EconomicResearch Division
November2014No86
SoutheasternEurope
Economic&FinancialOutlook
OurViewsinaNutshell
Romania:TheNationalBankof
Romaniahasroomtoloweritskey
rateinNovembermeeting.Thefiscal
performanceof9M2014suggeststhat
budgetdeficitmaydeclinetowards
2.2%ofGDPintheendof2014,thus
achievingthesettarget.
Cyprus:AssumingthatH22014
evolveslikeH12014,GDPfallmay
reach2.5%basedonapossible
declineoffinalconsumptionby1.2%
y/ywithadeclineininvestmentby
7.3%y/y.
Bulgaria:Thecurrentaccount
adjustmentwhichstartedduringdebt
crisisisexpectedtoremaininplace
thisyearandthecurrentaccount
balancetopostasmallsurplusof0.1%
ofGDP.
Serbia:Investorsareonwaitandsee
moodasthenewIMFdealispending.
NBSskeyratetoremainat8.5%until
theendof2014.
Albania:Thedecelerationofeconomic
activityisconsideredtobetemporary.InMarch2014,IMFconcludeditsfirstandsecondreviewoftheprecautionaryStandBy
Thecandidatestatusgrantedbythe
EuropeanUnionisexpectedtohavea
favourableimpactonforeign
investmentsandjobcreationinthe
country.
FYROM:GDPgrowthsofarisjustifying economycontinuedtorecover,fiscalimbalanceswerereducedandthecurrentaccount
theexpectationsforsolidrecoveryof deficitremainedlow.
thedomesticeconomy.
1.ROMANIA
ECONOMICOVERVIEW:AccordingtoNationalStatisticalOffice(INS)andEurostat,Romanian
GDP(seas.adjusted)expandedslower,by1.5%y/yinQ22014afterrisingby3.7%y/yin
Q12014(Eurostat).Therefore,inH12014GDProseby2.6%y/y.Ontheotherhand,GDP
inQ22014fellby1.0%q/qafteralsohavingfallenby0.2%inQ1q/q,suggestingsome
weaknessintheGDPformationduring2014comparedtotheunexpectedlybigriseof
GDPduring2013.AccordingtoupdateddatareleasedbytheNationalStatisticalOffice
(INS),GDPexpandedby3.5%in2013comparedto2012morethanmarketexpectations.
RomanianGDPgrowthin2013wasoneofthehighestamongEUcountries.Industry
contributedby2.2%tothe2013GDPgrowthrate,followedbyagriculturecontributingby
1.1%andservicesby0.1%,whereasconstructionhada0%contribution.Fromtheview
pointofGDP2013formation,basedonthevolumeofgrossvalueaddedactivities,there
wasaconsiderableincreaseinthevolumeofindustry(+8.0%),agriculture(+23.4%),real
estatetransactions(+2.0%),informationandcommunications(+1.8%),professional
activities(+1.1%)andevenconstruction(+0.4%).GDPformationwasnegatively
influencedbyfinancialintermediation(5.6%),health(1.1%)andhotelsandrestaurants(
0.2%).Fromtheviewpointoftheevolutionof2013GDPbasedonitsfinaluses,weseea
strongriseinexportsofgoodsandservicesby+13.5%whichcoveredthedecreasein
domesticdemandby0.8%.Importsroseby+2.4%andnetexportscontributedby4.4%in
the2013GDPgrowthwithprivateconsumptioncontributingby+0,7%,government
consumptionby0.1%,investmentby0.9%andinventorychangesby0.6%.Economic
recoverystartedgainingmomentuminH22013giventhefavourabletrendinthe
agriculturalsector,improvingeconomicandbusinessclimateinEurope(themajortrading
partnerofRomania),increasingabsorptionofEUstructuralandcohesionfundsanda
moreexpansionarymonetarypolicy.Improvementinemploymentandlowinflation
supportedfinalconsumptionin2013,withpublicconsumptionlaggingandinvestment
sentimentremainingweak.In2013,nominalGDPamountedtoRON628,581.3millionup
fromRON586,749.9millionin2012(up7.1%).AccordingtotheMinistryofFinance,
nominalGDPin2014isexpectedtoreachRON662.3billionupby5.5%from2013(RON
628.6billion.)
TheInternationalMonetaryFund(IMF) upgradedits20142015GDPgrowthforecastfor
RomaniainOctober2014.Particularly,IMFpredictsthatRomaniasGDPwillriseby2.4%
in2014andby2.5%in2015. Also,EuropeanBankforReconstructionand Development
(EBRD)(September2014)upgradedRomaniasGDPgrowthto2.6%in2014whilefor2015
expects GDP to rise by 2.8%. The Government and the National Bank of Romania (NBR)
expectGDPtoriseby2.8%and3.0%respectivelyin2014.Weforeseeeconomytogrow
by2.5%in2014andby2.6%in2015.
Arrangement(SBA).InApril2014,IMFstatedthattheRomanianprogramisontrackand
the structural reform agenda progresses well in the energy and transport sectors.
AccordingtotheIMF,despite2014isanelectionyearforRomania,itexpectsfiscaldeficit
to remain at 2.2% of GDP. In June 2014, joint teams from IMF and the European
Commission (EC) visited Romania to conduct discussions on the third review under the
IMFStandByArrangementandonthefirstreviewofRomaniasprecautionarybalanceof
payments program with the European Union. The mission noted that the Romanian
FISCAL POLICY: According to the Ministry of Finance, the 9M 2014 consolidated budget
turnedintoasurplusofRON419million(95million)or0.06%oftheGDPprojectedfor
2014fromadeficitofRON8.143million(1.837million)in9M2013or1.3%ofGDP.
Budget revenues rose by 5.5% in 9M 2014 y/y to RON 155.4 billion and budget
expendituresfellby0.3%toRON155.0billion.In2013consolidatedbudgetdeficitrose
toRON15.8billion(3.6billion)or2.3%ofGDPfor2013,againstRON14.8billion(
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 EconomicResearch Division
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3.3 billion) or 3.0% of GDP the corresponding period in 2012. Recent Eurostat figures
(ESA95definition)showthatRomaniangeneralgovernmentdeficitin2013cametoRON
14,308million,orat2.3%ofGDP,downfromRON17,548millionorat3.0%ofGDPin
2012.For2014and2015theEuropeanCommissionexpectsdeficittoGDPtofallto2.2%
andto1.9%ofrespectiveGDP(ECSpring2014).Also,basedonEurostatfigures,public
debt in 2013 stood at 38.4% of GDP while in Q2 2014 stood at 38.5% of GDP and
RealGDP(%y/y,unadjusteddata) accordingtotheIMF(October2014),itisexpectedtogrowto39.9%andto39.6%ofGDP
in2014and2015respectively.
5,4
INFLATION:HarmonisedConsumerPriceInflation(HCPI)stoodat1.8%y/yinSeptember
4,1 4,2
3,33,9
1,51,2 1,62,2 1,9 2,1
1,10,7 1,4 1,2
2014comparedto1.3%y/yinDecember2013,whileonaveragestandsat1.4%inthe9M
0,4
2014comparedto3.2%inthecorrespondingperiodof2013.HCPIinflationfelltoits
-0,5 -0,5-1,1 -0,5
-2,2 -1,7 lowestlevelinJune2014at0.9%andsinceAugust2013isemeainingbelow2.0%.
Headlineinflation(CPI)alsoremainedlowat1.5%inSeptember2014from1.6%in
December2013and4.4%inJuly2013afterpeakingat6.0%inJanuary2013.Theheadline
Q1Q2Q3Q4FYQ1Q2Q3Q4FYQ1Q2Q3Q4FYQ1Q2Q3Q4FYQ1Q2Q3Q4FY
inflationrecordedahistoricallowof0.7%inJune2014.DuringQ22014andQ32014,
2010 2011 2012 2013 2014
headlineinflationremainedbelowthelowerboundofthe+/1%variationbandofthe
Source:Eurostat,NationalStatisticalOffice
2.5%settarget.TheinflationreadingsinQ32014werebelowthoseexpectedbyBNRas
expressedintheAugust2014InflationReport.AccordingtoBNR,thetemporarilyvery
lowinflationlevelsaretheresultofoverlappingfavourablesupplyshockswhichalso
manifestthemselvesintheBalkanregioninadditiontotheappreciationofRONinQ2
andQ32014,thegoodweatherconditionsinH12014andthelowinflationinthe
Eurozone.NBRexpectsCPIinflationtoreach2.2%attheendof2014and3.0%attheend
of2015.Therapiddisinflationprocesswassupportiveofthecurrentmonetarypolicy
whichdrovekeyratetoahistoriclowlevelof3.00%.IMF(October2014)envisagesHICP
Industrialproduction(%y/y) average2014inflationat1.5%andat2.9%in2015.
14
13
12
11
Unemployment rate in Romania increased to an average of 7.0% in 2013 compared to
10
9
8
7
6
6.9% in 2012 and 7.1% in 2011 and moreover remained steady at 7.0% in 9M 2014
5
4
3
2
(averageunemploymentrate).InSept.2014unemploymentrateslightlydeclinedto6.9%
1
0
-1
-2
from 7.1% in June 2014. Labour market did not benefit from the high growth of GDP in
-3
-4
-5
-6
2013and2014andaccording toIMF(October2014)unemploymentrateis expectedto
-7
-8
-9
-10
average7.1%in20142015.
-11
-12
-13
-14 BALANCEOFPAYMENTS:Romaniascurrentaccountpostedadeficitof945millionin8M
2014comparedtoadeficitof489millionin8M2013.Thiscameasaresultofa
Source:NationalStatisticalOffice negativeincomebalanceof2,408millionin8M2014comparedtoanegativefigureof
1,371millionin8M2013,thusresultingtoanincreaseintheincomedeficitby1,037.
Goodsandservicesbalancewaspositiveat346millionin8M2014comparedtoadeficit
of529millionin8M2013aidedbyagoodperformanceoftheservicesbalance.In8M
2014,exportsroseby7%y/ywhileimportsalsoroseby6%y/y.Itshouldbenotedthatin
Augustexportsroseby0.6%y/yandimportsfellby3.5%y/yshowingsomeweakness.
Romania'scurrentaccountbalancepostedadeficitof1,505millionin2013(1.1%of
GDP),versusadeficitof5,843millionin2012(4.5%ofGDP)duetothedecreasein
tradebalancedeficitby3,956million,andalsoduetoasurplusinservicesbalanceof
HarmonizedConsumerPriceInflation(%y/y)
2,587millionfromasurplusofjust1,129million,thecorrespondingperiodayear
10,0
9,5 earlier.Thetradebalancedeficitwasreducedto3,423millionin2013(2.4%ofGDP)
9,0
8,5
8,0
7,5
fromadeficitof7,379millionin2012(5.7%ofGDP),duetorobustexports.Romanias
7,0
6,5
6,0
exportsroseby10.0%y/yto49.6billionin2013andimportsroseby+0.3%y/yto55.3
5,5
5,0
4,5
billioninthesameperiod,accordingtotheNationalBankofRomania.Thecurrent
4,0
3,5
3,0
transfersbalanceroseby8.4%y/ywhilethenetforeigndirectinvestmentamountedto
2,5
2,0
1,5
2,713millionin2013from2,140millionin2012.Itshouldbenotedthat,current
1,0
0,5
0,0
AllitemsHICP CoreHICP(excl.energy,food,alcohol,tobacco)
accountbalanceended2013atan23yearlowof1.1%ofGDPafterpeakingat13.4%of
07

