                   twice in May (2x25bp) to stem currency appreciation, and we expect one
      accept an IMF deal rather than facing an uncontrolled hryvnia adjustment.
                                                                                                   more cut of 25bp in the coming months.




                                                                                                                                                                                  3
                                                                                                                         MORGAN STANLEY RESEARCH
                                                                                                                     CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                 May 31, 2013




Next Week’s Focus
•   On Monday, June 3, Turkey’s TURSTAT will release the inflation data for May. The consensus forecast points to a monthly inflation rate of
    0.45%M, which is negligibly below our forecast of 0.49%M. These figures will take the year-on-year rate up to around 6.8-6.9%Y from the 6.1%Y
    recorded in April. This is almost purely driven by base effects rather than anything substantial, in our view. We have long been drawing attention
    to the upcoming rise in inflation starting in May, which will probably last throughout the summer.

•   In Central Europe, the May PMIs (Monday, June 3) will offer an early read into activity in the middle of 2Q. Given that March and April were
    distorted by working day and Easter effects, we will pay particular attention to the PMI, especially in the Czech Republic and Poland (less so in
    Hungary, where the PMI is rather volatile).

•   In Poland, the key event next week will be the MPC meeting on Wednesday, June 5. Along with consensus, we expect a 25bp rate cut, on the
    back of weak growth data and soft inflation. That said, the ongoing slide in risky assets is probably going to factor into the discussion, and some
    of the more hawkish members of the MPC will likely use it as a reason to argue that financial stability (including PLN) should be the priority, not
    cutting rates. That said, we still expect that at this stage growth concerns will dominate and the NBP will lower rates and keep an easing bias.

•   Data releases in South Africa will be light in the coming week. However, due to current FX volatility, markets are likely to pay undue attention to
    secondary releases such as the May PMI (Monday, June 3), where we expect a weaker currency to ensure that the reading does not slip back
    below the 50 point cut-off despite weak local and global demand. We look for a similar reading in the 2Q BER Business Confidence Index
    (Thursday, June 6), which we expect to slip back to 50 after what appears to be an unsustainable jump from 46 to 52 in 1Q.

•   In Israel, we will be waiting for the news regarding the choice of the new governor for the central bank. The new name will give us an idea about
    policy predictability and continuity, and we will comment on this in due course.

•   In Ukraine, we will be watching the reserves data release on Thursday, June 6 closely, particularly given the significant May repayment
    schedule, including nearly US$1 billion to the IMF. We will also be looking out for the May CPI data, expected on Thursday, June 6. We
    expect inflation at -0.3%Y, a slight increase from -0.8%Y in April.

•   In Russia, the focus next week will be on the manufacturing PMI at the start of the week, where we expect the number to continue just above
    the 50 threshold (April 50.6), and the inflation release on Tuesday, June 4, where we expect headline inflation to accelerate to 7.4%Y from
    7.2%Y in April, driven by seasonal food price increases.

•   In Kazakhstan, the key data release next week will be inflation on Monday, June 3, which we expect to be flat at the current 6.4%Y.
                                                                                                                                                                4
                                                                                                                                      MORGAN STANLEY RESEARCH
                                                                                                                                 CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                         May 31, 2013




Turkey – What’s Next?
And then the currency weakens: The noticeably negative real interest rates, the CBT’s very            Inflation to Rise (Temporarily?)
obvious preference for a weaker rather than a stronger currency and the market’s inconclusive
perception regarding the timing of the tapering from the Fed have not been a good mix for the
                                                                                                      Base effects, FX and food prices to set the course
lira. The Real Effective Exchange Rate (REER) that the CBT has been targeting since late
2012 (with a 120-130 range being the discomfort zone) is sharply lower according to our                    12
                                                                                                                %Y
calculations. Based on the most recent levels, we think that the REER might be hovering                    11

around 118. The most recent print was 121.1 when the CBT eased policy by another 50bp.                     10

Following the latest rate decision, we mentioned that the CBT would most likely stop here (see              9                                                             Forecast
Turkey Economics: Cut It, ROC It and TRY It, May 16, 2013). With the ongoing move in the                    8
market this is very likely to be the case. Any further easing would cause an unnecessary                    7
amount of volatility in the currency and possibly in the bond market, in our view. We believe               6
that the CBT will be thinking about possible adverse implications of the recent depreciation                5
rather than the positives. At this juncture, we are not claiming that the CBT would get overly              4
                                                                                                                                                Targeted Inflation: 5%
concerned since the inflationary implications will be limited with stable oil prices and no                 3
apparent pick-up in demand, but clearly the currency basket depreciation of 4-4.5% within the               2
past month has been noteworthy.




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What if the CBT gets bothered by the currency weakness? We currently do not believe




                                                                                                        M
that the CBT is concerned or bothered by the weakening in the currency. Hence, we doubt                                                  CPI Inflation
that there will be any meaningful action to stem it for a while. However, it would be helpful to
know if and how the CBT could counteract it if it becomes a necessity: The bank does not              Source: Haver Analytics, Morgan Stanley Research forecasts
have to wait until the next MPC meeting to take action. It has ample room and ammunition to
intervene in the market first by limiting the amount of liquidity it provides to the banking system
on a daily basis. This will result in a noticeable rise in money market rates and should help to
curb volatility while at the same time giving a strong signal that more action might be taken in
case the CBT’s limits are tested. This method has been tested and proven to have worked to a
large extent. In case this does not help, the CBT can always utilise the Reserve Option
Mechanism (ROM) and the Reserve Option Coefficient (ROC) to release additional FX
liquidity, but this has not been tested and may not prove as effective as outright tightening, in
our view. The last resort would be to utilise part of the FX reserves that have been built over
the past two years. That said, we would not expect the CBT to risk losing reserves while it can
easily slow down depreciation with some tightening.
Inflation: A key data event: Turkish CPI data will be released next Monday and it will be an
interesting data release to watch. The consensus forecast points to a monthly inflation rate of
0.45%M, which is negligibly below our forecast of 0.49%M. These figures will take the year-
                                                                                                                                      Tevfik Aksoy
on-year rate up to around 6.8-6.9%Y from the 6.1%Y recorded in April. This is almost purely
driven by base effects rather than anything substantial, in our view. We have long been                                               tevfik.aksoy@morganstanley.com
drawing attention to the upcoming rise in inflation starting in May, which will probably last                                         +44 (0)20 7677 6917
throughout the summer.
                                                                                                                                                                                        5
                                                                                                                                          MORGAN STANLEY RESEARCH
                                                                                                                                    CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                       May 31, 2013




Turkey – What’s Next?
What happens after that will depend on the currency, food and energy prices and domestic             FX Reserves Comfortably High
demand. As it stands, it seems like the currency is not gong to be providing any support to
disinflation, and risks are skewed to the upside. Food prices are difficult to predict but so far
                                                                                                     But the CBT would prefer to tighten rather than lose them
the weather conditions have been supportive and the news regarding the harvest has been
                                                                                                        140 US$bn
encouraging. We assume that oil prices will be staying stable and, with the current weak
global backdrop, it seems to be realistic to do so. The last item is still tricky to judge because      130
                                                                                                                                                                            130.2
there have been contrasting signals regarding the true state of domestic demand. So far, our            120
judgment has not changed and we see only a mild pick-up in growth from 2012 levels. This                110
means that we do not see a case for demand-pull inflation, but clearly the record-low                                   99.5
                                                                                                        100
consumer loan rates will keep the upside risks in place for now. Overall, we intend to keep our
year-end above-consensus CPI inflation forecast unchanged at 7%Y, which is considerably                  90
above that of the CBT’s own forecast of 5.3%Y.                                                           80                                85.4

Bring it on: The law on financial amnesty might support FX reserves: The government                      70
recently passed a law providing a financial or wealth amnesty aimed at the repatriation of               60
residents’ assets abroad. According to the programme, resident persons or companies can




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repatriate funds without being asked about the origin of funds in return for a tax payment of




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2%. The deadline to declare the wealth being kept abroad is set for July 31, 2013 and the
actual deadline to bring the funds onshore is end-August. This is important and in our view it                                 Central Bank FX Reserves (incl. Gold)
will draw interest and possibly sizeable flows. The previous amnesty law resulted in nearly
                                                                                                     Source: Haver Analytics, Morgan Stanley Research
US$30 billion of funds to be repatriated back in 2009. This also included the previously
undeclared wealth in the local economy (under-the-mattress money). This new law does not
                                                                                                     In Case You Missed It…
include the local wealth and so may not be as popular. That said, the previous law originated
during the crisis of 2009 and in comparison to then Turkey is being seen as a much safer             Turkey Economics: Normalisation or Just Another New Normal? April
place, so the confidence factor might offset the exclusion of the local wealth.                      16, 2013
No questions asked: Whose funds are they anyway? A key point to emphasise is that the                Turkey Economics: The Punch Bowl Stays in Place: CPI Buys More
source of these funds will not be asked or investigated. We are not sure how the authorities         Time, May 3, 2013
will convince the FATF regarding the question of the breach of the international anti-money          Turkey Economics: Everybody Else Is Doing It So Why Can’t We?
laundering regulations, but one cannot help but think that with such a flexible law, the system      May 9, 2013
might be prone to some level of abuse.                                                               Turkey Economics: Cut It, ROC It and TRY It, May 16, 2013
                                                                                                     Turkey Economics: No More Junk Talk - Finally a Full Investment
                                                                                                     Grade, May 17, 2013

                                                                                                                                           Tevfik Aksoy
                                                                                                                                           tevfik.aksoy@morganstanley.com
                                                                                                                                           +44 (0)20 7677 6917
                                                                                                                                                                                      6
                                                                                                                                       MORGAN STANLEY RESEARCH
                                                                                                                                CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                May 31, 2013




