Analytici Erste Group: Ukrajina vykazuje silný růst, musí však najít cestu, jak čelit inflaci

RESEARCH RELEASE 3. dubna 2008

Analytici Erste Group: Ukrajina vykazuje silný růst, musí však najít cestu, jak čelit inflaci • • • • •

Silný ekonomický růst je i nadále řízený/tažen domácí poptávkou Zahraniční deficity se mohou zvýšit, ale měly by zůstat pokryty přílivem zahraničních investic Vysoká míra inflace přiměla vládu přijmout protiinflační opatření O zavedení režimu inflačního cílování se ještě nejedná, ale rozšíření rozpětí měnového kurzu je letos pravděpodobné Vláda plánuje v letošním roce rozsáhlou privatizaci

Silný ekonomický růst zůstává řízen domácí poptávkou Silný růst reálné ekonomiky pokračoval i během druhé poloviny roku 2007, především díky trvale silné domácí poptávce a příznivému růstovému impulsu v zemích GUS (tj. hlavních obchodních partnerů Ukrajiny). “Očekáváme nárůst ekonomiky v roce 2008 o zhruba 6,6 %. Základem růstu bude domácí spotřeba podpořená rostoucími reálnými příjmy a nárůstem úvěrů. Zvýšení sociálních dávek zavedené v lednu novou vládou má rovněž podpořit spotřebu. Vyvážená investiční aktivita (2007: meziroční nárůst o 20 %) je pevným základem dlouhodobého ekonomického růstu v dalším období, obzvlášť, pokud by se ještě spojila s reformami v oblasti podnikání (jako například reformou daní),” tvrdí Juraj Kotian, vedoucí makroanalytik pro střední a východní Evropu v Erste Group. Silný příliv zahraničních investic (FDI) i v roce 2008, především díky aktivitám M&A a rozsáhlé privatizaci Bankovní sektor zaujal v předchozím roce s 37,9 % podílem na zahraničních investicích (3,5 mld. USD) špičkovou pozici. V roce 2007 mělo zahraničního majitele 47 bank z celkem 173 registrovaných bank. Zahraniční kapitál sehrál v bankovním sektoru důležitou roli při urychlení ekonomické konvergence. Bankovní sektor dosáhl v roce 2007 impozantního nárůstu: úvěry vzrostly o 84,5 %, vklady o 55,5 %. Sektory výstavby a nemovitostí zaznamenaly v roce 2007 rovněž výrazný vzrůst: jejich podíl na přílivu FDI činil 21 %. “Očekáváme další zvyšování zahraničních investic a pokračování razantního růstu i v roce 2008. M&A bude v oblasti bankovnictví i nadále nosným faktorem, jelikož v období mezi lednem a březnem 2008 byly avizovány velké obchodní transakce. Kromě toho jsou ukrajinská aktiva díky znehodnocení (depreciaci) dolaru levnější a tím pádem zajímavější pro evropské investory. K přílivu zahraničních investic by měla v roce 2008 velkou měrou přispět rozsáhlá privatizace” konstatoval Kotian. Privatizace v roce 2008 by měla vynést 4-5 mld. USD Vláda hodlá v roce 2008 zprivatizovat zhruba 318 podniků. Mezi nimi je 13 velkých strategických společností, které by státu měly vynést nejvíce. Vláda počítá s výnosem z privatizace v roce 2008 v celkové výši okolo 1,7 mld. USD. Podle analytiků Erste Group je to vzhledem k seznamu privatizovaných podniků poněkud konzervativní odhad. Jen samotný prodej společnosti Ukrtelecom (67,8 %) by

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RESEARCH RELEASE mohl překročit vládní odhady. “Domníváme se, že privatizační program bude úspěšný a že by vláda v roce 2008 mohla získat v rámci privatizací 4-5 mld. USD,” komentoval Kotian nadcházející privatizační procesy.

Inflace zůstane do konce první poloviny roku na úrovni kolem 20 % Inflace zůstává pro ukrajinskou ekonomiku jedním z nejproblematičtějších témat. Spotřebitelská inflace na počátku roku výrazně vzrostla na více než 20 % a zhruba na této úrovni zůstane až do poloviny tohoto roku. V pozdějším období roku 2008 by příznivá sklizeň měla napomoci antiinflačnímu procesu. Přesto dosáhne míra inflace na konci tohoto roku s velkou pravděpodobností zhruba 15 %. Vláda prohlásila, že přijme antiinflační opatření, která by měla současnou vysokou inflaci snížit.“Očekáváme, že se antiinflační balíček bude skládat ze sady opatření přijatých společně vládou a centrální bankou. Předpokládáme, že primárním cílem tohoto balíčku opatření bude omezení negativních dopadů expanzní finanční politiky na inflaci. Přesto je nepravděpodobné, že vláda přijde s jednoznačným návrhem na redukci plánovaného rozpočtového deficitu,” domnívají se analytici Erste Group. Růst v sektoru nemovitostí bude kolísat v závislosti na segmentaci trhu Ukrajinský obchod s nemovitostmi dosud rostl úžasným tempem. Podle ukrajinské asociace obchodníků s nemovitostmi vzrostla průměrná cena nemovistostí určených na bydlení v posledních třech letech o 40 % za rok. Investice do ukrajinských nemovitostí prodělaly v posledních několika letech dramatický nárůst z 24 mil. USD v roce 2005 na 1,1 mld. USD v roce 2007. Hlavní město Kyjev s 2,74 miliony obyvatel (6 % celkové ukrajinské populace) se stalo absolutním lídrem v oblasti obchodu s nemovitostmi (ceny nemovistostí určených na bydlení zaznamenaly v Kyjevě v posledních třech letech nárůst o 49 % za rok). Zdvojnásobení hypotečních úvěrů v roce 2007 Dostupnost hypotečních úvěrů, nárůst disponibilních příjmů a změna postoje vůči úvěrům (vzrostla důvěra k dlouhodobým úvěrům) přispěly k rozmachu obchodu s nemovitostmi na Ukrajině. Úvěrové sazby u hypotečních úvěrů (v současnosti okolo 1114 %) zaznamenaly v posledních letech výrazný pokles, i když v porovnání s evropským standardem (5-6 %) zůstávají i nadále vysoké. V roce 2007 se vyjímečný objem hypotečních úvěrů zdvojnásobil na 11,3 mld. USD (8,1 % HDP). Retailová klientela upřednostňovala úvěry v cizí měně (89 % v roce 2007). Na hlavní město Kyjev a kyjevský region připadá 27 % veškerých hypoteč

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RESEARCH RELEASE ních úvěrů poskytnutých v roce 2007. “Domníváme se, že ukrajinský trh nemovitostí bude v roce 2008 pokračovat v tomto úspěšném růstu. Přestože tempo růstu cen rezidenčních nemovitostí se v roce 2007 snížilo, jsme přesvědčeni o tom, že trh ještě není nasycen. Je zde rozdílná dynamika růstu v jednotlivých regionech závisející na úrovni ekonomiky příslušného regionu a na rozdílné segmentaci trhu bytové výstavby,” konstatovali analytici Erste Group. Po silném růstu v roce 2007 zaznamenala ukrajinská burza PFTS na počátku roku 2008 korekturu v souladu s vývojem na globálních trzích Ukrajinský akciový trh zaznamenal v roce 2007 neuvěřitelný nárůst hodnoty indexu PFTS o 135,4 % a nárůst kapitalizace trhu o 142,5 % na 111,8 mld. USD, přičemž nebyl nijak silně ovlivněn kolísáním na mezinárodních trzích (pravděpodobně díky jeho nízké likviditě). Ukrajinské společnosti získaly v roce 2007 na transparentnosti, což vedlo k většímu zájmu zahraničních investorů. Metalurgické společnosti, strojírenské podniky a distributoři/výrobci energie patřili ke špičkovým sektorům. Společnost Kyivenergo (KIEN UZ) byla nejvýkonnější akcií Tier-1, s návratností 429 % za celý rok. Trh je podporován především zahraničními institucionálními investory s investičním horizontem více než jeden rok, kteří očekávají nárůst svých vkladů o přinejmenším 20-30 % ročně. Minulý rok úspěšný pro prvotní kotace na burze (IPOs), tento rok mírnější předpověď Rok 2007 byl pro ukrajinské prvotní kotace na burze (IPOs) rokem rekordním. Celkový objem vstupů na burzu s dodatečně vydanými akciemi činil 1,89 mld. USD. Ukrajinské společnosti upřednostňovaly kotace na zahraničních burzách - v Londýně, ve Frankfurtu a ve Varšavě. Vstup na burzu (IPO) společnosti Ferrexpo (vedoucí ukrajinský výrobce železa) dosáhla na londýnské burze hodnoty 420 mil. USD (první kótování ukrajinské společnosti na této burze). Společnosti z oblasti nemovitostí a výroby potravin byly rovněž aktivní na mezinárodních burzách. Rozruch okolo sub-prime hypoték měl negativní dopad na vstupy na burzu ukrajinských společností, proto mnoho společností, které plánovaly vstup na burzu v roce 2008, tento záměr odložily na pozdější dobu, popřípadě na příští rok. “Věříme, že globální nálada bude hrát důležitou roli ve vývoji ukrajinské burzy PFTS v roce 2008. Mezi pozitivní faktory, které by mohly napomoci zotavení trhu, patří nadcházející privatizace a vydražení podílů ve státních podnicích (některé z nich budou vydraženy přímo na PFTS), dále vyšší transparentnost podniků a zlepšení finančních výsledků. Pozitivním aspektem je skutečnost, že došlo ke zvýšení tuzemské poptávky poté, co správci majetku zvýšili podíl tuzemského kapitálu ve svých portfoliích. Kromě toho největší státní penzijní fondy, jako například státní pošta a železnice, pověřili společnosti pro správu vkladů řízením svých fondů. Pokud se situace na globálních trzích v první polovině roku 2008 uklidní, má index PFTS reálnou šanci získat zpět ztracené pozice a docílit v roce 2008 mírného dvouciferného růstu,” shrnuli analytici Erste Group. Aktuální politická situace se do příštích prezidentských voleb v roce 2010 pravděpodobně nezmění Po předčasných parlamentních volbách v roce 2007 se politická situace na Ukrajině stabilizovala. “Domníváme se, že navzdory rostoucímu riziku politické nejistoty v této zemi bude ekonomika pokračovat cestou růstu. Je velmi pravděpodobné, že současný politický systém na Ukrajině přetrvá do příštích prezidentských voleb,” konstatoval Juraj Kotian, co-Head CEE Macro a Fixed Income Research Erste Group. Popularita stávající vládnoucí koalice vzrůstá, i když neshody mezi koalicí a opozicí způsobovaly zablokování činnosti parlamentu. Jedním ze sporných témat – členství v NATO – bylo dohodnuto, že bude podmíněno rozhodnutím referenda. 13. března byl dohodnut další z problematických bodů – Nafto

