ECONOMIC RESEARCH •

ENGLISH EDITION OCTOBER 2007

OCTOBER 2008

Eastern European Outlook

Theme: Russia
Resilience after the elections
eroding

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SEB Economic Research
Eastern European Outlook - October 2008

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 Summary
Eastern European Outlook — October 2008

The resilience of Central and Eastern Europe in the face of global economic slowdown
is on its way towards eroding. Until now, many countries have maintained their growth
thanks to vibrant domestic economies, with growing investments and consumption. Today,
however, pressure on the region’s economies has greatly increased as the euro zone has
stagnated and the repercussions of the international financial and credit market crisis intensi-
fy. We are adjusting our overall growth forecasts downward, and Central and Eastern
Europe can no longer be viewed as a “strong growth region”. GDP growth in the nine
countries covered in Eastern European Outlook will fall from an average of 7.4 per cent
in 2007 to 6.0 per cent this year, 4.5 per cent in 2009 and 4.8 per cent in 2010. Russia and
Poland stand out with continued decent growth but risks are skewed to the downside.
Inflation will fall in most countries, but the downturn will be sluggish in Russia and Slovakia.
Countries with large external imbalances – the three Baltic countries and Ukraine – are the
most vulnerable to tighter global credit conditions. Credit growth is clearly slowing from a
high level in Ukraine and will fall somewhat further in the Baltics, which are undergoing a
continued adjustment after their overheating.
Russia’s economic deceleration will be moderate. The reasons are large federal budget and
current account surpluses and the ability to respond to lower demand with a more expansive
fiscal policy. We are also assuming a moderate cool-down in commodity prices. The risk of
major failures in the banking sector is mainly linked to small and medium sized banks.
Ukraine’s economic outlook has become quickly and noticeably gloomier, after several
years of strong expansion. Overheating problems are not being resolved, due to continued
political instability and deteriorating terms of trade.
In Estonia the recession will be lengthy; GDP will fall again in 2009 and the labour market
will deteriorate noticeably. Home prices will continue to fall, bottoming out only late in 2009.
Wage-driven inflation will fall rapidly.
In Latvia, too, the downturn will be long-lasting. Consumption and investments will remain
weak. Unemployment is on the way up, and home prices will continue to fall in 2009. The
country’s large current account deficit will shrink quickly but remain at a high level
Lithuania is beginning a gradual, domestically driven slowdown. Growth will be weak in the
next couple of years. The current account deficit and inflation will remain stuck at high
levels, partly due to the closing of the Ignalina nuclear power plant in 2009.
Poland will experience a soft landing. Underlying economic strength and the modest scale
of the imbalances the country has built up point towards relatively good economic perform-
ance. The government’s new target of a transition to the euro by 2011 seems a year too
optimistic. Its ambitions will dominate economic policy, which will be relatively tight. Looking
ahead, this will provide support to the zloty.
Slovakia, the Czech Republic and Hungary will all be relatively hard hit by the euro zone
slowdown; they are more export-dependent than Poland. Growth in Slovakia and the Czech
Republic will halve. Hungary is slowly recovering after its earlier period of tough belt-
tightening policies.

3
 The international economy
Eastern European Outlook — October 2008

Global recession in 2009 For Central and Eastern Europe, the international
economic picture is thus substantially gloomier than
we foresaw last spring. Compared to Eastern Europe-
n Synchronised economic slowdown
an Outlook in March, we have adjusted our 2009
n Inflation on the way down growth forecast for the euro zone – a vital export
n Central banks will cut key interest rates market for the countries to its east – downward by
1.2 percentage points.
The global financial market crisis continues to have a
negative impact on economic performance. Credit Interest rate cuts on a broad front
conditions have tightened in the wake of major new Inflation pressure will diminish as commodity prices
losses in the banking system and dramatically wider continue to soften and the increasingly synchronised
interest rate spreads between safe and less safe secu- economic slowdown gradually increases the down-
rities. Although we expect the exaggerated spreads ward pressure on wages and prices. For example,
between mortgage bonds and government bonds to average euro zone inflation will fall from 3.5 per cent
shrink after the passage of a giant American financial this year to 2.3 per cent in 2009. Given our forecast,
rescue package, the process of adjustment to a more next summer the year-on-year inflation rate will have
normal situation risks being prolonged. It may last dropped to levels consistent with the European Central
until well into next year. A deeper economic slump and Bank’s inflation target of just below 2 per cent.
continued home price declines in the US during the
first half of 2009, as well as the emergence of bank- The ECB’s concern about inflation will ease due to
ing crises in Europe, will be obstacles along the way. weaker economic performance. The bank will begin
Credit conditions will thus be tough for another while. cutting its key interest rate during the autumn. It will
This will, in turn, hamper the real economy. slash the refi rate from 4.25 per cent to 3.25 per cent
next year, followed by further cuts in 2010. Sliding
GDP growth home prices and paralysed demand in the United
Year-on-year percentage change Kingdom will persuade the Bank of England to cut
interest rates more aggressively. The British repo rate
2007 2008 2009 2010 of 5 per cent will be lowered starting in October,
United States 2.0 1.5 -0.3 1.5 reaching 3.5 per cent by summer 2009. The US
China 11.9 10.0 8.0 8.0 Federal Reserve will lower its fed funds rate from 2 to
Euro zone 2.7 1.2 0.3 1.2
1 per cent in the next six months. If tensions in credit
and finance markets should become even more se-
United Kingdom 3.1 1.0 -0.5 1.3
vere, joint actions including sharp interest rate cuts
Nordic countries 3.0 1.7 1.0 1.8 cannot be ruled out.
OECD 2.7 1.3 0.1 1.3
The world 5.0 3.6 2.6 3.2
We expect long-term government bond yields to show
modest movement in the coming year, although short-
Sources: OECD, SEB
term fluctuations may be significant. On the one hand,
central banks will be cutting interest rates as inflation
The world economy will thus lose further momentum falls, which points towards lower long-term yields.
after very high growth in recent years. In 2009, On the other hand, there will be an increased supply
growth in the OECD countries will be lower than in of government bonds due to rising budget deficits,
the early 1990s, because the economic slump is especially in the US, which will counter a downturn.
spreading in earnest from the US to Western Europe
and Japan. To date, growth has remained good in Looking ahead, the dollar will enjoy support due to
much of Asia and Central and Eastern Europe. But expectations of earlier economic recovery in the US
now secondary effects from the OECD slowdown are than in Europe, as well as the resulting earlier interest
becoming more widespread while a number of coun- rate hikes. We expect the EUR/USD exchange rate to
tries are struggling with persistent inflation problems. stand at 1.30 in a one-two year perspective.

Overall, the global economy will grow by 2½ per cent We expect commodity prices to fall somewhat fur-
in 2009, measured in purchasing power-adjusted ther, due to ever weaker global economic prospects.
terms. This is what the International Monetary Fund For example, we are assuming that oil prices (Brent)
nowadays defines as a recession at the global level. A will average USD 80-90 per barrel next year.
clear recovery in the world economy will take time to
materialise. Due to credit market problems combined
with delayed economic policy responses in Western
Europe, growth there will end up well below trend in
2010 as well.

