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Sectoral Analyses


									                                                                              O U T LO O K 2 0 0 8 – 2 0 0 9

                                   Sectoral Analyses

A N A LY S E S   O F   T H E   U N I C R E D I T   G R O U P   N E W   E U R O P E   R E S E A R C H   N E T W O R K
    For authors see last page

    Published by UniCredit Group/Bank Austria Creditanstalt Aktiengesellschaft

    Edited by CEE Economics Department
    Bernhard Sinhuber, Tel. + 43 (0)50505-41964

    Produced by BA-CA Identity & Communications Department, Editorial Desk

    Printed by Bösmüller

    Layout: Horvath Grafik-Design

    Photographs: Getty Images

    Closing date: December 2007

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2   Sectoral Analyses, Outlook 2008–2009
Regional Outlook 2008 – 2009 ..............................................................................................................................................................................4
Bulgaria .................................................................................................................................................................................................................12
 Economic Framework .........................................................................................................................................................................................12
 Performance of the sectors ................................................................................................................................................................................12
 Structural Indicators ...........................................................................................................................................................................................16
Croatia ...................................................................................................................................................................................................................18
 Economic Framework .........................................................................................................................................................................................18
 Performance of the sectors ................................................................................................................................................................................18
 Structural Indicators ...........................................................................................................................................................................................22
Czech Republic .....................................................................................................................................................................................................24
 Economic Framework .........................................................................................................................................................................................24
 Performance of the sectors ................................................................................................................................................................................24
 Structural Indicators ...........................................................................................................................................................................................28
Hungary ................................................................................................................................................................................................................30
 Economic Framework .........................................................................................................................................................................................30
 Performance of the sectors ................................................................................................................................................................................30
 Structural Indicators ...........................................................................................................................................................................................34
Poland ...................................................................................................................................................................................................................36
 Economic Framework .........................................................................................................................................................................................36
 Performance of the sectors ................................................................................................................................................................................36
 Structural Indicators ...........................................................................................................................................................................................40
Romania ................................................................................................................................................................................................................42
 Economic Framework .........................................................................................................................................................................................42
 Performance of the sectors ................................................................................................................................................................................42
 Structural Indicators ...........................................................................................................................................................................................46
Russia ....................................................................................................................................................................................................................48
 Economic Framework .........................................................................................................................................................................................48
 Performance of the sectors ................................................................................................................................................................................49
 Structural Indicators ...........................................................................................................................................................................................52
Slovakia .................................................................................................................................................................................................................54
  Economic Framework .........................................................................................................................................................................................54
  Performance of the sectors ................................................................................................................................................................................54
  Structural Indicators ...........................................................................................................................................................................................58
Turkey ....................................................................................................................................................................................................................60
 Economic Framework .........................................................................................................................................................................................60
 Performance of the sectors ................................................................................................................................................................................60
 Structural Indicators ...........................................................................................................................................................................................64
Annex ....................................................................................................................................................................................................................66
 Bulgaria ...............................................................................................................................................................................................................66
 Croatia .................................................................................................................................................................................................................66
 Czech Republic ...................................................................................................................................................................................................67
 Hungary ..............................................................................................................................................................................................................68
 Poland .................................................................................................................................................................................................................69
 Romania ..............................................................................................................................................................................................................70
 Russia ..................................................................................................................................................................................................................71
 Slovakia ...............................................................................................................................................................................................................71
 Turkey ..................................................................................................................................................................................................................72
UniCredit Group CEE banking network ..............................................................................................................................................................74

                                                                                                                                                                              Sectoral Analyses, Outlook 2008–2009              3
     Regional Outlook 2008 – 2009: Winners and Losers

    Regional Outlook 2008 – 2009:
    Winners and Losers
    Withstanding the international credit squeeze

    • The CEE region continues to benefit from its expanding                                        • There are differences at the country level, with the man-
      role as the production arm of the EU and from still                                             ufacturing sector particularly strong in Central Europe and
      relatively lively domestic demand.                                                              Bulgaria, and construction in South Eastern Europe and
    • We expect the manufacturing sector to be the main driver                                        Russia.
      of growth in 2008 – 09 on the supply side, with the region                                    • In a still generally positive scenario, risks are on the
      tending to specialise in medium-high tech sub-sectors                                           downside, as the global credit squeeze could hit the sec-
      producing investment goods.                                                                     tors relying most on credit (i.e. construction, durable
    • Infrastructural needs and the renovation of homes will                                          goods). Still, we believe that construction and real estate
      drive growth in construction, while we also expect ser-                                         in CEE are largely influenced by the domestic environ-
      vices and network industries to perform well.                                                   ment and we classify these sectors as the best perform-
    • More traditional labour-intensive sectors are lagging behind,                                   ers in many countries. The production of durable goods
      as competition from low labour cost countries in Asia is                                        in some cases could even benefit, if deceleration at the
      fierce. The textile sector, traditionally relevant for CEE                                      global level drives further delocalisation of production in
      economies, is no longer competitive, except in some niches.                                     the direction of the region.

    Throughout the CEE region, the manufacturing sector is one of                                   more general “integration of trade and disintegration of produc-
    the main drivers of economic growth. Thanks to strong FDI and a                                 tion processes” at international level, the delocalisation of
    relatively good competitive environment, the region is reinforc-                                production activities in Europe is accelerating. Central Eastern
    ing its specialisation in the manufacturing industry. As part of the                            European countries are becoming increasingly significant as pro-

    Central Eastern Europe and EU-15: weight of sectors in GDP                                                                                                                     Chart 1
     CEE-8*: weight in GDP (2001=100)                                                               EU-15: weight in GDP (2001=100)

    105                                                                                            105

    100                                                                                            100

    95                                                                                              95

    90                                                                                              90

    85                                                                                              85
            2001          2002          2003          2004          2005          2006                       2001         2002          2003          2004          2005          2006

              Manufacturing             Services and Network Industries                                        Manufacturing             Services and Network Industries
              Other (Construction; Agriculture)                                                                Other (Construction; Agriculture)

    *) Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, Turkey. In the charts, when referring to CEE, Russia is not included (its relevant weight in terms of GDP
    would have distorted the average performance of the region/sector). / Source: UniCredit New Europe Research Network; Eurostat

4    Sectoral Analyses, Outlook 2008–2009
             ducers of manufacturing goods to serve both the Western and                                                ments are now enabling more sophisticated production, thus
             Eastern European markets. The “old” European countries, on the                                             avoiding the risk of rapidly losing competitiveness as labour
             other hand, are losing the production of some goods and gradu-                                             costs gradually increase. Russia’s production sector has devel-
             ally specialising in value-added activities, such as designing, soft                                       oped rather differently. It is more inward-oriented and can rely
             goods, patents, commercialisation, etc. CEE countries are receiv-                                          more on local demand; however, the sectors expected to have
             ing an increasing amount of foreign direct investment and the                                              the best performances in 2008 – 09 are quite similar to those in
             region is gradually becoming the European production arm. As a                                             the CEE region, thanks to the strong investment activity in
             consequence of such trends, the share of manufacturing in total                                            Russia.
             GDP has clearly expanded in CEE (Chart 1) and we expect further
             growth. By contrast, the role of the manufacturing sector in the                                           Electrical and Optical Equipment is one of the major “winners”,
             “old” EU countries is declining heavily, with the service sector as                                        particularly in Central Europe. In Poland, Hungary, Slovakia and in
             the major driver of development (it now accounts for around                                                the Czech Republic, the delocalisation of production in recent
             65 % of GDP). As the aforementioned trends are still consolidat-                                           years has already led to the formation of production clusters,
             ing, we continue to forecast that the manufacturing industry will                                          with a wide availability of suppliers. We have already observed a
             be the main driver of economic development in CEE in 2008 – 09                                             transition from basic towards higher value-added activities, with
             in all countries (see Chart 2). Russia is the only possible excep-                                         foreign players in the market delocalising increasingly sophisticated
             tion, as strong domestic demand favours some retail-oriented                                               production processes. Moreover, new foreign investors continue
             segments (trade, finance, communication) more than manufac-                                                to arrive, which is a clear sign of the sector’s good health and
             turing.                                                                                                    competitiveness. In Poland, for example, new investments in-
                                                                                                                        clude Toshiba (LCD TV sets), Sharp and Funai Electric Co. In the
             Looking at the sub-sectors in manufacturing and focusing solely                                            next three years, Poland will become the European leader in TV
             on the CEE-8, we believe the clear winners for 2008 – 09 will be                                           set production, with about 80 % of the new generation TV sets on
             a group of medium-high tech manufacturing sectors related to                                               the European market to be manufactured in Poland. The Czech
             the production of investment and intermediate goods. These are                                             Republic is also benefiting from growing EU demand for flat
             the sectors characterised by higher productivity, higher export                                            panel TVs and PCs, and further greenfield investments are expect-
             orientation and higher FDI intensity. Cost competitiveness related                                         ed in 2008. Slovakia is a strategic country in the plans of two
             to EU membership has attracted and continues to attract huge                                               global players, Samsung and Sony; and it is also a possible target
             investments from abroad. Consequent productivity improve-                                                  of Asiatic producers of LCD modules (such as the Taiwanese Chi-

        CEE sectoral outlook 2008 – 09:                                                                             CEE sectoral outlook 2008 – 09:
        manufacturing and service sector                                                           Chart 2          winners and losers                                                                                                           Chart 3

Service (% VA growth 2008 –’09)

                                                                                                             Value added growth 2008–’09

                                                                                                                                                            Rubber & plastic
                                                                                                                                                                                                                              Manufacturing (Inv. Goods)
                                  9.0                                                                                           10. 0%                           Machinery and Eq.
                                                                                                                                                                                                                              and construction
                                                                                                                                                      Electrical         Basic metals
                                                                                                                                                                    Transport Eq.
                                                                 Russia                                                                    7.5%                                                                Services and Network Industries
                                  7.0                                                                                                                         Non-metallic         Communications
                                                                                               Slovakia                                            Furn.                                     Transportations                  Wholesale & Retail Trade
                                                                                                                                           5. 0%              Chemicals Food
                                                                 Turkey                                                                             Paper                 Electricity, Gas & Water                                      Finance
                                                                                                                                                                    R & Hotels
                                  5.0                        Romania    CEE-8                 Bulgaria                                                          Mining
                                                   Croatia                      Czech Rep.                                                 2.5%                                                                               Losers
                                                                                                                                                     Leather                                                                  Traditional Manufacturing
                                                                      Poland                                                                                   Textiles
                                                                                                                                                                                                                              (Cons. Goods), Agriculture
                                  3.0                                                                                                      0. 0%
                                        3.0      5.0                      7.0                9.0                                                   0%                            5%                             10%                          15%
                                              Manufacturing (% VA growth 2008–’09)                                                                                        Weight of the sector (% on VA, 2006)

        Source: UniCredit New Europe Research Network                                                               Source: UniCredit New Europe Research Network

                                                                                                                                                                                                       Sectoral Analyses, Outlook 2008–2009                5
    Regional Outlook 2008 – 2009: Winners and Losers

    Mei). It is interesting to note that the electrical and optical equip-   but also given the low car penetration level, which is likely to
    ment sector is also a winner in Romania. With lower production           rise quickly as income grows. Overall, we believe the outlook for
    infrastructures and a less organised network, Romania is attract-        the automotive sector in CEE remains bright. The cluster in the
    ing investments for its lower labour costs. The electrical and opti-     “borderless economy” of Central Europe is enhancing abilities
    cal equipment sector has largely been privatised in 2007. Nokia          and positive spillovers among producers, suppliers and clients,
    recently announced its intention to open a “Nokia village”, and          and this is attracting other investors. Poland, for example, be-
    this is attracting many suppliers and other companies such as            came the fifth largest exporter of car diesel engines worldwide.
    Ericsson, Foxconn and Emerson. Samsung is also planning to pro-          We believe that even a slump in world demand for cars might
    duce LCDs in Romania.                                                    not have too negative an effect on the sector in CEE. As in the
                                                                             past, competitive pressures at the international level will most
    Transport Equipment is the sector most tied to foreign players’          likely promote a further relocation of activities towards CEE. It
    strategies, chiefly due to the automotive industry, which is very        should be noted that the Transport Equipment sector is classified
    much a global industry (note – the sector as a whole also in-            among the worst performers only in Croatia, where car produc-
    cludes the production of ships, trains and planes). Intense inter-       tion is non-existent, and shipbuilding activity, which is state-
    national competition has made the relocation of production an            owned and runs at a loss, is set to undergo major restructuring.
    unavoidable strategy for most of the top global market players.
    The CEE region has been one of the main beneficiaries of this            Machinery and Equipment is supporting the rapid expansion in
    process, with all of the top 10 major automotive players from            manufacturing activity in the region. The production of machines
    the USA, Asia and Western Europe now having plants in the                “to do something” (machinery for food production, textile pro-
    CEE-8 to serve the entire European market. In 2006 the region            duction, paper, metallurgy, etc.) is benefiting from the demand
    produced around 16 % of total passenger cars manufactured in             derived from other manufacturing sectors, but the segment of
    the entire of Europe and this share has doubled since 2002. The          home appliances also has bright prospects. FDI inflows have
    Central European cluster is particularly strong. The boom in             allowed the introduction of advanced technologies. Hungary, for
    Slovakia is due to the launch of production in new car plants,           example, is benefiting from the expanding activity of Electrolux.
    such as PSA (started production in May 2006) and KIA (started in         In Poland, many leading world players in the home appliances
    December 2006), as well as the launch of new model produc-               sector such as Bosch, Whirlpool, LG or the Fagor Group have de-
    tion (Audi Q7) at Volkswagen Slovakia. In the Czech Republic, the        localised. In 2007, new investments included those implemented
    first year of full production of the TPCA assembly plant – about         by Indesit and Electrolux. Refrigerators, washing machines and
    300,000 car units evenly distributed between Toyota, Peugeot             kitchen ovens manufactured in Poland already account for 15 %
    and Citroen – pushed the sector to new highs (around 30 % of all         of the overall production of such goods in Europe. We expect the
    passenger cars manufactured in the region). In Poland, new car           sector to remain among the best performers in the CEE region in
    models and the start of the production of MAN trucks will sus-           the years to come, both in the production of machines and in
    tain the sector’s performance. South Eastern Europe will also            home appliances, profiting from competitiveness in terms of
    attract further investments, especially in the production of car         costs and quality standards. In Russia the sector will mainly
    parts and components. Ford is entering Romania, where Renault            benefit from the massive investment programme for upgrading
    already produces the successful Dacia Logan. A slightly different        infrastructure in the utility sector as well as energy generation
    strategy is pursued in Romania, with foreign investors targeting         and transmission.
    the low cost segment, leveraging on cost competitiveness.
    Turkey, in addition to its important role as a passenger car man-        Positive spillovers from the increasing activity of the Transport
    ufacturer (550,000 cars produced in 2006), produces 70 % of the          Equipment sector, and in part also from Machinery and Equip-
    commercial vehicles (375,000 light vehicles, 29,000 trucks,              ment and Electrical Equipment, suggest classifying Basic metals
    35,000 buses) made in the entire CEE region. Russia, which               and Rubber and plastic among the “winners”. The sub-sectors
    already produced 1.1 million cars in 2006 but where the role of          that are more integrated with the automotive industry (steel,
    foreign investors was not as significant, will also attract invest-      aluminium production, rubber, tyres) will generate the best
    ment from abroad, through joint ventures. Both countries offer           performances. Foreign investments are also flowing in these
    strong potential, not only due to the long traditions in the sector,     sectors. One significant example in the rubber segment is that

6   Sectoral Analyses, Outlook 2008–2009
    all of the main players in tyre production have plants in CEE                                                               lems. Overall, we believe that apart from production serving spe-
    (Goodyear, Continental, Michelin, Bridgestone, Pirelli).                                                                    cific technical needs (such as automotive, medical, etc.), the tex-
                                                                                                                                tile sector is gradually going to lose its traditional relevance in
    While the CEE region specialises in medium-high technology,                                                                 CEE. The sector’s value-added growth in the region on average
    some de-specialisation is taking shape in more traditional labour-                                                          will probably be close to stagnation in the next two years.
    intensive activities. Within the manufacturing industries, we reck-
    on the performance of labour-intensive manufacturing sectors,                                                               Growth in manufacturing at regional level is accompanied by
    such as Textile and Leather, will be negatively affected by cost                                                            strong growth in construction activities. Infrastructural investment
    pressures and increasing competition from absolutely low-cost                                                               projects, the building of new production capacities and a boom in
    emerging markets. Despite many greenfield foreign investments                                                               the residential and business-related market have fuelled dynamic
    in the last decade, traditional fabric production in CEE is no longer                                                       growth, with only some stabilisation recorded in 2007. We classify
    competitive, with only a few exceptions. The price elasticity of                                                            construction as a best sector in almost all the countries. We be-
    demand in these sectors is generally very high, and Asiatic coun-                                                           lieve the sector’s growth will continue to be fuelled by infrastruc-
    tries are taking the lead, while labour costs in the CEE countries                                                          tural needs. The support of EU funds will also play a role in the
    are growing rapidly (salaries are now 2.5 times higher on aver-                                                             CEE-8. In Russia, both the private and public sector have launched
    age in CEE, in euro terms, than they were in 2000). In the textile                                                          a number of investment programmes related to infrastructure
    sector, Romania and Bulgaria are relatively more competitive                                                                (development of the Far East, Sochi 2014 Winter Olympic Games,
    given their lower labour costs. However, and this is especially                                                             etc.) that will further support growth. The demand for high-quality
    true for Romania, the sector suffers from the fact that foreign                                                             accommodation, office buildings and retail outlets also has major
    companies which entered the market in the past mostly delo-                                                                 potential in the region. Despite some expected stabilisation we
    calised or outsourced production, while keeping their commercial                                                            do not see risks for stagnation even under a scenario of a global
    bases and higher value-added activities in the original country.                                                            credit squeeze. While the sector might be one of those most
    Exit costs for these investors are thus low and companies are                                                               affected by a contraction in lending activities at the global level,
    starting to look at other attractive locations such as Ukraine,                                                             we still recognise a structural gap of supply with respect to
    Moldova and the Far East. Moreover, some tariffs on EU imports                                                              demand.
    from China are expiring in 2008. In Turkey, the sector was very
    competitive until a few years ago, but the strength of the curren-                                                          We expect the Services and Network industries to turn in a good
    cy in recent years has exacerbated the sector’s structural prob-                                                            performance next year, and to continue to represent an important
                                                                                                                                component of development in CEE economies. The increasing ser-
                                                                                                                                vice content at world level and the demand for higher service
                                                                                                                                standards will also be visible in the CEE region. These sectors are
CEE sectoral outlook 2008 – 09:
Central Europe and South Eastern Europe*                                                                              Chart 4
                                                                                                                                the target of many international corporations that aim to support
                                                                                                                                local demand and enter “under-penetrated” markets. Fast grow-
                                                                                                                                ing household disposable income (per capita GDP is expected to
South Eastern Europe (Growth 2008 –’09)

                                                                                                                                be around EUR 9,000 on average in the region in 2009) is a
                                    14.0                   Construction
                                                                           Basic metals                                         major driver for the development of retail-oriented sectors, such
                                    12.0                                                   Machinery
                                                                    Wood                   and eq.
                                    10.0                                                                                        as Retail Trade and the Financial Sector. Retail and Wholesale
                                          8.0                                                  Transport eq.                    trade is still in its early stages of development in some countries,
                                          6.0     Mining                                                                        such as the vast Russian market or in some South Eastern coun-
                                                                                                    Electrical eq.
                                                                                   Other non-metallic mineral pr.               tries, and therefore has significant growth potential. The perfor-
                                                                                                                                mance of network industries such as Communication and Trans-
                                            0.0      2.0      4.0          6.0       8.0        10.0           12.0    14.0
                                                                                                                                port, and to a lesser extent Electricity, Gas and Water, is expected
                                                                    Central Europe (Growth 2008–’09)
                                                                                                                                to be positive. Communication is a very concentrated sector, and
Source: UniCredit New Europe Research Network
                                                                                                                                foreign investors are present in most of the countries. The gap as
*) Central Europe: Czech Republic, Hungary, Poland, Slovakia; South Eastern Europe:                                             regards under penetration (in terms of lines, mobile users, inter-
Bulgaria, Croatia, Romania, Turkey. Russia has been excluded (its important weight, in
terms of GDP, would have distorted the averages and hence complicate the reading).                                              net users, etc.) is gradually going to be filled thanks to rapid

                                                                                                                                                                     Sectoral Analyses, Outlook 2008–2009   7
      Regional Outlook 2008 – 2009: Winners and Losers

     income growth. The Transport sector will take advantage of the                                   Given the above mentioned trends, our best, stable and worst
     completion and upgrade of many infrastructure projects. The sec-                                 classification for each sector in each country, which refers to the
     tor’s efficiency is considered vital for the development of manu-                                expected performance in 2008 – 09, and the structural features of
     facturing activity as a whole.                                                                   each industry*, is shown in Table 1.

    *) In order to classify sectors (according to NACE classification) as best, stable or worst in the CEE region, we take into account a number of factors, both structural and cyclical,
    using qualitative and quantitative information. Starting from current performance, financial results and ongoing transformations, through our forecasting model we consider ex-
    pected developments at the domestic and global level. We also consider the country’s position in world production, evaluating short and long-term potential in each sector based
    on specific structural features such as market structure and its possible evolution, actual and expected FDI, and international and domestic competitiveness in terms of export po-
    tential and productivity. Our forecasts are reported at pages 10/11, while structural indicators for each country are at the end of each chapter.

    Best and worst performers in CEE                                                                                                                                               Table 1
                                                                             BEST                                STABLE                                     WORST

                            Agriculture, Hunting, Forestry, Fishing          BG                                  PL, SK, HU, HR, RO, RU                     CZ, TK
                            Mining & Quarrying                               TK                                  CZ, BG, HU, HR, RU                         PL, SK, RO
                             Food; beverages and tobacco                                                         PL, SK, CZ, BG, HR, RO, TK, RU             HU

                             Textiles and textile products                                                       BG, TK                                     PL, SK, CZ, HU, HR, RO, RU

                             Leather and leather products                                                        HU, HR, RU                                 PL, SK, CZ, BG, RO, TK
                             Wood and wood products                          BG, RO, TK                          PL, SK, CZ, HR, RU                         HU
                             Pulp & paper; publishing & printing             HR                                  PL, SK, CZ, BG, HU, RO, TK, RU
                             Coke, refined petroleum prod. & nuclear fuel                                        PL, SK, CZ, BG, HU, HR, RO, TK, RU

                             Chemicals, chemical products                                                        PL, SK, CZ, BG, HU, HR, RO, TK, RU

                             Rubber and plastic                              PL, SK, CZ, HU, TK, RU              BG, HR, RO
                             Other non-metallic mineral products             PL, BG, HU, HR, RO, RU              SK, CZ, TK
                             Basic metals and fabricated metal products      PL, SK, BG, HU, TK                  CZ, HR, RO, RU
                             Machinery and equipment n.e.c.                  PL, SK, CZ, BG, HU, TK, RU          HR, RO

                             Electrical and optical equipment                PL, SK, CZ, BG, HU, HR, RO, RU      TK
                             Transport equipment                             PL, SK, CZ, BG, HU, RO, RU          TK                                         HR
                             Manufacturing n.e.c.                            BG, HR                              PL, SK, CZ, HU, RO, TK, RU
                            Electricity, Gas & Water                                                             PL, SK, CZ, BG, HU, HR, RO, TK, RU
                            Construction                                     PL, BG, RO, TK, RU                  SK, CZ, HU, HR
                            Wholesale & Retail Trade, Hotels & Restaurants
                             Wholesale & Retail Trade                        RU                                  PL, SK, CZ, BG, HU, HR, RO, TK
    Non Manufacturing and
      Network industries

                             Hotels & Restaurants                                                                PL, SK, CZ, BG, HR, HU, RO, TK, RU
                            Transportation & Communications                                                      RU
                             Transportation & Storage                                                            PL, SK, CZ, BG, HU, HR, RO, TK
                             Communications                                  SK, HR, RO                          PL, CZ, BG, HU, TK
                            Finance, Insurance, Real Estate & Bus. Services HR
                             Financial Institutions                          PL, BG, TK, RU                      SK, CZ, HU, RO
                             Insurance                                       PL, BG, RU                          SK, CZ, HU, RO, TK
                             Real Estate, Dwellings & Business Services      PL                                  SK, CZ, BG, HU, RO, TK, RU
                            Community, Social & Personal Services                                                PL, SK, CZ, HR, RO, TK, RU                 BG, HU
    Note: BG = Bulgaria, CZ = Czech Republic, HR = Croatia, HU = Hungary, PL = Poland, RO = Romania, RU = Russia, SK = Slovak Republic, TK = Turkey

8       Sectoral Analyses, Outlook 2008–2009
Risks to the scenario                                                  those most affected in CEE. Second, the credit channel seems
As things stand at present we are dealing with an international        the most powerful vehicle of possible transmission. The con-
macroeconomic scenario that is under scrutiny and subject to a         struction sector in CEE is experiencing a boom (despite a slow-
series of question marks: it is possible that there could be a sig-    down in some countries that was already visible in 2007), but
nificant slowdown (at least more than expected) in the US econ-        the sector could also be subject to the worldwide credit squeeze
omy, following the subprime crisis and related concerns, and/or        and the negative mood at the international level concerning the
tougher conditions in the international credit market. Given the       real estate market and residential properties. On the one hand,
leading role of the US economy at the global level, the slow-          companies and households could have less access to credit; on
down could affect other areas. Liquidity concerns can also spread      the other, construction and real estate companies themselves
across borders. CEE countries are not affected directly, as trade      could be less willing to get involved in large-scale construction
links between the US and CEE are rather weak. However, CEE             projects until the crisis is over. Paradoxically, the ongoing boom
countries are already feeling the indirect effects of the crisis       in the construction sector, with fast rising property prices, in-
through the financial channel. Good macroeconomic fundamen-            creases the probability of an abrupt correction in the event of a
tals, on average, have protected CEE countries from major diffi-       tougher credit squeeze. However, we think that the demand for
culties until now, but with imbalances in terms of external            infrastructure and high-quality accommodation will be key, and
accounts or banks’ financing strategies, the risk of a deeper credit   will sustain the sector’s performance and also reduce potential
squeeze than the one we currently envisage is there.                   risks. We classify the sector among the best in many countries
                                                                       (Poland, Romania, Bulgaria, Turkey and Russia).
At the sectoral level, as the crisis started from the US property
market the most affected sectors in the USA were housing and           The manufacture of durable goods (home appliances for in-
non-residential construction. The crisis was not limited to those      stance) may also be hurt in the event of a significant slowdown
sectors. There is already evidence of a considerable slowdown in       in demand, at the local or EU level (while CEE’s trade links with
manufacturing activity: durable goods (e. g. home appliances)          the USA are weak, they are very significant with the EU). In this
and the automotive sectors in particular have been hit the most        respect, the automotive sector is quite different. Competitive
during recent months. As consumption was affected, there have          pressures at the global level could accelerate the relocation
also been consequences for the retail trade segment. Moreover,         choices of major automotive players, and the CEE region could
banks and financial institutions suffered directly from the sub-       even benefit.
prime concerns.
                                                                       Finally, the credit squeeze may impact on sectors that are more
What could go wrong in the CEE region, at sectoral level, in the       in debt. In CEE, this largely means the traditional sectors such as
event of a more severe crisis with worsening conditions in global      Textile and Leather, whose already weak position could worsen
demand and a sharper liquidity squeeze? First, the most affected       further in the event of an eventual slump in demand and credit
sectors in the USA or at the international level are not necessarily   conditions.

                                                                                                           Sectoral Analyses, Outlook 2008–2009   9
       Regional Outlook 2008 – 2009: Winners and Losers

      Real Value Added. yoy growth in % – Forecast 2007 –'09
                                                                                      Bulgaria               Croatia                   Czech Rep.                  Hungary
                             Sectors                                          2007     2008 2009     2007     2008 2009       2007       2008 2009       2007       2008 2009

                             Agriculture, Hunting, Forestry, Fishing          – 8.1     7.6    5.4     1.5      3.0     2.0    – 5.0     – 1.0     1.5   – 10.0      6.4     2.8
                             Mining & Quarrying                                 2.2     2.0    2.9     3.8      3.0     3.0      2.7       0.2    1.5       0.0      8.6     8.0
                             Manufacturing                                    13.7      9.7    8.9     7.1      5.7     5.2      9.9       6.6     8.1       9.7     7.0     7.4
                              Food products, beverages and tobacco            12.2      8.3    8.1     4.5      3.5     3.2      2.1       1.5     2.8       0.9     1.6     3.0
                              Textiles and textile products                     7.1     4.8    4.6   – 2.0    – 3.0   – 2.0      3.6     – 2.8   – 2.1     – 1.7     1.8     2.7

                               Leather and leather products                    3.5      3.2    2.9   16.0      3.5     2.0      0.8       1.5     1.5     20.0       3.0     3.8
                               Wood and wood products                         14.8     10.4    9.5    7.0      7.9     6.5     12.0       6.0     4.0     – 1.1      1.1     2.8
                               Pulp, paper & paper products;
                               publishing & printing                           5.1      4.9    5.8   11.5      6.5     5.7      4.0       5.2     4.5       2.0      3.7     4.1
                               Coke, refined petroleum products &
                               nuclear fuel                                    2.5      3.2    3.8    5.5      4.6     4.5      4.9       2.5     2.9       0.3      1.3     3.2

                               Chemicals, chemical products and

                               man–made fibres                                12.1      9.0    9.0     5.8     5.9     5.1       4.9      2.0     3.4       2.2      3.9     4.7
                               Rubber and plastic products                     6.5      7.3    7.3     0.9     5.0     6.5      20.7      9.3    12.2      17.1     10.1     8.0
                               Other non–metallic mineral products            23.6     15.1   12.8     4.2     8.5     6.9      15.1      6.0     4.2      22.1     11.2    10.5
                               Basic metals and fabricated metal products     19.5     13.0   10.7   11.8     10.0     7.9       3.0      2.6     5.6      10.9      9.3     8.9
                               Machinery and equipment n.e.c.                 18.5     12.3   11.3     4.4     6.5     7.0      16.2     11.8     9.8      14.3      7.2     8.8

                               Electrical and optical equipment               18.5     14.6   11.8   16.4      7.4     7.4      10.9     11.6    12.4      11.8      8.8     9.3
                               Transport equipment                            18.4     12.8   10.4     0.5     1.9     3.0      11.9      8.6    12.8      19.2     11.0     9.9
                               Manufacturing n.e.c.                           18.1     10.7    9.5   13.0      9.5     9.5       6.9      2.9     4.0       7.0      3.9     4.0
                             Electricity, Gas & Water                          2.0      1.6    3.2   – 0.6     1.0     1.5    – 26.6      6.5     3.4       2.1      1.3     2.8
                             Construction                                     18.9     13.9   12.0     4.8     5.0     4.5       5.0      2.0     3.5    – 10.5      3.0     3.0
     Non Manufacturing and

                             Wholesale & Retail Trade, Restaurants & Hotels    5.6      4.7    4.7     6.1     4.0     3.6      11.0      6.0     4.0       1.7      2.0     2.9
       Network industries

                               Wholesale & Retail Trade                        5.8      4.8    4.8     6.0     4.0     3.5      11.4      6.3     4.2       1.8      2.1     3.0
                               Restaurants & Hotels                            4.9      4.3    4.5     6.5     4.0     4.0       6.4      2.8     2.0       0.9      1.4     1.7
                             Transportation & Communications                   4.5      4.6    4.8     8.8     7.0     6.5       8.7      4.6     3.4       4.0      4.5     5.0
                               Transportation & Storage                        4.9      5.2    5.5     8.0     6.0     5.0       7.9      4.2     4.0       4.1      4.9     5.1
                               Communications                                  3.9      3.9    4.0    9.8      8.2     8.3      9.3       5.0     3.0       3.8      4.1     4.8
                             Finance, Insurance, Real Estate &
                             Business Services                                 9.4      7.3    6.3    8.0      7.0     7.0      9.0       5.6     4.5       3.1       3.0     4.3
                             Community, Social & Personal Services             0.2      0.5    1.6    2.5      2.4     2.4      0.3       1.2     2.2     – 2.5     – 1.6   – 0.4
                             GDP growth                                        6.2      6.2    6.0    5.8      4.7     4.4      5.7       4.0     4.5       1.8       3.1     3.9

10       Sectoral Analyses, Outlook 2008–2009
        Poland               Romania                Russia                Slovakia                 Turkey                         EU
2007    2008 2009    2007     2008 2009      2007   2008 2009     2007      2008 2009     2007      2008 2009           2007     2008     2009

  0.9    1.9   1.0   – 5.6     2.8     0.6    3.0    3.0    2.7    3.9      3.7     3.6    – 2.5     1.3      1.0          0.8     0.7      0.8
– 0.4    1.9   2.0     0.5     2.6     3.6    2.0    5.5    5.6   21.6      0.5     3.0    11.5      7.0      6.0        – 5.4   – 0.7    – 0.3
  9.6    7.8   5.9     6.9     6.4     5.9    7.0    6.4    5.9   16.0     10.8     8.9      5.5     6.0      6.4          3.5     2.0      2.0
  3.4    6.2   5.3     9.0      5.7    5.1    5.8    5.7    5.4     2.5      3.3    5.2      3.5     5.0      5.5          2.1     1.6      1.8
  4.6    4.1   3.0   – 6.9    – 0.5    1.2    2.0    1.7    1.5   – 3.0    – 0.4    0.4      3.0     2.5      2.0          1.6   – 0.4    – 0.8
 4.7     3.9   2.0   – 3.4    – 0.5    1.8    5.7    6.2    5.1    1.0      1.9     1.5     3.0      3.0      3.0        – 0.5    – 2.6   – 2.1
 8.8     6.7   5.5   19.8     10.3     8.5    3.3    5.0    5.2    8.1      7.3     7.6    20.0     15.0     15.0          2.9      1.9     1.9