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RESEARCH RELEASE gaz Ukraina a Gazprom se dohodly na ceně plynu ve výši 179.5 USD/tcm na rok 2008. Kromě toho se Ukrajina potýká s vážným rizikem rostoucích cen plynu v průběhu příštího roku, neboť země střední Asie prohlásily, že počátkem roku 2009 začnou prodávat na Ukrajině plyn za evropské ceny. Po 14 letech jednání o vstupu Ukrajiny do Mezinárodní obchodní organizace WTO bylo téměř dosaženo výsledku – čeká se pouze na závěrečnou ratifikaci ze strany parlamentu. Dlouhodobě vstup Ukrajiny do WTO posílí konkurenceschopnost ukrajinské ekonomiky. Z členství ve WTO by měly nejvíce profitovat sektory orientované na vývoz jako metalurgický a chemický sektor. Nejvíce senzitivním sektorům jako zemědělskému, potravinářskému průmyslu a automobilové výrobě, bude uděleno pětileté přechodné období na to, aby se přizpůsobily standardům WTO. Analysts: Juraj Kotian, vedoucí makroanalytik zemí střední a východní Evropy v Erste Group Maria Valachyova, senior analytička Slovenská sporitelna Viktor Stefanyshyn, analytik Erste Bank Ukrajina Roman Oliynyk, analytik Erste Bank Ukrajina

Erste Group, Tiskové oddělení 1010 Vienna, Graben 21, Fax: 0043-50100-19849 Hana Cygonková, Tel: 0043-50100-11675, e-mail: [email protected] Ionut Stanimir, Tel: 0043-50100-11676, e-mail: [email protected] Tento text najdete také na naší homepage: http://www.erstebank.com/Press.

Erste Group je jedním z předních poskytovatelů finančních služeb v zemích střední a východní Evropy. 52 500 zaměstnanců v bezmála 3 000 pobočkách poskytuje finanční služby více než 16 milionům klientů z 8 zemí (Rakousko, Česká republika, Slovensko, Rumunsko, Maďarsko, Chorvatsko, Srbsko, Ukrajina). K 31. prosinci 2007 dosáhla bilanční suma Erste Group 200,5 mld. EUR, čistý zisk po menšinových podílech činil 1 174,7 mil. EUR a návratnost kapitálu (ROE) 14,6 %.

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CEE Research

Country Report

April 3, 2008

Ukraine

 Strong economic growth to stay driven by domestic demand  External deficits may widen but should stay covered by investment inflow  High inflation prompts government to adopt anti-inflationary measures  Adoption inflation targeting is not on agenda yet, but widening of FX band is likely this year  Government plans large-scale privatization this year

www.erstebank.at

Country Report http://global.treasury.erstebank.com

Table of contents

Analysts:

Introduction

2

Politics

4

Real economy

5

Privatization

9

Price development

11

Housing market

13

Monetary policy

15

Fiscal policy

16

Fincial market overview

17

Maria Valachyova Senior analyst of Slovenska sporitelna

+421 2 5957 4139

Viktor Stefanyshyn Analyst of Erste Bank Ukraine

+38 044 593 17 84

Roman Oliynyk Analyst of Erste Bank Ukraine

+38 044 593 9188

Edited by: Juraj Kotian Co-Head CEE Macro and Fixed Income Research

Country Report Ukraine, April 2008

+43 5 0100 17357

Page 1


Introduction At the time that we published our last country report on Ukraine six months ago, it was shortly before the elections and there was a lot of uncertainty about the ability of the country to escape from political deadlock. The situation has improved since then, as Parliament has started to function. Now, the main question is how fast the pace of economic convergence is, with GDP per capita of EUR 2,100, about a quarter of the average for CEE countries. Entering the WTO (World Trade Organization) should be a significant step forward in this area, as liberalization of trade will accelerate the catchup process by taking advantage of Ukraine's many competitive advantages. Ukraine is a very interesting market in terms of size, location and growth potential. The economy now enjoys strong growth of income, consumption and investments, without severe external imbalances like the Baltic and Balkan countries have been facing. However, double-digit growth of household consumption, well above the productivity growth, will translate into a worsened external balance. Fortunately, the surplus of the balance of services (thanks to income from oil and gas transport), together with strong FDI inflows, have sufficiently covered trade deficit financing needs. Furthermore, the government outlined an ambitious privatization plan, ensuring that strong FDI inflow will continue this year. Inflation, which recently climbed to 20%, has started to create worries. Besides external factors, such as the increase of food, oil and natural gas prices, there have been some strong local specifics. In order to tackle the high inflation, the government and central bank are likely to present a package of anti-inflationary short-term and mid-term measures, which should help to compress inflation. After some discussions with Ukrainian officials, we had to conclude that a switch of the currency regime to free float is very unlikely in the next two years, as there is only limited room for implementation of strict inflation targeting (inflation would be the only nominal anchor). In any case, widening of the fluctuation band remains our expected scenario for this year.


Page 2

Country Report http://global.treasury.erstebank.com Macroeconomic indicators 2005

2006

2007E

2008F

2009F

441452

537667

709445

908090

1098788

Population (mn)

46.9

46.6

46.4

46.1

45.8

GDP per capita (Loc. Curr.)

9407

11527

15301

19703

24009

2.6

7.1

7.3

6.6

6.0

20.6

14.4

17.4

8.7

10.0

Fixed Capital Form ation (grow th y/y %)

3.9

18.7

22.0

10.0

10.0

Nom inal Wages (Loc. Curr.)

806

1043

1353

1799

2249

Nom inal Wages (grow th y/y %)

36.5

29.4

29.7

33.0

25.0

Retail sales (grow th y/y %)

23.4

25.3

28.8

23.0

20.0

3.1

6.2

10.2

10.0

8.0

CPI (y/y, average%)

13.5

9.2

12.8

19.6

13.6

CPI (y/y, year-end%)

10.3

11.6

16.6

15.2

12.0

7.8

7.4

7.2

7.1

6.7

Exports fob (USD, mn)

34287

38368

49248

60575

75113

Imports cif (USD, mn)

36141

45034

60669

77050

95542

-2.2

-6.3

-8.1

-9.0

-9.0

Foreign direct investment (% of GDP)

8.8

5.0

6.5

6.6

3.8

Current account balance (% of GDP)

2.9

-2.9

-4.2

-5.8

-5.6

Govt. budget balance (% of GDP)

-1.8

-0.7

-1.1

-2.0

-3.0

Public debt (% of GDP)

17.7

14.8

13.0

11.2

11.0

Foreign debt to GDP (%)

46.6

51.0

60.0

55.0

52.5

Central bank intervention rate, average

9.2

9.0

8.2

10.0

9.5

Central bank intervention rate, year-end

9.5

8.5

8.0

10.0

9.0

Short term interest rate (3 months) average

12.7

13.5

9.8

10.9

10.0

Short term interest rate (3 months) year-end

16.0

15.0

11.4

10.5

9.5

Loc. Curr./USD average

5.12

5.05

5.03

4.95

4.82

Loc. Curr./USD year-end

5.05

5.05

5.05

4.85

4.75

Loc. Curr./EUR average

6.39

6.34

6.89

6.98

6.27

Loc. Curr./EUR year-end

5.97

6.65

7.42

6.55

5.94

Nom inal GDP (Loc. Curr., mn)

Real GDP (growth y/y %) Private Consumption (growth y/y %)

Industrial production (y/y %)

Unemployment (ILO, %)

Trade balance (% of GDP)

Source: Ukrstat, NBU, SLSP, Erste Bank Ukraine


Page 3


Politics Political status quo is expected to be preserved until next presidential election in 2010

After the 2007 early parliamentary elections, the political situation in Ukraine has stabilized, although disputes between the coalition parties occasionally appear and the blocking of parliamentary work by the opposition remains a usual tactic. Currently, both the coalition and opposition parties aim for reform of the Constitution, even though the implementation would be a challenging task (300 votes are needed to implement changes).

NATO issue will be put to state referendum

The work of Parliament was paralyzed for almost a month at the beginning of this year by the opposition parties, which protested against closer ties with NATO. Finally, on March 6, consensus was reached between the coalition parties and the opposition Party of the Regions and Parliament resumed its work. Both sides agreed that the NATO issue should be put to a state referendum, but the deadline for the referendum has not been scheduled. Closer ties with NATO will be discussed during the NATO summit in Bucharest on April 2-4.

