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Albanian Agribusiness Council challenges decision forcing farmers to sell to wholesalers

Asked On: October 2, 2015

Question: Would you please provide more information on what exactly the new agricultural ministry rules require of farmers?  When it says that farmers will be penalized for undeclared production, does this mean that someone tells them what their production level will be?  Or simply that they will be penalized for production that they don't sell to a wholesaler?   

Answers: The decision is part of the government campaign against informal economy that was launched on September 1. The ministry's decision stipulates farmers to obtain a unique tax code until end-December that will allow them to sell their products to wholesalers. The ministry said that the number of wholesale collection centres for farm products will be also increased. Albanian minister of agriculture Edmond Panariti urged farmers to “officialise the sale”, so they can benefit from subsidies. If farmers fail to register their products they will be penalised and their undeclared goods will be seized. This means they will penalised for production they don't sell to wholesalers.

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Macedonia's opposition ethnic Albanian party DPA splits ahead of early elections

Asked On: September 30, 2015

Question: Hello, Thanks for this article.  Do you have more information about the new groupings of the former DPA?  What are their policy preferences?  Would they be more or less likely to join a VMRO - DUI coalition?

Answers: Thank you for the question. In July, Sela said they believe that a new agreement should be created between the Albanians and the Macedonians. Under such an agreement, the country’s parliament would be bicameral and the Albanian language would be official in the whole country. He also called for new rules for allocating the budget expenditures. The Movement for Reforms-DPA reports that it has 15,000 registered members presently. At the general elections in April 2014, DUI and DPA won 153,646 and 66,393 votes, respectively.   Presently, the new party promotes itself as an alternative to DUI and DPA. Hence, at least before the elections, a more likely coalition would be one including NDP, Movement for Reforms-DPA, and Besa (a party formed in November 2014).

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Kosovo to auction €20mn in two-year T-bonds on Sept 29

Asked On: September 25, 2015

Question: If possible, could you please provide me with the link to the source on the central bank's website? Many thanks in advance.  

Answers: here are the links:

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Volkswagen scandal could damage Slovenian automotive parts suppliers, but could also lead to new business opportunities

Asked On: September 25, 2015

Question: What could be the consequences of the VW emissions scandal for the broader Eastern European Region (due to the presence of VW suppliers and strong integration of the region into German automotive suplly chains)? In a worst case scenario, would it be enough to brake the strongfooted recovery?

