Deloitte CE TOP 500 2009 Country by Country Report

Get a broader viewCE Top 500

Country Reviews

Contents

3 Introduction 4 Albania 8 Bosnia and Herzegovina 12 Bulgaria 16 Croatia 20 Czech Republic 24 Estonia 28 Hungary 32 Latvia 36 Lithuania 40 Macedonia 44 Moldova 48 Montenegro 52 Poland 56 Romania 60 Serbia 64 Slovakia 68 Slovenia 72 Ukraine 76 Leadership and governance

Get a broader viewIntroduction

Deloitte’s annual Country-by-Country Report, covering 18 states across the Central European (CE) region, is a vital component of the Deloitte CE Top 500 programme.

Designed to give the reader a rapid executive overview of the main political, social and economic forces at play in each country, it is perhaps the most accessible and diverse commentary on the current performance and future prospects of the region as a whole.

This year, the Country-by-Country Report paints a picture of a region under extreme pressure. First, following years of rapid growth, the unprecedented turbulence caused by the global financial crisis battered its economies and brought turmoil to countries that had played no part in creating market panic. This, though, was just the precursor of the deep recession in which, at the time of writing, many CE countries remain embroiled. Falling company profits, reduced export activity, recession and rising unemployment all becoming familiar experiences.

Experiences have been far from identical across the region, however, depending on factors such as individual countries’ reliance on exports, exposure to foreign debt, exchange rate performance, progress towards a transformed economy, and most of all size of domestic market and strength of households’ consumption.

Across the region, governments, banks and businesses – often with the support of international organisations like the IMF and EU – have taken urgent action to address the situation, with varying degrees of success. We still cannot envisage the shape of recovery in the CE region. Would it be a most welcome V-shaped (or more prolonged U-shaped), or less comfortable W-shaped, or much more worrisome L-shaped stagnation. For sure, the CE countries passed the test of democracy however, in the days of a global crisis comparable only to the Great Depression, bank runs, massive bankruptcies of companies, and workers’ layouts – all political campaigns, elections, or re-shuffles of cabinets are no different than in matured democracies.

Deloitte’s Country-by-Country Report charts this story, using our own expertise and knowledge of the region, supported by a wealth of data provided by Reuters. It is the essential guide to a region’s diverse response to a moment of shared crisis.

Rafal AntczakVice-president, Deloitte Business Consulting in Poland, CE Top 500

Please see over the page for a glossary of abbreviations used through the report.

Get a broader view Country Reviews 3

Albania held its elections in June 2009. The Assembly of Albania has 140 members elected, 70 seats belong to the Alliance for Changes, led by Democratic Party, 66 seats belong to Unification for Changes, led by Socialist Party and 4 seats to Socialist Alliance for Integration. Alliance for Changes and Socialist Alliance for Integration are in the process of negotiating the formation of a new government. Albania became a member of NATO in April 2009.

During the last four years, the government sought to lower the cost of doing business by reducing corporate tax rates, small business taxes and employers’ social security contributions as well as abolishing customs’ duties on imports of machinery and equipment. Partly as a result, The World Bank’s Doing Business 2009 report ranked Albania in second place in the world for the extent and depth of the reforms it introduced to improve the business climate during the year to June 2008.

51.3% of the country’s 3.1million population is classified as economically active. At 12.7% in 2008, unemployment is regarded as one of the most significant economic challenges that Albania faces, although this is considerably lower than the 16,4% recorded in 2001. The average monthly gross wage in Albania equates to EUR 311, with agriculture still significantly the largest employment sector. The country’s wealth of natural resources, including water, petroleum, coal, bauxite, copper, iron ore and nickel, makes it appealing to local and foreign investors alike.

Unlike most other European countries, Albania continued to enjoy strong GDP growth throughout 2008, averaging 6% across the year. This was driven by a major improvement in the country’s electricity supply, successful energy sales to Kosovo and the rapid expansion of credit availability. Other contributory factors included telecommunications, services and government capital expenditure, mainly on the construction of the Durres – Kukes Highway. The outlook for 2009 is less favourable, although the country is still likely to achieve a growth. This remains considerably better than its neighbours, despite recession in the Eurozone, a likely reduction in the remittances sent home by Albanians working abroad and a decline in the availability of credit. According to INSTAT, the industrial sector suffered more than any other

Albania


from the economic crisis, with a 13.2% year-on-year decline in productivity during the first quarter of 2009. High government expenditure during the election process benefited the Albanian economy in the first six months of 2009. Its absence will negatively impact economic growth in the second half of the year.

Even within this context of continued growth, Albania has kept inflation under control with a 3.4% increase in 2008. Declines in international fuel and commodity prices have driven it lower in 2009, and it is now expected to average under 2% in 2009-2010, well below the Bank of Albania’s upper limit of 4%. Albania’s domestic currency, the Lek, maintained a stable position against the Euro for the whole of 2008 (averaging 123.3), although it depreciated against the US Dollar in the second half of the year.

Tax receipts and income from the privatisation of state-owned enterprises remained the two main sources of financing for government spending. During 2008, the government completed the privatization of Albtelecom and launched the tenders to privatise some major state-owned enterprises, such as ARMO (the Albanian Oil Refinery), OSSH (the Albanian Electricity Distributor) and INSIG (the state-owned insurance company). Only ARMO was privatised in 2008, OSSH’s privatisation was concluded in 2009, while the successful bidder for INSIG withdrew.

Exports grew more slowly than imports during 2008 (to EUR 2 billion, against EUR 4 billion), widening the country’s trade deficit to EUR – 2,654 million. Albania’s main foreign markets are Italy, the Netherlands and Greece which between them buy a majority of the country’s exports which mainly comprise metals, minerals, textiles, footwear, and building materials. The current account deficit reached a record level of 15% of GDP in 2008. The decrease in remittances, which have been the primary source of finance for reducing the deficit in recent years, is expected to generate negative pressure.

Government spending has underpinned the construction industry, ranging from major projects such as the Durres – Morine highway that will link Kosovo to the major sea port in Albania, to many smaller schemes to improve the country’s existing transport infrastructure. The budget deficit reached 5.6% of GDP in 2009 a growth from 3.4% of GDP in 2007 due to major infrastructure works (especially due to the Durres – Kukes highway).

The four largest sectors of the Albanian economy are services, communications, agriculture and construction. Of these the fastest growing was communications, as the country moves towards a fully liberalised and competitive market. Key developments in 2008 included the privatisation of the remaining state – owned shares in the joint stock company AMC sh.a and the award of the country’s third GSM licence to Eagle Mobile. The fourth GSM licence was awarded in 2009 to a consortium including Kosovo Post Communications.


Albania 2005/2007 Average Values

2007-2008 2008

Change (%) Change (%)

Population (mil.) 0.4 0.4 3.1

Average monthly gross wage (EUR) 13.3 6.0 310.7

EUR Exchange rate vis-à-vis -1.1 1.4 123.3

USD Exchange rate vis-à-vis -2.9 7.0 88.7

Real change (%) Real change (%) EUR mil.

GDP 5.6 6.0 8,628

Private consumption n/a n/a 6,740

Public consumption n/a n/a 925

Gross fixed capital investments n/a n/a 3,145

Exports (goods and services) n/a n/a 1,999

Imports (goods and services) n/a n/a 4,024

Nominal change (EUR mil.)


EUR mil.

Trade balance -304 -360 -2,654

Current account balance -164 -488 -1,319

General government balance 7 -208 -489

General government gross debt 275 270 4,538

External debt 52 317 1,570

Foreign currency reserves 147 199 1,666

Percentage point change


%

Economic activity rate -0.8 -0.1 51.3

Unemployment rate -0.4 -0.5 12.7

CPI rate (previous year = 100%) 0.2 0.4 3.4

Central bank interest rate 0.3 0.0 6.3

1-year yield on Treasury Bill -0.3 0.3 6.2

10-year yield on Treasury Bond n/a n/a n/a

Sources used: Reuters EcoWin Pro


ContactsAlbania

Office Managing Partner

Maksim Caslli+40 21 2075 [email protected]

Function Leaders

Mario VangjeliAudit+355 4 22 77 [email protected]

Nuriona SokoliAudit+355 4 22 77 [email protected]

Anton LezhjaTax+355 4 22 77 [email protected]

Klodiana BllaciTax & BPO+355 4 22 77 [email protected]

Maksim CaslliConsulting+40 21 2075 [email protected]

Anton LezhjaFinancial Advisory+355 4 22 77 [email protected]

Artan GaqoEnterprise Risk Services+355 4 22 77 960 [email protected]

Industry Leaders

Mike JenningsFinancial Services+420 246 042 [email protected]

Vladimir VanekEnergy & Resources+420 246 042 [email protected]

Dariusz NachylaTechnology, Media & Telecommunications+48 22 511 [email protected]

Diana RogerovaReal Estate+420 246 042 [email protected]

Martin BuranskyPublic Sector+420 246 042 [email protected]

Country Review Analysts

Tomasz Ochrymowicz+48 22 511 [email protected]

Rafal Antczak+48 22 511 [email protected]

Clients & Markets

Matthew Howell+420 234 078 [email protected]

Xhoana Cela+355 4 2277 [email protected]

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The state of Bosnia and Herzegovina (BiH) comprises two main territories – the Federation of Bosnia and Herzegovina (Federation) and the Republika Srpska (RS). Political stability is proving difficult to establish in the country, particularly after the resignation of former prime minister Nedzad Brankovic in late May 2009. This followed pressure from his own party – the Bosniak Party of Democratic Action (SDA) – and the Croatian Democratic Union of BiH, both of which are in favour of constitutional reform alongside the Alliance of Independent Social Democrats (SNSD). Disagreement over some proposals has stalled the reform process, which in turn is placing in doubt BiH’s likelihood of being accepted as a candidate for EU membership.

There is some perceived danger of social discontent due to public-sector wage cuts and the recession, which threatens to increase the country’s already very high unemployment rate (23.4% in 2008). The population has declined significantly since the 1991 census, from 4.4 million to 3.8 million in 2008. This reflects the impact of the 1992-1995 war and a prolonged decline in the birth rate, while recent surveys show that many young people are considering emigration in search of better prospects.

As part of its efforts to mitigate the effects of economic downturn, the government has agreed a three-year stand-by loan worth SDR 1.01 billion (USD 1.57 billion) from the IMF. This followed repeated calls from the IMF for greater fiscal discipline in BiH, which is now a major priority as the country seeks macroeconomic stability. The loan will only come into force once the authorities have fully drafted plans for expenditure cuts, including wage reductions, stricter eligibility criteria for benefits and a redirection of current public spending towards investment.

BiH has also signed the Stabilisation and Association Agreement (SAA) with the EU, which is setting the country’s broad policy framework in 2009 and 2010. One result is the reduction or abolition of customs duties on a wide range of EU imports, which is increasing competition for local producers. By way of contrast, however, a bill to protect domestic production by reintroducing tariffs on products including milk, meat, fruit and vegetables has on first reading received the approval of the upper house of the BiH government, even though it contravenes the CEFTA.

Following a 5.5% growth in GDP to EUR 13.1 billion in 2008, this is now expected to contract by some 2% in 2009. This will be driven by reduced private consumption and lower industrial output due to recession in the Eurozone and the main Balkan export markets, as well as low prices for commodities such as steel and aluminium and significantly reduced demand for the output of the mining and electricity sectors.

Bosnia and Herzegovina


These and other factors, including a sharp fall in the global oil price and a slowing in the increase in food prices, have slowed inflation from the consumer price index average of 3.8% during 2008 to 0.4% in April 2009.

The local currency, the Marka (KM), is pegged to the Euro by the BiH currency board regime at a rate of 1.96, which appears to be a considerable over-valuation at the time of writing. There is little current likelihood of change, however, unless other Adriatic states with similar arrangements abandon their pegs to enable devaluation.

Industrial performance in the country’s two territories is markedly different, with year-on-year output shrinking in the Federation and increasing in the RS. Industrial output in the Federation shrank by over 10% year-on-year in the first quarter of 2009, although there have been some subsequent signs of improvement, while an exceptionally strong performance by the Bosanski Brod oil refinery drove a 50.3% year-on-year manufacturing increase in the RS.


Bosnia and Herzegovina 2005/2007 Average Values

2007-2008 2008


Population (mil.) 0 -0.1 3.8

Average monthly gross wage (EUR) 10.9 17.7 616

EUR Exchange rate vis-à-vis -0.3 -0.2 1.9



GDP 12.6 5.5 13,070

Private consumption 9.3 n/a n/a

Public consumption 4.7 n/a n/a

Gross fixed capital investments 15.2 n/a n/a

Exports (goods and services) 18.1 n/a n/a

Imports (goods and services) 8.5 n/a n/a



EUR mil.