Ukraine to pay originally agreed price for natural gas in 2007

After the gas disruption in March, when Gazprom decreased the volume supply to Ukraine by 25-50% for two days as a result of several disputed issues (such as the gas debt to Gazprom and the existence of intermediary companies), an agreement was reached on March 13, 2008. As a result, Naftogaz of Ukraine (a gas distribution company) will pay USD 179.5 tcm as of 2008, the price which was settled originally in 2007. In addition, Gazprom will be allowed to sell 7.5 bcm of gas to Ukrainian industrial consumers under direct contracts (12-15% of the industrial market share) in 2008. Central Asian countries declared that they will start selling gas at European prices starting in 2009. This provides a serious upward risk for gas prices next year, as Ukraine is a main consumer of Central Asian gas (Russia buys all gas from Central Asian producers and resells it to Ukraine).

Popularity of PM has been on rise

The popularity of the current governing coalition is increasing. Recent polls show that Tymoshenko's personal approval rate was much higher than that of opposition leader Yanukovych, at 35% and 24%, respectively. The popularity of Tymoshenko's BYuT party has been on the rise as well. She enjoys the support of 27% of the voters, vs. 22% for the Party of the Regions. Also, other polls conducted by a number of Ukrainian poll agencies have also been showing the increasing popularity of Tymoshenko's government. We think that, despite the increased risk of political vulnerability in the country, the economy will continue on its path to growth. It is most likely that the current status quo will remain in the political framework of Ukraine until the next presidential election. Current preferences for political parties (May 2005 - Feb 2008) 50% 45% 40% 35%

Party of Regions Yuliya Tymoshenko Bloc Bloc "Our Ukraine" Communist Party of Ukraine Socialist Party of Ukraine Lytvyn's People's Bloc

30% 25% 20% 15% 10% 5% 0% May 05

Sep 05

Jan 06

May 06

Sep 06

Jan 07

May 07

Sep 07

Jan 08

Source: FOM & other agencies, Erste Bank Ukraine


Page 4

Country Report http://global.treasury.erstebank.com Rating of Ukrainian Politicians 60%

Yuliya Tymoshenko 51%

Victor Yanukovych

50% Victor Yuschenko 46%

40%

36%

36%

31%

29%

30%

35% 28%

27%

29% 22%

20%

22% 15%

10%

0% May 05

Sep 05

Jan 06

May 06

Sep 06

22%

25% 24% 15%

Jan 07

24%

18%

16%

May 07

14%

Sep 07

Jan 08

Source: FOM, Erste Bank Ukraine

Real economy Strong economic growth remained driven by domestic demand

The real economy continued its hefty growth during the second half of 2007, benefiting from ongoing strong domestic demand and the favorable growth momentum in CIS countries (i.e. Ukraine's main trading partners). Real GDP growth reached 7.3% last year, slowing down at the beginning of this year to 5.8% (annual growth for JanuaryFebruary 2008). We expect economic growth at around 6.6% in 2008. Household consumption, supported by buoyant real income and credit growth, is going to be the cornerstone of growth this year as well. The increase in social benefits implemented by the new government as of January should support spending as well. Surging investment activity (estimated at 20% y/y in 2007) provides a solid base for lasting economic growth in the periods ahead, especially should business activity be supported by reforms in the entrepreneurial environment (such as the labor tax code). During last year, investments were made mainly in manufacturing, where companies were trying to increase their energy efficiency (especially by cutting natural gas consumption) in their production processes, and in real estate activities. These two sectors, along with trade, also generated the highest added value. Real GDP and household consumption growth (%) 25

GDP

Household consumption 20.6

20 17.4

15.9 15 11.5 10

12.1

15.0

13.1

9.5 7.3

7.3

6.6

5 2.6 0 2003

2004

2005

2006

2007

2008f

Source: Ukrstat


Page 5

Country Report http://global.treasury.erstebank.com New governament dramatically increased social benefits as of January 70% 60% 50% 40% 30% 20% 10%

Ja n06 M ar -0 6 M ay -06 Ju l-0 6 Se p-0 6 No v-0 6 Ja n07 M ar -0 7 M ay -07 Ju l-0 7 Se p-0 7 No v-0 7 Ja n08

0%

Source: Ukrstat, social benefits and other current transfers, annual growth rate

Improvement on labor market slowed down

Improvement on the labor market slowed down last year, when the number of unemployed people declined by just an estimated 30 thousand. The unemployment rate (based on ILO methodology) stood at 6.7% in September 2007 and is expected to finish the year higher, slightly above 7%. As the labor market shows the lack of qualified labor work, we expect employment gains at a rather modest 0.4% in the coming years. The registered unemployment rate (counted from people who are ready to start working) remains constantly low at around 2.5%. Wage growth in nominal terms will stay strong (at around 30%) this year, putting the real wage growth at slightly above 10%, due to high inflation. Nevertheless, wages remained low in comparison to neighboring countries, officially at less than EUR 200 a month.

Import growth to stay strong this year

Higher investments showed up in ballooning imports, along with higher imports of consumer goods (such as cars) and mineral products (especially natural gas). The fast growth in imports should continue, as all main contributors of last year's increase should stay in place in 2008. More specifically, company profits increased last year by a huge 60%, providing a solid base for capital expenditures this year. Furthermore, real income will likely increase by at least 10%, implying higher demand for consumer goods. Finally, natural gas prices already increased in January by 38%, bolstering energy imports.

Competitiveness of production did not deteriorate, despite higher natural gas prices

Interestingly enough, production branches such as the chemical and other than metallurgical industries were able to cope with the recent increase in natural gas prices very well. Factories, forced to increase their investments and efficiency, were able to raise their production and profits significantly last year (please see the figure). The key export segment - metallurgy - has been benefiting from high world steel prices. Agriculture is also expected to increase production, as this year's harvest forecasts are optimistic so far. The grain crop is expected to increase to 38-40mn tons, representing a 30-37% increase from last year's drought-hit harvest. Engineering is a rising star within the industrial sector, which is a positive factor, given the narrower segmentation of the Ukrainian economy.


Page 6

Country Report http://global.treasury.erstebank.com 2007: Increase in industrial production and profits of industries

Industrial production, total Mining Production and distribution of electricity, gas and w ater Manufacturing of w hich: metallurgy and production of finished metal products engineering manufacture of machinery and equipment manufacture of electrical, electronic and optical equipment manufacture of transport vehicles and equipment production of foodstuffs, beverages and tobacco products chemical and petrochemical industry Source: Ukrstat

Financial result before taxation (mln. UAH) 42136 8143

Change in production Change in profit volumes versus 2006 versus 2006 (%) (%) 21.4 10.2 51.6 2.7

2731 31262

-50.1 31.1

11.7

16087 4475

26.5 133.5

8.3 28.6

1187

61.6

15.3

1211

105.9

22.6

2078

249.4

42.3

3525

-20.3

10

1983

40.5

6.2

External deficit covered by investment inflow

While exports increased by a solid 28.4% last year, the trade deficit still widened to 8.1% of GDP. Widening of the trade gap is not necessarily a bad thing in a converging economy with a significant share of investment imports, such as Ukraine. Unfortunately, excessive growth of household consumption - well above the overall GDP growth suggests that Ukraine might face growing external imbalances. In this environment, a deterioration of the trade deficit is a very likely scenario for this year. What might soften the problem of the deteriorating trade balance is a surplus of the balance of services, which helped to pull up the current account gap to 4.2% of GDP in 2007. Positively, the current account deficit was sufficiently covered by FDI inflow, which reached a record USD 9.2bn last year (and increased by 60.7% over the previous year).

Banking sector attracted biggest share of FDIs

For the past three years, investments in Ukraine have significantly increased, due to the growing economy and attractiveness of Ukrainian assets. The banking sector was the absolute leader of FDI last year, with a 37.9% share in FDIs (USD 3.5bn). In 2007, 47 banks in Ukraine had a foreign stakeholder (out of 173 registered banks). Foreign capital coming to the banking sector played an important role in speeding up economic convergence. The Ukrainian banking sector has shown impressive growth, posting an 84.5% rise in loans and a 55.5% increase in deposits for 2007. The construction and real estate sector showed impressive growth as well in 2007, attracting 21% of all FDIs.

Strong FDI inflow to continue in 2008 on M&A activities and large-scale privatization

We expect the FDI growth to continue its strong momentum in 2008. M&A in banking will continue to be a driving factor, as large deals were announced in January-March 2008. Moreover, the USD depreciation made Ukrainian assets cheaper and more attractive for European investors. Large-scale privatization should contribute greatly to FDI inflow in 2008.


Page 7

Country Report http://global.treasury.erstebank.com FDI in Ukraine, 1995-2007 USD mn 10,000 Privatization

9,000

FDI in Ukraine 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: NBU, Erste Bank Ukraine

FDI sector breakdown in 2007

Other Sectors 13%

Real Estate 12%

FDI country breakdown in 2007

Construct. 9% Mining 7%

Russian Austria Federation Poland 3% 6% 5% United Kingdom 5% Netherlands 12%

Trade 6%

Other countries 35%

Non-metal prod. 4% Financial (banks) 39%

Chemical 4% Mettalurgy 3%

Food-proc. 3%

Cyprus 34%

Source: NBU, Ukrstat, Erste Bank Ukraine


Page 8


Privatization The government plans to privatize around 318 companies in 2008. There are 13 large strategic companies that are expected to bring the most revenues for the state. The government is counting on receiving about USD 1.7bn from privatization in 2008. In our view, this is a conservative assessment, taking into consideration the list of companies to be privatized. The sale of Ukrtelecom (67.8%) alone could exceed the government's estimates. Opposition does not agree on privatization plan

The government privatization plan has been scrutinized by the opposition parties. They are concerned about the sale of strategic enterprises, such as Odessa Portside Plant (the main fertilizer producer in the country), Turboatom (the main turbine producer) and Ukrtelecom (the main fixed-line and telecommunication company). The opposition leaders proposed a moratorium on the privatization of state-owned strategic enterprises.