 6.8     6.6   4.9    2.8      2.9     3.4   10.0    6.9    5.5    9.6      7.8     7.5     3.5      4.5      5.0         1.1      0.5     1.0

– 0.9    6.0   6.3   – 4.3     1.7     3.5    1.0    4.2    4.2    0.6      6.0     5.9     4.5      4.0      4.0         2.7      1.4     2.1

 8.9     7.7   5.5     6.4     6.0     5.0    2.7    5.2    4.5     5.1     3.8     3.6      7.0     6.0      6.0          2.3     2.4     2.5
13.8    11.9   8.9   13.0      7.8     5.1   17.0   17.7   15.4   13.5     10.4     8.6     11.0    12.0     13.0          3.0     1.9     2.0
15.3    10.0   6.8   17.6      9.7     7.7    8.0    9.0    7.1     4.6     4.3     4.7      1.0     2.0      2.5          2.7     1.7     1.6
13.3     7.8   4.9     4.3     8.3     7.3    4.0    4.5    5.0   21.0     13.7     9.8     12.5    13.0     13.5          3.7     2.3     2.0
11.3     6.9   5.9     2.9     6.8     6.8   19.0    9.0    8.3   15.0     10.6     9.2     10.0    12.5     13.0          5.8     3.1     2.6
12.1     8.7   6.6   – 1.6     5.3     7.2   17.0   14.9    9.9   16.5     16.9    13.2      1.0     2.5      5.0          4.3     3.5     3.2
 7.3     6.9   4.9   16.5     15.0    12.5   15.0    9.2    5.6   39.3     14.3    10.4      6.0     6.5      7.0          3.9     1.9     2.0
 9.8     7.4   5.5     1.8     3.2     3.2    7.5    8.3    7.4   15.7     10.3     8.5   – 10.0     5.0      7.5          3.5     1.9     1.8
 0.1     3.4   3.2   – 0.4     3.7     4.9    0.5    2.3    3.0   – 1.4     4.7     3.0    10.0      8.0      7.5        – 0.3     0.7     1.4
16.8     8.0   5.7   26.8     16.8    12.4   20.0   13.2   10.4     4.8     7.7     5.1    12.5     15.0     15.0          3.3     2.3     2.1
 5.6     5.3   3.9     5.3     4.8     5.3   11.5    8.8    8.0     5.7     6.6     5.3      5.2     5.7      6.2          2.2     2.3     2.3
 5.7     5.4   4.0     5.0     5.0     5.6   11.0    8.9    8.1     6.1     6.8     5.3      5.5     6.0      6.5          2.1     2.2     2.3
 3.9     3.8   2.8     6.8     3.7     4.1   10.0    7.1    6.5     0.7     4.8     4.9      3.5     4.0      4.5          2.5     2.4     2.2
 4.1     4.7   4.3     3.0     5.1     6.2    7.0    8.2    7.5   10.3     11.2     7.6      4.8     6.0      6.3          3.0     2.9     2.9
 4.0     4.8   4.4     1.4     4.4     5.9                        10.1     11.2     7.5      4.5     5.5      5.8          2.9     2.6     2.6
 4.4     4.5   4.1    7.7      6.9     6.9                        11.6     10.9     8.1     5.0      6.5      6.8         3.0      3.2     3.3

 4.0     4.4   4.0    9.3      6.4     6.0    7.4    6.0    7.3    5.0      6.2     5.5     3.9      4.4      4.9         3.1      2.6     2.5
 1.9     2.4   1.7    4.9      2.9     2.9    3.8    2.6    2.0    6.2      2.4     2.1     3.5      4.5      5.5         1.4      1.5     1.8
 6.4     5.2   4.3    5.8      5.5     5.0    7.5    6.6    6.0    9.0      7.4     5.9     5.0      6.1      6.2         2.5      2.1     2.2

                                                                                                           Sectoral Analyses, Outlook 2008–2009   11

     • Positive growth prospects underpinned by recent EU                       sectors, while agriculture should begin to pick up and
       accession and the improving business environment pro-                    its future looks bright.
       vide scope for a favourable outlook for the majority of                • Health care, education and government services are
       the sectors in the medium term, although some concerns                   well overdue for radical reforms and restructuring.
       over long-term competitiveness could arise in the future.                Increasing cost pressures might be felt most in labour-
     • We expect a solid performance from infrastructure                        intensive sectors like textile and leather production.
       construction along with related input suppliers and                      Hotels and restaurants could also face tougher times
       construction material producers. A strong showing is                     ahead based on rising input costs, increasing capacity,
       also likely from the higher value-added manufacturing                    and residual service quality issues.

     Economic Framework                                                       Performance of the sectors
     Overall, the economy is expected to experience healthy real GDP          Best Performers
     growth rates in the next two years on the back of a very solid           Agriculture, Hunting, Forestry & Fishing is likely to be supported
     2007. Still worth mentioning though are the signs of intensifying        by a number of factors going forward. Following an extended
     inflation, which may put pressure on domestic consumption and            period of low agriculture-related commodity prices, unfavourable
     impact on sentiment, and the widening current account gap.               weather resulting in significant production shortages caused dis-
     Nevertheless,      the    improving    business   environment,    the    proportionate price hikes in 2007. This should provide solid im-
     favourable tax regime and the stable macroeconomic framework             petus for increased planting in the coming years. Moreover,
     continue to be supportive. The increased purchasing power of             farmers are one of the first to feel the effects of subsidies and
     local consumers also bodes well for the future. All of the above         other common programs. The country has a significantly higher
     accompanied by heavy investments in infrastructure and the               share of agricultural land throughout its total territory than the
     transport network should stimulate new and solid FDI flows,              EU average, and this endowment, along with favourable climatic
     which along with disciplined fiscal policies will help keep the          conditions, will likely be utilised better during the next few
     economy in good shape for the period 2007 – 2009. With exter-            years. Furthermore, policies designed to stimulate bio-fuel pro-
     nal imbalances and risk repricing at international level, the coun-      duction in the EU should lead to an increased production of related
     try is still vulnerable to a credit squeeze, while higher inflation in   cultures. On the other hand, the sector’s results in terms of gross
     the context of a fixed exchange rate raises questions about the          value added have been very volatile over the past several years.
     country’s long-term competitiveness.                                     The main reasons have been the restructuring of the sector and
                                                                              the weather factor. Most of the farms are still smaller but the
     In terms of sector performance, the overall balance of our fore-         consolidation of land is underway and currently almost 5 % of
     cast is again largely positive, with the majority of sectors             total arable land is owned by large institutional investors. Meat
     assigned Best or Stable ratings. The economy is dominated by             and milk producers will have to comply with stringent EU
     services sectors, while manufacturing contributed around 19 % to         requirements in order to have access to the common market,
     gross value added in 2006. Notwithstanding, manufacturing reg-           but significant progress in this regard has already been achieved.
     istered signs of a healthy revival in 2007 and it grew faster than       Investments in modern equipment and the introduction of more
     services in the first half of the year. The trend is likely to be sus-   effective processes will drive more dynamic development in the
     tained through to year-end and the production of intermediary            sector in the coming years.
     and higher value-added final goods should continue to be a
     strong driver of economic growth.                                        The manufacturing sector is expected to grow faster, on average,
                                                                              than non-manufacturing activities. Among the non-manufactur-

12   Sectoral Analyses, Outlook 2008–2009
ing segments, the Construction sector has been one of the                 centrated sector (in terms of turnover share). The overall FDI
major drivers of economic growth over recent years and its rela-          appeal of the sector is one of the highest in the economy. The
tive share in total value added has increased significantly. The          sector is typically capital intense; fixed capital formation lies way
outlook continues to be favourable going forward, as construc-            above the average in the economy, while energy intensity is
tion related to EU funds could be particularly sound, supported           also one of the highest. The sector is predominantly focused on
by infrastructural projects like roads, railways, dams, ports and         satisfying local needs, as transportation costs are high.
airports, as well as industrial construction. On the other hand,
the residential segment has been the strongest in the past and            Basic Metals & Fabricated Metal Products and Wood & Wood
is likely to experience a slowdown, even if opportunities still re-       Products have both benefited from a very favourable global envi-
main. Profitability in the sector still remains attractive, propelled     ronment marked by strong demand and constraints in supply at
by healthy increases in real estate prices, although cost pres-           international level. Locally supplied inputs create further advan-
sures have been building up in terms of both labour and other             tages for companies producing copper, zinc and lead, as well as
inputs, and margins are likely to go down to more sustainable             wood products, while steel producers mostly import raw materials
levels. The ongoing boom in the construction sector with fast ris-        and their margins are likely to suffer from increasing transporta-
ing property prices increases the probability of an abrupt correc-        tion costs. Demand should remain strong both internally, as the
tion in the event of a credit squeeze.                                    capacity of manufacturers of investment goods increases and
                                                                          new investments are made, and externally, considering Bulgaria’s
Other Non-Metallic Mineral Products has also been one of the              advantage of having a lower production cost base within the
fastest growing sectors and one of the main beneficiaries of the          common EU market. Issues related to obsolete equipment and
construction boom lately: some of the largest segments are                low environmental protection standards remain, and significant
cement and concrete mixtures, which taken together account for            investments will be needed so that satisfactory levels are
almost 50 % of total turnover in the sector. Segments that have           reached. Several strong producers of plywood, hardboard, veneer,
also been strong are ceramics and other construction materials.           wooden transport pallets, packaging and other fittings used in
The good prospects are likely to be sustained with the continued          the construction of buildings have emerged during the past few
strong development expected in construction. The main players             years, as many of them are suppliers to major international pro-
in the sector have been privatised and big international compa-           ducers of final goods. The wood sector is closely linked to con-
nies have already positioned themselves well in this highly con-          struction and furniture production, as a major supplier to both.

Best and worst performers
BEST                                             STABLE                                          WORST

Agriculture, Hunting, Forestry & Fishing         Chemicals, Chemical Products & Man-Made Fibre   Community, Social & Personal Services
Basic Metals & Fabricated Metal Products         Coke, Refined Petroleum Prod. & Nuclear Fuel    Leather & Leather Products
Construction                                     Communications
Electrical & Optical Equipment                   Electricity, Gas & Water
Financial Institutions & Insurance               Real Estate & Bus Services
Machinery & Equipment n.e.c.                     Food, Beverages & Tobacco
Manufacturing n.e.c. (mainly furniture)          Mining & Quarrying
Other Non-Metallic Mineral Products              Pulp, Paper & Paper Products
Transport Equipment                              Publishing & Printing
Wood & Wood Products                             Restaurants & Hotels
                                                 Rubber & Plastic Products
                                                 Textile & Textile Products
                                                 Transportation & Storage
                                                 Wholesale & Retail Trade

                                                                                                               Sectoral Analyses, Outlook 2008–2009   13

     Industrial sectors including Machinery & Equipment, Electrical &      services segment should perform well as consumer confidence
     Optical Equipment and Transport Equipment should benefit              increases with the further accumulation of wealth.
     from increasing FDI supported by the better business environ-
     ment in the country within the EU, more efficient infrastructure,     Leather & Leather Products is dominated by shoe producers,
     a favourable tax regime (corporate tax is 10 %), as well as the       which accounted for around 50 % of sales. The sector will con-
     modernisation of equipment and processes and increasing local         tinue to face stiff competition from imports, and cost pressures
     and regional demand. Bulgaria is well positioned geographically       will likely continue to build up thanks to increases in both labour
     and can comfortably serve as the production base for several          and raw material costs. With regard to product quality there is
     markets with growth potential. The lower cost production bene-        still room for catching up to international standards. Moreover,
     fits of the country will become more and more evident as cost         profitability metrics and productivity are some of the lowest in
     pressures build up elsewhere and profit margins are increasingly      the economy, when compared to other sectors.
     being squeezed. This, coupled with the slower demand growth
     expected in more advanced countries and the increasing pur-           Selected Sectors with Stable Outlook
     chasing power in Bulgaria and the CEE region as a whole, should       Food Products, Beverages & Tobacco is one of the largest sec-
     provide impetus for large manufacturers to invest in local pro-       tors in terms of value added within manufacturing, accounting
     duction facilities. On the other hand, local producers have mod-      for around 3 % of total value added in the economy. The aver-
     ernised their equipment and technology, while learning curve          age consumer in the country still spends a significant share of
     advancements are becoming more obvious as subcontracted               his/her income on food. Domestic producers in the sector are
     orders for more sophisticated products are received.                  about to face increasing competition from large international
                                                                           companies, which are able to produce more efficiently and have
     Manufacturing n.e.c., represented mainly by furniture produc-         more sophisticated marketing and logistics approaches. Still,
     tion, has been strongly supported by very solid spending on           local producers have a major advantage with their knowledge
     housing and renovations in the country. The furniture segment         and experience in satisfying local tastes and preferences. Fur-
     has also become increasingly export-oriented to EU countries, as      thermore, companies that are able to source local inputs at
     strong traditions and low-cost advantages like local inputs and       lower cost will benefit, as pressures from higher commodity
     cheaper labour bode well for the future too.                          prices and wage demands intensify. After liberalisation in the to-
                                                                           bacco segment, the former monopoly and state-owned company
     Financial Institutions & Insurance should continue to do well as      Bulgartabac experienced a significant loss in market share,
     flexible financing remains a major driving force for investments,     falling to a still hefty level of around 70 % according to the latest
     while financial institutions further enhance their product and ser-   data for 2007. Demand for tobacco products is stable and the
     vice offerings. Insurance companies will continue to develop          country is attractive for large international manufacturers, which
     other products such as life, property etc., in addition to the auto   recently have been employing aggressive marketing strategies.
                                                                           Textiles & Textile Products has traditionally been a very impor-
     Worst Performers                                                      tant sector for the economy. More recently, clear cost advan-
     Given the positive performance expected of the Bulgarian econ-        tages attracted significant foreign investment. Nevertheless,
     omy, the number of sectors with a negative outlook is limited.        competition from lower cost locations should continue to put
     Healthcare and education systems continued to weigh negative-         pressure on local mass-production oriented manufacturers.
     ly on the economy as little action was taken to restructure them      Tariffs on EU imports from China expire at the end of 2007,
     both. Taking a longer-term view, reforms in these segments will       while the demand for higher salaries coupled with labour short-
     be crucial for the well-being and stable economic growth of the       ages in the country put pressure on local production costs. On
     country. The status of the two important segments above com-          the other hand, the prospects are good for companies focusing
     bined with still wide inefficiencies in government services are       on higher quality and value-added products, labelled as own
     the reasons for the retained Worst rating for the Community,          brands or produced efficiently with short lead times for other
     Social & Personal Services sector. Within the sector, the personal    European manufacturers.

14   Sectoral Analyses, Outlook 2008–2009
Wholesale & Retail Trade is the biggest employer in the economy         Foreign Direct Investments and Privatisations
as over 15 % of the total workforce is engaged in this sector.          The country has had one of the highest FDI/GDP ratios world-
Retail trade has been developing rapidly during the past few            wide over the past few years, consistently over 10 %. FDI is
years, whereby the very strong demand for cars, especially              likely to reach over 15 % of GDP in 2007. A major part of the in-
second-hand ones, petroleum products and car repair services            ward FDI has been invested in green-field projects, and more
were the main growth drivers. Other significant segments have           than one in every three euros has been channelled into real es-
been the trade of food and pharmaceutical products. The higher          tate investments since the beginning of 2007. Overall, services
inflation in food prices lately, if sustained, could lead to slower     sectors like Financial Institutions & Insurance, Real Estate and
spending on discretionary items going forward. On the supply            Business Services, Communications, and Wholesale & Retail
side, very solid growth continued for space in retail chains and        Trade have attracted the lion’s share of FDI during the past few
complexes, and in the future, focus is more likely to shift to dis-     years. More recently, foreign investors have also been particu-
count and department store formats. The wholesale trade is likely       larly active in projects related to the production of supplies and
to experience further development in terms of greater efficiency        materials for construction, the production of auto parts, the
and optimisation, as modern technologies are introduced and             building of retail complexes and chains, the production of food
better logistics employed, while investments in new storage             and drinks, and the setting up of bio-fuel plants and power gen-
facilities are likely to be strong too.                                 eration facilities. Several major investment plans have recently
                                                                        been announced regarding the building of new, and expanding
Restaurants & Hotels is one of the sectors that has experienced         existing, summer and especially winter resorts.
the heaviest investment flows during the past few years. The
country has a very favourable climate and good conditions for           The privatisation process is well into its final phase, as the gov-
both winter and summer tourism. Summer resorts have dominated,          ernment is still keeping control over major utility companies
but the attention of investors is also being increasingly attracted     from Electricity, Gas & Water, suppliers to the energy sector
by winter, spa tourism and other alternatives. Particularly signifi-    from Mining & Quarrying, weaponry and military equipment
cant investments are planned in ski and golf-related projects.          producers (in the Machinery & Equipment sector), and the
Looking forward, prospects are likely to be more favourable for         transportation company Bulgarian State Railways. Some of the
hotels and restaurants in big cities, where business travel should      utility giants may be partially privatised through the stock
continue to grow rapidly and the lifestyles of local consumers          exchange in 2008, but for now, the government intends to keep
change. On the other hand, issues related to overbuilding and an        its majority ownership in this segment (considered strategic for
insufficient level of services and infrastructure could exert a nega-   the country). The privatisation of Bulgartabac – the former
tive impact on some resorts. Moreover, oversupply combined              tobacco monopoly – is likely to appear on the government
with the rising cost of food and utilities could put pressure on        agenda again, after two unsuccessful attempts previously.
profit margins, while issues related to shortages of well-trained
staff are not likely to be solved easily in the short term.

                                                                                                             Sectoral Analyses, Outlook 2008–2009   15

     Bulgaria – Structural Indicators (2006)
     SECTORS                                                                                                                               MARKET STRUCTURE
                                                                                                             Number of         Number of              Top 5      Number of SME turnover
                                                                                                            enterprises*      employees*         turnover/          SME *        in sect.
                                                                                                                                                     sector                 turnover %*
                                                                                                                                               turnover %*

     TOTAL                                                                                                   1,166,296         2,207,733                24.3      265,756          59.27
     Agriculture, Hunting, Forestry, Fishing                                                                    66,847            66,522                 7.7        7,559          92.42
     Mining & Quarrying                                                                                             663            27,810               69.4           243         17.64
     Manufacturing                                                                                               91,153           611,468               42.0        27,878         42.16
       Food products, beverages and tobacco                                                                      22,951           108,112               14.3         6,501         53.81
       Textiles and textile products                                                                             16,451           167,880               17.7         4,873         56.70
       Leather and leather products                                                                               1,546            19,122               33.1           502         72.81
       Wood and wood products                                                                                     7,342            17,920               38.6         1,745         63.52
       Pulp, paper & paper products; publishing & printing                                                        5,892            24,635               29.4         1,839         63.53
       Coke, refined petroleum products & nuclear fuel                                                               46             4,673              100.0            14          0.79
       Chemicals, chemical products and man–made fibres                                                           1,778            24,031               36.6           646         38.35
       Rubber and plastic products                                                                                3,771            19,900               23.4         1,289         74.43
       Other non-metallic mineral products                                                                        2,590            25,878               37.8           861         48.79
       Basic metals and fabricated metal products                                                                 9,564            56,907               67.7         3,124         24.43
       Machinery and equipment n.e.c.                                                                             4,330            65,268               26.1         1,788         42.99
       Electrical and optical equipment                                                                           5,079            32,999               25.3         1,945         63.66
       Transport equipment                                                                                        1,754            13,823               46.5           454         47.75
       Manufacturing n.e.c.                                                                                       8,059            30,320               12.2         2,297         85.83
     Electricity, Gas & Water                                                                                       899            55,010               58.1           293          6.22
     Construction                                                                                                37,704           140,616                6.0        11,689         76.76
     Wholesale & Retail Trade, Restaurants & Hotels                                                             623,142           429,608               14.7       141,539         70.40
       Wholesale & Retail Trade                                                                                 547,820           345,420               14.9       123,625         69.86
       Restaurants & Hotels                                                                                      75,322            84,188               10.8        17,914         86.91
     Transportation & Communications                                                                             98,986           159,590               41.0        16,469         45.57
       Transportation & Storage                                                                                  97,500           119,308               20.5        15,838         63.01
       Communications                                                                                             1,486            40,282               81.9           631         10.74
     Finance, Insurance, Real Estate & Business Services                                                        121,128           165,069               11.8        28,568         68.82
       Financial Institutions**                                                                                   4,868            34,577               41.4         1,303         70.06
       Insurance**                                                                                                6,295                                 54.3           460         34.69
       Real Estate, Dwellings & Business Services                                                               109,965           130,493                3.8        26,805         73.35
     Community, Social & Personal Services                                                                      125,774           552,040               14.6        31,518         70.61
     *) All columns on Market Structure and Constraints plus Share in total FDI, FDI attractiveness, Capital Intensity and Energy intensity are with 2005 data
     **) If missing, it is given as total in: Financial Intermediation (Financial Institutions + Insurance)
     Source: National Statistical Insititute, BNB, COFACE, UniCredit Bulbank – Economic Research Unit
     See ANNEX for further explanations of the indicators

16    Sectoral Analyses, Outlook 2008–2009
                              SECTORAL DETAILS                                                   COMPETITIVENESS                        CONSTRAINTS
Share in    Export IMP/AC %     Share in         FDI     Capital       Energy     RCA         Labour        Average         Wage        Total       Bank
total VA   propen-                 total attractive-   Intensity     Intensity           Productivity     Personnel      adjusted     Indebt-     Indebt-
             sity %              FDI %*    ness %*          %*         (kgOE/              (manufac-            Cost       Labour     edness      edness
                                                                   BGN1000)*             turing=100)      (manufac- Productivity          %*          %*
                                                                                                        turing=100)    (manufac-

 100.0       30.9      38.3       100.0       100.0        37.7         301.9    100.0        149.0            110         135.0        60.0        10.7
   8.5       11.4       5.8         0.4         5.0        13.2          89.4    320.8            –             79         535.1        61.1        10.9
    2.9      21.5      83.2         0.4        13.7        49.0         414.5      8.5         347.6           188         184.6        53.2          5.3
   18.6         –         –        24.4       131.5        41.1         563.3        –         100.0           100         100.0        59.1         11.7
    3.0      19.4      22.1         2.5        86.2        60.8         271.1    130.4          89.9           102          88.1        67.5         19.6
    2.8     114.2     119.2         2.3        81.5        26.2          87.0    199.4          54.4            71          76.8        62.0          9.4
    0.2     171.7     182.7         0.1        24.9        16.7         425.8    166.8          40.0            63          63.1           –            –
    0.4      35.7      35.9         0.6       152.1        41.5         442.4    152.5          69.2            78          88.4        58.4         16.3
    0.8      16.8      37.4         0.8       102.4        49.2         623.7     52.1         109.0           109          99.8        55.3         12.0
      –         –         –         5.6           –           –             –        –             –           358             –           –            –
    1.2      76.4      85.9         2.0       168.3        45.5       1,237.5     82.1         163.3           149         109.9        44.1          8.4
    0.5      38.7      65.1         0.3        60.2        82.7         334.4     52.1          88.1            81         109.1           -         15.3
    1.5      22.9      28.3         2.3       155.4        99.7       1,334.9    115.8         184.8           117         157.4        51.0          8.1
    3.2      80.2      71.2         5.8       180.7        42.7       1,120.2    252.4         186.5           131         142.8        58.6         13.6
    1.5      58.0      76.6         0.8        55.6        27.4         162.5     64.8          76.5           116          65.8        52.6          6.3
    1.1      84.4      93.0         1.0        88.2        21.5          11.8     62.6         113.9           107         106.8        56.0          8.6
    0.4     106.1     101.0         0.1        32.0           –          61.5     25.2         101.3           145          69.8        57.9         16.2
      –         –         –         0.2           –           –             –    148.1             –            74             –        64.9         10.6
    4.0         –         –         4.7       115.8        77.3         592.3        –         241.7           196         123.6        35.8          9.8
    5.9         –         –         4.7        80.5        58.0          36.7        –         137.4            92         149.5        75.8          9.0
   11.8         –         –        15.8       133.6        68.9             –        –          90.3            80         112.6        73.7         14.4
    9.3         –         –        14.4       156.0        62.4             –        –          88.2            82         107.1        74.7         13.2
    2.5         –         –         1.3        51.6        91.4             –        –          99.1            72         138.5        68.1         21.1
   12.4         –         –        15.6       125.1        47.1         568.5        –         256.5           138         185.4        51.1          6.1
    6.9         –         –         1.4        19.9           –       1,066.9        –         189.0           123         154.0           –          7.6
    5.6         –         –        14.2       254.1           –             –        –         456.3           185         247.0           –          4.8
   20.7       0.0       0.1        32.9       158.9        22.8             –     25.4         412.3           141         292.9           –            –
    5.1         –         –           –           –        14.0             –        –         484.5           266         182.3           –            –
                –         –           –           –                         –        –             –           212             –           –            –
   15.6       0.0       0.2        15.7       100.6        25.9             –     25.4         393.2           110         358.3        58.1          8.7
   15.1       0.3       0.2         1.2         7.6        16.7         523.0    218.4          90.0           124          72.8        51.9          3.1

                                                                                                                      Sectoral Analyses, Outlook 2008–2009   17

     • Robust economic growth, which has accelerated in                         sectors along with the financial sector. Traditional sec-
       2007, is the result of a favourable mix of international                 tors like textiles are experiencing a drawback in favour
       circumstances, public investments and personal con-                      of more value added productions, while the tourism
       sumption, with tourism and the transport sector being                    industry has plenty of scope to reach its full potential.
       the main drivers of a buoyant export growth.                           • The EU accession negotiations and the privatization
     • We expect the manufacturing sector to grow faster than                   process will lure more FDIs as the costly restructuring
       non-manufacturing. The production of non-metallic                        reforms will make the know-how transfer easier,
       products, electrical and optical equipment, transporta-                  improving the productivity and profitability of the
       tion and communication are among the best performing                     entire Croatian economy.

     Economic Framework                                                       Performance of the sectors
     The growth of the Croatian economy during the past several years         Best Performers
     has remained robust, even showing signs of acceleration this year.       Paper industry, publishing and printing has been the most dy-
     The main drivers of this growth have been investments (particu-          namic manufacturing sector in the last decade. Since 1995 its
     larly from public expenditure) and, especially this year, personal       production has tripled, and in the last four years its average
     consumption, which is speeding up partly thanks to the substan-          growth rate was still as high as 10 % a year. The average growth
     tial repayments of debt to pensioners. Exports continue to be a          rate of employment, in this sector, over the same period amount-
     relevant contributor to GDP growth, highlighting the competitive-        ed to 4.5 % with an acceleration to 5 % in 2006. Publishing &
     ness of the country. The most important driver of the country’s ex-      printing accounts for three quarters of the overall sector in terms
     ports is not the manufacturing industry, but services, especially in     of value added and was the more dynamic part of the sector in
     the tourism and transport sectors. The exchange rate is very stable      the past, attracting the majority of FDIs. Yet, the pulp, paper &
     and inflation is moderate, despite the temporary significant rise in     paper products industry, which is much more export oriented, has
     food and energy price levels (due to the drought and substantial         been expanding at quite high growth rates (7.9 % in 2006, 9.8 %
     growth of oil prices on the world market). Macroeconomic stability       in the first nine months of this year in yoy terms), driven both by
     and the prospects of the country’s EU accession in the near future       domestic and foreign demand (its export grew by 8.2 % in 2006
     are increasingly attractive to foreign investors, although the struc-    and by as much as 24 % yoy in the first nine months of this
     ture of FDIs, so far, has been characterized by a lack of greenfield     year). The Pulp, paper & paper products industry is expected to
     investments. Explanations for that could be found in relatively          continue to grow strongly in the future on the back of dynamic
     high labour costs and the fact that the majority of large greenfield     domestic demand and of good potential for export growth thanks
     investments in the region were already planned and effectively           to its rich raw material base, favourable location and very good
     took place in other transition countries during the 1990s when po-       transport links to major markets. Publishing & printing is also ex-
     litical instability was a key issue in Croatia. More than a production   pected to grow well above the economy’s average.
     base, the country is fast developing in service activities, with
     many FDI inflows in these fields entering the country mainly             Good prospects in the coming years are also expected for the non-
     through acquisitions and privatizations. Although the current re-        metallic sector. A large part of Production of other non-metallic
     pricing of risk at the international level, in combination with the      mineral products is connected with the construction activity (pri-
     country’s tight monetary policy stance to correct external imbal-        marily production of cement, bricks and tiles, ceramic tiles, mortar,
     ances, are likely to result in moderately reduced access to credit,      cut stone, building glass and other construction materials), whereas
     we do not see any major adverse impact for the economy: We               the rest of the sector’s final products are mainly used in other
     continue to forecast growth at about 4.5 % in the next two years.        manufacturing industries (e.g. glass packaging). The sector’s pro-

18   Sectoral Analyses, Outlook 2008–2009
duction has almost doubled since 1995, triggered predominantly           ment is already confirmed by the positive performance recorded
by massive domestic demand generated by the huge expansion in            in this year’s first three quarters (+ 66 % yoy). The development of
investments and construction activities. The recent temporary slow-      the sector, as a whole, is largely determined by foreign demand,
down in the construction activities has not influenced the sector’s      especially as far as the production of electric machinery and appli-
output by much – the growth rate of 6% for the first three quarters      ances and communications equipment is concerned. FDIs attracted
yoy is still reasonably high compared to last year’s 10.4% – due to      so far are relatively modest (2.1 % of all FDIs), except for the
buoyant foreign demand. Thus the export growth rate in the same          investments made by Ericsson and Siemens. Nevertheless, the
period reached 16.8% yoy, up from 8.7% in 2006. This branch has          potential of the industry is much bigger considering its access to a
already attracted significant foreign investments (4% of the overall     competitive, comparatively well-educated labour force.
economy’s FDIs by the end of 2006) and achieved relatively high
levels of productivity and profitability.                                Manufacturing n.e.c. (manufacture of furniture and recycling) is
                                                                         also a fast growing sector thanks to the extraordinarily fast devel-
The Production of electrical and optical equipment sector has            opment of the recycling sub-sector. In the rapidly expanding seg-
emerged as one of the fastest-growing in the manufacturing in-           ment of recycling, significant new capacities have recently been
dustry during the last four years, with an average annual growth         put into place along with brand new establishments for recycling
rate of production, exports and employment of 7 %, 11.4 % and            of waste raw material (spurred by the harmonisation of Croatian
5.3 % respectively. Production of electric machinery and appliances      regulations on collection and management of waste raw material
and the manufacture of communications equipment, as the two              with EU standards). As an illustration, production of the entire sec-
most important sub-segments of the sector, has recorded very fast        tor in the last four years grew by an average annual rate of 9.1 %;
production growth over the past four years – 5.8 % and 12 %,             while furniture production grew by 3.6 %; meanwhile the recy-
respectively – while the two remaining sub-sectors (production of        cling segment exploded by an average annual rate of 24 %. That
medical, precise and optical instruments and production of office        segment certainly has bright prospects, but the possible revival of
appliances) has performed very differently. The medical and the          the manufacture of furniture should not be overlooked either.
optical equipment industry have recorded an exceptionally fast           Plans and already some concrete moves have taken place in an
average growth of 6.4 %, whereas the output of office appliances,        effort to spur development of an export oriented cluster for furni-
in the same period, has been reduced almost by half. However,            ture and design, envisaging to unify the now scattered small and
after substantial investments recently took place in that sub-sec-       medium-sized manufacturers. The idea behind this is to give visi-
tor, accelerating growth is expected in the near future. This senti-     bility to and ensure a more efficient and profitable use of the rich

Best and worst performers
BEST                                            STABLE                                          WORST

Pulp, Paper, Publish., Printing                 Agriculture, Hunt., Forest., Fish.              Textiles & Textile Products
Otner non-metallic mineral products             Food, beverages & tobacco                       Transport Equipment
Electrical and optical equipment                Leather & Leather Products
Manufacturing n.e.c. furniture                  Wood and wood products
Communication                                   Coke, Refin. Petrol. Products
Finance, Insurance. Real Estate                 Chemicals, Chemical Products
                                                Rubber and Plastic Products
                                                Basic Metals & Fabr. Metal Products
                                                Machinery and Equipment n.e.c.
                                                Electricity, Gas & Water
                                                Wholesale & Retail Trade,
                                                Restaurant & Hotels
                                                Transportation & storage
                                                Community, social & personal services