08

09

10

11

12

13

14
07

08

09

10

11

12

13
07

08

09

10

11

12

13

14

GDPin2007.AccordingtotheIMF(October2014),thecurrentaccountdeficitis
Sources:Eurostat,NationalStatisticalOffice expectedtoreach1.2%ofGDPin2014and1.7%in2015.
EXTERNAL DEBT: Total external debt at the end of August 2014 fell to 96.75 billion
comparedto98.1billionattheendof2013.Mediumandlongtermexternaldebtatthe
endofAugust2014stoodat77.4billionor80.0%oftotalexternaldebt.Borrowingfrom
theIMFdecreasedto437millionattheendofAugust2014from1.1billionatend
2013. Total external debt fell at the end of 2013 to 96.1 billion from 99.7 billion in
December2012.IntermsofGDP,totalexternaldebtinSeptember2014stoodat64.1%

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 EconomicResearch Division
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from 67.8% in December 2013 and 74.5% in December 2012. The reduction of external
imbalances was one of the main reasons Fitchs recent affirmation of Romanias credit
ratingasBBBwithaStableOutlook.Mediumandlongtermexternaldebtserviceratio
wasat37.0%inJanuaryAugust2014against42.9%in2013.Externaldebtseemedtohave
peakedinRomaniaduring2012andsincethenstartedtodeclinegradually.Finallyatthe
end of September 2014, the National Bank of Romanias foreign reserves (excl. gold)
stood at 31.1 billion from 32.5 billion in December 2013 and 31.2 billion at end
CurrentAccount:JanuaryAugust2014(mn) December2012.
Jan.-Aug.2014 Jan.-Aug.2013 %
Exports (fob) 30.297 28.304 7,0%
Imports (fob) 33.801 31.874 6,0%
MONEY & FINANCIAL MARKETS: In 10M 2014 RON slightly depreciated against Euro on
Trade Balance -3.504 -3.570 -1,8%
Services Balance 3.850 3.041 26,6%
average to 4.44 compared to an average 4.41 in 10M 2013. In particular, the domestic
-Tourism-travel -91 -215 -57,7% currencydepreciatedinnominaltermsagainstEuroby0.7%y/yin10M2014onaverage,
Income Balance -2.408 -1.371 75,6%
Current Transfers Balance 1.117 1.411 -20,8% whileitappreciatedagainsttheUSDollarby1.0%.In2013,RONappreciatedagainstthe
Current Account Balance -945 -489 93,3%
US Dollar and the Euro by 4.1% and 0.9%, respectively (average levels), while in 2012 it
Source:NationalBankofRomania haddepreciatedby13.8%againsttheUSDollarand5.2%againstEuro.Notethatintimes
of tension, the exchange rate RON/EUR went up to 4.5837 (7.6.2013) and 4.5695
(28.1.2014).TheBloombergconsensusforeseestheexchangerateofRON/EURat4.42in
Q4 2014, at 4.42 in Q1 2015 and at 4.40 in Q2 2015. On the other hand, the forward

marketratestandsat4.43inQ42014,risingto4.45inQ22015.TheadequateFXreserves
makeNBR'sanypotentialcurrencyactionjoblesspainful.Thiswillbealsosupportedby
thenewSBA,allowingRomaniatogetaprotectionfacilityof4billionbyinternational
creditors and alleviating fears on the currency front. However, we could not rule out a
majorshockforthedomesticcurrencyifinvestorschangetheirriskprofileforEmerging
MarketassetsespeciallyinEasternEuropeifeventsinRussiaUkrainedisputemoveoutof
MacroIndicators control. It should be mentioned that during the last three years average RON parity
Romania 2012 2013 2014 (f) 2015 (f) againstEURstoodat4.4391,thus,showinganeffortbyRomanianmonetaryauthoritiesto
Real GDP (%) 0.6 3.5 2.1 2.8
Prices
keepdomesticcurrencystable.
HICP Inflation (%Avg) 3.4 3.2 1.6 2.5
TheNationalBankofRomaniaintensifiedthemonetarypolicyeasingcyclesinceMarch
General Government (%GDP)
Overall Balance -3.0 -2.3 -2.5 -2.0 2013byeasingthecontroloverliquidityconditionsinthemoneymarketwhichdrove
Balance of Payments (% GDP) interbankinterestratestosubstantiallylowlevels.Morespecifically,NBRcutagainthe
Current Account Balance -4.4 -1.1 -1.8 -2.0
baserate(keyrate)by25bpsonthe30thofSeptember2014tothehistoricallowof3.00%
Source:AlphaBankEconomicAnalysis
from3.25%whenitwascutagaininAugust2014.NBRjustifiedthisactionbythefactthat
inflationrateremainedonadownwardtrendpathandtemporarilyrunningbelowthe
lowerboundsetfortheinflationtargetbutalsotheupdatedprojectedinflationpathby
NBRwasbelowtheoneenvisagedbytheBankinMay2014.Thethenleadingcandidate
forthePresidencyofRomaniaMr.Ponta,currentlythePrimeMinister,urgedtheNBRto
reduceitsbaseratefurtherpointingto2.75%.Itshouldbenotedthatthemarketseesthe
keyratetoriseupto3.50%by2015.Interbankratesfollowedthedeclineinthebaserate.
ROBOR3Mstoodatanaveragerateof2.44%in10M2014comparedtoanaveragefigure
of3.97%in2013andanaveragerateof5.10%in2012.Currently,on31.10.2014,ROBOR
EuroagainstRON 3Mstandsattheverylowlevelof1.82%suggestingthepossibilityofanothercutinthe
4,60
baserateofRomania.Outstandingdailyaveragevolumeofrepooperationsperformedby
4,55

4,50
NBRstoodatRON1,249millioninSeptember2014fromRON1,907millioninSeptember
4,45
2013andRON1,591millioninDecember2013.
4,40 Recentfigures,referringto9M2014,showthatdomesticcreditexpansion(inEuroterms)
4,35
totheprivatesector(NFCs,householdsandfinancialentitiesotherthanMFIs)declinedby
4,30
4.0%inSeptember2014y/yduetoafallinbusinessescreditby5.7%y/yandanother
4,25
fallincredittohouseholdsby2.1%y/y.Depositsbytheresidentprivatesector(inEuro
4,20
1/1/2013 1/5/2013 1/9/2013 1/1/2014 1/5/2014 1/9/2014
terms)roseinAugust2014by6.7%y/yduetoariseinhouseholddepositsby4.5%y/y
Source:Bloomberg andalsoariseinbusinessdeposits(NFCsandotherfinancialentitiesotherthanMFIs)by
10.2%y/y.Finally,figuresreferringtoQ22014showthatNPLsroseto22.3%ofgross
loansasoftheendofMarch2014upfrom21.9%inDecember2013and18.2%in
December2012.ThebankingsysteminRomaniaiswellcapitalizedwithsolvencyratioat
16.95%asoftheendJune2014(min.8%),whileNPLs(usingthestandardapproachand
internalratingmodels)attheendofJune2014stoodat19.2%downfrom20.4%inMarch
2014andkeptfallinginthesubsequentmonthsto17.2%inAugust2014witha
comfortablecoverageratioof67.8%.BanksinRomaniashowednetprofitabilityin2013
aswellasupto7Mof2014,followingthreeyearsofnetlosses,thankstoaslowdownof
NPLformationcoupledbyenhancedoperatingprofitability.TheRomanianbankingsector
istoundergoanextensiveassessmentfollowingtheRomanianauthoritiesdecisionto

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BUBOR3M jointheBankingUnionandallnecessaryassessments(riskassessment,stresstestsand
7,00
6,50 AssetQualityReview)willtakeplaceduring2015.Thebankingsystemislessexposedto
6,00
5,50
5,00
parentundertakingstotheirsubsidiaries,sincesuchexposuredeclinedby28%since
4,50
4,00 December2012uptoAugust2014.Furthermore,loantodepositratioadjustedtoa
3,50
3,00
2,50
comfortable100.3%inAugust2014from117.4%inDecember2012withthehelpofrising
2,00
1,50
1,00
depositsandadecreaseinforeigncurrencylending.AccordingtotheBNR(Financial
0,50
0,00 StabilityReport,2014)theeconomyhasanimportantandviablepotentialforlendington
28/12/2012

31/10/2013
30/11/2013
31/12/2013

31/10/2014
28/1/2013
28/2/2013
31/3/2013
30/4/2013
31/5/2013
30/6/2013
31/7/2013
31/8/2013
30/9/2013

31/1/2014
28/2/2014
31/3/2014
30/4/2014
31/5/2014
30/6/2014
31/7/2014
31/8/2014
30/9/2014
NFCs.

Source:Bloomberg
2.CYPRUS
ECONOMICOVERVIEW:TheGrossDomesticProduct,basedonseasonallyadjustedfigures,
fellbylessthanexpectedinH12014by3.2%onanannualbasis,whiletheTroika
(July2014)expectedGDPtodropby4.2%forthewhole2014.Thisdevelopmentis
attributedtoasmallerthananticipateddeclineoffinalconsumptioninH12014by
2.4%y/y,ofinvestmentsby2.5%,whileexportsofgoodsandservicesgrewby+0.8%
y/yandimportsby+1.0%y/y.
RealGDP(%y/y,seasonallyadjusteddata)
Amongsectorswhichshowweakness,theconstructionsectorwhichhascontinuously
beendecliningsince2009.Cementsales,whichisanindicatorofthesectors
5 production,declinedby17.7%in9M2014y/yreaching330Ktonescomparedto402
3
1,7 1,6 Ktonesin9M2013.Thedeclinein9M2014wassmallercomparedtothatin9M
0,5
1 2013whichstoodat32.2%.InSeptember2014,thedeclinewasmuchlowerat
-1 -0,4
-0,8
10.8%y/y.
-1,5
-3 -2,5-2,2 -2,5
-3,6
-2,4
Basedontheinformationavailablesofar,andtakingintoconsiderationthefragile
-3,9
-5
-5,0
-5,7
-5,0-5,4 economicenvironmentintheEuroareaduringH22014,GDPdeclinemayreach
-7 -6,0
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY 2.5%basedonapossibledeclineoffinalconsumptionby1.2%y/yandofinvestment
2011 2012 2013 2014 by7.3%y/yundertheassumptionoftheTroikasProgrammebeingfollowed.
Source:Eurostat,CYSTAT ItshouldbenotedthattheMinistryofFinanceduringthepresentationoftheBudget
for2015foreseesadeclineofGDPby3.0%in2014,whiletheIMF(October2014)
changeditsGDPforecastto3.2%.InSept.2014,theEBRDforecastedaGDPdecline
by3.5%andtheUniversityofCyprusEconomicResearchCenteralsoforecasteda
declineofGDPby2.5%in2014(declineby1.9%inQ32014andby1.4%inQ4
2014)andasmallerdeclineby0.4%in2015.Finally,Bloombergconsensusexpects
GDPtodeclineby2.8%in2014(2.2%inQ32014and1.9%inQ42014).
OptimismisprovidedregardingGDPdevelopmentsinQ32014byreleasedfigures
regardingtourism,retailsales,theunemploymentratebeingstabilized,successesin
thefiscalfrontplusthesuccessfulcompletionofbanksrecapitalizationviaprivate
Cementsales(%y/y)
25,0%
funds.
20,0%
18,0%
15,0%
10,0% 10,1%
10,0%
8,4%
Recently,theEurostatrevisionofEUGDPfigures,basedonESA2010methodology,
5,0% 3,4%
0,0%
-5,0%
2,4%
whichreplacedtheolderoneESA95,resultedtoasubstantialupwardsrevisionofthe
-7,2%
-10,0%
-15,0% -13,7% -17,7%
nominalCyprusGDPwithoutaffectingrealGDPbasedon2005figures.More
-20,0%
-25,0%
-30,0%
-25,8%
-32,2%
specifically,thenominalGDPof2010roseby+9.5%comparedtothatreportedunder
-31,5%
-35,0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:9M ESA95andisthehighestrateinEU(+3.7%inthecaseofEUand+3.5%inthecaseof
Source:CYSTAT theEuroarea.Also,thenominalGDPof2013underESA2010ishigherby9.5%orby
1.6billioncomparedtothecorrespondingfigureof2013underESA95andthesame
istruefor2012whereGDPishigherby+9.5%underthenewmethodologyorby
1.7billion.
EurostatandCystatfiguresindicatethatGDPinCyprussince2008andupto2014
takingintoaccounttheTroikaforecastofGDPfor2014,isbyacumulativefigureof
11.9%andsinceCyprusenteredtotheAdjustmentProgramthecumulativedeclineis
estimatedto9.3%(20122014).
FISCALPOLICY:TheupwardnominalGDPrevisionofCyprus,changesthefiscalimageof
thecountrytoamuchbetterlevel,especiallywithrespectthepublicdebttimepath.
Particularly,publicdebttoGDPattheendof2013isestimatedto101.8%from