4

Decent resilience
n Strong but decelerating consumer growth
n Lower commodity prices hampering expansion
n Inflation will fall slowly
n Twin surpluses are shrinking
Russia is coping relatively well with international
credit market turbulence, but a slowdown in growth
is also happening here. Aside from tighter credit con-
ditions, other factors behind this deceleration are
lower commodity prices and certain capacity con-
straints. GDP will grow by 7.0 per cent during 2008
as a whole, after last year’s 8.1 per cent increase.
Next year, growth will slow further to 5.6 per cent, in
line with the level usually stated as Russia’s trend
growth rate. The risk in the forecast is skewed to the
downside and is associated with more serious effects
of the financial crisis and a larger downturn in com-
modities. Fiscal policy will gradually become less
expansionary, but if the downshift in growth should
be larger than we have anticipated, there is both will-
ingness and room to ease fiscal policy again.
Growth will continue to be driven by domestic de-
mand, while capacity restrictions and real appreciation
of the rouble will hold down exports. Russia’s large
federal budget and current account surpluses will
gradually shrink as oil prices fall to USD 80-90 per
barrel during our forecast period.
Russia: GDP and inflation
Year-on-year percentage change
9 16
8 SEB forecast
7 12
6
5
4
3 trades, while manufacturing output rose at a more
2 4
1 2
0 0
02 03 04 05 06 07 08 09 10
GDP (LHS) CPI (RHS)
Sources: Rosstat, SEB
Lower commodity prices have contributed to a sharp
decline in the Moscow Stock Exchange since its peak
last summer. Considering that share ownership in
Russia is not especially widespread, however, this is
hardly likely to have any wealth effects on consump-
tion worth mentioning. Financing of companies via
the stock market is not of crucial importance to in-
vestments, either. About 50 per cent of corporate
investments are financed via internal cash flows, an
indication that the financial sector is still relatively
undeveloped.
Russia
Eastern European Outlook — October 2008
Lower commodity prices hurt sentiment
Theoretically, the oil price downturn should not make
so much difference to real growth, since variations in
oil prices primarily affect federal government savings
in the Stabilisation Fund via extremely high taxation of
oil income. This means that pay and profits are not
affected especially much, as long as the thrust of
fiscal policy remains unchanged. Despite expenditure
increases in recent years, the federal budget would
show a balance even if oil prices fell to USD 60-65
per barrel. Yet it is reasonable to assume that future
expectations of both households and companies are
affected. For example, household saving is likely to be
higher if federal government saving decreases. This
will curb the appetite for borrowing, at the same time
as lending practices become more restrictive.
The global financial crisis has reached Russia during
the autumn. The liquidity crisis has developed into a
crisis of confidence. The authorities have acted reso-
lutely with the support of a large financial buffer.
While the crisis may deepen further we believe the
risk of major failures in the financial sector seems
relatively small. Russia’s banking system is dominated
by a few financially sound banks, several of them
with large state ownership, making it possible to use
the large financial resources of the Russian federation
to recapitalise large banks that run into problems.
There are also numerous small and medium-sized
banks that are less well equipped. The credit crisis
will probably accelerate the consolidation of the finan-
cial service industry.
Continued slowdown in growth
Second quarter GDP growth was 7.5 per cent, or
14 clearly above trend, yet this represents a downshift
from the two preceding quarters, with growth rates
10 of 9.5 and 8.5 per cent, respectively. As earlier,
8
growth on the output side was mainly driven by
6
domestically oriented sectors such as distributive
modest pace. The downward trend in oil output
growth continued, and today output is also falling in
absolute terms. On the demand side, consumption is
the main growth engine, but investments have also
increased sharply, although there has been a clear
cool-down in recent months. We expect consumption
to remain the most important driving force behind
demand, among other things supported by continued
good real wage increases and some support, albeit
fading, from fiscal policy. The new middle class will
continue to be an economic engine, through greater
consumption but especially as a producer of various
new services.
Large-scale federal spending on infrastructure will
sustain investments in the next few years. Meanwhile
we expect certain negative effects from the tighter
credit situation on private capital spending. Another
5
 Russia
Eastern European Outlook — October 2008
constraint, especially in the construction sector, is
high capacity utilisation. New housing starts, for
example, are rising at a substantially slower pace than
before, indicating a deceleration in residential con-
struction. Although large investment projects may
contribute to increased overheating problems in the
short term, boosting the investment level is vital to
growth in a somewhat longer perspective, especially
in light of Russia’s negative demographic trend.
Russia: Oil output and prices
Year-on-year percentage change USD/barrel
15.0
12.5
10.0
7.5
5.0
2.5
0.0
-2.5
01 02 03 04 05 06
Oil output (LHS) Oil price, Ural (RHS)
Sources: Federal State Statistics Service, Reuters EcoWin
The trend towards stagnating or slightly falling oil
output will probably continue. Many oil fields are
nearing depletion, while few have been added in re-
cent years. Insufficient investments are one reason
for this, which in turn may be partly related to unclear
rules of the game for foreign companies and uncer-
tainty about the role of Russia’s government. Another
reason is the high tax burden. However, oil sector
taxation is currently being re-assessed, including
proposals for tax exemption during the first year of
offshore production. New legislation on strategic
sectors, including gas and oil, has removed some of
the uncertainties about the rules for foreign compa-
nies. The government has also recently boosted its
appropriations for prospecting, but ensuring produc-
tion growth in the medium term will require gigantic
investments, since new discoveries are often located
far from developed infrastructure. It is also worth
observing that while Russia is indeed the world’s
second largest oil producer after Saudi Arabia, the
country’s known oil reserves are only the seventh
largest in the world.
Since growth in oil and gas output is so weak, this
will eventually squeeze export income, especially with
prices now on their way down. Oil and gas account
for more than 60 per cent of the country’s export
income, about 20 per cent of GDP and 45 per cent of
federal government revenue. The easiest way for
Russia to increase, or rather maintain, its level of
energy exports is to reduce its high domestic energy
use. This is also the purpose of the ongoing deregula-
tion of the energy sector and plans for market adjust-
ment of gas prices for domestic users by 2011.
High underlying price pressures
Despite some deceleration in recent quarters, the
economy is still growing above potential. Among the
results are higher resource utilisation and a larger
proportion of demand being satisfied via increased
imports. Various types of bottleneck problems have
become increasingly apparent. In places, labour short-
ages are also an obstacle to expansion, especially in
Moscow and St. Petersburg, where unemployment is
close to zero. Due to relatively low geographic mobili-
ty, competition for labour in these areas is driving up
130
pay, which is currently increasing at about 30 per cent
annually. Real wage growth has been substantially
110 higher than productivity for several years. Due in part
90 to higher resource utilisation, underlying inflation has
moved upward in the past year, but the most impor-
70
tant reason for the doubling of CPI inflation since
50 early 2007 is sharp food price increases. Since food
30 accounts for 40 per cent of the consumption basket,
these hikes have had a strong impact on CPI.
10
07 08
Russia: Pay, CPI, and M2 money supply
Year-on-year percentage
60 30.0
55
50 25.0
45
40 20.0
35
30 15.0
25
20 10.0
15
10 5.0
04 05 06 07 08
M2 (LHS) CPI (RHS)
Wages and salaries (RHS)
Sources: Federal State Statistics Service, The Central Bank
Since last spring, the inflation rate has been relatively
steady at around 15 per cent. We expect a slight
decline via lower contributions from food and energy,
but judging from producer price trends, for example,
the downturn is likely to be moderate in the short
term. Looking somewhat further ahead, lower interna-
tional prices and probably also reduced inflows of
foreign capital will help ease price pressure. Working
in the opposite direction will be various planned hikes
in prices and fees over the next few years, for exam-
ple gas and electricity. Overall, we expect inflation to
average slightly below 14 per cent this year and fall to
slightly more than 11 per cent next year.
Direction of rouble less obvious
The central bank has repeatedly failed to achieve its
inflation target. One reason is that the bank has simul-
taneously had an exchange rate target. The primary
reason behind this target is that Russia wants to avoid
excessively rapid appreciation of the rouble, which
jeopardises businesses outside the commodities sector
that are exposed to international competition. In recent
6

years, the central bank has allowed nominal apprecia-
tion averaging about two per cent annually against a
basket consisting of 55 per cent dollars and 45 per
cent euros. This reflects the trend against the dollar,
while the rouble has weakened against the euro. Since
more than 60 per cent of imports come from the EU
and only 3 per cent from the US, this has helped to
drive up import prices.
During the spring and summer, the central bank
moved cautiously to tighten monetary policy, mainly
by boosting reserve requirements. The bank’s most
important interest rate has remained sharply negative
in real terms. In the spring, the bank announced plans
to allow larger rouble exchange rate movements to
make it harder to foresee short-term fluctuations and
thereby counter speculative capital inflows. The goal
is that starting in 2011, monetary policy will be man-
aged only on the basis of an inflation target. Until
then, the central bank will continue to base its ex-
change rate policy on a dollar/rouble basket.
The external conditions for central bank policies
changed drastically when the credit crisis reached
Russia in earnest late in the summer. Capital inflows
were replaced by outflows due to falling commodity
prices, increased political uncertainty and general
global credit market turmoil. The situation was exac-
erbated in part by large tax payments and the need to
refinance relatively large foreign loans during the
autumn. The strategy of Russian authorities for at-
tacking the credit crisis was to furnish the large
banks, which are pivotal to the financial system, with
liquidity. In addition, all banks received support via a
lowering of reserve requirements. The ministry of
finance also undertook stepped up oil surplus auc-
tions. Among other measures being undertaken are
lower taxation of oil exports, a more flexible VAT
payment system, higher government bank deposit
guarantee limits as well as earmarking of funds for
possible repurchase programmes in state-owned
companies. Despite official auctions, small and medi-
um-sized banks are still in a very strained situation.
The rouble weakened by more than 3 per cent in
August and September but then recovered marginally.
Even if the rouble recovers some lost ground ahead,
appreciation pressure will probably fade gradually as
Russia’s current account surplus falls. Our assess-
ment is that the rouble will then again weaken.
Increased political risk
The presidential transition last spring was just as
undramatic as one could expect. Two thirds of Prime
Minister Vladimir Putin’s government, which was
unveiled in mid-May, consists of members of the
previous government. The remaining members are
mainly people that Putin brought with him from his
own presidential administration. As earlier, the govern-
7
Russia
Eastern European Outlook — October 2008
ment is a mix of liberals and tougher individuals, but it
seems as if the liberal wing has been strengthened
somewhat. President Dmitry Medvedev has also been
perceived as relatively liberal and business-friendly,
due to his clear focus on reducing corruption and
bureaucracy and strengthening the rule of law, but a
number of events during the summer fuelled uncer-
tainty about government policy. The escalation of the
conflict between BP and its Russian partners in the
jointly owned company BP-TNK again focused atten-
tion on conditions governing foreign companies.
Putin’s criticism of pricing policies by the Mechel coal
and steel company led to strong reactions in the stock
market. The military conflict in Georgia further dam-
aged investors’ faith in the predictability of Russian
policies. Strong market reactions to the summer’s
events probably came as a surprise to the government
and may have served as an alarm clock, which in turn
might lead to improvements in the investment climate.
Who’s in charge?
Various contradictory statements by the president and
prime minister related to the Georgia conflict have
also fuelled speculation about the division of power
between Putin and Medvedev. The combination of a
president with strong formal powers and a prime
minister with significantly less formal power but very
strong informal power by virtue of his dominant
personality implies uncertainty as to where real power
lies. According to public opinion surveys, a clear
majority of the Russian public believes that Putin is
still in charge. So far, there have been no external
signs of a split between the two. However, it remains
unclear whether Putin sees his role as gradually ced-
ing power to Medvedev while the latter builds up his
own power base, or whether Putin is planning a
comeback as president by winning the 2012 presiden-
tial election.
As for the consequences of increased tensions with
the West and the Georgian conflict, they may further
delay future World Trade Organisation membership.
However, due to ever-increasing mutual dependence
between Russia and the EU in economic, financial and
energy-related terms, there are major incentives on
both sides to limit tensions. The powerful reactions to
Russia’s foreign policy actions, especially in financial
terms, also serve as a moderating factor, since the
country’s political leaders are not unaffected by the
dissatisfaction of various economic interests with
these developments.
 Ukraine
Eastern European Outlook — October 2008
Gloomier outlook
n Decelerating credit growth – weaker domestic
demand
n Record-high inflation will slow – but will
remain in double digits
n Less favourable terms of trade will lead to
larger current account deficits
After several years of vigorous expansion in the
Ukrainian economy, the growth outlook is now deteri-
orating. There will, of course, be continued strong
potential for catch-up-driven growth and for greater
integration in the world economy. Meanwhile, howev-
er, the country’s overheating problems have intensi-
fied, as manifested in its rising current account sur-
pluses and record-high inflation. Recurrent govern-
ment crises have led to the postponement of important
structural issues, and fiscal policy has become in-
creasingly pro-cyclical. Ukraine’s deteriorating exter-
nal balance and greater private debt abroad is increas-
ing the country’s vulnerability in the shadow of the
global credit crisis.
Ukraine now faces an adjustment to a more sustaina-
ble economic trend. Due to weaker credit growth
ahead, domestic demand will decelerate, while exports
will be hampered by weaker competitiveness and
deteriorating international economic conditions. GDP
growth will fall from 6.3 per cent this year to 3½ per
cent in 2009 and then recover somewhat to 4½ per
cent in 2010.
Ukraine: Stock market and CDS price
1300
1200
1100
1000
900
800
700
600
500
400
300
Jan Apr Jul Oct Jan Apr Jul
07 08
PFTS (LHS)
5-year credit default swaps, CDS (RHS)
Source: Reuters EcoWin
In recent months, growth has become increasingly
imbalanced, including slowdowns in exports and
investments as well as in consumption, which ac-
counts for an ever-larger proportion of demand.
Meanwhile import growth has accelerated, partly a
reflection of weaker competitiveness, despite the fact
that the hryvnina has largely followed the weakening
dollar in recent years. Although there will be a slight
rebound due to a bountiful agricultural harvest, ex-
ports will once again be squeezed as demand weakens
further in major customer countries in Europe. Weak-
er production will also have an impact due to a dimin-
ished need to expand capacity, which will restrain
capital spending. Increasingly tough lending practices
will have a similar effect ahead. There has already
been a clear deceleration in construction due to the
housing market slowdown, and this trend will intensi-
fy in the coming year.
There has been a noticeable deceleration in credit
growth from a rate of nearly 80 per cent early this
year to less than 60 per cent in recent months. This
trend will be accentuated as banks become more
cautious about their lending, in the wake of the global
credit crisis. The Ukrainian consumption boom will
thus lose momentum and slow to more sustainable
levels.
Ukraine: Current account balance
USD billions
3 3
2 2
1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: National Bank of Ukraine
Due to the slowdown in domestic demand, extremely
excessive growth in imports will gradually decelerate.
1000 This does not imply any improvement in the trade
900 balance, however, since we meanwhile expect a clear
800
deterioration in Ukraine’s terms of trade. After the
700
recent very favourable trend, especially for steel
600
500
prices, we expect a slowdown ahead, in line with
400
other commodity prices. Meanwhile import prices will
300
climb when Russia boosts natural gas prices at the
200 beginning of 2009. According to widely circulated
100 information, these prices will more than double. The
0 final outcome will be a matter of negotiations, and it is
Oct possible that Ukraine may escape with a smaller price
hike. To some extent, it can offset price hikes by
raising transit fees. If the increases should amount to
100 per cent, this means that the value of imports
would increase by about 5 per cent of GDP in 2009.
Although the price hikes may be lower, we are ex-
pecting a current account deficit of 7.5 per cent of
GDP this year and 10 percent in 2009.
Despite its poorer current account outlook and the
uncertain situation in global finance markets, Ukraine
attracted large capital inflows during the first half.
Among other things, foreign direct investments rose
by 40 per cent compared to the same period of 2007.
8