                                                                                                               Sectoral Analyses, Outlook 2008–2009   19

     potential of raw materials and manpower existing in this tradition-     development of products with higher value added in order to be
     al branch of Croatian industry. Last year we saw an increase of fur-    competitive in foreign markets despite relatively high labour
     niture production by 6.4 % followed by this year’s very high yoy        costs. However, since such examples are rare, it is realistic to ex-
     growth of 11 % in the first three quarters. At the same time, out-      pect a further gradual dwindling of the sector’s importance in the
     put growth in recycling reached 19.4 % and 12.7 % respectively.         overall structure of manufacturing activity in the future.
     During the next several years, very robust output growth – proba-
     bly close to two-digit rates – is expected in the entire sector.        The Transport equipment industry, in Croatia, is almost exclu-
                                                                             sively represented by the export oriented shipbuilding industry.
     Transportation and communications was among the most prof-              The sector, although the biggest exporter in the Croatian econo-
     itable sectors of the economy over the past years, mainly thanks        my, is a still state-owned and massively subsidized industry
     to the technologically advanced telecommunications industry,            characterized, for decades, by poor management and unchanged
     which has attracted significant amounts of FDI (Deutsche                work practices despite many attempts at restructuring. Despite
     Telekom, Telekom Austria) and offered numerous new services.            recent efforts in some shipyards to shift the production to the
     The former monopolistic situation in fixed telephony is gradually       building of more demanding ships with higher value added ele-
     changing into an emerging competitive environment similar to            ments, the shipbuilding industry is almost a regular loss-maker.
     the mobile telephony segment, which arose somewhat earlier              Because of heavy subsidies, it is also an important subject in EU
     along with the appearance of three independent service                  accession negotiations. By the end of this year, the government’s
     providers on the market. In coming years further development            restructuring programme for the industry is expected to be
     of new services, especially connected to the Internet and mobile        assessed by EU commission. In resolving the deep problems of
     communications, is expected to bring new sources of productivity        this industry the main accent is expected to be put on reducing
     for the entire economy, keeping the communications industry             capacity in return for one-time, last-time state assistance. These
     among the most profitable segments of the Croatian economy.             issues will have to be resolved before Croatia can open the com-
                                                                             petition policy chapter of Acquis Communautaire.
     The Financial intermediation, insurance, real estate & business
     services sector is a fast growing industry with banking already         Selected Sectors with a Stable Outlook
     more developed than other fields of this area. This sector has at-      A stable outlook is envisaged for the Construction industry.
     tracted the most of FDI inflows into Croatia, particularly in the       After several consecutive years marked by extensive growth, it
     banking industry. In the near future, the growth rates are expected     underwent a short period of stagnation at the beginning of this
     to remain higher than the average growth rates in the economy.          year. Despite its recent recovery, we expect it to slow down in
     Exceptionally fast growth is probable on the capital market, mu-        the next years as the credit expansion is over due to the un-
     tual and pension funds, as well as the real estate business, while      favourable effects of the tightened monetary policy and interna-
     moderation is expected in the banking industry as a conse-              tional credit squeeze.
     quence of the further tightening of monetary policy.
                                                                             The Hotels and restaurants sector is strongly related with
     Worst Performers                                                        tourism activity and it is one of the potential leaders of the econ-
     The textiles and textile products industry could be considered as       omy, but its overall performance, despite another successful
     one of the worst performing sectors within the economy in the           tourist season, is relatively modest. The development of the
     medium long run. Its output has been shrinking almost constantly        sector is not as fast as was expected, partly due to the relatively
     over the last two decades to fall in 2006 to only 28 % of 1990s         limited inflows of FDI. The need for sizeable investments in the
     production levels. Employment and export have been declining            reconstruction and modernisation of accommodation facilities, as
     over the years as well (1.8 % and 5.3 % annually from 2002,             well as in entertainment, sports and recreational facilities is
     respectively), despite sporadic FDIs such as Benetton and Calze-        required to upgrade the average service quality level and give
     donia. Harsh competition form the Far East, added to a lack of in-      new impetus to the sector.
     vestments in innovations/quality, design and marketing activities
     are the main reason for these negative trends. The only way out         Regarding the Transport sector, despite the solid performances
     for manufacturers in this sector is, probably, the orientation to the   in terms of numbers of transported passengers and freight (in

20   Sectoral Analyses, Outlook 2008–2009
particular railway, road and air transport) the traditional transport   non-metallic mineral products, Chemicals and Oil & gas industry.
industries, have not yet recorded significant improvement in            EU accession prospects will improve the attractiveness of Croatia
terms of financial results (especially railways, which are still in     as an FDI destination. Among the most attractive sectors in this
need of fundamental restructuring). In the next several years,          respect we see Hotels & Restaurants, the Paper industry, Manu-
major investments in transport infrastructure will probably con-        facturing n.e.c. (furniture and recycling) and Manufacture of rub-
tinue with the completion of the motorway network, modernisa-           ber and plastic products.
tion and upgrading of capacities of the most important sea ports
(Rijeka, Zadar, Ploče) and the construction of a high-speed rail        The privatization of some important companies took place during
route from the Hungarian border to Rijeka.                              2006 and at the beginning of 2007, with companies such as
                                                                        Željezara Split, Valjaonica Cijevi Sisak, and additional shares of HT
There are several manufacturing sectors that performed very well        – the biggest Croatian telecom and INA – oil & gas company
in recent years in terms of output, exports and employment, like        being sold. The first two companies were sold to foreign strate-
the Machinery and equipment, Basic metals and fabricated                gic partners, whereas privatizations of additional shares of HT
metal products industries, predominantly due to low starting            (32 %) and INA (18 %) were performed through public offerings.
points (which is especially true in the case of Basic metals produc-    In addition, 7 % of these two companies are to be sold to em-
tion). Some decades ago, those industries were traditionally were       ployees, pursuant to the law on privatization of public compa-
among the most important ones and are now finally on their way          nies. Another important privatization in the metal industry (TLM
to recovery, which we expect can be facilitated by FDI inflows in       ŠIBENIK, aluminium industry) is currently under way, but further
the future, especially in recently privatised steel mills (Sisak,       privatization plans are not clear at the time of writing.
Split). Despite impressive output expansion, their profitability is
still relatively poor. For many years the Leather and leather prod-     EU Convergence
ucts industry followed the trends of the textile industry and started   Croatia’s convergence to full EU membership is proceeding but
to disappear gradually (particularly the shoe industry). However,       brings many challenges and threats for future competitiveness,
the negative trend reversed in 2005 and since then the sector has       especially for specific sectors of the economy. The sectors which
been experiencing rapid production and export growth. To a great        have been protected the most from international competition in
extent, such a sudden turnaround can be attributed to a single          the past are likely to also be the most affected by the introduc-
major greenfield investment by Austria’s Boxmark in its Varaždin-       tion of new trade and subsidy policies. Shipbuilding, Agriculture
based plant for leather processing and manufacturing of leather         and Food industries, Manufacture of metal products and some
car seats. Nevertheless, the rest of the sector is still not perform-   branches of Transportation (railways, air transport) are among the
ing well and its negative trend is continuing.                          most important sectors which will have to cope with more
                                                                        demanding EU market regulations. The food industry will be addi-
Foreign direct investments and Privatizations                           tionally affected by demanding high quality and health standards,
Total foreign direct investment inflows into Croatia reached            and numerous measures (i.e. changes in regulations and stan-
EUR 14 billion by the end of 2006, recording substantial inflows        dards) have already been taken to help smooth adjustments after
in 2006 (EUR 2.7 bn compared to EUR 1.5 bn in 2005). In the             full integration into the EU. Almost all sectors in the economy will
first half of the current year, inflows have accelerated further to     be forced to make demanding and costly adjustments in their be-
EUR 2.1 bn (compared to EUR 1.1 bn in the same period in                haviour in order to fulfil strict EU standards for environmental pro-
2006). So far, FDIs amounted to about 5.5 % of GDP on average           tection. On the other hand, sectors which have been exposed to
over the last 5 years, whereas in 2006 their inflow rose signifi-       extensive market competition for a long time are likely to benefit
cantly, reaching the level of 8 %, which is likely to be the case       from this process through further integration into the EU market
this year. However, it should be mentioned that a major role in         and infrastructure availability (e.g. electricity supply), attraction of
impressive FDI growth in 2006 and 2007 has been played by               new FDI and easier transfer of know-how. Some sectors are
capital increases in foreign-owned banks, as one of the results of      already in the position to benefit from the transfers from EU pre-
tightened monetary policy. So far the largest FDI inflows were          accession funds (PHARE, SAPARD, IPA) for many useful projects,
oriented towards Financial intermediation (primarily the banking        especially in the fields of environmental protection, agriculture,
industry, as mentioned), Communications, Manufacture of other           small business, civil society and public administration.

                                                                                                               Sectoral Analyses, Outlook 2008–2009   21

     Croatia – Structural Indicators (2006)
     SECTORS                                                                                                                                MARKET STRUCTURE
                                                                                                                           Number of     Number of   Number of    SME VA in
                                                                                                                           enterprises   employees        SME    sect. VA %

     TOTAL                                                                                                                     78,509     865,883       78,068        51.0
     Agriculture, Hunting, Forestry, Fishing                                                                                    1,898      31,583        1,883        37.3
     Mining & Quarrying                                                                                                            226       7,023         220        18.8
     Manufacturing                                                                                                              10,738     260,660      10,594        44.5
       Food products, beverages and tobacco                                                                                      1,332      49,901       1,290        26.0
       Textiles and textile products                                                                                               760      28,285         752        71.6
       Leather and leather products                                                                                                141       7,862         139        55.6
       Wood and wood products                                                                                                      763      12,417         761        90.4
       Pulp, paper & paper products; publishing & printing                                                                       1,787      18,848       1,776        64.9
       Coke, refined petroleum products & nuclear fuel                                                                              11      10,662           8         0.3
       Chemicals, chemical products and man-made fibres                                                                            258      11,914         246        20.7
       Rubber and plastic products                                                                                                 597       7,210         595        92.2
       Other non-metallic mineral products                                                                                         542      14,054         527        46.7
       Basic metals and fabricated metal products                                                                                1,702      31,066       1,690        79.7
       Machinery and equipment n.e.c.                                                                                              569      12,305         565        89.3
       Electrical and optical equipment                                                                                          1,081      18,786       1,068        46.2
       Transport equipment                                                                                                         425      22,997         413        34.1
       Manufacturing n.e.c.                                                                                                        770      14,353         764        68.9
     Electricity, Gas & Water                                                                                                      190      25,742         175        18.6
     Construction                                                                                                                8,132      96,578       8,096        67.1
     Wholesale & Retail Trade. Restaurants & Hotels                                                                             31,192     234,102      31,067        67.7
       Wholesale & Retail Trade                                                                                                 27,375     193,766      27,271        68.4
       Restaurants & Hotels                                                                                                      3,817      40,336       3,796        63.3
     Transportation & Communications                                                                                             4,369      79,298       4,334        21.1
       Transportation & Storage                                                                                                  4,215      57,585       4,186        37.2
       Communications                                                                                                              154      21,713         148         2.5
     Finance, Insurance, Real Estate & Business Services                                                                        17,932      92,510      17,879        67.2
       Financial Institutions*                                                                                                     726       8,250         698        33.3
       Insurance*                                                                                                                   15          72          14        88.9
       Real Estate, Dwellings & Business Services                                                                               17,191      84,188      17,167        75.7
     Community, Social & Personal Services                                                                                       3,832      38,387       3,820        70.0
     *) Important Note: Data for financial institutions and insurance sector do not cover banking and insurance industry
     Source: FINA (Financial Agency), CBS (Croatian Bureau of Statistics), CNB (Croatian National Bank), Zagrebacka banka Research
     n.m. = not meaningful data – See ANNEX for further explanations of the indicators

22    Sectoral Analyses, Outlook 2008–2009
                              SECTORAL DETAILS                                                 COMPETITIVENESS                       CONSTRAINTS
Share in    Export IMP/AC %     Share in         FDI     Capital     Energy     RCA         Labour        Average        Wage        Total       Bank
total VA   propen-                 total attractive-   Intensity   Intensity           Productivity     Personnel     adjusted     Indebt-     Indebt-
             sity %               FDI %      ness %           %                          (manufac-           Cost      Labour      edness      edness
                                                                                       turing=100)      (manufac- Productivity         %*          %*
                                                                                                      turing=100)   (manufac-

 100.0       15.2      20.7                   100.0        47.5        10.3    100.0        115.1          100.7        114.4        43.8        29.4
   2.8        7.3      24.4         0.3        11.4        33.0        10.8    105.7         88.6           95.1         93.1        59.5        41.3
    2.0      42.0      83.1         4.1       206.6        83.2         8.2     41.5         283.8         131.9        215.2        30.4         17.2
   26.1      34.0      55.0        31.6       120.9        35.0        12.3    107.7         100.0         100.0        100.0        41.5         23.6
    6.1      17.6      24.0         3.3        53.9        29.7        10.6    152.5         122.5         109.0        112.4        44.2         22.3
    1.3      53.2      82.5         0.6        45.9        32.0         8.6    136.1          45.3          57.2         79.2        41.1         26.2
    0.4      80.3      77.2         0.2        58.2        36.8         3.8    172.1          51.1          53.1         96.3        25.8          9.3
    0.6      40.3      58.0         0.2        33.5        33.2        17.1    259.0          51.1          61.8         82.6        48.9         35.1
    1.9      12.1      31.0         0.9        46.1        21.4        11.3     79.0          99.9         113.8         87.8        37.1         25.4
    2.5      31.8      23.2         4.9       195.2       120.7         6.6    254.7         236.1         169.5        139.3        23.6         15.7
    1.9      53.2      70.9        14.5       749.8        17.7        29.2     87.7         162.0         148.1        109.3        41.9         19.9
    0.6      25.8      58.0         0.2        32.6        36.8        13.0     41.0          86.7          84.7        102.3        49.3         34.4
    2.0      26.6      29.8         4.0       202.2        33.4        33.3    161.6         140.5         109.4        128.4        38.9         27.0
    2.1      36.1      66.7         0.3        16.3        27.4        12.4     76.3          68.9          85.6         80.5        40.5         23.7
    1.0      40.6      88.5         0.3        33.2        18.8         6.9     69.4          77.6          96.4         80.5        30.0         14.6
    2.6      35.6      64.2         2.1        81.2        18.6         3.7     84.5         139.7         138.1        101.2        27.9         12.3
    1.9      67.3      93.8        n.m.        n.m.        15.1         6.2    107.5          83.4         106.4         78.3        62.1         32.4
    1.1      40.3      63.0         0.3        29.9        30.0         9.7    135.0          74.6          74.5        100.1        41.5         27.7
    4.4       4.4       8.2         0.8        18.9        82.0        35.9     84.5         172.1         125.9        136.7        16.3         14.7
    9.1       2.8         –         0.6         6.4        62.4        11.2        –          94.3          86.6        109.0        47.7         34.4
   24.4       5.9         –        12.2        50.0        43.2         6.8        –         103.8          90.8        114.3        41.9         26.1
   20.9       4.4         –         9.3        44.5        36.6         6.4        –         107.5          91.5        117.4        37.2         21.7
    3.5      34.8         –         2.9        82.9        82.6         9.0        –          86.3          87.5         98.6        68.2         50.4
   14.0      26.6         –        14.3       102.2        39.0        12.2        –         176.3         127.4        138.4        46.4         35.8
    7.5      37.7         –         0.7         9.2        43.7        21.6        –         130.2         117.2        111.1        54.2         42.0
    6.5       8.9         –        13.6       209.7        33.5         1.3        –         298.6         154.4        193.4        13.1          9.6
   13.7       8.9       0.2                    34.4        69.0         2.9     91.6         147.5         110.6        133.3        58.4         41.9
    2.7       1.4         –                     9.0        92.1         0.8        –         332.1         142.7        232.7        71.3         54.8
    0.0      72.3         –                    87.2        10.6         2.4        –         143.5         216.2         66.4         5.7          0.5
   10.9      10.3       0.3         4.4        40.7        63.2         3.4     91.6         129.4         107.4        120.5        53.8         37.2
    3.4       5.9       2.9         0.7        19.7        29.5         5.5     57.8          88.0         103.1         85.4        38.2         27.3

                                                                                                                   Sectoral Analyses, Outlook 2008–2009   23
     Czech Republic

     Czech Republic
     • The strong economic activity in 2006 and in the three               agriculture continued to lose ground. For the period
       quarters of 2007 was driven by culminating invest-                  ahead we forecast a downside risk for the construction
       ments and private spending. From the supply side, the               and real estate sectors, albeit leaving them within the
       growth of production in manufacturing was the biggest               ‘stable’ group.
       contributor to overall GDP growth.                                • Thanks to the stable economic environment, the
     • Manufacturing industry growth will be more dynamic                  country is probably among the least affected by any
       than the non-manufacturing sector. The increasing spe-              possible risk stemming from the crisis at international
       cialisation in medium-high tech production is reflected             level. In the coming years we expect inward FDI to
       in the good performance of the engineering branches,                remain strong and be around 4 % of GDP, net of privati-
       which did extraordinary well in 2006 and in the three               sation transactions, with reinvested profits becoming
       quarters of 2007. On the opposite side, textiles and                the most important component.

     Economic Framework                                                  Performance of the sectors
     Real GDP recorded 6.4 % growth in 2006, which was driven,           Best Performers
     among others, by the soaring investment activity. In the first      Some manufacturing sectors, especially those with related in-
     three quarters of 2007, economic activity followed a similar pat-   vestment activity, are among the best segments of the Czech
     tern. Culminating investments and private spending (driven by       economy.
     employment and wage rises as well as generous social bene-
     fits) contributed the most to GDP growth. The fast growth in for-   Within Czech industry, the Manufacture of transport equipment
     eign trade turnover continued, impacting positively on the trade    is one of the most competitive sectors. The first year of full pro-
     balance in both 2006 and the first three quarters of 2007. From     duction in the TPCA assembly plant (production of about 300,000
     the supply side, industry remained the very chart horse of the      car units, evenly distributed between Toyota, Peugeot and
     growth posting figures of about 20 % and 9.5 % in 2006 and Q3       Citroen) pushed the sector’s whole-year results to new heights.
     2007 respectively. Trade and business services also did well        Measured by the index of industrial production, the branch re-
     over the same period. The stable business environment com-          ported a 20.6 % increase in 2006, well above the 10.5 % growth
     bined with government incentives continued to attract a large       in manufacturing. The production of road vehicles (i.e. passenger
     amount of foreign direct investment, which was chiefly ab-          cars, LUV, lorries, buses) reached 857,000 units in 2006, which
     sorbed by sectors producing technologically advanced products.      represents a historical record. In nominal terms, sales grew by
     Consequently, foreign-owned companies have become the               16.9 % to CZK 522 bn, accounting for nearly 23 % of total manu-
     main drivers of production growth. Most importantly, FDI creates    facturing sales. From January to August 2007 there was a modest
     the potential for future export expansion. For the whole of 2007    decline in growth in the branch. As a natural outcome of this
     we forecast only a moderate decline in overall economic activity.   development, the branch has strengthened its position of being
     Thanks to the stable economic environment, the country is           the biggest sector (measured by sales) within the whole indus-
     probably among the least affected by any possible risk stem-        try in the last two years. There will be no additional assembly
     ming from the crisis at international level. We set our full 2007   capacity increase for 2007; however, we expect another increase
     and 2008 real GDP growth projections at 5.7 % and 4.0 % re-         to come in the second half of 2008 and in 2009 when the
     spectively.                                                         production lines in the new Hyundai plant gradually reach full
                                                                         capacity. This new investment is expected to stimulate assembly
                                                                         growth in the Czech Republic by 23 % in unit terms in 2008 –

24   Sectoral Analyses, Outlook 2008–2009
2009. This production, which already represents around one third         itself, the production of computers has done extraordinarily well
of total CEE vehicle production, will reach more than one million        (growing by over 40 % in 2006). Moreover, production in the
vehicle units a year by 2009. This may allow the sector’s indus-         RD & TV & communication segment recovered from its decline in
trial production index to grow by more than 10 % a year on aver-         2005 and went up strongly by 22 % in 2006. The expansion con-
age in 2007 – 2009.                                                      tinued from January to August 2007, albeit in a rather more
                                                                         modest way. Growing demand in Europe for flat-panel TVs and
Driven by the strong external as well as domestic demand, the            PCs has attracted new investors. Next year, the new green-field
results of the Machinery and equipment branch have been im-              investments in the manufacturing of LCD/plasma displays will
pressive lately. Over the last three years, production in the            arrive. The production of LCDs in the new IPS Alpha plant should
branch has increased annually in double-digit rates and it will          gradually increase up to 2 mn units p.a. within the next couple
most likely do the same in 2007. Indeed, from January to August          of years. Alongside IPS Alpha, Hitachi has invested EUR 60 mn
2007 the growth in the branch did not abate, with the industrial         into the new production plant for LCD/plasma TV sets. The full-
production index rising 21.7 % yoy. The utilisation of capacities        scale capacity of about 80,000 units per month is supposed to
has been running high and enterprises within the branch have             be reached within two years. Foxconn has jumped on the band-
obviously been looking for expansion possibilities. The productivity     wagon and announced a CZK 3 bn investment venture into a
index has soared despite the increase in staff hiring. Moreover,         new production facility, which should be finished in H2 2008; the
the inflow of new orders (serving as a guide for the rest of 2007        plan is to produce flat displays and PC components there. Given
and H1 2008) has posted a double-digit figure for twelve quar-           these trends, in terms of industrial production we reckon the
ters in a row. All told, the branch is still going to remain one of      sector will grow by about 16 % in 2007 as a whole, slowing to
the best performers, with double-digit growth in terms of indus-         around 12 % and 10 % in 2008 and 2009 respectively.
trial production expected for both 2007 and 2008 – 2009.
                                                                         Thanks to its close links to the automotive, electrical industry,
Electrical and optical appliances are also among the fastest             packing materials and also construction, the Rubber and Plastic
developing branches in Czech industry. In 2006, the industrial           industry has registered enormous expansion over the last
production index in the branch grew by 20 %. Within the branch           decade and the sector has significantly strengthened its position

Best and worst performers
BEST                                            STABLE                                        WORST

Transport equipment                             Mining & Quarrying                            Agriculture, Hunt., Forest., Fishing
Rubber & plastic production                     Food, beverages & tobacco                     Textiles & textile products
Machinery & equipment                           Wood & wood products                          Leather & leather products
Electrical & optical equipment                  Pulp, paper; publishing, printing
                                                Coke, refined petroleum products
                                                Chemical products
                                                Other non-metallic mineral products
                                                Basic Metals, Fabr. Metal products
                                                Manufacturing n.e.c. (furniture)
                                                Electricity, Gas & Water
                                                Wholesale & Retail Trade
                                                Hotels & Restaurants
                                                Transportation & Communications
                                                Finance & insurance
                                                Real Estate & Business Services
                                                Community, Social & Personal. Serv.

                                                                                                             Sectoral Analyses, Outlook 2008–2009   25
     Czech Republic

     within manufacturing. In 2006 it posted the sixth double-digit        Selected Sectors with a Stable Outlook
     rate of annual growth in a row. Over the same period, the sec-        Real Estate & Business Services is one of the most promising
     tor’s revenues more than doubled, nearly 20,000 new jobs were         sectors in the Czech Republic, especially regarding services to
     created and productivity rose at an average of 7.8 %. The key         enterprises. The need for business services has expanded dra-
     feature of the branch is the rise in the number of enterprises. On    matically; many enterprises are also developing R & D and IT
     the back of West-to-East relocation of production and strong do-      services in the country. On the other hand, we have some con-
     mestic demand, the number of enterprises in the sector of rub-        cerns about the real estate segment of the branch. The global
     ber and plastics production with more than 20 employees rose          credit squeeze could have an impact across Europe and property-
     by 43 (+ 7 %) in 2006, displaying the highest increment within        related services have a strong chance of being hit the hardest.
     Czech manufacturing. We remain optimistic as regards the out-         The extent and duration of the credit squeeze is unclear and that
     look: we foresee growth in terms of industrial production of          is the reason why, for the time being, we rank the branch as
     about 20 % in 2007 and around 10 % in 2008 and 2009.                  stable (and not worst). Over the 2007 – 2009 period we predict
                                                                           yoy GVA growth in the sector will total about 6.7 % on average.
     Worst Performers
     In general, light industries in the Czech Republic (including food    We assigned a stable rating to the Czech Construction sector.
     processing, textiles, leather products, paper products, publishing    Nevertheless, in 2007 construction underwent a sharp correction
     and printing) are still suffering from mediocre output growth, a      in GVA growth from 16 % in Q1 2007 to 0.3 % yoy in Q3 2007.
     decline in employment and, until 2006, sub-par growth in pro-         Apart from the warm winter effect (which boosted construction
     ductivity. Among them, labour-intensive branches like Textile &       activity in Q1 2007), the declining stock of new orders began to
     Textile products and Leather & Leather products suffer the most       weigh down on the sector’s activity. We expect this factor to
     from the increasing competition of cheaper production in East         continue dragging growth down in the construction sector in
     Asia. As for the Textile & Textile products branch we uphold our      2008 and 2009. Over the 2007 – 2009 period we predict yoy
     negative view in the long term. The sector is gradually going to      GVA growth in the sector will total about 3.5 % on average.
     lose or see fall its comparative advantage on the international
     markets, except for production serving specific technical needs
     (such as automotive or medical). As for Leather & Leather prod-
     ucts, the outlook is not bright but we assume that the worst is

     The Agriculture, hunting, foresting and fishing sector is still       Stock and new orders in construction industry
     suffering from an ongoing structural imbalance. The long-term          constant prices of 2002

     declining trend in agriculture production did not reverse itself
     even after entering the EU. Agriculture production in 2006 went       220                                                                             90
     down by 4.2 % in constant prices, while in current prices it          200                                                                             80
     plunged 2.6 %. Despite declining production, Czech farmers            180                                                                             70
     made a profit: thanks to subsidies from the EU, profits in the sec-
                                                                           160                                                                             60
     tor were about CZK 7 bn in 2006, the third positive result in a
                                                                           140                                                                             50
     row. As for future development, our outlook remains negative.
                                                                           120                                                                             40
     From a short–term perspective, the sector might benefit from
                                                                           100                                                                             30
     higher prices of agriculture products in Q3 2007. However, in the            1Q 3Q         1Q 3Q         1Q 3Q         1Q 3Q          1Q 3Q   1Q 3Q
                                                                                    2002          2003          2004          2005          2006    2007
     long run, this rise in prices looks unsustainable and could addi-
     tionally be matched by an inevitable rise in input prices (i.e.             Stock of construction works (Stock of orders CZK bn, l. h. s.)
                                                                                 Orders of construction works (Orders CZK bn, r.h.s.)
     fuels, fertilisers, services, etc.). Over the 2007 – 2009 period we
     foresee a negative performance with Gross Value Added growth
     in the sector at about – 1.5 % on average.                            Source: CZSO

26   Sectoral Analyses, Outlook 2008–2009
Foreign direct investments and Privatisations
In 2006, the inflow of foreign direct investment into the Czech
Republic dropped by nearly 50 percent yoy to EUR 4.2 bn. The
decline reflects an unusually high inflow in 2005 due to the pri-
vatisation of the Czech fixed-line operator Cesky Telecom. Rank-
ing first among the 10 new EU members in 2005 in terms of
nominal FDI inflow, the Czech Republic was outrun by Poland
and Hungary in 2006. In the first nine months of 2007, inward
inflows recorded EUR 4.2 bn. Without any big-ticket privatisation,
the FDI inflow consisted mainly of reinvested profits. A large
share of the inflow (around 33 %) went into the manufacturing
industries. This is set to further reinforce the key position of
manufacturing within the branches of the Czech economy. As far
as manufacturing is concerned, all of the engineering branches
except for Electrical appliances recorded positive FDI inflows*,
whilst Transport equipment saw the highest amount for the pe-
riod. Apart from manufacturing, the most attractive sectors for
FDI investors within the Czech economy this year were Real
Estate & Business Services and Financial institutions. For the
coming years we expect non-privatisation inward FDI to stabilise
around 4 % of GDP, with reinvested profits retaining the position
of the most important component. However, there are still some
companies to be privatised, such as CEZ (the biggest producer
and distributor of electricity in the Czech Republic), CSA (airline
carrier), Budvar (highly export-oriented brewery) and Letiste
Praha (serving Prague airport).

*) For the first time in the decade, the Electrical appliances branch as a whole posted
a negative flow of FDI in 2006. The sharp decline of FDI over the last two years has
been most probably related to the difficulties in LG Philips Displays Holding (registe-
red in Holland), which went bankrupt at the end of 2005. Presumably, some credits
were repaid from the Philips Hranice plant back to foreign creditors and to its parent
in 2005 and 2006 (i.e. around CZK 4 bn in 2005 – 2006). We expect an outflow of at
least CZK 2 bn in the same sub-sector to be posted in 2007 for the same reasons.

                                                                                          Sectoral Analyses, Outlook 2008–2009   27
     Czech Republic

     Czech Republic – Structural Indicators (2006)
     SECTORS                                                                                                  MARKET STRUCTURE
                                                                                             Number of     Number of   Number of    SME VA in
                                                                                             enterprises   employees        SME    sect. VA %

     TOTAL                                                                                      24,111     2,406,470      18,719        26.4
     Agriculture, Hunting, Forestry, Fishing                                                     1,651       110,481       1,388        46.6
     Mining & Quarrying                                                                             100       42,737          63         5.5
     Manufacturing                                                                                8,442    1,053,336       6,130        19.3
      Food products, beverages and tobacco                                                        1,063      106,196         793        18.1
       Textiles and textile products                                                                617       60,115         491        32.7
       Leather and leather products                                                                 100        7,900          76        43.0
       Wood and wood products                                                                       414       26,566         344        41.9
       Pulp, paper & paper products; publishing & printing                                          439       41,233         348        28.0
       Coke, refined petroleum products & nuclear fuel                                                5        2,859           1         1.6
       Chemicals, chemical products and man-made fibres                                             226       36,918         156        14.5
       Rubber and plastic products                                                                  647       71,043         473        25.0
       Other non-metallic mineral products                                                          404       63,975         254        14.1
       Basic metals and fabricated metal products                                                 1,544      164,671       1,170        24.0
       Machinery and equipment n.e.c.                                                             1,115      137,674         766        27.0
       Electrical and optical equipment                                                             873      152,551         566        16.8
        Transport equipment                                                                         377      128,473         195         4.0
       Manufacturing n.e.c.                                                                         619       53,162         496        31.9
     Electricity, Gas & Water                                                                       277       53,653         169         6.8
     Construction                                                                                 2,692      163,318       2,400        43.1
     Wholesale & Retail Trade, Restaurants & Hotels                                               4,715      331,408       4,156        48.1
       Wholesale & Retail Trade                                                                   3,911      286,740       3,428        48.7
       Restaurants & Hotels                                                                         804       44,667         727        41.1
     Transportation & Communications                                                              1,219      238,685         982        14.5
       Transportation & Storage                                                                       –            –           –           –
       Communications                                                                                 –            –           –           –
     Finance, Insurance, Real Estate & Business Services                                          3,749      310,282           –           –
      Financial Institutions                                                                         37       63,913           –           –
       Insurance                                                                                    927       49,090           –           –
       Real Estate, Dwellings & Business Services                                                 2,785      197,279       2,356        48.9
     Community, Social & Personal Services                                                        1,268      102,570       1,059        37.2
     *) 2005 Data
     Source: Czech Statistical Office, Czech National Bank, Ministry of Industry and Trade
     See ANNEX for further explanations of the indicators

28    Sectoral Analyses, Outlook 2008–2009
                                SECTORAL DETAILS                                                   COMPETITIVENESS                       CONSTRAINTS
  Share in    Export IMP/AC %     Share in         FDI       Capital     Energy     RCA         Labour        Average        Wage        Total       Bank
total VA %   propen-                 total attractive-     Intensity   Intensity           Productivity     Personnel     adjusted     Indebt-     Indebt-
               sity %               FDI %      ness %             %     (Gj/CZK              (manufac-           Cost      Labour      edness      edness
                                                                           mln)            turing=100)      (manufac- Productivity         %*          %*
                                                                                                          turing=100)   (manufac-

    100.0      44.1      43.5       100.0       100.0           2.2        417     100.0          104            109            96       47.5        25.6
      2.6      22.7      31.3         0.2         7.0           3.2        246      63.2           49             78            62       21.5        12.3
      1.4      27.2      75.3         0.4        30.8           2.8      1,885      12.0           150           128          117        44.9         26.1
     26.7      76.4      74.7        38.1       142.9           2.1        511     107.5           100           100          100        51.0         27.7
      2.7      24.2      30.3         3.6       136.1           2.2        302      71.6           102            96          106        48.6         26.0
      0.8     130.9     131.5         0.7        83.6           1.6        352      99.4            51            67           76        48.6         30.1
      0.1     208.9     137.7         0.0        11.9           0.9         73      51.4            39            63           62        75.1         43.1
      1.0      56.8      38.0         2.9       129.3           2.8        123     210.4            79            84           93        50.1         32.6
      2.2      57.2      58.8                                   2.8        251      91.9           104           112           93        43.2         26.7
      0.2      23.6      40.3          5.7         168.2        3.9     10,435      44.8           258           153          169        49.4         24.4
      1.3      80.3      87.8                                   2.3      1,699      55.5           168           120          141        42.6         28.3
      1.9      56.1      57.7                                   2.2        161      91.7           108            97          111        42.8         27.8
      1.9      51.2      35.5         3.8       205.7           1.8        819     187.0           121           103          117        47.7         31.9
      4.7      67.1      67.3         4.8       103.4           2.2      1,019      96.6           102           104           98        46.1         22.6
      2.8     108.2     110.9         2.6        95.1           1.9        148     127.4            85           101           85        56.8         28.8
      3.2     120.3     121.7         4.3       133.5           1.9         80     103.4            83            95           87        62.7         29.4
      3.9      77.4      65.5         9.2       236.1           2.4        121     176.4           134           115          117        54.9         27.8
      1.2      83.9      77.7         0.4        11.0           1.1         98     146.8            74            80           92        56.1         33.0
      3.7       4.0       1.5         5.7       154.1           2.3      5,574     262.1           396           146          271        37.5         20.7
      6.4         –         –         1.2        18.4           1.0         74         –            86           121           71        66.8         19.5
     15.2         –         –        10.4       107.4           3.8         37         –           168           176           96        64.7         36.0
     13.2         –         –         9.8        73.7           2.0         36         –           107            98          108        64.4         34.0
      2.0         –         –         0.7        33.7           1.8         43         –            62            84           73        67.6         58.1
     10.3         –         –        12.1       117.9           3.5        162         –           108           118           91        35.8         19.8
      7.5         –         –           –           –             –     208.14         –             –             –            –           –            –
      2.8         –         –           –           –             –      40.41         –             –             –            –           –            –
     16.8         –         –        31.1       760.6             –      25.78         –             –             –            –           –            –
      2.8         –         –        18.8       668.5             –      17.16         –             –             –            –           –            –
      0.6         –         –           –           –             –      17.50         –             –             –            –           –            –
     13.4         –         –        12.3        92.1           1.6         22         –           101           168           60        55.1         32.9
     17.0         –         –         0.8         5.0           2.2         29         –            77            97           80        56.6         38.1

                                                                                                                       Sectoral Analyses, Outlook 2008–2009   29

     • The implementation of the fiscal restructuring schedule                   • Sectors that are export-driven with high FDI penetration
       undertaken by the Government in 2006 in compliance with                     have, on the other hand, been less affected by the
       the EU Convergence Program has strongly restricted domes-                   slowdown of domestic demand. FDI will continue to
       tic demand, depressing growth in 2007. We expect a mod-                     play a key role in shaping the performance of the
       erate recovery from 2008 onwards, supported by an im-                       manufacturing sector in the coming years, especially in
       proving external trade balance and a revival of investments.                the Automotive and Electrical equipment fields.
     • In such a context, the performance of industries such as
       Healthcare, Education and Construction that are strongly
       related to public financing schemes is weak.