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111.7%estimatedpreviouslyundertheESA95GDPestimation.Takinginto
considerationtheECforecasts(July2014)forpublicdebtin20142016andthe
nominalGDPunderESA95andassumingrevisedGDPunderESA2010,thedebtto
GDPin2014declinesto109.2%from119.9%estimatedinJuly2014byECandin
2015declinesto113.3%from124.4%forecastedearlier.
Atthesametime,theweightedaveragedurationroseto7.8yearsinJune2014from
4.7yearsin2012,while9.4%oftotaldebtmatureswithinoneyearandwas21.2%in
ConsumerPriceInflation(%y/y) 2012.Alargepartofdebtmaturesin2019(2.3billion)andin2020(2.0billion)
6,0%
whilein20151.3billiondebtmaturesduetothe1.1billionLaikiBankbond.Also,
5,5%
5,0%
4,5%
4,0%
theaverageweightedinterestrateofpublicdebtinQ32014was2.9%from4.2%in
3,5%
3,0%
2,5%
2012and3.0%in2014(MoF,October2014).
2,0%
1,5%
1,0%
0,5%
Thefiscalbalancealsoappearstobeinbettershapetakingintoconsiderationthe
0,0%
0,5%
1,0%
1,5%
upwardsrevisionofnominalGDP.Morespecifically,fiscaldeficitoftheGeneral
2,0%
2,5%
3,0%
Governmentof2013isnowestimatedto5.0%ofGDPcomparedto5.4%basedon
Dec.
06
Dec.
07
Dec.
08
Dec.
09
Dec.
10
Dec.
11
Dec.
12
Dec.
13 GDPfiguresunderESA95.TakingintoconsiderationEC(July2014)forecastsregarding
HICPInflation Headlineinflation
thefiscalbalancein20142016,itappearsthat2014deficitisgoingtobereducedto
Source:Eurostat,CYSTAT
4.8%ofGDPfrom5.3%underESA95methodologyand2015deficitfallsto4.7%of
GDPfrom5.1%whereasthe2015budgetdeficitisestimatedto2.2%from2.4%
undertheoldGDPforecast.
BALANCEOFPAYMENTS:Externalbalancefiguresappeartobelessaffectedbythe
nominalGDPrevision.Morespecifically,currentaccountbalanceof2013fallsto
1.7%ofGDP(ESA2010)from1.9%underESA95,whereasfor2014theestimateis
thesameof0.1%underbothGDPmeasurements.Inasimilarway,currentaccount
balancebecomespositivein2015and2016,risingto+0.2%and0.6%ofGDP
respectivelyunderbothmethodologiesofGDPmeasurement.
MacroIndicators UNEMPLOYMENT:UnemploymentratebasedonCystatfigures,showssignsoftopping
Cyprus 2012 2013 2014 (f) 2015 (f)
during2014asaverageunemploymentrateinH12014stoodat16.2%with
Real GDP (%) -2.4 -5.4 -2.8 0.4
Prices reasonableprospectsoffallingtoanaveragerateoflessthan16%during2014,while
HICP Inflation (%Avg) 3.1 0.4 -0.2 0.7 IMF(October2014)expectsaverageunemploymentratein2014tobeat16.6%and
General Government (%GDP)
Overall Balance -6.4 -4.9 -3.0 -3.0 at16.1%in2015.TheprospectsofunemploymentinQ32014seemtoberather
Balance of Payments (% GDP) positive,asregisteredunemploymentfiguresrelatingtoSeptember2014,suggesta
Current Account Balance -6.6 -1.4 -1.2 -0.6
fallofunemployedpersonsby8.4%onayearlybasis(seasonallyadjusteddata).
Source:EuropeanCommission
Employmentduring2014isdecliningbylowerratescomparedto2013.More
specifically,inH12014employmentfellby0.7%onayearlybasis,whileinQ22014
employmentroseby+0.3%.Thisdevelopmentsuggeststhatemploymentin2014
maydeclinebylessthan2.0%comparedto2013.IMF(October2014)estimated
employmentinCyprusfor2014tobeat355Kpersonsfrom365Kpersonsin2013
(declineby2.7%)andfor2015stayingstableat355Kpersons.IMFestimatesfor
bothunemploymentandemploymentaresomewhatlessoptimisticfromthosewhich
comefromH12014performance.
Unemploymentrate(%) BANKINGSECTOR:Thefinancialsystemwasoneofthemainsectorsalongsidewiththe
18
17 constructionsectormostaffectedbytherecentcrisis.Thefinancialsystem
16
15
14 contractedsignificantlyduring20132014,capitalcontrolswereimposedinthe
13
12
11 movementofcapitalandsubstantialamountswereneededtorecapitalisethe
10
9
8
domesticbankingsector.Theneedforrecapitalisationbecameevidentastheresult
7
6
5
ofrisingNPLsfiguresandbiglossesfrominvestmentsinGGBsaffectedbythePSIof
4
3
2
2012.HellenicBanksuccessfullymanagedtoberecapitalisedbyownmeanswith
2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 2013Q3 2014Q2

fundscomingfromtheprivatesector,whileBankofCyprusneededabailininorder
Source:CYSTAT toberecapitalisedbyover4billionafterhavingabsorbedthegoodpartofLaiki
Bank.Cooperativebanksneeded1.5billiontobefullyrecapitalizedandthisamount
camefromtheCyprusEconomicPackageof10billionallocatedbytheTroika.
During2014,BankofCyprus,actingproactively,managedtoraisefromthe
internationalmarkets1billion,whiletheHellenicBankhassetforwardaplanto
raiseextracapitaltocoverwhateverisnecessaryaftertheannouncementofAQRand
stresstests.InthesharecapitalofBankofCyprus,EBRDhasashareof5.1%,

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 EconomicResearch Division
November2014No86

contributingwitharound115million.ThesuccessfulcapitalincreaseofBankof
Cypruswhichattractedstronginternationalinstitutionalinvestorsindicatesthatthe
confidencetoCyprusauthoritiestocontinuetheAdjustmentProgrammehasbeen
restored.BankofCypruswillgetanewBoardofDirectorsonNovember20th,2014
representingthemajorchangeittookplacelastsummerwithanewCEOproposal
(formerCEOofDeutscheBank)andamongthemainaimstoenlistthecompanyin
theCyprusStockExchange,sinceitwasdelistedinMarch2013.Atthesametime,
BankofCyprustriestoreduceEurosystemdependencesuccessfullysofar(8.80
HousePrices(%y/y)
28,0%
billioninSept.2014from9.63billioninAug.2013and11.49billioninSept.2013).
23,0%

18,0%

13,0%
CyprusmonetaryauthoritieshavefocusedtheirattentioninreducingNPLs,which
8,0%

3,0%
reached47.9billionattheendofAug.2014or47.6%ofgrossloans.NPLsin
-2,0%

-7,0%
Cooperativebanksstoodat53.1%ofgrossloansinJune2014comparedto44.7%of
-12,0%
allothercommercialbanksand46.5%forthewholeCyprusbankingsystem.
2007:Q1

2007:Q3

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

Cyprus Dwelling Prices General Index (% annual change) 4 MA

Asfarascooperativebanksareconcerned,strictconditionswereplacedforNPLs.
Source:BankofCyprus
ThetargetofNPLs(90dayspastdue)wassetnottoexceed60%uptotheendof
2017andtheamountofNPLstodeclineto4.5billionfrom6.285billioninJune
2014.Moreover,CoreTier1shouldrisetoover15%in2017from13.6%inJune2014
andleverageratiotofalltolessthan10%.Branchnetworkisenvisagedtodeclineby
13%andthenumberofemployeesby5%.Untilmid2014,thenumberof
CooperativeBankswasreducedto18from93beforethecrisis.
Theabovepositivedevelopmentsinthebankingsectorcoupledbythegoodresults
regardingtheAQRandstresstestswillspeedupthecapitalmovementliberalisation.
DepositsandLoansOutstanding(EURbn) CapitalcontrolshavealreadybeenabolishedinsideCyprusandonereasonforthe
75,000

70,000
69,940 69,298
72,467 delayintheabolitionofcapitalcontrolsregardingoutsidetheislandisthedelayin
68,574 70,157
65,000

60,000
56,009
58,155 61,475
63,598
59,776
thefulfillmentoftheEconomicProgramprerequisiteregardingforeclosures,asthe
57,874
55,000

50,000
52,514
54,443

46,993
fifthReviewoftheProgramwascompletedintheendofJuly2014.TheLaw
governingforeclosureswasvotedintheCyprusParliamentonthe6thofSeptember
45,969
45,000
43,099
40,000 41,020
38,073
35,000

30,000

25,000
28,062
31,417
2014withanoverwhelmingmajoritybutCypruscreditorsexpressedsomeobjections
DEC.05 DEC.06 DEC.07 DEC.08 DEC.09 DEC.10 DEC.11 DEC.12 DEC.13 SEPT.14

Total Deposits Total Loans oncertainarticlesoftheLawandthereforethePresidentoftheCyprusRepublicsent

Source:BankofCyprus theLawtotheSupremeCourtforafinalverdict.Theobjectionsarethefollowing:
Certainconditionsreferringtorescindingfromgettingduepayments,firsthomeand
professionalhomeprotection.
Certainarticlesreferringtotherelinquishmentofguarantorsfromtheprovisionof
guaranteeorduepaymentevenafterthesaleofmortgagedproperty.
Certainarticlesreferringtotherelinquishmentofdebtorandguarantorsfromthe
provisionofguaranteeorduepaymentevenafterthesaleofmortgagedproperty.
Nonperformingloans
CertainarticlesextendingtheperiodoftheStartingoftheLawreferringtoDwelling
30,0 60,0%
28,0
26,0
26,1
27,8 28,0 27,9
55,0%
50,0%
MortgagingandTransfer.
24,0 45,0%
22,0
20,0
41,7%
46,5% 46,9% 47,7%
40,0%
35,0%
ThePresidentoftheRepublicofCyprushasdecidedtorefertheabovelegislative
18,0
16,0
27,2%
15,5
30,0%
25,0%
proposaltotheSupremeCourt.Marketexpectsthatacompromisewillbeachieved
14,0
12,0
14,2%
18,1%
11,0
20,0%
15,0% andthenewLawonforeclosureswillbeacceptedbytheTroikaandwillbeenforced
10,0 10,0%
8,0
6,0
8,6 5,0%
0,0%
asof1.1.2015.Thisdevelopmentwillunfreezethedisbursementoftheamountdue
2010 2011 2012 2013 2014. 2014. 2014.
toCyprusbyESM(350million)andIMF(86million).Cyprushasreceiveduntil
NPLs( bn)(LHS) NPLsRatio(%)(RHS)
todayatotalof5,771millionoutofthe10billionpackage(5,350millionfrom
Source:BankofCyprus
ESMand421millionfromIMF).