Current account balance 53 -743 -1,914


General government gross debt 452 1,053 4,483

External debt -7 122 2,183

Foreign currency reserves 430 -583 2,517



%

Economic activity rate 0.9 0.7 54.3



Central bank interest rate n/a n/a n/a

1-year yield on Treasury Bill n/a n/a n/a




ContactsBosnia and Herzegovina


Milos Macura+381 11 3812 [email protected]

Country Leaders

Sead Bahtanovic+387 33 277 [email protected]

Ranko Travar+387 0 51 213 [email protected]

Industry Leaders

Mike JenningsFinancial Services +420 246 042 [email protected]

Vladimir VanekEnergy & Resources +420 246 042 [email protected]







Clients & Markets


Aleksandra Kolaric+385 1 2352 [email protected]











Early July 2009 saw a fundamental shift in the Bulgarian political scene, with victory in the country’s parliamentary elections by the right-wing Citizens for European Development of Bulgaria party under the leadership of Sofia mayor Boyko Borisov. In gaining over 40% of the vote they won the elections over the Bulgarian Socialist Party led by former prime minister Sergei Stanishev. During the last year, Bulgaria’s main political challenge has been the management of the financial crisis in the face of the EU sanctions imposed because of certain cases of misappropriation of European funds.

Bulgaria’s population of 7.3 million people is made up of a substantial majority of ethnic Bulgarians (84%) with minorities of Muslim (9.4%) and Roma (4.7%) origin. After two years within the EU, Bulgaria still has the lowest per-capita annual income of any EU country, although, the average gross monthly wage rose by 17.9% to EUR 289. In recent years, the country has successfully combated unemployment, which fell from 12% in 2004 to 6.3% in 2008. This downward trend is now in reverse, however, and unemployment is expected to rise again to some 9% by the end of 2009.

Prudent fiscal policies over the last decade have driven a major reduction in the amount of public debt, from over 100% of GDP in 1997 to less than 17% in 2008.

GDP grew in 2008 by 3.5% to EUR 34.1 billion, although it is now believed to be falling during 2009. This will be driven by a 12.2% decline in the industrial sector and a 3.1% fall in agriculture, although the services sector expanded by 0.9%.

Exports and imports were down in 2008 by 6% and 3.2% respectively, replacing the solid growth experienced in previous years. The decline continued further as exports fell significantly during February 2009 while imports outweighed this further contracting. One positive news might be that although the outlook for Bulgaria’s export sector remains bleak in 2009, the potential for imports to reduce even further will help to improve Bulgaria’s net trade position.

Consumer price inflation averaged 12.3% in 2008, after spiking above 15% in the middle of the year. The fall in world energy prices and a successful harvest in 2008 helped to bring inflation down to 7.8% by the end of the year. With world oil prices still far below the peak levels of 2008, a recession-driven drop in energy consumption

Bulgaria


and general deflationary trends, inflation is expected to decline to an average of 3.5% in 2009.

Overall, risks to Bulgaria’s growth prospects are mounting due to the global downturn and volatile global food and energy prices. The large current account deficit (over 25% of GDP in 2008) and high private sector debt remain sources of vulnerability in light of the reduction in private external financing. Bulgaria is however, relatively well positioned to face the current slowdown with its foreign exchange reserves accumulated in the fiscal reserve account and the banking sector.

Reserves in Bulgaria’s banking system grew substantially in 2008, by 17.7% to approximately EUR 35.6 billion, due to strong banking supervision and stricter regulations than are in place in other EU countries.

Lending, however, stands at the lowest rate for several years, with consumer loans in May 2009 sinking to a third of their peak 2009 level (Bulgarian National Bank reserves).

Bulgaria’s largest companies are in the energy, oil and gas, telecommunications and metallurgy sectors. In the autumn of 2008, the Minister of Economy and Energy authorised seven leading energy companies to form Bulgarian Energy Holding EAD (BEH). This is now one of the region’s largest energy businesses, with approximately 21,000 employees, assets of EUR 4.96 billion and consolidated revenues of some EUR 1.84 billion.

Lukoil, the country’s leading refining and chemical-processing plant, is the country’s largest company, followed by copper plant Aurubis Bulgaria.

The Bulgarian Telecommunication Company (BTC) is the largest business in the telecommunications, media and technology (TMT) sector, with total 2008 revenues of EUR 531.7 million. It is combating increased competition and falling demand for fixed line telephony with a focus on the underdeveloped broadband market and the aggressive promotion of ADSL services.


Bulgaria 2005/2007 Average Values

2007-2008 2008


Population (mil.) -0.9 -0.8 7.3


EUR Exchange rate vis-à-vis 0.0 0.0 2.0



GDP 6.4 3.5 34,120

Private consumption 5.6 1.8 23,112

Public consumption 4.6 -1.5 2,585

Gross fixed capital investments 20.7 15.8 11,379

Exports (goods and services) 7.2 -6.0 20,633

Imports (goods and services) 10.9 -3.2 28,405



EUR mil.

Trade balance -1,523 -1,459 -8,759

Current account balance -1,987 -1,367 -8,634

General government balance 247 -57 1,023

General government gross debt -786 9 5,732

External debt -961 -261 2,832

Foreign currency reserves -434 775 12,714



%



CPI rate (previous year = 100%) 2.8 -4.7 7.8


Interbank SOFIBOR 12M 2.5 1.8 9.2

10-year yield on Treasury Bond 0.0 2.3 7.4



ContactsBulgaria


Maksim Casli+40 21 207 [email protected]

Chairman Deloitte Bulgaria

Ilian Vassilev+359 2 8023 [email protected]

Function Leaders

Sylvia PenevaAudit+359 2 8023 [email protected]

Assen DimovAudit+359 2 8023 [email protected]

Desislava DinkovaAudit+359 2 8023 [email protected]

Borislav StratevLegal+359 2 8023 [email protected]

Georgi SarakostovTax+359 2 8023 [email protected]

Jan SkvarilConsulting+359 2 8023 [email protected]

Kurt WerthFinancial Advisory+359 2 8023 [email protected]

Marian Marinov Enterprise Risk Services +359 2 8023 [email protected]

Industry Leaders



Dariusz NachylaTechnology, Media &Telecommunications+48 22 511 [email protected]






Clients & Markets


Albena Petkova +359 2 8023 306 [email protected]











The Croatian coalition government is led by the centre-right Croatian Democratic Union (HDZ), whose leader, Ivo Sanader, resigned in May 2009 to be replaced as premier by Jadranka Kosor. This resignation has intensified some of the key challenges facing the government, which include addressing the economic crisis. Unblocking stalled negotiations regarding EU accession is the country’s primary foreign policy goal, despite a poll carried out in February 2009 that showed a lack of public enthusiasm about the EU. Accession negotiations are currently being held up by neighbouring Slovenia due to an ongoing bilateral border dispute.

Croatia’s population of 4.5 million people has settled following the large fluctuations caused by the 1991 – 95 conflict. Today, a falling birth rate is being compensated by inward migration, including that of ethnic Croats from Bosnia & Herzegovina, which would otherwise mean an annual population decline of some 10,000. Some 48.5% of the population aged 15 and over is economically active, and unemployment stood at 13.5% in 2008 despite a fall of 0.9% during the year. Following an increase in unemployment in early 2009, it fell again in the second quarter – possibly due to an increase in tourism activity – which might boost flagging consumer demand during 2009.

With broad cross-party support for EU integration, the Croatian government is committed to its programme of EU-mandated reforms, which has now reached politically sensitive sectors of the economy such as agriculture, fishing and steel. It is planning to introduce a number

of measures which will enable completion of the negotiations’ technical phase during 2009 or early 2010.

The global economic slowdown has, however, forced the government to revise its 2009 budget due to a significant fall in revenues which saw tax receipts fall by 17% year-on-year in the first quarter of 2009. While it has already introduced a range of expenditure cuts, it intends to keep spending at a level that provides some support for the economy. Despite these cuts, falling GDP – which is expected to contract by some 4% during 2009 (after a sluggish growth of 0.2% in 2008) due to a decline in the real estate sector, an expected contraction in investment activity, and an increasingly gloomy export situation, will lead to a larger 2009 budget deficit.

Croatia


In addition, the global credit squeeze and declining asset values mean that privatisation revenue is not expected to contribute significantly to public finances during 2009.

Despite these challenges, and concern expressed by the IMF about Croatia’s external debt, the government and the Croatian National Bank (CNB) currently deny the need for the IMF funding.

This situation may change, however, despite the government’s success in May 2009 in raising EUR 750 million through the issue of Eurobonds to cover public sector payments due in the second half of the year.

The CNB is taking action to ensure liquidity in the domestic market and prevent the economy from shrinking, including a reduction in minimum reserve requirements. By holding regular repurchase agreement auctions, it is also helping improve the liquidity of commercial banks and reduce the upward pressure on money market interest rates. The CNB is also keen to control the liquidity of the Croatian currency, the Kuna, to below a level which would undermine its strength. While the Kuna saw some significant appreciation in 2008 to average 7.2 against the Euro, it is expected to depreciate to an average of 7.4 in 2009. There is also a risk of

steeper depreciation, however, particularly if investor insecurity grows as a result of increased anxieties about the economy. Managing the Kuna’s volatility remains the CNB’s main monetary policy, matching domestic interest rates and money supply with the inflation expectations of the currencies of Croatia’s main trading partners (chiefly the Euro and US Dollar).

In 2008, while exports rose by 6.1% to EUR 19.5 billion, imports growth was still significantly higher by 8.2% at EUR 23.4 billion causing the trade balance to widen further to reach 9.6% of GDP compared to 7.5% of GDP in 2007.

By May 2009, industrial production had fallen for seven consecutive months, driven by reduced domestic consumption and foreign demand. This was mainly manifested in lower production of consumer durables, as well as reductions in capital goods, intermediate goods, non-durable consumer goods and energy. While March and April 2009 saw some recovery in month-on-month retail sales volumes, the year-on-year figures remained negative. Falling incomes, difficulty in gaining credit and eroded consumer confidence continue to make a rapid recovery unlikely.

As part of its activities to fulfil the conditions necessary to negotiate on market competition with the EU, the government has reached agreement with the European Commission on the sale of six shipyards that between them account for 15% of Croatia’s annual exports and employ 11,500 people. Four of these – Brodosplit, Brodotrogir, 3rd May and Kraljevica – will be offered at the initial symbolic price of one Kuna, and the Split yard for special building projects will also be sold at a symbolic price. For the profitable Uljanik yard, 25% of shares will be sold to employees at a reduced price, and 59.3% to a strategic investor at a nominal price of HRK 400 million (EUR 54 million). The government requires the investor to commit to investing in new technology and taking over some of the obligations currently covered by government guarantees.


Croatia 2005/2007 Average Values

2007-2008 2008







GDP 4.4 0.2 46,457


Public consumption 2.3 1.9 8,624


Exports (goods and services) 4.8 1.7 19,469

Imports (goods and services) 5.9 3.6 23,359



EUR mil.


Current account balance -601 -1,218 -4,454

General government balance -190 -476 -608

General government gross debt 697 -716 13,487





%






10-year yield on Treasury Bond n/a n/a 6.0



ContactsCroatia



Function Leaders

Branislav VrtacnikAudit+385 1 2351 [email protected]

Attila KovesdyTax +36 1 428 [email protected]

Paul TrinderConsulting+ 36 1 428 [email protected]

Vladimir MilosevicFinancial Advisory+385 1 2351 [email protected]

Paul TrinderEnterprise Risk Services+ 36 1 428 [email protected]

Industry Leaders







Tomasz Ochrymowicz +48 22 511 [email protected]


Clients & Markets













Targeting deficit reduction, privatisation, healthcare and tax reforms were at the top of the Czech Republic’s governmental economic agenda in 2008. The strong economic growth of previous years presented an ideal opportunity for reducing the deficit and introducing structural reforms. The agenda started to change significantly in the third quarter of the year however when clear signs of financial and economic crisis spread across Europe.

On the international stage, the Czech Republic assumed the EU Presidency during the first half of 2009, a particular challenge for a relatively small country. Its actual performance in this task was significantly affected when in March 2009 the ruling coalition was subject to a vote of no confidence in the Czech parliament. An interim government was appointed and parliamentary elections were brought forward to October 2009.

Discussions on adopting the Euro came to halt in 2009 following this vote of no confidence, and will in all probability only begin again following October 2009 parliamentary elections and the return of some stability to the turbulent economic climate. Further increases in the budget deficit, which is likely to exceed 4% in 2009 and 2010, could further delay the Czech Republic’s introduction of the Euro.

Unemployment among the Czech Republic’s 10.2 million population stood at 6% of the workforce, while the average gross monthly wage was EUR 915 – an increase of over 7% during the year, which together

with a weakening of domestic currency has upheld CPI inflation at 3.6% in 2008, still much higher than in 2005-2007.

Like all economies in Europe, the Czech Republic has been seriously affected by the rippling effects of the global recession. Strong growth from 2005 to 2007, when the country’s GDP grew at annual rate of over 6%, was followed by a subsequent sharp economic decline in 2008 where the growth decreased to 3% while the fourth quarter in 2008 already showed decline. Current predictions estimate that GDP will decline by some 4% in 2009, reaching its low in the second and third quarter. This sudden shift from strong growth to economic decline presented a clear challenge both for the country’s policy makers and its economy as a whole.