     Economic Framework                                                          Performance of the sectors
     After years of steady growth amidst excessive financial imbalances,         Best Performers
     the Hungarian economy is currently experiencing its steepest de-            Manufacturing activities are still benefiting from large FDI in-
     celeration for more than a decade as a result of the fiscal restruc-        flows in the past and strong export orientation. Just like other
     turing program implemented by the government in 2006. The                   Central European countries, Hungary has become competitive in
     move was inevitable to make Hungary eligible for adopting the               medium-high technology sectors.
     euro by 2013 at the latest. As the main goal of the program is to
     curb the high public debt and narrow the current account deficit            The manufacturing of transport equipment has been one of the
     through halting both private and public expenditure, its realisation        fastest growing sectors over the past fifteen years. Thanks to the
     has curtailed GDP growth. The parts of the economy which largely            investments of several of the world’s leading multinational compa-
     depend on public finance, directly or indirectly, are experiencing a        nies this has become the second largest manufacturing branch be-
     downturn or slowdown. Construction, retail sales, public adminis-           hind the electronic industry in terms of value added (HUF 486 bn),
     tration, healthcare, education, personal and business services and          revenues (HUF 2605 bn) and its external trade surplus (HUF 170 bn).
     the residential property market are all adversely affected. However,        The presence of Suzuki and Volkswagen (through Audi) has also
     in the sectors where performance is linked to exports, develop-             attracted several suppliers and spare-part producers, which are
     ments have accelerated to dynamic rates that are rarely seen.               in a favourable position to serve the Central European automo-
     Booming exports along with shrinking domestic consumption,                  tive cluster. Given that over 90 % of the output relates to multi-
     which holds back imports, have caused a rapid improvement in the            national interests and that 96 % of the production is exported,
     external trade balance, which is the first already visible achieve-         the future prosperity of Hungarian transport equipment manufac-
     ment of the fiscal plan. Thanks to the government’s efforts to              turing is determined partly by global demand, but especially by
     reduce the budget deficit, Fitch revised its outlook for Hungary up-        Hungary’s international competitiveness, which can influence the
     ward from “negative” to “stable” on 5 November 2007. With the               relocation choices of the major players in the sector. Industry in-
     burden of such a restrictive fiscal policy, we forecast that GDP            dicators for the first nine months of 2007 confirm that the boom
     growth will bottom out in 2007, growing at a rate of merely 1.8 %.          in the sector is continuing. Not only the nine-month aggregate
     From this point on, driven mainly by surging investments and                production was up by 17 % yoy in September, but the stock of
     strong export activity, and partly as a result of a modest rebound in       orders grew by 80 % compared to the same period in 2005. In
     private consumption, GDP growth is expected to strengthen, rising           addition to this, the majority of manufacturers have picked up
     by 3.1 % in 2008 and by 3.9 % in 2009. Given the current domestic           the pace of their investment activity.
     weaknesses, however, the economy is more vulnerable to poten-
     tial volatility induced by the repricing of risks at international level.

30   Sectoral Analyses, Outlook 2008–2009
The Manufacturing of rubber and plastic products has gradually             Output growth of Other Non-Metallic Mineral Products has ac-
become one of the leading sectors in manufacturing over past               celerated since 2005, though it enjoyed considerably dynamic
decades, again thanks to the surge of incoming FDI. More than 70%          development even before this. From 1999 to 2006 the volume
of rubber production is exported. As Hungarian production has been         of production increased by 85 %, and in the first half of 2007 it
exceeding domestic consumption, the external trade of tires has            expanded by a further 28 %. This impressive performance is
been running a solid surplus of 20–40% in proportion to apparent           mainly due to the rapid expansion of the two sub-sectors, the
consumption. FDI penetration in the manufacturing of rubber is one         manufacturing of goods made of concrete, lime and gypsum,
of the highest throughout the whole economy: the rubber industry           and industries that make raw materials for them, i.e. concrete,
is a success story in the Hungarian economy with the giant invest-         lime and gypsum. The weakest sub-branch is the manufacturing
ment of Hankook, and the additional capacity expansion of Michelin         of ceramic tiles with its stagnating production, shrinking exports
and Bridgestone. Besides them, other rubber producers are also             and deteriorating external trade balance. The sub-branch of clay
producing solid growth. Given the large-scale capacity develop-            products (roof tiles, bricks, etc.) underwent impressive develop-
ments recently implemented, we expect that the export-driven               ment between 1999 and 2004, but the massive inflow of FDI
prosperity will keep going strong in the next two years.                   created excessive production capacity; since early 2005 there
                                                                           has been a kind of stagnation in production due to the contrac-
The Electric and electronic industry has experienced the most              tion of the domestic market. As the transportation of bricks (and
spectacular evolution of all the sectors and outperformed all              similar goods) is lucrative only within quite a short distance
other industries in terms of capital inflow, output growth, net ex-        (100 – 150 km), the export potential is rather limited.
port and profitability. Behind these achievements, the immense
amount of FDI has played a more significant role than in any               In 2006 the production of Basic Metals was 15 % higher than a
other segment of the economy. Though narrowing over the last               year before. Since 2004, when Dobasco, owner of the Dunaferr
two years, the industry has been running an external trade sur-            Steel Company bought DAM Steel Rt., there have only been two
plus, mainly thanks to the exploding export sales of lighting              steel companies that produce basic steel and iron, Dunaferr and
devices, office equipment and especially personal electronic               Ózdi Acélművek Kft.. Together they produce more than 2 mn
telecom appliances (home entertainment devices, mobile                     tonnes of steel, 3.6 % more than in 2005. In terms of the future
phones, etc.). The entire production of these goods is essentially         development of the sector, the Swiss-Ukraine firm Dobasco is in-
controlled in full by foreign capital. Further significant capacity        vesting EUR 500 million in the next four years to turn Dunaferr
expansion is either in progress or has been approved (or even              into a globally competitive steel company with 3.6 million tonnes
already implemented) by numerous multinationals.                           of production capacity against the current 1.8 million. Hence, we

Best and worst performers
BEST                                            STABLE                                           WORST

Rubber and Plastic Products                     Agriculture, Hunt., Forest., Fish                Food, Beverages & Tobacco
Other non-metallic mineral products             Mining & Quarrying                               Textiles & Textile Products
Basic Metals & Fabr. Metal Products             Leather & Leather Products                       Wood and wood products
Machinery and Equipment n.e.c.                  Pulp, Paper, Publish., Printing                  Community, Social & Personal Serv.
Electrical and optical equipment                Coke, Refin. Petrol. Products
Transport Equipment                             Chemicals, Chemical Products
                                                Manufacturing n.e.c. furniture
                                                Electricity, Gas & Water
                                                Wholesale & Retail Trade
                                                Restaurant & Hotels
                                                Transportation & Storage
                                                Financial Institutions, Insurance
                                                Real Estate & Business Services

                                                                                                                Sectoral Analyses, Outlook 2008–2009   31

     envisage quite a positive outlook for the whole branch that            the current year are only enough to maintain labour productivity
     serves other fast-growing industries of the manufacturing sector.      and product quality, or just improve them slightly. Given the pre-
     Fabricated Metal Products grew even faster than metallurgy. By         sent concerns, prospects for the sector do not seem much brighter
     the end of 2006, the volume of production was 139 % higher             than the recent past, and we expect a situation close to stagna-
     than in 1999, and the expansion was continuing in 2007 as well.        tion in 2007, with just a slight acceleration from 2008 onwards.
     The most dynamic sub-branches are the manufacturing of metal-
     lic structures, treatment and coating of metals. Thanks to the         Textiles & Textile Products has been on the decline since a struc-
     surge in export-oriented FDI in the manufacturing of metallic          tural transformation began in the early 1990s. The trend acceler-
     structures, its foreign trade surplus is gradually outstripping the    ated with the introduction of the minimal wage and the global
     growing deficit on the trading of other metallic items. The major      surge of cheap Far-East and Eastern European products, with
     representatives of this industry have invested or are set to invest    which Hungarian traditional fabric production simply cannot com-
     vast sums in expanding or setting up the production of metallic        pete. Several large firms that have been present in Hungary for
     items, and this is a promising sign of long-term progress.             many years ceased operations, and relocated capacities to Romania,
                                                                            Ukraine, China or Vietnam. The clothing industry has a better out-
     Machinery and Equipment is a lucrative industry attracting             look as some of the producers are already specialised in high
     much FDI, with impressive development in the past and a bright         added-value items. As the business climate in the textile and
     outlook for the future. Just like in the automotive sector, high       clothing industry is unlikely to change, the industry’s value added
     capital inflows from multinational companies have set the indus-       growth will probably be close to stagnation in the coming years.
     try on a fast development track. The most successful sub-sector
     is the manufacturing of household appliances, mainly due to the        Even though the output of the sector grew by 43 % between
     constantly expanding exports and investments of Electrolux. In         1999 and 2006, mainly as the production of builders’ carpentry
     addition to this, other branches have also boosted exports, while      and joinery almost doubled, Wood & Wood Products has little
     the share of imports in domestic consumption has declined. As a        relevance in the Hungarian economy. This is basically because
     result, machinery became a net exporter at the end of 2006 and         progress is constrained by the limited natural resources of the
     we expect this improving trend to continue.                            raw material, while importing makes production more expensive
                                                                            than in Slovakia or Romania. Another factor hampering competi-
     Worst Performers                                                       tiveness is that the prices of the raw material from domestic
     Even after many years of unsuccessful struggles against foreign        sources started to flare following the cut in the state reimburse-
     competition, especially after EU entry, Food Products, Beverages       ment of residential gas prices, as the move suddenly made wood
     & Tobacco is still one of the key sectors in Hungary: it employs       a competitive heating alternative for gas. The future looks differ-
     3 % of the economically active population, its contribution to na-     ent for manufacturers depending on their size and the nature of
     tional GDP is 2.5 % and it acts as the only source of income for       their owners. Foreign firms running plants in Hungary will proba-
     thousands of independent farmers. Operating margins have               bly withstand any challenge and continue with their capacity ex-
     shrunk dramatically as unit labour costs rise sharply and the two-     pansions. The majority of small Hungarian enterprises, however,
     sided squeeze from corporations buying in large quantities and         must face poorer market conditions along with rising input prices
     raw material suppliers has increased. Several Hungarian firms with     and higher costs due to environment protection issues.
     quite a long history behind them have gone bankrupt, the majori-
     ty of them in meat processing. Hungarian food companies kept on        The Community, Social & Personal services sector fundamentally
     losing ground against foreign competition, whereby the domestic        differs from all the other industries: only 8 % of VA derives from
     food market expanded by 2.5 % in 2006, while both domestic and         corporate businesses, while 75 % is provided by General govern-
     export sales of the Hungarian food industry declined. As a result of   ment (13 % is accounted for by the estimated economic perfor-
     this long-standing trend, the share of imported food in domestic       mance of households). As there is a long way to go until the
     consumption increased to over 22 % by the end of 2006 from             budget deficit falls below 3 % of GDP, as targeted by 2010 in the
     10 % in 1999. Even though the external trade balance of the sec-       Convergence Programme, value added in relevant areas of the
     tor is still in the black, it has been shrinking constantly. Invest-   economy will very much likely shrink amidst fundamental
     ments implemented in the food industry during the previous and         changes in the structure of financing and spending.

32   Sectoral Analyses, Outlook 2008–2009
Selected Sectors with Stable Outlook                                  next two or three years the amount of value added in the sector
Agriculture, Hunting, Forestry & Fishing suffers from a frag-         will grow more slowly than that of the national economy.
mented land structure dominated by small land properties, a se-
vere and permanent shortfall of capital and a low mechanisa-          The volume of freight-tonne kilometres performed by Trans-
tion. Yet another factor hindering competitiveness is related to      portation has been growing steadily since 2001 and, taking that
the fact that between 2007 and 2013 farmers in the new Mem-           year as a base, the market is 83 % larger in 2006. The Corporate
ber States receive Agriculture and Rural Development subsidies        segment of the industry generated revenue of HUF 2,723 billion,
per hectare, which are only 64 % and per farmer only 33 % of          even higher as motor vehicle manufacturers, and 25 % more
the amount the older EU members receive. In spite of all the          than in 2005. Transport performances have kept going strong in
troubles in agriculture we have upgraded the sector from worst        2007 as well, and we expect this trend will prove to be long-
to stable, because numerous factors affecting business (changes       lasting. The only weak areas are public transport and passenger
in prices, EU directives, capital consolidation of domestic produc-   rail transport. They are under state or public control and usually
ers launched) indicate that agriculture has bottomed out in 2007      operate with huge losses. Because of the weak business perfor-
and from now on a gradual recovery should begin.                      mance of passenger transport, the sector as a whole could not
                                                                      be classified as best.
With a 15.3 % yoy fall in output during the first nine months of
2007 due to depressed domestic demand, relatively high inter-         Given its 18 % GDP share, Real estate, Dwelling and Business
est rates and a strong correction in public spending (which           Services, is the second largest branch of the economy following
means a sharp reduction in the financing of infrastructure pro-       manufacturing. Its importance is well founded if we consider its
jects), the correction in the Construction industry is coming after   7.9 % share in employment and its 37 % share in the number of
a few years of unusually high growth driven by strong govern-         enterprises. Apart from the residential segment, real property
ment investments in motorway construction and other projects          development has been thriving, especially the kind that relates
improving infrastructure. In addition, residential home building      in some way to commercial offices & outlets, logistics & trans-
activity, which peaked in 2004, has decelerated slowly from           portation, or manufacturing. Some downside risk is also possible
2005 onwards. Despite the current difficulties, steady develop-       for the real estate segment, given the concerns derived from the
ment is expected to return in 2008 as the business climate is         international environment. The reason for the industry not being
good in areas of the private sector on whose orders the long-         qualified as best is that other business-related services (IT, rent-
term results of the construction industry tend to depend.             ing, R & D, advertising, etc) are experiencing only mediocre de-
                                                                      velopment in the current phase.
Value added in Tourism & Restaurants accounted for 4.1 % of
national GDP in 2006. The sector has strategic importance for         Foreign Direct Investments and Privatisations
Hungary as an efficient factor balancing the current account.         With the exception of a handful of companies still under the con-
Tourism has suffered a series of shocks, beginning with the global    trol of the state, privatisation has almost come to an end and is
downturn in the tourism industry in 2001 – 02. Despite encourag-      no longer an issue in Hungary. The role of FDI in the economy,
ing signs in some segments, the overall performance of tourism        however, cannot be overemphasised: its volume is vitally impor-
does not seem to be on a solid footing on a long-term basis. The      tant to fill the external financing gap and largely determines the
stronger forint and higher incomes made travel abroad more            track which the Hungarian economy will plot in the long run.
accessible for average Hungarians before the introduction of the      Though interim 2007 figures do not provide too much cause for
stability package in the autumn of 2006, and an increasing pro-       optimism, there are currently around 59 large-scale greenfield
portion of the population travelled abroad. 2007 has not been a       investments under debate (of which 25 are closed). These pro-
good year either: foreign visitors spent less nights in Hungary       jects, which are expected to be implemented between 2007 and
and the rise in the tourism nights of domestic guests is not          2010, measure around EUR 2 billion and are to provide employ-
enough to compensate for the loss: foreign visitors tend to           ment for 11,200 people. The remaining 34 companies that have
spend around ten times as much as an average Hungarian cus-           not yet decided may bring a further EUR 2.5 billion in FDI and
tomer, and it will be a tiresome business to find revenue to          4,500 new job opportunities, if the deals are struck.
compensate for this shortfall. Therefore, we expect that over the

                                                                                                           Sectoral Analyses, Outlook 2008–2009   33

     Hungary – Structural Indicators (2005)
     SECTORS                                                                                                             MARKET STRUCTURE
                                                                                                        Number of     Number of   Number of     SME VA in
                                                                                                        enterprises   employees         SME    sect. VA %
                                                                                                            (2006)       (2005)      (2005)        (2005)

     TOTAL                                                                                              1,183,953     3,632,750     707,357         50.3
     Agriculture, Hunting, Forestry, Fishing                                                               52,769       194,000      24,758         88.1
     Mining & Quarrying                                                                                       678         4,848         707         72.7
     Manufacturing                                                                                         80,488       688,133      67,195          n,a,
       Food products, beverages and tobacco                                                                 8,478       110,821       6,971         40.0
       Textiles and textile products                                                                        8,880        60,349       7,913         58.6
       Leather and leather products                                                                         1,031        12,825         908         63.0
       Wood and wood products                                                                               6,328        19,751       5,743         72.7
       Pulp, paper & paper products; publishing & printing                                                 10,986        39,875       8,995         70.2
       Coke, refined petroleum products & nuclear fuel                                                         12         6,707           3           0.3
       Chemicals, chemical products and man-made fibres                                                       945        30,765         729         15.8
       Rubber and plastic products                                                                          2,915        36,497       2,394         63.4
       Other non-metallic mineral products                                                                  3,125        25,239       2,503         49.3
       Basic metals and fabricated metal products                                                          12,278        73,897      10,650         58.7
       Machinery and equipment n.e.c.                                                                       7,649        59,264       6,409         58.0
       Electrical and optical equipment                                                                     8,529       137,042       6,076         16.7
       Transport equipment                                                                                  1,046        49,905         633           7.7
       Manufacturing n.e.c.                                                                                 8,286        25,196       7,268         85.2
     Electricity, Gas & Water                                                                                 976        56,490         707         19.7
     Construction                                                                                          94,478       315,100      72,151         77.5
     Wholesale & Retail Trade, Restaurants & Hotels                                                       282,548       740,200     193,110         86.2
       Wholesale & Retail Trade                                                                           211,431       585,900     159,864         89.7
       Restaurants & Hotels                                                                                71,117       154,300      33,246         62.6
     Transportation & Communications                                                                       45,343       216,079      37,490         28.3
       Transportation & Storage                                                                            42,331       158,268         n,a,        42.3
       Communications                                                                                       3,012        57,811         n,a,        10.8
     Financial Intermediation                                                                              35,657        80,300      22,636          n,a,
     Real Estate, Dwellings & Business Services                                                           444,216       275,800     188,865         88.2
     Community, Social & Personal Services                                                                146,800     1,061,800      99,738         38.7
     Source: CSO Yearbook, CSO Monthly Bulletin, Tax Bureau Nace II, CSO, NBH, UniCredit Bank Hungary
     See ANNEX for further explanations of the indicators

34    Sectoral Analyses, Outlook 2008–2009
                          SECTORAL DETAILS                                             COMPETITIVENESS                          CONSTRAINTS
  Share in     Export IMP/AC %    Share in         FDI     Capital      RCA        Labour        Average      Wage adj.          Total       Bank
total VA %   propen-     (2005)      total attractive-   Intensity   (2005)   Productivity     Personnel         Labour       Indebt-     Indebt-
    (2005)     sity %               FDI %      ness %           %                   (2005,           Cost   Productivity      edness      edness
              (2005)               (2005)      (2005)      (2005)                manufac-          (2005,         (2005,            %          %
                                                                              turing=100)       manufac-       manufac-        (2005)      (2005)
                                                                                             turing=100)    turing=100)

    100.0      16.5       17.3      100.0       100.0        26.6    100.0           85.3         108.3            78.7         55.8          6.0
      4.3       2.0        0.7        0.4         9.3        25.2    293.6           69.1          70.3            98.3         49.7         17.0
      0.2       3.9        6.0        0.1        40.4        18.7     66.4          143.2          115.4          124.0         59.8         13.3
     22.2      55.1       49.1       41.4       186.2        26.2    134.4          100.0          100.0          100.0         42.5          7.4
      2.6      22.3       15.8        4.2       163.1        26.1    162.3           71.9           89.9           80.0         54.7         18.7
      0.6      90.8       88.8        0.5        91.1         8.8    131.3           30.5           57.3           53.3         60.2          9.6
      0.1      67.3       63.4        0.1        81.6        11.4    125.4           29.4           59.9           49.1         58.4          4.8
      0.3      23.0       16.4        0.4       130.7        25.7    161.6           50.8           62.3           81.5         50.1         12.1
      1.1      10.2       14.6        1.3       113.5        25.1     70.7           86.2          107.2           80.4         44.7          9.3
      1.6      36.3       50.9        1.9       119.4        22.6     58.0          725.2          278.4          260.5         32.3          4.9
      2.1      50.8       35.0        5.4       261.7        40.1    202.9          208.0          165.6          125.6         31.3          3.2
      1.0      45.1       37.7        1.4       140.7        31.7    143.6           81.6          100.5           81.1         56.9         10.5
      0.9      23.8       21.7        1.7       189.8        45.8    119.1          108.7          106.7          101.9         49.1          7.1
      1.9      46.8       31.6        2.8       143.5        24.4    201.2           81.3           94.8           85.8         49.7         11.6
      1.5      44.8       33.5        2.2       146.4        28.9    170.6           78.8          101.8           77.4         48.4          4.9
      5.6      73.4       70.3        8.9       159.6        15.9    122.9          126.2          105.4          119.8         51.4          3.3
      2.6      86.8       82.6       10.4       404.3        36.6    146.7          159.7          129.8          123.1         28.7          2.6
      0.4      33.2       21.0        0.2        55.3        21.3    198.4           49.9           64.5           77.4         61.9         11.2
      2.9       0.7        4.5        4.2       144.4        38.4     16.4          158.6          143.8          110.3         37.2         12.6
      4.9       0.3        1.0        0.9        19.0        13.5     30.8           47.8           72.9           65.5         63.2         11.0
     12.7       6.1       15.8       12.4        97.9        18.4     36.5           53.1           84.4           62.9         59.3         10.3
     11.1       6.3       16.4       11.7       105.4        18.6     36.5           58.5           89.4           65.4         59.5          9.8
      1.6       0.2        0.5        0.8        46.6        16.9     52.7           32.5           65.5           49.7         57.1         16.8
      7.7       2.4        3.8       10.1       131.6        40.5     66.8          109.9          116.2           94.6         59.9          8.5
      4.2       3.4        3.7        0.8        18.6        47.0     97.9           83.1          101.7           81.7         69.8         11.3
      3.4       0.3        4.0        9.3       272.0        32.4      8.3          183.2          155.9          117.6         44.4          4.0
      4.6       0.0        0.8       10.3       221.8        10.4      0.8          178.4          239.9           74.4         62.0          1.8
     17.1       1.1        1.1       17.9       104.5        42.2    107.7          192.4          110.7          173.8         54.3          7.0
     23.4      21.2       18.1        2.4        10.1        20.1    129.1           68.1          118.9           57.3         40.9          4.0

                                                                                                              Sectoral Analyses, Outlook 2008–2009   35

     • The Polish economy is growing fast, amidst strong                  • Construction activity also has bright prospects and is
       domestic demand – mainly investment. Strong growth                   relatively immune to risks derived from the inter-
       is adding some pressure in terms of the high utilisation             national turbulence.
       of production capacity, and on the labour market. Still,           • The role of foreign investments is a major driver of
       new projects entering full operation in the coming                   growth, especially in the manufacturing sector: the
       years are likely to ease the constraints.                            Automotive and the Electrical Equipment sector
     • The manufacturing sector is expected to maintain a                   accounted for the lion’s share of FDI (Bridgestone,
       bright performance, especially in the field of producing             Toyota, Dell, Sharp have recently invested in the
       intermediate and investment goods.                                   country, to quote some recent examples)

     Economic Framework                                                   Performance of the sectors
     The Polish economy is now in a high-growth phase thanks to           Best Performers
     strong domestic demand – mainly investment. Following a 6.2 %        The manufacturing sector in Poland is very strong and it is ex-
     GDP performance in 2006 and 6.4 % yoy in Q3 2007, we expect          pected to maintain its bright performance in the next few years.
     GDP growth of 6.4 % for the whole of 2007. In 2006, total con-       Hence, many manufacturing sub-sectors are classified among
     sumption grew by 5.1 %, while gross investments were up by           the best sectors, especially those related to the production of in-
     16.8 %. In the first three quarters of 2007 a similar pattern        termediate and investment goods. Construction activity also has
     evolved, with investments again growing at double-digit rates        good prospects, despite concerns at international level.
     (+ 19.6 % yoy in Q3). In 2008 we expect slightly lower, but still
     double-digit investment growth because of the high level of ca-      The favourable situation in Construction and in some related in-
     pacity utilisation, with strong inward foreign investment and EU     dustrial sectors (Other Non-metallic Mineral Products and Basic
     funds. Consumption will also increase robustly due to higher         Metals & Fabricated Metal Products) is the result of infrastruc-
     household incomes resulting from higher wages and employ-            ture investment growth as well as industrial and housing invest-
     ment, lower disability pension contributions and the expected        ments. The number of building permits obtained in housing con-
     valorisation of pensions. Export growth remains sound, but the       struction during the first three quarters of 2007 was 52 % higher
     contribution of net exports to growth is negative as a result of     than a year ago. Before the Euro 2012 Football Championship,
     strong acceleration in imports. Overall, we forecast 5.2 % growth    one can expect huge infrastructure investments such as stadi-
     in 2008.                                                             ums, hotels, roads, bridges and railways. Industry investments
                                                                          will also be stimulated by the high utilisation of current produc-
     The strong increase in sales of the non-financial business sector    tion capacity. Foreign investors are increasingly interested in con-
     is combined with an even more powerful increase in earnings          struction and related activities. Around 170 of the 1091 biggest
     growth (net profit grew 36 % yoy in 2006). However, in 2008 we       foreign investments in 2006 pertain to the above-mentioned
     expect a reversal in this trend due to cost pressures: the rate of   sectors. Given these (positive) features of the construction sector
     wage growth is still exceeding productivity growth. Additionally,    in Poland, this branch seems relatively immune to any conta-
     some sectors (energy, cement, steel) could be faced with the re-     gious effect stemming from the international environment.
     quirement of gaining additional CO2 emission rights.
                                                                          The output of Other Non-metallic Products increased by 19.5 %
                                                                          in 2006 and very high growth is also expected for 2007. The sec-
                                                                          tor supports the fast growing construction activity. Double-digit

36   Sectoral Analyses, Outlook 2008–2009
growth is likely in Fabricated Metal Products too: steel industry         to the large export, nevertheless the large scale of the used
output was 10 mn tonnes in 2006, but consumption was                      cars import, the sector develops very dynamically. This produc-
10.7 mn tonnes; in 2007, output will increase to 11.1 – 11.3 mn           tion growth should continue due to the manufacturing of new
tonnes and consumption to 12 mn tonnes.                                   car models (such as the Fiat 500, the Chevrolet Aveo and the
                                                                          Opel Astra Sedan) and the start of manufacturing MAN trucks.
The Machinery & Equipment sector maintained a stable and                  New FDI into the automotive sector has resulted in the devel-
high rate of growth for many years. Strong FDI inflows in this            opment of Polish car parts suppliers. Generators produced in
sector too have allowed the introduction of advanced technolo-            Poland are becoming a Polish specialty; however, electronic
gy. Foreign investors are especially interested in the production         products, electric cables and brake systems are also prominent.
of home appliances: leading world players of the home appli-              Car parts manufactured in Poland are used in cars of well-
ances sector such as Bosch, Whirlpool, LG or the Fagor Group              known brands like Mercedes, Nissan, Opel, Porsche, Toyota,
have established factories in Poland. In 2007, new investments            Volkswagen, Isuzu, Fiat, Citroen, Honda, Peugeot, Volvo, Rolls-
include ones implemented by Indesit in Radomsko and Elec-                 Royce, Lamborghini and Ferrari. Given that foreign investment
trolux in Swidnica. Refrigerators, washing machines and kitchen           has already taken off in the sector and is attracting further pro-
ovens manufactured in Poland account for 15 % of the overall              ducers to the country, the outlook of the sector remains posi-
production of such goods in Europe.                                       tive. Even a slowdown in EU demand for cars and other vehicles
                                                                          could have a limited impact, as it can be set off by further
Electrical & Optical Equipment is developing dynamically due to           potential relocations (from Western Europe) of automotive pro-
foreign investment. New investments in this sector include                ducers.
Toshiba in the LCD TV segment (in Kobierzyce), a new invest-
ment of Sharp (in Łysomice near Toru       ) and the Funai Electric       The Rubber & Plastic sector mainly targets the internal market,
Co.’s investment (in Nowa Sól). In three years’ time, Poland will         both households (manufacture of plastic products like plates,
become the European leader in the production of TV sets, with             packing goods, etc.) and the corporate sector (as it provides in-
about 80 % of the new generation TVs on the European market               puts to other industrial sectors, like construction, automotive,
manufactured there.                                                       electrical equip. and food processing for packaging). The domi-
                                                                          nant branch is tyre production: it is a competitive industry,
The Transport Equipment sector is putting in a very positive per-         which has been able to attract a significant amount of FDI. For-
formance in many Central European countries. The sector encom-            eign investors who already operate in Poland are increasing
passes two large segments, of which the Manufacture of Motor              their production capacity, and other foreign firms, like Bridge-
Vehicles records a very significant rate of production growth. Due        stone, are coming.