3.BULGARIA
ECONOMIC OVERVIEW: Gross Domestic Product (seasonally adjusted) expanded by +1.8%
y/yinQ22014aftergrowingby+1.5%y/yinQ12014thusshowinggrowthby+1.7%y/y
in H1 2014. GDP in Q2 2014 rose by 0.3% compared to Q1 2014 suggesting possibly a
deceleration of GDP growth during 2014. According to the National Statistical Institute,
GDP for Q2 2014 at current prices amounted to BGN 19,215 million whereas the Gross

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November2014No86

ValueAdded(GVA)atcurrentpricesamountedtoBGN16,423million.Theservicessector
has the largest share, of 61.2%, in total value added, followed by the industrial sector
(34.0%)andtheagriculturalsector(4.8%).Inrelationtotheseasonallyadjusteddata,the
GDPgrowthrateinQ22014hadanincreaseof0.5%comparedwiththepreviousquarter.
AccordingtoflashestimatesofGDPbyfinalexpenditureinQ22014,majorcontributionto
thegrowthregisteredwasattributedtotheexportofgoodsandserviceswhichincreased
by1.0%,togrossfixedcapitalformationincreasingby0.8%andtoindividualconsumption
increasing by 0.1%. During Q2 2014 GDP at seasonally adjusted figures rose by 1.6%
compared to the same quarter of the previous year. On expenditure basis, the final
RealGDP(%y/y,seasonallyadjusteddata) consumption registered an increase as individual and public consumption rose by 1.9%
and0.3%respectively,comparedtothesamequarterofthepreviousyear.Additionally,
3,7
grossfixedcapitalformationrecordedanincreaseby3.9%comparedtothesamequarter
1,51,52,30,91,6 0,80,70,60,8 1,6 a year ago while exports & imports of goods and services rose by 2.9% and 1.0%
0,0 0,2 0,5 0,40,40,91,20,71,2

-0,4
correspondingly. Stronger GDP growth could be achieved by a better exploitation of
-1,9
availableEuropeanUnionfunds,whichcanaddtoGDPuptoextra3percentagepointson
themediumterm(IMF).BulgarianGDPatcurrentpricesin2013amountedtoBGN78,115
million or 39,940 million compared to BGN 78,079 million or 39,926 million in 2012
Q1Q2Q3Q4FYQ1Q2Q3Q4FYQ1Q2Q3Q4FYQ1Q2Q3Q4FYQ1Q2Q3Q4FY
anditisexpected(IMF,October2014)toriseto40,031millionin2014.
2010 2011 2012 2013 2013

Source:NationalStatisticalInstitute In the first eight months of 2014, industrial production rose strongly by +2.4% y/y
comparedtoafallby1.3%y/yinthesameperiodin2013.Thiswasduetotheaverage
riseintheproductoftheminingandquarryingsectorby+4.3%y/ytogetherwitharisein
themanufacturingoutputby3.45%y/ywhiletheproductionofelectricityandgassector
fell by 0.85% y/y. In the last three months (JuneAugust 2014) industrial production
declinedby0.5%y/ysuggestingaweak3Q2013andpossiblyaweakQ42014.In2013,
the manufacturing sector grew by an average of +0.8% compared to a rise by +0.2%
during2012andtheelectricitygaswatersectoralsoroseby+1.5%comparedtoadecline
Industrialproduction(%y/y) by0.9%in2012.Finallytheminingandquarryingsectordeclinedby5.8%in2013after
18
16
alsodecliningby2.0%in2012.
14
12
10
8
TheGovernmentofBulgariaexpectsGDPtoriseby+2.1%in2014,2.6%in2015and3.4%
6
4
2
in2016butaccordingtoIMF(October2014)GDPisexpectedtogrowabitlower,i.e.by
0
-2
-4
+1.4%in2014andfasterby+2.0%in2015and2.5%in2016.Similarly,EBRD(May2014)
-6
-8
-10
expectsGDPgrowingby+1.9%in2014and+2.0%in2015aftergrowingby+0.9%in2013.
-12
-14 According to EBRD (September 2014), economic growth this year will be lower at 1.5%
-16
and at 2.0% in 2015. The European Commission (Spring 2014 Forecasts) expects GDP
1/12/2009

1/12/2011

1/12/2013
1/8/2010

1/4/2011

1/8/2012

1/4/2013

1/8/2014

growthtoreach+1.8%in2014andriseto+2.0%in2015,drivenbydomesticdemandas
Source:NationalStatisticalInstitute netexportsareseentohaveaneutralcontributiontoGDPgrowth.Bloombergconsensus
forecast (October 2014) suggests GDP growth by 1.5% in 2014, rising faster to 2.0% in
2015 and 2.4% in 2016. We foresee Bulgaria's GDP growth to expand by +1.6% in 2014
andby+2.0%in2015,mainlysupportedbyprivateconsumption.Itshouldbementioned
thattheforecastsaresubjecttoadownwardrevisionincasethetensionbetweenRussia
andUkrainespillsoverEuropeandgenerategassupplydisruptions.
UNEMPLOYMENT: According to Eurostat, in September 2014, the number of unemployed
Retailsales(%y/y) peopleinBulgariafellto377,000personsdownfrom432,000personsinSeptember2013,
30 whereasunemploymentratewasstandingat11.3%inSeptember2014downfrom12.8%
25

20
inSeptember2013.The figuresshowsomedecreaseinunemploymentduringthe nine
15
month period 2014. Nevertheless, the labour market in Bulgaria remains fragile as
10 average 9M 2014 unemployment rate stood at 11.7%. The developments in 2014 were
5
betterthanthoseforecastedbybothECandIMF.AccordingtoEC(Spring2014Forecast)
0

-5
unemploymentratewillremainhighintheperiod20142015,decliningfromanaverage
-10 rateof13.0%in2013to12.8%in2014andslightlylowerto12.5%in2015.IMF(October
-15
2014) also expects average unemployment rate at 12.5% in 2014 and at 11.9% in 2015.
TheGovernment(Europe2020:NationalReformProgramme)alsoseesaverygradualfall
Source:NationalStatisticalInstitute
intheunemploymentrateto10.9%in2017from13.0%in2013.Basedontheinformation
of9M2014,averageunemploymentratein2014maybearound11.6%fallingtolessthan
11%in2015,whichisinlinewiththeBloombergOctober2014consensusforecast.

FISCALPOLICY:AccordingtotheMinistryofFinance,consolidatedbudgetdeficit

widenedto758.3millionin9M2014(1.9%ofGDP)fromadeficitof226.4

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 EconomicResearch Division
November2014No86
millionayearearlier(0.6%ofGDP).Budgetrevenuesfellby9.2%y/yto11billion
andexpendituresalsofellby4.6%y/yto11.4billion.AccordingtoEurostat(April
2014)generalgovernmentbudgetdeficitin2013stoodat602.2millionorat1.5%
ofGDPupfrom309.0millionor0.8%of2012GDP.Similarly,theconsolidated
budgetdeficitin2013onacashbasisroseto740million(1.8%ofGDP)upfrom
179millionin2012(0.5%ofGDP)anditwasnegativelyaffectedbyanincreaseof
9.2%inexpenditurescoupledbyaslowerriseinrevenuesby+5.5%thoughbelowthe
Unemploymentrate(%) ceilingwhichwassetbytheGovernmentat2.0%ofGDPor820million,inthe
14,0%
Budgetof2013.Ontherevenueside,thebiggestitem,whichistaxreceipts,stoodat
13,0% 11.4billionor1.9%lowerfromtheBudgetsettargetandthiswaspartiallycovered
12,0%

11,0%
byarise+4.5%ofnontaxrevenuesto2billion,afigurehigherthanthetargetset
10,0% bytheState.TheGovernmentnowexpectsbudgetdeficitonacashbasistoriseto
9,0%

8,0%
4%ofGDPin2014andonanaccrualbasis(EUdefinition)to3.6%duetotheneedto
7,0%
recapitalizethefailedbankKTB.NotethatIMF(Oct.2014)wasalsoexpectingariseof
6,0%

5,0%
deficittoGDPin2014at2.7%ofGDPonacashbasis,aratherlowfigurecomparedto
Dec.08

Dec.09

Dec.11

Dec.12

Dec.13
Jun.09

Jun.10

Jun.11

Jun.12

Jun.13

Jun.14
Dec.10

theestimateoftheGovernment.
Source:NationalStatisticalInstitute Fiscalreserveintheendof2013stoodatthesatisfactorylevelof2.4billionabove
thetargetof2.3billionsetbytheGovernmentandinSeptember2014furtherrose
to 4.2 billion from 3 billion In May 2014 due to EU transfers. Fiscal reserve
includedreceivablesbyEUstoodat4.5billionattheendofSeptember2014.
AccordingtoEurostat(April2014),publicdebtroseto7,532.9millionintheendof
2013orto18.9%ofGDPfrom7,356.6millionor18.4%ofGDPin2012.Thepublic
debt breached the limit set in the Budget Law of Bulgaria at 7.5 billion. In fact,
publicdebtfurtherroseto8,445millioninQ22014orto21.1%ofGDPaccordingto
Eurostat(Oct.2014)andstillisthesecondlowestamongEU28countries.Publicdebt
CurrentAccount:JanuaryAugust2014(mn)
Jan.-Aug.2014 Jan.-Aug.2013 %
is expected to rise further during 2014 due to the cost of supporting KTB and may
Exports
Imports
14.264
16.126
14.687
16.086
-3%
0%
reach25.2%ofGDP,stayingat25.1%ofGDPin2015(IMF,Oct.2014).
Trade Balance -1.861 -1.400 33%
Services Balance 1.885 1.807 4% INFLATION: Theharmonizedconsumerpriceindex(HICP)declinedbyanaverageof
Income Balance -788 -977 -19%
Current Transfers Balance 1.573 1.827 -14% 1.5% y/y in 9M 2014, and since August 2013, for 14 consecutive months, is on a
Current Account Balance 809 1.258 -36%
negative ground suggesting a mild deflation. The harmonised consumer price index
Source:BulgarianNationalBank
(HICP)rosebyanaverage0.4%y/y,in2013fromariseby2.4%in2012.Inasimilar
manner,headlineCPIinflationincreasedin2013by0.9%y/yonaveragefromarise
by 3.0% in 2012, being negative since Aug.2013. In September 2014 HICP and CPI
inflation stood at 1.4% y/y and 0.8% y/y respectively. Average 9M 2014 inflation
basedonHICPandCPIindicesstoodat1.5%and1.7%correspondingly.Ananalysis
ofCPIfiguresduring9M2014revealsthatthedeclineinthepricesduring2014can
beattributedtothedropoffoodpricesbyanaverageof1.1%y/yaswellasthedrop
of housing, water, electricity & gas by 4.0%, as well as, the decline of transport &
MacroIndicators communicationpricesby2.1%y/yand2.4%y/yrespectively.Positivegrowthwas
Bulgaria 2012 2013 2014 (f) 2015 (f) registered in the alcohol and tobacco prices (+1.2%), as well as, in the education
Real GDP (%) 0.8 0.9 1.6 2.0 (+1.4%) and alcoholic beverages and tobacco prices (+1.2%). The lowgrowth
Prices
HICP Inflation (%Avg) 2.4 0.4 -1.4 0.9 environment and decreases in the administratively set energy prices have kept the
General Government (%GDP) averageannualrateofHICPinflationinanegativeterritory.Theoverallpictureduring
Overall Balance -0.8 -1.5 -2.1 -1.9
Balance of Payments (% GDP)
2013 and 9M in 2014 leads to lower inflation estimate for 2014. IMF (Oct.2014)
Current Account Balance -1.3 1.9 -0.3 -1.8 forecastsHICPinflationin2014toaverageat1.2%andat+0.7%in2015.
Source:AlphaBankEconomicAnalysis
BALANCE OF PAYMENTS: Thecurrentaccountbalanceadjustmenthasbeensustainedover
thelastfiveyearsandisanticipatedtoremainbroadlybalancedinthenearfuture.Sofar
in8M2014,thecurrentaccountshowedasurplusof808.8millionor+2.0%ofGDPfor
2014,comparedtoasurplusof1,257.7millionor+3.1%ofGDPin8M2013.Thiswas
mainlytheresultofalargertradedeficit,whichroseby+32.9%y/yto1.9billionfrom
1.4billionin8M2013.Inthecapitalaccount,netFDIinBulgariain8M2014amountedto
1,105million(2.7%ofGDP)comparedto1,059million(2.6%ofGDP)in8M2013.The
largestpartofFDIinflows,totaling1,221million,whichwerehigherby4.0%compared
tothesameperiodoflastyear,cameintheformofothercapitalamountingto891.1
millionfollowedbyequitycapitalamountingto223.7millionandbyreinvestedearnings
amounting to another 106.6 million. FDIs during 8M 2014 seem not to have been