Privatization may net USD 4-5bn in 2008

We think that the government will succeed in its privatization plan. The government has already announced that in late spring it will proceed with the sale of six electricity distribution companies, selling shares on the local stock exchange PFTS, which is good news for investors and the local stock market. We estimate that the government might collect up to USD 4-5bn from privatizations in 2008. Target Privatization vs. Actual Privatization Revenue: 2001-2008e 4,5 4,0

Target Privatization, USD bn

3,5

Actual Privatization Revenue, USD bn

3,0 2,5 2,0 1,5 1,0 0,5 0,0 2001

2002

2003

2004

2005

2006

2007

2008E

Source: MinFin, SPF, Erste Bank Ukraine

Companies

Industry

Ukrtelecom

Telecommunications

Stake for Sale 68%

Odesa Portside Plant

Chemicals/Fertilizers

100%

Turboatom

Engineering /Turbines

75%

Poltavaoblenergo

Electricity Distributors

25%

Lvivoblenergo


27%

Odesaoblenergo


25%

Chernihivoblenergo


25%

Prykarpattyaoblenergo


25%

Sumyoblenergo


25%

Centrenergo

Electricity Generators

60%

Donbasenergo


60%

Zakhidenergo


60%

Dniproenergo


60%*

Notes: *The stake has not been finalized yet; the case is in court Source: SPF, Erste Bank Ukraine


Page 9

Country Report http://global.treasury.erstebank.com WTO membership to bring benefits of free trade and faster growth After 14 years of negotiation, Ukraine's accession to the WTO is almost complete waiting only on ratification by Parliament Main benefits include: z trade liberalization will accelerate trade flows (quantitative restrictions on the trade flows with Ukraine will be eliminated by the WTO members and all the quotas will be lifted) z the Ministry of Finance forecasts a positive impact on GDP growth at around 1-2% p.a. in the medium-term, which we see as realistic z exports and imports are expected to increase by 5-8% p.a., as almost 60% of Ukrainian trade is with WTO members z the most favored nation treatment z access to the WTO dispute settlement mechanism z WTO membership enables the country to begin talks on establishing a free trade zone with the EU Competitiveness of Ukrainian economy should rise in long term In the long term, WTO entry would enhance the competitiveness of the Ukrainian economy. Export-oriented sectors such as metallurgy and chemicals should benefit the most from WTO entry. The EU is expected to lift quotas on Ukrainian steel, when a free trade zone agreement with the EU is signed (expected in 2010-12). Ukraine produced 42.8mn tons of steel in 2007, or 3.2% of the world total. The chemical industry is undergoing a modernization process and counterbalancing the 38% gas price increase may get a bit of relief from entering the WTO. The world demand for fertilizers is expected to be strong in 2008 as well. The agricultural and food-processing industries may be hurt in the short term because of market competition, but in the long term, they would benefit, as they would have to modernize and restructure their production chain. The automotive industry would also face tougher competition with WTO entry. The WTO agreement stipulates an import duty reduction on new cars from the current 25% to 10%. New car sales increased last year by an impressive 46%, reaching 542ths cars (Ukraine was ranked No. 7 in new car sales in Europe last year). The most sensitive industries, such as agriculture, food-processing and the automotive industry will get a 5-year transition period to adjust to the WTO standards.


Page 10


Price development Inflation will stay near 20% until midyear

Inflation remains one of the most problematic issues for the Ukrainian economy. Consumer inflation gradually increased to above 20% at the beginning of this year and will stay near this level until the middle of the year. There are plenty of factors that caused the acceleration of price growth. Besides external factors, such as the increase of food, oil and natural gas prices, there have been some strong local specifics. The first one is the extraordinarily high weight of food in the consumer basket (almost 60%), almost triple that of other CEE countries, meaning that Ukrainian CPI captures more or less the development of food prices. Another pro-inflationary factor comes from the currency peg to the weakening US dollar (which lost 11.5% against the euro in 2007 and an additional 6% this year), which effectively means a relative devaluation of the Ukrainian currency measured through the Nominal Effective Exchange Rate (NEER). The depreciating exchange rate does not help in the disinflation effort, as the weaker currency generally eases monetary conditions in an economy. Consumer inflation (annual growth, %) 24 22 20 18 16 14

forecast

12 10 8 6 4 Jan-04

Sep-04

May-05

Jan-06

Sep-06

May-07

Jan-08

Sep-08

Source: Ukrstat, Erste Bank Ukraine

Nominal effective exchange rate (NEER) 15,0% NEER (trade weighted) 10,0% 5,0% 0,0% -5,0% -10,0% -15,0% Jan May Sep Jan May Sep Jan May Sep Jan May Sep 2004 2004 2004 2005 2005 2005 2006 2006 2006 2007 2007 2007

Source: Bloomberg, Erste Bank Ukraine

Good harvest should help reduce inflation only partially

Later in the year, a favorable harvest is expected to help the disinflationary process. Nevertheless, inflation will likely finish the year at around 15%. A good harvest seems too little to compensate for other factors fuelling Ukrainian inflation and raising Country Report Ukraine, April 2008

Page 11

Country Report http://global.treasury.erstebank.com inflationary expectations from the medium-term point of view. The government has declared that it will adopt anti-inflationary measures, which should get inflation down from the recent highs. Government to adopt anti-inflationary measures in accordance with NBU

It is clear that neither the government nor the NBU alone can successfully curb inflation. That is why we expect the anti-inflationary package to consist of a set of mutual tasks for both the government and the central bank. In countries with an explicit inflation targeting regime, the responsibility for inflation is at the central bank. In Ukraine, the responsibility of the central bank is to keep the currency stable; the still unliberalized energy and transport prices provide only limited room for maneuvering with inflation. That is why we expect the anti-inflationary package to be primarily focused on limiting the adverse effect of the expansionary fiscal policy on inflation. However, it is unlikely that the government will come up with an explicit proposal to reduce the planned budget deficit. Thus, strictly adhering to the ceiling for expenditures might be a more feasible measure. This would secure a scenario in which higher than budgeted tax intake and privatization receipts do not increase expenditures further and provide additional stimulus for inflation growth. Any initiatives in terms of structural changes of public expenditures would be welcomed, especially those that limit growth of government transfers and consumption, which have been boosting average disposable income of households above productivity growth.

Deceleration of credit growth among main goals

The central bank's contribution in the fight against inflation will likely be to slow credit growth. Some initiatives have already been introduced (see the monetary policy section) that have been focused on the reduction of excessive liquidity from the market. Now, the government might be supportive in this area through issuing primary local currencydenominated debt, which would drain liquidity further and constrain credit growth. Some minor measures might appear in the area of stronger supervision focused on currency misalignments on balance sheets and prudence of credit risk policy, which would help to restrict credit growth.

Medium-term goal is to switch to inflation targeting and free float

The evidence from other transition countries has been that it is not possible to keep inflation low without having an open currency channel, which would take over part of price convergence from inflation. Thus, one of the mid-term goals for the Ukrainian central bank remains to switch to free float and inflation targeting. However, before switching to inflation targeting, utility prices have to be liberalized, or at least a binding deregulation schedule has to be approved by Parliament, which would make price adjustments more predictable and help to avoid sudden sharp increases of utility prices.

Short-term price caps might at least help to anchor inflation expectations

However, most of above-mentioned measures will have a positive impact on inflation only in the mid-term. That is why the government obviously needs to buy time with a proposal of some short-term measures, which would be easy to understand by the public and cut inflation expectations in the economy. The Ministry of the Economy on March 15, 2008, proposed administrative measures to regulate the situation on the food market. According to the draft, retail prices for main food products such as bread, sunflower oil, meat and dairy products will be limited to 15% above wholesale prices, excluding transport costs. Moreover, to elevate the inflation pressure, the government proposed to limit profits of food producers to 12% above costs.


Page 12


Housing market Real estate growth will vary, depending on market segmentation

Ukrainian real estate has been growing at an astonishing pace. According to the Ukrainian Association of Realtors, the average residential prices increased by 40% p.a. for the past three years. Investments in Ukrainian real estate increased dramatically over the past few years, starting from USD 24mn in 2005 and reaching USD 1.1bn in 2007. The capital city of Kyiv, with a population of 2.74mn (6% of the total Ukrainian population), was the absolute leader in terms of real estate deals (residential real estate prices have increased by 49% p.a. for the past three years in Kyiv).

1,051

1,017

1,200

918 979

1000

991

1,252

2007

1,000

1,119 1,281

2006

1,123

1,020

1,066

2005

1,433 1,133

1500

1,560

2000

1,400

1,823

2500

1,661 1,364

3000

2004

1,594

3500

2,976

Average retail prices for main Ukrainian cities USD per sqm, 2004-07

500

Sumy

Luhansk

Poltava

Cherkasy

Lutsk

Chernigiv

Ivano-

Zaporizhzhia

Zhytomyr

Ternopil

Vinnytsia

Uzhgorod

Chernivtsi

Lviv

Mykolaiv

Donetsk

Simferopol

Kharkiv

Sevastopol

Dnipropetrovsk

Kyiv

Odesa

0

Source: Ukrainian Association of Realtors, Erste Bank Ukraine

Besides residential real estate, commercial real estate has been in high demand, as Ukraine has lagged in developing modern offices, retail stores and warehouse properties. The shortage of commercial real estate has driven yields upward, giving Ukraine the leading position in the CEE region. Vacancy rates in Ukraine are below 2%, much lower than in neighboring Poland (Warsaw: 4%). Ukraine qualified for the top-5 most attractive countries for retail worldwide in A.T. Kearney's 2007 Global Retail Development Index. In warehousing space, there is also a large misbalance in supply and demand. The stock of quality commercial warehousing of 320ths sqm was five times lower than in Warsaw. Office Prime Real Estate Yields (2006) 12% 10.0% 10%

10.3%

9.0%

5.5%

5.8%

Prague

5.1%

Warsaw

4.30%

4.8%

Berlin

6%

Vienna

8%

4% 2%

Sofia

Kyiv

Moscow

0% Paris

Small supply of commercial real estate pushed yields up

Source: CB Richard Ellis, Erste Bank Ukraine


Page 13

Country Report http://global.treasury.erstebank.com Stock of Warehousing Space (thsd sqm, 3Q07) thsd sqm 3500