Best and worst performers
BEST                                            STABLE                                          WORST

Rubber & Plastic Products                       Agriculture, Hunting, Forestry & Fishing        Mining & Quarrying
Other Non-Metallic Mineral Products             Food, Beverages & Tobacco                       Textile & Textile Products
Basic Metals & Fabricated Metal Products        Wood & Wood Products                            Leather & Leather Products
Machinery & Equipment                           Pulp, Paper & Paper Products
Electrical & Optical Equipment                  Coke, Refined Petr. Products & Nuclear Fuel
Transport Equipment                             Chemicals, Chemical Products
Construction                                    Manufacturing n.e.c. (mainly furniture)
Financial Institutions & Insurance              Electricity, Gas & Water
Real Estate & Business Services                 Wholesale & Retail Trade
                                                Restaurants & Hotels
                                                Transportation & Storage
                                                Community and Personal Services

                                                                                                              Sectoral Analyses, Outlook 2008–2009   37

     Banks are the largest segment of the Financial Sector but their        Selected Sectors with a Stable Outlook
     share in the segment is constantly decreasing. Good results in         Wood and Wood Products sector largely participates in exports and
     the banking sector in Poland stem from the good economic situ-         successfully competes on foreign markets. The tendencies in the
     ation, related on the one hand to the increase in deposits and         wood sector indicate relatively good prospects for medium-term
     on the other to the demand for credit. In the Financial Interme-       growth. The conditions for such an outlook are the potential of the
     diation sector the most significant growth is observed in the          furniture manufacturing market and the increasing exports to East-
     insurance segment, more specifically, in life and property insur-      ern markets (with the European market being rather stable). The
     ance, including home insurance due to the dynamic develop-             Wood and Wood Products sector, however, does face some obsta-
     ment of mortgage loans. The economic boom and good stock               cles, namely the accessibility of wood and its increasing price.
     exchange performance are enhancing the popularity of invest-
     ment funds, whose assets have grown by 65 % in the last                The consumption of Chemical Products per head in Poland is less
     12 months alone. The profitability of the whole sector is sound.       than half that in Western European countries, which indicates the
                                                                            potential of further development. The sector comprises two main
     Worst Performers                                                       segments: Basic Chemicals and Pharmaceutical Products account for
     As in other CEE countries, the traditional and more labour-inten-      the largest shares and also the fastest increases in growth. The rise
     sive sectors, such as Leather and Textile, are recording disap-        in consumption demand for pharmaceutical products results from
     pointing performances. Moreover, the mining and quarrying seg-         the ageing of society. The whole Chemical and Chemical Products
     ment is also classified among the worst sectors.                       sector is being challenged by problems like the stability of supplies
                                                                            and the higher prices of strategic raw materials such as gas and oil.
     Mining and quarrying is the only sector which has been experi-
     encing a reduction in VA of an average 4 – 5 % per annum in the        The dominant part of the Manufacturing n.e.c. sector is furniture
     last 10 years. In 2006, mining sector VA decreased by 8.5 % in         production, which remains at a high level. About 80 % of all furni-
     just one year. Coal will keep its fundamental energy source posi-      ture is exported. Poland is the fourth largest furniture exporter in
     tion in Europe due to the increasing prices of oil and gas. Poland     the world (after China, Germany and Italy). At present, domestic
     is the largest hard coal producer in the EU. However, the sector       demand is increasing too. The relatively rapid increase in the
     requires significant investments related to new technologies and       prices of wood is threatening the financial situation of the sector.
     access to new deposits. We expect the performance of this              Average prices in the first three quarters of 2007 were 10 % high-
     sector to be significantly lower than the average of the whole         er than a year ago.
                                                                            The Food, Beverages and Tobacco sector includes more than ten
     Regarding the more traditional sectors, like Textile and Textile       segments, whereby the manufacturing of soft drinks, non-alcoholic
     Products and Leather and Leather Products, unstable growth             beverages, beer, dairy products and children’s food are set for dy-
     trends are evident in both sectors, the inability to compete in        namic growth, while in other segments, such as fruit processing,
     foreign markets (RCA indicator is below 100 %, so Poland is al-        bakery and the production of potato products, growth is stable but
     ready “despecialised” in these activities) and the lack of prof-       rather slow. The manufacturing of non-refined bio-fuel products is
     itability at a large number of firms are quite clear. However,         standing on the threshold of one of its biggest development oppor-
     since 2006 the production of both sectors has grown and the            tunities. For many years the food industry has been an industry
     profitability indicators have improved. In the textile sector, firms   with a large contingent of foreign investors. Last year, 124 projects
     which hold their own brands are performing quite well and de-          out of a total of 1091 were conducted in the food industry sector.
     veloping their sales networks, including networks abroad. Many         The sector is competitive in foreign markets, as confirmed by the
     firms have outsourced manufacturing to China. In the leather           high score of the Revealed Comparative Advantage Index.
     products sector, the shoe manufacturing industry effectively
     competes with cheap imports, broadening its market offerings           The Pulp, Paper & Paper Products, Publishing and Painting sector
     and developing its own sales network. In line with the outlook         is indicated as stable, mainly due to Publishing. Indeed, the paper
     of these sectors in many other countries of the region, we main-       segment has been experiencing fast growth and has also attracted
     tain a negative outlook.                                               foreign investors, but the other segment of the sector, i.e. Publish-

38   Sectoral Analyses, Outlook 2008–2009
ing, more inward oriented by nature, is currently in its mature stage   value of contracts related to the “Polish Governmental IT Program
with a moderate growth dynamics. The publishing market is being         for 2007 – 2010” is estimated at PLN 3.5 billion. Positive spill-overs
challenged by competitors such as TV, free press and Internet.          are also expected from the increasing demand derived from the
                                                                        fast developing medium-high tech sectors within the manufactur-
In terms of the network industries – Electricity, Gas and Water –       ing industry.
the value of the Polish electricity and energy sector is estimated
at PLN 50 billion. The energy sector in Poland has been the sub-        The sector of Transport and Communication is benefiting from
ject of a consolidation process. As a result of this process, four      the good economic situation and the growing trade exchange. At
groups of companies dealing with the production, trade, and dis-        the same time, the competition resulting from the de-regulation
tribution of energy were established. The income of the largest         of the sector is growing (low-cost air carriers, alternative railway
group, Polska Grupa Energetyczna, is estimated at PLN 20 billion.       operators, for instance). Competition has also increased in the
The consolidation is aimed at necessary investments in the areas        telecommunications sector. The regulator introduced attractive
of production and environmental protection requirements. The            access conditions in the fixed telecommunication sector within
sector is dominated by state-owned companies. BOT Energetyka i          the framework of wholesale line rentals and bit-stream access.
Górnictwo has the largest energy production and its market share        The fourth mobile telephone operator (Play) has launched its
is 26 %. In the gas sector, PGNIG (controlled by the state) holds a     business, along with several MVNOs (Mobile Virtual Network
monopoly position. The situation is influenced by the slow dereg-       Operator).
ulation process in the sector. The necessary investments for the
future result from the obligatory CO2 emission decrease by              Foreign direct investments and Privatisations
Poland (by 20 % until 2020), the obligatory increase in renewable       In this period of economic growth in Poland, foreign firms have
energy (to 7.5 % by 2010) and the need to satisfy the growing           demonstrated their strong interest in investing in the country. For-
demand for energy. The most important energy projects to be             eign investment in Poland is supported by financial grants, in the
conducted within the framework of energy security are the con-          case of large investments, and by the tax relief system in the
struction of gas pipelines, underground gas retention tanks, the        special economic zones.
Brody–Płock gas pipeline, the LNG terminal and the Polish-
Lithuanian electricity and energy system.                               In 2006 the inflow of FDI in euro terms was 82.7 % higher than in
                                                                        2005. About 29 % of the foreign capital was constituted by the
The growth rate of Hotels and Restaurants and the financial             reinvestment of profits by foreign firms in Poland. In 2006 the
results until 2006 were quite moderate. In 2007 all of the most         transit capital (inflow of resources to increase the funds of com-
significant factors relevant for the sector improved. The most im-      panies operating in Poland, where these resources are later in-
portant indicator for the sector – RevPAR, indicating the income        vested in branches and in affiliated companies abroad) grew by
for one hotel room in Warsaw – increased by 18 % in the first half      140 %. Even better growth dynamics (171 %) were seen in rela-
of 2007. The growth in income has been mostly due to confer-            tion to non-residents selling and purchasing real estate in Poland.
ences, marketing and sport events.
                                                                        Inflow of foreign direct investment in 2005–2006 (EUR million)
The Real estate market is now also set for a boom. The market is        Year                          Components of FDI inflow               Total
                                                                                                   Equity Reinvested        Other
not mature yet and still not consolidated. One can expect merg-
                                                                                                  capital   earnings       capital
ers and even some bankruptcies. The important development               2004                      5,841        5,085          – 943        9,983
factor for the whole sector of Real Estate & Business Services is        of which: real estate        0            0              0            0
business activities, including IT, modern service centres and out-       capital in transit           0            0              0            0
sourcing centres (BPO). As the largest country in the Central and       2005                      3,555        2,709         2,016         8,280
                                                                         of which: real estate      336            0              0          336
Eastern European region, Poland has the opportunity to become
                                                                         capital in transit       1,218            0              0        1,218
the leader on the shared services and outsourcing services mar-
                                                                        2006                      5,632        4,358         5,071        15,061
ket. New outsourcing projects are now being considered in                of which: real estate      910            0              0          910
Poland. IT is developing dynamically and in the last 4 years its         capital in transit       2,928          186              0        3,114
value has increased in double-digit rates each year. The overall        Source: PAIIZ

                                                                                                              Sectoral Analyses, Outlook 2008–2009   39

     Foreign investments are primary greenfield investments. In 2006                                 PLN 1.1 billion. The new investments will create 15,500 jobs. The
     the majority of FDI was provided to firms operating in the real                                 majority of the projects were completed in 2006. The Automotive
     estate sector, services sector, the manufacturing industry, the                                 and the Electrical Equipment sector accounted for the lion’s share.
     trade sector and in financial intermediation.                                                   The largest foreign investments in 2006 were the new tyre factory
                                                                                                     of Bridgestone (in Stargard Szczeciński), the Dell computer factory
     The Polish Information and Foreign Investment Agency (PAIZ)                                     (in Łódź), the Sharp LCD module factory (in Łysomice) and the
     completed 43 investment projects in 2006 for a total value of                                   Toyota gear factory (in Wałbrzych). Poland has been attractive for

     Poland – Structural Indicators (2006)
     SECTORS                                                                                                                                       MARKET STRUCTURE
                                                                                                                            Number of         Number of        Number of          SME VA in
                                                                                                                            enterprises       employees                SME       sect. VA %
                                                                                                                             (in 1,000)        (in 1,000)       (in 1,000)

     TOTAL                                                                                                                        3,636           13,093             3,603              36.5
     Agriculture, Hunting, Forestry, Fishing                                                                                         92            2,143                91                 –
     Mining & Quarrying                                                                                                               2              182                 2               3.0
     Manufacturing                                                                                                                  375            2,583               366              14.7
       Food products, beverages and tobacco                                                                                          33              479                31              14.5
       Textiles and textile products                                                                                                 51              262                49              29.7
       Leather and leather products                                                                                                  11               37                10              27.6
       Wood and wood products                                                                                                        40              137                40              32.1
       Pulp, paper & paper products; publishing & printing                                                                           34              144                34              25.6
       Coke, refined petroleum products & nuclear fuel                                                                                0               16                 0               0.3
       Chemicals, chemical products and man-made fibres                                                                               5              105                 4               8.8
       Rubber and plastic products                                                                                                   15              149                15              21.1
       Other non-metallic mineral products                                                                                           21              138                21              18.4
       Basic metals and fabricated metal products                                                                                    56              322                55              18.2
       Machinery and equipment n.e.c.                                                                                                23              201                22              19.2
       Electrical and optical equipment                                                                                              31              190                31              14.7
       Transport equipment                                                                                                           10              186                 9               4.0
       Manufacturing n.e.c.                                                                                                          45              217                44              22.6
     Electricity, Gas & Water                                                                                                         4              217                 3               7.9
     Construction                                                                                                                   368              653               365              50.4
     Wholesale & Retail Trade, Restaurants & Hotels                                                                               1,274            2,322             1,270              52.8
       Wholesale & Retail Trade                                                                                                   1,161            2,099             1,157              52.6
       Restaurants & Hotels                                                                                                         113              223               112              65.1
     Transportation & Communications                                                                                                259              708               258              33.5
       Transportation & Storage                                                                                                     253              542               252              45.5
       Communications                                                                                                                 7              166                 7               8.3
     Finance, Insurance, Real Estate & Business Services                                                                            733            1,282               730                 –
       Financial Institutions                                                                                                        17              248                17                 –
       Insurance                                                                                                                      1               40                 1                 –
       Activities auxiliary to financial intermediation                                                                             112               18               112                 –
       Real Estate, Dwellings & Business Services                                                                                   603              976               600              56.9
     Community, Social & Personal Services (L+M+N+O)                                                                                530            3,004               518              55.4
     Source: Concise Statistical Yearbook of the Republic of Poland, Central Statistical Office, Polish Information & Foreign Investment Agency, Bank Pekao Macroeconomic Research Office
     See ANNEX for further explanations of the indicators

40    Sectoral Analyses, Outlook 2008–2009
foreign investors in 2007 too. Until July, foreign firms invested          of FDI in Poland are the narrower opportunities in privatisation
about EUR 5.6 billion. In the first half of 2007, PAIZ completed           projects and the significant increase in labour costs. Large infra-
31 investment projects. In 2007 the priority foreign investments           structural projects, especially in the energy sector, will attract
were in the service centres and in the automotive, electronics             further investments in the near future.
and chemical sectors. The main factors restricting the growth rate

                         SECTORAL DETAILS                                              COMPETITIVENESS                           CONSTRAINTS
    Share in    Export IMP/AC %       Share in           FDI         RCA           Labour        Average            Wage         Total       Bank
  total VA %   propen-                   total   attractive-                  Productivity     Personnel         adjusted      Indebt-     Indebt-
                 sity %                 FDI %        ness %                     (manufac-           Cost          Labour       edness      edness
                                                                              turing=100)      (manufac-     Productivity           %           %
                                                                                             turing=100)       (manufac-

      100.0       37.3       39.9       100.0        100.0      100.0              104.5          110.1               94.9       40.6        11.1
        4.3        5.8        9.4         0.4          9.9       67.3               27.2          106.3               25.6          –           –
        2.4       12.6       46.9         0.1          5.5       18.2              181.4          202.9               89.4       25.8         2.3
       18.9       47.0       47.9        34.5        182.8      107.8              100.0          100.0              100.0       43.7        12.7
        3.2       20.4       13.8         5.2        163.2      179.7               91.0           91.5               99.4       47.4        16.4
        0.8       63.1       69.5         0.4         47.1       83.8               39.4           61.9               63.7       45.7        12.9
        0.1       59.3       73.7           –            –       58.1               45.2           62.6               72.3       51.0        10.3
        0.7       39.1       20.0           –            –      286.7               73.5           71.1              103.3       38.2        16.9
        1.3       26.3       28.8         3.6        271.4       99.1              126.6          126.7               99.9       39.5        12.4
        0.5       19.0       25.4         0.1         21.2       77.4              416.1          219.6              189.5       36.3        18.6
        1.4       44.1       64.0         3.4        254.2       49.8              176.4          150.9              116.9       33.3        10.5
        1.2       41.5       42.8         2.9        248.4      106.3              106.4           98.7              107.8       45.3        11.6
        1.2       25.6       19.2           –            –      161.3              122.4          103.9              117.8       36.3        10.5
        2.9       52.4       52.6         3.7        128.3      111.0              121.9          103.8              117.4       42.0        10.2
        1.6       65.6       73.2         1.7        111.0       78.1              105.8          114.4               92.5       47.5         9.6
        1.4       75.2       80.9         0.9         66.1       79.8              103.6          113.1               91.6       51.9        12.8
        1.6       85.0       79.5         6.1        376.2      164.2              119.7          121.2               98.8       50.9         8.6
        1.0       63.8       33.8           –            –      385.5               64.5           76.5               84.3       50.1        15.7
        3.5        2.7        0.6         2.9         84.6      480.3              218.3          153.4              142.3       23.0         9.9
        6.5          –          –         1.9         30.1          –              135.4           91.6              147.8       54.0         8.4
       20.3          –          –        18.3         90.2          –              119.4           87.1              137.1       55.4        11.8
       19.1          –          –        17.7         93.0          –              124.3           88.9              139.8       56.4        11.6
        1.2          –          –         0.5         45.4          –               73.3           70.2              104.3       33.9        17.8
        7.2          –          –         8.2        113.1          –              139.7          118.8              117.6       41.2         6.4
        4.3          –          –         1.8         41.8          –              107.6          108.1               99.6          –           –
        3.0          –          –         6.4        215.4          –              244.4          154.3              158.3          –           –
       18.2          –          –        33.2        182.0          –              194.5          135.6              143.5          –           –
        3.1          –          –        15.1        494.6          –              168.8          189.9               88.9          –           –
        1.0          –          –         3.6        362.4          –              342.9          243.2              141.0          –           –
        0.5          –          –         0.5        102.6          –              354.5          222.7              159.2          –           –
       13.7          –          –        13.9        101.9          –              191.9          115.8              165.8       25.8        11.5
       18.8          –          –         0.5          2.5          –               85.7          116.5               73.6       45.6         9.6

                                                                                                               Sectoral Analyses, Outlook 2008–2009   41

     • Economic growth is strong, with investment activity                   from the still relatively high competitiveness of the
       sustained by large infrastructure projects supported by               Romanian labour market by EU standards.
       EU structural funds. Widening external imbalances in                • At the same time, traditional manufacturing sectors
       the context of a general repricing of risk at the inter-              such as leather and textile, which are still very impor-
       national level are, however, enhancing vulnerabilities.               tant (more than 10 % of total value added) will lose
     • Despite this, construction and communication remain                   further ground.
       among the sectors with the best prospects. Within the               • FDI will continue to play a major role in shaping the
       manufacturing segment, Wood, Non metallic mineral                     future specialisation of the country. Foreign companies
       products as well as Automotive and Electrical Equip-                  already represent 43 % of total turnover and 72 % of
       ment exhibit the most favourable outlook, benefiting                  the total exports of Romania.

     Economic Framework                                                    Performance of the sectors
     The significant stabilisation of the macroeconomic environment        Best Performers
     achieved in recent years was stimulated by the prospect of be-        Strong investment and construction activities support growth in a
     coming an EU member. Romanian GDP increased by a real 7.7 %           number of medium/low technological sectors. In the services
     yoy in 2006. Prospects look bright, albeit with some deceleration     category, the communication sector is also classified as best.
     expected in consumption growth and a further deterioration of
     the net export contribution. Investment activity is expected to       The Wood and wood products industry was one of the fastest
     gain more ground, sustained by large infrastructure projects that     growing industries in the first three quarters of 2007, accelerating
     are supported by EU structural funds. Overall, we project real        to 21.4 % annual growth (from 9.5 % last year) and it is expected
     GDP growth will come in at 5.8 % for 2007 and we expect it to         to continue benefiting from the widespread availability of natural
     stay above 5 % in the next two years. The short-term vulnerability    resources (forests cover more than 25 % of the country’s territory).
     of Romania is driven by deteriorating external imbalances, as         The wood industry is a strongly export-oriented sector, represent-
     reported by the latest S & P report changing the country’s outlook    ing 4 % of total exports. The sector lures foreign investors. One
     from positive to negative. Further pressures on the current ac-       example is the Austrian firms Kronospan and Holzindustrie
     count deficit are expected to come mainly from the persistence        Schweighofer, some of the biggest investors from abroad. The
     of robust consumption, strong investment growth and loose             growth rate potential of the industry has attracted one of the
     fiscal policy in the light of parliamentary elections scheduled for   biggest greenfield investments realised by the Egger Group,
     2008. In line with the overall GDP slowdown, industrial value         which ranks among the leading producers of wood-based materi-
     added decelerated to 5.9 % yoy in the first half of 2007 from         als in Europe. Holzindustrie Schweighofer also intends to increase
     6.9 % in 2006. In any case, we project industrial growth will re-     its production capacities and to build two electro-thermal cogener-
     main at a sustained level fostered by new investment projects.        ation stations. Moreover, Kronospan has announced a EUR 15 mn
     Some concerns arise, however, when comparing labour produc-           investment in addition to the EUR 250 mn already invested in
     tivity gains (10.3 % yoy in the first three quarters of 2007) with    Romania.
     wage growth that further accelerated to a real 14 % yoy in Sep-
     tember 2007. Moreover, some structural shortages in the labour        The Other non-metallic Mineral Products sector is characterised
     force are expected in the near future as shown also by the            by medium technology and by some important examples of de-
     record low unemployment rate of 4.4 % on average registered in        localisation. The booming construction sector has supported the
     the first three quarters of 2007.                                     production of building materials with 18 % yoy growth in the

42   Sectoral Analyses, Outlook 2008–2009
first three quarters of 2007 and is expected to continue having         the Chinese company BYD that announced investments in a fac-
positive spill-over effects in the coming years too. Romania ben-       tory to manufacture batteries and IT components for Nokia
efits from both natural resources and output capacity. Some of          phones). Ericsson, Foxconn and Emerson have stated their inten-
the main international players that have already established            tion to open production facilities close to Nokia’s. Also, it is possi-
their production bases in Romania are Holcim (Switzerland, ce-          ble that the enthusiasm created by the Nokia factory will be
ment), Lafarge (France, cement), HeidelbergCement (Germany,             repeated by Samsung, who is planning to produce LCDs, and in
cement-concrete), Wienerberger (Austria, bricks), Lasselsberger         the case of Fujitsu-Siemens which plans to open a PC production
(Austria, ceramic tiles), Carmeuse (France, lime), Saint-Gobain         unit in Eastern Europe, in competition entering Romania and
(France, glass) and Yioula Glassworks (Greece, glass). There are        Ukraine. In 2007 the sector has largely been privatised. Another
also several local producers engaged with non-metallic mineral          sub-sector, IT, is growing quickly: more than 50 % of the personal
products. Given the significant amount of investment ongoing            computers and laptops sold on the Romanian market are
and planned in the public infrastructure sector, we see good op-        produced in the country. Given that the majority of computer
portunities there too for companies focusing on building materi-        components all over the world are made in Asia, computer pro-
als like road bitumen, bitumen additives or geotextiles. Such in-       duction in Romanian essentially means their assembly. The man-
vestment opportunities have already been noted by several of            ufacture of lighting equipment and electric lamps includes
the main international players present on the local market, such        important international companies such as Luxten, Alstom, 3M,
as Bechtel (USA) and Astaldi (Italy).                                   Moeller, Schneider and Siemens, but the market is dominated by
                                                                        the local company ELBA, with 85 years of experience in the
Electrical and Optical equipment is one of the most important           field. The prospects for Electrical and Optical equipment look
export-oriented industries (13 % of total exports in 2006) and re-      bright, boosted by the new arrival of competitive international
mains the foundation of the improving export capacity of Roma-          players, especially in the fields of electrical and telecommunica-
nia. Nokia, the biggest mobile telephone producer announced its         tion equipment.
intention to open a new Nokia village, this time in Romania.
Total investments in what is to become a true industrial park will      The high appeal for FDI, double-digit output growth (21 % in
total EUR 200 mn, with Nokia announcing an investment of                2006) and the strong export focus (11 % of total exports in 2006)
EUR 60 mn and attracting to Romania its main suppliers (such as         positions the transport equipment sector among the best per-

Best and worst performers
BEST                                          STABLE                                           WORST

Wood and wood products                         Agriculture, hunt., forest., fish.              Mining and quarrying
Other non-metallic mineral products            Food, beverages & tobacco                       Textiles & textile products
Electrical and optical equipment               Pulp, paper, publish., printing                 Leather & leather products
Transport equipment                            Coke, refined petroleum products
Construction                                   Chemicals, chemical products
Communication                                  Rubber and plastic products
                                               Basic metals & fabricated metal products
                                               Machinery and equipment n.e.c.
                                               Manufacturing n.e.c. furniture
                                               Electricity, gas & water
                                               Wholesale & retail trade
                                               Restaurant & hotels
                                               Transportation & storage
                                               Financial institutions
                                               Real Estate, dwell. & business services
                                               Community, social & personal services

                                                                                                              Sectoral Analyses, Outlook 2008–2009   43

     forming branches. Around 44 green-field and brown-field invest-       population of 21 mn). Among the 10 most valuable Romanian
     ment projects in the transport equipment industry, mainly attracted   companies, three firms are from the communications industry:
     by the cheap labour costs, have been monitored by the Romanian        the biggest mobile phone company, Orange Romania is followed
     Agency for Foreign Investment (ARIS). The newest Logan model          by its competitor Vodafone. The third operator, Romtelecom, al-
     launched in 2004 proved to be a success for Automobile Dacia,         though characterised by a falling market share and shrinking
     producing 188,000 units out of the total Romanian car production      turnover last year, remained the dominant player on the fixed
     of around 202,000. Moreover, Ford intended to buy Automobile          telephony market. Cosmote, the third player on the mobile tele-
     Craiova, but the negotiations were frozen by the European Com-        phony market was overtaken by the Greek telecom group OTE
     mission which decided to examine allegations of state aid in-         which increased its number of clients from 20,000 in 2005 to
     volved in the deal. The Commission initiated its investigation to     2 million in April 2007.
     see whether Ford received state aid in the form of a lower price
     paid for the plant in exchange for promises to keep certain em-       Over the next couple of years we expect the robust growth to
     ployment levels and reach a certain output; the final decision will   continue. Under increasing competition, tariffs in voice segments
     be made only in the spring of 2008. We assign a positive outlook      are expected to decrease, shifting the profitability gains to the
     to the ship building industry too. Since the beginning of 2007,       non-voice segment. Therefore, the diversification of alternative
     Daewoo Mangalia Heavy Industries has signed contracts of over         services and the increasing penetration of Internet access will
     EUR 800 mn with the three most important ship owners in the           form the basis of future growth. Moreover, some successful
     world. We expect the current trends, characterised by conver-         Romanian companies, like RCS & RDS, may enter the markets of
     gence in wages and increasing competitive pressures from other        other countries in the region. Future investments could also enter
     emerging markets, to be outperformed by growth in productivity        the country. Romtelecom has pledged to invest EUR 500 mn in a
     gains thanks to the investments of recent years.                      next generation network. Furthermore, RCS & RDS intends to
                                                                           enter the mobile telephony market too, as the operator has
     Increasing demand for high-quality accommodation, office build-       acquired one of the two 3G licenses auctioned by the Romanian
     ings and retail outlets is supporting growth in the Romanian          authorities in 2006 and is launching its first third-generation
     Construction sector. Real growth in construction value added          services.
     equalled 19 % in 2006, which accelerated even further to a
     record level of 32 % in the first half of 2007. Some 50 % of total    Worst Performers
     investments in the economy were focused on new construction           The Mining and quarrying of coal and radioactive ores is one of
     works. The number of finished homes reached 38,000 in 2006,           the sub-sectors that has been in continuous recession over the
     up by 16 % from 2005; this is still one of the lowest figures in      last few years. However, some improvement is expected based
     the region, representing 1.7 finished homes per thousand inhab-       on the newly established energy strategy of the government for
     itants, compared to the 2.8 homes in the CEE region and around        2007 – 2020. The nuclear electricity industry mainly intends to
     6 homes in Eurozone countries. Positive income prospects and          use the internal production of uranium and thorium. Moreover,
     the access to mortgage loans will boost demand for homes fur-         the still significant weight of thermoelectric energy based on
     ther. Most of the construction companies still rely on domestic       coal (35 % in 2020 from 39 % now) is to be supplied in increas-
     capital. At present, the construction sector is expected to remain    ing proportions from internal coal production. This can be trans-
     the fastest growing component of the economy posting double-          lated into further reorganisation and modernisation of these
     digit growth, even though there could be some moderation as a         sub-sectors, which, however, requires significant investment.
     consequence of the credit squeeze.                                    The worst performing sub-sector has proved to be the produc-
                                                                           tion of metalliferous ores, which was seriously affected by the
     Good prospects are also envisaged for communication: the Ro-          decision of the National Bank not to buy gold from the local
     manian telecom market experienced a robust increase in 2006,          market in 2000. The situation is better for petroleum and gas ex-
     further accelerating by 60 % yoy in the first three quarters of       traction. Petrom, owned by OMV Austria, is the main exploiter of
     2007. Despite the already high penetration, an additional 4 mil-      oil reserves. Romgaz, the main natural gas extractor and producer,
     lion mobile phone clients have been added, thus bringing the          proved to be very profitable last year, with plans for further in-
     total number of mobile phone clients to around 17 mn (out of a        vestments. Overall, despite the expected recovery, the prospects

44   Sectoral Analyses, Outlook 2008–2009
for the mining and quarrying sector, which is mainly driven by                    ing 83 projects with total value of EUR 4.2 bn. Some of the most
the sub-segment of energy materials, are negative due the ab-                     important greenfield projects started in 2006 are in the production
sence of competitiveness on the international markets.                            of automotive components, such as Calsonic Kansei (Japan), Pirelli
                                                                                  Tyre (Italy), Caucho (Spain), Schlemmer (Germany), Manufactura
Cost advantages continue to play a major role in shaping Roman-                   Moderna de Metales (Spain), Marquardt Schaltsysteme (Germany);
ian international attractiveness, but competition from countries                  in the electric equipment sector, Bamesa (Spain), Zumtobel (Aus-
with even lower production costs is felt in some sectors. Textiles,               tria) and Willy Kreutz (Austria). Additionally, in the business ser-
wearing apparel and leather is a clear example, given the high                    vices sector there are several projects like Microsoft EMEA (US),
labour intensity and the fast rise in salaries recorded (20 % yoy in              General Electric (US) and Hewlet-Packard HP (US).
September 2007 for instance). As the sector is usually charac-
terised by the widespread use of outsourcing contracts, exit costs                Year                 Equity –   Reinvested     Intercompany         Total –
                                                                                                       EUR mn         profit –          loans –      EUR mn
from the market are low and foreign players, who usually kept                                                        EUR mn            EUR mn
their commercial bases, product designs and other production                      2005                  2,688          1,164            1,361         5,213
phases with higher value added in their home country, move eas-                   2006                  4,159          2,673            2,227         9,059
ily searching for absolutely low costs. Countries like Ukraine,                   2007 (Jan.– Sept.)    2,507          2,506            5,013
Moldova or the Far East might benefit from this. Although declin-                 Source: NBR

ing, the exports of textiles and leather are still the most impor-
tant, representing 20 % of total exports and around one third of                  During 2007, one of the major FDI inflows through privatisation
total exports to EU countries. The relatively negative develop-                   was registered in the electric power distribution sector. Electrica
ments affecting the sector are already reflected in the perfor-                   Muntenia SUD was sold to the Italian energy company ENEL; ad-
mance observed in recent years, with industrial output in textiles                ditionally, the electric equipment producer Electroputere Craiova
and leather registering negative growth of – 7 % and – 12 %                       was sold to Al-Arrab. Although interrupted by an EU investigation,
respectively in 2006 and in the first three quarters of 2007.                     an important deal in the automobile industry has been also
Although some slight improvement could be generated through                       recorded: Ford finalised negotiations to buy a 72 % stake in Auto-
structural transformation towards higher value added activities,                  mobile Craiova for EUR 57 mn with plans for further investments
we keep the medium-term outlook negative.                                         of around EUR 500 mn. Although we expect an acceleration in
                                                                                  green-field and brown-field investments in the forthcoming period,
Foreign Direct Investments and Privatisation                                      some opportunities still remain in connection with privatisations
The accumulated FDI reached EUR 34.5 bn at the end of 2006. In                    in public utilities distribution (gas and oil), gas exploration, public
terms of sector attractiveness, most of the FDI was directed toward               transportation and pharmaceuticals. At the end of last year, the
banking (22 %), retail distribution networks (12 %), telecommuni-                 Authority for State Assets Recovery (AVAS) held a portfolio of 447
cations (8 %), metallurgy (8 %) and construction and real estate                  companies. The next expected deal is the privatisation of the
transactions (6 %). Of the total stock of FDI, foreign greenfield in-             pharmaceutical producer Antibiotice Iasi. The chemical producer
vestment stock amounted to EUR 16.7 bn. Foreign companies play                    Oltchim is also expected to be privatised next year. As for the
a very important role and represent 43 % of the total turnover,                   energy sector, the Romanian state has stopped privatisations and
58 % of total imports and 72 % of the total exports of the country.               intends to create a new energy company from the merger of
In 2006, the inflow of FDI in Romania reached a historical high                   several state-owned hydroelectric power plants, fossil fuel power
(EUR 9.1 bn). This high level of FDI entered Romania mainly                       plants, the nuclear power plant and some power distributors that
through privatisations: BCR (Banca Comerciala Romana) was                         still remain state-owned, although the idea was not welcomed
bought by the Austrian Erste Bank for a record EUR 3.75 bn. In                    by the European Commission.
2006, reinvested profit accounted for 30 % of net inward FDI.
Green-field investments have started to become increasingly im-                   Stimulus for investments is also expected to come from the Struc-
portant and are likely to offset the lower inflows from privatisation             tural and Cohesion funds, amounting to around EUR 30 bn for
following the completion of the process. ARIS* has been monitor-                  2007 – 2013. The main beneficiary of EU funds will be agriculture.
                                                                                  For 2008 the state budget projects that EU funds will be absorbed
*) Romanian Agency for Foreign Investments (ARIS) monitors projects larger then
USD 1 mn, which benefit from state aid.                                           to the tune of 2.6 % of GDP (around EUR 3 bn).