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November2014No86

affectedbypoliticalinstabilityinBulgariathisyearcomparedtothesameperiodof2013.
EXTERNAL DEBT & INT. RESERVES: Totalgrossexternaldebtstoodat37,335millionatthe
endofDecember2013(93.6%ofGDP)from37,635million(94.3%ofGDP)attheend
2012.IntheendofAugust2014,totalgrossexternaldebtamountedto38,202million
(94.3%ofGDP)upby2.3%fromend2013.TheratioofforeignreserveswiththeCentral
Banktoshorttermdebtwas148.7%atendof2013from144.7%attheendofDecember
2012.GrossexternaldebtpracticallyremainedalmoststableuptoAugust2014.
MONEY & FINANCIAL MARKETS:Bulgariacontinuesthecurrencyboardregime,peggingthe
HarmonizedIndexofConsumerPrices Bulgarian Lev (BGN) to the Euro at a fixed exchange rate of 1.95583 BGN to 1 Euro.
(%y/y) Although the country fulfils the criteria for joining ERM II, the Eurozone waiting room,
6%
BulgariaisnotintendingtomakeanymovetowardsEuroadoptionwithinthenextyears.
5%
4% DomesticdemandforcreditremainedsubduedamidhighunemploymentandweakGDP
3% growth. In September 2014, credit expansion rose faster, by +2.7% y/y, compared to a
2%
1%
marginal rise by +0.2% y/y in December 2013 and +2.8% annual growth in December
0% 2012.Businessfinancinggrewby+4.0%y/yinSeptember2014fromariseby+0.1%y/yin
-1%
December2013andcredittohouseholdsalsoroseby+0.1%y/yfromamarginaldecline
-2%
-3% by 0.2% y/y in December 2013. In September 2014, consumer credit remained
2009 2010 2011 2012 2013 2014
unchangedfromariseby+2.2%y/yinDecember2013andmortgagesalsogrewby+0.2%
Source:Eurostat
after declining by 1.2% y/y in December 2013. Deposits grew by 6.9% y/y in August
2014 via strong growth of household deposits (+7.8% y/y). As a result, the loan to
deposit ratio rose to 97.8% in August 2014 from 96.6% in December 2013. The
bankingsectorhasmanagedtopreserveitsstabilityuntilmidJune2014.Thesudden
collapseofthefourthlargestdomesticlender,CorporateCommercialBank(KTB),and
the subsequent pressures on the First United Bank(third largest lender in Bulgaria)
affected market confidence towards the Bulgarian banking system. BNB decided to
HousePriceIndex temporarilycloseKTBandtransferitshealthyassetsanddepositstoanotherbankof
116 theKTBgroup,CreditAgricoleBulgaria.Also,BNBpromisedtorecapitalisethebank
114
112
110
with 1.4 billion and this will affect budget deficit and debt of 2014. Based on
108
106
104
information regarding 2013, the average quality of banks' loan portfolio also
102
100 remainedbroadlyunchanged,withthenonperformingloans(NPLs)ratiostandingat
98
96
94
16.9%inQ42013from16.6%intheendof2012and15.0%intheendof2011after
92
90
88
peakingat17.2%inQ32013.ThestockofNPLsattheendof2013wasroughlylower
86
84 compared to the one at the end of 2012. Also, coverage ratio (accumulated
provisionsovertotalstockofNPLs)improvedfurtherduring2013reaching72.9%in
Source:NationalStatisticalInstitute
endof2013upfrom70.5%in2012and68.8%in2011.Bankprofitabilityamounted
to258millionlowerby3.8%from2012,thereforeresultingtoaratherlowROEof
4.9% (5.3% in 2012) and also low ROA of 0.6% (0.7% in 2012). Overall banking
profitability in 2013 was impacted from lower net interest margin falling to 3.3% in
2013from3.6%in2012and4.2%in2011theresultoflowerloanactivityplusrising
deposits coupled by sizeable provisioning charges introduced in order to raise
coverage ratio. The Bulgarian banking system was well capitalised as regulatory
capitaladequacyratiointheendof2013reached17.0%comparedto16.6%in2012
SOFIBOR3M and 17.6% in 2011. Also, Tier 1 capital ratio was standing at 16.0% in 2013 from
1,00

0,90
15.1% in 2012 and 15.7% in 2011. Finally, liquidity continued to ensure adequate
0,80 coverageofattractedfundsandnormalintermediationduring2013,asliquidityratio
0,70

0,60
stoodat27.0%intheendof2013upfrom26.0%in2012and25.5%in2011.More
0,50 recent figures referring to Q2 2014 did not show any significant change in the
0,40
Bulgarianbankingsystem.Totalcapitaladequacystoodat21.2%inQ22014andTier
0,30

0,20 1 ratio at 19.2%. Preprovision results showed profitability and stability in the
29/12/2012

31/10/2013
30/11/2013
31/12/2013

31/10/2014
29/1/2013
28/2/2013
31/3/2013
30/4/2013
31/5/2013
30/6/2013
31/7/2013
31/8/2013
30/9/2013

31/1/2014
28/2/2014
31/3/2014
30/4/2014
31/5/2014
30/6/2014
31/7/2014
31/8/2014
30/9/2014

provisioncharges,thussuggestingincreaseprofitpotentialinthefuture.Infact,ROE
stoodat4.9%andROAat0.6%inH12014excl.KTB.AlsoNPLs(excl.KTB)inQ22014
Source:Bloomberg stoodat18%withprovisioncoverageat55.8%.Untilrecentlythebankingsectorwas
under a process of consolidation, as local banks acquired the subsidiaries of two
foreign banks in 2013 and this trend may accelerate in the light of recent
developments. Note that as of end of March 2014, based on assets, 67.8% of the
BulgarianbankingsystemwascontrolledbyEUbankinginstitutions,leaving30.8%to

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domestic banks. Finally, according to BNB, at the end of September 2014 the
Bulgarian banking system (excl. KTB) remained stable registering growth and good
Nonperformingloans financial results. Liquidity (liquidity ratio) reached 29.84% and net profit in the 9M
20,0% 2014roseto316millionwithROAat1.03%.TheBulgarianmonetaryauthoritieswill
18,0%

16,0%
trytotackletheKTBprobleminadecisivemannerintheimmediatefuturewiththe
14,0% helpofEBAandEUsothattheBulgarianbankingsystemisrepairedfromthedamage
12,0%

10,0%
comingfromthefailureofKTB.
8,0%

6,0%

4,0%

2,0%

Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014

4.SERBIA
Source:BulgarianNationalBank ECONOMICOVERVIEW:AnIMFteamisduetoarriveinSerbiatorevieweconomicandfiscal
policies,pavingthewayforanewstandbyprecautionaryloanfor34years.Serbiawants
to sign an agreement with IMF as soon as possible according to Serbias PM. The PM
stressed the need for Serbia to put reforms into place in the next three years with the
highimpact package of measures in 2015. The Government is trying hard to restore
production levels to those experienced in last June and intends to fiscal consolidation
aiming to stronger FDIs. According to the PM, Serbia has struck agreement on most
economicissueswithIMFandnowtheIMFteamwillhavenomajorproblemsindealing
with Serbias issues. Serbian elections, which took place in March 2014, allowed
ProgressivesPartytobethewinnerwithanabsolutemajorityintheParliamentandthe
RealGDP(%y/y,unadjusteddata) aimnowistospeedupreforms.TheformationofthenewGovernmentwasdelayedas
18 thewinningpartytooktheopportunitytoformabroadercoalitionGovernmentsoasto
16
14 concludethenegotiationswithIMFearlyinautumn2014.Serbiaisexpectedtofollowa
12
10
8
fiscalconsolidationprogramwiththeassistanceofIMFandEUasthecountryaimstobe
6
4
anEUmemberby2020.
2
0
2
GDP declined by 3.7% y/y in Q3 2014 affected by the severe floods and political
4
6
indecision,followingashallowerdeclineby1.1%inQ22014y/yandamarginalgrowth
8
10
by +0.1% in Q1 2014 y/y. Therefore, the overall decline of GDP during 9M 2014 is
1/12/2000

1/11/2003

1/10/2006

1/12/2007

1/11/2010

1/10/2013
1/7/2001
1/2/2002
1/9/2002
1/4/2003

1/6/2004
1/1/2005
1/8/2005
1/3/2006

1/5/2007

1/7/2008
1/2/2009
1/9/2009
1/4/2010

1/6/2011
1/1/2012
1/8/2012
1/3/2013

1/5/2014

estimated to 1.6% y/y, a figure which is higher than the recently forecasted (by IMF,
EBRD and the Serbian Government) fullyear 2014 GDP decline by 0.5%. It should be
Source:NationalStatisticalOffice
notedthat,theSerbianeconomyexpandedbyreal2.7%y/yinQ42013,withtherevised
fullyear growth figure at 2.6% following a decline by 1% in 2012. The Serbian
GovernmentexpectsGDPtoremainstagnantin2015andIMF(October2014)appearsto
bemoreoptimisticsuggestingagrowthrateof+1%withEBRDbeingevenmoreoptimistic
(+2.0%). Also, Bloomberg consensus (October 2014) expects GDP to decline by 0.9% in
2014 and grow by +1% in 2015 and faster, by +1.9%, in 2016. The 2014 GDP estimate,
reportedbyBloomberg,seemstobeclosertotheoutcomeoftheyear,whichmayshowa
GDP decline by 1%, a new estimate also adopted by the Government following the
releaseofQ32014GDPfigures.AccordingtotheNationalBankofSerbia(NBS),thetotal
damagetotheeconomyfromthefloodsduringlastMayisestimatedtobearound1.5
Industrialproduction(%y/y) millionwithaheavytollonelectricityproduction,miningandagriculture.Thistranslates
14
12
to a 0.9 pp negative contribution to GDP but on the other hand the reconstruction of
10
8 damagedinfrastructurewilladdanother0.3pptoGDPandthuswillresultinanoverall
6
4
2
GDPdeclineby0.5%forthewhole2014.Thenewagriculturalseasonthatfollowedthe
0
floods and the governments program to subsidise interest on bank loans for those
1/12/2009

1/12/2010

1/12/2011

1/12/2012

1/12/2013
1/3/2010
1/6/2010
1/9/2010

1/3/2011
1/6/2011
1/9/2011

1/3/2012
1/6/2012
1/9/2012

1/3/2013
1/6/2013
1/9/2013

1/3/2014
1/6/2014
1/9/2014

2
4
6 companiesthatsufferedfromthenaturaldisaster,mightbothbeatemporaryreliefinthe
8
10 economy.
12
14
16 Theindustrialproductionfellby5.3%y/yonaveragein8M2014underpinnedbythe
18
20 flooddisasterthatoccurredinmidMay.Thedamageintheminingsectorwassizeable;its
Source:NationalStatisticalOffice outputfellby13.9%y/yin8M2014withmanufacturingoutputalsodownby0.9%y/yin
thesameperiod.ThenaturaldisasterinSerbiawassostrongandresultedtoafallin
industrialproductionduringMayAugust2014by11.7%y/ydraggingdownthepositive
(+2.7%y/y)industrialperformanceregisteredintheperioduptoMay2014.Anumberof
companiesreducedtheirproductioncapacity(electricalmachinery,FIATautomobiles,
coke)althoughsomeothers(tobacco,wood,leather)keptadecentperformance.It
shouldbenotedthat,theindustrialproductionincreasedby+5.5%in2013comparedtoa
fallby3.5%in2012.During2013,manufacturingproductionroseby+4.9%y/yafter