Given the recent sharp deterioration in risk appetite,
however, this favourable trend is rather unlikely to
continue. FDI inflows are also being hampered be-
cause the government has postponed privatisation
plans for the time being. With foreign debt having
grown relatively quickly, from about 45 per cent of
GDP in 2005 to 60 per cent last year, financing re-
quirements will increase in the future.
Inflation culminated in May at above 31 per cent but
slowed to 26 per cent in August. Considering that
food makes up half the CPI consumption basket,
inflation in Ukraine has been greatly influenced by the
food price trend. Meanwhile there is strong underlying
inflation pressure in the economy, with wages and
salaries rising about 35-40 per cent. In addition, fiscal
policy has been clearly pro-cyclical, among other
things via sharply higher transfer payments. Looking
ahead, we expect inflation pressure to continue easing
gradually. Reduced price pressure from food and
gradually slower pay increases as the economy decel-
erates will contribute to this. Meanwhile there is a
pent-up need to raise various charges and fees. The
sharp price increases for gas are another reason why
the downturn will occur gradually. Our assessment is
that inflation will average nearly 26 per cent this year
and fall to 16 per cent in 2009.
The National Bank of Ukraine has relatively limited
means for combating inflation, since monetary policy
focuses chiefly on maintaining a fixed exchange rate
against the dollar. Since last summer, the bank has
aimed at keeping the hryvnia in the UAH 4.65-5.05
range against the dollar, with a benchmark rate of
4.85. The central bank has also signalled that it will
gradually shift towards maintaining an exchange rate
against a basket of currencies. At first the hryvnia
traded in the stronger portion of its band, very much
due to continued strong capital inflows, but during the
turbulence of recent weeks, the rate has weakened
clearly. Our assessment is that the hryvnia will weak-
en further against the dollar as a consequence of
rising current account deficits and reduced capital
inflows. By the end of 2009, the exchange rate against
the dollar will be 6.50.
Politics getting even messier
There have been recurrent political crises in recent
months. In June, two defections from coalition parties
caused the government to lose its parliamentary ma-
jority, but a later court ruling declared these defections
unconstitutional. Meanwhile the conflicts between
Parliament and President Viktor Yushchhenko on
constitutional reform have escalated. When Prime
Minister Yulia Timoshenko joined forces with the
opposition in order to curb presidential power, Yush-
chenko’s party Our Ukraine pulled out of the govern-
ment. A snap election is thus moving ever closer, only
a year after the last one. It would be the third parlia-
9
Ukraine
Eastern European Outlook — October 2008
mentary election in as many years. Judging from
public opinion surveys, the Timoshenko Block would
make major gains in a possible early election. Support
for Yushchenko and Our Ukraine has collapsed and is
now only about 5-6 per cent. Weak public support for
the President and Our Ukraine indicates that the party
has very little to gain from a snap election and might
thus be willing to conclude a new agreement with the
Timoshenko Block.
Another conceivable solution to the crisis is for the
Timoshenko Block to form a broad coalition with the
pro-Russian Party of Regions. Timoshenko’s low
profile during the Georgia conflict and improved
relations with Russia have undoubtedly made it easier
for such a constellation to take shape. Regardless of
how the current crisis ends, however, the potential for
a strong government will not be especially good until
the presidential election early in 2010, since the issue
of the division of power between the president and
parliament remains unresolved. Added to this domestic
political turbulence is greater uncertainty in relations
with Russia, triggered by the crisis in Georgia. Al-
though the parallels between the break-away regions
of Georgia and the situation in the Crimea are mislead-
ing in many respects, increased tension in the region
is a further uncertainty factor.
It is not obvious what the economic consequences of
this uncertain political situation may be. Instability in
Ukrainian domestic politics is nothing new, although
the situation has deteriorated in recent months. Yet
economic growth has remained strong and foreign
investments have continued to flow into the country.
One possible reason is that despite Ukraine’s messy
politics, there is relatively broad consensus about such
fundamental matters of policy as closer relations with
the EU, WTO membership (Ukraine became a mem-
ber this year) and key elements of reform policy.
However, there is now a risk that politics will have a
more negative impact on the economy ahead. Due to
domestic political disunity, fiscal policy has become
increasingly pro-cyclical, thereby worsening the
overheating in the economy. A continuation of the
constitutional conflict on the division of power be-
tween Parliament and president will also be a growing
obstacle to the implementation of important reforms.
 Estonia
Eastern European Outlook — October 2008
Lengthy recession ahead
n Home prices are continuing to fall
n Domestic demand remains depressed
n Inflation will rapidly come down
Since the second quarter of 2008, Estonia has slid into
recession. There seems to be relatively little chance of
avoiding a lengthy period of negative growth. In 2009,
global financial and economic stress will leave its
mark on Estonia. In addition to obvious pressure on
exports, an equally crucial effect will be via monetary
conditions, which will tighten. Domestically, the
adjustment has been slower than expected, with
remarkable inertia in the labour market and prices.
Next year, the government will also boost several VAT
rates. That means that the correction will take longer
than previously thought and major shifts are expected
to happen only in 2009, further prolonging the reces-
sion. In 2009, negative GDP growth will continue,
averaging minus 2.2 per cent. In 2010, growth will
recover to plus 2 per cent.
A lengthy recession combined with marked losses of
competitiveness implies a risk of currency adjustment.
In our new, darker economic scenario, with a more
substantial increase in unemployment this risk has
risen despite the government’s tightening measures.
Weaker prospects for exports imply that the return to
sustainable current account deficit (5-7 per cent of
GDP) will take a longer time. But our main scenario is
still that Estonia’s exchange rate peg will survive. A
substantial share of loans in the private sector is
denominated in euro. Therefore the costs associated
with a devaluation are large. Consequently we expect
that the authorities will go very far in order to pre-
serve the currency pegs. The same argument goes for
Lithuania and Latvia.
The economic slowdown started with a gradual defla-
tion of the real estate bubble from mid-2007 onward.
A year later, the average price of flats had fallen 15
per cent, and in Tallinn 19 per cent.
Estonia: Property prices
EEK per square metre, year-on-year % change
30000
25000
20000
15000
10000
5000
0 -30
Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
03 04 05 06 07
Tallinn, price (LHS)
Estonia, price (LHS)
Tallinn, change (RHS)
Estonia, change (RHS)
Source: Estonian Land Board
Early in 2008, several additional external shocks hit
the economy, including skyrocketing oil prices and
decelerating global growth, while transit trade fell 40
per cent below the year-earlier level. These develop-
ments finally drove Estonia into recession. As a con-
sequence of additional shocks, by mid-2008 the eco-
nomic downturn had become very widespread, af-
fecting not only domestic demand but also such key
export sectors as wood, furniture and textiles.
Meanwhile other export sectors like metals, chemicals
and machinery production were performing quite
well. Even in construction, value-added remained
positive, despite the freezing of several construction
projects in 2008 due to oversupply in the real estate
market. Construction was sustained by public sector
and commercial property projects, which will not be
there any more in 2009.
Because so many projects were being built, as of
mid-2008 no decrease of employment in the construc-
tion sector had occurred. In June, overall unemploy-
ment stood at an all time low, 4 per cent. However,
vacancies have been declining since late 2007. A rise
in the jobless rate is expected during the second half
as the manufacturing sector shrinks. Wage growth
slowed from 19 per cent year-on-year in the first
quarter of 2008 to 15 per cent in the second quarter
and should moderate to an average of about 8 per cent
in 2009. Jobs will also disappear in the public sector
during the second half of 2008 due to expenditure
cuts. This means that unemployment will increase not
only in the blue-collar segment but also the white-
collar segment. Unemployment will not climb sharply,
however, since the labour market remains rather tight
and some of the people who are laid off can be em-
ployed in other sectors.
The longer the recession lasts, the more likely it is that
some companies will not survive the pressure. This
situation will culminate in 2009, whereas in 2008 most
companies can still rely on savings and other assets
accumulated during previous boom periods.
Tighter credit conditions
The global credit crunch will mean less capital inflow
and higher interest rates. The massive expansion of
70
cheap credit that fuelled the rapid growth of recent
years will be replaced by very cautious lending prac-
50 tices and higher interest margins. Tighter credit sup-
ply will constrain real estate and other investments
30
and favour companies in good financial health.
10
-10 Home prices will continue downward in 2009 as
financing conditions remain tight, consumer confi-
Q1
dence is low and the real estate oversupply persists.
08 We expect residential investments to decline in 2009.
The fall in real estate prices will help prolong the
economic slump. We expect prices of flats to bottom
out at 25 per cent below their peak late in 2009.
10
 Estonia
Eastern European Outlook — October 2008