Russia – The Resilient Consumer
Private consumption accounts for 65% of Russian growth: Total consumption dominates
growth, accounting for 73% of growth since 2000, while household or private consumption
                                                                                                    Wages and Disposable Income
dominates total consumption, accounting for 89% of consumption growth since 2000. Overall,          Robust growth continues
we estimate that household consumption growth has accounted for 65% of Russian growth
over the last decade.                                                                              30            %Y growth
Now set to slow: The Russian government in its latest economic forecast is predicting a
slowdown in this key driver of growth, from 6.8%Y in 2012 to 4.3%Y in 2013, as a result of a
                                                                                                   20
slowing economy and a growing consumer debt burden. Although there are no data yet on
consumption from the GDP accounts for 1Q, this forecast looks supported by the data on 1Q
retail sales, which grew at 3.8%Y, below the MinEcon’s full-year retail turnover forecast of       10
4.3%Y. We agree that private consumption will slow, but we think that it will be more resilient
than expected by the government, and expect it to grow at 4.9%Y for the full year, implying a
                                                                                                    0
strengthening from the current level through the rest of the year.
Slowdown exaggerated by political business cycle… We think that the slowdown in the
                                                                                                   -10
economy has been exaggerated by the base effect and the political business cycle. First, the
elevated GDP growth rates of around 5%Y in 2H11/1Q12 were driven by a combination of a               Jan 08    Jan 09         Jan 10     Jan 11      Jan 12      Jan 13
good harvest and a loose fiscal policy, aided by an investment surge from SOEs, which means                   Retail sales                   Real wages, %Y (rhs)
                                                                                                              Nominal wages                  Real disposable income
that 1Q12 to 1Q13 comparisons are somewhat distorted. Already, the annualised growth rates
have picked up from 1.6%Y (1Q13 to 1Q12) to a reported 2.6%Y (April 2013 to April 2012), as
the annual base shifted from the stimulated 1Q12 to the much weaker post-election 2Q12.            Source: Rosstat, Morgan Stanley Research
Second, following the March 2012 presidential election, government spending has fallen
sharply. In particular, federal budget spending growth fell from 38.2%Y (3mma) in March 2012
to 3%Y (3mma) in April 2013. Now that the highly stimulated 1Q12 falls out of the comparison
and the move from a loose to a tight fiscal position has already happened, we expect growth
rates to pick up, and this appears to have begun.
…and despite this slowdown, some sectors continue to show strength: While parts of
the economy have weakened – such as IP and investment, which are flat year on year, and
car sales, which were down 8%Y in April – other parts are growing robustly. These include
construction, where for instance cement production is running at 7%Y (4M13 over 4M12),
despite the longer-than-normal winter; the loan market, where loan growth is running at 21%Y                                    Jacob Nell
(April); and the labour market, where unemployment is at 5.4%Y sa and vacancies are rising.                                     jacob.nell@morganstanley.com
And we are now seeing a move to looser policy: Over recent months, we have seen looser                                          +74 (95)287 2134
policy. This is partly a consequence of reduced interest rates globally, which have supported                                   Alina Slyusarchuk
strong external borrowing, running at 21%Y at end-1Q13, up US$121 billion over the year, and
in turn put downward pressure on domestic interest rates. But the effects are also the result of                                alina.slyusarchuk@morganstanley.com
a domestic policy shift, with a subtle loosening of fiscal and monetary policy in response to                                   +44 (0)20 7677 6869
concerns about slowing growth.                                                                                                                                                 7
                                                                                                                                         MORGAN STANLEY RESEARCH
                                                                                                                                    CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                         May 31, 2013




Russia – The Resilient Consumer
For fiscal policy, although the government has not changed the spending envelope, which                Tight Labour Market
implies a tight budget with a cut in spending of 2.8% in real terms, we now expect a watering
down of the fiscal rule, as the government uses oil revenues in excess of the 5YMA oil price to        Supports income growth
cover the shortfall in non-oil revenues, road fund revenues and privatisation receipts rather           2.4                                                              10
than saving them in the Reserve Fund. Similarly, for monetary policy, although the CBR has,
                                                                                                        2.2                                                              9
despite slowing growth and considerable pressure, held the main policy rates steady since
September 2012, we also saw an easing of monetary policy with the April and May 25bp cuts                2
                                                                                                                                                                         8
in longer-duration policy rates. We expect more of this surreptitious easing, and 50bp cuts in
                                                                                                        1.8
the main policy rates later this year as inflation falls back to target. In addition, we expect to
                                                                                                                                                                         7
see a package of ‘pro-growth’ measures, including: i) Around RUB 200 billion in off-budget              1.6
infrastructure spending; ii) Some MinFin purchases of dollars on the market for transfer to the                                                                          6
Reserve Fund; and iii) Privatisations through issue of additional shares, rather than sales of          1.4
shares.                                                                                                 1.2                                                              5
More specifically, we have three reasons to expect private consumption to pick up:
robust income, strong consumer borrowing and the scope for savings to fall.                              1                                                              4
                                                                                                         Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
I. Robust Income
                                                                                                                  Vacancy rate, %           Unemployment rate, % (rhs)
Nominal wage growth is still running in double-digits, as it has since early 2010. Although
higher inflation means real wage growth has fallen from last year (4.2%Y in April 2013 versus          Source: Rosstat, Morgan Stanley Research
11.1% in April 2012), it is still robust, and we think that it will remain robust for two reasons:
A. Tight labour market: With unemployment at historical lows and vacancies rising, we see
upward pressure on wages. Nominal wage growth has slowed somewhat, from 14.5%Y in
1Q12 to 12%Y in 1Q13, and in real terms, wage growth has halved, from 10.6%Y in 1Q12 to
5% in 1Q13, as inflation has approximately doubled, which might seem to indicate a less tight
labour market. But actually unemployment is lower this year, and we see wage growth as
being driven more by the private sector rather than the public sector, reflecting the tight labour
market rather than the political cycle. For instance, wages in private sector construction are
higher (up 16%Y in 1Q13 compared to 10%Y in 2012) while wages in public administration are
much lower (up 13%Y in 1Q13 compared to 29%Y in 2012).
B. Slowing inflation: Although we think that inflation will increase slightly in May from April’s
7.2%Y because inflation in May 2013 is higher than in May 2012, we expect it to return to the                                       Jacob Nell
5-6%Y target later in the year. This is partly because of subdued monetary growth, supported
                                                                                                                                    jacob.nell@morganstanley.com
by the tight budget, which supports a slowdown in CPI. In addition, we see three events over
the summer that should bring prices back to the target range by September:                                                          +74 (95)287 2134
Base effects: Unwinding of base effects from the election year, including the 1% gasoline price                                     Alina Slyusarchuk
cut in early 2012, reversed in summer 2012 after the elections.                                                                     alina.slyusarchuk@morganstanley.com
Utility tariff cap: In practice, it appears that the proposed cap on utility tariffs at the level of                                +44 (0)20 7677 6869
inflation will come into force from 2014 – but we expect a smaller hike in July than last year.
                                                                                                                                                                                        8
                                                                                                                                       MORGAN STANLEY RESEARCH
                                                                                                                                  CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                               May 31, 2013




Russia – The Resilient Consumer
Food prices: Most importantly, we expect lower food prices as the harvest reverts to the mean.        Consumer Confidence
Food accounts for 37% of the CPI basket and food prices are driving inflation – rising at
8.8%Y in April 2013 compared to 1.2%Y in April 2012. Here we suspect a strong relationship            A leading indicator of retail sales growth
between the harvest and food price growth in the subsequent year. To date, the harvest looks                                                                   20
in good shape, thanks to heavy rain in May, with the Ministry of Agriculture forecasting 95              0                                                     15
million tonnes of grain, more than the bumper 2011 harvest.
                                                                                                                                                               10
II. Strong Borrowing                                                                                   -10
                                                                                                                                                               5
The net provision of funds to households by banks turned negative in January and February
                                                                                                       -20                                                     0
due to seasonally weak lending, but we expect it to return to positive territory. With HH credit
growth running at a robust 36.5%Y in April and continued scope for strong HH credit growth,                                                                    -5
given low rates of HH debt and debt service, we expect net HH lending to stay robust, and to           -30
                                                                                                                                                               -10
see a net transfer of resources from banks to consumers for the rest of this year, as last year.
                                                                                                       -40                                                     -15
In Russia, with its relatively low levels of HH debt (12% of GDP), we estimate that the                  1Q-02    1Q-04      1Q-06    1Q-08    1Q-10   1Q-12
household debt-service ratio stands at 4.2% of income in 2012. This clearly cannot continue
                                                                                                                          Consumer confidence index
to expand at current rates – it is up from 3.1% of income in 2011 – but there continues to be
room for growth, since it remains well below that of other EM countries (for example Brazil,                              Retail Sales, %Y (1Q lag)
where 8.7% of disposable income is spent on debt service).
                                                                                                       Source: Rosstat, Morgan Stanley Research
III. Scope for Savings to Fall
Savings have picked up recently, to 11.3% of income (6mma), and, as of March, were running
1.9pp higher than a year ago. Against the background of full employment, we see scope for             In Case You Missed It…
savings to decline. The sharp fall in cash savings over the last year, from 28% to 22% of
savings, and the corresponding increase in savings in securities and deposits indicates that          “The Cautious Easer” in CEEMEA Macro Monitor (A Fistful of Firsts),
there has been a shift in the motivation for saving, with less emphasis on precaution, which          May 17, 2013, pp. 8-10
may also support a move to higher consumption. In addition, we also see a supportive uptick
                                                                                                      The Global Macro Analyst: All Over Now? May 9, 2013
in the Rosstat consumer confidence index, which has been a leading indicator of retail sales in
the subsequent quarter, and which rose to -7 in 1Q13 from -8 in 4Q12.                                 Russia Economics: Easing While Holding, May 23, 2013
The Russian consumer should be resilient in 2013, but faces longer-term structural                    Russia Economics: The Resilient Consumer, May 31, 2013
challenges: We think that the Russian consumer story is robust in 2013 and beyond, barring
a shock, because of the tight labour market, falling inflation and looser policy. In the longer                                   Jacob Nell
term, however, the consumer faces significant structural challenges. In particular, if real wage                                  jacob.nell@morganstanley.com
growth continues to outstrip productivity growth, firms are likely to face falling profits, eroding                               +74 (95)287 2134
their capacity to raise wages, and if wage growth continues to outstrip growth in output, this
suggests imports outstripping exports, and the consequent continued fall in net exports would                                     Alina Slyusarchuk
erode Russia’s trade and current account surplus (3.7% of GDP in 2012) and put pressure on                                        alina.slyusarchuk@morganstanley.com
RUB and subsequently on inflation.                                                                                                +44 (0)20 7677 6869
                                                                                                                                                                              9
                                                                                                                                         MORGAN STANLEY RESEARCH
                                                                                                                                    CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                             May 31, 2013