3200

3000 2500 2000 1600

1500

1500

1300

1000 500

320

0 Moscow

Warsaw

Prague

Budapest

Kyiv

Source: DTZ, Erste Bank Ukraine

Mortgage loans seeing boom

The affordability of mortgage loans, growing disposable income and the change in people's attitude toward credit (more trust in LT borrowing) have been contributing to the real estate boom in Ukraine. The interest rates on mortgage loans (currently about 1114%), although high compared to European standards (5-6%), have substantially declined over the past few years. In 2007, the outstanding volume of mortgage loans doubled to USD 11.3bn (8.1% of GDP). Retail clients preferred foreign currency for mortgage loans (89% in 2007). The city of Kyiv and the Kyiv region accounted for 27% of mortgage loans issued in 2007. Mortgage Loans in Ukraine, 2003-07 12 Mortgage Loans, USD bn 10

Mortgage Loans, % GDP

8 6 4 2 0 2003

2004

2005

2006

2007

Source: NBU, Erste Bank Ukraine, UNIA

Housing market to expand in coming periods

We think that the Ukrainian real estate market will continue with healthy growth in 2008. Although the pace of growth in residential real estate prices decelerated in 2007, we are confident that the market has not reached the level of saturation. There is a different dynamic of growth among the regions, depending on the level of the economy in each region and the different segmentation of the housing market. It is important to note that the moratorium on the sale of land to foreigners in Ukraine has been upheld for next year by Parliament.


Page 14


Monetary policy Inflation targeting regime will not become reality soon

On the monetary policy front, the status quo in the current pegged FX regime is a very likely scenario for the central bank. Although the widening of the current band this year remains our baseline scenario, a switch towards an inflation targeting regime will not be delivered so soon - not in 2008, and probably not next year either. Why? The fixed FX regime is seen by the NBU as the only nominal anchor that it can keep under control. The first reason why the NBU does not switch to inflation targeting and sticks to the currency peg is the still unliberalized prices in the energy and transportation sectors. Hence, there are exogenous factors affecting inflation in Ukraine, which are less predictable and beyond the scope of NBU policy. For example, prices of natural gas are still to rise in the coming years - in total, by around 70%, in order to reach European standards. However, the schedule of adjustment is not known. Another factor for the NBU's sticking with the FX peg is a missing measure of core inflation. Another reason arguing against hurrying to float the currency is the lack of political stability. In politically unstable times, the chances of currency depreciation are not negligible; free float has served on some occasions as a disciplining device for government actions in CEE countries in recent years.

We expect widening of band this year

Although a widening of the currency band is very likely this year, in the medium term, the price convergence will take a path almost solely through inflation, rather than through a combination of exchange rate appreciation and inflation, as was the case in CEE countries. For this year, we stick to our older forecast of a shift in the stronger band to 4.85 UAH/USD from the current 4.95UAH/USD.

Central bank tightened its policy…

Interest rates are not seen as a very efficient monetary policy tool that could significantly help the central bank in its disinflationary effort. Hence, we would not expect severe increases in policy rates in the next few months. Currently, the key interest rate stands at 10%. The central bank will instead try to limit excess liquidity, increase reserve requirements and continue issuing Depo Certificates.

… via draining liquidity from market…

Indeed, the times of cheap hryvnia funds, when 1-month (ask) rates were at 3.0-3.5% and the Ukrainian interbank market enjoyed excess liquidity at the level of UAH 15-17bn, are already in the past. In the first quarter, the 1-month rates reached on average 6.4%. Since the fourth quarter of 2007, the National Bank of Ukraine started gradually reducing the liquidity via deposit certificates, treating this as one of the tools to curb credit growth and inflation.

… increasing minimum reserves

The extension of the minimum reserve requirements to funds obtained from banks and foreign financial institutions introduced in November 2007 has substantially raised the amount of minimum reserves by 75% to UAH 9.7bn in December 2007. The volume of excess liquidity has been shrinking, from UAH 8-10bn in January 2008 to UAH 3-5bn in March 2008, as the government has been very efficient in tax collection, draining liquidity from the market. This has impacted the price of resources and the money market rates have returned to their historical maximum levels (1M at 15.55% on March 18, 2008, and 3M at 13.0% on March 18, 2008), while the yield curve has become inverted.

Drained liquidity increased demand for hryvnia

During the period of low liquidity, banks had to sell their dollar resources to increase their hryvnia liquidity. This pushed the USD/UAH exchange rate during the third week of February and second week of March to the stronger end of the band (4.95-5.00 USDUAH). The central bank has even resumed overnight refinancing on a large scale to calm the market, which was not the case last year. Given the clear intention of the central bank to reduce excess liquidity, we expect money market rates to remain elevated in 2008.


Page 15

Country Report http://global.treasury.erstebank.com Liquidity monitor UAH mn 35,000

NBU deposit certificates Excess liquidity

30,000

20

NBU resumed selling deposit certificates to reduce the excess liquidity and to slow down the inflation

Required reserves

10

Treasury account 25,000

KIEVPRIME 3M

0

KIEVPRIME 1M KIEVPRIME ON 20,000

-10

15,000

-20

10,000

-30

5,000

-40

0 01 Feb 2007

08 Mar 2007

12 Apr 2007

17 May 2007

21 Jun 2007

26 Jul 2007

30 Aug 2007

04 Oct 2007

08 Nov 2007

13 Dec 2007

17 Jan 2008

21 Feb 2008

-50 27 Mar 2008

Source: NBU, State Treasury, Bloomberg, Erste Bank Ukraine

Fiscal policy State budget deficit should be maintained at 2% of GDP

The government expects the state budget deficit for 2008 to reach 2.0% of GDP or USD 3.4bn. Parliament has approved a preliminary state budget for 2008 with amendments. In the spring of 2008, the government is expected to come up with the amended and final version of the state budget for 2008. This was part of the deal between the government and Parliament that stipulated the approval of the state budget for 2008 in a short period of time (to pass a deadline for 2008).

Government likely to borrow mostly on domestic market

According to the preliminary version, revenues are expected to reach UAH 215.4bn (USD 42.65bn) and expenditures to net UAH 232.4bn (USD 46.02bn). The government plans to borrow UAH 15.9bn (USD 3.14), both on the domestic primary bond market (USD 1.54bn) and externally (USD 1.6bn). However, taking into consideration the global liquidity crisis, investors' aversion to risky EM bonds and the central bank's aim to drain liquidity from the market, the government will likely focus mostly on domestic issues. It will be a challenging task, as the current yields of 7.6-8% did not attract a significant number of buyers (USD 75.8mn sold in Jan-Feb 08), even though the Ministry of Finance increased the yield by 110bp in a recent auction of 2Y bonds.

Social expenditures mean risk to proposed budget deficit

Social spending plays an important role in the state budget of PM Tymoshenko. On average, social spending will increase by 30% in 2008. The government plans to increase the minimum salary by 32% y/y and pensions by 37% y/y, as well as implement other social programs. Approximately 50% of the workforce was employed in the public sector. In 2007, more than USD 6bn was paid as salaries to the public sector. This category of employees gets salary indexation based on the minimum wage level set by the government. That is why the increase in minimum wages means a nonCountry Report Ukraine, April 2008

Page 16

Country Report http://global.treasury.erstebank.com negligible pro-inflationary impulse, although the share of people receiving the minimum wage is not so big. In 2007, overall social spending amounted to UAH 53.2bn (USD 10.54bn). Compensation for Oschadbank savers not likely to be fully paid this year

Another big government bill is related to compensation for savers at Oschadbank, who suffered from devaluation of the currency after the collapse of communism, for which the government earmarked UAH 20bn (USD 3.96bn) in the 2008 budget. However, this is the estimated maximum amount and it is contingent on the privatization results for the year. In the 2008 budget, UAH 6bn (USD 1.19bn) is assigned to payments in cash through the Oschadbank branches to former clients (USD 200 per person). An additional UAH 2bn (USD 0.4bn) is to be paid in non-cash form with depositors able to claim offsets on utility bills. This part of the package has been misinterpreted by some savers (pensioners), which caused a delay in utility payments at the beginning of the year. We estimate that finally only about UAH 8bn (0.9% of GDP) will be paid out as compensation in 2008.

So far, tax collection has improved in 2008

Revenue collection has shown a positive dynamic for the first two months of 2008. Revenue collection exceeded the target by UAH 1.8bn (8% y/y) in the first two months of the year. The government has called for a serious effort to fight corruption in the state customs. As a result, custom collections have increased by an impressive 70% y/y (as of March 14, 2008) to UAH 15.2bn. There is also a positive dynamic of VAT collection as well as refunds, a main source of Ukraine's budget (36% of the 2007 budget or USD 11.8bn). Tymoshenko's government has announced that it would work on eliminating VAT corruption schemes, in which some exporters with government ties were given preferential VAT treatment. We think that the state budget deficit of 2% of GDP will be met in 2008. It is important to note that most of the social spending was implemented in the first month of the year. As of March 25, 2008, USD 725mn was paid to Oschadbank savers, or 61% of cash payments planned for 2008. The positive dynamic of the state revenue collection looks encouraging and the prospects of strong privatization results make us optimistic about the state budget for 2008. We are less optimistic on the government borrowing plan, as the government yields would have to be increased in order to attract investors. However, given the low level of public debt (12.5% of GDP), higher costs of debt service should not burden the state budget too much.

Financial market overview Tough liquidity situation causes low investor interest

The local fixed income market has not avoided the impact of the recent global credit crunch impact and local liquidity squeeze (as a result of anti-inflation measures). Companies have reoriented themselves towards issuing debt on the local market, but the demand side remains weak. This has increased yields for domestic bonds; domestic corporate bond yields have increased on average from 13% in September 2007 to 15% in March 2008. Similar trends have been observed in the banking, municipal and government segments. Banks, being major local buyers of domestic bonds, have cut demand during the recent liquidity shortage on the local money market after the central bank substantially dried up the excessive liquidity in the market.