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November2014No86

havingdeclinedby0.9%in2012andelectricityandgasproductionroseby+8.1%after
havingdeclinedby7.1%in2012whereasminingoutputgrewby+5.5%afterbeing
stagnantin2012.
FISCAL POLICY:Serbiasconsolidatedgeneralgovernmentdeficitroseby25.7%y/ytoRSD
103.8billion(896million)inH12014andrevenuesroseby4.2%toRSD721.7billionand
expendituresby6.5%toRSD825.5billion.Theriseinexpenditurescanbeattributedto
higherinterestpayments,whichroseby38.2%y/yorbyalmostRSD20billionaswellas
by capital expenditures which rose by 26.8% y/y or by almost RSD 10 billion. On the
revenue side, tax revenues rose by 5.2% y/y to RSD 649.9 billion positively affected by
Retailsales(%y/y) corporatetaxationrevenueswhichroseby53.9%orbyalmostRSD16billionandalsoby
10
8
6
increased social contributions which rose by 8.3% y/y or by almost RSD 16 billion.
4
2
AccordingtotheNBS(InflationReport,August2014),Serbiasbudgetdeficitaspercentof
0
-2 GDPstoodat6.0%inH12014,comparedto5.0%ofGDPin2013asawholeandgiven
-4
-6
-8
theflooddamageeffectsonthebudgetdeficitin2014willrisefurtherifnoconsolidating
-10
-12
measuresarenottakensoon.AccordingtotheMinisterofFinance,Serbiawilltakethree
-14
-16 years to get its budget and public debt on a sustainable track. Serbia's consolidated
-18
-20 general government budget deficit declined by 17.9% y/y to RSD 178.7 billion ( 1,580
million) in 2013 as revenue growth partly offset expenditure rise. According to the
Source:NationalStatisticalOffice Ministry of Finance (MoF), the 2013 budget deficit accounted for 5.0% of GDP, down
from6.6%ayearearlieranditcoveredallthe2013revisedsettargetofRSD178billion
(RSD122billionoriginally).ThebudgetgapceilingsetbytheParliamentat5.2%wasmet
bythefinalbudgetoutcomeof2013.Thebudgetrevenueincreasedby4.4%y/ytoRSD
1,467.9 billion in 2013 mainly due to higher tax revenue by 5.8%. Expenditure rose by
1.4%in2013toRSD1,646.5billionduetohigherwagesandsalaries(up4.8%y/y).VAT
grewby3.6%toRSD380.6billionin2013,reflectingthe2ppsriseinnonfoodVATto20%
inOctober2012andexcisesroseby13.1%toRSD204.8billion.Additionally,incomefrom
profittaxroseby10.6%y/ytoRSD60.7billion.Expendituregrowthwasalsoaffectedby
MacroIndicators
rising interest expenditure by 38.6% to RSD 94.5 billion. In the Fiscal Strategy for 2014
2012 2013 2014 (f) 2015 (f)
2016,theMoFhavingassumedconsolidationmeasuresaretaken,expectsbudgetdeficit
Serbia
Real GDP (%) -1.7 2.5 -0.4 0.3 to be at 5.5% of 2014 GDP going lower to 4.2% in 2015 and to 2.3% in 2016. IMF
Prices (October2014)alsoexpectsbudgetdeficittoGDPtobeat5.6%in2014goingdownto
Consumer Price Inflation (%Avg) 7.3 7.8 3.6 4.5
General Government (%GDP)
4.9% in 2015 and to 3.6% in 2016. The October 2014 budget revision assumed budget
Overall Balance -6.4 -5.0 -7.1 -5.8 deficit to GDP to be at 7.6% in line with the Fiscal Council estimate provided for the
Balance of Payments (% GDP) consolidated budget deficit of 2014, which include many oneoff items. Given the new
Current Account Balance -10.6 -5.2 -5.8 -6.5
estimatesforGDPdevelopmentsduring2014wealsoforeseethisyearsfiscaldeficitto
Source:AlphaBankEconomicAnalysis
be at over 7.0% of GDP assuming consolidation measures start to operate as soon as
from autumn of 2014. As of end of September 2014, according to the MoF, public debt
amountedto22.1billionor66.8%ofGDPcomparedto20.1billionor59.6%ofGDPin
theendof2013and17.7billionor56.2%ofGDPintheendof2012.Accordingtothe
FiscalCouncil,publicdebtin2014mayriseto23billionortoaround70%ofGDP.Also,
publicdebtisexpectedtoreach70.7%ofGDPin2014and74.4%in2015accordingtoEC
(Spring 2014) up from 59.6% in 2013. Similar assessment is provided by IMF (October
2014)expectingSerbiasdebttoGDPtoriseto75.6%in2014andto79.6%in2015.The
ConsumerPriceInflation(%y/y)
recentfloodsandthedelaysinthenewGovernmentdecisionspointtoahigherdebtto
16
14
GDP in 2014 even to 71% and further higher to 75% in 2015 before the effects of the
12 measuresstarttotakeplaceinameaningfulway.
10
8 INFLATION:Serbia'sannualCPIinflationdeceleratedto2.2%inDecember2013from4.9%
6
4
inSeptember2013and12.8%inJanuary2013.Thedecelerationofinflationcontinuedin
2 thefirstninemonths of2014andin June2014reachedthe50yearhistoriclowrate of
0
1.3%,averagingin9M2014at2.1%.Infact,sinceMarch2014inflationisbelowthelower
1/1/2007
1/6/2007

1/4/2008
1/9/2008
1/2/2009
1/7/2009

1/5/2010

1/3/2011
1/8/2011
1/1/2012
1/6/2012

1/4/2013
1/9/2013
1/2/2014
1/7/2014
1/11/2007

1/12/2009

1/10/2010

1/11/2012

limit of inflation set by NBS which is at 2.5% with upper limit 5.5% and central value at
4.0%. The fall in inflation during 2013 and 2014 is attributed to the fall of food and
Source:NationalStatisticalAuthority
transport prices coupled by a limited rise in the administered prices. In 2013 average
inflationstoodat7.9%from7.3%in2012.Theaverageinflationin9M2014standingat
2.1%, below the lower bound of the target tolerance band (4% 1.5%). Under the NBS
estimate, annual inflation will continue to move around the lower bound of the target
tolerance band in the months to come. This will be due not only to monetary policy
measures, but also to low aggregate demand. According to the NBS, the main
disinflationaryfactorwillbelowaggregatedemand,whileupwardpressurewillbecoming

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from administered price growth especially in 2014 and the impending increase in the
specialVATrate.Foodpricesarenotexpectedtoexertinflationarypressures.InAugust
2014, the NBS reduced inflation projections for the years 20142015 due to expected
lowerGDPprojectionsforthesetwoyearsto0.5%and+0%respectivelyaswellasdueto
weak low inflation expectations in the Eurozone. NBS expected inflation in Q3 2014 to
remainbelowthelowerboundofthetargettolerancebandandstartgrowinginQ42014
stabilising to 4% in mid2015. We also expect inflation in late 2014 to return within the
target tolerance level (4%+1.5%) and will most probably trend below 4%, the central
target of NBS. Similarly, IMF (October 2014) expects average inflation rate at 2.3% and
CurrentAccount:JanuaryAugust2014(mn) 3.4% in each of the years 2014 and 2015. These estimates are considered to be on the
Jan.-Aug. 2014 Jan.-Aug. 2013 % high side given Serbias inflation performance during 9M 2014, when average inflation
Exports 6.995 6.669 5%
Imports 9.555 9.394 2% stood at 2.1% with NBS expecting inflation staying below the lower limit of 2.5%. It
Trade Balance -2.560 -2.725 -6%
Services Balance 233 166 40% appearsmostprobablythataverageinflationin2014willbecirca2.3%assumingthatin
Income Balance -744 -783 -5%
Current Transfers Balance 1.992 2.106 -5%
lateQ4inflationapproachesNBScentralvalueof4%.
Current Account Balance -1.079 -1.236 -13%

Source:NationalBankofSerbia(NBS) BALANCEOFPAYMENTS:Basedonnewmethodologyreviseddata,during8M2014the
currentaccountdeficitdeclinedby12.6%onayearlybasisorby156million
reaching1.079billionfrom1.235billionin8M2013supportedbybetter
performanceinthetradebalance.Tradebalancein8M2014amountedto2.561
billionfrom2.725billioninthesameperiodof2013.Basedonthereviseddata,in
2013thecurrentaccountdeficitdecreasedby42.5%onayearlybasisduetopositive
foreigntradetrends,higherinflowofremittancesandlowerinterestpayments.Net
inflowfromFDIamountedto768.5millionin2013comparedto241.9millionayear
earlier.InH12014currentaccountdeficitroseby+20.8%y/yto1,044.0million
EuroagainstRSD affectedbylowerexportactivity(fallinexportsby10.4%y/y)andsubduedimports(fall
120 by2.3%).CurrentaccountdeficitasapercentofGDPfellto6.5%in2013from12.3%in
119
118 2012andaccordingtotheNBSisexpectedtonarrowto5.9%of2014GDPwithmarket
117
116
consensusforecastat5.2%.NBSalsopredictscurrentaccountdeficittoGDPtofurther
115 fallto3.8%2015comparedtotheBloombergconsensusforecastof6.1%.IMFalsosees
114
113 currentaccountdeficitin2014higherat6.1%ofGDPandat5.1%ofGDPin2015.
112
111 EXTERNALDEBT&INT.RESERVES:AccordingtotheNBSexternaldebtinSerbiaremained
110
109 almostunchangedduringH12014standingat25.4billionor79.9%ofGDPcomparedto
108
1/1/2013 1/5/2013 1/9/2013 1/1/2014 1/5/2014 1/9/2014 25.8billionintheendof2013or80.6%ofGDP.In2013,thestockofexternaldebtrose
Source:Bloomberg by+0.5%from2012to25.6billiondownfrom86.6%of2012GDP.Thesplitbetween
publicandprivatesectordebt,asapercentofthetotal,standsat5050.Thelevelof
NationalBankofSerbia'sforeignexchangereservesstoodat11.2billioninQ42013,up
by274millionfromQ42012andinQ22014theirlevelwaslowerat10.1billion.Short
termDebt/Fxreservesstoodat1.6%inJune2014whileshorttermdebt/totalexternal
debtat0.6%.Morerecentexternaldebtfiguressuggestexternaldebtintheendof
August2014stoodat26.1billionorat82%ofGDPshowingstabilityaroundtheH1
figure.
MONEY & FINANCIAL MARKETS:TheNationalBankofSerbia(NBS)decidedunexpectedlyto
2WRepo cutitskeypolicyrateinJune2014by0.50%to8.50%forasecondtimethisyearandsince
12,00
11,75
that time remained at 8.50%. In total, the NBS cut the key rate by 100bps in May and
11,50
11,25
11,00
June.ForitsdecisiontheNBStookintoaccounttheweakeningofinflationarypressures
10,75
10,50
10,25
andthereducedbalanceofrisksrelatedtofiscalmovements.During2013,policyratefell
10,00
9,75
9,50
from11.25%to9.50%withthebiggestfalltakingplacesinceSeptember2013.NBSquotes
9,25
9,00
8,75
persistent low inflationary pressures over the last 18 months due to low aggregate
8,50
8,25 demandandnomajorcostpushpressures.Geopoliticalrisksandtheneedtokeepstable
8,00
thenationalcurrencydidnot allow furthercutinthekeypolicyrate.The mediumterm
3/10/2013
3/11/2013
3/12/2013