South Africa – Primary Sector Drives GDP to Multi-Year Low
Summary: Supply-side 1Q13 GDP data surprised significantly to the downside, at just 0.9%Q.           Significant Undershoot in Mining,
Consensus was broadly in line with our own 1.7%Q forecast. At face value, the reading would
argue that the SARB should perhaps have eased rates at its Monetary Policy Committee
                                                                                                     Agriculture and Government Services
(MPC) meeting last week. We would argue to the contrary, however.                                    Sector                        GDP weight     GDP growth      GDP contribution
                                                                                                     %Q, saar                                  4Q12 1Q13 1Q3E 1Q13          1Q13E
Sectoral details: That the main area of weakness in the reading was concentrated in the              Agriculture                           2.3 10.0   -4.9    6.1  -0.1         0.1
manufacturing sector comes as no surprise. Monthly manufacturing data pointed towards a              Mining & quarrying                    5.0 -9.3   14.6   26.2   0.7         1.3
sharp contraction across most of the industry, particularly in the food, petroleum and steel         Manufacturing                        15.0    5.0   -7.9   -7.8   -1.2         -1.2
                                                                                                     Electricity, gas & water              1.7   -2.2   -3.0   -1.4   -0.1          0.0
sectors. However, looking forward, we believe that the second half of the year should see a
                                                                                                     Construction                          3.0    0.2    0.9    2.0    0.0          0.1
technical rebound – underpinned in part by the weaker currency as well as an improvement in          Wholesale & retail trade             12.4    1.5    1.9    0.8    0.2          0.1
international demand. From the contribution columns in the Exhibit, we focus on the three key        Transport, storage & comms            9.0   1.9    2.2    2.0    0.2          0.2
areas that drove the undershoot relative to our expectations: First, is the 14.6%Q recovery in       Finance & real estate                21.3   2.9    3.3    2.0    0.7          0.4
mining and quarrying activity, which fell far short of our 26%Q forecast. We suspect that the        General government services          13.8   2.6    1.9    3.2    0.3          0.4
deviation here may have been compounded by the different base years that were used to                Personal services                     5.4   2.5    1.4    1.6    0.1          0.1
compute the monthly and quarterly growth rates. While the monthly data on which our                  Total value added                    89.1   2.2    0.8    1.5    0.7          1.3
forecasts were estimated are based on constant 2010 prices, the quarterly GDP print is based         Taxes less subsidies                 10.9   1.9    1.5    2.8    0.2          0.3
                                                                                                     GDP at market prices                100.0   2.1    0.9    1.7    0.9          1.7
on a 2005 base year. Second, contrary to our expectations, agricultural production contracted
for the first time since 4Q11. Unfortunately, Statistics South Africa does not provide reasons       Source: Statistics South Africa, Morgan Stanley Research estimates
for the surprise contraction here. Finally, general government services eased to its slowest
pace in a year, suggesting that the pace of hiring in the public sector may have in fact
                                                                                                     In Case You Missed It…
decelerated in 1Q13. The latter would pose downside risks to our forecast of a 2.5%Y print in
household spending this year.                                                                        South Africa Economics: SARB MPC – More Capitulation Coming, but
Will the 1Q13 GDP print have surprised the SARB? We were somewhat surprised by the                   No Hike in Sight, March 20, 2013
extent to which the MPC cut its 2013 GDP forecast last week (from 2.7% at its March meeting          Investor Survey: Wary but in it for the Carry, April 19, 2013
to a low 2.4% in May). In retrospect, we now believe that the SARB’s demand-side estimates           South Africa Economics: Impact of FX-Adjusted Commodity Price
must have pointed towards significant weakness in the first quarter of the year. If this is indeed   Movements on CAD, April 19, 2013
that case, then this reading would already have been baked into the SARB’s forecasts.
                                                                                                     South Africa Economics: Why the SARB Might just Say ‘No Thanks’,
Policy implications: We are not convinced that the MPC would necessarily opt to ease policy          May 13, 2013
rates on the back of one negative print in the inherently volatile agricultural sector. Also, the    South Africa Economics Chartbook: External Trade Metrics – Would a
MPC has, on numerous occasions, expressed its view that the weakness in the mining sector            Weaker FX Really Help? May 20, 2013
is underpinned by structural constraints that go beyond the ambit of monetary policy. Thus,
                                                                                                     South Africa Economics: MPC Says No to Easier Money, May 23, 2013
while we acknowledge that the risks to our call for on-hold rates through 2013/14 are
somewhat elevated (see South Africa Economics: MPC Says No to Easier Money, May 23,
2013), the 1Q13 GDP reading alone is not enough to lead us to revise our view. Looking            Michael Kafe                   Andrea Masia
forward, we will continue to keep a close watch on manufacturing, retail and finance activity,    michael.kafe@morganstanley.com andrea.masia@rmbmorganstanley.com
as we believe that the MPC is more likely to be sympathetic towards these sectors where           (27 11) 587-0806
policy rates arguably matter, than in weather-dependent or strike-infested sectors such as                                       (27 11) 282-1593
agriculture and mining, respectively.
                                                                                                                                                                10
                                                                                                                                                 MORGAN STANLEY RESEARCH
                                                                                                                                          CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                                     May 31, 2013




Poland – On the New Growth Paradigm and Fiscal Challenges
The Polish economy expanded by just 0.1%Q (sa) in 1Q, after 0.0%Q in 4Q13: The economy                     Poland: Growth Rotation
has been practically stagnating for six months and growing at just under 1% annualised for the
last five quarters, a pace which is clearly sub-trend. In terms of the year-on-year change, 1Q
                                                                                                           Pp contribution to YoY GDP growth
GDP was 0.5%Y, not far from the flash estimate of 0.4%Y. Across components, we got the split                 8             domestic-led growth
                                                                                                             7
we were expecting and the monthly data had been suggesting. Domestic components                                                                                        net exports-led growth
                                                                                                             6
remained weak, especially fixed investment (-0.5%Q and -2.0%Y); household consumption                        5
barely grew (0.1%Q and 0.0%Y), and government spending was soft also (0.4%Q and -0.5%Y).                     4
                                                                                                             3
Looking at contributions, net trade was the main (and only) driver of growth (+1.4pp), on the
                                                                                                             2
back of more resilient exports (+1.3%Y) and some import compression (-1.7%Y); domestic                       1
components were soft, especially investment (-0.8pp, mostly due to inventory drawdown). The                  0
growth mix is the one that is all-too-familiar across CEE – economies remain export-led and                 -1
domestic components are subdued. Poland was a happy exception to this growth pattern in                     -2
2009-11, but has now ‘caught-down’ with CEE peers.                                                               Q1   Q2   Q3   Q4       Q1   Q2   Q3    Q4       Q1     Q2     Q3    Q4    Q1
                                                                                                                 10   10   10   10       11   11   11    11       12     12     12    12    13
Implications of this print for the NBP: We think this number seals the case for a June 5 rate                         HH consumption           Fixed Investment             Net exports
cut (25bp). The recent weakness in risky assets and PLN will likely feature in the discussion, but                    Govt consumption         Inventories                  Headline GDP, %
we think that at this stage growth concerns still dominate on the MPC. In addition, with GDP
growth running at around half what the NBP was expecting in its latest projection (March) and              Source: GUS, Morgan Stanley Research
CPI also running at 0.5-0.6pp below the NBP projection, the central bank seems very likely
to downgrade both its GDP and CPI outlooks at the July 3 meeting (new projection), which will
likely be a trigger for another cut. We therefore expect 50bp of rate cuts in total (25bp in June
and 25bp in July), followed by an extended wait-and-see period.
Poland still in the EDP, with two more years to correct the excessive deficit: As expected,                In Case You Missed It…
the European Commission recommended that Poland stay in the EDP, but it also granted two                   Poland: More of a V-Shaped Recovery? March 15, 2013
extra years (until 2014) to bring its deficit sub-3% of GDP. The two-year extension was granted
on the grounds that a one-year correction would imply too severe an adjustment. This approach              Poland: Rethinking the NBP, May 9, 2013
is consistent with an overall more flexible posture by the EC with regards to fiscal corrections.
And of course, Poland also benefits from a strong track record in terms of fiscal adjustment as
well as still-low debt levels.
How much more tightening is needed and what does it mean for the pension system? In
order to bring the deficit sub-3% in 2014, the EC estimates that additional measures worth 0.4pp
of GDP in both 2013 and 2014 are needed. With growth likely to undershoot the government’s
forecast (1.5% for this year), the revenue side (e.g., VAT) will likely come under pressure. The
government is close to making public its decisions on the funding of the pension system. Recall                                               Pasquale Diana
that in 2011, the government lowered contributions to OFE (private pension system) from 7.3%
                                                                                                                                              pasquale.diana@morganstanley.com
to 2.3% of the total wage (it is set to rise this year to 2.8%). This cut the budget deficit to the tune
of around 1% of GDP. Therefore, another 0.5pp of GDP could be saved if the contributions were
                                                                                                                                              +44 (0)20 7677 4183
suspended entirely, for instance. An announcement is expected over the next two weeks.                                                                                                           11
                                                                                                                                               MORGAN STANLEY RESEARCH
                                                                                                                                           CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                              May 31, 2013




Hungary – What Will Life Outside the EDP Look Like?
As widely expected, the National Bank of Hungary cut the base rate by 25bp this week, to                   Falling Inflation Makes Cutting Easy
4.50%. The move took the total amount of rate cuts since the easing cycle started (August 2012)
to 250bp. The statement was unsurprisingly dovish, even more so than in April. The
                                                                                                           NBH keen on bringing funding costs lower
section in the statement that discusses inflation is even softer than it was in April, and mentions        7.0
                                                                                                                   %Y
subdued wage growth as a reason not to expect significant pass-through from higher production
                                                                                                           6.0
costs to consumer prices. Also, the May statement mentions that both commodity prices and a
stronger HUF have contributed to the disinflation process.                                                 5.0
Easing bias still in place: The bank notes in the concluding paragraph that perceptions of the
                                                                                                           4.0
risks associated with the economy have improved (this was new). And it adds that the MPC will
consider a further reduction in the policy rate if the medium-term outlook for inflation remains in        3.0
line with the bank’s 3% target and the improvement in financial market sentiment is sustained
(same as last month).                                                                                      2.0