Better tax collection has compensated for unsuccessful auctions

Under such challenging market conditions, the government was able to borrow USD 76.9mn (or 5% of the planned volume for 2008) by selling treasury bonds on the domestic market since January. Such lower than scheduled inflow of borrowings had no great impact on the state budget, as it was filled from other sources (more effective tax collection and customs duties). A large part of this amount was borrowed in January, as sovereign bonds were offered at higher yields (approx. 110bps more than in previous auctions). However, during the following months, the Ministry of Finance faced a series Country Report Ukraine, April 2008

Page 17

Country Report http://global.treasury.erstebank.com of unsuccessful auctions, as investors were not interested in buying treasuries and waited for higher yields. Since the beginning of 2008, there have been no new corporate Eurobond issues. Borrowers are obviously waiting for more favorable conditions. Ukrainian Eurobonds average yields %, AVG YTM (bid) Sovereign Eurobonds Municipal Eurobonds Banking Eurobonds Corporate Eurobonds

13%

11%

9%

7%

13/03/08

12/02/08

13/01/08

14/12/07

14/11/07

15/10/07

15/09/07

16/08/07

17/07/07

17/06/07

18/05/07

18/04/07

19/03/07

5%


Ukrainian domestic bonds average yields %, AVG YTM (bid)

Corporate bonds

19%

Banking sector Municipal bonds Treasury bonds

17% 15% 13% 11% 9% 7%

06/03/2008

06/01/2008

07/11/2007

08/09/2007

10/07/2007

11/05/2007

12/03/2007

11/01/2007

12/11/2006

13/09/2006

15/07/2006

16/05/2006

17/03/2006

16/01/2006

5%

Source: Cbonds, Bloomberg, Erste Bank Ukraine


Page 18

Country Report http://global.treasury.erstebank.com Treasury Bonds auction volume UAH mn

160 140

135.7

120 100 75.9

80

61.7 53.4

60

42.8

5.3

0.0

0.0

3.7

0.0 24.03.08

0.0

17.03.08

0.0

18.02.08

0.0

14.02.08

10.3 0.0

03.03.08

20

28.02.08

40

25.02.08

11.02.08

04.02.08

31.01.08

28.01.08

21.01.08

17.01.08

15.01.08

10.01.08

0

Source: MinFin, Erste Bank Ukraine

Equity market performance Performance +140% +120%

PFTS Index RTS$ (Russia) SVSM (Slovenia)

MSCI EM CSI 300 (China) S&P 500

+100% +80% +60% +40% +20% +0% -20% 29/03/2007

07/06/2007

16/08/2007

25/10/2007

03/01/2008

13/03/2008

Source: PFTS, Bloomberg, Erste Bank Ukraine

Stock market saw strong rally in 2007

The Ukrainian stock market showed an incredible performance of 135.4% for the PFTS Index, a 142.5% increase of the market capitalization to USD 111.8bn in 2007, and was not strongly affected by fluctuations on international markets (as it has low liquidity). Ukrainian companies became more transparent in 2007, which led to greater interest among foreign investors. Metallurgical companies, machine builders and distributors/ generators of electricity were the top-performing sectors. Kyivenergo (KIEN UZ) was a top-performing Tier-1 stock, returning a 429% gain for the year.

In early 2008, PFTS faces correction, in line with global markets

The recent global instability caused by the credit crunch has dragged the local stock market into a bearish trend in the first months of 2008. As of March 20, 2008, the PFTS Index had lost 12.7% YTD and entered a second wave of sell-offs. Such a situation is explained by the high share (up to 80-90%) of foreign capital operating on the local stock market, as well as the global risk aversion. However, there is no panic, as these sellCountry Report Ukraine, April 2008

Page 19

Country Report http://global.treasury.erstebank.com offs usually happen on average daily turnover of USD 10-15mn. Buyers are largely represented by short-term speculators buying back the shares they sold earlier. The market is mostly supported by foreign institutional investors with an investment horizon of more than one year, who expect their investments to grow no less than 20-30% per year. Last year successful for IPOs, this year looks more moderate

2007 was a record year for Ukrainian IPOs. The total volume of IPOs with additional share issuance amounted to USD 1.89bn. Ukrainian companies preferred foreign exchanges for their IPOs - the London SE, Frankfurt SE and Warsaw SE. The Ferrexpo (the leading Ukrainian iron producer) IPO raised USD 420mn on the London SE (the first listing of the Ukrainian company on this exchange). Real estate and food processing companies were also active on the international exchanges. The sub-prime mortgage turmoil had a negative impact on IPOs of Ukrainian companies. As a recent example, developer Davento Limited was able to place only USD 77.8mn (an 11% stake), instead of the planned USD 150-165mn (a 20% stake), in a private placement. Thus, many companies that had planned an IPO for 2008 have postponed it until later this year or next year.

What should we expect in 2008?

What should we expect in 2008? Global sentiment will play a major role in the performance of the PFTS. Among positive factors that could help the market to rebound could be the upcoming privatization and auctioning of state-owned company stakes (some of them will be auctioned directly on the PFTS), improved transparency of the companies and better financial results. It is positive that internal demand has been on the rise, as asset managers have increased the share of internal capital in their portfolios. Moreover, the large government pension funds, such as the state post office and state railway company, have hired asset management companies to manage their funds. If the global markets calm down in 1H08, the PFTS Index has a good chance to gain back the lost positions and show moderate double-digit growth in 2008.


Page 20


Published by Erste Bank der oesterreichischen Sparkassen AG Börsegasse 14, OE 543 A-1010 Vienna, Austria. Tel. +43 (0)50100-ext.

Erste Bank Homepage: www.erstebank.at On Bloomberg please type: ERBK . This research report was prepared by Erste Bank der oesterreichischen Sparkassen AG. (”Erste Bank”) or its affiliate named herein. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgement on the date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, Erste Bank or its affiliates or the principals or employees of Erste Bank or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities Erste Bank or its affiliates or the principals or employees of Erste Bank or its affiliates may from time to time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Further information on the securities referred to herein may be obtained from Erste Bank upon request. Past performance is not necessarily indicative for future results and transactions in securities, options or futures can be considered risky. Not all transaction are suitable for every investor. Investors should consult their advisory, to make sure that the planned investment fits into their needs and preferences and that the involved risks are fully understood. This document may not be reproduced, distributed or published without the prior consent of Erste Bank. Erste Bank der oesterreichischen Sparkassen AG confirms that it has approved any investment advertisements contained in this material. Erste Bank der oesterreichischen Sparkassen AG is regulated by the Financial Securities Authority for the conduct of investment business in the UK.


Page 21

Country Report http://global.treasury.erstebank.com Group Research Head of Group Research Friedrich Mostböck, CEFA +43 (0)5 0100 - 11902 CEE Equity Research Co-Head: Günther Artner, CFA +43 (0)5 0100 - 11523 Co-Head: Henning Eßkuchen +43 (0)5 0100 - 19634 Günter Hohberger (Banks) +43 (0)5 0100 - 17354 Franz Hörl, CFA (Steel, Construction) +43 (0)5 0100 - 18506 Gernot Jany, CFA (Banks, Real Estate) +43 (0)5 0100 - 11903 Daniel Lion (IT) +43 (0)5 0100 - 17420 Martina Valenta, MBA (Transp., Paper) +43 (0)5 0100 - 11913 Christoph Schultes (Insurance, Utilities) +43 (0)5 0100 - 16314 Vera Sutedja, CFA (Telecom) +43 (0)5 0100 - 11905 Vladimira Urbankova (Pharma) +43 (0)5 0100 - 17343 Gerald W alek, CFA (Machinery) +43 (0)5 0100 - 16360 International Equities Hans Engel (Market strategist) +43 (0)5 0100 - 19835 Ronald Stöferle (Asia) +43 (0)5 0100 - 11723 Jürgen Rene Ulamec, CEFA (Europe) +43 (0)5 0100 - 16574 Macro/Fixed Income Research Head: Veronika Lammer (Euroland,SW) +43 (0)5 0100 - 11909 Alihan Karadagoglu (Corporates) +43 (0)5 0100 - 19633 Rainer Singer (US, Japan) +43 (0)5 0100 - 11185 Elena Statelov, CIIA (Corporates) +43 (0)5 0100 - 19641 Macro/Fixed Income Research CEE Co-Head CEE: Juraj Kotian (Macro/FI) +43 (0)5 0100 - 17357 Co-Head CEE: Rainer Singer (Macro/FI) +43 (0)5 0100 - 11185 Editor Research CEE Brett Aarons +420 2 24995 - 904 Research, Croatia/Serbia Head:Mladen Dodig +38 1 112200 - 866 Damir Cukman (Equity) +38 5 6237 - 2820 Ivan Gojnic (Equity) +38 1 112200 - 852 Alen Kovac (Fixed income) +38 5 6237 - 1383 Uros Mladenovic (Equity) +38 1 112200 - 872 Davor Spoljar (Equity) +38 5 6237 - 2825 Research, Czech Republic Head: David Navratil (Fixed income) Petr Bartek (Equity) Maria Hermanova (Fixed income) Lenka Slamova (Equity) Radim Kramule (Equity) Martin Lobotka (Fixed income) Lubos Mokras (Fixed income) Jakub Zidon (Equity) Research, Hungary Head: József Miró (Equity) Zoltan Arokszallasi (Equity) Mihaly Tatar (Equity) Orsolya Nyeste (Fixed income) Research, Poland Head: Artur Iwanski (Equity) Magda Jagodzinska (Equity) Marcelina Hawryluk (Equity) Tomasz Kasowicz (Equity) Piotr Lopaciuk (Equity) Marek Czachor (Equity) Research, Romania Head: Lucian Claudiu Anghel Mihai Caruntu (Equity)