Non-residential property investments will also remain teracted by an increased willingness to export. During
below trend, reflecting tighter credit conditions and 2006-2007, some companies focused on the domestic
low confidence. In 2008, profits were hurt by rapidly market, profiting from rapid price increases and the
increasing input costs and decelerating sales. In 2009, consumption boom. This was one reason why export
sales will still be depressed, but input costs will fall as growth rates fell earlier than foreign demand.
a looser labour market slows wage growth. Oil prices
will have peaked in 2008. The Baltics: Real effective exchange rate
Index 2000=100
Falling prices of homes and other assets will reduce 135 135
household wealth and keep down consumption. De- 130 130
spite rapid wage growth deceleration, the pace of real 125 125
personal income growth should remain positive, 120 120
though modest, since inflation will also fall at a rapid 115 115
pace. However, consumption will slow due to deterio- 110 110
rating confidence and higher unemployment. 105 105
100 100
With domestic demand suppressed and wage inflation 95 95
slowing markedly, there will be far less inflation pres- 90 90
sure ahead. Estonia’s major indirect tax hikes took 85 85
00 01 02 03 04 05 06 07 08
place in 2008, setting the stage for lower inflation, but
the government’s latest budget bill proposes VAT Latvia Estonia Lithuania
Source: BIS
increases on such items as medicines, books and
concert tickets. Also, electricity prices will increase. Meanwhile high domestic price increases and appreci-
Import price increases have peaked, and lower oil ation of the currency (the real effective exchange rate
prices, the inflation rate will slow to 5.0 per cent in climbed) undermined competitiveness, and productivi-
2009 and 3.5 per cent in 2010. ty growth lagged. Over the next few years, one main
task for exporters will be to bring their productivity
The government is continuing to aim at a balanced
growth back in line with wage growth. Reducing the
budget and will therefore cut various planned expendi-
labour force will be one part of this process.
tures in the next few years. It plans to freeze public
sector pay, trim operational expenses and cancel Fading inflation pressure will help lay the groundwork
certain investments, especially property-related ones. for economic recovery in 2009 but will probably be
Despite a much slower increase in government spend- not sufficient to counteract diminishing external de-
ing in 2009 than previously, tax revenue is likely to be mand. Another growth-supporting factor will be
insufficient to meet expenses. We thus expect a defi- service exports. Although the global slowdown will
cit. lower the demand for services, they are less cyclical.
Estonia: Growth in export markets and exports
8 60

7 50
SEB forecast
40
6
30
5
20
4
10
3
0
2 -10

1 -20
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Weighted average, growth in main export markets (LHS)

Estonian export growth (RHS)
Sources: Reuters EcoWin, SEB

Exports crucial for recovery

During 2009, the only way Estonia can climb out of
its recession will be through exports, and the funda-
mental question here is competitiveness. Due to rapid-
ly decelerating external demand, export growth had
already shrunk to almost zero by mid-2008, and we
expect a further slump. This decline might be coun-

11
 Latvia
Eastern European Outlook — October 2008

Recession ahead and the economy was mainly driven by exports. For
the fifth consecutive quarter, there was clear down-
ward trend in manufacturing and retailing. Support
n Plummeting demand will help dampen
from construction, transit trade and commercial
imbalances services was also weaker than expected.
n Tighter fiscal policy but export stimulus
Foreign debt
n Weak real wage growth in 2009
Per cent of GDP
140 140
After three years of double-digit GDP increases, 130 130
leading to an overheated economy, Latvia is now 120 120
110 110
experiencing a slump in domestic demand. Growth
100 100
has almost vanished. This is partly connected to
90 90
tighter credit conditions and global financial turmoil. 80 80
Negative GDP growth is a certainty during the next 70 70
several quarters. Stagnating demand in the euro zone 60 60
and troubled world financial markets will have a 50 50
dampening effect on Latvia’s economic recovery. 40 40
Furthermore, fiscal policy will be tightened. We have 00 01 02 03 04 05 06 07 08
thus substantially revised our previous GDP forecast Latvia Estonia
downward to minus 0.5 per cent this year, minus 2.0 Source: Reuters EcoWin

per cent in 2009 and expect plus 2 per cent in 2010.

The sharply cooling economy will help dampen the The government’s plan to cool the economy, present-
country’s long lasting imbalances. The large current ed in the spring 2007 after a period of currency tur-
account deficit will continue to shrink relatively quick- moil, proved ineffective. It was implemented very
ly. Inflation will wane substantially due to the reces- selectively and with long delays. One important goal
sion. of this “anti-inflation plan” was to bring down unsus-
tainably high private sector credit growth. Meanwhile
Latvia: GDP and inflation such external factors as rising energy and food prices
Year-on-year percentage change and the global credit crunch increased the risk of a
12 16 hard landing. Economic sentiment indicators dropped
SEB
10 forecast
14 to levels not seen since the early 1990s. In 2007, the
8 12 real estate bubble burst. Home prices have fallen 35
10 per cent from their peak. We expect a further 20 per
6 cent correction by 2009 before the market stabilises.
8
4
6 Exchange rate EUR/LVL
2
4 0.7125 0.7125
0 0,7100
2 0.7100 0.7100
-2 0
0.7075 0.7075
01 02 03 04 05 06 07 08 09 10
0.7050 0.7050
GDP (LHS) Inflation (RHS)
Sources: Statistics Latvia, SEB 0,7028 ± 1%
0.7025 0.7025

Looking ahead, due to global financial turmoil the 0.7000 0.7000

Latvian economy, with its elevated foreign debt, will 0.6975 0,6960 0.6975
face tightening financing, which may lead to specula-
0.6950 0.6950
tion about the stability of the currency. Despite a
continued decline in external imbalances, we see a 0.6925 0.6925
lingering exchange rate risk. In our new recession 05 06 07 08

scenario this risk has increased, although we still Source: Reuters EcoWin

assume that Latvia and the other two Baltic countries

will maintain their exchange rate pegs. The risk of an
exchange rate adjustment (devaluation or freely float-
ing currency) seems greatest in Latvia, followed by
Estonia.
The growth rate plummeted from stable double-digit
figures to almost zero in the second quarter of 2008.
Both private consumption and investments declined,
Surprisingly, today’s sluggish growth has not yet been
reflected in the labour market. On the contrary, in the
second quarter job growth continued. Unemployment
fell to 6.3 per cent, mainly due to more active job-
seeking in anticipation of the coming recession. How-
ever, a sharply decreasing number of vacancies and
expected workforce reductions in both the private and

12

public sector will push unemployment up to 9 per
cent next year.
Nominal wage and salary growth slowed to 24 per
cent in the second quarter from above 30 per cent as
recently as the fourth quarter of 2007. This decelera-
tion can partly be explained by intensive efforts last
year to legalise wages and salaries in the informal
economy. Pay increased have slowed both in the
private and the public sector. We expect nominal wage
growth to decline to 9 per cent next year, resulting in
negligible real wage growth.
Latvia: Consumer confidence and retail sales
5 40
0 30
-5
-10
-15
-20
-25
-30
-35
02 03 04 05 06 07
Consumer confidence, net balance (LHS)
Retail sales, year-on-year percentage change (RHS)
Sources: DG ECFIN, Statistics Latvia
Inflation slowing
Inflation peaked in May at a 17.9 per cent rate due to
unprecedented hikes in regulated prices and commodi-
ty prices but started to lose momentum in the sum-
mer, partly due to a substantially drop in consumption.
In August, consumer prices rose 15.7 per cent year-
on-year. Despite this autumn’s 40 per cent hike in
natural gas prices, inflation will decrease to 13 per
cent by year-end. Absent further energy price and tax
hikes in 2009 and because of constrained consump-
tion, it will fall to single digits next spring. We expect
inflation to average 16.1 per cent in 2008, 8 per cent
in 2009 and 5 per cent in 2010. The latter is neverthe-
less nearly twice the rate that Latvia would need to
show in order to meet the inflation criterion for joining
the euro zone, so euro adoption is still far away.
In line with our expectations, the current account
deficit has decreased. During the first half of 2008, it
was 16.9 per cent of GDP, compared to 25 per cent a
year earlier. The main factor was a shrinking foreign
trade deficit, due to good export performance and
lower imports. In addition, Latvia recorded a more
positive service balance.
Weak domestic demand will lead to a further decrease
in the current account deficit to 10 per cent of GDP in
2009. However, financial and economic challenges in
Latvia’s main export markets will blunt further export
Latvia
Eastern European Outlook — October 2008
growth. Foreign direct investments into Latvia re-
mained stable in the first half of 2008. Four fifths of
the second quarter current account deficit was cov-
ered by long term capital, of which 58 per cent was
FDI.
The budget will be tightened
Overly optimistic budget planning forced the govern-
ment to abandon its goal of achieving a public budget
surplus of 1 per cent of GDP in 2008. Prime Minister
Ivars Godmanis, who has extensive experience from
the tough reforms of the early 1990s, is playing a key
role in efforts to tighten spending in 2009. To ensure
that the budget deficit is as small as possible, he is
calling for such measures as a pay freeze in the public
20 sector and a reduction in the number of public em-
10 ployees.
0
During the summer the government tried to force all
-10 state institutions to cut their planned costs. However,
-20 these plans had to be shelved. The current budget
-30 proposal for 2009 projects a deficit of 1.85 per cent
-40
of GDP and will be decided by Parliament in October.
08 The major labour unions are upset with the proposed
freeze on public sector salaries, and passage of the
budget will depend on trade-offs between the unions
and the Godmanis cabinet. The prime minister is
determined to cut the number of public employees by
10 per cent in 2008-2009. Despite these severe cost
cutting measures, the government is unlikely to es-
cape fiscal deficits this year and next. Our forecast is
that the deficit may reach 1.5 per cent in 2008 and 3
per cent in 2009, thus touching but not exceeding the
Maastricht Treaty limit.
The government is under pressure from the business
community and voters in general to soften the impact
of the approaching recession and stimulate purchasing
power. Since the spring, the government has taken
steps to improve Latvia’s competitiveness in 2009.
This has included increasing the availability of export
guarantees, allowing faster depreciation of assets,
exempting investments in new technologies from
profit taxes, reducing bureaucracy and speeding up
the utilisation of EU funds. The authorities have re-
sponded to the demands of commercial banks by
broadening liquidity in the financial market and by
lowering reserve requirements.
13
 Lithuania
Eastern European Outlook — October 2008