Answers: Within Eastern Europe, the greatest impact of the Volkswagen emissions scandal is expected to be on Slovakia, where the German automaker has operations, and the Czech Republic where it owns the country’s largest car maker Skoda Auto. In Poland, which also has a Volkswagen plant, the response to the revelations has been very mild.In Slovakia, the scandal could impact not only Volkswagen’s own operations in the country, where it is one of the largest employers, but local economy which is heavily reliant on car exports. Outside Slovakia, the auto industry is also the traditional driving force of the Czech economy and makes up more than 20% of industrial output. The Czech automotive sector’s production totalled CZK853bn in 2014, making up 19% of GDP at current prices.As Volkswagen is owner of the country’s largest car maker Skoda Auto, the implications of the Volkswagen scandal have strongly resonated throughout the Czech Republic so far. The Czech transport ministry launched on September 23 an investigation to estimate the number of Volkswagen cars in the country that could be affected by the scandal involving falsified emissions tests. Skoda Auto has said it no longer uses Volkswagen diesel engines of the type involved in the scandal. It did, however, use the engines in older versions of its models. The ministry said it is ready to call in owners of affected vehicles for free checks and potential fixes. The scandal will likely take its toll on Skoda, which has already started to feel the effects of a slowdown in China, its largest single market. Still, the impact on Skoda and the whole Czech auto industry is expected to be rather low, since Skoda is not expected to be directly accused of cheating. Relatively little fallout is expected in Poland too, where car production is responsible for around 8% of GDP (2014 data). This year in January-July, over 400,000 cars were produced in Poland, with the July growth coming in at 13.6% y/y. Volkswagen has slightly over 23% share in the market, behind GM at over 28% and Fiat Chrysler Automobiles Poland at 43%. Volkswagen is set to expand production in Poland in its new factory in Wrzesnia, near the western city of Poznan, to 100,000 vehicles annually starting in 2016.Poland's institutional response to the Volkswagen problems has been very mild. As of the end of last week, there were no official signals from the consumer protection watchdog UOKiK or the environmental watchdog GIOS about any moves against Volkswagen. It has been quiet from the prosecution as well. In Hungary the automotive industry accounts for up a third of the country’s industrial production. As a percentage of GDP the sector makes up around 5%-6%, so any negative effect from the VW scandal will likely hurt Hungary’s economic growth. Still, of the car manufacturers present in Hungary, Audi is the only one associated with Volkswagen. Hungary is also home to car plants run by Opel, Daimler and Suzuki Motor Corp. If Audi has to reduce its output, Hungarian industrial production, and thus the GDP growth outlook, should only marginally deteriorate, Erste said in a report. “However, if the scandal spreads systematically and other car manufacturers are also forced to revise their presence and strategies, Hungary may have to face challenges, as a third of manufacturing output is delivered by the automotive industry”, the analysts note. So far only Janos Lazar, Prime Minister Viktor Orban's chief of staff, commented on the Volkswagen scandal saying he has no plans to carry out any kinds of probes against car manufacturers present in Hungary. Relatively little impact is expected in Southeast Europe, although the region is home to a number of plants that supply Volkswagen. As export oriented country, Slovenia closely cooperates with almost all the European auto giants. Some 600 Slovenian companies currently do business for or with Volkswagen, Fiat, Peugeot and other companies. However, production at these plants is competitive, and they would most likely be able to find new partners if necessary. A decline in Volkswagen’s sales would have no major impact on the Croatian economy as it only hosts a number of relatively small-scale enterprises that supply automotive parts to foreign manufacturers. The country’s automotive industry accounts for only 1.8% of total exports, while around 90% of the revenue in the sector is generated through exports, according to Croatia’s Agency for Investments and Competitiveness. Car parts manufacturing is also important in both Bulgaria and Macedonia, however, even in the unlikely event of a complete Volkswagen, a lot of substitution would most probably will take place in the car parts sector, as each of the companies there typically supplies many carmakers, so any problems would be mostly short-term. On the consumer side, there is speculation that citizens of Serbia and other non-EU member states could be interested in buying the problematic cars second-hand if their price goes down significantly. The Volkswagen brand is one of the most popular in Serbia, and since Serbian citizens are in general not well informed about air and environmental pollution, the scandal is not expected to significantly affect the local market when it comes to end-users. It is a similar situation in Bosnia and Herzegovina and Montenegro, where the Volkswagen brand is a status symbol, while the pollution is something that is not in a focus of the majority of the population.

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Turkish central bank keeps rates on hold as widely expected

Asked On: September 24, 2015

Question: Even though the CBT has been on hold for the last six-months, I can see from the central bank's statisitics that the blended cost of funding has been continuously increasing over that period. Isn't this akin to a "temporary" rate hike? What impacts does it have on turkey's domestic liquidity conditions and on the exchange rate of the Lira?

Answers: As we have also been reporting very often in the recent months, Turkish central bank has been operating under political pressure orchestrated by Turkish President Recep Tayyip Erdogan in order to decrease policy rates, however, the pressure then returned to keep the rates at least constant after the global and domestic conditions worsened. Although the central bank has the power to set the policy rates, as a reference to the markets for setting market rates, the monetary authority does not have full control over the market rates. Under current conjuncture, on-going political tensions in the country and in the region as well as the expected contraction in global liquidity conditions due to the FED's expected rate hike, market rates have been increasing recently in Turkey. The central bank also tries to indirectly adapt to the market conditions since it currently has no field for a policy rate hike due to the political pressure. So we can say that these moves are indirect rate hikes, but not temporary under current expectations set, and also the central bank had to announce that it will follow the FED's rate hikes which are expected to begin at the end of this year. The central bank tries to strengthen liquidity conditions in the domestic markets through indirect tools (rates) and to keep exchange rate against exaggerated fluctuations, however, it seems we can not say the monetary authority is successful in these attempts while the Turkish lira is the worst performing emerging markets currency this year.      