More cuts on the way: We revisited the outlook for Hungarian rates last week and feel                      1.0
comfortable with our view that the NBH will take rates much lower, to 3.50% by the end of the
summer (for more details, see Hungary Economics: The NBH and the ‘New Normal’)                             0.0
                                                                                                             Jan-09               Jan-10         Jan-11           Jan-12           Jan-13
Out of the EDP, as expected – what’s next? As expected, the European Commission
recommended that Hungary be allowed to exit the EDP. The actual decision will be taken on                        CORE CPI OFFICIAL (nsa)   CORE CPI EX PROCESSED FOOD (nsa)     HEADLINE CPI
June 21 by the Ecofin, but it looks like a formality at this stage. The text of the communiqué
shows that the recent round of fiscal tightening undertaken by the Hungarian authorities proved            Source: Haver Analytics, Morgan Stanley Research
decisive: the updated EC fiscal assessment shows a deficit/GDP projection of 2.7% in 2013 and
2.9% in 2014 (versus 3% and 3.3% previously). With Hungary joining the club of the fiscally
virtuous for the first time since 2004, what is likely to change? We see two immediate
                                                                                                           In Case You Missed It…
implications of this: first, the risk of short-term fiscal ‘fixes’ that patch up budget holes has fallen
dramatically. This is because, in order to be subject to another EDP, Hungary needs to actually            Hungary Economics: Uncharted Waters, March 27, 2013
exceed the 3% threshold again, which will not happen until April-May 2014 at the earliest (when
                                                                                                           Hungary Economics and Strategy: Not So Unorthodox, After All; But
official 2013 deficit data are available). Second, the government has gained more fiscal leeway,
                                                                                                           Will It Work? April 5, 2013
which can prove an asset when drafting the 2014 (election) budget. Clearly, while the first
implication is unambiguously good, the second one (greater fiscal manoeuvre) carries risks.                Hungary Economics: The NBH and the ‘New Normal’, May 17, 2013

Boosting ‘funding-for-growth’ by 50%: Separately, the NBH announced that it plans to boost
the size of its Funding for Growth (FSG) scheme by 50%, to HUF 750 billion (2.6% of GDP).
More specifically, the NBH announced that the ‘first pillar’ (cheap HUF loans to SMEs) will be
increased from HUF 250 billion to HUF 425 billion. And the ‘second pillar’ (cheap HUF loans to
SMEs to replace FX loans) will be boosted from HUF 250 billion to HUF 325 billion. The fact that                                             Pasquale Diana
the plan has not yet been launched (June to August) and yet the NBH has already increased its                                                pasquale.diana@morganstanley.com
size by 50% is undoubtedly a sign that the banks are showing interest. We have always held the                                               +44 (0)20 7677 4183
view that the FSG programme is a pilot scheme that could be expanded if the initiative is
successful. We would not rule out that the amounts could be increased again in the future.                                                                                                  12
                                                                                                                                         MORGAN STANLEY RESEARCH
                                                                                                                                    CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                      May 31, 2013




Israel – The Cut Is Delivered; Now Waiting for a New Governor
The second cut in a month: The Bank of Israel cut the policy rate by another 25bp following a             Interest Spread Narrowing
similar move delivered after the emergency policy meeting held on May 13. This came against
the consensus expectation but it was in line with our call (admittedly it was a close call). The
                                                                                                          BoI seems determined to addressing ILS appreciation
BoI’s main aim, in our view, was to keep the shekel from appreciating, but we also think that it
                                                                                                               6    %                                                    pp.   4
must be concerned that the recent fiscal measures might impose downside risks to growth by
suppressing domestic demand. Despite the recent escalation of concerns surrounding the issue                   5
                                                                                                                                                                               3
of the Fed tapering sooner than previously anticipated, we think that the Great Monetary Easing                4
(GME) will linger for a while and the BoI seems to be determined to keep the interest rate                     3
                                                                                                                                                                               2
differential with the Fed as low as possible in order to discourage the inflows that led to ILS                                                                        1.1
                                                                                                               2                         0.4                                   1
appreciation.
More easing in the pipeline?Our main view regarding the economic and policy outlook has                        1
                                                                                                                                                                               0
not changed. Until incoming data point to a marked improvement in outlook or a convincingly                    0
strong change in the attitude of core global central banks towards monetary expansion                                                                                          -1
                                                                                                               -1
changes, we think that the BoI’s bias to ease will remain. To us, the reasons to ease further, for
instance another 25bp in the coming months, outweigh the reasons against it: i) Inflation is not               -2                                                              -2

an issue. At 0.8%Y, it is well below the target range and in the next 12 months we expect it to




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stay closer to the lower end; ii) The new budget will impose further downside risks to growth




                                                                                                           M




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(domestic demand) and could lead to a faster-than-anticipated deceleration; iii) External                                BoI Rate   Fed Funds   Spread (right-axis)
demand is still weak and the fundamental reasons for ILS to appreciate remain; and iv) Almost
all other central banks, especially core ones and peers, are easing and are likely to ease more.         Source: Haver Analytics, Morgan Stanley Research
Incoming data still point to weakness: On the external front, the weakness in exports
continues, although in recent months there has been some minor improvement in the trend.
                                                                                                         In Case You Missed It…
After posting a year-on-year deceleration of some 3.6%Y at the start of the year, the figure
gradually improved to show -0.3%Y as of April. This is partially a reflection of the base effects        Israel Economics: The Day After (Fischer), January 29, 2013
but also a slight improvement in the global picture. In case the ongoing weakening in the
currency persists, there is a possibility that better competitiveness might have a positive impact       Israel Economics: The Next Move: A Cut? February 26, 2013
on export performance in the coming months. On the domestic front, the bad news came from                CEEMEA Spring Macro Outlook: Is the Worst Behind Us? March 13,
unemployment, with the seasonally adjusted rate reaching 6.9% – the highest level of the past            2013
six months. With the planned reduction of employment in the public sector as well as the
restrictive fiscal measures, it might be difficult to reverse this trend in the near term. Lastly, the   Israel Economics: A Good Case for a Cut? March 21, 2013
state-of-the-economy or the S-index has been showing some weak signs of improvement in
April (with a marginal rise of 0.2%M). However, this number is preliminary and so far the
retrospective revisions have mostly been made to the downside. Hence, we approach the
numbers with caution.
                                                                                                                                         Tevfik Aksoy
The new BoI governor: Based on media reports, we understand that the new BoI governor
                                                                                                                                         tevfik.aksoy@morganstanley.com
might be announced in early June. The new name will give us an idea about policy predictability
and continuity, and we will comment on this in due course.
                                                                                                                                         +44 (0)20 7677 6917
                                                                                                                                                                                    13
                                                                                                                                      MORGAN STANLEY RESEARCH
                                                                                                                                 CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                             May 31, 2013




Ukraine – Short-Term BoP Improvement, Challenges Ahead
Current account deficit improved in April, mostly driven by a lower trade deficit: The
CAD narrowed to US$677 million from US$964 million, even more than we expected (our               CAD Narrowed in January-April 2013
forecast: -US$900 billion). On the trade side, imports fell from -5.6%Y in March to -7.3%Y in     Mostly driven by lower trade deficit
April, led by a sharp 30.1%Y contraction in fuel imports. In particular, gas imports were down
29.8%, oil and oil products contracted by 1.6 times and coal went down 27.8%Y. The demand                    US$ million
for fuel was lower as the economy is in recession, while domestic industries have switched to      1000
alternative energy sources and improved energy efficiency in response to the strong price
growth, including a 2.4 times increase in industrial gas prices since 2008. At the same time,         0
exports rose from -1.8%Y in March to 0.5%Y in April (3mma), with the main drivers being
mineral products (i.e., ores), up by 47.3%Y, and chemical exports (fertilisers), up by            -1000
13.2%Y. Though still down 10.5% on an annual basis, the recovery of metal exports also
continued on a sequential basis, while food exports were down 7.8%Y as global demand              -2000
eased in anticipation of a good new harvest and lower prices.
Financial inflows strengthened, helped by sovereign and corporate Eurobond issuance:              -3000
The surplus on the financial account improved to US$1.6 billion from US$1.1 billion in March              Jan-12        Apr-12        Jul-12   Oct-12      Jan-13
as US$1.25 billion Eurobonds were issued by the government. The net purchases of FX cash
from banks were also subdued at only US$104 million in April, down 43.7% YTD. This allowed                         Goods balance                 Services balance
reserves to climb by 2.1%M or 2.8%YTD despite a US$407 million repayment to the IMF. Now                           Income                        Current transfers
                                                                                                                   Current account (rhs)
at the level of US$25.2 billion, reserves cover 2.9 months of imports.
Stronger BoP data reduce immediate pressure on the government to act and allow it to              Source: NBU, Morgan Stanley Research
postpone the reforms required to access financing from the IMF. More generally, looking
forward we expect the positive trend towards a narrower CAD to continue. Ukraine has
responded to rising food and gas prices by increasing its agricultural exports and reducing its   In Case You Missed It…
energy imports. As a result, even in the absence of the new Russia deal, we see the CAD at
6.0% of GDP in 2013, a 2.4pp improvement from 2012. However, we think that the CAD at             Strategy and Economics: Will Ukraine Close the Deal? March 28, 2013
6% of GDP will remain challenging to finance and the current stabilisation with reserves at       CEEMEA Economics: Moscow and Kiev Trip Takeaways, April 16,
only 2.9 months of imports remains fragile. In particular, we see two challenges for the          2013
financial account in 2013:                                                                        Ukraine Economics: The Narrowing Trade Deficit, May 24, 2013
1. Higher FX pressures in autumn on the domestic market. FX purchases typically increase          Global EM Investor: Paring Back on Bonds, May 28, 2013
in October-December, driven by seasonal factors.
2. More challenging issuance of sovereign and corporate FX debt ahead: Our strategy                                              Jacob Nell
team has recently turned more negative on EM credit, in response to stronger growth in the                                       jacob.nell@morganstanley.com
US and rising expectation of an earlier Fed exit. In particular, Ukraine was downgraded to                                       +74 (95)287 2134
underweight due to its high funding needs, and we expect Ukraine to face a more challenging
market when it seeks to issue sovereign and corporate FX debt. On balance, despite the                                           Alina Slyusarchuk
government’s apparent intention presently to stick to the current exchange rates until the                                       alina.slyusarchuk@morganstanley.com
presidential elections in March 2015, we expect these pressures to force Ukraine to agree an                                     +44 (0)20 7677 6869
IMF deal in the autumn, with UAH weakening to 9.0 UAHUSD by end-2013.
                                                                                                                                                                        14
                                                                                                                                       MORGAN STANLEY RESEARCH
                                                                                                                                 CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                               May 31, 2013




Kazakhstan – Revised 2013 Budget Increases Oil Dependency
Kazakhstan approves a revised budget: On May 30, the Madjlis approved a revised 2013                 Revenue Weakness
budget. Overall, the revised budget reduces forecast revenues by 1.4% of GDP, and finances
the gap through a mix of tax rises (50%), spending cuts (30%) and a wider deficit (20%). In
                                                                                                     Prompts caution on budget spending
particular, 2013 revenues are now expected to be KZT 485.5 billion less than previously
                                                                                                       80%                                                           1600
expected. In response, the government is planning to offset about half of this revenue loss with
increased revenues from other sources (KZT 251 billion), mainly the previously announced               60%                                                           1200
increase in the export duty on crude oil from US$40 to US$60/tonne. In addition, the
                                                                                                       40%                                                           800
government will offset a third of the lost revenues by a reduction in spending of KZT 160 billion,
largely through reducing VAT repayments, including a KZT 50 billion reduction in VAT                   20%                                                           400
repayment on the much-delayed Kashagan project and a KZT 60 billion reduction in other VAT
                                                                                                         0%                                                          0
repayments. The remaining approximately 20% will be financed through an increase in the
budget deficit from KZT 785 billion to KZT 871 billion or 2.6% of GDP, which is approximately          -20%                                                          -400
the same level as in 2012. This wider deficit in turn increases the likelihood of a Kazakh
eurobond issue this year, as recently mentioned by the Minister of Finance.                            -40%                                                          -800