of the global credit crunch, will reduce the appetite

Soft landing so far for Lithuanian goods. CIS exports remain strong
(Russia absorbed 15.1 per cent of Lithuanian exports
n Growth is gradually slowing down
in January-July), due to lower inflation in Lithuania
n No major easing of inflation and strong economic growth in these markets. In-
n Outcome of parliamentary elections uncertain creased political risk in Eastern markets has not trans-
lated into actions limiting purchases of Lithuanian
exports.
GDP grew by 5.2 per cent year-on-year in the second
quarter of 2008. This was slower than in the first Lithuania: Domestic demand and exports
quarter, when GDP grew by 7 per cent. The slow- Year-on-year percentage change, constant price
down will be more apparent in the second half of the 20.0 20.0
year. Our latest forecast of 5.5 per cent GDP growth 17.5 17.5
for 2008 as a whole is still realistic. In 2009 downside 15.0 15.0
pressure will be stronger, given weakening sentiment
12.5 12.5
in domestically oriented sectors such as construction,
retail trade and transport. Moreover, sectors relying 10.0 10.0

on exports are also facing uncertainty, since Lithua- 7.5 7.5

nia’s main export markets are stagnating. We expect
the country to avoid a technical recession, but GDP
growth will be weak: 2 per cent in 2009 and 1 per
cent in 2010. Our forecasts have been cut.
Lithuania: GDP and inflation
Year-on-year percentage change
11
10
9
8
7 8.0
6
5
4
3 2.0
2
1
0 -2.0
00 01 02 03 04 05 06 07 08
GDP (LHS) Inflation (RHS)
Sources: Statistics Lithuania, Eurostat, SEB
Domestic demand will dampen further in the wake of
deteriorating consumer sentiment, tighter lending
conditions and an inflation spike due to rising central
heating charges. In the second quarter, retail growth
slowed markedly, and consumer sentiment worsened
sharply in the summer months. January-August 2008
retail sales grew by 10.1 per cent year-on-year, fol-
lowing first quarter growth of 29.4 per cent. The
domestic market is cooling due to stagnating real
estate and construction sectors (especially the resi-
dential segment). This will dampen related activities
such as production and sale of construction materials,
furniture and domestic appliances. Ober Haus Real
Estate research notes that prices of residential proper-
ties fell roughly 10 per cent in the first half of 2008.
Overall 2008 prices could fall by 15 per cent, and in
2009 by a further 10 percent.
While domestic demand is slowing, exports are still
holding up so far. Downside risks are increasing,
however. During January-July 2008, exports in-
creased by 33.8 per cent. However, the slowdown in
the euro zone economies, as well as the repercussions
5.0 5.0
2.5 2.5
0.0 0.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
06 07 08
Domestic demand Exports
Sources: Statistics Lithuania, SEB
14.0
SEB forecast
12.0
Lithuania exceeded its tax collection target for the first
10.0
half of the year, but a gap emerged as early as July. It
will widen further by the end of the year as decelerat-
6.0
ing retail sales limit value-added tax revenue. Moreo-
4.0
ver, the profitability of enterprises is set to decline and
corporate tax inflow might shrink correspondingly.
0.0
Given the election cycle, public expenditure cuts will
be limited in scope. Moreover, recent law on the
09 10 indexation of minimum wages, pensions and social
benefits as well as agreed pay increases in the health
and education sectors will sustain pressure on public
expenditures. Although the fiscal discipline law pre-
scribes only a 0.5 percent deficit for 2009, we are
raising our fiscal deficit forecast to 1.5 per cent of
GDP this year and next.
Wage and salary growth coming down
Nominal wages and salaries continue to grow fast,
although real wage growth is slowing down. During
the second quarter of 2008, average gross wage
growth remained robust at 22.5 per cent year-on-year.
Public sector wages were supported by decisions that
took effect from January 1, 2008 – a minimum
monthly wage increase, an increase in base earnings,
and a lower personal income tax rate. During the
same quarter, additional wage increases took effect in
the health and education sectors, and further increases
are scheduled in the third quarter.
Total gross wage and salary growth should slow to 15
per cent during the fourth quarter due to economic
deceleration, statistical base effects and higher unem-
ployment. Public sector wage growth in 2009 will be
contained due to an expected deterioration in tax

14

collection by the end of the year. Total gross wage
growth in 2009 will still reach 13 per cent.
Inflation will remain high
During the summer, the inflation rate began a slight
retreat. The easing of food and energy prices in global
markets should significantly dampen inflation pres-
sures in the second half of the year. However, in-
creases in public transport fares, educational costs
and – most importantly – water, gas and central heat-
ing will continue to be major inflationary factors.
Therefore average annual HICP inflation, will stay
double digit this year. We expect average inflation for
2008 to reach 11.5 per cent.
As GDP growth slows in 2009, inflation should come
down to 8 per cent. A sharper decline in inflation will
not occur, since excise duties for fuel, alcoholic
beverages and tobacco are expected to increase.
Electricity price hikes are also possible, pending deci-
sions by utilities regulators. After the closure of Ignali-
na nuclear power plant, electricity price increases in
2010 will again re-ignite cost-push inflation pressure.
We expect electricity price increases of 10-20 per
cent in 2009 and a further 80-90 per cent in 2010
after the Ignalina closure. Our 2010 inflation forecast
includes direct effects of about 2.5 percentage points,
plus indirect effects of another 1-1.5 percentage
points.
Energy from Russia
The chances of extending Ignalina’s lifespan until
2012 are shrinking, and the plant is expected to stop
operations on December 31, 2009 – its closure could
shave up to 3 percentage points off GDP growth.
Although a consultative referendum on an extension
of Ignalina operations will take place in conjunction
with the parliamentary elections in October, European
Commission President José Manuel Barroso recently
reiterated the stance of the Commission by asking
Lithuania to comply with the terms of its EU acces-
sion treaty.
However, the Commission and EU member states are
increasingly aware of the situation in the Lithuanian
and regional energy market, and additional measures
and financial resources to mitigate the energy supply
crunch are expected. The economic cool-down in
Europe and Russia will also slow the growth of de-
mand for energy. Therefore the chances are increas-
ing that Russia might have sufficient energy resources
to satisfy demand in Lithuania. Yet political and cli-
mate risks remain. While Lithuania is not expected to
be linked up with major energy markets in Scandina-
via and Poland until 2015, apart from Russia it can
still import electricity from Estonia and Finland via
Latvia and from Ukraine via Belarus.
15
Lithuania
Eastern European Outlook — October 2008
Looking further ahead, the energy situation in Lithua-
nia and the region will be improved by constructing
new nuclear plants in Lithuania, Kaliningrad and Bela-
rus. To lead and finance the nuclear project in Lithua-
nia, the government controversially merged a private
electricity distribution company with state-owned
distribution and transmission companies, forming the
holding company LEO LT. This company and its
consortium partners in Poland, Latvia and Estonia are
expected to construct the plant by 2018. Decisions on
the size of the plant and the choice of technology will
be made during the spring of 2009.
Slower credit growth
Credit growth is slowing. This reflects worsening
economic sentiment and tighter lending conditions.
Increases in interest rates, high inflation and the ex-
pectation of continued corrections in the real estate
market have also dampened the appetite for new
loans.
During the first half of 2008, the loan portfolios of
commercial banks increased by 35.6 per cent year-
on-year. We are lowering our full-year forecast to 25
per cent and next years’ to 15 per cent.
Coalition government expected
Parliamentary elections are scheduled to take place on
October 12. Polls indicate that six parties will attract
enough votes to win seats in Parliament. The outcome
is difficult to predict, as a sizeable number of undecid-
ed voters will be attracted by the referendum on the
Ignalina nuclear power plant, and their votes could
significantly alter the final composition of Parliament.
A coalition government will probably have to be
formed. Based on the economic programmes of the
parties, two possible coalitions may emerge – centre-
left and centre-right. A centre-left government would
largely continue the policies of the incumbent govern-
ment, while the centre-right parties have expressed an
ambition to tighten budget expenditures, streamline the
public sector and promote foreign direct investment.
 Poland
Eastern European Outlook — October 2008
Aiming at the euro
n Soft landing for the economy
n Tighter fiscal and monetary policy
n Zloty will enjoy support
The global economic slowdown is now drawing
Poland into a major deceleration. Previous overheating
risks are being replaced by concern about a deep
slump accompanied by bankruptcies, rising unem-
ployment and weakened central government finances.
However, underlying economic strength and the
modest scale of the imbalances built up by Poland
point towards relatively good economic performance
in the next couple of years. We predict that growth
will cool from 6.6 per cent in 2007 to 5 per cent this
year and 3.8 and 4.5 per cent annually during 2009
and 2010 respectivly.
Economic policy will be dominated by the new gov-
ernment target of a transition to the euro by 2011.
This timetable seems optimistic considering the politi-
cal, economic and legal challenges Poland must over-
come. More importantly, though, the process will
serve as an economic policy anchor, reducing uncer-
tainty and giving substance to Polish financial assets
as harsh winds blow in global markets.
Poland: GDP and inflation
Year-on-year percentage change
7 7
6 6
SEB
5 forecast 5 cent — are only half as large as in Hungary and the
4 4
3 3
2 2
1 1
0 0
01 02 03 04 05 06 07 08 09 10
GDP (LHS) Inflation (RHS)
Sources: Statistics Latvia, SEB
Growth below potential
After eight consecutive quarters of GDP growth
above 6 per cent, growth cooled somewhat to 5.8 per
cent year-on-year during the second quarter. Given
weakening demand, initially from abroad, the growth
rate will fall below its potential level of around 5 per
cent. In recent years, private consumption and invest-
ments have become increasingly influential driving
forces. Consumption has benefited from rapid job
creation, real wage increases and credit expansion
(though substantially more moderate than in various
other Central and Eastern European countries). During
2008, disposable income gains have been partly offset
by inflation that has climbed to nearly 5 per cent, but
16
real wage growth is still good. Year-on-year pay
increases have been in double digits.
The tight labour market situation and continued good
tax collection would seem to indicate an undiminished
economic boom. Meanwhile, according to a number
of other indicators, the economic temperature is
cooling. Confidence indicators have fallen rapidly. The
business sector has turned pessimistic while consum-
er confidence remains at an elevated level. Manufac-
turing output and retail trade are showing a rapid cool-
down. Corporate profits are weakening.
The slowdown is arriving from the West, channelled
primarily via two mechanisms. First, the outlook for
exports and foreign direct investments is worsening
as demand falls in Western Europe. Second, Polish
consumers and investors are being drawn into the
prevailing global pessimism.
The cyclical slowdown should not be as deep as the
one early in this decade, though, since macroeconom-
ic imbalances are smaller today. Adjustments will thus
be less painful. Household and company balance
sheets, as well as the banking system, are generally
healthy. Continued job creation and re-migration will
dampen wage pressure, while productivity growth is
relatively good. A continued increase in EU-financed
projects and investment needs in preparation for the
2012 European football championships (organised
together with Ukraine) are other sources of support.
Zloty benefits from underlying strength
Exports as a percentage of GDP — just over 30 per
Czech Republic, but there are strong ties between
Poland’s manufacturing output and Germany’s IFO
index, for example. The manufacturing sector’s
symbiotic relationship with Western Europe, which
buys ¾ of Polish exports, leads to powerful upturns
as well as downturns. When German demand deceler-
ates, Polish production follows. Exports will thus take
a beating before imports cool. We expect the current
account deficit to continue climbing to 5.8 per cent of
GDP during 2009 and then stabilise in 2010.
The European slowdown will dampen investment
activity, thereby holding down FDI in Poland, which
will cover less than half of the current account deficit
compared to around 100 per cent earlier. But the
funds available from the EU are increasingly being
utilised.
The zloty thus faces a less favourable flow situation,
but the upward trend in the currency looks unlikely to
end. The extreme uncertainty in financial markets that
has prevailed so far during the autumn of 2008 is
likely to result in continued “flight to safety” will also
harm the zloty in the short term. We nevertheless see
three main reasons for continue appreciation against
the euro in a longer perspective: higher productivity