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IMF to review Romania’s 2016 budget planning in October

Asked On: September 18, 2015

Question: Hello, what is the implication of President Johannis returning the fiscal code? If Ponta were to resign - who do you think Johannis would give the mandate to? thank you

Answers: The role of President Iohannis in the Fiscal Code case -- of negotiator among the parties involved and advocate of a moderate position essentially, was indeed highly beneficial. It is not clear yet whether the outcome was perfect. But it does not mean that the role of President Iohannis was less beneficial. The Fiscal Council, central bank and IFIs have warned on one threat [fiscal slippage] and Iohannis acted rather effectively in this direction.   Iohannis might play the same role of negotiator in nominating a new PM. But the circumstances are more difficult and essentially different. The main parties’ interests are rather diverging (hence more difficult to accommodate each other), than in the case of the Fiscal Code – when both have advocated for tax cuts. Both the main parties, PNL and PSD, have in principle an interest in remaining at rule or succeeding at rule – mainly because of the local elections in the spring. But if PSD is forced by circumstances [Ponta's indictment], it might negotiate handing over the cabinet to opposition to minimise the losses. Ponta could resign under two circumstances – 1. on his own [with no prior warning] and this would create uncertainty and complicated negotiations or 2. As part of a negotiated agreement between PSD, President Iohannis and opposition. Under the former scenario, Iohannis could stick with the plans and nominate Catalin Predoiu. Under the latter, there could be negotiated the remaining of PSD at rule with possibly Liviu Dragnea (currently PSD interim president) as PM particularly if Dragnea wins a full term as PSD head at Oct 11 party congress.Or PSD could accept a role in opposition, paving the way for Predoiu.

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Moldova might repeat auction for bank frauds consultant

Asked On: September 11, 2015

Question: I have been following this story over the last month or so and I was wondering whether you would be able to answer the following questions: 1. Were the announcements made in press releases? If so, would you be able to direct me to them? I imagine they would be in the Moldovan language. 2. Do you have any additional information on the tender process? 3. Do you know who is managing the investigations for Moldova's central bank? 4. Do you have any other information regarding Kroll's management of the tender process and their investigations? 5. What is your opinion on the handling of the investigation into the bank fraud?   I look forward to hearing from you.  

Answers: Thank you for your questions, we will answer them one by one: 1. There was no public invitation; Moldova's central bank specifies that it invited  Ernst & Young, KPMG, Kroll and PricewaterhouseCoopers. The deadline was September 1 and only one bid was submitted -- Kroll with a partner. For the first stage of the investigations, Kroll was again selected under a close process where the firms invited were  Kroll, Ernst & Young, KPMG, Deloitte & Touche and Pricewaterhouse Coopers.  Notably, Strelet said that if the authorities have to repeat the selection process, there will be an open, public invitation to everybody interested.  2. There was only one bid, the central bank announced on September 2. Moldova's Committee for Financial Stability (CNFS) invited Kroll representatives in Chisinau for negotiations, PM Strelet said on September 10. The Committee was summoned on September 7 and Strelet expressed at that time since September 3 disappointment with the price asked by Kroll. The price for investigation is fine, but the price for recovery is too high, he commented -- implying the structure of the cost asked by Kroll. Possibly, this structure was set by the Moldovan authorities in the tender book -- namely a sum for the investigations, plus a percentage (to be decided by bidders, as part of the bidding process) of the money recovered. In the meanwhile, Strelet specified that for €100mn recovered, Kroll asks €60mn.  Speculations are that in fact government wants to abandon the investigations, or at least delay them indefinitely. 3.  The investigations are carried by the Committee for Financial Stability - CNFS. Central bank's governor [Dorin Dragutanu currently] is the deputy-president of CNFS -- with the PM as the president of the Committee. Part of the Committee are minister of finance, head of the financial committee of the parliament, the president of the capital market regulating body and head of deposit guaranteeing fund.  4. This is a very good question, very rarely asked. The central bank has never explained how has it picked up the firms selected to partake the close auction process. As for the investigations [if you mean the first stage], there is no secret that the report [The Kroll Report] is based solely on data and information supplied by the central bank. This has raised question marks, since the central bank is broadly suspected of at least not having intervened to stop the frauds. 5. There is no secret that the functioning of the judiciary in Moldova is far from perfect and prosecutors' investigations are lingering. This should explain in principle why authorities started parallel investigations. Problem is that since politicians seem to be involved in the frauds, the authorities' investigations can hardly be considered as independent. Based on the evidences provided by the central bank, Kroll report points to several very obvious breaches of law -- including the general shareholder meeting where Banca Sociala transferred the claims against Shor group to a UK-registered limited liability company [shell company]. All the three banks under investigations have previously carried operations with the breach of law. And yet, nobody is held responsible.   