                                                                                                                         Sectoral Analyses, Outlook 2008–2009   45

     Romania – Structural Indicators (2006)
     SECTORS                                                                                                                                   MARKET STRUCTURE
                                                                                                              Number of          Number of               Top 5        Number of          SME VA in
                                                                                                              enterprises        employees          Turnover/              SME          sect. VA %
                                                                                                                                                   Turnover %

     TOTAL                                                                                                       480,382         4,306,128                  5.5         478,494                50.4
     Agriculture, Hunting, Forestry, Fishing                                                                      13,347           127,194                 20.8          13,306                58.1
     Mining & Quarrying                                                                                               734           107,840                87.9             707                 4.3
     Manufacturing                                                                                                 58,878         1,540,635                13.6          57,835                40.5
       Food products, beverages and tobacco                                                                        10,588           206,219                15.6          10,463                38.8
       Textiles and textile products                                                                                8,183           326,383                 8.1           7,909                49.6
       Leather and leather products                                                                                 2,057            96,506                11.5           1,987                60.1
       Wood and wood products*                                                                                      7,370            79,289                20.7           7,342                75.4
       Pulp, paper & paper products; publishing & printing                                                          5,332            52,335                12.7           5,309                74.7
       Coke, refined petroleum products & nuclear fuel                                                                 32             6,921                97.5              27                 4.0
       Chemicals, chemical products and man-made fibres                                                             1,166            47,883                36.9           1,129                37.9
       Rubber and plastic products                                                                                  2,679            46,629                25.2           2,655                58.7
       Other non-metallic mineral products                                                                          2,825            59,841                31.5           2,774                32.6
       Basic metals and fabricated metal products                                                                   6,742           162,416                39.5           6,657                31.9
       Machinery and equipment n.e.c.                                                                               1,545           103,078                24.4           1,453                33.4
       Electrical and optical equipment                                                                             2,745           112,655                20.4           2,671                37.4
       Transport equipment                                                                                          1,056           122,691                47.6             973                12.6
       Manufacturing n.e.c.                                                                                         6,558           117,789                15.1           6,486                64.0
     Electricity, Gas & Water                                                                                         507           131,248                34.0             412                 7.8
     Construction**                                                                                                36,115           421,579                 6.2          35,954                79.7
     Wholesale & Retail Trade, Restaurants & Hotels                                                               226,525         1,037,469                 6.3         226,341                79.5
       Wholesale & Retail Trade                                                                                   205,946           919,632                 6.5         205,787                80.2
       Restaurants & Hotels                                                                                        20,579           117,837                11.7          20,554                70.8
     Transportation & Communications                                                                               32,076           374,025                28.4          31,969                26.3
       Transportation & Storage                                                                                    28,610           287,796                17.9          28,521                42.7
       Communications                                                                                               3,466            86,229                73.4           3,448                 6.9
     Finance, Insurance, Real Estate & Business Services                                                           89,228           435,459                 4.2          89,044                84.9
       Financial Institutions                                                                                       3,084            18,980                29.9           3,077                98.6
       Insurance                                                                                                    2,139             3,090                18.5           2,139               100.0
       Real Estate, Dwellings & Business Services**                                                                84,005           413,389                 3.3          83,828                82.9
     Community, Social & Personal Services***                                                                      22,972           130,679                24.8          22,926                46.5
     *) FDI relative to Wood & Wood products include also the one relative to the furniture industry.
     **) For calculation of the indicator “Share in total FDI”, data are based on 2006 figures; FDI in Real Estate transactions is included in Construction sector. “FDI attractiveness” calculated based on 2005 figur
     ***) “Public administration and defence; compulsory social security” sector excluded from Community, Social & Personal Services (exept of indicators from national accounts: Share in total VA, Capital inte
     Source: National Institute of Statistics, National Bank of Romania, UniCredit Tiriac Bank – Economic Research
     See ANNEX for further explanations of the indicators

46    Sectoral Analyses, Outlook 2008–2009
                                                        SECTORAL DETAILS                                                      COMPETITIVENESS                       CONSTRAINTS
                  Share in        Export IMP/AC %            Share in         FDI      Capital      Energy     RCA         Labour        Average        Wage        Total       Bank
                  total VA       propen-                        total attractive-    Intensity    Intensity           Productivity     Personnel     adjusted     Indebt-     Indebt-
                                   sity %                      FDI %      ness %            %        kgOE/              (manufac-           Cost      Labour      edness      edness
                                                                          (2005)       (2005)      EUR mn             turing=100)      (manufac- Productivity         %*          %*
                                                                                                 VA (2005)                           turing=100)   (manufac-

                     100.0          14.1           32.8        100.0         100.0       26.6     2,991.3     100.0        124.0          104.5        118.6        65.9          7.4
                      11.3          19.0           20.2            –             –        0.6       343.2     159.1         70.5           80.1         88.0        71.5          5.7
                        1.4          1.1           56.5           6.1        513.8         –     12,800.8       2.0         369.2         271.0        136.2        42.4          1.8
                       23.4         50.7           63.1          34.2        159.6      56.3      6,904.3     113.6         100.0         100.0        100.0        61.3          7.6
                        6.7          3.5           20.0           5.5         97.6         –      2,006.9      26.8         114.2          92.9        122.8        64.9         10.6
                        2.1        133.9          164.8           2.1         99.6         –      1,229.5     202.2          52.9          67.7         78.3        59.4          4.0
                        0.5        160.8          224.2                                    –        748.2     217.7          52.0          67.6         77.0        67.5          1.3
                        1.1         49.1           30.7            2.5       138.0         –      2,737.8     417.6          68.1          63.5        107.2        70.2         13.7
                        0.9          7.9           34.6                                    –      4,402.2      27.4         127.5         108.8        117.2        59.5          6.3
                        0.9         73.5           43.5            4.5       156.5         –     19,678.8     598.0         204.1         253.8         80.4        71.0          9.7
                        1.0         50.7           77.2                                    –     35,670.7      56.8         176.5         161.2        109.5        59.9         13.4
                        0.8         34.6           63.8                                    –      2,817.3      56.9         122.1          99.0        123.4        62.3          7.1
                        1.1         10.0           28.3           3.1        298.5         –     17,258.6      47.8         187.0         119.2        156.9        43.9          6.4
                        2.1         52.1           55.9           8.3        383.5      26.3     22,997.8     149.1         145.7         133.3        109.3        51.0          6.4
                        1.2         89.1           98.3           1.2        135.7     393.6      6,884.9      70.0          87.1         124.0         70.3        67.7          6.2
                        1.6         89.9           98.6           1.8        113.5     189.6            –      90.5          98.1         119.1         82.4        59.5          6.3
                        2.3         56.3           70.3           4.1        220.7     214.8            –      88.2         139.4         142.9         97.5        67.8          5.2
                        1.2         34.4           32.8           1.1        118.1      33.8      1,379.2     258.0          73.1          76.0         96.1        65.3          4.7
                        2.6          1.6            0.4           3.7        164.0         –      6,512.6     741.2         233.1         200.7        116.1        47.8         10.5
                        7.1            –              –           6.4         11.3     172.4        787.3         –          93.8          93.9         99.8        88.7          6.0
                       13.6            –              –          13.0        111.9         –            –         –         102.9          78.8        130.7        73.3          5.3
                       11.4            –              –          12.2        131.4         –            –         –         107.4          80.7        133.2        74.3          5.1
                        2.2            –              –           0.8          9.2         –            –         –          67.9          64.0        106.0        59.5          8.1
                       11.4            –              –           9.3        107.3         –            –         –         194.6         140.8        138.2        59.8          8.1
                        7.8            –              –           1.1         16.6         –      7,821.3         –         137.2         124.7        110.0        69.5          7.0
                        3.5            –              –           8.2        308.2         –            –         –         386.0         194.4        198.6        43.2         10.1
                       14.1            –              –          26.3        157.4       5.7            –         –         142.5         102.1        139.6        68.5         11.9
                        2.5            –              –          22.2        577.4         –            –         –         380.2         161.0        236.1        86.7         42.5
                                       –              –                                    –            –         –         179.4          67.1        267.5        49.6            –
                       11.6          0.0            0.1           4.1         66.4       6.9            –      29.3         131.3          99.6        131.8        62.7          2.2
                       15.3          0.7            2.8           1.0            –         –            –      38.4          148            90        164.39        73.2          2.8

res, FDI in Real Estate included in “Real Estate, Dwellings and Services”.
ensity and Energy intensity)

                                                                                                                                                  Sectoral Analyses, Outlook 2008–2009   47

     • Domestic demand, supported by acceleration of growth              • We expect construction industry and some segments of
       in real disposable income is the main driver of growth.             machinery and equipment manufacturing to be the
       Consumer-oriented segments as wholesale and retail                  main beneficiaries from rapid expansion of investment,
       trade, retail banking and food processing are thus                  given the need for a massive upgrade of physical infra-
       growing much faster than GDP.                                       structure in the country.
     • Global liquidity squeeze due to the US subprime mort-             • Textile and textile products is instead likely to suffer
       gage crisis had so far no strong impact on the Russian              from the fast appreciation of the rouble, which stimu-
       real economy and capital inflows. While we expect                   lates increasing import substitution.
       some deceleration in lending activities, we do not fore-
       see any big constraint to the real economy performance
       also in the medium term.

     Economic framework                                                  the medium and long term large Russian corporations, which
     Russia’s macroeconomic outlook remains favourable and is un-        use actively external sources of financing (especially the bond
     derpinned by strong economic growth and a healthy external          capital market), may experience some negative impact, includ-
     position. Russia’s GDP grew by 7.4 % yoy in the Q3 2007. The        ing some difficulties to finance their investments.
     main drivers of growth are still private consumption (indeed re-
     tail sales increased by 14.8 % yoy) and fixed capital formation     As domestic demand became one of the main contributors of
     (which rose sharply by 21.2 % yoy in the first nine months of       growth, consumer-oriented segments as wholesale and retail
     2007). Corporate sector also performed well: aggregate profit in    trade, retail banking and food processing, demonstrate dynamics
     the economy grew by 20.7 % yoy. Industrial production is also       significantly above the GDP growth rates. Along with consumer-
     keeping a substantial dynamic, despite a slowdown during the        oriented segments, transport, engineering and chemical indus-
     summer, growing by 6.5 % yoy in the period January – October        tries are becoming more significant drivers of economic growth.
     2007.                                                               Both private capital and government sectors launched a number
                                                                         of investment programs to satisfy infrastructural needs, and this
     Continued rally of oil prices in the second half of 2007 supports   represents an additional demand for capital goods.
     the positive trend on the external trade front. The most recent
     data of the current account showed that its surplus reached         As a result, Russia can gradually shift away from a mineral re-
     USD 39 bn in first two quarters of 2007. Despite the appreciation   source-based economy. The share of mining and quarrying, after
     of the real effective exchange rate, the current account surplus    its peak of 9.6 % of GDP reached in 2005, began to reduce in
     for the total year will reach around USD 68 bn, or 5.2 % of GDP.    2006 (around 9 % of GDP). In Q3 2007, this share narrowed to
                                                                         8 % of GDP. The share of oil and gas in the exports structure de-
     World liquidity squeeze due to US subprime mortgage crisis is so    creased to 63.3 % in the Q3 2007 from 67.4 % one year before.
     far not affecting significantly the Russian real economy. The de-   We believe that the Russian economy will continue to show
     celeration of the pace of industrial output in August and Septem-   strong performance in the future thanks to growing capital in-
     ber is mostly linked with a decrease in food processing (due to     flows, high oil and gas prices, and the on-going consumption
     the rise of the grain and milk prices on world market) and in the   boom. We forecast an acceleration of GDP growth in 2007 to
     mining sector, especially oil production, because of a reduction    7.5 % yoy from 6.7 % yoy in 2006. In 2008 –’09 we expect GDP
     of the global oil consumption during last summer. However, in       growth to be close to 6.5 % on average.

48   Sectoral Analyses, Outlook 2008–2009
Performance of the sectors                                               that represent 30 % of all the countries produced in Central East-
Best Performers                                                          ern Europe. In the future, foreign investors, already present in
We envisage a promising outlook, coherently with the macro-              CEE countries, could be interested in producing in Russia, espe-
economic outlook depicted above, for investment goods and en-            cially trough joint ventures with local partners. Ford and Renault
gineering branches, such as machinery and electrical equipment,          are already producing in the country; the latter is also buying a
for consumer oriented sectors, such as wholesale and retail              stake in the Russian Avtovaz (producing Lada) and Russia will
trade and retail banking, and for construction activity.                 replace Renault’s home country as its largest single market.

Electrical and optical equipment and Machinery and equip-                The rubber and plastic products segment has shown strong ex-
ment are expected to benefit from the massive investment                 pansion over the past several years, mostly due to the tendency
program for upgrading infrastructure in Russian utilities sector,        of leading Russian oil companies towards diversification of pro-
energy generation and transmission in particular. The investment         duction and expansion of production chain to consumer goods,
program is primarily driven by the entry of strategic investors          driven by boom in consumption. Given the presence of the
into Russian energy sector, following ongoing reform of UES              abundant resource base and continued strong demand, especially
(Unified Energy System). Moreover, the government plans invest-          from the automotive industry and partly from retail (packaging
ments in the context of the federal program for development of           materials), the sector is also expected to expand in the future.
the Far East amounting to USD 20 bn over 2007 – 2012; other
funds, allocated for building sport infrastructure of Sochi-2014         Russian construction industry is set to become a prime benefi-
Olympics Winter Games, are projected at the level of USD 12 bn.          ciary from the rapid expansion of investment demand in Russia,
                                                                         which is expected to continue at double-digit rates throughout
The Transport Equipment sector is also benefiting from invest-           2008 – 2009. In particular, the stringent need for a massive up-
ment activity. Moreover, the local market is expanding fast:             grade of physical infrastructure in the country, resulting from the
1.8 mn new car were sold in 2006, and this number doubled                long period of underinvestment throughout the previous decade,
since 2000. Regarding production, 1.1 mn passenger cars were             will continue to fuel demand for residential and office construc-
produced in 2006 (+ 10 % with respect to the previous year),             tion in addition to massive efforts for reconstruction, rehabilita-

Best and worst performers
BEST                                            STABLE                                         WORST

Rubber and Plastic Products                     Mining and Quarrying                           Textiles & Textile products
Other non-metallic products                     Agriculture, Hunt., Forest., Fish.
Machinery and Equipment n.e.c.                  Food, Beverages and Tobacco
Transport Equipment                             Leather and leather products
Electrical and optical equipment                Wood and wood products
Construction                                    Pulp, Paper, Publish., Printing
Wholesale & Retail Trade                        Coke, Refin. Petrol. Products
Financial Institutions & Insurance              Chemicals, Chemical Products
                                                Basic Metals & Fabr. Metal Products
                                                Manufacturing n.e.c.
                                                Electricity, Gas & Water
                                                Restaurant & Hotels
                                                Transport & Communication
                                                Real Estate, Dwellings & Bus. services
                                                Community, Social and Personal services

                                                                                                              Sectoral Analyses, Outlook 2008–2009   49

     tion and upgrade. Additional boost to the sector will be provided     which has been growing extremely fast during the past several
     by planned massive spending from public funds, which has              years (by 350 % since 2000 in Euro terms) and are expected to
     already been budgeted for the next three years mostly using al-       continue to do so in the near term.
     ready existing financial resources. These drivers make the sector
     relatively immune from any possible sharp slowdown deriving           Selected Sectors with a Stable Outlook
     from the international liquidity squeeze. Fast growing construc-      Most of other manufacturing industries, especially in the field of
     tion demands more and more raw materials. This is the main            consumption and intermediate goods, are classified as stable. In
     reason we also classify as a best the sector of other non-metal-      particular, food products, beverages and tobacco, leather and
     lic mineral products (cement, asbestos, tiles, etc.).                 leather products, pulp & paper products, publishing and print-
                                                                           ing, transport equipment, and manufacturing n.e.c. (mainly
     The acceleration of the growth in the real disposable incomes         furniture) will also continue to benefit from the ongoing growth
     (+ 12.6 % yoy in January – October 2007) is sustaining consumer       of consumption and investment demand. However, these indus-
     related activities. We expect the strong real growth of private       tries are also expected to face an intensifying competition with
     consumption in Russia experienced during 2001 – 2007 to continue      imports, which is likely to put an increasing pressure on growth
     in the future, and most local and international players will take     prospects.
     advantage from this situation. The primary beneficiary from such
     growth is wholesale and retail trade, which largely remains in        On the other hand, sectors with export potential like chemicals,
     the early stages on development, and therefore has significant        chemical products and man-made fibres and basic metals and
     potential for further growth, even despite some potential credit      fabricated metal products are expected to benefit from the ris-
     squeeze at the economy level. Moreover, growth of real dispos-        ing global commodities prices. At the same time they will feel
     able incomes in Russia since 2000 has already resulted in the         intensifying pressure from the expected continuation of the real
     creation of rather vast middle-class in the country (the average      appreciation of rouble.
     salary in Russia for the first time exceeded the level of USD 500
     per month), which increases markets for more sophisticated            Mining and quarrying is the main culprit of the recent slow-
     goods and services.                                                   down of industrial output in August and September 2007 to
                                                                           3.8 % and 3 % yoy respectively, from a growth of 7.7 % yoy in
     Another beneficiary of this trend is the financial institutions and   the January – July 2007 period. Indeed, the Mining sector had a
     insurance sector. The turbulence at international level and the       fall by 1.5 % and 3.3 % in the same period, mainly due to the
     related credit squeeze should not affect dramatically the whole       decrease of oil production. Global oil demand is reduced in the
     sector. Only some minor banks could suffer the more difficult en-     second and third quarter of 2007 by around 800 thds bbl/day
     vironment, and this can foster further consolidation in the sector.   from the level of Q1 2007. The slowdown affected also other re-
     Big private banks and public banks could even benefit from this       lated sectors, such as refined petroleum products. Very high oil
     consolidation process.                                                prices and forecasted deceleration of the global growth may
                                                                           limit the development of these sectors. However, despite the re-
     Worst Performers                                                      cent slowdown the health of the sector is not under discussion
     There has been a recovery in the Russian textile and textile          after the positive performance of the last years. Its financial
     products industry in 2006 due to abolition of custom duties for       strength is supported by the high level of profitability.
     45 items of technological equipment and toughening rules con-
     cerning border traversing for private individuals aimed at limiting   The service sector is also expanding in a vivid pace, even faster
     grey imports. However, the outlook of the sector remains bleak        than manufacturing. Continued expansion of sectors like electric-
     due to intensifying competition from Asian imports, which are         ity, gas and water, and transportation and communications is
     presently largely underrepresented on the Russian consumer            expected to be hindered by the need for extensive investments,
     market. 2007 expected performance already shows a relevant            long term nature of projects in such industries, and to some ex-
     deceleration to 2.9 % yoy growth from 7.2 % in 2006. This tradi-      tent by the slow pace of reforms in respective sectors where
     tionally labour intensive industry is also expected to suffer from    competitive pressures are not so strong as in other segments.
     additional burden in the form of rapidly increasing labour costs,

50   Sectoral Analyses, Outlook 2008–2009
We also classify the agriculture sector among the stable sectors.   The global liquidity crisis provoked net private capital outflows
Russia began to realize its substantial comparative advantages      from Russia in Q3 2007. In October capital inflow into Russia
in the agricultural sector due to its massive arable land re-       seems to have resumed, which, if confirmed, would indicate
sources and cheap labour force. Now Russia became the 4th           that the global liquidity squeeze had only a rather limited influ-
world largest producer of grain, with a 3 % share in the global     ence on the Russian economy, at least in the short term.
market. So, despite the underinvestment in the past, agricul-
ture, hunting, forestry, and fishing is expected to deliver a       The main recipients of FDI are the oil and food industries and finan-
stable growth rate of around 3 % yearly. The main risks for the     cial institutions. By the end of the year we expect two IPOs in retail
domestic agriculture derive from a possible Russia’s entry to the   and chemical industries sectors (M.Video and Uralkaliy) amounting
WTO that still remains a possibility.                               to USD 300 mn and USD 950 mn respectively. Since the beginning
                                                                    of 2007 Russian companies have raised over USD 26 bn, well
Foreign direct investments and Privatizations                       above last year’s record level of USD 17 bn. The most high profile
FDI inflows have been on a constant upward trend over the past      events were in the banking sector, with the IPO by VTB, which sold
seven years. The phenomenon is a direct result of economic          23% of its shares for USD 8 bn, and a USD 9 bn secondary offering
and financial stabilization, market reforms accompanied with        by Sberbank. Other significant offerings included real estate (PIK
economic growth and strengthening of the currency. As of            group, AFI Development and Open Investments), metals (MMK and
October 1, 2007, the accumulated stock of foreign direct invest-    Polimetall) and pharmaceuticals (Pharmstandart).
ments reached the remarkable amount of USD 197.8 bn. The
most attractive sectors for the investments are manufacturing       Upcoming presidential elections (following parliamentary elec-
(30 % of total FDI), wholesale and retail trade (25 %) and          tions at the beginning of December) represent just moderate risk
mining (22 %). Foreign investments to the Russian economy in        to the Russian economy and to the investment attractiveness of
2007 will probably be as high as USD 80 bn, including USD 36 –      the country in particular. Any potential successor to president
38 bn of FDI.                                                       Putin will not alter the policies established over the past 8 years.

                                                                                                          Sectoral Analyses, Outlook 2008–2009   51

     Russia – Structural Indicators (2006)
     SECTORS                                                                   MARKET STRUCTURE
                                                              Number of      Number of         Top 5   Number of
                                                             enterprises,   employees,    turnover/        SME,
                                                                    thds          thds        sector       thds
                                                                                         turnover %

     TOTAL                                                        4,506        69,189             –      1,032.5
     Agriculture, Hunting, Forestry, Fishing                        262         7,106             –         31.3
     Mining & Quarrying                                               15        1,036             –          4.1
     Manufacturing                                                   410       11,255             –        123.4
      Food products, beverages and tobacco                            61        1,430          20.8            –
       Textiles and textile products                                  31          439          18.8            –
       Leather and leather products                                    4           64                          –
       Wood and wood products                                         36          331          18.4            –
       Pulp, paper & paper products; publishing & printing            52          382                          –
       Coke, refined petroleum products & nuclear fuel                 3          132             –            –
       Chemicals, chemical products and man-made fibres               15          536          31.6            –
       Rubber and plastic products                                    16          255             –            –
       Other non-metallic mineral products                            25          643             –            –
       Basic metals and fabricated metal products                     31        1,142          43.7            –
       Machinery and equipment n.e.c.                                 58        1,111          88.0            –
       Electrical and optical equipment                               30          842             –            –
       Transport equipment                                             9        1,122             –            –
     Electricity, Gas & Water                                         22        1,861          57.5          4.1
     Construction                                                    352        5,075             –        117.1
     Wholesale & Retail Trade, Restaurants & Hotels                1,710       12,498             –        485.4
      Wholesale & Retail Trade                                     1,629       11,315           0.3        464.6
       Restaurants & Hotels                                           81        1,183             –         20.8
     Transportation & Communications                                 194        5,423             –         50.3
       Transportation & Storage                                      170        4,472          37.6         43.2
       Communications                                                 24          951          96.5          7.1
     Finance, Insurance, Real Estate & Business Services             753        5,864             –        178.0
      Financial Institutions                                                                   69.6         14.7
                                                                      94          928
       Insurance                                                                               27.1            –
       Real Estate, Dwellings & Business Services                   659         4,936             –        163.3
     Community, Social & Personal Services                          338         4,603             –         38.8
     Source: Rosstat, International Moskow Bank
     See ANNEX for further explanations of the indicators

52    Sectoral Analyses, Outlook 2008–2009
                      SECTORAL DETAILS                                COMPETITIVENESS                          CONSTRAINTS
Share in   Share in                  FDI     Energy         Labour         Average             Wage                    Total
total VA      total          attractive-   Intensity   Productivity      Personnel          adjusted                 Indebt-
             FDI %               ness %                  (manufac-             Cost           Labour                 edness
                                                       turing=100)       (manufac-      Productivity                      %
                                                                       turing=100)        (manufac-

   100        100                     –           –             98            105              93.2                        –
    5.9        0.6                 10.2         3.7             45             45             101.1                      4.6
    9.5       16.6               174.7          3.8            660             227            291.1                      8.7
   17.3       27.5               159.0          3.6            100             100            100.0                      37
      –        2.5                   –            –              –              85                –                      5.7
      –          0                   –            –              –              47                –                      0.3
      –          0                   –            –              –              55                –                      0.1
      –          1                   –            –              –              70                –                      0.9
      –        0.9                   –            –              –             109                –                      0.9
      –        7.2                   –            –              –             220                –                     10.3
      –        2.8                   –            –              –             118                –                      2.1
      –        0.6                   –            –              –              86                –                      0.9
      –        1.1                   –            –              –              99                –                      1.7
      –        6.8                   –            –              –             118                –                      5.5
      –          1                   –            –              –             103                –                      1.4
      –        0.3                   –            –              –             100                –                      1.4
      –        2.6                   –            –              –             112                –                        4
    3.4        0.6                17.6         14.4            118             125             94.3                        4
    5.4        1.3                24.1          1.4             77             110             70.0                      2.7
   20.4       23.7               116.2            –            122              81            150.4                      21
   19.5       23.6               121.0          0.8              –               –                –                        –
    0.9        0.1                11.1          2.8             54              71             75.7                      0.4
   10.8        9.6                88.9          4.1            126             130             96.7                     12.4
      –        1.1                   –            –              –               –                                         7
      –        8.5                   –            –            717             127            565.9                      5.4
   14.4       19.4                   –            –              –               –                –                        –
                                     –          0.9
    5.5        8.5                                             283             271            104.3                      0.5
                                     –            –
    8.9       10.9               122.5          3.8            123             125             98.4                      7.8
   12.8        0.6                 4.7          2.6             30              77             39.4                      0.6

                                                                                             Sectoral Analyses, Outlook 2008–2009   53

     • New FDI in the manufacturing sector is supporting a                  • Textile and Leather should still find itself under hard
       strong economic performance. Adopting the euro which                   competitive pressure. A further deceleration and
       is planned for 2009 is also expected to benefit the pro-               restructuring of production is also expected to take
       duction industries.                                                    place in the near future. Better prospects are shown by
     • Automotive and Electrical Equipment are expected to                    the automotive part of the sectors, such as technical
       be the main drivers of the economy in the coming                       textiles and the non-shoe leather industry.
       years, driven by supply side shocks from relatively                  • The construction boom is expected to continue, backed
       strong FDI in recent years. The potential lack of labour               by the planned acceleration of motorway building as
       (mainly in the Western part of the country) and high                   well as relatively strong investment activity. However,
       dependency on European demand (and on the reloca-                      risk repricing at international level and capacity
       tion choices of Western producers) are the main poten-                 constraints could lead to an increase in construction
       tial risk factors for both sectors.                                    material prices and excessive wage growth, impacting
                                                                              negatively on smaller local companies in particular.

     Economic Framework                                                     Performance of the sectors
     Following the strong 2007 economic performance (+ 9 % GDP              Best Performers
     growth expected for the whole year), 2008 growth is expected           The Transport Equipment sector has again become the engine
     to be driven mainly by supply-side effects due to the launching        of the Slovak economy in 2006. The sector speeded-up its per-
     of new FDI-based operations. The consequent strong apprecia-           formance after 2 years of lower annual growth, due to cyclical
     tion of the Slovak koruna should not harm the export perfor-           circumstances (launching of new model production at Volkswa-
     mance of the leading industries significantly, as these global         gen). The annual VA growth of the sector accelerated to 27.4 %
     companies are relatively immune from foreign exchange risks.           in 2006, while employment grew by 18.4 % and labour produc-
     After net exports, investment activity will play the largest role in   tivity by 7.6 %. Turnover recorded a growth rate of 30.3 % and
     contributing to GDP growth. Monetary conditions are expected to        export performance was up by 34.4 % in the same period. The
     stay balanced with the koruna strengthening to curb any major          whole Transport equipment sector is composed of the automo-
     risk of overheating and inflation pressure; the fixing of the ex-      tive sector (including the supply of parts and components) and
     change rate is expected in mid-2008. The key policy target, the        other transport equipment (motorcycles, railway, ships, aircraft).
     planned adoption of the euro in 2009, is by itself expected to be      The bright performance of the whole sector is influenced by the
     favourable for the production industries due to stimulus to for-       automotive segment. The boom is driven by the launch of pro-
     eign trade and the low interest rates. These factors should offset     duction in new car plants, such as PSA Trnava (in May 2006) and
     the extra costs that mainly SMEs are expected to face in relation      KIA Žilina (in December 2006), as well as the launch of new
     to the necessary adjustments required for introducing the euro.        model production (Audi Q7) at Volkswagen Slovakia, which still
     Stable political environment, controlled labour cost growth and        represents the most significant player in the automotive cluster.
     spill-over effects from existing FDI are creating good precondi-       Slovakia also witnessed the launch of engine production (pro-
     tions for further inflows, which will gradually target more sophis-    duced in the KIA plant – also for the sister plant of Hyundai in
     ticated sectors of services.                                           the Czech Republic), which was missing until now. In 2006, a
                                                                            total of 295,000 passenger cars rolled off the production lines of
                                                                            domestic car plants, compared to 218,000 in 2005. The increase
                                                                            of production in the new car plants in the coming years should

54   Sectoral Analyses, Outlook 2008–2009
improve the production performance of Slovak car plants to               Poprad, ZOS Trnava and ZOS Vrutky is struggling with several
800 – 900,000 passenger cars in 2008 – 2009. The automotive in-          problems (even if it is still a dominant European producer of
dustry (together with corresponding supplier clusters) should            railway cargo wagon chassis) and further consolidation will be
therefore be the main driver of the economy in the years to              necessary.
come. It already represents 12 % of total Slovak manufacturing
value added. With about 90 % of Slovak production in the auto-           Besides the strong automotive industry, the economy also has a
motive sector being exported, this means the country’s perfor-           “second supporting pillar” in the shape of the Electrical & optical
mance is dependent on international (mainly European) demand             equipment sector. The sector benefits both from automotive as
for vehicles and the relocation choices of the big automotive            well as non-automotive consumer electronics production. In 2006
players. The diversification of production – from city cars (PSA) to     the VA of the sector grew by 20.7 % yoy, while labour productivity
middle-class (KIA) and upper-class represented by off-road vehi-         increased by 18.2 %. Electrical & optical equipment is also playing
cles (VW and KIA) – should, at least partially, minimise potential       a dominant role in the country’s exports, and represented about
short-term shocks in global car demand. Besides the high de-             20 % of all the country’s exports in 2006. The prospects of the sec-
pendency on global demand, the automotive sector could face a            tor remain positive, mainly in the non-automotive consumer seg-
lack of qualified labour and higher wage pressure in the coming          ment. On the other side, some doubts are creeping in regarding
years. However, the problem of the labour market in the West-            the competitiveness of the segment for small automotive parts
ern part of the country (where all three car plants are located)         (e.g. cable production) because of the potential shift in production
could be solved, at least partially, by incoming labour from             to countries with lower costs. However, taking into account the
abroad. Currently, investments into new car plants in Slovakia do        strong position of the automotive industry in the region and a rel-
not seem very likely. However, some space still exists in the            atively high share of just-in-time supplies, we think any potential
Eastern part of Slovakia, where there is a qualified but unem-           shift of production will not be dramatic. Besides smaller domestic
ployed labour force still available. There are some possibilities        and foreign-owned companies, consumer electronics is represented
for a new car plant near Košice (in the Kechnec industrial park).        mainly by two strong international players, Samsung and Sony.
Other segments inside the Transport Equipment industry do not            While Sony’s plant is clearly oriented towards the production of
present such an optimistic outlook. While shipbuilding is repre-         LCD TV sets, Samsung’s plant also produces other consumer elec-
sented by SLKB in Komarno and shows a relatively stable perfor-          tronics such as players, phones, etc. Slovakia is a strategic Euro-
mance, railway wagon production represented by Tatravagonka              pean country in the plans of both companies: both of them have

Best and worst performers
BEST                                            STABLE                                         WORST

Rubber and Plastic Products                     Agriculture, Hunt., Forest., Fish.             Mining & Quarrying
Basic metals and fabr. metal products           Food products; beverages and tobacco           Textiles & Textile products
Machinery and Equipment n.e.c.                  Wood and wood products                         Leather & Leather products
Electrical and optical equipment                Pulp, Paper, Publish., Printing
Transport Equipment                             Coke, Refin. Petrol. Products
Communications                                  Chemicals, Chemical Products
                                                Other non-metallic mineral products
                                                Manufacturing n.e.c. furniture
                                                Electricity, Gas & Water
                                                Wholesale & Retail Trade,
                                                Restaurant & Hotels
                                                Transportation & Storage
                                                Real Estate, Dwellings & Business Services

                                                                                                              Sectoral Analyses, Outlook 2008–2009   55

     placed their plants in the Western part of the country. The produc-   Worst Performers
     tion of LCD TV sets will also be supported by the opening of a new    As in most of the CEE countries, mining and quarrying and
     LCD module plant by Samsung in nearby Trnava in 2008. It will be      leather and textile are among the worst sectors.
     the second LCD module plant in Europe (the only existing one of
     LG-Philips is located in Poland). The production of TV sets is        Mining and quarrying has been in recession over the last few
     backed by increasing demand in Europe, which could persist in the     years. However, we have to distinguish between energy materials
     coming years too. The country could also attract new investments,     mining and the quarrying of construction materials. The mining
     but companies will have to face similar labour market tensions as     of energy materials bottomed out in 2006, while the lower
     mentioned above for the automotive sector, mainly in Western          base helped it climb back into the black in 2007. Despite the re-
     parts of Slovakia. The state investment agency SARIO confirmed        covery, the prospects of the segment are still not optimistic and
     negotiations with the Taiwanese firm Chi-Mei (producer of LCD         the gradual closing of ineffective coal mines is probably un-
     modules), which could build a plant in Eastern Slovakia. While        avoidable. Such mines have survived mainly thanks to state aid,
     Samsung’s plant should be oriented mainly to the production of        which is trying to put off the inevitable closing dates. The inter-
     LCD modules for TV sets (mainly with bigger screens), Chi-Mei is      est of foreign investors is targeting uranium mining, and partially
     one of the leading global producers in the segment of LCD mod-        also soapstone or gold: the deposits are in Eastern Slovakia.
     ules for PC monitors and smaller TV sets. The investments of Asian    However, as projects bring a lot of environmental questions, the
     companies into LCD module plants in EU countries (including           start of these projects in the sectors is not likely in the near
     Slovakia) could be supported by custom duties, which the EU is        future. Non-energy materials mining and quarrying exhibits a
     considering introducing (as suggested by Poland).                     better performance as well as good prospects for the coming
                                                                           years, derived mainly from the construction boom. Furthermore,
     Machinery, Basic Metals and Rubber & Plastic are among the            the quarrying of construction materials has attracted the inter-
     fastest growing sectors in the economy based on the very posi-        est of several big foreign players in recent years, helping to
     tive development of the automotive industry, but also the good        consolidate the sector.
     prospects in the non-automotive segment, such as the produc-
     tion of machinery for other business/investment activity in the       The Leather and Textile industries are under harsh competitive
     country or the production of components for household appli-          pressure, having to face aggressive Asian competition. Although
     ances. The continuation of the strong investment activity envis-      the still relatively cheap labour force makes both sectors more
     aged for the coming years will support the performance of these       competitive vis-à-vis other EU members (except in comparison
     sectors, and further reinforce the position of Slovakia as a manu-    with Bulgaria and Romania), a gradual shift of production to-
     facturing centre.                                                     wards Eastern countries with lower labour costs is likely. Local
                                                                           companies are relatively successful in facing wage pressures,
     Among services, Communications recorded a very good perfor-           but the strong koruna is making them less competitive interna-
     mance in recent years. The sector has been investing in the           tionally. Furthermore, as long as the local producers try to main-
     building of new communications infrastructure as well as new          tain their international competitiveness through slow wage
     services for customers. Despite this, the indebtedness of the sec-    growth alone, they could face a lack of labour. Investments tar-
     tor is one of the lowest. Future expansion is still expected main-    geting modernisation and more sophisticated production (to de-
     ly in the segment of high-speed broadband Internet and related        crease the share of manual production) are thus the only ways
     services. The sector shows a very high level of concentration and     for a local producer to survive. The outlook is clear: the closing
     we see some risk in the segment of smaller local Internet             of ineffective plants and a significant decrease or restructuring
     providers, which could be crowded out by the dominant players.        of production activity. This trend is visible mainly in the clothing