                                                                                                           08




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                                                                                                                                                                13
Budget prudence welcome… We think that the authorities’ prudent approach to the budget is




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                                                                                                                   n-




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                                                                                                                                           n-




                                                                                                                                                    n-




                                                                                                                                                              n-
                                                                                                       Ja




                                                                                                                 Ja




                                                                                                                             Ja




                                                                                                                                         Ja




                                                                                                                                                  Ja




                                                                                                                                                            Ja
welcome, particularly given an economy that is growing more robustly than its neighbours, with
growth in 1Q13 running at 4.6%Y and retail sales currently running at 14%Y, and which looks to            Budget balance, 12 sum, bn KZT (rhs)    Revenue, %Y, 3m avg
be operating close to potential, given unemployment at 5.3% sa. This prudence, reflected in               Expenditure, %Y, 3m avg
falling budget spending, does appear to be contributing to a slowdown in wage growth to a
                                                                                                      Source: Kazstat, Morgan Stanley Research
more sustainable level, with real wages now growing at 1.5%Y (April), compared to 9%Y in
2012 overall.
…but we have three reservations… First, we note that the main revenue action is to increase          In Case You Missed It…
budget revenues from oil, which muddies the previously clear distinction between oil revenues
paid to the National Oil Fund, with an annual transfer to support the budget, and other revenues     CEEMEA Spring Macro Outlook: Is the Worst Behind Us? March 13,
paid to the budget, and risks increasing oil dependency. Second, we note that the main item          2013
in reducing expenditure was to reduce funds allocated for VAT repayment, which increases the
risk of the government failing to meets its obligations and running up expenditure arrears.
Finally, and most importantly, the budget only gives a partial view of the fiscal account, since
the Oil Fund may be directly financing some infrastructure projects.
...and we still see a risk of fiscal policy loosening: Unfortunately, we do not have good
                                                                                                                                 Jacob Nell
information about Oil Fund domestic investments. So far, Oil Fund assets have surged by 8%                                       jacob.nell@morganstanley.com
YTD, increasing to US$62 billion, or 31% of GDP, and the Oil Fund has effectively transferred                                    +74 (95)287 2134
the full amount due to the budget this year (KZT 1.34 trillion out of KZT 1.38 trillion, or 26% of
                                                                                                                                 Alina Slyusarchuk
federal budget revenues). Since President Nazarbayev has called for the Oil Fund to invest in
domestic projects, such as the planned refinery modernisation, we expect domestic Oil Fund                                       alina.slyusarchuk@morganstanley.com
investments, on top of the transfer to the budget. Since this would be fiscal spending, in our                                   +44 (0)20 7677 6869
view, we still see a risk that looser fiscal policy could threaten financial stability.                                                                                     15
                                                                                                                                           MORGAN STANLEY RESEARCH
                                                                                                                                       CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                              May 31, 2013




Ghana – Will the BoG’s 100bp Shock Therapy Suffice?
Summary: Last week, the Bank of Ghana surprisingly raised its policy rate by 100bp from               Inflation and Policy Rates
15% to 16%, pushed for an asymmetric realignment of the policy corridor presumably to
encourage interbank activity and minimise risk of loss of its policy anchor, and introduced an        45    %
informal standing facility to enhance the transmission mechanism of monetary policy. We had
                                                                                                      40
expected the MPC to maintain an on-hold stance at this meeting.
                                                                                                                                                Morgan Stanley forecasts
Upside surprises in recent inflation outcomes: The main rationale behind the surprise                 35
decision was the MPC’s assessment that risks to the inflation outlook were in fact elevated
                                                                                                      30
(previously balanced) and far outweighed downside risks to GDP growth. In February, the
Bank of Ghana predicted that CPI would peak in early 2Q13 and decline thereafter to remain            25
within the inflation target of 9% +/- 200bp by the end of the year. However, shortly thereafter,
CPI exited single-digit territory to print at 10%Y, and has been on an uptrend since then.            20
Interestingly, the return to double-digits was initially downplayed by the newly appointed
governor – His Excellency Dr. Henry Kofi Wampah – when he indicated that “inflation would             15
go up at the end of the first quarter and will trend down by half year as the harvest season sets
                                                                                                      10
in so we are not worried”. Unfortunately, much to our and the central bank’s surprise,
subsequent inflation outcomes have continued to accelerate, reaching 10.6%Y in April, and
                                                                                                       5
showing no signs of letting up. In its May 22 statement, the MPC indicated that the country’s          Jan-00   Jan-02      Jan-04     Jan-06     Jan-08   Jan-10    Jan-12     Jan-14
high twin deficits had contributed significantly towards an uplift in aggregate demand
                                                                                                                         Policy rate                                  CPI
pressures; that food prices have in fact accelerated from 3.5%Y in January to 6.4%Y in April,
while non-food inflation has risen from 11.5%Y to 13%Y over the same period; that the sharp           Source: Ghana Statistical Services, Morgan Stanley Research forecasts
decline in commodity prices has contributed to a deterioration in the country’s visible trade
metrics, resulting in heightened exchange rate pressures; and that fiscal slippage and erratic
electricity supply were likely to exert further upside pressures on domestic inflation –
especially if one considers that producers of goods with high electricity content are likely to re-
price such goods for full cost recovery. Importantly, the MPC indicated that its current central
inflation trajectory is now a full percentage point higher than it had previously expected.
100bp shock therapy plus other macro-prudential measures: Presumably, with no desire
to go down in the annals of history as the administration under whose tenure Ghana’s inflation
returned to double-digit territory, Governor Wampah and his team opted for shock therapy and
unexpectedly raised the repo rate by as much as 100bp from 15% to 16%. Not only that, the
central bank also recently decided to realign its policy corridor asymmetrically by maintaining
the spread of the money market reverse repo rate over the policy rate at 200bp while reducing
the repo rate by 100bp through the policy rate. It also introduced a little-known ‘informal
standing facility’ for commercial banks – presumably the window at which it hopes to conduct                                                Michael Kafe
the money market repos going forward – and indicated that the modus operandi of the facility                                                michael.kafe@morganstanley.com
would be formalised shortly. While the 200bp spread in the reverse repo rate (the effective
borrowing rate) represents a macro-prudential decision that no doubt raises the cost of capital                                             (27 11) 587-0806
to commercial banks that end up with a daily net short position which needs to be squared by                                                                                             16
                                                                                                                                   MORGAN STANLEY RESEARCH
                                                                                                                               CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                          May 31, 2013




Ghana – Will the BoG’s 100bp Shock Therapy Suffice?
close of business, thereby dampening the supply of credit, the fact that the repo rate (the de    Ghanaian Cedi – Mostly a One-Way Bet
facto placement rate) has also been reduced by 100bp suggests to us that perhaps the bigger
story here is a desire by the Bank of Ghana to help develop the interbank market. Quite            3.2                                                           2.1
                                                                                                         EURGHC/GBPGHC                                 USDGHC
clearly, making both rates so penal should force commercial banks to trade among
                                                                                                   3.0                                                           2.0
themselves rather than frequently resort to the central bank window to square up their daily
positions. This should ensure that the central bank maintains its position as lender of last       2.8
resort and not an active agent for matching long and short commercial money market                                                                               1.9
positions. Ultimately, this should also help to enhance the transmission mechanism of              2.6
                                                                                                                                                                 1.8
monetary policy, as commercial banks learn to square off their own daily positions with one
                                                                                                   2.4
another, allowing for an active market that promotes discovery of the ‘true’ price of credit.
                                                                                                                                                                 1.7
Furthermore, the MPC also indicated that the gamut of macro-prudential measures adopted in         2.2
May 2012 (see Ghana Economics: More Macro-Prudential Measures, May 7, 2012) would                                                                                1.6
                                                                                                   2.0
remain in place, and that an April 2012 Base Rate Formula that was initiated by the previous
administration would be implemented by all commercial banks effective July 2, 2013. Hitherto,      1.8                                                           1.5
commercial banks only paid lip service to the formula – a framework designed to limit the
extent of subjectivity involved in the rate-determination process. The formula mostly relates      1.6                                                           1.4
the base rate to the cost of funds, return on equity, provision for bad debts and the risk          Jan-10            Jan-11           Jan-12         Jan-13
premium. This rate is to be reviewed monthly and made public. Importantly, no bank is                        EURGHC               GBPGHC              USDGHC
allowed to transact away from its published base rate – effectively placing a floor under
                                                                                                  Source: Bloomberg, Morgan Stanley Research
lending rates and helping to improve the transmission mechanism of monetary policy while
contemporaneously minimising the risk of slippage in the monetary policy anchor.
Looking forward, we continue to expect currency weakness over the remainder of the                In Case You Missed It…
year, and maintain our view that USDGHC averages 1.98 in 2Q13 (currently 1.97 in the first
two months of the quarter) before breaching 2.00 in 3Q13 to close the year at 2.05. We            Ghana Economics: The Fastest-Growing Economy in Africa,
therefore do not share the governor’s optimism that the cedi will strengthen in 2H13. More        December 16, 2011
importantly, we now believe that sustained FX weakness should combine with the recent             Ghana Economics; 2013 Outlook – Less FX Turbulence, January 14,
upside CPI surprises to keep inflation in double-digits for the remainder of the year.            2013
Contrary to the Bank of Ghana, which expects inflation to decelerate into year-end, our           Ghana Economics: BoG on Hold in Face of Surprising Fiscus,
forecasts show that CPI is likely to track broadly sideways over the next several months before   February 13, 2013
accelerating somewhat into year-end – thanks in part to unfavourable base effects from the        Ghana Economics: Wage Slippage, March 6, 2013
unusually low prints that were recorded just before the elections last year.                      Ghana Economics: February CPI Leaps to Double Digits…Really?
                                                                                                  March 15, 2013
With regards to policy, we expect CPI to turn out somewhat stickier than the MPC expects.
This of course raises the probability that the MPC may raise interest rates even further in the                                    Michael Kafe
coming months – although we believe that the shock therapy that was administered last week
                                                                                                                                   michael.kafe@morganstanley.com
should suffice for now. We will look to reassess once the reweighted and rebased CPI is
published in the coming weeks/months.                                                                                              (27 11) 587-0806
                                                                                                                                                                       17
                                                                                                                                                       MORGAN STANLEY RESEARCH
                                                                                                                                                 CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                                            May 31, 2013