Czech Republic


That said, the Czech economy is one of the most robust in the Central European region. Low levels of public debt (which should not exceed 40% of GDP in the foreseeable future, even after increases associated with the current crisis), favourable external debt, a high proportion of FDI in the net external position, and a trade balance surplus are all reducing the risk of economic destabilisation.

In 2008, the country’s exports reached over EUR 107 billion, which even after the rapid decline towards the end of the year represents annual growth of 6.5% and an exceptionally high proportion of its EUR 138 billion GDP (77%). The value of the Czech Republic’s exports significantly outweighed those of its imports, which rose by 4.6% in 2008 to almost EUR 100 billion.

However, as an open economy that is highly dependent on exports, the Czech Republic has seen demand plunge due to dramatically worsening economic conditions in Western Europe. The depreciation of the Czech Crown (after rapid appreciation peaking in mid-2008) has eased export pains for some companies, but this alone cannot compensate for the falling demand affecting many industries, such as car-manufacturing. A reliance on an export-oriented economy based in particular on manufacturing, the automotive and consumer electronics sectors, has delivered a serious blow to Czech growth

and employment prospects. There have been boosts for some sectors of the economy, such as the car scrapping bonus introduced by Germany and other European economies, which positively affected international sales of cars and car components manufactured in the Czech Republic, but such stimulus packages are temporary and the potential for market decline following their withdrawal presents a concern.

The Czech Republic has been proven in recent months to possess one of the CE region’s strongest financial sectors. Generally favourable economic conditions and a primary focus by the banks on servicing the domestic economy (with a growing emphasis on retail lending products) reduce the costs of writing off toxic assets in the Czech banking sector due to their low exposure to such markets. This approach has also created a high deposit-to-loan ratio, which combined with the good liquidity of the Czech banks enabled them to weather the storm, at least in the short term.

Nevertheless, a majority of the banking institutions have tightened their credit terms to reduce their exposure within an economy that is facing unprecedented uncertainty. The key question facing the banks and their regulator is how large the losses arising from the declining quality of their loan portfolios could prove to be. While the Czech National Bank is suggesting that the banking sector can sustain substantial further economic decline, it is still not clear how much the Czech banks could be affected by the country’s short-term economic development. So far, first quarter data for 2009 suggest that the banks continue to post strong profits even within a recession.

The commercial real estate and construction sectors are also affected by a decline in demand and the expectation of falling prices following the recent period of strong growth. As a consequence, the development of new office space came to a complete halt during the first half of 2009. In contrast, the demand for residential property is riding the recession better. The ability and willingness of the banks to continue providing mortgages (albeit under tighter lending criteria) also has the potential to help the market, which is still waiting for a pick up in activity as the majority of would-be buyers are waiting for the price reductions which are now to some extent underway.


Czech Republic 2005/2007 Average Values

2007-2008 2008







GDP 6.4 3.0 138,164



Gross fixed capital investments 6.2 -0.1 33,281





EUR mil.

Trade balance 1,397 -796 2,522

Current account balance 209 -586 -4,611

General government balance 453 -738 -2,072

General government gross debt 4,705 3,694 37,372

External debt 7,698 9,520 47,965

Foreign currency reserves 23,871 2,251 25,692



%


Unemployment rate -1.2 0.0 6.0


Central bank interest rate 0.3 -1.3 2.3

Interbank PRIBOR 12M 0.5 -0.3 3.9

10-year yield on Treasury Bond 0.2 -0.4 4.3



ContactsCzech Republic


Michal Petrman+420 246 042 [email protected]

Function Leaders

Michal Brandejs Audit+421 2 582 49 [email protected]

Tomas Seidl Tax+420 246 042 [email protected]

Petr KymlickaConsulting+420 246 042 480 [email protected]

Josef KotrbaFinancial Advisory+420 246 042 [email protected]

Vladimir VanekEnterprise Risk Services+420 246 042 [email protected]

Industry Leaders




Diana Rogerova Real Estate+420 246 042 [email protected]



Tomasz Ochrymowicz +48 22 511 [email protected]


Clients & Markets


Eva Usai Blumental+420 246 042 [email protected]











The European elections of June 2009 were the second in which Estonia has participated since it became a full member of the European Union (EU) in 2004. Of the 392,494 people who voted (43.2% of the eligible population, up from just 26.8% in 2004) 58,669 chose to vote online for the first time. Of the country’s six representatives now in the European parliament, two are from the Estonian Centre Party, which led the way in the election with 26% of the vote.

Until 2008 Estonia was one of the fastest growing countries in the region. Following consistent year-on-year growth in consumption averaging 9.5% between 2000 and 2007, Estonian consumers have become significantly more conservative as the economic situation deteriorates. This has, however, had the benefit of increased levels of household savings, which have historically been lower than in other developing countries. This situation is expected to reverse again in 2009, however, as job losses mount and people are forced to use their savings rather than suffer a reduced standard of living.

The Estonian economy started to cool in 2007, earlier than many of its neighbours, and moved into recession in mid-2008. By the final quarter, year-on-year decline in GDP stood at 3.6%, with the only sectors showing even modest growth being public administration, social care and education.

Estonia had for some years enjoyed a credit boom, which resulted in an unbalanced economy. Healthy export demand might have enabled an easier transition from

one growth regime to the next, but global recession is continuing to drive further GDP decline during 2009. This in turn, is creating an exceptionally poor array of confidence indicators, indicating weak demand and excessive production capacity, which is driving down prices. These factors are placing upwards pressure on unemployment, which in turn is contributing to further economic contraction.

However, the country is undergoing major economic restructuring designed to bring production capacity in line with demand, which is due for completion by 2011. This, aligned with recovery in neighbouring countries to boost Estonian exports is expected to start a recovery in productivity in late 2009 or early 2010 with a return to growth in 2011.

It is also expected that the banks’ high aversion to risk may cause difficulties in gaining access to credit even

Estonia


for those businesses with good prospects, potentially restricting lending at precisely the time that the economy needs the banking sector’s support.

In 2006, supported by a favourable investment environment and optimistic outlook, investment in Estonia amounted to over a third of GDP with a significant proportion coming from the commercial and domestic property markets. These markets are now in recession and the proportion of investment in GDP is expected to decline to some 22% in 2009, lower even than during the financial crisis of the late 1990s. Little recovery is anticipated until there is some clarification of the situation regarding Estonia’s future adoption of the Euro. This would be expected to stimulate investment growth, by providing increased economic confidence at home and abroad, and to enable cheaper lending, thanks to

a reduction in interest rates and decrease in risk margins. There is hardly a sector that has not yet or will not be impacted by the economic slowdown, with the retail, automotive and manufacturing sectors among those which are suffering most severely. It is not possible to accurately assess how large the decline will be by the end of 2009 for the most drastically affected sector of all, construction, which fell in the first quarter of the year by 42% year-on-year. This was due to the collapse of the real estate market, which was previously an important driver of the overheated economy.

On the positive front however, the response of the private sector has been very positive, with salary cuts of up to 30% and a rigorous reduction of over-production driven by lower demand for products and services.


Estonia 2005/2007 Average Values

2007-2008 2008







GDP 8.6 -3.6 15,866

Private consumption 10.1 -4.0 8,694







EUR mil.

Trade balance -490 1,011 -2,395

Current account balance -563 1,284 -1,499


General government gross debt 17 227 762

External debt -3 121 490




%





Interbank TALIBOR 12M 1.7 0.6 8.3




ContactsEstonia


Veiko Hintsov+372 640 [email protected]

Function Leaders

Madis ValkAudit+372 640 [email protected]

Mait RiikjärvTax+372 640 [email protected]

Anneli SimmConsulting+372 640 [email protected]

Anneli SimmFinancial Advisory+372 640 [email protected]

Siret MaremäeEnterprise Risk Services+372 640 [email protected]

Industry Leaders



Dariusz NachylaTechnology, Media & Telecommunications +48 22 511 [email protected]






Clients & Markets


Gisela Toomesoo+372 640 [email protected]











Hungary

The need to respond vigorously to the global economic crisis with heightened levels of fiscal discipline resulted in further falls in the popularity of Hungary’s ruling parties. This led to the resignation at the end of March 2009 of Prime Minister Ferenc Gyurcsany, whose popular standing had already been relatively low for some time before the eruption of the financial crisis. His successor, Gordon Bajnai, enjoying majority support in the parliament from the Hungarian Socialist Party and the Free Democrats, has received the approval of investors for signs that his government is committed to cutting public spending, increasing revenues and improving the efficiency of the tax regime. Results in the EU elections just two months after his installation as prime minister, however, suggested that his fiscal toughness was already affecting his popularity with the public, as right wing parties made major advances at the Socialists’ expense.

Hungary has a declining and ageing population, which is embroiled in tensions affecting the integration of its Roma community. This is the largest of its ethnic minorities and tensions between Romas and non-Romas have in recent months erupted into a growing number of violent atrocities stirring racist sentiment. In parallel with the need to address this situation, Hungary is also seeking to grow the proportion of economically active people within its population, which stands around 50% of labour force (the lowest rate among all Central European countries).

The working population is continuing to shrink, with a 1.2% decrease in the number of employed during 2008 alone contributing to a growing unemployment rate that, at 8%, is at its highest since 1998.

In addition, Hungary faces an overall environment of shrinking GDP. This was reported to have fallen by 2.5% in 2008, although when the still burgeoning agricultural sector is excluded the reduction declines sharply to some 4%. The country also faces an exceptionally high level of indebtedness which, at over 70% of GDP (expected to grow to 80% in 2009), is already the highest in the CE region. Such levels of debt led several commentators to believe that Hungary was on the edge of bankruptcy in the autumn of 2008, resulting in a major flight of capital


away from the country as investors sought to reduce their exposure to perceived risk. These significant trends combined to threaten the Hungarian government’s ability to finance its debt servicing commitments in late 2008, leading in turn to a dramatic fall in the Forint’s exchange rate against the Euro and other major western currencies. In order to calm investors’ nerves and prevent further acceleration in the exodus of capital, the government and national bank sought and received a EUR 20 billion credit line facility from the IMF and the EU in November 2008.

While this did have the desired effect of enabling the Hungarian financial sector to achieve some stability during a period of almost unprecedented turmoil, a precondition of the agreement was that the government should introduce strong measures to curb its spending and stabilise the budget deficit.

Although it is widely expected that the country’s indebtedness will continue to climb during the remaining months of 2009, these actions are likely to have some rapid positive effects on the Hungarian economy. Some have already been witnessed – for example, the improved investor confidence that they have enabled has led to an improvement in the Forint’s exchange rate, which

recovered by the end of July to below 270 against the Euro from a low of 317.

The budget deficit, meanwhile, is forecast to be just 3% in 2009 and 2010, while the cost of servicing foreign debt is expected to represent some 13% of export values. This is around half the proportion experienced in Poland, for example.

The global financial crisis and exodus of capital from Hungary resulted during the last three months of 2008 in a EUR 0.7 billion reduction in banks’ debt provisions in the country. This particularly affected short-term credit facilities, but the availability of long-term loans for businesses was also significantly reduced. While this is unsurprising within the context of the banking industry’s global crisis, it is also a contributory factor to the industry’s widely expected losses for 2009 that are also being driven by higher costs of financing and increased exposure to bad debts. The Hungarian economy is strongly export-driven, a characteristic it shares with many other CE states that have recently joined the EU. This is the result of the investments made in the country by major multinational companies, including Suzuki, Audi, General Motors, General Electric, Nokia and others. While this has been a cause of growing economic strength in recent years, in 2008 it hastened the impact of recession on the country. The global drop in demand for goods – with the automotive and electronic manufacturing sectors being particularly hard hit – was initially damaging. This was quickly exacerbated by the speed and efficiency with which the affected companies responded by implementing major redundancy rounds.

Despite the still gloomy global business environment, the strong measures introduced by the government to curb its spending and stabilise the budget deficit have been positively received by international credit rating institutions. If the government manages to execute its crisis managing plans vigorously, does not fall into the trap of going for an “election budget”, and makes the best use of available EU funds, Hungary has the opportunity to emerge from the crisis stronger than before the downturn.


Hungary 2005/2007 Average Values

2007-2008 2008







GDP 3.0 -2.5 101,006


Public consumption 0.2 -1.9 9,577






EUR mil.