+420 +420 +420 +420 +420 +420 +420 +420

2 2 2 2 2 2 2 2

24995 24995 24995 24995 24995 24995 24995 24995

-

439 227 232 289 213 192 456 340

+36 1 235 - 5131 +36 1 235 - 5135 +36 1 235 - 5134 +36 1 373 - 2830 +48 2 23306 +48 2 23306 +48 2 23306 +48 2 23306 +48 2 23306 +48 2 23306 -

253 250 255 251 252 254

+40 2 1312 - 6773 +40 2 1311 - 2754

Dumitru Dulgheru (Fixed income) Cristian Mladin (Fixed income) Loredana Oancea (Equity) Raluca Ungureanu (Equity) Research, Slovakia Head: Juraj Barta (Fixed income) Michal Musak (Fixed income) Maria Valachyova (Fixed income) Research, Ukraine Viktor Stefanyshyn (Fixed income) Roman Oliynyk (Fixed income)

+40 2 1312 +40 2 1312 +40 2 +40 2

6773 6773 1311 1311

-

1028 1028 2754 2754

+42 1 25957 - 4166 +42 1 25957 - 4512 +42 1 25957 - 4185 +38 044 593 - 1784 +38 044 593 - 9188

Institutional Sales Head of Sales Equities & Derivatives Michal Rizek +44 207 623 - 4154 Brigitte Zeitlberger-Schmid +43 (0)5 0100 - 83123 Equity Sales Vienna XETRA & CEE Hind Al Jassani +43 (0)5 0100 - 83111 Werner Fuerst +43 (0)5 0100 - 83114 Josef Kerekes +43 (0)5 0100 - 83125 Cormac Lyden +43 (0)5 0100 - 83127 Stefan Raidl +43 (0)5 0100 - 83113 Simone Rentschler +43 (0)5 0100 - 83124 Sales Derivatives Christian Luig +43 (0)5 0100 - 83181 Manuel Kessler +43 (0)5 0100 - 83182 Sabine Kircher +43 (0)5 0100 - 83161 Christian Klikovich +43 (0)5 0100 - 83162 Armin Pfingstl +43 (0)5 0100 - 83171 Roman Rafeiner +43 (0)5 0100 - 83172 Equity Sales, London Dieter Benesch +44 207 623 - 4154 Tatyana Dachyshyn +44 207 623 - 4154 Jarek Dudko, CFA +44 207 623 - 4154 Federica Gessi-Castelli +44 207 623 - 4154 Declan Wooloughan +44 207 623 - 4154 Sales, Croatia Zeljka Kajkut (Equity) +38 5 6237 - 2811 Damir Eror (Equity) +38 5 6237 - 2813 Sales, Czech Republic Michal Brezna (Equity) Ondrej Cech (Fixed income) Michal Rizek Jiri Smehlik (Equity) Pavel Zdichynec (Fixed income)

+420 +420 +420 +420 +420

Sales, Hungary Gregor Glatzer (Equity) Krisztián Kandik (Equity) Istvan Kovacs (Fixed income) Sales, Poland Head: Andrzej Tabor Pawel Czuprynski (Equity) Lukasz Mitan (Equity) Jacek Krysinski (Equity) Sales, Slovakia Head: Dusan Svitek Rado Stopiak (Derivatives) Andrea Slesarova (Client sales)

2 2 2 2 2

24995 24995 24995 24995 24995

-

523 577 537 510 590

+36 1 235 - 5144 +36 1 235 - 5140 +36 1 235 - 5846 +48 +48 +48 +48

2 2 2 2

23306 23306 23306 23306

-

203 212 213 218

+42 1 25050 - 5620 +42 1 25050 - 5601 +42 1 25050 - 5629

Treasury - Erste Bank Vienna Sales Retail & Sparkassen Head: Manfred Neuwirth Equity Retail Sales Head: Kurt Gerhold Domestic Sales Fixed Income Head: Thomas Schaufler Treasury Domestic Sales Head: Gottfried Huscava Corporate Desk Head: Leopold Sokolicek Alexandra Blach

+43 (0)5 0100 - 84250 +43 (0)5 0100 - 84232 +43 (0)5 0100 - 84225 +43 (0)5 0100 - 84130 +43 (0)5 0100 - 84601 +43 (0)5 0100 - 84141

Roman Friesacher Helmut Kirchner Christian Skopek Fixed Income Institutional Desk Head: Thomas Almen Martina Fux Michael Konczer Ingo Lusch Ulrich Inhofner Karin Rauscher Michael Schmotz


+43 (0)5 0100 - 84143 +43 (0)5 0100 - 84144 +43 (0)5 0100 - 84146 +43 +43 +43 +43 +43 +43 +43

(0)5 (0)5 (0)5 (0)5 (0)5 (0)5 (0)5

0100 0100 0100 0100 0100 0100 0100

-

84323 84113 84121 84111 84324 84112 84114

Page 22

ERSTE GROUP

Press conference April 3, 2008, Kiev

Ukraine shows strong growth, but has yet to find a way to battle inflation

Juraj Kotian, Co-Head CEE Macro and Fixed Income Research, Erste Group Viktor Stefanyshyn, Analyst of Erste Bank Ukraine Roman Oliynyk, Analyst of Erste Bank Ukraine

Ukraine will follow convergence of incomes experienced by CEE countries in the last decade

ERSTE GROUP

GDP per capita (in EUR) 18000 1997

2007E

16000 14000 12000 10000 8000 6000 4000 2000

en ia Sl ov

ic ub l Re p

C

ze ch

H

un g

ar y

nd Po la

ia ak Sl ov

to ni a Es

ni a

Li th ua

tv ia La

a an i om R

ul g B

U

kr a

in e

ar ia

0

Source: Eurostat, IMF, Erste Group Research Press Conference April 3rd 2008,

Country Report on Ukraine 2

Entering the WTO will increase trade opportunities and speed up the catching up process

ERSTE GROUP

Exports to GDP (%) 90 2000

2007E

80 70 60

CEE countries have utilised their competitive advantages and boosted exports

50 Eurozone level (2006) 40 30 20 10 0 Poland

Ukraine

Hungary

Czech Republic

Slovakia

Source: Erste Group Research Press Conference April 3rd 2008,


Inflation will remain a relatively high as income convergence induces also price convergence

ERSTE GROUP

160%

Price level (Eurozone = 100%)

140% Eurozone

120% 100% CEE countries

80% 60%

40% Ukraine 20% 0% 0%

20%

40%

60%

80%

100%

120%

140%

160%

GDP per capita in PPP (Eurozone = 100% ) Source: Eurostat, OECD, IMF, Erste Group Research Press Conference April 3rd 2008,


Introduction of inflation targeting would require a binding schedule of adjustment of energy prices

ERSTE GROUP

Inflation as of February 2008 (%)

− Ukraine faces the same exogenous price shocks (increasing food and oil prices) like the rest of the world

Ukraine Latvia Bulgaria

Local specifics: − High weight of food prices in consumer basket − Peg to the weakening US dollar − Fiscal expenditures boost consumption

Estonia Lithuania Romania Czech Republic Hungary

Anti-inflationary package − focus on anti-cyclical policy

Slovenia Poland

Food prices y/y Energy prices y/y

Slovakia

Inflation targeting & free float currency − the most efficient disinflation policy in CEE

Inflation (% ) Eurozone 0

10

20

30

40

Source: Eurostat, Erste Group Research Press Conference April 3rd 2008,


Ukraine is cushioned against risks related to financing C/A deficit thanks to strong FDIs − The risk premium for countries with high external imbalances has increased under the global turmoil on financial markets

ERSTE GROUP

Current account deficit / GDP (%) Latvia Bulgaria Estonia

− Ukrainian current account deficit is to deteriorate due to strong growth of consumption and investments

Romania Lithuania Croatia

− FDIs have been sufficiently high to cover C/A deficit

Slovakia Hungary

− Privatisation is to keep FDI inflow on high level in next couple of years

Ukraine Poland

C/A deficit / GDP FDI inflow / GDP

Czech Republic 0

5

10

15

20

25

Source: Eurostat, Erste Group Research Press Conference April 3rd 2008,


GDP growth will slow in 2008 to 6.6% ERSTE GROUP

GDP/household/wages/growth

− GDP will drop marginally to 6.6% in 2008

% y/y

25 20 15 10

− There is a gap in GDP growth and household consumption

5 0 2002

-5

2003

2004

2005

2006

2007

-10

− GDP will continue to be fuelled by strong consumption

Households Consumption

GDP

General Government

Gross fixed capital formation

% y/y

Real disposable income y/y Households Consumption Grow th Real Wages Grow th Unemployment rate

30

− Gross fixed investment, especially in manufacturing is expected to be strong in 2008 (2007 companies profits increased by a huge 60% in 2007)

25 20 15 10 5 0 2002

2003

2004

2005

2006

10 9 8 7 6 5 4 3 2 1 0

2007

Source: Ukrstat, Erste Group Ukraine

Press Conference April 3rd 2008, Kyiv


Social benefits should support spending ERSTE GROUP

Social Benefits increase in 2008

− Increase in social benefits, on average by 30% should support spending

− Growth of social benefits as a procyclical measure pose additional risk to inflation

− We expect the nominal wage to increase by 33%

− Retail sales (the highest in CIS) will be have a double-digit growth in 2008 as well Source: Ukrstat, social benefits and other current transfers, annual Growth rate



Commercial real estate will be in high demand ERSTE GROUP

Average housing prices for major cities, USD per sqm

− We expect a moderate growth in housing in 2008 (in 2007 housing went up by 18% y/y)