CEEMEA Sovereign Rating Monitor
               Moody’s                                                S&P                                                     Fitch
      Rating   Sovereign      Last change   Outlook          Rating   Sovereign      Last change   Outlook           Rating   Sovereign      Last change   Outlook
        Aa2    Qatar          Jul 07↑           S              AA     Qatar          Jul 10↑           S               AA
        Aa3    Saudi Arabia   Feb 02↑           S              AA-    Czech Rep.     Aug 11↑↑          S               AA-    Saudi Arabia   Jul 08↑           S
                                                                      Estonia        Aug 11↑↑          S
                                                                      Saudi Arabia   Jul 07↑           S
        A1     Czech Rep.     Nov 02↑↑↑         S               A+    Israel         Sep 11↑           S               A+     Czech Rep.     Mar 08↑           S
               Estonia        Nov-02            S                                                                             Estonia        Jul 11↓           S
               Israel         Apr 08↑           S                                                                             Slovakia       Jul 08↑           S
        A2     Poland         Nov 02↑↑          S               A     Slovakia       Jan 12↓           S                A     Israel         Feb 08↑           S
               Slovakia       Feb 12↓           N
        A3                                                      A-  Poland           Mar 07↑           S                A-    Poland         Jan 07↑           P




                                                                                                                                                                     Investment grade
                                                                    Slovenia         Feb 13↓           S
       Baa1    Lithuania      Sep 09↓           S              BBB+ Kazakhstan       Nov 11↑           S              BBB+ Kazakhstan        Nov 12↑           S
               Russia         Jul 08↑           S                                                                          Lithuania         May 13↑           S
               S. Africa      Sep 12↓           N                                                                          Slovenia          May 13↓           N
       Baa2    Bulgaria       Jul 11↑           S              BBB    Bulgaria       Oct 08↓           S              BBB Latvia             Nov 12↑           P
               Latvia         Mar 13↑           P                     Latvia         Nov 12↑           P                   Russia            Feb 09↓           S
                                                                      Lithuania      Aug 09↑           S                   S. Africa         Jan 13↓           S
                                                                      Russia         Dec 08↓           S
                                                                      S. Africa      Oct 12↓           N
       Baa3    Azerbaijan     Apr 12↑           S              BBB-   Azerbaijan     Dec 11↑           S              BBB-    Azerbaijan     May 10↑           S
               Romania        Oct 06↑           N                     Morocco        Mar 10↑           N                      Bulgaria       Nov 08↓           S
               Turkey         May 13↑           S                                                                             Croatia        Jun 01↑           N
                                                                                                                              Morocco        Apr-07            S
                                                                                                                              Romania        Jul 11↑           S
                                                                                                                              Turkey         Nov 12↑           S
        Ba1    Croatia        Feb 13↓           S              BB+    Croatia        Dec 12↓           S               BB+    Hungary        Jan 12↓           S
               Hungary        Nov 11↓           N                     Romania        Oct 11↓           S                      Tunisia        Dec 12↓           N
               Morocco        Jul-99            N                     Turkey         Mar 13↑           S
               Slovenia       Apr 13↓↓          N

        Ba2    Jordan         Nov 10            N               BB    Hungary        Nov 12↓           N               BB




                                                                                                                                                                     Sub-Investment grade
               Tunisia        May 13↓↓          N                     Serbia         Mar 11↑           S
        Ba3    Georgia        Oct-10            S              BB-    Georgia        Nov 11↑           S               BB-    Georgia        Dec 11↑           S
               Nigeria        Nov-12            S                     Jordan         May 13↓           N                      Nigeria        Jan-06            S
                                                                      Tunisia        Feb 13↓           N                      Serbia         May-05            N
                                                                      Nigeria        Nov 12↑           S
        B1     Ghana          Dec-12            S               B+                                                     B+     Egypt          Jun 12↓           N
               Lebanon        Apr 10↑           S                                                                             Ghana          Mar 05↑           N
        B2     Egypt          Dec 11↓           N               B     Ghana          Aug 10↓           S                B     Lebanon        Mar 10↑           S
                                                                      Lebanon        Dec 09↑           N                      Ukraine        Jul 10↑           S
                                                                      Ukraine        Dec 12↓           N
        B3     Belarus        Apr 11↓           N               B-    Belarus        Sep 11↓           S                B-
               Ukraine        Dec 12↓           N
       Caa1                                                    CCC+ Egypt            May 13↓           S              CCC+

The number of arrows indicates the number of notches of the change in rating. No arrows mean that the rating has not been changed since assigned for the first time.
Outlook: P = Positive; N = Negative; S = Stable; D = Developing; *SD = Selective Default. Source: Bloomberg, Moody’s, S&P, Fitch
                                                                                                                                                                                                       18
                                                                                                                                                                                          MORGAN STANLEY RESEARCH
                                                                                                                                                                                      CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                                                                             May 31, 2013




    CEEMEA Inflation Monitor

Czech Republic                                                                          Turkey                                                                   South Africa
8.0                                                              Target: 2.0% (+/-1%)   14.0                                                       Target: 5%    12.0                                                      Target: 3-6%
7.0                                                                                     12.0
                                                                                                                                                                 10.0
6.0
                                                                                        10.0
5.0                                                                                                                                                               8.0
4.0                                                                                      8.0

3.0                                                                                      6.0                                                                      6.0

2.0                                                                                      4.0                                                                      4.0
1.0
                                                                                         2.0
0.0                                                                                                                                                               2.0
                                                                                         0.0
-1.0                                                                                                                                                              0.0
                                                                                           Jan-08    Jan-09   Jan-10   Jan-11   Jan-12   Jan-13    Jan-14
   Jan-08      Jan-09   Jan-10    Jan-11    Jan-12     Jan-13     Jan-14                                                                                            Jan-08   Jan-09    Jan-10   Jan-11   Jan-12   Jan-13   Jan-14



Poland                                                                                  Israel                                                                   Nigeria
6.0                                                         Target: 2.5% (+/-           6.0                                                       Target: 1-3%   18.0

                                                                                        5.0                                                                      16.0
5.0
                                                                                                                                                                 14.0
4.0                                                                                     4.0                                                                      12.0
3.0                                                                                                                                                              10.0
                                                                                        3.0
                                                                                                                                                                  8.0
2.0                                                                                     2.0                                                                       6.0
1.0                                                                                                                                                               4.0
                                                                                        1.0
                                                                                                                                                                  2.0
-
                                                                                        0.0                                                                       0.0
     Jan-08    Jan-09   Jan-10     Jan-11    Jan-12     Jan-13      Jan-14
                                                                                          Jan-08    Jan-09    Jan-10   Jan-11   Jan-12   Jan-13   Jan-14            Jan-08   Jan-09    Jan-10   Jan-11   Jan-12   Jan-13   Jan-14




Hungary                                                                                 Russia                                                                   Ukraine
    8.0                                                               Target: 3.0%      16.0                                                      Target: 5-6%   35.0                                                      Target: 4-6%
    7.0                                                                                 14.0                                                                     30.0
    6.0                                                                                 12.0                                                                     25.0
    5.0                                                                                 10.0                                                                     20.0
    4.0                                                                                  8.0                                                                     15.0
    3.0                                                                                  6.0                                                                     10.0
    2.0                                                                                  4.0                                                                      5.0
    1.0                                                                                  2.0                                                                      0.0
    0.0                                                                                  0.0                                                                     -5.0
      Jan-08   Jan-09    Jan-10    Jan-11     Jan-12     Jan-13       Jan-14               Jan-08    Jan-09   Jan-10   Jan-11   Jan-12   Jan-13   Jan-14            Jan-08   Jan-09    Jan-10   Jan-11   Jan-12   Jan-13   Jan-14




    Source for all charts: Haver Analytics, Morgan Stanley Research estimates
                                                                                                                                                                                                                                          19
                                                                                                                                                            MORGAN STANLEY RESEARCH
                                                                                                                                                        CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                                              May 31, 2013




 CEEMEA Real Exchange Rate Monitor

Czech Republic                                                     Turkey                                                           South Africa
120                                                                110                                                              110


110                                                                                                                                 100
                                                                   100
                                                            96.1                                                            95.5
100                                                                                                                                 90

                                                                    90                                                                                                                           87.2
 90                                                                                                                                 80


 80                                                                 80                                                              70
  Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13       Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13    Jan-07    Jan-08     Jan-09   Jan-10   Jan-11   Jan-12     Jan-13



Poland                                                             Israel                                                           Russia
130                                                                110                                                              120

120                                                                                                                         101.7                                                                  10
                                                                                                                                    110
                                                                   100
110
                                                          97.1                                                                      100
100
                                                                    90
                                                                                                                                     90
 90

 80                                                                 80                                                               80
  Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13       Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13     Jan-07   Jan-08     Jan-09   Jan-10   Jan-11   Jan-12     Jan-13




Hungary                                                            Romania
120                                                                130

                                                                   120
110

                                                         94.8      110
                                                                                                                           101.4
100
                                                                   100

 90                                                                 90


 80                                                                 80
  Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13       Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13




 Source for all charts: Haver Analytics, Morgan Stanley Research estimates
                                                                                                                                                                                                         20
                                                                                                                                        MORGAN STANLEY RESEARCH
                                                                                                                                    CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                               May 31, 2013