56   Sectoral Analyses, Outlook 2008–2009
and shoe segments. The closing of plants has also hit several         nies in the top 50 controlled by domestic capital. All the privati-
big producers such as Ozeta Neo Trenčín and Ozkn Prešov. Fur-         sation projects were stopped after the 2006 elections, including
ther foreign investment in the shoe and clothing sub-sectors is       projects already underway such as cargo railway transportation
not expected (as investors are targeting “cheaper” countries).        or Bratislava airport. Despite this, foreign capital can still make
The outlook of both segments remains negative. The only com-          its way into state companies. The government declared an in-
ponent that shows better prospects is the technical textile           terest in finding a strategic foreign partner for the airport in
industry thanks to several new investments derived from the           Bratislava. It is possible that it will be Vienna airport again,
automotive boom. A similar situation can be found in the non-         which will privatise the airport based on the decision of the
shoes leather industry, which produces mainly for local car           previous government (which failed to obtain approval from the
plants.                                                               Antitrust office). In the case of cargo railways, several options
                                                                      are being considered, including a merger with the Czech cargo
Selected Sectors with a Stable Outlook                                railway (seems to be the most likely option at the moment). At
Backed by a peak in the economic cycle, the construction sector       present, further privatisations in the power industry are not
is undergoing a clear upswing, driven by both corporate invest-       likely (the previous government planned to sell additional
ments and residential building. However, it will be very hard to      stakes in power distribution companies). Slovakia is expected to
maintain a strong growth performance, as showed already by            remain highly attractive for foreign investors. The country is try-
developments in 2007. The capacity constraints (both in con-          ing to draw several larger investment projects to the region
struction materials and the labour force) led to a significant        (e.g. the LCD module plant of Chi-Mei mentioned above, rubber
slowdown in annual growth in summer 2007, especially in               plants of the Indian firm Apollo Tyres or the German firm Conti-
small residential construction. The credit squeeze at international   nental). It is likely that the bigger projects will be placed mainly
level could also play a role and reduce the potential of the          in Eastern Slovakia (due to labour market constraints). However,
sector. As several bigger projects were also closed, the cyclical     we expect the main part of FDI to come through smaller pro-
position of large constructions was not helpful either. Construc-     jects, chiefly in the form of supply companies for automotive or
tion production thus recorded a yoy decline in August 2007, for       electrical equipment, but also in the wood or furniture industry.
the first time since 2003. Despite recent trends, construction        The economy boom should also boost investments into logistic
should also be supported by the planned acceleration of motor-        centres, mainly in Western Slovakia, close to Bratislava. So far,
way building. However, the sector will have to face some              most of the investments targeted the Western and North-west-
capacity constraints, which could lead to a significant increase in   ern parts of Slovakia, as mentioned. Future investment flows –
construction material prices and excessive wage growth. We            also in other areas of the country – are conditional on the de-
predict that these threats could impact negatively on some            velopment of infrastructure facilities, in particular increasing the
smaller local companies. Therefore, we have decided to move           motorway and railway density. The government decided to
construction from the Best (last year) to the Stable performers.      speed-up the building of motorways using EU funds as well as
                                                                      public-private partnership (PPP) projects to finance them. Based
Foreign direct investments and Privatisations                         on a proposal (still not definitively approved), the construction
Privatisations have been taking place in several sectors over         of 350 km of motorway should start in 2007 – 2010 (of which
recent years, with international buyers playing a dominant role.      151 km will be through PPP projects), while 238 km should be
There is no company controlled by local capital among the top         finished in the same period. In railways, the modernisation of
10 ranked by turnover (even though the state still has a majority     all four international corridors is underway, mainly for the part
stake in some companies, i.e. SPP, foreign investors have the         of corridor IV Bratislava – Nové Mesto to Váhom, which is sup-
majority in top management), while there are only 11 compa-           ported by the EU Cohesion fund.

                                                                                                           Sectoral Analyses, Outlook 2008–2009   57

     Slovakia – Structural Indicators (2006)
     SECTORS                                                                           MARKET STRUCTURE
                                                             Number of     Number of           Top 5   Number of SME turnover
                                                             enterprises   employees      turnover/         SME       in sect.
                                                                                              sector              turnover %
                                                                                         turnover %

     TOTAL                                                      93,411     2,131,786          15.18       84,413         22.0
     Agriculture, Hunting, Forestry, Fishing                     4,257        75,823              –        3,797         43.0
     Mining & Quarrying                                            126         8,872          63.78           81          6.3
     Manufacturing                                              11,688       517,381          29.83        9,871         12.3
       Food products, beverages and tobacco                      1,323        43,128          18.10        1,083          9.3
       Textiles and textile products                               838        48,400           8.58          762         28.5
       Leather and leather products                                222        15,185          59.14          170          7.5
       Wood and wood products                                    1,395        36,679           9.82        1,321         49.9
       Pulp, paper & paper products; publishing & printing       1,157        24,504          34.18        1,000         17.1
       Coke, refined petroleum products & nuclear fuel               7         3,001         100.00            4          0.0
       Chemicals, chemical products and man-made fibres            231        12,308          28.00          148          2.0
       Rubber and plastic products                                 690        22,424          54.35          521          6.4
       Other non-metallic mineral products                         504        25,817          24.39          412          9.5
       Basic metals and fabricated metal products                2,099        95,971          53.63        1,792         19.1
       Machinery and equipment n.e.c.                              945        49,981          33.02          730         11.6
       Electrical and optical equipment                          1,205        78,552          52.96        1,043         13.2
       Transport equipment                                         217        35,589          78.88          123          1.3
       Manufacturing n.e.c.                                        855        25,842          39.30          762         24.6
     Electricity, Gas & Water                                      257        37,348          78.93           95          0.6
     Construction                                                6,605       155,984          14.98        5,961         33.3
     Wholesale & Retail Trade, Restaurants & Hotels             38,115       473,180           9.78       34,319         24.0
      Wholesale & Retail Trade                                  34,958       413,282          10.07       31,231         22.3
       Restaurants & Hotels                                      3,157        59,898           3.22        3,088         76.5
     Transportation & Communications                             3,677       142,903          37.45        3,298         20.1
       Transportation & Storage                                  3,511       108,394          28.56        3,159         23.6
       Communications                                              166        34,509          87.01          139          2.9
     Finance, Insurance, Real Estate & Business Services        23,519       206,642              –       22,018         33.1
      Financial Institutions                                       670        34,801              –          591          5.0
       Real Estate, Dwellings & Business Services                22,849      171,841           5.37       21,427         39.5
     Community, Social & Personal Services                        5,167      513,653          30.18        4,973         40.5
     *) Data refer to 2005
     Source: Statistical Office, DataCentrum, UniBanka
     See ANNEX for further explanations of the indicators

58    Sectoral Analyses, Outlook 2008–2009
                        SECTORAL DETAILS                                            COMPETITIVENESS                            CONSTRAINTS
Share in    Export IMP/AC %   Share in             FDI     Capital    RCA         Labour        Average          Wage          Total       Bank
total VA   propen-               total     attractive-   Intensity           Productivity    Gross wage       adjusted       Indebt-     Indebt-
             sity %             FDI %          ness %           %              (manufac-      (manufac-        Labour        edness      edness
                                                                             turing=100)    turing=100)   Productivity            %           %

 100.0       33.9      36.6     100.0          100.0         29.2    100.0          111            100         110.9           54.7        13.3
   4.0       33.3      15.5       0.4           10.9         21.3     97.9          123             76         162.1           30.1         6.8
    0.5      46.9      96.5       0.6          106.8         31.0      4.9           139           107          129.9          50.2          9.8
   21.9      77.1      79.9      39.1          178.3         47.8    113.2           100           100          100.0          53.6         13.0
    1.9      30.1      42.4       4.0          209.1         42.9     70.1           104            90          115.8          64.5         19.9
    0.8      91.1     106.5       0.4           55.2            –     84.8            39            60           66.2          60.4         10.0
    0.3     113.7      95.8       0.3          106.5            –    124.0            41            66           62.6          65.0          6.7
    0.9      33.4      34.1       0.5           52.1            –    189.0            57            66           86.4          61.9         21.4
    1.2      53.7      49.6       1.2          100.6            –    157.8           119           115          103.5          46.8         17.7
    0.9      59.9      37.2       5.0          569.3         38.3    234.0           686           243          281.7          20.3          0.0
    0.8     125.2     108.0       2.5          303.0         29.8     67.4           158           129          122.2          39.2          6.5
    1.0      71.2      80.4       1.8          182.5            –     88.3           105           110           96.0          51.9         17.3
    1.2      40.2      37.2       1.5          120.4            –    132.0           112           107          104.7          65.5         17.4
    4.9      72.3      82.1       9.5          196.5         23.9    148.4           119           116          102.9          69.4         16.0
    1.9      98.0      95.3       2.6          140.0            –     97.2            89           111           80.6          63.5          9.6
    2.7     103.7     106.5       2.9          104.2            –     94.1            82            95           86.2          65.0          6.2
    2.7      92.9      83.9       6.1          225.4        144.0    145.4           180           134          133.9          53.2         15.7
    0.7      55.5      62.9       0.8          109.5            –    116.5            66            89           74.8          72.6         21.1
    5.6       3.5       4.7      14.0          248.7         37.2     77.7           355           147          240.6          39.9         10.7
    6.9       1.1       2.4       0.7           10.0          6.1     40.6           104            77          134.6          61.3          5.8
   16.9       0.1       0.8      12.0           70.9         15.7     36.5            84            97           86.7          62.1          9.0
   15.5       0.1       0.9      11.5           73.9         15.3     36.5            89           100           88.5          62.1          8.6
    1.4         –         –       0.5           36.7         20.3    300.0            54            75           71.1          62.4         16.3
    9.9      29.7      11.7       8.3           84.2         51.1    166.7           163           104          157.1          48.1         14.1
      –      39.6         –       2.3              –            –    158.3             –            97              –          61.6         22.2
      –      10.4         –       6.1              –            –    277.0             –           126              –          31.1          4.0
   18.9       6.8       5.1      24.3          128.0         29.0     56.2           216           140          153.9          72.8         24.2
    4.3         –      12.3      15.2          448.5         11.8     36.4           290           204          142.4             –            –
   14.7       4.3       2.9       5.1            34.5        34.0     83.1           201           126          159.3          64.2         13.8
   15.4      78.0       9.9       0.7             4.5        12.9    102.7            71            91           77.4          57.2         18.5

                                                                                                             Sectoral Analyses, Outlook 2008–2009   59

     • In a lower interest rate environment we forecast eco-               • The network industries (transport and energy), the
       nomic growth of more than 6 % in the forthcoming                      food industry and real estate are likely to be the main
       years in Turkey, with widespread positive spill-overs at              beneficiaries of FDI.
       sectoral level.                                                     • Despite criticism for the slowdown in the reform
     • Construction and related sectors (wood, rubber, non metal-            process due to the domestic political environment in
       lic mineral products, etc.) together with machinery and               2007, we expect there could be a revival in relations
       equipment will continue to be among the leading sectors.              with the EU in 2008.

     Economic Framework                                                    the aftermath, the economic crisis in 2001 exacerbated activities
     2007 was a relatively turbulent year for Turkey in terms of the ef-   in the sector, and its share in total value added dropped below
     fects of both the domestic and global environment. Aside from         4.0 %. The recovery of the sector became evident after 2004: the
     the financial turmoil abroad, the domestic political agenda was       upturn in building investments as well as the increasing demand
     busy with general and presidential elections. It will also take       for housing and dwellings triggered increased activity in the sec-
     some time to eliminate the risks emanating from the geo-politi-       tor and is anticipated to do so in the forthcoming period as well.
     cal tension between Turkey and Iraq, and in the global markets        Since the sector is vulnerable to movements in interest rates,
     the effects of the liquidity crunch. Encouraging developments in      the recent financial turmoil deteriorated the pace of growth as
     Turkish economic fundamentals have stimulated capital inflows         expected. However, interest rates are falling, while the new
     and resumed the appreciation trend of the TRY. Domestic demand        mortgage system in Turkey will become more effective and will
     was robust to adverse developments in financial markets in            underpin the ongoing economic activity in the sector. Neither
     2007, though it declined slightly vis-à-vis 2006. Consumption and     the increase in political tension in Turkey nor the sub-prime
     investment in the Turkish economy are envisaged to be the main        mortgage turmoil in USA had a very strong negative or persis-
     drivers of GDP growth in 2008, since the easing cycle in interest     tent effect on the course of slowly but steadily falling interest
     rates has recently begun and the fall in inflation has become         rates on mortgage loans in 2007. The volume of mortgage loans
     more pronounced. We forecast a significant drop in interest rates     is expected to grow between 35 % and 40 % in 2007 and remain
     in the coming years. Moreover, exports have underpinned the           strong over the coming period, given the stimulus provided by
     economic growth so far and are not expected to run out of steam       further interest rate cuts. The outlook for the sector is highly
     over the forecasting period, though the rates may slow down. We       promising, especially regarding construction activity in the resi-
     forecast growth of more than 6 % in the coming years.                 dential segment, since the upward trend of mortgage loans is
                                                                           expected to continue and household financial wealth is expected
     Performance of the sectors                                            to remain buoyant.
     Best Performers
     Good prospects for the economy support a positive outlook for         The Machinery and equipment sector produces white goods,
     some intermediate and investment goods categories, mining             general-purpose machinery, pumps, compressors, pressing ma-
     and construction. Those, together with financial services, are        chine-tools, lifting and handling equipment, etc., most of which
     likely to be the best performers in the coming years.                 belong to the investment goods category. Since 2002, gross
                                                                           fixed investments have been among the main drivers of eco-
     The construction sector is the backbone of the Turkish economy        nomic growth in Turkey, and machinery and equipment expendi-
     with its high backward and forward linkages to other sectors.         tures have had considerable contributions during the period.
     The share of the construction sector in total value added was         Despite the growing competition from low-wage countries and
     around 6.5 % until the earthquake of 1999 hit the sector hard. In     the appreciation of the local currency in recent years, the sector

60   Sectoral Analyses, Outlook 2008–2009
increased its sales in both the domestic and foreign markets.            The Wood and wood products sector meets the material de-
Capacity utilisation in most sectors has reached hitherto un-            mands of the furniture and construction sectors. Although the
precedented levels and thus requires additional fixed invest-            sector is dominated by a few large firms, half of the total value
ment. In line with our positive expectations for investment activ-       added can be attributed to SMEs. Capital intensity in the sector is
ity in the coming years, the anticipated production increases in         high enough to allow it to afford risks associated with more
the manufacturing sectors will bring a surge in the demand of            volatile environments. The prospects for the sector are positive,
the machinery and equipment sector.                                      since the demand for these goods is not expected to saturate
                                                                         over the coming years. Moreover, a buoyant construction sector
The Mining and quarrying industry has a modest share in GDP,             will pull production in the sector due to high backward linkages.
but it has significant comparative advantages in several minerals.       Since we foresee an improved outlook for domestic demand, we
Chromite deposits, for instance, are among the highest grade             predict the sector will continue its historical upward trend.
metallic ores and Turkey is the second largest producer and ex-
porter of boron minerals and compounds in the world. Besides             Rubber and plastic products is one of the most innovative and
these ores, the two main inputs provided by the sector are crude         fastest growing sectors in Turkey. There is excess demand for
oil and natural gas, most of which are provided via imports:             these goods worldwide and Turkey is among the top ten produc-
Turkey, in this sense, is becoming a regional hub, connecting pro-       ers in Europe. The plastic processing sector produces important
ducers and European consumers. Since all these goods play a key          intermediate materials for auto parts, construction, kitchenware,
role for the manufacturing sector, the mining and quarrying              electrical and household items, etc. The good performance in the
industry will continue to be of vital importance. As part of the         automotive and construction industries is expected to sustain the
reform program, various amendments have been made to the                 performance of the Rubber and Plastic sector. The international
Mining Law (e.g. simplification of procedures for obtaining              market has considerable potential, since plastics are increasingly
licences), which in turn will help improve the investment and            becoming a substitute for wood and metal in many fields. The
production base. The sector is expected to continue growing at           proliferation of raw material suppliers is of vital importance, and
above average rates, provided that production activities in the          therefore, finalising the privatisation of Petkim (which has been
manufacturing industry and construction maintain their pace.             the main supplier) is expected to inject impetus into the sector.

Best and worst performers
BEST                                          STABLE                                           WORST

Mining and quarrying                           Food, beverages & tobacco                       Agriculture, hunt., forest., fish.
Wood and wood products                         Textiles & textile products                     Leather & leather products
Rubber and plastic products                    Pulp, paper, publish., printing
Basic metals & fabricated metal products       Coke, refined petroleum products
Machinery and equipment n.e.c.                 Chemicals, chemical products
Construction                                   Other non-metallic mineral products
Financial institutions                         Electrical and optical equipment
                                               Transport equipment
                                               Manufacturing n.e.c. furniture
                                               Electricity, gas & water
                                               Wholesale & retail trade
                                               Restaurant & hotels
                                               Transportation & storage
                                               Real Estate, dwell. & business services
                                               Community, social & personal services

                                                                                                               Sectoral Analyses, Outlook 2008–2009   61

     The Basic metals and fabricated metal products sector provides           years, however, the sector has been facing fierce competition
     important intermediate goods for the rest of the industrial sectors      from Asian countries (especially China), and as a result, produc-
     and is one of the key sectors of the Turkish economy. The sector         tion in the sector has shrunk by over 10 % since 2005. Unfortu-
     has significant links to construction, transport equipment, machin-      nately, the price elasticity of demand in the sector is very high
     ery and equipment, and is expected to benefit from the favourable        and therefore it is not difficult to substitute for cheap products of
     developments in these sectors. Moreover, the great export poten-         Asian textiles. The appreciation trend of the TRY has also been
     tial in home appliances is also expected to boost production in the      detrimental for the sector. As a result of increasing competition
     sector: the sector generated USD 9.3 billion in export revenues in       from abroad as well as rising costs in the domestic economy, the
     2006, ranking third after the textile and transport equipment sec-       business structure in the sector has changed drastically. The sur-
     tors. In 2006, crude steel production rose to 23.3 million tonnes        vival of the sector in the international arena depends on its ability
     and Turkey became the 11th largest producer worldwide. The ex-           to produce high value added and high-end goods. Moreover,
     pected rise in fixed capital investments in the Turkish economy          consumers in developed countries have become more and more
     over the coming years will also be accompanied by an increase in         demanding for healthier goods produced without chemicals or
     the sector’s production level. In Turkey, steel consumption per capita   man-made substances. This serves as a distinct opportunity and,
     is much lower than that of the EU and developed countries, and           if captured, will pave the way for exporters to exploit the de-
     thus has great potential in terms of domestic demand. The sector         mand by increasing the use of organic cotton, where Turkey has
     imports most of its raw material needs and therefore is vulnerable       a high competitive advantage. This transformation in the sector
     to fluctuations in exchange rates and commodity prices. Hence, rel-      is expected to continue over the medium term, since the current
     atively calm financial markets and less volatile exchange rates          “Darwinist” transition involves the consolidation of competitive
     might help improve the outlook for the sector. With its modern in-       firms. In the coming period, the increase in domestic demand, of
     frastructure and up-to-date technology in existing facilities, produc-   which some portion will be attributable to the reduction in VAT
     tivity in the sector is high and is expected to rise over the medium     rates from 18 % to 8 %, will underpin growth in the sector. All in
     term. Ongoing investments in thin slab technology will increase          all, our stance for the sector is slightly cautious, since the net
     the size of export markets, since slabs are made into a variety of       effect of the aforesaid developments is hard to predict. The
     other products including hot and cold rolled sheets, coils, pipes,       short-term perspective of the sector is not negative.
     plates, etc. The overall outlook is bright and the sector is expected
     to maintain its strength both in domestic and foreign markets dur-       The outlook for Electrical and optical equipment is varied.
     ing the coming period.                                                   Indeed, the sector covers the electronics industry as well as the
                                                                              communications equipment, optical equipment, office equip-
     Financial institutions have made considerable progress since the         ment and medical equipment sectors. While the performance of
     twin crisis of 2000 and 2001. Following the enactment of the             electrical machinery and equipment is very impressive and has a
     new Banking Law in 2005, the sector became more stabilised               promising outlook, other sectors appear to have run out of
     and has attracted a significant amount of FDI. In recent years,          steam. The battle in the domestic and export markets against Far
     owing to the strong economic growth banks have increased their           East countries has restrained the growth in these sectors. Fur-
     efforts to raise penetration levels (e.g. branch openings). This         thermore, the strength of the domestic currency has subdued
     trend is likely to continue in 2008 – 2009 and thus deposit growth       the overall performance. The aggregate outlook for the sector is
     is expected to remain robust. Corporate investments are expected         sanguine, since the overall picture is very different from the one
     to flourish in the future and are likely to stimulate corporate          depicted by any one of the sluggish sub-sectors.
     loans, while consumer loans and mortgages will continue to be
     the main drivers of the sector. Increasing risk awareness and bet-       Turkey is becoming a production base for global markets for the
     ter cost controls will also contribute to the sector’s profitability.    Transport equipment sector. The sector has been the main
                                                                              growth dynamo for the manufacturing industry. Domestic demand
     Selected Sectors with a Stable Outlook                                   is also crucial for the future of the sector. Nevertheless, in 2007
     The Textile and textile products sector has traditionally repre-         the local market somewhat saturated and car loans declined
     sented one of the leading sectors in Turkey in terms of value            (– 0.4 % yoy in September). The outlook for the sector will be
     added, employment opportunities and export revenues. In recent           firm, as long as domestic demand increases and exports remain

62   Sectoral Analyses, Outlook 2008–2009
intact over the course of 2008 and beyond. However, the sector           inflows, each receiving 40 % of total FDI revenues. The finance
is not classified among the best performers, as similarly to most        sector is expected to maintain a high FDI inflow rate with possi-
CEE countries it will take quite some time for new investments           ble mergers and acquisitions in the banking sector, as well as
to ensue and for domestic demand to revive.                              the privatisation of Halkbank (the 7th largest bank in Turkey,
                                                                         currently in the privatisation portfolio).
Worst Performers
The Agriculture, hunting, forestry and fishing sector has been the       The leading sectors in the next few years in terms of FDI inflows
largest employer and one of the major contributors to GDP, and           are likely to be the network industries (transport and energy),
still generates almost 10 % of total value added. However, produc-       the food industry and real estate. The privatisation agenda is
tivity in the sector is the lowest in the economy. Output develop-       busy: the energy sector constitutes the core of planned privatisa-
ments in the sector exhibit a boom-bust pattern due to certain           tions through energy distribution and generation plants. The ten-
features of agricultural production (e.g. fallow periods, climate        der phase of the electricity distribution sector, which took an
changes). Turkey adopted a new Agriculture Law in 2006: al-              indefinite breather in 2007, is to be reinitiated in 2008. More-
though it makes the competitiveness and modernisation of the             over, the privatisation process of Petkim is to be finalised in early
sector a high priority, the new law moves Turkey further away            2008. The privatisation process of ports is to be completed with-
from the principles of the reformed Common Agricultural Policy           in the next two years. Six toll motorways and two Bosphorus
(CAP). The sector is still in a transition period and the reform         Bridges are also in the privatisation portfolio.
efforts need to be revitalised. Transfers of land ownership to facili-
tate the creation of larger and more productive farms is of vital        FDI inflows to the manufacturing sectors remained limited at
importance to the sector. However, given the large population            10 %. A certain shift from the service sector to industry seems
working on small farms and the absence of a safety net, land con-        plausible. Privatisations are anticipated to boost FDI inflows to
solidation poses significant social challenges. Implementing a           the food industry with the sale of Turkey Sugar Factories and
comprehensive package of reforms in the sector is a difficult task       Tekel Tobacco Company.
and thus only limited progress is expected to take place in the
coming years.                                                            EU Convergence
                                                                         The EU convergence process has clearly slowed down during the
The Leather and leather products sector resembles the textile            last year. The annual EU Progress Report criticises the stagnation
and textile products sector, albeit the change in correlation be-        of reforms. As the slowdown of the reform process was largely
tween their trends in recent years. Unlike the textile and textile       attributed to the elections, relations with the EU are expected to
products industry, the leather and leather products sector is not a      gain momentum in 2008. So far, negotiations have been opened
net exporter and is highly dependent on imported materials.              on 4 chapters (science and research, industrial policy, statistics,
Moreover, the sector has a very limited number of export mar-            financial control) and provisionally closed on one (science and
kets. The sector is very labour-intensive and the technology             research).
utilised in the sector has become obsolete. The quality-related
issues have not been addressed in full so far, which in turn in-         The EU accession period has been considered a reform process
creases the vulnerability of the sector to fierce competition from       for Turkey: in the first eight of nine reform packages, 218 articles
Asian countries. The sector is very price sensitive and the curren-      of 53 different laws were amended. The most prominent struc-
cy is too strong to sustain the performance of the sector.               tural reforms include the Banking Law, the FDI law, the Insurance
                                                                         law and tax reform. The simplification of legal and regulatory
Foreign direct investments and Privatisations                            rules governing the conduct of business was achieved, reducing
FDI inflows started to play a prominent role only in recent years:       business registration to an average of 9 days. On 17 April 2007
in the last three and a half years Turkey has attracted 3 times          Turkey’s Program for Alignment with the EU acquis 2007 – 2013
the amount of FDI received in the previous 20 years. FDI inflows         was announced. Within this context, the Turkish Commercial
are estimated to be USD 18 billion in 2007. In 2005 and 2006,            Code and Capital Market Law will be adopted. The envisaged
finance and communications were the leading sectors for FDI              legislation is expected to boost FDI inflows.

                                                                                                               Sectoral Analyses, Outlook 2008–2009   63

     Turkey – Structural Indicators (2006)
     SECTORS                                                                                                                        MARKET STRUCTURE
                                                                                                         Number of      Number of           Top 5    Number of      SME VA in
                                                                                                        enterprises,   employees,      turnover/          SMEs/   sect. VA %*
                                                                                                               thds          thds          sector    Number of
                                                                                                                                      turnover % Enterprises %*

     TOTAL                                                                                                   6,697        22,330               –          93.2          51.9
     Agriculture, Hunting, Forestry, Fishing                                                                 2,316         6,088               –         100.0         100.0
     Mining & Quarrying                                                                                           3          128            69.0          91.6          58.7
     Manufacturing                                                                                              498        4,186            20.7          90.4          39.5
       Food products, beverages and tobacco                                                                      64          603            23.1          91.7          52.9
       Textiles and textile products                                                                            103        1,177            12.3          85.0          47.7
       Leather and leather products                                                                              12           71            89.8         100.0         100.0
       Wood and wood products                                                                                    44          101            79.8          96.1          53.2
       Pulp, paper & paper products; publishing & printing                                                       20          140            33.0          97.0          87.7
       Coke, refined petroleum products & nuclear fuel                                                            0           10            85.8         100.0           3.6
       Chemicals, chemical products and man-made fibres                                                           5          150            34.7          90.0          46.4
       Rubber and plastic products                                                                               20          187            43.0          96.2          62.4
       Other non-metallic mineral products                                                                       21          248            22.1          92.9          67.0
       Basic metals and fabricated metal products                                                                87          535            26.8          92.9          42.8
       Machinery and equipment n.e.c.                                                                            29          291            71.2          93.0          25.4
       Electrical and optical equipment                                                                           9          166            55.6          91.6          31.6
       Transport equipment                                                                                        8          226            58.8          83.5          14.4
       Manufacturing n.e.c.                                                                                      75          281            72.9          91.0          64.4
     Electricity, Gas & Water                                                                                     3           93            82.1          87.0          35.6
     Construction                                                                                               166        1,267               –          95.5          75.7
     Wholesale & Retail Trade, Restaurants & Hotels                                                           1,853        4,730               –          96.8          64.7
       Wholesale & Retail Trade                                                                               1,553        3,957               –          97.7          65.0
       Restaurants & Hotels                                                                                     300          773               –          91.7          53.6
     Transportation & Communications                                                                            414        1,163               –          96.4          19.3
       Transportation & Storage                                                                                 409          967               –             –             –
       Communications                                                                                             5          196               –             –             –
     Finance, Insurance, Real Estate & Business Services                                                        213        1,011               –             –             –
       Financial Institutions*                                                                                   28          335               –             –             –
       Insurance*                                                                                                 0           19               –             –             –
       Real Estate, Dwellings & Business Services                                                               186          657               –          96.9          92.8
     Community, Social & Personal Services                                                                    1,232        3,665               –          94.2          63.3
     *) Data refer to 2005
     Source: CBRT, SIS, Undersecretary of Treasury, TEDC, Yapi Kredi Strategic Planning and Research Dept.
     n.m. = not meaningful data – See ANNEX for further explanations of the indicators

64    Sectoral Analyses, Outlook 2008–2009
                               SECTORAL DETAILS                                                     COMPETITIVENESS                          CONSTRAINTS
Share in     Export IMP/AC %     Share in         FDI      Capital       Energy      RCA         Labour        Average        Wage          Total       Bank
total VA   propen-                  total attractive-    Intensity     Intensity            Productivity     Personnel     adjusted       Indebt-     Indebt-
            sity %*                FDI %      ness %            %    (kwh/real                (manufac-           Cost      Labour        edness      edness
                                                                            VA)             turing=100)      (manufac- Productivity           %*          %*
                                                                                                           turing=100)   (manufac-

   100       22.4       30.7       100.0       100.0         21.0          689     100.0             89               –             –       49.9        14.5
    9.4      10.6        8.1         0.2         1.8          9.8          254     200.8             30               –             –       49.1        23.2
    1.5      11.2       82.7         2.2       152.5         26.2          604        8.5           223             –              –        46.2         14.2
   21.6      27.9       96.4        26.6       125.9         32.5          835      118.6           100           100          100.0        47.1         17.9
    2.7      17.2       29.1         5.7       213.5         48.0          735      290.7            88           112           78.9        44.1         19.6
    3.1      39.1       n.m.         0.3         9.7         54.4        1,623      611.4            51            71           71.1        52.7         23.6
    0.2      21.6       87.3         0.0         1.6         34.1        1,739       67.5            41            55           74.2        49.6         16.8
    0.2      10.0       60.3         0.0        11.1         73.6          893       80.5            38            33          115.7        60.5         30.8
    0.7      10.0       57.9         0.6        84.5         45.0        1,107       42.5            95           102           93.1        34.5         11.3
    0.7      10.2      108.9         1.4       207.8         13.5                    72.7         1,314           597          220.1        46.9          8.8
    1.9      13.4       83.5         3.3       177.9         20.9          315       29.0           242           248           97.8        42.1         14.6
    0.9      30.8       80.3         1.2       129.1         44.1          928      190.9            97            93          103.7        44.5         16.0
    1.6      21.0       28.7         2.7       167.8         28.8        1,641      321.7           127           104          121.3        33.5         12.1
    3.5      37.8       96.0         1.5        45.0         17.1        1,201      106.0           125           106          117.8        42.6         19.2
    1.7      31.0       96.9         1.7       105.8         27.6          688       68.5           110           112           98.5        53.8         18.1
    1.1      54.9      113.9         1.3       118.8         29.1          679       65.4           130           127          102.5        66.8         19.5
    2.5      43.0      147.3         6.8       279.5         23.8          611      153.9           214           166          128.8        52.1         15.4
    0.9      18.2       63.4         0.1         8.5         22.0          689      209.4            60            51          119.1        54.6         26.1
    3.1       4.7        0.2         3.4       111.6         32.2            –     1107.6           643             –              –        44.0         14.5
    5.4      10.9          –         0.5         9.0         49.2          209          –            83             –              –        72.1          8.3
   20.9      17.5          –        11.6        56.6            –          498          –            86             –              –        62.3         17.5
   17.4      17.4        5.9        10.5        62.0            –            –       15.8            85             –              –        66.9         17.7
    3.5      21.3          –         1.0        30.0         34.9            –          –            89             –              –        34.9         16.9
   14.4      20.4          –        28.9       205.9         30.5           54          –           239             –              –        50.3          9.1
      –         –          –           –           –            –            –          –             –             –              –           –            –
      –         –          –           –           –            –            –          –             –             –              –           –            –
    9.6         –          –        24.6       261.4            –            –          –           185             –              –           –            –
    4.8         –          –        20.0       428.9            –            –          –             –             –              –           –            –
      –         –          –                                    –            –          –             –             –              –           –            –
    4.9       4.0        0.0         4.7          98.0          –            –       64.6             –             –              –        17.5          7.5
   14.1       1.1        0.0         2.1          15.5          –        1,605       15.6            75             –              –        59.7         12.1