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Morgan Stanley says Turkey at midst of uncharted waters, lowers 2015 GDP growth expectation to 2.2%

Asked On: September 9, 2015

Question: Can you please inform from where we can access to the full Morgan Stanley report published. Thanks.

Answers: Thanks for your question.   The Morgan Stanley report (CEEMEA Economic Autumn Outlook) is avaliable at:

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Kosovo sells out €15mn in five-year T-bonds

Asked On: September 1, 2015

Question: Could you please indicate from where on the CBK's website I can get hold of this information (only press release or also more extensive information on issuance of government securities).  

Answers: Thanks for your question here is the link for Kosovo t-bond issue:  

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bne:Chart - Polish opposition PiS pulls away in election poll

Asked On: August 26, 2015

Question: Hello, do you have an article describing the policy pledges or preferences of the smaller political parties that are likely to make it into the next government? Can i download the opinion polls data from somewhere on the website?

Answers: Thank you for your question. The issue of the next coalition is tricky because the difference in the polls between leaders PiS and PO is significant. As you can see here, hardly any other party manages to get at least 5% - the minimum required to win seats in the lower house - in the polls. As it is now, the PiS majority government seems the most likely outcome. Should PiS not win majority in the lower house, however, they may well form a coalition with the Polish Peasants Party (PSL) if PSL manages to receive 5% of the vote. PSL is the party of and for the rural electorate and focused on that group. Their main policy lines is to maintain the best possible conditions of subsidies and other help for farmers from the EU funds, as well as retain current very favourable rules for social security payments for farmers (these payments are much lower than for any other group). PiS may also go for a coalition with the wildcard Kukiz'15 movement (not officially a party yet), which is however a loose group without a clearly defined programme and widely predicted to fail in the elections eventually. Coalitions with the centre-left Zjednoczona Lewica (United Left, a coalition organised for the elections by SLD with minor centre-left and left parties) and centrist, similar to PO, Nowoczesna Polska, are extremely unlikely. If it's PO that somehow gets to form the new government, it is almost certain they will require a coalition partner and PSL could be their first choice (as they have been in coalition for the last eight years). They may also go with SLD. The programme of the United Left is centre-left, although the group is yet to reveal particulars during a convention schedule for late August/early September.

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Polish government reportedly set to accelerate VAT cut

Asked On: August 25, 2015

Question: I am looking for the most relevant articles showing a detailed list of measures and estimated cost pledged by PIS and PO/SLD on their post-election policies. I didn't find it looking for "poland fiscal" - can you help?    

Answers: Thank you for your question. For now, PiS has been much more active than PO in terms of proposing post-election policies. I’m not discussing SLD because they’re in complete disarray and polls have consistently showed them below minimum required to win seats in the parliament. PiS, which is leading in the polls, has so far proposed the following measures that will come at a cost for the state and/or business sectors: -lower the retirement age from the current 67 for both sexes to 65 for men and 60 for women over time. The cost estimates for this move differ wildly, from PLN10bn claimed by PiS, to 20bn claimed by PO and some experts; -pay parents PLN500 per second, then third etc. child in family (estimated cost: PLN13-22bn); -raise tax-free income to PLN8,000 per year, from the current PLN3,091 (estimated cost around PLN7bn experts claim, although there are estimates of as much as PLN21bn); -lower VAT tax rate from the current 23% to 22%; -lower CIT for small and medium enterprises from 19% to 15%; -new tax ranging from 0.5% to 2% for large retail chains with turnover of PLN1bn or more; -bank tax on assets ranging from 0.15% to 0.25%; -last but not least, PiS has said several times it would like to allow FX borrowers to convert their loans to PLN at historical rates, which is estimated to cost banks PLN30bn. As for PO, much of what they say about their post-election policies remains in opposition to PiS in the sense PO says they will not propose anything like the measures PiS is proposing or propose measures that appear less costly. PO’s proposal include: -0% personal income tax for people under 30 years of age (estimated cost about PLN8bn); -increase of tax free income to PLN3,575 from the current PLN3,091 (estimated cost PLN2bn); -lower CIT for companies, but only those that employ staff on regular work contracts, as different from temporary contracts, which are very common in Poland (estimated cost PLN1bn-2bn); -lower VAT to 22% from the current 23% (although the finance minister has been on record that it is hardly possible to do); -proposal to allow conversion of FX loans to PLN at market rates is currently going through the parliament (estimated cost: about PLN20bn).