Global Monetary Policy Rate Forecasts
                                               Current        2Q13         3Q13          4Q13          1Q14          2Q14   3Q14        4Q14
     United States                              0.15          0.15          0.15         0.15          0.15          0.15   0.15         0.15
     Euro Area                                  0.50          0.25          0.10         0.10          0.10          0.10   0.10         0.10
     Japan                                      0.05          0.05          0.05         0.05          0.05          0.05   0.05         0.05
     United Kingdom                             0.50          0.50          0.50         0.50          0.50          0.50   0.50         0.75
     Canada                                     1.00          1.00          1.00         1.00          1.00          1.00   1.00         1.00
     Switzerland                                0.00          0.00          0.00         0.00          0.00          0.00   0.25         0.50
     Sweden                                     1.00          1.00          1.00         1.00          1.00          1.00   1.25         1.50
     Norway                                     1.50          1.50          1.75         1.75          2.00          2.25   2.25         2.50
     Australia                                  2.75          2.75          2.25         2.25          2.25          2.25   2.25         2.25
     New Zealand                                2.50          2.50          2.50         2.50          2.75          3.00   3.25         3.25
     Russia                                     5.50          5.50          5.25         5.00          4.75          4.50   4.50         4.50
     Poland                                     3.00          2.75          2.50         2.50          2.50          2.75   3.00         3.25
     Czech Republic                             0.05          0.05          0.05         0.05          0.25          0.50   0.75         1.00
     Hungary                                    4.50          4.25          3.50         3.50          3.50          3.50   3.50         3.50
     Romania                                    5.25          5.25          4.50         4.25          4.25          4.25   4.25         4.25
     Turkey                                     4.50          4.50          4.50         4.50          4.50          5.00   5.50         5.50
     Israel                                     1.25          1.25          1.00         1.00          1.50          2.00   2.00         2.00
     South Africa                               5.00          5.00          5.00         5.00          5.00          5.00   5.00         5.00
     Nigeria                                    12.00        12.00         12.00         11.00         9.50          9.50   9.50         9.50
     Ghana                                      16.00        16.00         16.00         16.00         16.00        16.00   16.00       16.00
     China                                      6.00          6.00          6.00         6.00          6.00          6.00   6.00         6.00
     India                                      7.25          7.25          7.25         7.25          7.00          7.00   7.00         7.00
     Hong Kong                                  0.50          0.50          0.50         0.50          0.50          0.50   0.50         0.50
     S. Korea                                   2.50          2.50          2.50         2.50          2.75          3.00   3.25         3.25
     Taiwan                                     1.875        1.875         1.875         2.000         2.125        2.250   2.375       2.375
     Indonesia                                  5.75          5.75          5.75         5.75          5.75          5.75   5.75         5.75
     Malaysia                                   3.00          3.00          3.00         3.00          3.00          3.00   3.00         3.00
     Thailand                                   2.50          2.50          2.50         2.50          3.00          3.50   3.50         3.50
     Brazil                                     8.00                        8.25         8.25          8.25          8.25   8.25         8.25
     Mexico                                     4.00          4.00          4.00         4.00          4.00          4.00   4.00         4.00
     Chile                                      5.00          5.00          5.00         5.00          5.50          5.50   5.50         5.50
     Peru                                       4.25          4.25          4.25         4.25          4.50          4.75   4.75         4.75
     Colombia                                   3.25          3.25          3.00         2.50          2.50          3.75   4.75         5.00


Source: National Central Banks, Morgan Stanley Research forecasts; Note: Japan policy rate is an interval of 0.00-0.10%.
                                                                                                                                                                          21
                                                                                                                                             MORGAN STANLEY RESEARCH
                                                                                                                                      CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                 May 31, 2013




CEEMEA Structural Indicators
                                               Cz. Rep.   Hungary   Israel Kazakhstan   Poland   Romania    Russia   South Africa   Turkey    Ukraine
    External Debt and Reserves
    International Reserves (USD bn)                44.7      46.9    77.1        26.4    109.1      47.3     533.2           50.3    142.4       25.2
    External Debt % Exports                        64.5     134.1   103.4       143.7    155.4     190.0     116.4         137.5     158.6      151.2
    External Debt % GDP                            50.7     126.5    38.1        68.4     71.7      76.8      31.2           36.4     42.7       76.6
      ST External Debt % GDP                       13.1      17.7    15.2         5.0      8.2       9.1       3.9            7.4     12.8       18.8
      Med. and LT External Debt % GDP              30.8      78.7    22.4        30.3     47.5      52.3      19.5           22.7     29.9       52.7
      Intercompany Loans % GDP                      6.7      30.1     na         33.2     16.0      15.3       5.9            6.3      na         5.0
    Short-Term Debt/Reserves (%)                   58.5      48.2    48.4        37.6     38.0      33.2      14.6           55.4     70.9      131.7
    Total Reserves/Import (%)                      30.5      42.2    83.9        42.9     47.6      61.1     117.9           41.8     56.2       24.4
    Fiscal
    Budget Balance % of GDP (2012)                 -5.2      -2.1    -4.2         4.5     -3.5       -3.5      0.4           -5.0     -2.1       -5.5
    Revenue, % GDP (2012)                          40.2      46.6    26.6        25.3     39.3      33.5      36.9           27.7     22.8       31.6
    Expenditure % GDP (2012)                       45.4      48.7    30.8        20.8     42.8      37.0      36.5           32.6     24.9       37.1
    Government Debt % GDP (2012)                   45.5      79.2    74.0        13.1     55.8      35.4      10.3           47.2     37.0       36.6
    Credit and Banking Sector
    Private Sector Credit % GDP                    51.9      49.9    79.2        33.8     49.9      37.7      46.1           77.1     55.3       57.3
      HH Credit % GDP                              29.6      25.6    41.3         9.9     33.8      17.7      12.7           44.6     20.1       13.5
       FX % Total HH Credit                         0.2      55.9     na         18.3     34.0      67.2       3.0            na       0.1       44.9
      NFC Credit % GDP                             22.3      24.3    37.9        23.9     16.1      20.0      33.5            na      35.2       43.8
       FX % Total NFC Credit                       18.8      57.3     na         32.3     23.6      58.7      21.4            na      41.3       34.6
    Private Sector Credit % yoy                     2.9      -4.6     5.3        11.6      1.9      10.7      21.4            9.1     19.3        3.9
    Loan/Deposit Ratio                             0.75      1.00     1.1        1.38     1.11      1.17      1.20           1.05     1.04       1.37
    GDP and Population
    Nominal GDP (USD bn, 4q sum)                   196        126    245         200      496        169     2028            378      789        176
    Nominal GDP (bn, local currency, 4q sum)      3830      28267     941      29894     1603        587    62599           3214     1417       1409
    Population (mil people)                      10.50       9.99    7.76       16.67    38.54     21.43    142.90         50.59     74.72      45.60
    GDP per capita (USD)                         18651      12594   31601      12010    12861       7879    14193           7474    10556       3866




Source: Morgan Stanley EMEA Economics. Notes: E = Morgan Stanley EMEA estimates; FX rate vs. EUR (Czech Republic, Hungary, Poland, Romania); FX rate vs.
USD (Israel, South Africa, Russia, Turkey). For Poland and Hungary, we use gross investment instead of gross fixed investment.
                                                                                                                                                                            22
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                                                                                                                                                                                 CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                                                                                May 31, 2013




CEEMEA Vulnerability Watch
                                                                 Turkey        Israel     Russia   Ukraine   Kazakhstan         Cz. Rep.      Hungary        Poland      Romania                Bulgaria      S. Africa   Nigeria

  Latest
  C/A % of GDP                                                        -6.0         -0.1      4.9      -8.0           3.1              -3.0            1.6        -3.0             -3.4                -1.0         -6.1       7.5
  External debt/GDP                                                   42.7         38.2     34.0      76.6         68.4             50.7           126.5         71.8            76.8                 94.1        35.8        2.6
  St external debt/FX reserves                                        70.9         53.1     15.4     131.7         37.6             58.1             48.2        38.3            33.2                 69.0        54.8        4.6
  Loan to Deposit ratio for the whole banking system                   1.0          0.9      1.2       1.4          1.5               0.7             1.0         1.1                1.2               1.1         1.0        0.6
  FX loans as a % share of total PS credits (HH + NFC)                27.0         10.3     16.8      37.0         29.1               8.1            55.8        31.3            62.7                 63.9        11.7        3.5
  Budget deficit % GDP                                                -1.8         -4.0      0.1      -4.0           6.7              -4.4           -3.3        -3.9             -2.9                -0.8         -5.2      -2.3
  Gov't debt % GDP                                                    37.9         70.6      8.4      28.3         12.8             45.9             78.5        52.4            37.8                 18.5        39.4       19.8
  3Q08
  C/A % of GDP                                                        -6.0          0.7      7.1      -6.7          3.3               -2.4           -7.0        -6.4           -13.6              -23.7           -7.7      20.4
  External debt/GDP                                                   37.8         44.5     32.3      55.3         82.0             42.6           112.8         51.4            51.8              105.9          26.2        1.8
  St external debt/FX reserves                                        48.0     111.1        19.5      73.0         49.1             77.7           116.5         84.7            64.5               87.6          80.0        2.1
  Loan to Deposit ratio for the whole banking system                   0.8          0.9      1.4       1.6          1.6               0.8             1.3         1.0                1.4               1.1         1.1        0.9
  FX loans as a % share of total PS credits (HH + NFC)                25.2         10.0     22.6      47.0         43.9               8.5            55.9        27.6            56.1                 55.5         8.0        6.0
  Budget deficit % GDP                                                -2.3         -0.1      8.0      -0.2           4.6              -1.4           -3.5        -2.4             -5.1                 2.2         0.9       -0.2
  Gov't debt % GDP                                                    37.7         75.0      5.3       7.4           8.9            27.0             66.0        42.8            11.4                 14.3        24.0       11.9

 Source: Morgan Stanley Research; the chart shows an aggregation of the vulnerability metrics we show above as an equally weighted average of each indicator’s deviation from the regional
 average (expressed in standard deviations). Source: Haver Analytics, Eurostat, national statistical offices, national central banks. Data on loans, deposits, external debt and reserves, most
 recent available data used. Data on external debt/GDP and government debt/GDP, latest available, based on 4Q rolling sum of GDP. Current account % of GDP and budget deficit numbers were
 calculated using the 4Q or 12M rolling sums, using the most recent available data. For the budget deficit in Hungary, we used the European Commission March estimate, which provides the
 budget deficit net of the exceptionally large revenues in 1Q11, of a one-off character, coming from the pension system reform.