Trade balance 944 279 -903

Current account balance 224 -1,895 -8,449

General government balance -274 2,612 -3,441

General government gross debt 5,424 7,429 73,734

External debt 3,332 4,941 38,355




%

Economic activity rate 0.3 -0.4 50.1

Unemployment rate 0.5 0.3 8.0


Central bank interest rate -0.7 2.5 10.0





ContactsHungary


Gabor Gion+36 1 428 [email protected]

Function Leaders

Gabor GionAudit+36 1 428 [email protected]

Dr. Attila KovesdyTax+36 1 428 [email protected]

Bela SeresFinancial Advisory+36 1 428 [email protected]

Paul Trinder Business Advisory Services+36 1 428 6659 [email protected]

Peter Gruhala Consulting+36 1 428 [email protected]

Ralph van UdenEnterprise Risk Services+36 1 428 [email protected]

Industry Leaders









Clients & Markets


Kinga Tihanyi+36 1 428 [email protected]











The structure of the Latvian economy is similar to that of most developed countries, with services accounting for some 74%, industry (including construction) for 22% and agriculture for 4%. Booms in the country’s property and construction markets were the main causes of Latvia’s exceptionally high growth rates, which was followed by sharp reverses in 2008, when the construction sector nearly stopped resulting in an approximate 30% fall in property prices. As a result, the banks’ over-exposure to the property sector has called into question the value of their assets. In November 2008, the government announced the nationalisation of the country’s second-largest bank, Parex Banka.

The political situation in Latvia remains unstable following the collapse of its government in early 2009, which was replaced by a new five-party centre-right coalition led by the New Era party. Latvia as a member of the EU and NATO has encouraged both the organisations to take a tougher stance in dealing with Russia, whose activities in Georgia it condemned in October 2008. Its close alliance with the US resulted in November 2008 in the granting of visa-free travel between the two countries.

Latvia has a declining population, driven by a falling birth rate and large-scale emigration to other EU countries, which the Central Statistical Bureau estimated in 2008 to stand at 2.2 million – down by 15% since 1990. Recession, too, is having a significant effect on Latvian society. By the end of 2008, 7% of the workforce was without a job, many households were saddled by debts incurred during recent economic overheating, inflation stood at 10.6%, wage growth was slowing sharply and a public sector salary freeze was on the horizon.

Such factors have seen the annual per capita income level of almost EUR 10,000, achieved in 2008, fall sharply in 2009.

Domestic consumption, traditionally the driving force behind most economies, has therefore fallen sharply. With virtually all markets in the Euro zone and other Baltic states also suffering from economic downturn or recession, Latvian exports have also fallen following their robust 10% real growth in 2007. For these and other reasons, Latvia has received a USD 10.5 billion support package from the EU and the IMF, equivalent to 35% of the country’s GDP. This is helping to stabilise the economy, allowing debt-servicing obligations to be met and the agreed currency peg within the EU exchange rate mechanism to be maintained.

Latvia


However, the IMF has demanded in return unprecedented cuts in government expenditure, including public-sector lay-offs and wage cuts, which in turn are expected to deepen the current recession and lead to a rise in business insolvencies. These demands are additional to the country’s need to cut its current account deficit, which stood at 13% of GDP in 2008, down from 24% in 2007. The government is still aiming to meet the Maastricht criteria and to join the Eurozone in mid-2012, but this might be subject to delay as long as the economy remains in recession.

The factors underlying a contraction in investment activities at the level of companies were several, including the deteriorating financial position of Latvia’s enterprises, falling real estate prices, a decrease in construction activity, a negative outlook for external and domestic demand and the moderating pace of lending due to the financial turmoil in global and domestic financial markets. Retail turnover has decreased by 11%, due to weakened domestic demand and reduced consumer spending. At the beginning of 2008, production declined primarily due to a fall in domestic demand, which was exacerbated by weakening

external demand during the second half of the year. The construction industry too experienced significant change, with output decreasing by 3.7% in 2008. Investment dynamics reflected this ongoing economic downturn. Growing non-financial investment in the public sector, most notably in public administration and defence, manufacturing, transport, storage and communication, did not compensate for a parallel fall in the private sector.

In 2008, the global financial crisis led to a significant deterioration in the financing opportunities and conditions facing Latvian banks, which led to a substantial tightening in lending standards. Rumours concerning potential devaluation of the local currency also acted to encourage withdrawal of deposits. As a consequence, the banks faced significantly higher liquidity and financing risks. The key performance indicators of the financial sector slowed markedly alongside the rapid decline in domestic economic activity. Assets still grew due to higher loans granted to home-owners, yet this increase declined sharply in late 2008.


Latvia 2005/2007 Average Values

2007-2008 2008







GDP 11.1 -10.3 21,594








EUR mil.

Trade balance -1,000 994 -4,379

Current account balance -791 1,276 -2,052







%





Interbank RIGIBOR 12M 2.5 3.6 15.2




ContactsLatvia


Igor Rodin+371 6 7074101 [email protected]

Function Leaders

Hendrik KramerAudit+371 6 7074140 [email protected]

Igor RodinTax+371 6 7074101 [email protected]

Alexander ParfinovichConsulting+371 6 7074145 [email protected]

Edgars GodmanisFinancial Advisory+371 6 7074152 [email protected]

Industry Leaders









Clients & Markets


Anastasija Ruza+371 6 [email protected]











There were some significant changes not only in Lithuania’s economy but also in its political scene during 2008. The conservative Homeland Union-Lithuanian Christian Democrats won the parliamentary elections in October to form the ruling coalition with three other parties, excluding the Social Democratic Party that had led the country for the previous eight years. Also, the convincing victory of Dalia Grybauskaite, the former EU budget commissioner, in the presidential election held in May 2009 is likely to lead to a more active presidential role in the economic life of the country.

The country has a population of approximately 3.6 million, of which 84% are Lithuanian, 6.1% Polish and 4.9% Russian. The average monthly gross wage in 2008 was EUR 672, up by 13% on the previous year. Unemployment also began to rise in 2008, rising by 3.7 percentage points during the year to 7.9% and reaching 11.9% at the end of the first quarter of 2009.

After several years of impressive economic growth, Lithuania descended into recession as the economy decelerated more rapidly than anticipated. Its recovery appears to be highly dependent on the recovery of the global economy and its internal fiscal policy.

The gradual economic decline in the first three quarters of 2008 was replaced by a rapid drop in the fourth, which in turn preceded a double-digit decline in GDP during early 2009. Responding to the economic downturn, the new government took action at the end of 2008 with a crisis-management plan, which among other measures included fiscal reforms.

These included a VAT increase from 18% to 19% (alongside the abolition of almost all VAT exemptions) while corporate income tax was increased from 15% to 20% and certain excise duties were also increased. From September 2009 VAT will be increased to 21%.

The Lithuanian government is confident that the country does not need the support of the IMF and sees no need to devalue the Lithuanian Litas which is currently pegged to the Euro, although there is persistent speculation as to the sustainability of the currency. Instead of IMF support, the government aims to cut spending and boost revenue to narrow the budget deficit. The first budget cut was introduced in May 2009 when spending was reduced by EUR 870 million (some 2.9% of projected GDP). The government acknowledged that this spending cut alone would be insufficient and more action may need to be taken later in the year.

Lithuania


A rapid decline in demand from Lithuania’s main export markets in March 2009 saw a year-on-year fall of about a quarter. A simultaneous collapse in domestic demand, however, reduced imports to substantially cut the trade deficit.

Consumer price inflation peaked at 12% in June 2008 (averaging 8.5% in the year as a whole) and the first months of 2009 saw prices rise only slowly, reflecting the increase in excise duties and higher value-added tax. However, considerably reduced household consumption resulted in monthly deflation during the second quarter of 2009, recorded at 0.8% in July 2009. Yearly inflation decreased to 3%. This elimination of inflationary pressures may ease the route to Euro adoption by 2012, although this will require strict budgetary control.

The weakening of domestic demand and the contraction of export markets have both hit manufacturers.

Companies are facing insolvency problems as banks cut lending and tighten their borrowing conditions. The government has therefore prepared an economic stimulus package (of approximately 5% of GDP) which aims to stimulate the credit market, promote exports and foreign direct investment (FDI), and accelerate the assimilation of EU funds.

Energy policy has been a controversial issue in Lithuania since 2004, when as part of its deal to join the EU it agreed to close its ageing Ignalina nuclear power plant by the end of 2009. While this is an unpopular step due to the high levels of employment the plant provides, decommissioning of the plant’s one remaining unit is still expected to take place on 31 December 2009. The economic crisis has now placed in doubt the future of a project to replace the plant with a modern equivalent at nearby Visaginas, which was planned to be built in partnership with Poland, Latvia and Estonia.


Lithuania 2005/2007 Average Values

2007-2008 2008







GDP 8.2 3.0 32,292








EUR mil.

Trade balance -941 346 -4,957

Current account balance -919 412 -3,738



External debt 361 -22 3,222




%

Economic activity rate -0.4 0.4 56.7




1-year yield on Treasury Bill 0.7 1.3 5.8




ContactsLithuania


Tim Mahon+370 5 255 [email protected]

Function Leaders

Torben PedersenAudit+370 5 255 [email protected]

Tatjana VaiciulieneTax+370 5 255 [email protected]

Andrew CrossConsulting+370 5 255 [email protected]

Linas GalveleFinancial Advisory+370 5 255 [email protected]

Andrew CrossEnterprise Risk Services+370 5 255 [email protected]

Industry Leaders









Clients & Markets


Marius Marcenkovas+370 5 255 [email protected]











For the last decade, the dominant political force in Macedonia has been VMRO-DPMNE, led by Prime Minister Nikola Gruevski. The party won both the presidential and local authority elections held in March and April 2009 respectively, building on its success in 2008’s parliamentary elections. However, although it is the dominant political force in Macedonia, VMRO-DPMNE could not form the government on its own. It therefore sought a coalition partner, finding it in the Democratic Union for Integration (DUI), the largest ethnic Albanian party in Macedonia. The coalition has a clear mandate to govern until 2012. The most important political boost of recent years occurred in 2005 when Macedonia was officially granted EU candidate status recognised as a major step towards political stability in the country and the wider region. However, since 2005 insufficient reforms have been introduced to start the EU accession talks.

The 2002 census indicated that ethnic Macedonians made up around 64% of the population and ethnic Albanians approximately 25%. The census also indicated a population decline of 0.6% from 2001. While life expectancy fell after 1990, owing to deterioration in health services and living standards, it has recovered somewhat in recent years with data from the WHO from 2006 indicating life expectancy at 71 for men and 76 for women.

The Macedonian government has decided not to seek a replacement programme for the three-year stand-by arrangement, granted by the IMF that ended in 2008. The government is determined to push ahead with tax breaks and capital investment to counter the economic downturn and to support construction, steel and other

industries that are facing a sharp slowdown in demand. On the other hand, the IMF has urged fiscal discipline due to Macedonia’s deteriorating balance of payments, as demand for exports contracts and remittances from Macedonian people working abroad decline. Risks to the country’s macro-economic stability have become more evident recently as the current account deficit has grown; the government’s revised budget for 2009, adopted in April, envisages a near doubling of the deficit against the 2008 target and a 9% cut in expenditure. Although the government is continuing to use a vigorous publicity campaign and generous tax incentives to attract FDI, inflows into Macedonia are likely to decline sharply in 2009 due to the current global economic climate.

After several years of stability, the outlook for public finances looks gloomier in 2009 as a decline in tax receipts is a logical consequence of recession. Along with plans for increased public-sector spending on

Macedonia


capital investment, this has prompted the government to increase its budget deficit target from 1.5% of GDP in 2008 to 2.8% in 2009. Although the government has revised budget and cut expenditure to match the expected shortfall in revenue, it has kept the planned deficit unchanged.

Monetary policy is managed within what is essentially a currency peg to the Euro. Until recently, capital inflows enabled Macedonia to raise its international reserve coverage, using part of this to pay some of its external debt obligations ahead of schedule. However, the 2008 surge in the current-account deficit could put the Macedonian Denar under pressure in the near future. Inflation surged in the first half of 2008, with consumer prices in March 2008 rising by more than 10% for the first time since 2000. They began to fall back after the middle of the year, declining to 0.2% year-on-year growth by March 2009 due to smaller increases in food prices and the drop in global oil prices. The National Bank of the Republic of Macedonia (NBRM) is determined to maintain the exchange-rate peg as part of its monetary policy strategy in 2009 - 2010. In March, NBRM raised its key repo rate for lending to other banks from 7% to 9% in a bid to stabilise the Denar.

The current account deficit in 2008 increased four-fold compared with 2007, amounting to the equivalent of 13.1% of GDP. This surge was caused by a credit-driven import boom, a loss of export competitiveness, initially high global oil prices and a slowdown in foreign remittances.

The latest package of approximately 70 measures was adopted by the government to mitigate the impact of the downturn. It may be divided into three components: the revised budget; credit support to companies; and a range of other measures, chiefly comprising support for business. Credit support consists of the EIB credit line, worth EUR 100 million, to help SMEs. This includes the co-financing of long-term investment and other credits, along with the provision of subsidised interest rates and credit guarantees.

Other forms of support for businesses include measures for simplifying customs procedures, reducing red tape and finishing specific infrastructure projects. The new set of measures is based on an initial package, introduced in November 2008, offering around EUR 300 million in assistance, mostly to companies with liquidity problems. The second package was announced in early March, when the authorities adopted an ambitious seven-year programme, worth EUR 8 billion for infrastructure projects. Much of that programme will now need to be postponed, in view of the sharp economic downturn and subsequent deterioration in public finances.