                                                                                                                          Sectoral Analyses, Outlook 2008–2009   65

     Methodology Notes

     Bulgaria                                                               Energy Intensity: Energy Intensity = Gross Consumption of Ener-
     Structural Indicators                                                  gy/VA, in kgOE/BGN1000 – kilograms of oil equivalent per BGN
     Number of enterprises: total number of companies with business         1000 value added. Source: National Statistical Institute
     activity. Source: Coface Bulgaria Credit Management Services Ltd.
                                                                            RCA: Revealed Comparative Advantage = Share in Total Exports/
     Number of employees: number of employees – average for the             Share in Total Imports, Source: National Statistical Institute
     year, Source: National Statistical Institute (NSI)
                                                                            Labour Productivity: Labour Productivity = GVA/Number of Em-
     Top 5 companies turnover/ Tot. Sect. turnover: Source: Coface          ployees, manufacturing = 100. Source: National Statistical Institute
     Bulgaria Credit Management Services Ltd.
                                                                            Average Wage: Average wage per employee, manufacturing =
     Number of SME: number of companies with number of employ-              100, Source: National Statistical Institute
     ees up to 250 and either annual turnover up to EUR 50 millions
     or total assets up to 43 million BGN, Source: Coface Bulgaria          Wage adjusted Labour Productivity: Wage adjusted Labour
     Credit Management Services Ltd.                                        Productivity = Labour Productivity/Average wage per employee,
                                                                            manufacturing = 100, Source: National Statistical Institute
     SME Value added in sector Value added:
     Source: National Statistical Institute                                 Total Indebtedness: Total Indebtedness = Total Debt/Total Liabil-
                                                                            ities, Source: National Statistical Institute
     Share in VA: Relative share of each sector in Total Gross Value
     Added for the whole economy (in current prices),                       Bank Indebtedness: Bank Indebtedness = Short-term and Long-
     Source: National Statistical Institute                                 term Bank loans/Total Liabilities, Source: National Statistical Institute

     Export Propensity: Export Propensity = Exports/Gross Output,
     Source: National Statistical Institute                                 Croatia
                                                                            Legend: n.m. = not meaningful data (index or rate); one or both
     Import/Apparent Consumption: Apparent Consumption = Gross              values in quotient negative
     Output + Imports – Exports, Source: National Statistical Institute     Generally, FINA data from financial statements of enterpreneurs
                                                                            do not cover state entities (public administration, defence, public
     Share in Total FDI: Foreign Direct Investment (stock),                 education and health care systems) and producers which are not
     Source: Bulgarian National Bank                                        registrered as companies (i.e. are not liable for profit tax – craft-
                                                                            men, individual farmers and fishermen, etc.). FINA data also do
     FDI Attractiveness: FDI Attractiveness = Share in FDI (stock)/         not cover banking and insurance industries sectors. So, totals for
     Share in VA, Source: Bulgarian National Bank, National Statistical     economy and some sectors are downward distorted.
                                                                            Structural Indicators
     Capital Intensity: Capital Intensity = Expenditure for Acquisition     Number of enterprises: Number of entities which actually pre-
     of Tangible Fixed Assets/GVA, Source: National Statistical Institute   sented and submitted financial statement for year 2006 to FINA
                                                                            (Financial Agency). All legal and physical persons which are liable

66   Sectoral Analyses, Outlook 2008–2009
for profit tax, according to the law, are obliged to submit their    Capital Intensity: Calculated by Zagrebacka banka Research
financial statements. Source: FINA                                   from FINA data. Capital Intensity = Gross Fixed Capital Forma-
                                                                     tion/VA. Source: FINA
Number of employees: Average number of employees on the
basis of working hours in enterprises which presented financial      Energy Intensity: Calculated by Zagrebacka banka Research
statement for year 2006. Source: FINA                                from FINA data. Energy Intensity = Energy costs/VA. Source: FINA

Number of SME: SME are defined as companies up to 250 em-            RCA: Calculated by Zagrebacka banka Research from CBS data.
ployees, total assets up to HRK 30 mln, and total revenue up to      RCA = Share in Total Exports/Share in Total Imports. Source: CBS
HRK 60 mln. Source: FINA
                                                                     Labour Productivity: Calculated by Zagrebacka banka Research
Value added: VA = Gross Value Added, calculated by Zagrebacka        from FINA data. Labour Productivity = VA/Number of Employees
banka Research from FINA data. VA = Turnover – Total costs +         (in HRK per employee & year). Manufacturing = 100, Source: FINA
Depreciation + Financial costs + Labour costs. Source: FINA
                                                                     Average Personnel Costs: Calculated by Zagrebacka banka Re-
Share of SME VA in sector VA: Zagrebacka banka Research cal-         search from FINA data. Average Personnel Costs = Total Person-
culations from FINA data. Source: FINA                               nel (Labour) Costs (net wages + contributions from/on wages
                                                                     for pensions, social and health care + other personnel costs)/
Share in total VA: VA of specific sector divided by total VA         Number of Employees (in HRK per employee and year). Manu-
added (Zagrebacka banka Research from FINA data).                    facturing = 100, Source: FINA
Source: FINA
                                                                     Wage Adjusted Labour Productivity: Calculated by Zagrebacka
Export propensity: Calculated by Zagrebacka banka Research           banka Research from FINA data. Wage Adjusted Labour Produc-
from FINA data. Export propensity = Exports revenues (revenues       tivity = Labour Productivity/Average Personnel (Labour) Costs.
from merchandise and services sold abroad)/Total revenues            Manufacturing = 100, Source: FINA
from merchandise and services (sold domesticly and abroad).
Source: FINA                                                         Total Indebtedness: Calculated by Zagrebacka banka Research
                                                                     from FINA data. Total Indebtedness = Total Debt/Total Liabilities.
Import/Apparent Consumption: Indicator calculated by Zagre-          Source: FINA
backa banka Research from FINA and CBS data. Apparent Con-
sumption = Revenues from merchandise and services + Imports          Bank Indebtedness: Calculated by Zagrebacka banka Research
– Exports. Sources: FINA (revenues) and Central Bureau of Statis-    from FINA data. Bank Indebtedness = Bank Debt/Total Liabilities.
tics (imports and exports)                                           Source: FINA

Share in Total FDI: Foreign Direct Investment (stock as of 31th
December 2006, cumulated from beginning of 1993). For the            Czech Republic
sector Financial intermediation, FDI inflows to banking and insur-   Structural Indicators
ance industry are excluded because those sectors are not cov-        Number of enterprises: enterprises with 20+ employees.
ered by FINA data. Source: Croatian National Bank                    Source: Czech Statistical office (CZSO)

FDI Atractiveness: Calculated by Zagrebacka banka Research           Number of employees: enterprises with 20+ employees.
from FINA and CNB data. FDI inflows to banking and insurance         Source: CZSO
industry are excluded. FDI Attractiveness = Share in FDI (stock)/
Share in VA. Sources: FINA, CNB                                      Number of SME: enterprises with 20 – 99 employees.
                                                                     Source: CZSO

                                                                                                           Sectoral Analyses, Outlook 2008–2009   67

     Share of SME VA in Sector VA: considering again enterprises          Bank Indebtedness: (Bank loans, Obligations & Bills, Other lia-
     with 20 – 99 employees. Source: CZSO                                 bilities)/Total Liabilities, for enterprises with 100 +more employ-
                                                                          ees. Source: CZSO
     Share in Total VA: Share of sector VA out of Total VA. VA = Gross
     Value Added (in current prices). Source: CZSO
     Export Propensity: Exports/Revenues from merchandise, own            Structural Indicators
     products and services. Note: the indicator is upward distorted as    Number of enterprises: total number of registered companies,
     while exports refer to the total sector, revenues are related to     Source: Central Statistical Office
     enterprises with 20 and more employees. Source: CZSO
                                                                          Number of employees: number of employees – average for the
     Import/Apparent Consumption: Apparent Consumption = Rev-             year, Source: Central Statistical Office
     enues from merchandise, own products and services + Imports –
     Exports. Note: the indicator is upward distorted as while exports    Number of SME: number of companies with number of employ-
     and imports refer to the total sector, revenues are related to       ees up to 250 and annual turnover up to EUR 50 millions.
     enterprises with 20 and more employees. Source: CZSO                 Source: Ministry of Economy and Transport

     Share in Total FDI: Share of sector FDI out of total FDI (stock).    Share in VA: Relative share of each sector in Total Gross Value
     Source: Czech National Bank                                          Added for the whole economy (in current prices),
                                                                          Source: Central Statistical Office
     FDI Attractiveness: Share in FDI stock/Share in VA.
     Source: Czech national bank, CZSO                                    Export Propensity: Export Propensity = Exports/Gross Output,
                                                                          Source: Central Statistical Office
     Capital Intensity: Purchase of the fix assets (tangible and intan-
     gible) minus sales of the fix assets divided by VA. Available for    Import/Apparent Consumption: Apparent Consumption = Gross
     enterprises with more than 20 employees. Source CZSO                 Output + Imports – Exports, Source: Central Statistical Office

     Energy Intensity: Energy Consumption (in TJ) out of VA.              Share in Total FDI: Foreign Direct Investment (stock),
     Source: CZSO                                                         Source: National Bank of Hungary

     RCA: Share in Total Exports/Share in Total Imports. Source: CZSO     FDI Attractiveness: FDI Attractiveness = Share in FDI (stock)/
                                                                          Share in VA, Source: National Bank of Hungary, Central Statistical
     Labour Productivity: VA/number of employees (in CZK per em-          Office
     ployee & year), for enterprises with more than 20 employees for
     non-financial enterprises. Manufacturing = 100, Source: CZSO         Capital Intensity: Capital Intensity = Expenditure for Acquisition
                                                                          of Tangible Fixed Assets/GVA, Source: Central Statistical Office.
     Average Personnel Cost: in CZK per employee & year, for enter-
     prises with more than 100 employees. Manufacturing = 100,            RCA: Revealed Comparative Advantage = Share in Total Exports/
     Source: CZSO                                                         Share in Total Imports, Source: Central Statistical Office

     Wage adjusted Labour Productivity: Labour Productivity/Aver-         Labour Productivity: Labour Productivity = GVA/Number of Em-
     age personnel costs, for enterprises with 100 + employees.           ployees, Manufacturing = 100, Source: Central Statistical Office.
     Manufacturing = 100, Source: CZSO                                    Average Wage: Average wage per employee, Manufacturing =
                                                                          100, Source: Central Statistical Office
     Total Indebtedness: Total Debt/Total Liabilities, for enterprises
     with 100 and more employees. Source: CZSO

68   Sectoral Analyses, Outlook 2008–2009
Wage adjusted Labour Productivity: Wage adjusted Labour               Apparent Consumption: AC = Gross Output + Imports – Exports.
Productivity = Labour Productivity/Average wage per employee,         Source: BANK PEKAO Research calculation from CSO data
Manufacturing = 100, Source: Central Statistical Office               • Export and Import: Source: CENTRAL STATISTICAL OFFICE;
                                                                      • Gross Output: equal to the sum of the gross output of prod-
Total Indebtedness: Total Indebtedness = Total Debt/Total Lia-          ucts (goods and services) of all the ownership sectors or insti-
bilities, Source: Tax Bureau                                            tutional sectors, or to the sum of the gross output of products
                                                                        of all the sections, divisions. Calculated by Macroeconomic Re-
Bank Indebtedness: Bank Indebtedness = Short-term and Long-             search Office. Estimated Gross Output in the table is presented
term Bank loans/Total Liabilities, Source: Tax Bureau, National         based on the adopted estimated structure and estimated
Bank of Hungary                                                         interrelation between Gross Output and VA in sectors.

                                                                      Share in total FDI: % on total Foreign Direct Investment.
Poland                                                                Source: National Bank of Poland
Structural Indicators
Number of enterprises: Number of entities recorded in the             FDI Attractiveness: FDI Attractiveness = Share in FDI (stock)/
REGON register. Source: CONCISE STATISTICAL YEARBOOK of the           Share in VA. Source: BANK PEKAO Research calculation from both
Republic of Poland                                                    the National Bank of Poland and CSO data

Number of employed persons: Population and Housing Census             RCA: RCA = Share in Total Exports/Share in Total Imports.
of 2005, Source: CONCISE STATISTICAL YEARBOOK of the Republic of      Source: BANK PEKAO Research calculation from CSO data
                                                                      Labour Productivity: Labour Productivity = VA/Number of Em-
Number of employees: Average paid employment,                         ployees. Manufacturing = 100, Source: BANK PEKAO Research
Source: CENTRAL STATISTICAL OFFICE                                    from CSO data

Number of SME: The data refer to enterprises, in which the            Average monthly gross Personnel Cost – Average monthly
number of employees amounts to 49 or less persons.                    gross wage and salary – Manufacturing = 100, Source: CENTRAL
Source: CENTRAL STATISTICAL OFFICE                                    STATISTICAL OFFICE

Share of SME turnover in sector turnover: Turnover is defined         Wage Adjusted Labour Productivity: Wage Adjusted Labour
as Revenues from the sale of products, goods and materials.           Productivity = Labour Productivity/Average Personnel Cost (yearly),
Source: calculation by BANK PEKAO Research from CENTRAL STATIS-       Manufacturing = 100, Source: BANK PEKAO Research from CSO
TICAL OFFICE.                                                         data

Value added: VA = Gross Value Added. The data refer to all            Total Indebtedness: Total Indebtedness = Total Debt/Total Lia-
enterprises. Source: for sectors: CSO; for sub-sectors – calculated   bilities. Source: BANK PEKAO Research calculation from CSO data
by BANK PEKAO – Research.
                                                                      Bank Indebtedness: Bank Indebtedness = Bank Debt/Total Lia-
Export propensity: Export propensity = Exports revenues/Total         bilities (Total bank credits and loans/Total Liabilities).
turnover. Source: BANK PEKAO Research calculation from CSO data.      Source: BANK PEKAO Research calculation from CSO data
• Turnover: Revenues from total activity CENTRAL STATISTICAL
  OFFICE – Financial result of non-financial enterprises.

                                                                                                            Sectoral Analyses, Outlook 2008–2009   69

     Romania                                                                 Share of SME VA in Sector VA: SME Gross Value Added (current
     Structural Indicators                                                   prices, LC)/Sector Gross Value Added (current prices, LC). Uni-
     Abbreviations                                                           Credit Tiriac calculation. Source: NIS – Structural Survey
     NIS: National Institute of Statistics of Romania; NCA: National
     Customs Authority                                                       Share in Total VA: Sector Gross Value Added (constant prices
                                                                             LC)/Total Gross Value Added (constant prices LC). UniCredit Tiriac
     NTRO: National Trade Registry Office; MPF: Ministry of Public           calculation. Source: NIS – National Accounts
     Finance of Romania; NBR: National Bank of Romania
                                                                             Export propensity: Export/Turnover. Export figure in EUR, and
     Sources                                                                 provided by NIS – Foreign Trade Division (primarily sourced by
     NIS – Structural Survey: Represents a statistical method con-           NCA). Turnover in current prices LC, and sourced by NIS – Struc-
     ducted by the National Institute of Statistics that covers all eco-     tural Survey
     nomic sectors. Micro indicators are calculated following a national
     scale inquiry upon a sample of enterprises relevant to the entire       Import/Apparent Consumption: Import/Apparent Consump-
     national economy. The enterprises are classified for each eco-          tion. Apparent Consumption = Yearly Output + Import – Export.
     nomic sector according to NACE, Rev. 1.                                 Export and Import in EUR, provided by NIS – Foreign Trade Divi-
                                                                             sion (primarily sourced by NCA). Yearly Output in current prices
     NIS – National Accounts: It turns the results of the official statis-   LC, and sourced by NIS – Structural Survey
     tical surveys into national accounts having in view the method-
     ological principles of ESA 95 (European System of Accounts). It         Share in Total FDI: Sector FDI/Total FDI, sourced by NBR
     uses data coming from MPF (public budget execution, balance
     sheets, and tax on revenues statements of individuals) and by           FDI Attractiveness: Share in Total FDI/Share in Total Gross Value
     NBR (balance of payments document).                                     Added (GVA). UniCredit Tiriac calculation. Source: FDI from NBR
                                                                             in EUR and GVA from NIS – National Accounts
     NIS – Foreign Trade Division: It covers, in cooperation with
     National Customs Authority (NCA) import and export figures in           Capital Intensity: Gross Fixed Capital Formation/Total sector
     EUR terms, based on enterprises custom statements and national          GVA in constant prices. UniCredit Tiriac calculation.
     inquiry standard forms.                                                 Source: NIS – National Accounts

     Structural Indicators                                                   Energy Intensity: Energy Consumption (in kg of oil equivalent)
     Number of enterprises: Total number of enterprises, Classified          out of Gross Value Added in current prices (EUR mn).
     according to NACE. Source: NIS – Structural Survey Number of            Source: NIS –Industries and NIS-National Accounts
     employees: Total number of employees in enterprises.
     Source: NIS – Structural Survey                                         RCA: Revealed Comparative Advantage computed as Share in
                                                                             Total Exports/Share in Total Imports. Source: NIS – Foreign Trade
     Top 5 companies turnover/Total Sect. turnover: Top 5 Compa-             Division (primarily sourced by NCA)
     nies Turnover/Total Sectors Turnover. UniCredit Tiriac calculation.
     Both, Top 5 Companies Turnover and Total sectors’ turnover are          Labour Productivity: Gross Value Added/Number of employees.
     in current prices, local currency. Source: NIS – Structural Survey      Gross Value Added, in current prices LC, and Number of employ-
                                                                             ees sourced by NIS – Structural Survey. Manufacturing = 100
     Number of SMEs: Total number of SMEs, defined as enterprises
     with less than 250 employees. Source: NIS – Structural Survey           Average Personnel Cost: Total expenses with the personnel/
                                                                             Number of employees. UniCredit Tiriac calculation. Total expens-
                                                                             es with the personnel, in current prices LC , and Number of em-
                                                                             ployees sourced by NIS – Structural Survey. Manufacturing = 100

70   Sectoral Analyses, Outlook 2008–2009
Wage Adjusted Labour Productivity: Labour Productivity/Aver-            Labour Productivity: LP=GVA/Number of employees. Manufac-
age Personnel Cost. UniCredit Tiriac calculation. Manufacturing =       turing = 100. Source: Rosstat
100. Source: NIS – Structural Survey
                                                                        Average wage: Manufacturing = 100. Source: Rosstat
Total Indebtedness: Total Debt (current prices LC)/Total Liabili-
ties (current prices LC). UniCredit Tiriac calculation. Source: NIS –   Wage adjusted labour productivity: WALP=Labour Productivity/
Structural Survey                                                       Average wage per employee. Manufacturing = 100.
                                                                        Source: Rosstat
Bank      Indebtedness:    Bank    Indebtedness    (current   prices
LC)/Total Liabilities (current prices LC). UniCredit Tiriac calcula-    Total Indebtedness. Total debt on total liabilities, Source: Rosstat
tion. Source: NIS – Structural Survey

Russia                                                                  Structural Indicators
Structural Indicators                                                   Number of enterprises: Based on Statistical official registry of
Number of enterprises: Total amount of enterprises includes             organizations including only active entity – yearly average.
enterprises of state governance and military defence.                   Source: Statistical Office
Source: Rosstat
                                                                        Number of employees: Employers are defined as persons who
Number of employees: Total amount of employees includes                 work on the basis of formal or informal contract for other resi-
the employees of state governance and military defence enter-           dent unit for financial or natural wage. A balancing method is
prises. Source: Rosstat                                                 used, i. e. supply of labour force is balanced with demand, by
                                                                        comparing and harmonizing the data from the enterprise survey
Top 5 companies’ turnover/Total sector turnover – Expert                with data from the labour force sample survey in households, in
magazine’s “Russia’s Top 400 companies”. Source: Rosstat                order to meet the definitions according to ILO and ESA 95. Data
• in sector “Wood and wood products” data is cumulative for             are calculated according to national definition.
  wood and pulp & paper industry.                                       Source: Statistical Office
• in sector Textiles is cumulative for Textiles and Leather prod-
  ucts.                                                                 Top 5 turnover/Sector turnover: based on data from financial
                                                                        statement (UniCredit Bank calculation). Source: DataCentrum,
Number of SMEs: Source: Rosstat                                         Trend weekly, Statistical Office

Share in VA – Relative share of each sector in Total Gross Value        Number of SME: Number of entities with turnover less than SKK
Added for the whole economy, in current prices. Source: Rosstat         40 mln. based on financial statement for 2005.
                                                                        Source: DataCentrum
Share in FDI: Source: Rosstat
                                                                        SME turnover/Sector turnover: based on data from financial
FDI Attractiveness: FDI Attractiveness = Share in FDI/Share in          statement (UniCredit Bank calculation). Source: DataCentrum
VA. Source: Rosstat
                                                                        VA: Gross value added. Source: Statistical Office
Energy intensity: Energy consumption out of VA. Source: Rosstat
                                                                        Share in VA: VA of specific sector divided by total VA added
RCA: RCA=Share in total Exports/Share in Total Imports.                 (UniCredit Bank calculation). Source: Statisticall Office
Source: Rosstat
                                                                        Export and Import: in commodity structure (not in sector struc-
                                                                        ture) and FOB type. Source: Statistical Office

                                                                                                              Sectoral Analyses, Outlook 2008–2009   71

     Export propensity: Export over Turnover for each sector (Uni-        business services are computed from the “General Census of In-
     Credit Bank calculation). Source: Statistical Office                 dustry and Business Establishments-2002” (GCIB-2002 hence-
     Apparent consumption (AC): Gross production – Export + Import
     for each sector (UniCredit Bank calculation).                        Number of employees: Total number of employees for main
     Source: Statistical Office                                           sectors is taken from “Household Labour force Survey-2006”
                                                                          (HFS-2006 henceforth). Breakdown of the sectoral data for min-
     Share in Total FDI: FDI of specific sector divided by total FDI      ing and quarrying, wholesale and retail trade, restaurant and ho-
     (UniCredit Bank calculation). Source: Statisticall Office            tels, transportation, storage and communication is done accord-
                                                                          ing to their sub-sector shares calculated from the SBS-2004 fig-
     FDI attractiveness: Share in FDI (stock as of December 31st,         ures. For finance, insurance, real estate and business services
     2006) over Share in VA (UniCredit Bank calculation).                 GCIB-2002 data is used. Number of employees for manufacturing
     Source: NBS, Statistical Office                                      sub-sectors is estimated by building a mathematical program-
                                                                          ming model.
     Capital Intensity: Gross fixed capital formation over VA (Uni-
     Credit Bank calculation). Source: Statistical Office                 Top 5 companies’ turnover/Total sector turnover: Calculated
                                                                          according to IES-2006 data.
     RCA: Relative competitive advantage – Share in Export divided
     by the share in Import (UniCredit Bank calculation).                 Share of SMEs in total number of enterprises: Due to data
     Source: Statistical Office                                           limitations (i.e. the classification in company accounts), SMEs are
                                                                          defined as companies up to 500 employees. Calculated accord-
     Labour productivity: VA over number of employee (UniCredit           ing to CA-2005 data.
     Bank calculation). Manufacturing = 100. Source: Statistical Office
                                                                          Share of SMEs VA in sector VA: SMEs net turnover out of total
     Average gross wage: monthly in SKK per employee.                     enterprises’ net turnover. Calculated according to CA-2005 data.
     Source: Statistical Office
                                                                          Share in total VA: Figures are calculated according to national
     Wage adjusted Labour productivity: Labour productivity over          accounts of TURKSTAT. Contributions of sub-sectors in manufactur-
     average personnel wage (UniCredit Bank calculation). Manufac-        ing industry are estimated by building a mathematical program-
     turing = 100. Source: Statistical Office                             ming model.

     Total indebtedness – Total debt divided by the Total liabilities     Export propensity: Percentage share of exports in gross sales.
     based on financial statement, Source: Statistical Office, DataCen-   Calculated according to CA-2005 data.
                                                                          Imports/Apparent Consumption: Percentage share of imports
     Bank indebtedness – Total bank debt divided by the Total liabil-     in apparent consumption, AC = Nominal Value Added + Imports –
     ities based on financial statement, Source: NBS, DataCentrum         Exports. Source: Yapi Kredi calculation on foreign trade figures of

     Turkey                                                               Share in total FDI: Percentage share of each sector’s FDI in total
     Structural Indicators                                                FDI. Source: Yapi Kredi calculation on “International Investment Po-
     Number of enterprises: Total number of employees/average             sition-2006” data of CBRT
     number of employees that are calculated according to SBS-2004
     data of enterprises and employees. Figures for agricultural sector   FDI attractiveness: Percentage of share in total FDI to share in
     are calculated according to “General Agricultural Census-2001”       total VA. Source: Yapi Kredi calculation on CBRT data
     (GAC-2001 henceforth), while finance, insurance, real estate and

72   Sectoral Analyses, Outlook 2008–2009
Energy intensity: Ratio of consumption of electricity (kwh) to
real VA. Source: Yapi Kredi calculation on o statistics of Turkish
Electricity Distribution Company

Capital intensity: Percentage share of gross fixed investments
in VA (current prices). Fixed investment figures for main sectors
are taken from Statistical Planning Office (SPO). Breakdown of
manufacturing sector is done according to their proportions in
the overall gross fixed investment in SBS-2004 data.

Relative Comparative Advantage: Ratio of share in total ex-
ports to share in total imports. Source: Yapi Kredi calculation on
foreign trade figures of TURKSTAT

Labour productivity: Nominal Value Added per number of em-
ployees. Manufacturing = 100.

Average personnel costs: Figures for gross earnings of each
sector in manufacturing industry are taken from TURKSTAT for
2004 and 2006. Average personnel costs of 2004, which are cal-
culated from SBS-2004 data, are then updated according to the
change in TURKSTAT’s numbers. Manufacturing = 100.

Wage adjusted Labour productivity: Ratio of Labour productivi-
ty to average personnel costs. Manufacturing = 100.

Total indebtedness: Sum of short term and long term debts out
of total liabilities. Calculated according to CA-2005.

Bank indebtedness: Sum of short term and long term bank
debts out of total liabilities. Calculated according to CA-2005.

                                                                     Sectoral Analyses, Outlook 2008–2009   73
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     The Baltics                                 UniCredit Bank                      RF-19034 Moscow
     UniCredit Bank Estonia Branch               Szabadság place 5 – 6,              Phone: +7 095 258 7200
     Liivalaia Street 13/15, EST-10118 Tallinn   H-1054 Budapest,                    E-Mail:
     Phone: +372 668 8300                        Phone: +36 1 269 0812                             E-Mail:
                                                       Yapi Kredi Moscow
                                                                                     Goncharnaya emb. 2,
     UniCredit Bank Lithuania Branch                                                 RF-115172 Moscow
     Vilniaus Gatve 35/3, LT-01119 Vilnius       Kazakhstan
                                                 ATFBank                             Phone: +7 495 234 9889
     Phone: +370 5 2745 300                                                          E-Mail:
                                                 100, Furmanov Str.                        050000 Almaty             
     UniCredit Bank (Latvia)                     Phone: +7 (727) 2 583 111           Serbia
     Elizabetes Iela 63, LV-1050 Riga                        UniCredit Bank
     Phone: +371 708 5500                                                            Rajiceva 27 – 29, 11000 Belgrade                        Kyrgyzstan                          Phone: +381 11 3204 500
                                                 ATFBank Kyrgyzstan                  E-Mail:
                                                 493, Zhibek Zholu Ave.    
     Bosnia and Herzegovina
     UniCredit Zagrebacka banka                  Bishkek
                                                 Phone: +7 312 67-00-47              Slovakia
     Kardinala Stepinca b.b.,                                                        UniCredit Bank
     BH-88000 Mostar                                                                 Šancova 1/A, SK-813 33 Bratislava,
     Phone: +387 36 312112                                                           Phone: +42 1 44 547 6870
                                                 Macedonia                                 BA-CA Representative Office
                                                 Dimitrie Cupovski 4 – 2/6,
                                                                                     UniCredit Bank
     HVB Central Profit Banka                    MK-1000 Skopje                      Šmartinska cesta 140,
     Zelenih Beretki 24, BH-71000 Sarajevo       Phone: +389 2 3215 130              SI-1000 Ljubljana,
     Phone: +387 33 533 688                      E-Mail:         Phone: +386 1 5876 600
     E-Mail:                                                         E-Mail:                              Montenegro                
                                                 BA-CA Representative Office
                                                 Hercegovacka 13,                    Turkey
     Nova Banjalucka Banka
                                                 81000 Podgovica                     Yapi Kredi
     Marije Bursac 7, BH-78000 Banja Luka        Phone: +382 81 66 7740
     Phone: +387 51 243344                                                           Yapi Kredi Plaza D Blok, Levent,
                                                 E-Mail: ba-ca@cg.yu                 TR-80620 Istanbul,
     E-Mail:                                                    Phone: +90 212 339 70 00                         Poland                    
                                                 Bank Pekao
     Bulgaria                                    ul. Grzybowska 53/57,               Tajikistan
     UniCredit Bulbank                           PL-00-950 Warsaw                    Sohibkorbank
     Sveta Nedelya Sq. 7, BG-1000 Sofia          Phone: +48 42 6838 232              165, Kamoli Hudzhandi Str.
     Phone: +359 2 923 2111                                735700 Hudzhand, Sogdian region                                                         Phone: +8 10 99 23 4 22 6 30 65
                                                 UniCredit Tiriac Bank
     Croatia                                     Ghetarilor Street 23 – 25,          Ukraine
     Zagrebacka banka                            RO-014106 Bucharest 1,              UniCredit Bank
     Paromlinska 2, HR-10000 Zagreb              Phone: +40 21 200 2000              14, D. Galitskogo St., UA-43016 Lutsk,
     Phone: +385 1 6305 250                      E-Mail:   Phone: +380 332 776210                          

74   Sectoral Analyses, Outlook 2008–2009
               This is a product of the New Europe Research Network. The New Europe Research Network involves
     all the research offices of the Group dealing with the CEE region, with the aim of providing a shared view in terms of
                              economic developments at the single country and at the regional level

Debora Revoltella
UniCredit Group, CEE Chief Economist
Network Coordinator

UniCredit Group, CEE Economic Research                            UniCredit Tiriac Bank – Economic Research
Carmelina Carluzzo (CZ, HU, PL, SK) – Matteo Ferrazzi (HR,        Rozalia Pal, Senior Economist
LT, TR) – Hans Holzhacker (EST, RUS, UA) – Fabio Mucci (BG,       Anca Mihaela Stoica
LV, RO) – Lisa Perrin – Bernhard Sinhuber – Gerd Stiglitz
                                                                  UniCredit Bank Slovakia –
UniCredit Bulbank – Planning and Control Division,                Macroeconomics & Market Analyses
Economic Research Unit                                            Viliam Patoprsty, Chief Analyst
Kristofor Pavlov, Chief Economist                                 Lubomir Korsnak
Elena Georgieva – Milen Kassabov – Katerina Topalova
                                                                  Yapi Kredi Bankası
Zagrebacka Banka – Macroeconomic Research                         Cevdet Akcay, Chief Economist
Goran Saravanja, Chief Economist                                  Ahmet Cimenoglu, Head, Strategic Planning and Research
Nenad Golac                                                       Yelda Yucel – Murat Can Aslak – Eren Ocakverdi –
                                                                  Cenk Tarhan – Muhammet Mercan
UniCredit Bank Czech Republic – Economic Research
Pavel Sobisek, Chief Economist                                    International Moscow Bank – Treasury
Patrik Rozumbersky – Vaclav Verner                                Sergei Kondrashov – Valery Inyushin –
                                                                  Dmitriy Marushkevich
Bank Pekao – Macroeconomic Research Office
Andrzej Bratkowski, Chief Economist                               UniCredit Bank Hungary
                                                                  Márta Szegö Biróné, Chief Economist
                                                                  Tibor Nagy

The authors of this issue

Matteo Ferrazzi, Debora Revoltella (Regional Outlook)
Milen Kassabov (Bulgaria); Nenad Golac (Croatia); Vaclav Verner (Czech Republic); Tibor Nagy (Hungary);
Andrzej Bratkowski, Teresa Szkudłapska, Waldemar Wywrocki (Poland); Valery Inyushin, Vladimir Osakovsky,
Dmity Panteta (Russia); Rozalia Pal, Anca Mihaela Stoica (Romania); Lubomir Korsnak, Viliam Patoprsty (Slovakia);
Eren Ocakverdi (Turkey).

                                                                                                    Sectoral Analyses, Outlook 2008–2009   75
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