   Vulnerability Scoring Indicator (VSI)                                                                         Changes in the VSI Since 3Q08
    1.5                                                                                                           0.6
                                                                                                                                                                             less vulnerable

                                                                                                                  0.4
    1.0
                                                                                                                  0.2
    0.5
                                                                                                                  0.0
    0.0
                                                                                                                  -0.2
   -0.5
                                                                                                                  -0.4
   -1.0
                                                                                                                  -0.6             more vulnerable
   -1.5
                                                                                                                  -0.8
           NG    RU      KZ   CZ    IL    SA    TR     BG   PL   RO      HU   UA
                                                                                                                           UA    SA      TR   CZ       PL   RU   NG     RO      IL         BG    KZ      HU
                      3Q08                                   Latest
   Source: Morgan Stanley Research; the chart shows an aggregation of the vulnerability                          Source: Morgan Stanley Research
   metrics we show above as an equally weighted average of each indicator’s deviation
   from the regional average (expressed in standard deviations).                                                                                                                                                                           23
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                                                                                                                                CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                           May 31, 2013




CEEMEA Annual Economic Forecasts
                                            Cz. Rep.   Hungary   Israel Kazakhstan   Nigeria   Poland     Russia South Africa      Turkey   Ukraine
  Real GDP                          2011         1.9       1.7     4.7         7.5      7.4        4.3       4.3          3.1         8.8       5.2
  growth (%)                        2012E       -1.2      -1.7     3.1         5.0      6.3        2.1       3.4          2.5         2.2       0.2
                                    2013E       -0.1      -0.5     3.0         5.3      7.2        1.3       2.9          2.5         4.4       0.8
                                    2014E        2.3       1.3     3.4         6.2      8.0        3.0       3.4          3.3         4.8       4.0
  Private Consumption (%)           2011         0.7       0.5     3.6        10.9       na        2.6       6.4          5.0         7.7      15.0
                                    2012E       -3.5      -1.4     2.7         9.0       na        0.5       6.8          3.3        -0.7      11.7
                                    2013E        0.2      -0.2     3.4         4.5       na        0.5       4.9          2.5         2.0       0.0
                                    2014E        1.5       0.4     3.3         5.0       na        2.0       5.0          3.3         4.2       3.5
  Gross Fixed Investment (%)        2011        -0.6       1.4    16.2         3.9       na       11.3      10.2          4.4        18.0      10.1
                                    2012E       -1.5     -11.7     3.6         2.5       na        0.1       6.0          5.5        -2.5       0.9
                                    2013E       -3.4       0.2     6.0         8.0       na        1.1       4.5          4.1         3.8      -3.8
                                    2014E        2.6      -0.1     5.5         8.0       na        5.5       6.1          5.3         7.7       4.7
  Exports (%)                       2011         9.6       6.5     4.9         2.3       na        7.8       0.3          5.9         7.9       2.2
                                    2012E        4.1       2.0     0.1         2.0       na        2.4       1.4          0.7        17.2      -7.7
                                    2013E        1.2       2.1     3.4         4.0       na        4.0       1.0          1.1         8.1      -1.0
                                    2014E        8.7       7.8     4.9         8.0       na        6.4       1.6          5.2         6.4       4.0
  Imports (%)                       2011         7.2       5.2    10.6         5.1       na        5.7      20.3          9.7        10.7      16.8
                                    2012E        1.9       0.1     3.4        10.0       na       -1.8       9.5          6.8         0.0       1.9
                                    2013E        2.2       2.6     3.9         8.0       na        1.8       7.2          2.3         6.2      -5.0
                                    2014E        8.7       7.8     5.3         7.0       na        6.0       6.0          6.6         7.4       3.0
  CPI Inflation                     2011         2.4       4.1     2.4         7.4     10.5        4.6       6.1          6.3        10.5       4.6
  (% year end)                      2012         2.4       5.0     1.4         6.0     12.2        2.4       6.6          5.7         6.2      -0.2
                                    2013E        2.6       2.1     1.6         7.3     10.5        1.6       6.0          5.7         7.0       6.2
                                    2014E        1.5       2.8     2.2         7.0     10.5        2.4       5.4          5.4         6.0       5.3
  FX rate (year-end,                2011        25.7      315     3.81         148      162       4.46      32.0          8.4        1.89      7.99
  vs.EUR for CE4; US$ for others)   2012        25.1      291     3.73         150      157       4.07      30.4          8.8        1.78      8.05
                                    2013E       25.8      320     3.70        150      155        4.15      30.9          9.2        1.83      9.00
                                    2014E       25.0      305     3.55        150      155        3.90      30.9          8.8        1.75      9.20
  C/A Balance                       2011        -2.8       0.9     0.1         6.6      7.5       -4.9       5.3         -3.5        -9.7      -6.3
  (% GDP)                           2012E       -2.4       2.2     0.0         3.8      7.5       -3.5       3.7         -5.8        -6.0      -8.4
                                    2013E       -1.5       3.0     1.0         4.7      7.7       -3.0       2.5         -5.5        -6.6      -6.0
                                    2014E       -1.2       3.0     2.0         5.1      7.8       -3.2       1.3         -4.0        -7.0      -5.0
  Govt.Debt                         2011        40.8      81.4    74.2        12.4     17.9       56.4       8.5         43.3        39.6      36.3
  (% GDP)                           2012E       45.8      79.2    73.2        13.1     19.8       55.8      10.3         47.2        37.0      36.6
                                    2013E       48.3      83.0    74.2        12.0     21.7       57.6      11.5         48.0        35.5      42.0
                                    2014E       50.1      82.1    74.0        11.3     22.1       57.3      12.5         47.5        34.5      44.5
  Public sector balance             2011        -3.3       4.3    -3.3         4.7      -2.5      -5.0       1.5         -4.0        -1.4      -4.3
  (% GDP)                           2012E       -4.4      -2.1    -4.2         4.5      -2.5      -3.5       0.4         -4.9        -2.1      -5.5
                                    2013E       -3.4      -2.8    -5.0         4.6      -2.1      -3.4       0.8         -4.8        -1.9      -4.5
                                    2014E       -3.3      -2.9    -3.0         4.5      -2.3      -2.9       1.0         -4.0        -2.0      -4.3

  Source: Morgan Stanley EMEA Economics. Notes: E = Morgan Stanley EMEA estimates; FX rate vs. EUR (Czech Republic, Hungary, Poland, Romania); FX
  rate vs. USD (Israel, South Africa, Russia, Turkey). For Poland and Hungary, we use gross investment instead of gross fixed investment.
                                                                                                                                                                      24
                                                                                                                                         MORGAN STANLEY RESEARCH
                                                                                                                                   CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                          May 31, 2013




CEEMEA Macro Calendar (June 3-7)
               Mon 3                           Tue 4                        Wed 5                               Thu 6                                     Fri 7
      Czk Budg et Bala nce (May)         Czk GDP S A ( 1Q F)         Czk Retail Sale s (Apr)           Czk Trade Bal ance (A pr)             Czk Industrial Production (Apr)
          MS : NA, Cons: NA             MS: -1.9%Y , Cons: NA          MS: NA, Cons: NA                   MS: NA, Cons: NA                        MS: 1.7%Y, Co ns: NA
          Pre v: -CZK16.5bn                    Pre v: -1 .7% Y            Pre v: - 3.3%                    Prev: CZK32.3bn                            P rev: -6.0 %Y
           Czk P MI (Ma y)                    Rom PPI ( Apr)          Czk Real Wages ( 1Q)                 Hun GDP (1Q F)                   Hun Indu strial Prod uction (Ap r P)
          MS : NA, Cons: NA                  MS: NA, Cons: NA          MS: NA, Cons: NA                 MS: -0 .9% Y, Cons: NA                    MS: 1.4%Y, Co ns: NA
              Pre v: 49 .5                     Prev: 4.5%Y                Prev: 0.9%Y                        Pr ev: - 2.7 %Y                       Prev: -0.7%Y , WDA

      Hun Tr ade Balance (Mar F)              Rus CPI (May)      Hun Budg et Bal ance (May, YTD)    SA B ER Bus. Conf. Index (2Q)              Rom In dustria l Sa les (Ap r)
          MS : NA, Cons: NA              MS: 7.4%Y, Cons: NA           MS: NA, Cons: NA                   MS: 5 0, Cons: NA                        MS: NA, Cons: NA
            Pre v: €7 53.4m                    Prev: 7.2%Y             P rev: -HUF528.6bn                     P rev: 52.0                             P rev: -2.9 %Y
           Hun PMI (May)                                             Hun Retail Sales (Apr)                 Ukr CP I (May)
          MS : NA, Cons: NA                                            MS: NA, Cons: NA                 MS: -0 .3% Y, Cons: NA
              Pre v: 51 .7                                                Pre v: -2 .9% Y                    Pr ev: - 0.8 %Y
            Kaz CPI (May)                                                P ol Bas e Rate           Uk r Inte rnational Rese rves (May)
        MS: 6.4 %Y, Cons: NA                                        MS : 2.75%, Cons: 2 .75 %             MS: NA, Cons: NA
             P rev: 6.4 %Y                                                Prev: 3.0%Y                      Pr ev: US$ 25.2 bn

            P ol P MI (Ma y)                                         Rom Real GDP (1Q P)
          MS : NA, Cons: NA                                           MS : 2.1%Y, Cons: NA
              Pre v: 46 .9                                                Prev: 1.1%Y
        Rom Retail Sales (Apr)                                     Rom A vera ge Wa ges (A pr)
          MS : NA, Cons: NA                                            MS: NA, Cons: NA

            Prev: -0.8% Y                                                 Prev: 4.8%Y
           Rus PMI (May)
          MS : NA, Cons: NA
              Pre v: 50 .6

            SA PMI (May)
          MS: 50, Co ns: NA
              Pre v: 50 .5

            Tur CPI (May)
       MS: 6 .9% Y, Cons: 6.8%Y
             P rev: 6.1 %Y
            Tur P PI (May)
          MS : NA, Cons: NA
             P rev: 1.7 %Y

Source: Morgan Stanley Research, Bloomberg
                                                                                                                                                                                     25
                                                                                                         MORGAN STANLEY RESEARCH
                                                                                                     CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                May 31, 2013




CEEMEA Economics Team

Tevfik Aksoy (Head of CEEMEA Economics)                        tevfik.aksoy@morganstanley.com                          (44 20) 7677-6917
Turkey, Israel
Pasquale Diana                                                 pasquale.diana@morganstanley.com                        (44 20) 7677-4183
Poland, Hungary, Czech Republic, Romania, Bulgaria, Slovenia
Michael Kafe                                                   michael.kafe@morganstanley.com                          (27 11) 587-0806
South Africa, Nigeria, Kenya, Ghana
Andrea Masia                                                   andrea.masia@rmbmorganstanley.com                       (27 11) 282-1593
South Africa, Nigeria
Jacob Nell                                                     jacob.nell@morganstanley.com                            (7 495) 287-2134
Russia, Ukraine, Kazakhstan, Belarus
Alina Slyusarchuk                                              alina.slyusarchuk@morganstanley.com                     (44 20) 7677-6869
Russia, Ukraine, Kazakhstan, Belarus, Georgia




                                                                                                                                           26
                                                                                                                                                    MORGAN STANLEY RESEARCH
                                                                                                                                               CEEMEA Economics: Weekly Macro Monitor
                                                                                                                                                                                 May 31, 2013




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                                                                                                    MORGAN STANLEY RESEARCH
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© 2013 Morgan Stanley
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Description: Macro Monitor (Party Over?)