3500 2004 2006

2 976

2005 2007

3000

− Mortgages increased by more than 60% in 2007 to USD 11.2bn (8.2 % GDP). We expect a healthy mortgage growth in 2008

2500

2000

1 823

1 661

1 594

1 433 1 281

1 364 1 400

1500

− We see a strong potential in commercial real estate because of misbalances in supply-demand: retail (Ukraine offers the highest yields in CEE region), offices (2% vacancy rate), and warehousing (shortage of supply)

1 560

1 066 1 133

1000

1 119 1 252 1 200 1 017 1 123 1 051 1 020 1 000 991 979 918

Sumy

Luhansk

Poltava

Cherkasy

Lutsk

Chernigiv

Ivano-Frankivsk

Ternopil

Zhytomyr

Vinnytsia

Chernivtsi

Uzhgorod

Lviv

Mykolaiv

Simferopol

Kharkiv

Donetsk

Sevastopol

Odesa

Dnipropetrovsk

Kyiv

0

Zaporizhzhia

500

Source: Ukrainian Association of Realtors



FDI is expected at USD 11.2bn in 2008 ERSTE GROUP

− FDI was driven by strong M&A in banking (38% of 2007 FDI) and real estate and construction (21% of GDP)

FDI Inflow/Privatization USD mn 12 000

11 200 Privatization

10 000

9 218

FDI in Ukraine 7 843

8 000

− We expect FDI to beat a record 2007 (USD 9.2bn) and reach USD 11bn in 2008 driven by strong M&A and privatization revenues

5 737

6 000 4 000 1 711 1 411

2 000

541 625

413

747 489

594 769

698

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

− The government plans to sell 13 strategic companies (more than 300 companies). We expect that a conservative privatization target of USD 1.7bn will be beat (we project around USD 4bn revenues received)

4.5

4.1

4.0

4.0

Target Privatization, USD bn

3.5

Actual Privatization Revenue, USD bn

3.0 2.5 1.7 1.8

2.0 1.5

1.7

1.1

1.0 0.5

2.1

2.0

0.4

0.6

0.5

0.4

0.4 0.4

0.1

0.1

0.0 2001

2002

2003

2004

2005

2006

2007

2008E

Source: Ukrstat, MinFin, SPF, Erste Bank Ukraine



Current Account Balance ERSTE GROUP

Current Account Balance: 1999-2007 70

USD bn

60

The C/A deficit is expected to w iden moderately in 2008, but strong FDI inflow should help to offset the rise in C/A deficit

% of GDP

25%

60.4 20% 49.8

50 44.1 36.2

40 33.4 10.65% 29.7

15%

38.9

35.0

30

10% 7.48% 23.7 23.2 5.25%

20

13.2 12.9

4.74% 17.1 15.7 14.9

18.7 16.9

18.0 3.76%

5.77%

5%

3.69%

10

0% 0 1999 -10

2000

2001

Export (goods) Export (services) C/A balance FDI

2002

2003

2004

2005

Import (goods) Import (services) Financial Account C/A balance, %GDP (rhs)

2006 -1.52%

2007 -5% -4.21%

Source: NBU, Erste Bank Ukraine



Inflation will slightly decrease in 2008 ERSTE GROUP

CPI Data with forecast: 1998-2009F

− We expect CPI to be elevated for the year and subside in the second half of 2008 to finish the year at 15.2%

30.0 25.8

25.0 20.0 20.0

− Ukrainian specific of inflation: food basket accounts for 55% of weight (three times higher than in CEE countries); peg to USD (dollar depreciation leads to imported inflation)

16.6

19.2

15.2

15.0

12.3 12.0 11.6

10.0 10.3

8.2

6.1 5.0 -0.6 0.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F -5.0

− The government anti-inflationary measures in conjunction with NBU: short and mid-term measures

Source: Ukrstat, Erste Bank Ukraine



Fiscal Policy ERSTE GROUP

− We expect Budget Deficit to widen to 2% of GDP in 2008

Budget 2002-2008F UAH bn

% of GDP

250

232.0

State Budget Revenue (UAH bn)

25%

215.0

State Budget Expenditure (UAH bn) State Budget Balance (UAH bn) 200

− Increased expenditure (minimum salary, pensions)

20%

State Budget Balance (% of GDP)

174.6 165.9

137.3 133.5

150

15%

113.1 105.2 10%

100

50

− Positive dynamics of tax collection would help to offset the deficit. The government has been orienting more on domestic borrowing

44.4 43.2

80.5 56.1 70.3 55.1 5%

0.5% 0

0% -0.4% -1.8%

-0.7%

-1.1% -2.0%

-2.9%

-50 2002

2003

2004

2005

-5% 2006

2007

2008 E

Source: MinFin, Erste Bank Group



Money Market ERSTE GROUP

− NBU became more active in reducing liquidity to curb credit growth (+74% in 2007)

Liquidity Chart UAH mn 35 000

30 000

− Time of cheap hryvnia is over, MM rates are hovering around 10%. We expect 3m 25 000 KIEVPRIME to be at 11% in 2008 − Draining of liquidity through deposit certificates, increased reserve requirements, and accumulating resources on Treasury accounts

NBU mid- and long-term certificates NBU refinancing NBU overnight deposits Transit and corr accounts Required reserves Tresury account Interbank Credit Market, volume KIEVPRIME 3M KIEVPRIME 1M KIEVPRIME ON

KIEVPRIME, % 20

10

0

20 000

-10

15 000

-20

10 000

-30

5 000

-40

− Demand for hryvnia has increased in the time of lower liquidity and global dollar depreciation

0 -50 01 Feb 13 Mar 22 Apr 01 Jun 11 Jul 20 Aug 29 Sep 08 Nov 18 Dec 27 Jan 07 Mar 2007 2007 2007 2007 2007 2007 2007 2007 2007 2008 2008

Source: NBU, Bloomberg, Erste Bank Ukraine



FX ERSTE GROUP

− Currency appreciation helped to fight inflation in CEE countries

FX Chart UAH mn

2 400

2 100

− Widening of the fluctuation band is feasible in 2008. We expect the shift to 1 800 the stronger band by the end of the year 1 500

NBU Interventions, Volume USD/UAH ASK Cash USD/UAH BID Cash USD/UAH ASK USD/UAH BID NBU Intervention

USD/UAH

5.12

5.10

5.08

5.06

1 200

5.04

900 5.02

− Stronger UAH in 2008

600 5.00 300 4.98 0 12.12.2006 13.02.2007 20.04.2007 03.07.2007 05.09.2007 07.11.2007 14.01.2008 16.03.2008 4.96

-300

Source: NBU, Bloomberg, Erste Bank Ukraine



Bonds ERSTE GROUP

UA Bond Yields

− Lower investors interests to bonds on domestic markets and Eurobonds (global aversion to EM bonds)

Corporate bonds Banking sector Municipal bonds Treasury bonds

%, AVG YTM (bid) 19% 17% 15% 13% 11%

− Yields will be elevated and may come down in the second half of the year

9% 7%

− Government raised UAH 368 mn (target UAH 1bn). Yields increased by 110 bp for mid-term treasuries

06.03.08

06.01.08

07.11.07

08.09.07

10.07.07

11.05.07

12.03.07

11.01.07

12.11.06

13.09.06

15.07.06

16.05.06

17.03.06

16.01.06

5%

Sov ereign Eurobonds Munic ipal Eurobonds Banking Eurobonds Corporate Eurobonds

% , A V G Y TM (bid) 13% 11% 9%

13.03.2008

12.02.2008

13.01.2008

14.12.2007

14.11.2007

15.10.2007

15.09.2007

16.08.2007

17.07.2007

17.06.2007

18.05.2007

18.04.2007

5%

19.03.2007

7%

Source: Bloomberg, Cbonds, Erste Bank Ukraine



Equity Market ERSTE GROUP

Equity Indices Performance

− PFTS strong rally in 2007 turned into a bear mood in the IQ 2008

+140%

+120%

PFTS Index

MSCI EM

RTS$ (Russia)

CSI 300 (China)

SVSM (Slovenia)

S&P 500

+100%

− Record IPO volume in 2007 (USD 1.9bn) will see a slow down in 2008 due to global volatility on financial markets

+80%

+60%

+40%

− Positive for 2008: sales of state’s stakes in oblenergos on PFTS; improving transparency and financial results of the companies; state pension funds and local investors would become more active

+20%

+0%

-20% 29.03.07

07.06.07

16.08.07

25.10.07

03.01.08

13.03.08




Contacts ERSTE GROUP

Erste Group Research (Vienna)

Thank you for attention!

CEE Macro and Fixed Income Research Juraj Kotian co-Head of CEE Macro and Fixed Income Research +43 5 0100 17357 [email protected]

Visit our webpage www.erstebank.at and download the most recent research or sign for automatic delivery via e-mail

Rainer Singer co-Head of CEE Macro and Fixed Income Research +43 5 0100 11185 [email protected]

Local research offices (Macro and Fixed Income) Bratislava

Budapest

Bucharest

Slovenska sporitelna Head: Juraj Barta +421 (2) 59574166 [email protected] Coverage: Slovakia, (Ukraine)

Erste Bank Hungary Analyst: Orsolya Nyeste +36 (1) 3732830 [email protected] Coverage: Hungary

BCR Head: Lucian Anghel +40 (21) 3126773 [email protected] Coverage: Romania

Kyiv

Prague

Zagreb

Erste Bank Ukraine Analyst: Viktor Stefanyshyn +38 (044) 593 17 84 [email protected] Coverage: Ukraine

Ceska sporitelna Head: David Navratil +420 (2) 24995439 [email protected] Coverage: Czech Republic, Poland

Erste Bank Analyst: Alen Kovac +385 (62) 371383 [email protected] Coverage: Croatia, Serbia

Press Conference April 3rd 2008,


Analytici Erste Group: Ukrajina vykazuje silný růst, musí však najít cestu, jak čelit inflaci

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