Industrial output continued to fall year-on-year in March 2009, largely attributable to lower output in the production of basic metals (down by 53.1%), vehicles (down by 58.5%), other transport equipment (down by 46.6%), leather (down by 25.4%) and textiles (down by 21.6%). There was also a significant decrease in recycling (down by 70.3%) and the manufacture of wood (down by 48.9%). The publishing industry grew (up by 123.6%), as did the manufacture of fabricated metal products (up by 40.8%) and the tobacco industry (up by 66.4%). Early 2009 saw a 10.8% year-on-year decrease in industrial output affecting most sectors, with the largest falls in metals and textiles, Macedonia’s two main export commodities.


Macedonia 2005/2007 Average Values

2007-2008 2008







GDP 4.6 5.0 6,491








EUR mil.

Trade balance -85 49 -499

Current account balance 64 -680 -851


General government gross debt -34 -54 1,428

External debt -66 -43 1,259




%









ContactsMacedonia



Country Leader

Lidija Nanus+389 0 2 31 11 [email protected]

Industry Leaders

Mike Jennings Financial Services+420 246 042 [email protected]








Clients & Markets













Following deadlock with Russia in 2003, a primary focus of Moldova’s leading political party, the Party of Communists of the Republic of Moldova (PCRM), has been on improving the country’s relationship with the EU. Nevertheless, depending on the evolution of the political and economic situation in Moldova, the EU option could recede and Russia could become more dominant. Tense relations with Romania, an EU member, will further complicate relations with the EU, after allegations by the Moldovan authorities that Romania stirred up trouble in Moldova following the election in April 2009. A long-term dispute over the self-proclaimed independence of the territory of Transdniestr is also unlikely to be resolved in the near future.

Moldova’s population of 3.6 million has shrunk by 2.3% since 2005, largely due a migratory labour-force which in turn has created a simultaneous decline in both employment and the unemployment rate, which fell by 1.5 percentage points to 3.9% in 2008. One estimate shows 310,000 people (some 9% of the population) as working abroad in 2008. Although this migration was a driving factor in economic growth, by providing the financial resources that enabled rising consumption, it also threatened the fiscal sustainability of the social insurance fund, raised the labour costs and led to labour shortages in some sectors of the economy. However, the forced return of workers from those countries most seriously affected by the financial and economic crisis is expected to drive the unemployment rate up again in 2009, possibly to as high as 10%.

The global economic crisis has had an increasingly negative impact on the Moldovan economy. In recent years, private consumption has been its primary engine room, mainly fuelled by the inflow

of remittance funds from overseas workers to reach 113% of GDP in 2008. Recession in the EU has made this unsustainable, and the situation is exacerbated by the government’s failure to stimulate the private sector through investments in education and infrastructure. As a result, Moldova appears to be one of the most vulnerable transition economies.

Growth in 2008 was impressive, however, with GDP up by 6.5% to EUR 4.2 billion, a substantial decline is now forecast for 2009, due to reduced private and external consumption and a scarcity of investment resources.

Investment levels increased significantly over the three years up to 2008, contributing positively to GDP growth. Unfortunately, this tendency ceased once the global financial crisis emerged in the Moldovan economy, and it is expected that investment resources will remain scarce in 2009-2010.

Moldova


Under these harsh economic conditions, companies are expected to make better use of existing capital and labour and to achieve higher productivity.

The country’s currency, the Moldavian Leu, strengthened for much of 2008 before starting a decline in September 2008 that in early 2009 forced the National Bank of Moldova (NBM) to intervene more strongly in order to limit its further weakening. In the face of significantly falling inflation during 2009, however, it is expected that the NBM will be able to boost the liquidity of commercial banks and encourage lending by reducing interest rates.

Average annual inflation is expected to fall from 7.3% in 2008 to a maximum of 4% in 2009 and 2010, as oil and food prices decline.

Although the current account deficit is forecast to narrow during 2009 and 2010, it will remain substantial. Inflows from FDIs and private-sector borrowings are likely to be negatively affected by the poor global economic environment. Following a slight decline in exports (down by 1.3% to EUR 1.7 billion) and imports remaining unchanged at EUR 3.7 billion in 2008. Both exports and imports fell sharply in the first quarter of 2009, driven by recession in Romania, Italy and Germany, the three primary markets for Moldova’s relatively limited export base.

The budget deficit is expected to widen to around 3.5% of GDP in 2009 under the impact of economic recession, before narrowing in 2010.


Moldova 2005/2007 Average Values

2007-2008 2008


Population (mil.) 0.0 -0.1 3.8





GDP 5.4 6.5 4,163


Public consumption 29.4 8.5 882






EUR mil.


Current account balance -147 -251 -726

General government balance -4 7 0

General government gross debt -17 -43 864

External debt -5 -55 622




%









ContactsMoldova



Function Leaders

Santiago PardoAudit+40 21 2075 [email protected]

Alexandru ReffTax & Legal+40 21 2075 [email protected]

Maksim CaslliConsulting+40 21 2075 217mcaslli @deloittece.com

Hein Van Dam Financial Advisory+40 21 2075 [email protected]

Industry Leaders









Clients & Markets


Patricia Ilisiu +40 21 2075 488 [email protected]











The Democratic Party of Socialists (DPS) remains the dominant political force in Montenegro, which it proved again with its convincing victory in the parliamentary elections of March 2009. Prior to this victory, Milo Djukanovic – considered for 15 years to be the dominant political figure in Montenegro, but absent from politics for some time – resumed his leading role within the DPS and accepted the role of prime minister. This highlighted the government’s inability to make progress on planned reforms without his active involvement in the political process. The DPS candidate for president, Filip Vujanovic, was re-elected two months later. Despite its dominance, DPS required at least one coalition partner in the new government, and is now addressing a range of sensitive issues relating to the global economic crisis in partnership with the Social Democratic Party (SDP). The government has also set itself the ambitious goal of becoming a member of EU and NATO. In December 2008 Montenegro submitted a formal application to join the EU just 14 months after it had signed a Stabilisation and Association Agreement (SAA).

The 2003 census showed a slight rise in Montenegro’s population, to 620,000 from about 615,000 in 1991. More significantly, it highlighted a substantial change in the country’s ethnic structure with the number of people describing themselves as Montenegrin falling by about 113,000 to 268,000 and those identifying themselves as ethnic Serbs rising from 57,000 to almost 200,000.

As one of the smallest countries in the region, Montenegro’s economy has a different structure from those of its neighbours.

Owing to its geographical position, it is more oriented towards service industries including tourism, which is one of the country’s most important sectors. Montenegro also specialises in the manufacture of products including aluminium, which has historically been its major export item. According to EBRD estimates, service industry in Montenegro accounts for some 60% of GDP.

As with most of the former Yugoslav states, Montenegro’s transition towards a market economy was sluggish in the 1990s, both during and in the years following the war. Notable reforms were evident in 1997, when the Montenegrin leadership distanced itself from the Milosevic regime in Serbia and invested great effort in achieving macroeconomic stabilisation and structural reforms.

While Montenegro was not at that time a member of the IMF (it joined this and other international organisations after it declared its independence from Serbia in 2007) and receiving the IMF guidance in this initiative.

Montenegro


Montenegro has managed its own public finances since 1998, when it ceased the transfer of federal taxes into the Yugoslav federal budget. Since then, the authorities have introduced a number of reforms to improve its tax collection. Fiscal reform has gathered pace since 2001, and the introduction of VAT in 2003 made public spending more transparent. As a result of such fiscal policies, the state budget deficit first fell to 1.7% of GDP in 2005, before recording a surplus in 2006 equivalent to 2.4% of GDP. This trend continued throughout 2007, surpassing all forecasts to deliver a surplus equivalent to some 8% of GDP.

In November 2000, the Montenegro Central Bank made the Deutschmark the sole valid currency in the republic, replacing it with the Euro in 2002. Adopting a foreign currency as its official currency brought some stability to Montenegro’s monetary system, providing an anchor to control inflation and facilitate foreign trade. One disadvantage of this approach is that the Central Bank cannot influence money supply, imposing a heavy burden on fiscal policy in the event of a major economic crisis. One of the main monetary instruments of the Central Bank is to slow the rapid acceleration of bank lending. This has grown considerably in recent years (by some 130% year-on-year in 2008), raising doubts about the banks’ appropriate assessment of the risks involved.

The adoption of a foreign currency as the sole legal tender reduced inflation considerably, from 67% in 1999 to 2.1% in 2006. However, inflationary pressures have risen again since 2007 because of high oil and food prices (as a consequence of drought in 2007), rising throughout 2008 to 8.2% in March 2009. Wage rises have also impacted on monetary stability in Montenegro. This acceleration was driven by public sector wage increases in October 2007, resulting in 20% growth in 2007 and a 25% year-on-year increase in March 2008. The largest growth was recorded in public administration, particular in the education sector which showed a 41% increase in 2008.

To some extent, Montenegro’s economy still owes its underperformance to the period in the 1990s, when war and sanctions caused GDP to contract sharply. However, even between 2000 and 2005, by when Montenegro was running an independent fiscal and monetary policy, GDP only grew by the rather modest average of 2.5% – significantly below average growth for the Balkans. Growth subsequently strengthened, however, reaching 8.6% in 2006 and 7% in 2007, mainly driven by increased expenditure and inflows of foreign direct investment (FDI).

Despite this GDP growth, Montenegro’s current account deficit remains large, raising questions as to its future sustainability. In 2008, it reached some 29% of GDP, rising from 25% of GDP in 2006. This increase was primarily caused by a large trade deficit, which expanded to 64% of GDP in 2007, followed by increases in domestic demand and a large inflow of FDI. The main challenge facing Montenegro economy is its ability to compete with other regional economies based on a somewhat narrow range of goods for export. Aluminium, fuel products and steel represent over 70% of its exports, aluminium alone accounting for 40%. On the other hand, imports are diversified, with machinery and motor vehicles featuring as significant items in the country’s import structure. The most notable surplus in the Montenegrin economy is in the tourism industry, which accounts for approximately one third of the total service industry.

FDI inflows were modest until 2005, a direct consequence of inadequate privatisation, a lack of large scale opportunities and the relatively small overall size of the country’s market. Since the full advent of privatisation, however, inflows have risen considerably, reaching close to EUR 1 billion in 2007. It is estimated that half of these are invested in real estate (amounting to some EUR 483 million according to central bank data). Foreign investments made by Montenegrin companies reached EUR 62.5 million in 2007. Other investments also increased considerably in 2007, reaching some EUR 358 million, as a direct consequence of credit inflow from abroad to Montenegrin banks and companies. With the help of these investments, Montenegro has managed to increase its foreign reserves despite its large current account deficit.

Industrial output contracted by 16.3% year-on-year in the fourth quarter of 2008 and by 12.5% year-on-year in January-February 2009, with the manufacturing sector hardest hit. This stemmed mainly from the severe problems encountered by Montenegro’s key industry, basic metals and metal products, and was exacerbated by an acrimonious dispute over electricity prices between the state energy company, EPCG, and Montenegro’s largest industrial producer, the Russian-owned Podgorica Aluminium Plant (KAP). As a result, the metals sector, which accounted for 43.4% of total industrial output in 2008 (down from 49% in 2007) contracted by 43.2% year-on-year in the fourth quarter of 2008. Two other large industries, manufacturing non-metal minerals and chemicals, also contracted significantly. Food processing, which accounted for 9.3% of industrial output in 2008, was the only sizeable industry that posted a positive growth rate (23.9% growth in the last quarter of 2008 and a 27.3% rise during January and February 2009).


Mining and quarrying reflected the downturn, contracting year-on-year by 9.4% in the fourth quarter of 2008. By contrast, the energy sector fared relatively well, falling by just 5.6% in the fourth quarter.

Retail trade decelerated in early 2009, reflecting slowing demand, from an average of 16% year-on-year growth in 2008 down to 9.9% in January and February 2009. However, the latest data indicate that retail is continuing to expand relatively rapidly in comparison with other countries in the Balkans.

Montenegro 2005/2007 Average Values

2007-2008 2008


Population (mil.) -0.5 0.2 6.2





GDP 7.8 8.1 3,339

Private consumption n/a n/a 2,566

Public consumption n/a n/a 923

Gross fixed capital investments n/a n/a 759

Exports (goods and services) n/a n/a 1,552

Imports (goods and services) n/a n/a 2,637



EUR mil.