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Bosnia’s c-bank appoints Senad Softic as new governor

Asked On: August 12, 2015

Question: Any comments on Softic's background, political orientation, and views on economic and monetary policy?

Answers: Softic is a member of the largest Muslim Bosniak party, the hardline Party of Democratic Action (SDA), which is part of the ruling coalition. He propagated the SDA’s economic programme that supports the country’s EU integration, stabilisation, economic development, opening new jobs, cutting jobless rate, improving the overall business environment as well as taking measures in the key sectors: energy, mining agriculture, industry and transport. While taking over the new position on August 12, Softic has stressed the important role of the former governor Kemal Kozaric in keeping the country’s monetary and financial stability. Softic was deputy chairman of the Supervisory Board of Bosnia’s Investment Bank, which was later renamed to Development Bank of FBiH. During his consulting practice, he participated in drafting of over 120 studies and projects inthe fields of micro- and macro economics (management, finance, banking, strategy, organization, development).  He was anauthor or co-author of 13 books and monographs and his 30 scientific studies were published in many economic magazines and other publications.

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Net assets of Macedonian mandatory pension funds rise 26% y/y in July

Asked On: August 11, 2015

Question: Do you have an idea what these funds invest in, what types of maturities, whether they invest in only MKD denominated assets, and whether all the assets they invest in are on public markets, etc.

Answers: In the table below I am giving the end-July structure of the investments of the mandatory funds, NLB Penziski Fond (NLBm) and KB Prv Otvoren Zadolzitelen Penziski Fond (KBPm), as reported by MAPAS: (in %) NLBm KBPm Bonds of domestic issuers 58.8 63.3 Investment funds of foreign issuers 13.5 28.8 Deposits 10.2 4.1 Shares of domestic issuers 3.8 2.1 Shares of foreign issuers 10.1 0.0 Cash 2.2 0.2 Receivables 1.5 1.5 TOTAL 100.0 100.0  

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Early results give Socialists-led coalition lead in local polls in Albania

Asked On: August 3, 2015

Question: Thanks for this article.  Do you have any more thoughts about the implications of the results of the local elections on the political setting?  Has this been seen as a strong victory for the ruling party? Has the ruling coalition gained strength to push legislation through parliament as a result of this election? Has their reform agenda been vindicated?  Did the junior coalition partner Socialist Movement for Integration gain or lose strength as a result of these elections?  Did the 61 municipalities display regional voting preferences (ie North tending to vote Democratic and South Socialist)?  Did one party or the other gain or lose specific segments of society - students, professionals, laborers, pensioners, etc.?  Or did the elections seem very personality based on a strictly local level?  

Answers: The local vote in Albania and the victory of Socialists, which have been in power since 2013, was seen as an incentive for the governing party to deepen the country’s reforms. According to prime minister Edi Rama the elections on June 21 were best so far. Socialist-led coalition won mayor positions in 45 out of 61 municipalities with Socialist alone winning 33. The Democratic Party won only 15 municipalities, while one mayor position in the country's southwest was won by an ethnic minority party. The strong victory of the governing party is expected to help Albania overcome political tension between the government and the opposition that hindered reforms required for the country to advance on its path towards EU membership.  Socialist-led coalition managed to win the majority of municipalities including the largest cities: Tirana, Durres, Vlora, Elbasan and Korca and inflicted a heavy blow to the opposition by getting over 63% of the total votes in terms of seats in city councils. The opposition coalition led by conservative Democratic Party won only 32.5% in city councils and seems it continues to lose control after its loss in the 2013 general vote. However, Democrats managed to retain the mayor post in its traditional strongold - Shkodra.   The Socialist Movement for Integration SMI, the junior governing partner, increased its voters’ base and could become a threat to Democrats as it won only 60,000 votes less than the latter. SMI won in nine municipalities. Two seats were won by minor partner Party for Justice, Integration and Unity (PDIU) and one, as mentioned above, by ethnic minority Macedonian party. Democrats won mostly in the country’s north as well as in few municipalities in the southeast and southwest of Albania. In July 2014, the Albanian parliament passed legislation to reorganise the country’s municipalities, reducing the number from 380 to 61, a move aimed to cut costs and boost local decision-making, putting Albania more in line with EU standards. The reorganisation of the local government structure was aimed at offering better public services, more efficient and modern services for citizens, more public investments and better opportunities for social economic development.