Euro transition in 2011?
On September 10, Prime Minister Donald Tusk made
the surprising announcement that Poland is aiming
for a transition to the euro in 2011. The central bank is
October 2008 Official timetable unveiled
Q4 2008 Application for ERM2 membership
Q1 – Q2 2009 Referendum: constitutional amendments
April 2009 ERM2 membership. Fixing of central
parity rate
June 7, 2009 EU parliamentary elections, possible
date for referendum
2010 Measurement period for budget and
public debt criteria
and growth, rising interest rate spreads and financial
convergence in the wake of plans to adopt the euro.
Representatives of both the government and the Na-
tional Bank of Poland (NBP) agree that constitutional
amendments shifting authority from the central bank
to the ECB are needed and should be adopted before
ERM2 accession. In today’s parliamentary situation,
the 3/5 majority required for such amendments would
probably not be achieved. A referendum on the issue
is thus likely (with at least a 50 per cent voter turnout
required to be valid) and should take place during the
spring of 2009.
Economic stabilisation needed ahead
The accelerated euro zone plan will require a tighter
fiscal policy in order to keep the budget deficit com-
fortably below 3 per cent of GDP, the Maastricht
Treaty ceiling. This will limit the government’s room
for stimulating the economy now that growth is
slowing. There will also be less room for generous
election promises as Poland votes for its president in
2010 and Parliament in 2011. The budget deficit has
decreased in recent years of strong GDP growth, and
we expect it to remain at about 2.5 per cent of GDP.
Monetary policy must also shift from the current
inflation target of 2.5 per cent ± 1 point to achieve the
Maastricht-defined criterion in practice. Formally, the
target is likely to be charged to HICP at 2.0 per cent
or lower. The NBP has announced that this will occur
when euro adoption plans become firmer. In the
coming quarters Polish inflation will slow, thanks to
falling/stabilising commodity prices, previous interest
rate hikes and weakening demand/wages. But given
our forecast of significantly lower inflation throughout
the EU (and the strict Maastricht inflation criteria),
Poland will probably require even tighter fiscal policy.
We expect the real interest rate to rise as the key rate
17
Poland
Eastern European Outlook — October 2008
preparing to realign its monetary policy towards this
end. Euro zone membership by the end of 2001 is
technically possible, but a more likely date is 2012.
The timetable might look something like this:
April 2009 – Measurement period for inflation
March 2010 and interest rate criteria
Q2 2010 Verification process (European
Commission, Central Bank, Parliament)
Q2 – Q3 2010 Approval (ECOFIN). Final exchange rate
Q4 2010 Practical preparations. Euro zone
membership technically possible
January 1, 2012 Euro zone membership, EUR transition
remains at 6.0 percent despite falling inflation. Longer
term interest rates will, hower, fall.
Tolerance for a strong zloty will increase. Poland’s
currency policy will also be tested. Our assessment is
that in practice, the zloty will only be allowed to
weaken by 2.25 per cent from its central party rate
against the euro upon ERM2 accession. It appears
likely that the zloty’s ERM2 period may be far more
turbulent than that of the Slovakian koruna, in light of
a substantially more challenging global economic
situation. The main risks to achieving the goal of a
euro transition in 2011 (or 2012) is if the attempts to
amend the constitution fail and if a deep economic
slide erodes public support for the governing parties in
the run-up to the coming elections. We believe euro
adoption in 2012 is slightly more probable than in
2013.
Slow progress on the path to reforms
The reform-oriented governing coalition led by the
Civic Platform party has a weak parliamentary base
but has taken the initiative towards joining the euro
zone after a cautious first year in power. It remains to
be seen whether this will lead to progress in enacting
reforms in such areas as the labour market and the
health sector as well as continuing with privatisations
and dismantling bureaucratic obstacles.
So far, the pace of reform has been slow because the
other coalition partner, the Polish Peasants’ Party, is
less reform-minded. Prime Minister Donald Tusk is
riding on a wave of popularity that he does not wish
to jeopardise before the 2010 presidential election.
Above all, President Lech Kaczynsky has announced
that he will veto most reforms. The coalition lacks the
3/5 support in Parliament required to override presi-
dential vetoes. In light of this, it is reasonable that
reform expectations are rather modest.
 Slovakia
Eastern European Outlook — October 2008
Sharp slowdown from
high levels
n Private consumption still robust
n Euro adoption feeds inflation
n Strong public finances
Slovakia has experienced one of the highest levels of
economic growth in the Central European region over
the past few years. However, growth will be less
spectacular during the next couple of years, since
international demand will be weak. Inflation is on the
rise, and euro zone accession in January 2009 is
expected to hamper the decline in inflation.
In the first quarter of 2008, the GDP growth rate was
8.7 per cent. This was higher than in the same period
of 2007 but much slower than during the preceding
quarter (11.5 per cent). In the second quarter, growth
slowed further to 7.6 per cent, which was still the
highest rate in the EU. Weakening foreign demand
means that the contribution of net exports will dimin-
ish. However, it will be partly offset by growing
consumption. Our GDP growth forecast is 7 per cent
in 2008, 3.5 per cent in 2009 and 4.0 per cent in
2010.
Slovakia: EU sentiment indicator and GDP
17.5
15.0
12.5
10.0
7.5
5.0
2.5
0.0
-2.5
00 01 02 03 04 05
GDP, year-on-year percentage change (LHS)
EU sentiment indicator, index (RHS)
Sources: European Commission, Statistical Office of Republic of Slovakia
During January to June, Slovakia showed an increase
in its current account deficit, which will probably
widen through the year. While the foreign trade sur-
plus improved slightly, this was unable to offset dete-
riorating service, income, and current transfer ac-
counts. The biggest shift came on the service ac-
count, which went from surplus to deficit, indicating
that in this sector, Slovakia is perceived as less attrac-
tive than neighbouring countries. During the first five
months, foreign direct investment reached a net in-
flow of EUR 126 million, down from EUR 136 in the
year-earlier period. The economy is reaping the fruits
of the past investment boom and ongoing projects in
the automotive and electrical equipment industries.
However, global developments and the completion of
ongoing projects suggest that FDI inflows will slow
and that their peak has passed.
Job growth is continuing, and unemployment will
decline somewhat further but remain high compared
to other EU countries. Productivity growth is gradual-
ly slowing as well.
Despite rising inflation, Slovakia met all the criteria for
adopting the euro and will join the single currency
area on January 1, 2009. By the end of this year,
inflation should lose momentum due to favourable
base effects, although a rise in minimum wage and
cost-driven inflation factors may start to dominate the
inflation picture. Euro adoption will trigger slight price
increases due to rounding off of prices and other
factors. The government is trying to persuade energy
companies to moderate price increases. We expect
inflation to average 3.5 per cent in 2008 and 3.6 per
cent next year and in 2010.
The conversion rate has now been set at 30.1260
koruna to the euro, which corresponds to the current
central rate within ERM2. The switch to the European
Union single currency has created a buzz among
shoppers and consumers, since prices must be stated
in both koruna and euro terms.
Solid public finances
The first half 2008 budget deficit was considerably
120 lower than a year earlier. The government approved a
115 public financial deficit target of 2.2 per cent of GDP
110 for 2009, compared to the 2.3 per cent originally
105 expected. Revenue collection indicates that the gov-
100 ernment will be able to exceed the target of its deficit
95 reduction plan for this year, but the plan to introduce a
90 13th monthly pension in order to boost social benefits
85 and lower GDP growth will hamper further tightening
80 in 2009. Owing to good budgetary performance,
06 07 08 government debt is expected to diminish slightly in the
next couple of years.
The concerns that accompanied the formation of a
coalition between Prime Minister Robert Fico’s Smer-
Social Democracy party and two rightist parties have
proved largely unfounded. On the contrary, economic
success and political skills have contributed to Fico’s
continuously rising popularity. His cabinet faces a
major challenge in ensuring a smooth euro introduc-
tion process. The government has thus pushed
through a law that threatens fines and blacklisting for
those who take advantage of the currency transition.
18
 The Czech Republic
Past the peak
n Economy still resilient, slower growth
n Broad-based weakening
n Inflation the top challenge
The Czech economy is past its cyclical peak and is
cooling down. However, the economy remains gener-
ally resilient and has not seen any substantial impact