Current account balance -235 -151 -976

General government balance 74 -128 51


External debt -11 20 481

Foreign currency reserves 145 -160 335



%

Economic activity rate n/a n/a n/a








ContactsMontenegro



Country Leader

Danijela Dimovski+382 0 81 664 [email protected]

Industry Leaders









Clients & Markets













With almost 39 million inhabitants, Poland is the second most populous country (after Ukraine) in the Central European (CE) region. It is also the region’s largest economy (eighth in the EU), with GDP totalling EUR 309 billion in 2008. Both its GDP and EU ranking would have been higher but for the weakening of the Polish Zloty (PLN) that took place at the end of 2008 due to foreign capital outflows from CE. However, the global economic crisis may prove to be less painful for Poland than for many other countries, with statistical support for this position emerging after the first quarter of 2009. Economic growth across 2008 reached 4.9%, but the fourth quarter in 2008 saw this rate fall to 2.9% year-on-year. For 2008 as a whole, household consumption was the engine of GDP growth, growing by 5.4% in 2008 (5.3% year-on-year in the fourth quarter). The economic slowdown rapidly had an impact upon previously positive trends in the labour market. The unemployment rate, for example, stood at 9.5% at the end of 2008 (i.e., just 1.7 percentage points less than a year earlier) and the number of unemployed people at 1.5 million. In December, however, the number of new unemployed rose sharply (up 19% year-on-year), and the number of those deregistering continued to weaken (a trend underway since May 2007). Household incomes continued to register growth in both nominal and real terms, however, which kept consumption at around its pre-crisis level and supported GDP during the following months of 2009.

Investment growth in 2008 was 8.2%, falling to 4.6% in the fourth quarter. An important element of this growth was driven by outlay from EU funds. According to a report on the use of EU funds, expenditure on implementing investments from the cohesion funds (mainly road-building) accelerated strongly in 2008,

with combined year-on-year growth (together with structural funds) standing at 27% in the fourth quarter. Construction production data also confirmed this, showing that double-digit year-on-year growth (13%) was maintained by sales of services connected with highway, road and bridge-building.

Exports and imports were quite robust throughout 2008 (growing in real terms respectively by 7.2% and 8.2%). In the fourth quarter though, the global financial crisis started to reveal its influence with exports to the EU falling by 1%, to Italy and Hungary by about 15%, to Germany by just under 1%, to France by 0.4% and to Ukraine by 16%. The risk to Poland’s balance of payments affected the Zloty, with the final quarter of 2008 marking the end of its appreciation in annual terms. In December, the average Zloty exchange rate weakened by 11.3% year-on-year against the Euro (to 4.01) and by 19.7% year-on-year against the USD (to 2.96).

Poland


The first months of 2009 brought with them record falls in the Zloty, to a level of 4.8975 against the Euro (on 17 February), the same as noted almost exactly five years earlier (20 February 2004). The Zloty’s fall against both the Euro and the USD was close to the largest of all emerging countries in the Americas, Asia and Central Europe. For example, in January 2009, the Zloty lost on average 43% year-on-year against the Euro, while the Romanian Leva and the Hungarian Forint both lost 15.5% year-on-year and the Russian Rouble lost 26% year-on-year.

Given the strength of the Polish economy, the Zloty’s decline appears perplexing, but there were a number of factors that can provide some context: speculative attacks on the foreign exchange market; rising cost of closing open positions on currency options by organizations; the depository policies of Western parent banks, resulting from pressure to achieve liquidity in the countries where the capital originated.

The global financial crisis arrived in Poland when the first symptoms of economic overheating appeared throughout CE. The current account deficit set a new record, reaching 6.4% of GDP in 2008. Mortgage loans, including foreign currency products, were up by over 50% year-on-year as well, while increased household debt fuelled private consumption to growth levels ahead of GDP (6.4% versus 5.4%). Enterprises became less averse to risky investment decisions, such as purely speculative transactions on the financial markets, while the valuation of financial assets, from stocks to properties, lost contact with economic fundamentals in a manner similar to the situation in developed countries.

The pro-cyclical fiscal policy of recent years has not helped reduce Polands general government deficit that has averaged 3.2% of GDP from 2005 to 2007 and grew to 4.6% of GDP in 2008. This was irrespective of 2008’s 4.9% GDP growth, down from the average 5.5% achieved from 2005 to 2007. Polish governments of recent years have been unable to launch any fiscal or structural reforms. The most recent successful self-government reforms, partially successful pension reforms, and disastrous health care reforms were implemented as long ago as 1999. On the other hand, Poland’s accession to the EU in May 2005 proved to be a great political

and economic success, stabilising the situation in the country. Support for this move has not dropped below 75%, and the highest increase was recorded among farmers covered by the Common Agricultural Policy. Political parties seeking to exploit anti-EU resentment lost votes and seats in the Polish and European parliaments after the elections of October 2007 and June 2009 respectively. EU funding is a powerful growth factor, second only to household consumption, and practically all investment activities in early 2009 were related to the resources provided by the EU.

By the end of the first quarter of 2009, the Polish economy was the only EU economy registering GDP growth in both quarterly and yearly terms (0.8% year-on-year). The Polish banks were surprisingly resistant to the financial crisis, as non-performing loans barely exceeded 5%, and Polish companies remained sufficiently conservative to finance most of their investments from retained earnings. The abolition of the highest personal rate of income tax (40%) in 2009 has increased household disposable incomes, which together with continued wage growth is affecting retail sales positively. The stimulus packages of the biggest EU countries (particularly Germany) have helped maintain positive industrial production dynamics, especially in the car industry. Imports dropped significantly in the early months of 2009, as the result both of a decline in exports (most imports to Poland are related to exports) and the weakening of the Zloty. As a result, the current account deficit declined by 11% year-on-year in 2009’s first quarter and by 54% year-on-year in the second, to below 3% of GDP. In this way, Poland was shown to be much less dependent on external circumstances and foreign trade than other, smaller CE economies.

The near future will show whether Poland can manage to escape recession, and if the upcoming self-government and presidential elections (in the spring and autumn of 2010) will not see the introduction of populist economic policies, which could undermine weak but still positive GDP dynamics. As in other CE countries, the issue of entry to the Eurozone appears to be on hold until parliamentary elections (due in 2011). The ambitious privatisation plan proposed by the government may prove to be more important for the future performance of the Polish Zloty and efficiency-growth at a microeconomic


Poland 2005/2007 Average Values

2007-2008 2008


Population (mil.) -0.1 0.0 38.5

Average monthly gross wage (EUR) 10.9 -6.6 752.5




GDP 5.5 4.8 309,040








EUR mil.

Trade balance -2,128 -1,498 -21,016


General government balance 1,930 -8,256 -14,105

General government gross debt 13,523 -1,219 145,273

External debt 2,263 2,977 37,457




%



CPI rate (previous year = 100%) -0.2 -0.4 3.4


1-year yield on Treasury Bill -0.2 -0.5 5.3



level. It includes the sale of state assets in the energy and chemical sectors, as well as minority share-holdings in already privatised companies, to realise revenues of around PLN 36.7 billion (roughly EUR 9 billion) before the end of 2010. With the government’s general reluctance

to raise taxes or increase the national debt, financing the deficit with privatisation revenues looks to be the next-best option (after reducing government spending), always assuming that the global crisis does not become a long-term phenomenon.


ContactsPoland











Marek Metrycki+48 22 511 08 [email protected]

Function Leaders

Gavin FlookAudit+48 22 511 07 [email protected]

Piotr ŻarskiTax+48 22 511 08 59 [email protected]

Dariusz KraszewskiConsulting+48 22 511 01 48 [email protected]

Gavin Hill Financial Advisory+48 22 511 07 [email protected]

Zbigniew SzczerbetkaEnterprise Risk Services+48 22 511 08 85 [email protected]

Industry Leaders



Dariusz NachylaTechnology, Media &Telecommunications+48 22 511 06 [email protected]




Tomasz Ochrymowicz+48 22 511 04 [email protected]

Rafal Antczak+48 22 511 00 [email protected]

Clients & Markets


Halina Franczak+48 22 511 00 [email protected]


Three years of debate came to an end in March 2008 when the Romanian Parliament approved the single-member constituency, under which one member is elected per constituency. The first election under the new system followed in November, resulting in a coalition between the left wing Social Democratic Party and the centre-right Democratic Liberal Party, whose president Emil Boc is now prime minister. Some observers believe, however, that the stability and longevity of the coalition is open to doubt, primarily due to the rising unemployment rate and unfavourable economic situation. In addition, Romania is under the threat of penalties from the EC unless its authorities take action to reduce the incidence of high-level corruption. The country’s target date for adopting the Euro is 2014.

Romania’s population stood at 22.2 million in 2008, out of which 54.5% were economically active. While the unemployment rate fell by 0.3 percentage points to 5.8% in 2008, it is expected to rise sharply in 2009. However, there is a view that this will create some slack in the labour market, which will help the Romanian Central Bank in its bid to control inflation by controlling the wage growth. In 2008, the average monthly gross wage rose by 4.7% to EUR 502, and the bank has stated that salary rises over the next three years should not exceed 5.9% in nominal terms in 2009, 3.9% in 2010 and 3.5% in 2011.

May 2009, saw the IMF release the first EUR 5 billion tranche of the EUR 20 billion loan agreed between the Romanian government the IMF, the World Bank, the EU and other agencies.

Designed to ease pressure on the balance of payments and the currency – the Romanian Leu (RON) – the loan is also intended to restore faith in the economy and stimulate bank lending. Its effects were rapidly visible in an improved exchange rate, while the RON’s slide against the Euro started in July 2008, culminating in January and February 2009 at a historic low of 4.3, down from a 2008 average of 3.68, the announcement of the loan saw the beginning of a rally, which resulted in a rate of 4.24 by the end of March. Further stabilisation of the currency is expected in the second half of 2009 due both to the loan and to the government’s strong commitment to a prudent fiscal policy. The main foreign banks operating in Romania have also pledged to support their subsidiaries by refinancing the external debt repayments that fall due during 2009.

Romania


While the fourth quarter of 2008 was relatively weak, Romanian GDP, fuelled by availability of credit, grew by 7.1% during the year as a whole to stand at EUR 125 billion. Negative growth is widely expected in 2009, followed however by a predicted modest recovery for 2010 and 2011.

Average annual inflation reached 7.9% in 2008, and although the rate had already fallen to 6.3% by the end of the year, the depreciation of the RON against the Euro in early 2009 saw consumer prices rise by 2.6% in the first quarter of 2009 alone. While a reduction in domestic demand is expected to bring the rate of inflation down to some 4.4% by the end of 2009, this is still higher than the National Bank’s targets and more than is forecast for most other EU member states.

Romania is subject to the EC’s excessive deficit procedures. In 2008, the country’s current account deficit reached EUR 16.9 billion, although over half of this figure was covered by FDIs. While FDIs were among the highest in the CE region, totalling over EUR 9 billion in 2008, it showed a year-on-year drop of 13.9% in the first quarter of 2009.

However, it is expected that FDIs levels will recover due to Romania’s relatively low costs for skilled labour, simplified taxation (flat tax system), and low costs of rent and land favoured by investors.

In late 2008, banks virtually ceased lending, threatening the ability of businesses to service their existing debt. In addition, lower incomes, higher interest rates, growing incidence of bad debt and a depreciating RON conspired to worsen the quality of the bank portfolios.

The two largest companies in 2009 within Romania are still both energy and resources companies – first place belongs to Petrom SA, controlled by the Austrian OMV Group, which grew its turnover by 23.6%. Second-placed Rompetrol Rafinare, which is owned by KazMunaiGaz, grew even more strongly with a 44.6% rise in its turnover. Renault-owned Automobile Dacia also needed to take strong action, including temporary closure, however, the company has recently seen increased exports to Germany and other western European countries. Fourth-placed steel company ArcelorMittal Galati successfully addressed some significant commercial challenges to achieve a record profit while posting a reduced turnover.


Romania 2005/2007 Average Values

2007-2008 2008







GDP 6.1 7.1 125,024








EUR mil.

Trade balance -4,806 -947 -22,709

Current account balance -3,859 -221 -16,898

General government balance -702 -3,892 -6,751



Foreign currency reserves 4,820 913 26,221



%





Interbank BUBOR 12M -2.5 6.9 15.5




ContactsRomania



Function Leaders

Santiago PardoAudit+40 21 2075 [email protected]

Alexandru ReffTax & Legal+40 21 2075 [email protected]

Maksim CaslliConsulting+40 21 2075 [email protected]

Hein Van DamFinancial Advisory+40 21 2075 [email protected]

Industry Leaders









Clients & Markets


Patricia Ilisiu +40 21 2075 488 [email protected]











The Serbian government is led by a coalition of four parties, called European Serbia (ZES). The alliance is dominated by the pro-EU Democratic Party (DS) of President Boris Tadic. The question of Kosovo still remains one of the key points in Serbian foreign policy. The government has declared that it will never recognise Kosovo’s independence, even if recognition were to become a condition for EU membership. Irrespective of this, Serbia’s EU membership is and will be one of the top priorities for the government. Serbia also has an important bilateral relationship with Russia, which strongly supported Serbian opposition to Kosovo’s independence and is Serbia’s dominant energy supplier.

The Serbian population (excluding Kosovo) is gradually falling: the estimate of 7.3 million by mid-2008 contrasts with the 7.8 million recorded in the 1991 census. The 2002 census indicated that 16.5% of the population was aged 65 or above, roughly in line with the EU average. However, because of declining fertility rates, the average age of Serbia’s population increased from 35 years in 1991 to 40 in 2005. This is contributing to a rise in the old-age dependency ratio (the ratio of people aged above 60 to the working-age population). Implications for the state pension system are particularly important because one of the parties in the ruling coalition is calling on the government to raise pensions to 70% of the average salary (from about 55% in mid-2008).