3/10/2014
3/11/2014
3/1/2013
3/2/2013
3/3/2013
3/4/2013
3/5/2013
3/6/2013
3/7/2013
3/8/2013
3/9/2013

3/1/2014
3/2/2014
3/3/2014
3/4/2014
3/5/2014
3/6/2014
3/7/2014
3/8/2014
3/9/2014

inflationexpectationsarestableandsuggestthatinflationinSerbiawillremainwithinthe
band. NBS expects inflation to return within the tolerance band limits by Q4 2014 and
Source:Bloomberg
remain within the band during 2015. Provided, that the trends in the foreign exchange
market show signs of stability, the NBS may decide to cut rates again until the end of
2014,to7.50%,cuttingthemfurtherduring2015.FitchdowngradedSerbiasratingtoB+
from previous BBwith a Stable Outlook. S&Ps rating is BB as of April 2014 and
Moodys rating is B1. The Outlook provided by Fitch and Moodys is Stable while the
Outlook by S&P is Negative. RSD depreciated by 3.3% against Euro during 10M 2014
reachinganaveragelevelof116.5657.DuringOctober2014RSDfelltotheweakestlevel

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against Euro at 119.5155 and now is around 119.1. Once an agreement is reached with
IMF, the sliding of RSD against Euro is going to cease and perhaps RSD may even
appreciatewithrespecttoEuro.
Creditexpansiontotheprivatesectordecreasedby4.5%y/yinDecember2013froma
fallby1.4%y/yinDecember2012(inEuroterms).Loanstobusinessesfellby8.7%y/y
whereasloanstohouseholdsincreasedby3.2%y/y.InSeptember2014,creditexpansion
to the private sector (in Euro terms) fell by 4.6% y/y affected mainly by a fall of credit
towardsbusinessby8.3%y/ydespiteasmallriseofcredittohouseholdsby+2.0%y/y.
Ontheotherhand,privatesectordepositsinAugust2014acceleratedby+2.5%y/yfrom
an increase of +5.5% y/y in December 2013. The loantodeposit ratio fell to 113.0% in
NPLratio August2014from117.6%inDecember2013,affectedbyweaklendingactivityandarise
24,0%
23,0%
indeposits.AccordingtotheNBS,thebankingsectorinSerbiahadanexceptionallyhigh
22,0%
21,0%
liquiditydespitedeleveragingwhichcontinuedtobeariskin2013duetothehighshare
20,0%
19,0% of foreign banks (mainly EU banks) in the system, which is reducing crossborder
18,0%
17,0% exposure.Atthesametime,thelocalbankingsystemrespondedbyincreasingtheshare
16,0%
15,0% ofdomesticsourcesoffundingviadepositsinordertobridgethefinancinggap.Intheend
14,0%
13,0%
12,0%
of2013,Serbianbankingsystemassetsamountedto25.2billionor78.9%ofGDPwith
11,0%
10,0%
foreignownedbankstakingup68.7%oftotalbankingassets.Greekbankshad13.3%ofall
9,0%
08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1
bankingassetsinSerbia,Italianbanks22.0%andAustrianbanks13.9%.Profitabilitywas
weakin2013afteraweakQ42013asROAstoodat0.1%intheendof2013from0.4%in
Source:NationalBankofSerbia the end of 2012 with ROE being also low at 0.4% from 2.0% in 2012 affected by low
lending activity and more provisioning. NPLs ratio in June 2014 went up to 23.0% rising
from 22.3% in the end of March 2014. In June 2014, corporate NPLs stood at 27.4% up
from 26.5% in March 2014 and household sector NPLs also rose to 10.2% from 9.6% in
March 2014. Coverage of NPLs as of end of June 2014 stood at 54.4%. Note that NPLs
ratio stood at 21.4% in December 2013 (23.5% in the corporate sector and 9.3% in the
householdsector)upfrom18.8%inDecember2012,whilecoverageratioofNPLsstoodat
50.9%inDecember2013upfrom50.0%inDecember2012.Thebankingsystemremained
well capitalised with capital adequacy ratio at 20.4% in Q2 2014 up from 20.9% in
Decemberof2013and19.9%inDecember2012.Tier1capitalratiostoodat17.6%inQ2
2014from19.3%inDecember2013and19%inDecember2012.

5.ALBANIA
ECONOMICOVERVIEW:AlbanianGDPdecreasedby0.6%y/yinQ22014onanunadjusted
basis,comparedtoanexpansionof1.7%y/yinQ12014.Thisoutcomeinterruptedthe
growthdynamicsofthepreviousquarters.AccordingtotheBankofAlbania,the
decelerationoftheeconomicactivityisconsideredtobetemporaryandmayreflecta
morepronouncedweaknessofaggregatedemandandstrongerorlongerlastingsupply
sideshocks.Intermsofaggregatedemand,theeconomycontractedmostlyduetothe
negativefiscalstimulusandthenegativeimpactformnetexports.Privateinvestments
andconsumptionprovidedalargepositivecontribution,reflectingtheimprovementof
RealGDP(%y/y,unadjusteddata) confidenceintheeconomyandtheeasingoflendingstandards.Tothisdecrease
8 constructioncontributedby2.79pp,transportby0.73ppandindustryby0.20ppwhile
5,6
6 apositivecontributionhadotherservicesby+1.23pp,agriculture,huntingandforestryby
3,6
4 2,9 2,9 +0.95pp,andtrade,hotelsandrestaurantsby+0.95ppInQ22014,anincreasewas
2,2 1,9 2,3 2,0 2,2
1,1 1,2 1,4 1,7
2 0,9 registeredintrade,hotelsandrestaurantsby7.1%y/y,inotherservicesby4.6%y/yand
0 inagricultureby3.2%y/y.Ontheotherhand,inQ22014,adecreasewaspostedin
-0,4 -0,6
-2 transportby23.1%y/y,inconstructionby22.4%y/y,inindustryby1.3%y/y,andin
-2,3
-4 postandtelecommunicationsby1.0%y/y.Onthe24thofJune2014,Albaniawasgranted
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY
2011 2012 2013 2014 thecandidatestatusbytheEuropeanUnionandthisisexpectedtohaveafavourable
impactonforeigninvestmentsandjobcreationinthecountry.AsregardstoEUfinancial
Source:INSTAT
assistance,alongwiththeaccesstotheEUInstrumentforPreAccessionAssistance
AlbaniawillalsobeabletobenefitfromtheparticipationinEUprogramsaswell.Growth
willalsobesupportedbysignificantenergyrelatedprojects,suchastherecentlyagreed
TransAdriaticPipeline(TAP)designedtotransportgasfromAzerbaijanviaGreeceand
AlbaniaandacrosstheAdriaticSeatoItalyandWesternEurope,aswellasforeign
investmentinanewhydropowerproductionunit.DuringAugust26thtoSeptember9th,

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 EconomicResearch Division
November2014No86

MacroIndicators
Albania
Real GDP (%)
Prices
Consumer Price Inflation (%Avg)
General Government (%GDP)
Overall Balance
Balance of Payments (% GDP)
Current Account Balance
Source:AlphaBankEconomicAnalysis
ConsumerPriceInflation(%y/y)
5,0
2014astaffteamfromIMFconducteddiscussionsonthesecondreviewofthe
arrangementundertheExtendedFundFacilityof36monthsandSDR295.42million(
330.9million)approvedbyIMFinFebruary2014,inordertosupportlocalauthorities
effortstoboostgrowthandmacroeconomicstability.Thediscussionsincludedthe2015
governmentbudget,structuralreformsandtheBankofAlbaniasgovernanceandpolicy
framework.AccordingtotheBankofAlbania,preliminarydatafromtheNational
StatisticalOffice(INSTAT)pointtopositiveeconomicgrowthinQ32014mainlydrivenby
theexpansionofconsumptionandprivateinvestment.AccordingtoIMF(October2014)
andWorldBank(June2014),economyisexpectedtoexpandby2.1%y/yin2014,fuelled
byexternaldriversandamodestrecoveryindomesticdemandandby3.3%y/yin2015.
EBRD(September2014)ismorepessimisticandforecastsGDPtoriseby1.7%y/yin2014
2012 2013 2014 (f) 2015 (f) andby2.5%in2015.For2014,weenvisageaGDPgrowthat1.4%,mainlydrivenfrom
1.6 0.4 1.9 2.9 infrastructureprojects.
2.4 1.9 1.9 2.5 FISCAL POLICY:TheBudgetof2014envisagesabudgetdeficitofALL91.7billionup40.2%
y/yor6.6%ofGDPfrom4.8%ofGDPin2013withexpenditurerisingby15.8%y/ytoALL
-3.4 -4.8 -6.2 -5.0
456.4 billion or 32.7% of GDP and revenue rising by 11.0% y/y to ALL 364.7 billion or
-10.4 -10.4 -11.0 -12.0 26.1%ofGDP.Suchdevelopmentsmaynegativelyaffectpublicdebtlevelkeepingitabove
thestatutorylevelof60%ofGDP,whichwasviolatedattheendof2012.
In 8M 2014, budget deficit decreased by 43.7% y/y to ALL 30.9 billion, from ALL 54.9
billion in 8M 2013 due to the increase in tax revenues. In 8M 2014, budget revenues
recordedagrowthof12.5%y/ytoALL236.4billionastaxrevenuesincreasedby12.2%
y/y and budget expenditure increased marginally by 0.8% y/y to ALL 267.3 billion. VAT
revenuesmadeamajorcontributiontotheincreaseintotalrevenuesincreasingby16.3%
y/y in 8M 2014. During H1 2014 the budget deficit was financed through domestic
resources as the Government issued shortterm instruments (3M Tbills) and longterm
bonds(7yearand10year).IMFpointedoutthatfiscalconsolidationisontrackwithno
additionalrevenueorexpendituremeasuresneededin2014andthatapublicdebttarget

4,5
below60%ofGDPinthemediumtermappearsattainable.IMF(October2014)forecasts
4,0 thatbudgetdeficit,from5.2%ofGDPin2013,willincreaseto6.7%ofGDPin2014and
3,5 thendecreaseto4.7%ofGDPin2015.
3,0

2,5
INFLATION:AccordingtotheNationalStatisticalOffice,CPIinflationdecreasedto1.5%in
2,0

1,5
September2014(3monthlow)against2.0%inAugust2014(6monthhigh),remaining
1,0 belowthelowerboundoftheBankofAlbaniastargetzone(3%+1%).ToCPIinflation
0,5
mainlycontributedfoodandnonalcoholicbeverageby+0.83ppthatincreasedby2.1%
0,0
2007 2008 2009 2010 2011 2012 2013 2014 y/ywithvegetablesincludingpotatoeshavingincreasedby20.1%y/y,goodsanddifferent
Source:INSTAT
servicesby0.43pphavingincreasedby8.7%y/y,andalcoholicbeveragesandtobaccoby
0.25pphavingincreasedby6.8%y/ywithtobaccoalonehavingincreasedby11.7%y/y.
Onamonthlybasis,inflationincreasedto0.3%inSeptember2014basicallyimpactedby
anincreaseinrecreationandculturefrom0.1%inAugust2014.AccordingtotheBankof
Albania,thelowinflationratecontinuestoreflectmostlytheexistenceofthespare
productioncapacitythathascontributedtolowgrowthoflabourandproductioncosts.
Furthermore,thelowinflationratehasbeenaffectedbylowinflationratesinAlbanias
tradepartners,decreasinginflationexpectationsandweakpressuresfromliquidityinthe
economy.AccordingtotheBankofAlbania,inflationwillrisegradually,convergingtothe
targetsetforthemediumtermhelpedbythecurrentmonetarypolicystance.IMF
CurrentAccount:JanuaryJune2014(mn)
6M 2014 6M 2013 %
(October2014)alsoforecastsinflationtorise,to1.8%in2014andto2.7%in2015.
Exports 479 500 -4%
Imports 1.412 1.321 7%
BALANCEOFPAYMENTS:InQ22014,currentaccountbalancedeficitincreasedby20.6%y/y
Trade Balance
Services Balance
-933
34
-821
-2
14%
3400%
to343.7millionfrom285.0millioninQ22013.Thatwasmainlytheresultofan
Income Balance -35 -1 3069% increaseinthedeficitoftradebalanceby17.7%y/yto507.3millioninQ22014from
Current Transfers Balance 316 316 0%
Current Account Balance -618 -508 22% 431.1millioninQ22013.Exportsdecreasedby5.8%y/y,whileimportsincreasedby8.4%
Source:BankofAlbania y/yduetotheintensificationofimportedgoodsforinvestmentpurposesdrivenbythe
improvementoftheconsumerandbusinessconfidence.IMF(October2014)forecaststhe
currentaccountdeficittowidenin2014to11.0%ofGDPandin2015to12.7%ofGDP
from10.4%ofGDPin2013.
MONEY&FINANCIALMARKETS:Onthe27thofOctober2014,theBankofAlbaniadecidedto
keeptheinterestrateunchangedat2.50%,deemingthatthemonetarypolicystanceand
current financial conditions are adequate to ensure the return of the inflation to the
targetinmediumterm.ThelasttimethattheBoAlowereditsinterestrateitwasonthe