from the global financial crisis. GDP growth was
previously driven by foreign trade, but its strength will
wane during the rest of 2008 and in 2009 owing to
the cool-down in most of Europe.
Reflecting weaker consumer spending and the stag-
nating euro zone economies, the Czech economy
expanded at its slowest pace in four years: 4.5 percent
during the second quarter of 2008, compared to 5.1
per cent in the first quarter. Since both export growth
and domestic demand are continuing to slow and this
trend will continue next year. The GDP growth fore-
cast for this year is 4.1 per cent. We expect growth to
slow further to 2.5 per cent in 2009, and we expect
some improvement in 2010.
Czech Republic: HICP and repo rate
Year-on-year percentage change and per cent
8 4.0
SEB forecast
7 than three years and was an attempt to counter the
6 3.5
5 economic growth. The slowing economy gives the
4 3.0
HICP (LHS)
3
2 2.5
= yearly
1
average
0 2.0
-1
Repo rate (RHS)
-2 1.5
03 04 05 06 07 08 09 10
Sources: Eurostat, Reuters Ecowin
During the first half of 2008, exports grew by 5.2 per
cent and imports by 4.8 per cent. The trade surplus
surpassed last year’s performance but shrank during
the second quarter. There will be further deterioration
in export volume and subsequently also in the trade
and the current account balance, the latter deteriorat-
ing to minus 3.5 per cent of GDP in 2009.
On January 1, 2008 the Czech Republic introduced a
flat income tax rate of 19 per cent, replacing four
progressive rates and leaving most workers with more
cash. In the second quarter, however, real wages
grew at the slowest pace in almost ten years. Real
wage growth is likely to remain sluggish during the
rest of this year but will recover next year as inflation
falls. Combined with increasing unemployment, it will
19
Eastern European Outlook — October 2008
slow the performance of the whole economy. The
economy consequently will rely more on foreign trade
than on the domestic sphere.
Consumer prices have climbed in the past year due to
tax changes as well as rising global commodity and
food prices. Inflation peaked at a nine-year high of 7.9
per cent in January 2008. The continued rise in food
and energy prices has prevented any big slowdown in
inflation. However, owing to a decline in the prices of
food and non-alcoholic beverages and transport, year-
on-year consumer price growth slowed to 6.2 per
cent in August, the lowest rate this year. In the first
two quarters of next year, we expect inflation to
moderate further. Due to base effects, 2009 inflation
will not reflect tax changes implemented in 2007. The
increase in regulated prices will slow as well. We
forecast average inflation of 6.4 per cent this year,
slowing to 3.0 per cent in 2009 and 2.8 per cent in
2010.
Further interest rate cuts
Early in the summer, the koruna climbed significantly,
hitting records. The Czech National Bank cut its key
interest rate by 25 basis points to 3.50 per cent in
August. The CNB was reacting to the koruna’s ex-
change rate against the euro, which dipped below
CZK 23, making it the first central bank in the region
to loosen policy. This was the first rate cut in more
koruna’s record appreciation to try to revive fading
CNB room for further easing of monetary conditions.
It may decide to cut interest rates further this year,
but the next move will depend on inflation develop-
ments and expectations, as well as other factors. The
key rate will bottom out at 2.75 per cent in 2009.
The koruna’s strength is not consistent with slowing
domestic growth. The exchange rate trend of the
koruna will take its toll on export performance and on
investments. Our EUR/CZK forecast for the end of
2009 is 24.2.
Euro still elusive
The Czech Republic has not yet fixed an official date
for euro adoption, but the business community is
pushing the government to do so, in order to maintain
the attractiveness of the economy. As for joining the
euro zone, low inflation and public sector fiscal disci-
pline will be the most important issues. The proposed
budget for 2009 should ensure a public sector deficit
of 1.6 per cent of GDP. However, with growth falling
and elections coming up in 2010 we expect a moder-
ate fiscal loosening. The government wants to contin-
ue to reduce the gap to 1.2 per cent in 2012. Inflation
has thus become the main obstacle to euro adoption in
the next few years.
 Hungary
Eastern European Outlook — October 2008
Slower recovery
n Domestic demand is picking up
n Fiscal loosening from 2009
n Sluggish decline in inflation
Hungary is starting to emerge from its economic
problems. The ”double deficit” is back to more sus-
tainable levels. GDP growth has recovered after a
very slow trend last year. The main growth engine
will gradually shift from foreign demand back to
domestic demand. In 2008, real GDP growth should
reach 1.9 per cent. We foresee 2.2 per cent growth in
2009 and 3.5 per cent in 2010. Inflation is heading
downward.
Tax reductions ahead
After adopting its belt-tightening policies in September
2006, the government has achieved the desired eco-
nomic results. Harsh austerity measures helped reduce
the budget deficit from 9.2 per cent of GDP in 2006
to a projected 3.8 per cent in 2008. The government
is consequently now considering a step in the opposite
direction, i.e. providing some fiscal stimulus to the
economy. Early in September, Prime Minister Ferenc
Gyurscány proposed tax cuts equalling HUF 300
billion (EUR 1.2 billion) in 2009 (1.1 per cent of GDP)
and HUF 1.2 trillion by 2012. The package includes
cutting the corporate tax rate from 20 to 18 per cent,
lowering payroll taxes and making the lower of two
personal income rates applicable to higher salaries.
If approved, this package would encourage economic
growth. On the other hand, it may threaten to push
the budget deficit much higher, since Mr Gyurscány
has rejected cuts in social expenditures proposed by
the liberal Alliance of Free Democrats, which with-
drew from his government last spring. The tax reduc-
tion proposal sparked new controversy in the political
arena. On October 11, a gathering of the ruling Social-
ist party will decide whether to support the Prime
Minister’s proposed early election. According to our
base scenario, Gyurscány will remain in office but
some adjustments in his current proposals for fiscal
policy reforms will be carried out before approval.
The next parliamentary election is scheduled for 2010.
Comeback for the domestic market
After almost stagnating in 2007, this year the Hungari-
an economy is showing somewhat more robust
growth. In the first half of 2008, real GDP rose 1.9
per cent year-on-year, compared to a 0.9 per cent
increase in the second half of 2007. The economy
continues to be driven mainly by net exports. House-
hold consumption also showed a minor increase in
January-June 2008. However, gross capital formation
20
and government expenditures were still declining,
compared to the first half of 2007. This summer, the
agricultural harvest almost doubled from the same
period a year ago, contributing significantly to the
country’s value-added. Construction earnings also
improved in the second quarter of 2008, largely owing
to public tenders for motorways.
In the near future, domestic demand should recover
further, supported both by loosening fiscal and mone-
tary policies. On the other hand, the labour market is
recovering slowly and banks are tightening their credit
conditions in the face of the global liquidity crunch.
There is a risk that the credit crunch may affect
Hungary more severely. Meanwhile, noticeable chal-
lenges await net exports in the near future, as growth
stalls in Hungary’s main export markets (in the euro
zone) and competitiveness is eroded by the relatively
strong forint and high inflation.
Despite Hungary’s poorer competitiveness and the
weak economic growth in Western Europe, in the first
half of 2008 external trade moved into surplus from a
substantial – and traditional – deficit a year earlier.
However, pressure on the current account will rise as
exports are squeezed and imports accelerate due to
recovering domestic demand. The current account
deficit should fall to 6 per cent of GDP in 2008, 5.7
per cent next year and 5.2 per cent in 2010.
In August 2008, year-on-year HICP inflation fell to 6.5
per cent, its lowest rate since October 2006, helped
by stumbling domestic demand. Inflation is likely to
drop further in the second half of this year due to
favourable base effects, declining food prices due to
the plentiful harvest and the effects of interest rate
hikes last spring. However, administratively controlled
gas and electricity prices are set to rise in the next
few months. As consumption starts recovering, de-
mand-pull pressures may also become a renewed
potential source of inflation next year. We are fore-
casting average HICP inflation of 6.5 per cent in 2008,
4.2 per cent in 2009 and 3.2 per cent in 2010.
Meanwhile, the National Bank of Hungary expects
inflation to fall to its 3 per cent target within three
years. We thus expect NBH to adopt a dovish stance
but to do it slowly and to reduce its key interest rate,
currently at 8.5 per cent, to 7.25 per cent by the end
of 2009 and 6.5 per cent by the end of 2010.
Despite support against other major currencies, due to
high interest rate differentials, the forint will be vul-
nerable due to political turbulence and weak global
 Key economic data
Eastern European Outlook — October 2008