The 2002 census found that almost 83% of the country’s permanent population (excluding Kosovo) declared themselves as Serbs. The next-largest group was ethnic Hungarians, with less than 4% of the population, concentrated in the province of Vojvodina in the north of Serbia.

After the economic crisis of the 1990s, following Milosevic’s ousting in 2000, Serbia started to recover from its long crisis. Trade and prices were liberalised, fiscal reforms were implemented, privatisation commenced and the entire banking and financial system was reformed. Serbia’s budget also became a lot more transparent, including expenditure on social security and pensions. A number of reforms were also introduced in an effort to attract foreign investors; these included a reduction in the number of taxes, corporate tax was cut to 14% and VAT was introduced at the beginning of 2005. The end of 2005 also was significant, when corporate tax was lowered again to 10%, making it the lowest corporate tax in the region. Although the government claimed in the early years of this century that the budget was in surplus, the Ministry of Finance has changed the way in which the budget is calculated, in line with IMF methodology by including net lending in total expenditure. (This was previously a financing item).

Serbia


Using the old methodology, the budget was in surplus in 2005-2007; using the new methodology, however, the budget recorded deficits in 2006 and 2007. Since 2006, fiscal policy has been loosened with large increases in public sector wages and high government spending, and large public enterprises continue to be a drain on the budget.

The National Bank of Serbia (NBS) has successfully maintained the stability of the Dinar in recent times. The current governor, Radovan Jelasic, has further tightened monetary policy in order to combat increased bank lending. However, the central bank had few tools at its disposal to achieve stability, and used the two-week repo rate as its main policy instrument. The bank raised repo rate sharply in late 2007, citing its concerns regarding heightened inflationary expectations. Core inflation rose to 10.3% year-on-year in July 2008, well above the 6% which was the upper limit of the bank’s target for the end of the year. The NBS raised its policy rate in late May by 50 basis points, to 15.75%, and it will consider further increases to ensure that its target for core inflation in 2008 is met (or at least not seriously overshot). In 2001, Serbia adopted a managed float system for the Dinar’s exchange rate, giving it limited flexibility. While the central bank does not have an exchange rate target, it has expressed its determination to intervene in currency markets whenever necessary, particularly if currency stability is jeopardised.

During 2005-2007, the annual rate of GDP averaged around 5.9%. The main drivers for such growth were increasing domestic demand, where expansion of fixed investment was recorded, private consumption fuelled by strong wage growth. This was followed by credit growth, which contributed to a steady increase in household consumption, which grew on average by 3.4% during 2005-2007. Even more notable was growth in fixed investments, which grew of average by 14.3% during 2005-2007. Even at this rate, the pressing need for increased fixed investments in Serbia has not diminished at all.

Serbia’s current account deficit remains large, and there is a prospect that it will expand further. During 2005-2007, Serbia’s current account deficit amounted to around 12% of GDP, a potential threat to macroeconomic stability. The current account deficit increased further to almost 20% of GDP in 2008.

Since 2000, the majority of investments have been the result of privatisation. Several large multinationals established their businesses in Serbia during that period, including Phillip Morris which bought a tobacco factory in Nis, the Russian oil company Lukoil which bought Beopetrol, Lafarge which acquired BFC from Beocin, and many others. Although privatisation is considered to have been a moderate success, the number of greenfield investments is still lagging behind. The most notable greenfield investment was the opening of the Ball packaging facility for production of aluminium cans (USD 95 million).

Serbia received large FDI inflows in 2005-2007, peaking during 2006 when it totaled USD 5.6 billion. A major contribution to this growth, however, was made by the sale of mobile telecommunications operator Mobi 63 to Norwegian Telenor. This trend did not continue into 2007, when FDI totaled USD 2.2 billion. It should be noted, however, that there was a major outflow due to the purchase of Telekom Srpske by Serbia’s largest telecommunication operator, Telekom Serbia.

In the first quarter of 2009, Industrial production contracted by 16.9% year-on-year. Manufacturing was hit the hardest in this period, posting a 22.5% year-on-year decline. Tumbling foreign and domestic demand cut the production of semi-finished goods, which comprise roughly one-third of total industrial output. Capital goods and consumer durables posted declines of 26% to 28%. Mining and quarrying fared slightly better, contracting by 7.3%, owing to a 34.5% expansion in the mining of metal ores. The utility sector also recorded relatively good results, with a 0.8% year-on-year decline in the first quarter and 6.1% year-on-year growth in March 2009.

Exports were affected by the strength of the Dinar, making Serbian goods expensive for the European market and contributed to the relatively slow growth of Serbia’s main export markets. However, Serbia should eventually start to reap the benefits of previous inflows of FDI.


Serbia 2005/2007 Average Values

2007-2008 2008







GDP 5.9 5.4 31,191

Private consumption 3.4 11.8 n/a

Public consumption 7.0 13.8 n/a

Gross fixed capital investments 14.3 -7.7 n/a

Exports (goods and services) 12.2 9.8 n/a

Imports (goods and services) 6.7 9.2 n/a



EUR mil.

Trade balance -535 -1,805 -8,588

Current account balance -757 -1,820 -6,235

General government balance -76 -701 -540

General government gross debt -518 -134 9,856

External debt 3,105 -408 5,802

Foreign currency reserves 755 -2,563 1,114



%









ContactsSerbia












Function Leaders

Miroslav ToncicAudit+381 0 11 3812 [email protected]

Zarko MijovicAudit+381 0 11 3812 [email protected]

Srdjan PetrovicTax+381 0 11 3812 [email protected]

John Nicholson Financial Advisory+381 0 11 3812 [email protected]

Nada SudjicEnterprise Risk Services+381 0 11 3812 [email protected]

Industry Leaders









Clients & Markets




A complex, widespread and successful programme of reform by the Slovak government has brought the country not only the often-used nickname of the ‘East European Tiger’, but also widespread recognition (not only by economists) of the importance of good macro-economic management. In addition, on 1 January 2009 Slovakia adopted the Euro as its currency.

Slovakia posted GDP growth above 7% in each of the years between 2005 and 2007. In 2007, this reached an unprecedented peak of 14.3%, the highest achieved in the European Union. A significant proportion of this was due to structural reforms, introduction of a flat tax, and commitment to encourage FDIs, particularly in the automotive and consumer electronics sectors. These in turn have contributed to growth in employment levels and a noticeable acceleration in per-capita GDP and labour productivity growth to close the gap on western economies.

However, the country’s GDP of EUR 67.3 billion in 2008 was a comparatively modest rise of just 2.5%. The world economic crisis started to affect Slovakia after it had reached the peak of the economic cycle, when there were already signs of overheating in some sectors such as automotive and consumer electronics. Due to the country’s significant exposure to the sectors that were hit hardest during the early days of the crisis, Slovakia’s growth slowed rapidly during the fourth quarter of 2008.

As well as a decline in demand for Slovak exports, some sectors were also hit initially by the strength of the Slovak Crown and then following adoption, of the Euro. While most CE currencies have depreciated since the crisis began, the Slovak Crown appreciated by 10% in 2008.

In December 2008, industrial production dropped by almost a quarter, suggesting a major decline in demand for Slovak exports. As a small, open economy, Slovakia could not sustain growth through domestic consumption alone. However in January 2009 the government approved stimulus packages worth EUR 332 million to support the economy, including measures to support employment and a car-scrapping scheme.

Slovakia


Unemployment remained at 8.4% at the end of 2008, but the collapse in industrial production which started during the last quarter of 2008 drove it up to 11.8% by June 2009. Further increases are expected, since the industrial production sector accounts for over 35% of total employment.

Much public debate centred upon Euro adoption on 1 January 2009. Entering the Eurozone allowed Slovakia to eradicate uncertainty over exchange rates, and is likely to bring about lower sovereign risk and, more importantly, reduced uncertainty in the economy as investors seek the stability that the Euro provides. It should therefore lead to increased international competitiveness for Slovakia. These benefits are likely to be of a long-term nature, although there are already some signs of progress, such as Slovakia’s success in overcoming Czech competition to assemble Volkswagen’s new small car in the Bratislava production plant, mainly thanks to Euro adoption. Production should start in 2011. In the short term, however, the stronger ‘local’ currency may cause some parts of the Slovak economy to face a more difficult environment than their competitors from Poland, Hungary or the Czech Republic. On the other hand, the strong conversion rate of the Slovak Crown and the slowing economy have eradicated the inflationary worries connected with transition to the Euro, as the consumer price index rose by 2.3% in the first quarter of 2009.

Fiscal challenges for 2009 and 2010 are likely to include better control of the deficit and more efficient public spending. The economic stimulus packages, together with lower tax income, have engineered a larger deficit, with the IMF predicting that it will reach 4% of GDP. Slovakia’s arrival in the so-called ‘safe harbour’ of the Eurozone will not cause the government to suspend its conservative approach to its financing needs, since international financial markets are still showing higher risk-aversion towards smaller states such as Slovakia.

The financial sector remains sound, with most banking institutions recording higher profits for 2008 than the previous year. Despite a growth in lending, Slovak banks have sufficient capital to continue servicing the asset side of their business while covering possible losses in the credit portfolio. Liquidity of the Slovak banks has traditionally been good, and they received a further boost in late 2008 in the form of increased deposits, mainly driven by Euro conversion as people took out their savings in Slovak Crown and deposited them as Euros. Slovak banks, similarly to those in the Czech Republic, have a very small proportion of their lending denominated in foreign currency, decreasing their reliance on external funding. The key challenge for the Slovak banking sector is how to deal with a weaker economy and declining real estate values arising from reduced demand for property caused by tighter lending conditions.


Slovakia 2005/2007 Average Values

2007-2008 2008





USD Exchange rate vis-à-vis -5.9 -6.5 21.5


GDP 10.5 2.5 67,331








EUR mil.

Trade balance 307 11 -714

Current account balance 85 -1,116 -4,393

General government balance -28 -313 -1,481

General government gross debt -212 502 18,583





%



CPI rate (previous year = 100%) -0.8 1.0 4.4


1-year yield on Treasury Bill 0.3 -1.1 3.4




ContactsSlovakia


Michal Petrman+420 246 042 [email protected]

Function Leaders

Zuzana LetkovaAudit+421 2 582 49 [email protected]

Stephen GawronskiTax+421 2 582 49 167 [email protected]

Petr KymlickaConsulting+420 246 042 480 [email protected]

Iain Child Financial Advisory+421 2 582 49 [email protected]

Marian HudakEnterprise Risk Services+421 2 582 49 211 [email protected]

Industry Leaders









Clients & Markets


Eva Usai Blumental+420 246 042 [email protected]











Slovenia is governed by a centre-left coalition, elected in November 2008 and led by the Slovenian Social Democrats (SD) in partnership with the Liberal Democratic Party (LDS), Zares and the Democratic Party of Pensioners of Slovenia (DeSUS). Relations are good with the non-aligned President Danilo Tuerk who was elected in November 2007 with 68.2% majority. Slovenia was the first of the new member states to hold the rotating EU presidency, in the first half of 2008.

The country has an unsolved territorial conflict with Croatia, which has been running since independence 18 years ago. The Slovenian government has taken a hardened stance and wishes to resolve the issue before Croatia’s entry into the EU.

Slovenia’s population of 2 million is ageing, creating pressure on the national budget, and the pension system in particular. It is, however, among the countries with the lowest poverty level in the EU; in 2007 approximately 11.5% of the population lived below the at-risk-of-poverty threshold. Due to rapid economic growth, unemployment reached a record post-independence low of 4.3% in 2008. It began to rise in late 2008; later than other impacts of the financial crisis thanks to government job-creation schemes. It continued to rise in the first quarter of 2009, with the greatest increase in manufacturing, construction and agriculture.

In the autumn of 2008, the government started several measures to alleviate the impact of the unfavourable economic environment, including guarantees for banks, issuing government bonds, a EUR 1.2 billion guarantee scheme for company loans and a revised national budget and stability programme.

These measures are expected to temporarily increase gross government debt above the Maastricht euro-entry criteria.

As a small, deregulated economy, Slovenia has been greatly affected by the current crisis. Record post-independence GDP growth in 2007 and relatively high growth in the first half of 2008 was followed by a slowdown and fall in the second half and into 2009, driven by reduced gross investments, export/import activities and government spending alongside a stagnation of household consumption. The slowdown resulted in a 0.5% decrease in nominal GDP during 2008 to EUR 37.1 billion, a downward trend that is expected to continue throughout 2009 with an estimated 4.6% decrease in nominal GDP. A marginal recovery is expected in 2010, with a 3.7% year-on-year increase in nominal GDP.

Slovenia


Maastricht criteria for Euro-adoption set a maximum inflation level for each year from 2002, which decreased annually to reach 2.5% during the period before Slovenia entered the Euro zone in 2007. There was a sharp rise in 2007, exceeding Maastricht criteria, driven by high food and oil prices, high economic activity in the previous period and growth in labour costs. It then dropped significantly in the second half of 2008, which resulted in an average CPI of 2.1% for the whole of 2008. In 2009, CPI is expected to drop to 1.7%.