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30thofMay2014to2.50%from2.75%,aimingatcreatingmorefavourableconditionsfor
inflation to return to the BoA s target in the medium term by boosting domestic
consumptionandinvestments.
CreditexpansionincreasedinSeptember2014(forthethirdmonthinarow)by1.6%y/y
atalowerratethan2.1%y/yinAugust2014andcomparedwithadecreaseof1.2%y/y
in December 2013. In particular, loans to businesses, that accounted for 73.2% of total
loans,increasedby2.0%y/yinSeptember2014,duetotheeasingoflendingstandards
andtheimprovementofcreditsupplydownfromanincreaseof2.6%y/yinAugust2014
andadecreaseof1.7%y/yinDecember2013.Loanstohouseholds,thataccountedfor
26.8%oftotalloans,increasedby0.5%y/yinSeptember2014fromanincreaseof0.9%
EuroagainstALL y/y in August 2014 and no change y/y in December 2013. According to the Bank of
142,00 Albania, credit demand remains moderate and will continue to define a sluggish credit
141,50

141,00
growthinthequartersahead.TheloanportfolioqualityworsenedasNPLstototalgross
140,50 loans increased to 24.1% in Q2 2014 from 23.2% in Q4 2013 impacting the banking
140,00

139,50
systems profitability. The loan loss provisioning ratio increased to 66.3% in June 2014
139,00 from65.2%inDecember2013.AccordingtotheBankofAlbaniasBankLendingSurvey,
138,50
lending standards eased during Q2 2014 for both businesses, for the first time since Q1
138,00

137,50
2011, and households for the third consecutive quarter. Bank of Albanias easing policy,
137,00
1/1/2013 1/5/2013 1/9/2013 1/1/2014 1/5/2014 1/9/2014
liquidity level and the banking systems competitiveness are the main factors affecting
easingofcreditstandardstobusinessesandhouseholds.ThegovernmentandtheWorld
Source:Bloomberg
Banksignedtwoagreementsworthof$220millionaiming(a)toboostthepublicfinancial
management in the treatment of arrears, to promote reforms in taxation, pension and
energyand(b)tomodernisethefinancialsectorthroughthereformoftheregulatoryand
supervisory regime. The Albanian banking system is still well capitalised as the capital
adequacyratiowas17.5%inQ22014comparedwith18.0%inQ42013.


6.FYROM

RealGDP(%y/y,unadjusteddata)
ECONOMICOVERVIEW:AccordingtotheStateStatisticalOffice,FYROMsGDPgrewby4.3%
y/yinQ22014,higherthanexpected,comparedwith3.9%y/yinQ12014,justifyingthe
10

8
expectations for solid recovery of the domestic economy. In Q2 2014, household
6,1
6 consumptionincreasedby2.5%y/ycomparedwith2.3%y/yinQ12014andinvestment
3,9 3,9 4,3
4 3,6 2,8 2,9 3,3 3,2 3,1 increased by 15.3% y/y compared with 17.1% y/y in Q1 2014. Furthermore, in Q2 2014
2 1,3 1,0 0,4 0,1 exports increased by 14.2% y/y compared with 14.3% y/y in Q1 2014, while imports
0
-0,4
increased by 10.7% y/y compared with 9.8% in Q1 2014. On the production side, the
-2 -1,0 -0,6
biggestincreasewasrecordedinwholesaleandretailtrade,repairofmotorvehiclesand
-4
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY motorcycles, transportation and storage, accommodation and food service activities by
2011 2012 2013 2014 5.0%y/yandinfinancialandserviceactivitiesby4.1%y/y.
Source:StateStatisticalOffice The competitiveness of the economy will be boosted by the National and Regional
Rehabilitation Project under the Partnership Strategy with the World Bank. Within this
project,FYROMwillreceivealoanof$400millionfortheconstructionandreconstruction
ofroadsinthecounty.InOctober2014,52millionwerereceivedunderthefirstphase
oftheproject.
AccordingtotheavailabledataforQ32014,GDPgrowthcontinued,butataslowerpace
comparedtoQ22014duetoweakerperformanceofmostoftheimportanteconomic
MacroIndicators
sectors.Accordingtothe2014Budget,GDPisprojectedtoriseby3.2%y/yin2014andby
FYROM 2012 2013 2014 (f) 2015 (f)
Real GDP (%) -0.4 3.1 3.5 3.6 3.8%y/yin2015.EuropeanCommission(May2014)projectsGDPtogrowby3.0%y/yin
Prices 2014andby3.2%y/yin2015.EBRD(September2014)foreseesGDPgrowthin2014and
Consumer Price Inflation (%Avg) 3.3 2.8 1.0 1.6
General Government (%GDP)
in2015at3.0%y/y.WorldBank(June2014)forecastsGDPgrowthat3.0%y/yin2014
Overall Balance -4.0 -4.1 -3.8 -3.1 andat3.5%y/yin2015.IMF(October2014)ismoreoptimisticandprojectsGDPtorise
Balance of Payments (% GDP)
by3.4%y/yin2014andby3.6%y/yin2015.
Current Account Balance -3.0 -1.9 -3.5 -3.4
Source:AlphaBankEconomicAnalysis FISCAL POLICY: In9M2014,thebudgetofcentralgovernmentrecordedadeficitofMKD
17.4 billion, compared with MKD 15.8 billion in 9M 2013. Total budget revenues
amountedtoMKD104.6billionupby1.5%y/yin9M2014fromMKD103.0billionin9M
2013,asaresultofthegrowthinrevenuesfromtaxesandparticularlyinpersonalincome
taxandVAT.TotalexpendituresincreasedtoMKD122.0billionorby2.7%y/yin9M2014
fromMKD118.8billionin9M2013,includingthehighersocialtransfersinQ12014ahead

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ofthePresidentialandearlyParliamentaryelectionsthattookplaceinApril2014.InJuly
2014, the government approved a revision to the State budget for this year, raising the
projecteddeficitto3.9%ofGDP.TherevisionmostlyaimstoprovideMKD1.43billion($
31.4 million/ 23.2 million) as additional funding for Corridor X motorway projects. The
2014Statebudgetsetsdeficit at3.5% ofGDP.The2015DraftBudgetwas votedbythe
ParliamentonOctober20th,2014andaccordingtoittherevenuesareprojectedatMKD
163.3billionandexpendituresareprojectedatMKD181.8billion,whilethebudgetdeficit
ConsumerPriceInflation(%y/y) isprojectedatMKD18.5billionor3.5%ofGDP.
6%

5% INFLATION:InSeptember2014,theCPIwasnegative(forthesecondmonthinarow)at
4% 0.7%y/ycomparedto0.5%y/yinAugust2014.Onamonthlybasis,theCPIremainedat
3%
thesamelevelinSeptember2014comparedto0.5%y/yinAugust2014.Onamonthly
2%

1%
basis,thebiggestincreasewasregisteredintelephoneandtelefaxequipmentby10.4%,
0% financialservicesby9.4%,oilandfatsby3.5%andeggsby1.7%,whilethebiggest
-1% decreasewasregisteredinpassengertransportby13.3%andliquidfuelsandlubricantsby
-2%
Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
2.1%.TheNationalBankofFYROMexpectsasignificantdropintheannualaverage
Source:StateStatisticalOffice
inflationto1.0%in2014from2.8%in2013andanincreaseto2.0%in2015.
BALANCEOFPAYMENTS:In8M2014thecurrentaccountdeficitincreasedto136.1million
orby17.5%from115.8millionin8M2013.Theincreaseincurrentaccountdeficit
reflectsthedecreaseinservicessurplusby9.8%to219.3millionfrom243.2millionin
8M2013,theincreaseinprimaryincomedeficitby11.9%to129.7millionfrom115.9
millionin8M2013andtheincreaseintradedeficitby0.6%to1,243.0millionfrom
1,235.9millionin8M2013asexportsincreasedby13.8%y/yandimportsincreasedby
CurrentAccount:JanuaryAugust2014(mn) 7.9%y/y,whilecurrenttransferssurplusincreasedby2.5%to1,017.1millionfrom
Jan.-Aug.2014 Jan.-Aug.2013 %
Exports 1.738 1.526 14% 992.7millionin8M2013.Itshouldbenotedthatexportsin8M2014covered58.3%of
Imports 2.981 2.762 8%
Trade Balance -1.243 -1.236 1%
respectiveimportsupfrom55.3%in8M2013..
Services Balance 219 243 -10%
Income Balance -130 -116 12% MONEY & FINANCIAL MARKETS:Onthe14thofOctober2014,theNationalBankofFYROM
Current Transfers Balance 1.017 993 2%
Current Account Balance -136 -116 18% kept its key policy rate stable at 3.25% for the 10th consecutive session after July 2013
Source:NationalBankofFYROM whenithadlowereditfrom3.50%astherearenopricepressures,theeconomicgrowth
is solid and there are positive developments in the credit market. The National Bank of
FYROM will continue to closely monitor the macroeconomic developments and the
possiblematerialisationoftherisksanditwilladjustmonetarypolicyaccordingly.
InQ32014,thegrowthofactivitiesofbankscontinuedasaresultoftheincreasinglevel
offinancialintermediationandsupportfortheeconomy.Creditexpansion(inEuroterms)
EuroagainstMKD grew by 8.5% y/y in September 2014, from 9.0% y/y in August 2014 and 7.5% y/y in
65,00
December2013.InSeptember2014,loanstohouseholdsincreasedby11.5%y/yhigher
64,50
64,00
than loans to enterprises that increased by 6.4% y/y. The ratio of NPLs to total loans
63,50
63,00
increasedto11.9%inAugust2014from11.4%inJuly2014and11.3%inDecember2013.
62,50
62,00
The loantodeposit ratio decreased to 89.5% in July 2014 from 91.3% in June 2014 and
61,50
61,00
89.5%inDecember2013.Depositgrowth(inEuroterms)stoodat8.0%y/yinSeptember
60,50
60,00
2014comparedto8.4%y/yinAugust2014butitwashigherthan7.2%y/yinDecember
59,50
59,00
2013. The solvency of the banking sector further increased in Q2 2014, with the capital
58,50
58,00
adequacyratioincreasingto16.9%inQ22014from16.7%inQ12014and16.8%inQ4
1/1/2013 1/5/2013 1/9/2013 1/1/2014 1/5/2014 1/9/2014
2013.InJune2014,bankswereusingthedepositfacilitywiththeNationalBankofFYROM
Source:Bloomberg forovercomingtheshorttermliquidityfluctuations.

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