CZECH REPUBLIC
2003 2004 2005 2006 2007 2008(f) 2009(f) 2010(f)
GDP, % 3.6 4.2 6.1 6.4 6.5 4.1 2.5 3.3
Inflation, HICP, average, % -0.1 2.6 1.6 2.1 3.0 6.4 3.0 2.8
Unemployment, ILO, % 7.8 8.3 7.9 7.1 5.3 4.7 5.0 4.6
Current account, % of GDP -6.2 -6.0 -2.1 -3.1 -2.5 -2.4 -3.5 -3.5
Public sector financial balance, % of GDP -6.6 -3.0 -3.6 -2.7 -1.6 -1.8 -2.3 -2.5
Public sector debt, % of GDP 30.1 30.4 29.8 29.6 28.7 28.5 28.2 27.8
EUR/CZK, end of period 32.40 30.30 29.00 27.50 26.60 25.50 24.20 23.00
Key rate, eop 2.00 2.50 2.00 2.50 3.50 3.25 2.75 3.00
5-year government bond, eop 3.70 3.40 3.20 3.70 4.00 3.80 3.00 3.40

ESTONIA
2003 2004 2005 2006 2007 2008 (f) 2009 (f) 2010 (f)
GDP, % 7.1 7.5 9.2 10.4 6.3 -1.5 -2.2 2.0
Inflation, HICP, average, % 1.4 3.0 4.1 4.4 6.6 10.5 5.0 3.5
Unemployment, % 10.0 9.7 7.9 5.9 4.7 5.5 7.0 6.0
Current account, % of GDP -11.3 -12.3 -10.0 -15.5 -17.4 -10.0 -8.0 -8.5
Public sector financial balance, % of GDP 2.0 2.3 2.3 3.8 2.9 -1.5 -1.0 -0.5
Public sector debt, % of GDP 5.7 5.2 4.4 4.1 2.7 3.0 3.2 3.5
EUR/EEK, end of period 15.6 15.6 15.6 15.6 15.6 15.6 15.6 15.6
3-month interest rate, eop 2.6 2.4 2.6 3.9 7.3 6.7 5.3 4.9

HUNGARY
2003 2004 2005 2006 2007 2008(f) 2009(f) 2010(f)
GDP, % 4.2 4.8 4.1 3.9 1.3 1.9 2.2 3.5
Inflation, HICP, average, % 4.7 6.8 3.5 4.0 7.9 6.5 4.2 3.2
Unemployment, % 5.9 6.1 7.2 7.5 7.6 7.7 7.2 6.9
Current account, % of GDP -7.9 -8.6 -7.5 -7.5 -6.4 -6.0 -5.7 -5.2
Public sector financial balance, % of GDP -7.2 -6.5 -7.8 -9.2 -5.4 -3.8 -3.8 -3.5
Public sector debt, % of GDP 58.0 59.4 61.6 65.6 66.0 63.0 61.0 60.0
EUR/HUF, end of period 262.2 245.9 252.7 252.3 252.0 265.0 240.0 225.0
Key rate, eop 12.50 9.50 6.00 8.00 7.50 8.50 7.25 6.50
5-year government bond, eop 9.30 8.00 7.10 7.40 7.40 8.80 6.80 6.50

(f) = forecast

21
Key economic data
Eastern European Outlook — October 2008

LATVIA
2003 2004 2005 2006 2007 2008(f) 2009(f) 2010(f)
GDP, % 7.2 8.7 10.6 12.2 10.3 -0.5 -2.0 2.0
Inflation, HICP, average, % 2.9 6.2 6.9 6.6 10.1 16.1 8.0 5.0
Unemployment, % 10.6 10.4 8.7 6.8 6.0 7.0 9.0 8.5
Current account, % of GDP -8.2 -12.8 -12.5 -22.5 -23.8 -13.5 -10.0 -8.5
Public sector financial balance, % of GDP -1.6 -1.0 -0.4 -0.2 0.0 -1.5 -3.0 0.0
Public sector debt, % of GDP 14.4 14.5 12.0 10.0 9.3 9.0 9.3 9.5
EUR/LVL, end of period 0.67 0.70 0.70 0.70 0.70 0.70 0.71 0.70
Key rate, eop 3.00 3.50 4.00 5.00 6.50 6.00 5.50 5.50
5-year government bond, eop 4.60 4.00 3.20 4.90 7.50 7.50 7.00 6.50

LITHUANIA
2003 2004 2005 2006 2007 2008(f) 2009(f) 2010(f)
GDP, % 10.2 7.4 7.8 7.8 8.9 5.5 2.0 1.0
Inflation, HICP, average, % -1.1 1.2 2.7 3.8 5.8 11.5 8.0 11.0
Unemployment, % 12.4 11.4 8.3 5.6 4.3 5.0 6.5 7.0
Current account, % of GDP -6.8 -7.7 -7.1 -10.6 -14.6 -12.0 -10.0 -11.0
Public sector financial balance, % of GDP -1.3 -1.5 -0.5 -0.4 -1.2 -1.5 -1.5 -2.0
Public sector debt, % of GDP 21.1 19.4 18.4 18.0 17.0 14.5 16.0 17.0
EUR/LTL, end of period 3.45 3.45 3.45 3.45 3.45 3.45 3.45 3.45
3-month interest rate, eop 2.70 2.60 2.50 3.80 6.70 6.00 5.80 5.60
5-year government bond, eop 3.60 3.00 3.10 3.90 4.50 6.30 6.00 5.80

POLAND
2003 2004 2005 2006 2007 2008(f) 2009(f) 2010(f)
GDP, % 3.8 5.3 3.6 6.2 6.6 5.0 3.8 4.5
Inflation, HICP, average, % 0.7 3.6 2.2 1.3 2.6 4.3 3.3 2.3
Unemployment, % 19.6 19.0 17.7 13.8 11.7 10.0 9.5 9.0
Current account, % of GDP -2.1 -4.2 -1.7 -2.3 -3.8 -5.2 -5.8 -5.5
Public sector financial balance, % of GDP -6.3 -5.7 -4.3 -3.8 -2.0 -2.5 -2.8 -2.5
Public sector debt, % of GDP 47.1 45.7 47.1 47.6 45.2 43.0 42.0 41.0
EUR/PLN, end of period 4.71 4.08 3.86 3.83 3.60 3.60 3.10 2.90
Key rate, eop 5.25 6.50 4.50 4.00 5.00 6.00 6.00 5.50
5-year government bond, eop 6.70 6.20 5.00 4.98 6.13 5.80 4.70 4.20

(f) = forecast

22
 Key economic data
Eastern European Outlook — October 2008

RUSSIA
2003 2004 2005 2006 2007 2008(f) 2009(f) 2010(f)
GDP, % 7.3 7.2 6.4 7.4 8.1 7.0 5.6 5.5
Inflation, average % 13.7 10.8 12.7 9.7 9.0 13.8 11.2 8.0
Unemployment, % 8.6 8.2 7.6 7.2 6.1 5.7 5.4 5.4
Current account, % of GDP 8.2 9.9 11.0 9.8 6.1 7.5 2.0 -1.0
Public sector financial balance, % of GDP 1.4 4.9 7.7 8.4 6.1 6.4 2.0 1.2
Public sector debt, % of GDP 29.6 22.3 14.8 10.4 8.6 7.00 6.5 6.5
EUR/RUB, end of period 29.50 27.70 28.70 26.30 24.50 26.00 26.00 26.60
3-month interest rate, eop 6.90 6.40 6.50 5.80 6.60 9.00 7.75 7.00

SLOVAKIA
2003 2004 2005 2006 2007 2008(f) 2009(f) 2010(f)
GDP, % 4.2 5.4 6.0 8.3 10.4 7.0 3.5 4.0
Inflation, HICP, average % 8.4 7.5 2.8 4.3 1.9 3.5 3.6 3.6
Unemployment, % 17.6 18.2 16.3 13.4 11.1 10.4 10.00 9.3
Current account, % of GDP -5.9 -7.8 -8.4 -7.0 -5.3 -4.0 -5.0 -5.0
Public sector financial balance, % of GDP -3.7 -3.0 -2.9 -3.4 -2.2 -2.1 -2.7 -2.7
Public sector debt, % of GDP 42.7 41.6 34.5 30.8 29.4 28.5 28.0 27.3
EUR/SKK, end of period 41.10 38.70 37.80 34.60 33.60 30.13 30.13 30.13
Kay rate, eop 6.00 4.00 3.00 4.75 4.25 4.00 3.00 3.00
5-year government bond, eop 5.20 4.00 3.20 4.20 4.40 4.50 3.50 3.70

UKRAINE
2003 2004 2005 2006 2007 2008 (f) 2009 (f) 2010(f)
GDP, % 9.6 12.1 2.6 7.0 7.3 6.3 3.5 4.4
Inflation, average, % 5.2 9.0 13.5 9.1 12.8 25.8 16.0 10.0
Unemployment, % 9.1 8.6 7.2 6.8 6.4 5.7 6.2 6.5
Current account, % of GDP 5.8 10.6 2.9 -1.5 -3.5 -7.5 -10.3 -8.5
Public sector financial balance, % of GDP -0.2 -3.2 -1.8 -0.7 -0.9 -1.5 -3.0 -4.0
Public sector debt, % of GDP 24.7 19.6 14.9 12.4 10.1 8.5 12.0 14.0
USD/UAH, end of period 5.33 5.31 5.05 5.05 5.05 6.00 6.50 6.50
Key rate, eop 7.00 9.00 9.50 8.50 8.00 12.00 10.50 9.50
3-month interest rate, eop 23.50 28.00 15.30 12.80 11.40 15.80 14.00 13.00

(f) = forecast

23
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