Slovenia‘s economy is highly dependent on foreign trade, some 70% of which is with the EU. During 2008 exports, which totaled EUR 25.5 billion, and imports totaling EUR 26.5 billion, both recorded a fall of nearly 0.8%. The decrease in exports was most apparent in the last quarter of 2008 mainly as a result of decline in demand from the EU. The decrease in foreign trade continued in the first quarter of 2009, with a sharp decline in exports to those non-EU (ex-Yugoslavian) countries which were affected by the crisis later. Growth of exports and imports is expected to increase gradually, once more reaching 2008 levels in 2011.

Slovenia’s current account deficit has been increasing since 2003, reaching a record post-independence high of 5.5% of GDP in 2009 when, in the first quarter, it rose to EUR 154.9 million. On the positive side, the trade deficit which had been increasing since 2005, decreased noticeably in the first quarter of 2009, mainly as a result of more favourable terms of exchange and a decrease in imports, among other factors. It is expected that the trend towards an increased current account deficit will temporarily stall in 2009, narrowing to around 3% of GDP, before picking up again in 2010.

During rapid economic growth, credit conditions were favourable with falling real interest rates, but the financial crisis ended this. Although nominal interest rates for loans decreased significantly in late 2008, margins increased for new loans on the key Euro Interbank Offered Rate (Euribor).

Since then, credit activity has shrunk considerably. Growth of loans both to non-financial institutions and to households more than halved in the first quarter of 2009 compared to 2007. Due to the limited availability

of external financing, banks inflows became increasingly dependent on household deposits, which grew in the second half of 2008 and the first quarter of 2009. This growth stopped in April, when state deposits became an important savings option following the issue of government bonds in March.

Slovenia’s accession into the EU had significant long and short-term consequences for Slovenian companies. Competition increased, both from the EU and other Central European countries, which put pressure on price competition due to lower production costs. Since duties (taxes) were quite low even before Slovenia joined the EU, there were no significant cost decreases that would improve the position of Slovenian exporters. One factor strengthening its competitiveness is its favourable geographic location and existing links to western markets arising from the time of the former Yugoslavia, when Slovenia acted as its trading arm.

One of the greatest disadvantages for those wishing to invest in Slovenia used to be the time and number of procedures associated with opening a company there. Following reforms, the number of days needed to establish a business has fallen to 19 and procedures required to 5, placing Slovenia at 54 in the World Bank index 2009 for the ease of doing business.

All industries were affected, directly and indirectly, by global market conditions in 2008. Fluctuations in the price of oil and metals, which reached record values in July before a rapid fall, impacted on manufacturers, along with the unfavourable exchange rate of the Euro against the USD and Chinese Yuan in the second half of the year. Some manufacturers responded to these conditions by introducing a shortened working week to save on the costs of labour, materials and logistics.

In addition, the financial crisis made it difficult for Slovenia’s banks to raise money on international markets, forcing them into more conservative lending strategies and the need to increase their provisions against bad debts. While the resulting credit squeeze caused all retail businesses to report decreased sales volumes, the impact was hardest felt in those sectors dealing in high-value goods, such as automotive and construction.


Slovenia 2005/2007 Average Values

2007-2008 2008


Population (mil.) 0.0 -0.1 2.0



USD Exchange rate vis-à-vis 1.5 4.4 0.7


GDP 0.2 -0.5 37,125


Public consumption -0.1 0.5 6,661






EUR mil.


Current account balance -245 -600 -2,055




Foreign currency reserves -1,909 -58 582



%






10-year yield on Treasury Bond n/a 0.7 5.1



ContactsSlovenia



Function Leaders

Yuri SidorovichAudit+386 1 3072 [email protected]

Attila KovesdyTax+36 1 428 [email protected]

Paul TrinderConsulting+ 36 1 428 [email protected]

Vladimir MilosevicFinancial Advisory+385 1 2351 [email protected]

Paul TrinderEnterprise Risk Services+36 1 428 [email protected]

Industry Leaders









Clients & Markets













Ukraine is an emerging democracy, where power is divided between the president and the parliament. The Orange Revolution of 2004 triggered significant investments into Ukraine from European countries, although the current political environment is uncertain. The pre-term parliamentary elections in 2007 established some short-term stability, but inconsistent decision-making broke down the governing coalition and was a key reason behind the country’s failure to gain access to the Membership Action Plan for entering NATO. Tension between pro-Russian and pro-Western factions is a feature of Ukraine’s political and economic landscape.

Ukraine’s population of approximately 46 million is ageing, with the population of the 0-14 year-old declining by over 19% since 2000. There are currently 32 million people in the economically active section of the population (15-64). The country has a highly skilled and well-educated labour force, with a 98% literacy rate, and nearly 30% of population has higher education. Until recently, the Ukrainian economy could be counted among Europe’s best performers, resulting in the rapid improvement of living standards, with real wages and personal disposable income increasing at a rapid rate.

Ukraine became a member of the WTO at the beginning of 2008; a move which is set to have a positive long-term impact on the country’s economy. In addition, the country’s historically strong economy has encouraged a substantial increase in the volume of FDIs since 2000 to USD 12 billion at the end of 2008, as foreign investors gained confidence in the country.

As a result, foreign currency reserves grew rapidly in the face of strong current-payment outflows. In late 2008, however, the global economic crisis began to affect the Ukrainian economy, and has continued to do so into 2009. However, the adverse external environment was not the only reason for Ukraine’s emerging economic problems. Historically, the Ukrainian economy has been highly dependent on industrial production. In 2008, over a quarter of the country’s GDP was linked to metals’ production, which accounted for 80% of the country’s total exports. The recent collapse in the global demand for metals has clearly exposed a significant economic imbalance, which has existed since the 1990s. The situation has been aggravated by the banking crisis. The GDP growth slowed in 2008 to 2.1% following a rapid growth in 2005-2007 on average by 6% per year.

Ukraine


A sharp decline in exports in the fourth quarter, driven by reduced prices and a fall in external demand for metals and chemical products together with weakening of domestic currency resulted in 8.2% drop in the whole 2008.

The Ukrainian currency, the Hryvnia (UAH), has been pegged in a relatively tight band to the US Dollar since 2000. The National Bank of Ukraine (NBU) revalued the Hryvnia in April 2005 by 5%. Since then it has been pegged at UAH 5-5.05 to the Dollar. Following the collapse of global steel prices in late 2008, Ukraine’s US Dollar-denominated income from metal exports contracted by almost 50%. Coupled as it was with the capital flight it contributed to a significant contraction in the balance of payments. The majority of external borrowings in the Ukrainian financial sector were denominated in US Dollars, and were therefore difficult to refinance amid the global liquidity crisis, triggering a US Dollar deficit in the financial system. As a result, in October 2008 the Hryvnia depreciated significantly to the Dollar and the Euro (respectively by 55% and 50%).The sharp devaluation of the Hryvnia forced the NBU to support it with forex interventions. As a result, Ukraine’s gold and currency reserves decreased by almost USD 6 billion from September to December 2008.

The impact of the credit crunch on banking system growth intensified in the final quarter of 2008, as a result of liquidity, financing and refinancing problems at most Ukrainian banks. The depreciating currency exacerbated the problem, and lost confidence in the system saw worried depositors withdraw their money en masse. As a result, refinancing much of the external debt repayments faced by the Ukrainian banking sector became difficult. In October, the NBU prohibited the pre-term withdrawal of deposits. It also placed those banks most affected by the crisis under temporary administration and injected substantial liquidity via long-term refinancing. Also, it enlisted international auditors to carry out diagnostic ‘stress tests’ on the banking sector to determine whether any further capital injections were required.

In November 2008, the IMF approved a USD 16.4 billion, 24-month stand-by arrangement, to help Ukraine stabilise the impact of the crisis. An initial tranche, amounting to USD 4.5 billion, was drawn down soon afterwards, and a second tranche worth USD 2.8 billion was received in May 2009. The third tranche of USD 3.3 billion was granted in late July 2009. The IMF set strict conditions, including a tightening of fiscal and monetary policy and

a significant reform of exchange-rate policy. This includes the introduction of a flexible exchange rate.

The Ukrainian parliament has also adopted an anti-crisis law, designed to stabilise the banking system and the real estate sector. Other sectors of the economy (metals and chemical producers, construction companies, agriculture and the food industry) are also expected to receive government assistance.

Despite the fact that the economic crisis has exposed many structural weaknesses, the underlying fundamentals remain stable. Ukraine has traditionally maintained a fairly tight fiscal policy, flexible government budget and current account surplus. Ukraine enjoys a relatively low amount of public debt. The total amount of Ukraine’s sovereign and quasi-sovereign debt repayment for 2009 is USD 3 billion, a figure that is manageable, given the country’s foreign currency reserves of USD 26.5 billion as at 1 March 2009.

Despite strong growth in recent years, Ukraine’s GDP per capita is still significantly below most other Central European countries. This is advantageous, however, in that it leaves sufficient room for long-term, above average economic growth following emergence from the crisis, as living standards continue to converge with European averages.

The country also enjoys great natural resource wealth, particularly in terms of its rich agricultural land and large iron ore deposits. Formerly known as the ‘bread basket’ of the Soviet Union, Ukraine accounted for about a quarter of Soviet grain production, one fifth of its meat and dairy output, and more than half of its sugar beet production. The country also boasts about 20% of global iron ore reserves, nearly 25% of the world’s black-soil, and over 30% of the world’s manganese ore reserves, and is counted among the world’s top 10 steel producing countries.

The structure of GDP did not change significantly, with major movements in agriculture (which increased from 7.4% to 8.6% of total GDP) and construction (which decreased from 4.4% to 3.7%). Manufacturing showed growth during the past year, but a sharp decrease in the fourth quarter affected the year-on-year indicator, resulting in a total decrease of 3.1%. The chemical manufacturing, engineering industry and mining and smelting sector decreased the most in the fourth quarter 2008 by some 29-45%, in comparison with fourth quarter 2007.


The banking sector, which represents the most developed and advanced part of the country‘s financial system, increased its total lending by 71.9%, with a simultaneous increase in deposits by 27.7%. Agriculture became the leading sector in 2008, with a 17.5% growth in real volume. Difficulty in obtaining credit caused a 16% year-on-year decrease in all types of construction work in comparison with 2007.

The EURO 2012 Football Championship finals are to be held in Ukraine and Poland. A massive direct impact on the Ukrainian economy is expected, with preparation set to cost some USD 25 billion in Ukraine alone. The Ukrainian government expects 75% of this to be covered by private investment in sport infrastructure and transport connections, including the construction and development of seven airports, railways and motorways, across the country, alongside the development of modern public transport systems (metro, trams, trolleybuses, and buses) in all host cities.

Ukraine 2005/2007 Average Values

2007-2008 2008







GDP 6.0 2.1 85,882




Exports (goods and services) -3.3 -10.4 40,222




EUR mil.

Trade balance -3,505 -5,258 -13,070


General government balance 218 -202 -1,028



Foreign currency reserves 4,920 -20 21,716



%









ContactsUkraine

Managing Partner

Vladimir Vakht+38 044 490 90 [email protected]

Function Leaders

Quentin O‘TooleAudit+38 044 490 90 [email protected]

Grigory Pavlotsky Tax & Legal+38 044 490 90 [email protected]

Andriy Stepanov Consulting +38 044 490 90 [email protected]

Dmitriy Anufriev Financial Advisory Services+38 044 490 90 [email protected]




Clients & Markets

Andriy Bulakh +38 044 490 90 [email protected]

Rita Rosen+38 044 490 90 [email protected]











Leadership and governance

Office Managing Partners

Maksim CaslliBalkans+40 21 2075 [email protected]

Miloš MacuraPannonAdria+381 11 3812 [email protected]

Marek MetryckiPoland & Baltics +48 22 511 [email protected]

Michal PetrmanCzech Republic & Slovakia+420 246 042 [email protected]

Function Leaders

Gavin FlookAudit+48 22 511 [email protected]

Jaroslav ŠkvrnaTax+420 246 042 [email protected]

Petr KymličkaConsulting+420 246 042 [email protected]

Béla SeresFinancial Advisory+36 1 428 [email protected]

Zbigniew SzczerbetkaEnterprise Risk Services+48 22 511 [email protected]

Industry Leaders


Vladimír VaněkEnergy & Resources+420 246 042 [email protected]

Dariusz NachyłaTechnology, Media &Telecommunications+48 22 511 [email protected]

Diana Rádl RogerováReal Estate+420 246 042 [email protected]

Martin BuranskýPublic Sector+420 246 042 [email protected]

CE Top 500 Project Team


Rafał Antczak+48 22 511 [email protected]

Ranking Analysts

Patryk Darowski +48 22 [email protected]

Artur Galbarczyk+48 22 5110526 [email protected]

Clients and Markets


Anne Charlesworth+420 246 042 [email protected]


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Deloitte CE TOP 500 2009 Country by Country Report

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