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Tajik foreign reserves at $447mn in June

Asked On: July 23, 2015

Question: I tried to look for more figures about Tadjik foreign reserves on their Central Bank website, and I did not find any information. Do you have official sources about it ?  

Answers: The figure for Tajikistan's forex and gold reserves was given by the governor of the country's central bank at a news conference - we haven't got the figure from an official source. You are right, the National Bank of Tajikistan, the central bank, doesn't seem to publish the information on its website  The IMF does publish figures for individual countries but on an annual basis

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Albanian court sentences two in c-bank theft scandal

Asked On: July 14, 2015

Question: Would you have any more news on what has happened with Ardian Fullani? Is he still to face trial, and if so, when? Any other news regarding his current situation?

Answers: On September 5 2014, the former governor of the Bank of Albania, Ardian Fullani,was taken into police custody but now is under house arrest while several charges against him are investigated.  See also this: Albania’ Court of Appeal released Fullani on September 15 and placed him under house arrest awaiting trial in connection with the theft of several million euro from the c-bank. According to media, Fullani, who denied any wrongdoing,faces up to seven years in jail if convicted. Gazeta Shqip said in March that the investigation against Fullani will continue for at least another three months. There is no new information on the possible trial.

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Bosnia’s Federation adopts budget framework for 2016-2018

Asked On: July 10, 2015

Question: What are the financing plans contained within the framework?  What deficits is the Federation planning on running?  Is IMF financing a part of the framework?

Answers: The Federation has not yet revealed its expectations on budget balance in 2016-2018. As far as IMF's financing, Bosnia is still negotiating a new loan agreement, however the fund says the country needs to do a lot of work in order to comply for new agreement. n June, IMF concluded that Bosnia needs more time to complete a number of policies in several areas, including measures to improve the functioning of the labour market, strengthen tax collection, enhance bank oversight, and improve the business environment. A new mission is expected to arrive and resume talks soon.

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Azerbajiani manat “good for carry”, say analysts

Asked On: July 4, 2015

Question: Thank you for the article, very interesting. What is the source of these statements by the analysts? I could not find any reference online.

Answers: There is no link as it is a short note to investors that ICBC Standard Bank sent via e-mail. Please find the full text below.   Azerbaijan – Buy the Manat for Carry Last February Azerbaijan devalued the Manat by a massive 35% to 1.05 to the US dollar from 0.78, following 7 years of currency stability (USD based investors would have lost 26%). With hydrocarbons making up 95% of Azerbaijan’s exports and 35% of its GDP, the currency devaluation was inevitable following the collapse in the price of oil.   Manat (AZN) as a carry trade We believe that the Manat is due for a period of currency stability, making a long Manat position one of the most interesting FX carry trades in the illiquid frontier space. Current yields on AZN NDFs range around 6-8%, and investors should expect a total return equivalent to the trade’s carry. While AZN’s low volatility will help reduce a portfolio’s overall actual volatility, investors ought to remember that gap risk always exists for managed currencies such as the Manat. However, looking ahead, we think that the risk of a further devaluation (gap risk) is currently very low.   The price of oil is crucial to the fate of the currency. With the oil price in the 55-70 range (Brent) we see no pressure for any additional devaluation. However, if oil prices were to go lower again and average US$40pb or lower for a considerable amount of time then we would expect a possible second devaluation but probably of a smaller magnitude than the last one. Longer-term, there is a possibility that the authorities will adopt greater currency flexibility, as recommended by the IMF, but we do not see the possibility of such a policy shift over the next year.   The economy is adjusting from the oil price shock and subsequent devaluationThe 35% sharp devaluation last February has gone a long way to ensure that the current account stays in surplus. It is expected to reach between 4-6% of GDP, depending on the price of oil, down from 16% of GDP last year. While the devaluation has helped restore competitiveness, FX reserves preservation is important to maintain private sector confidence. Central bank reserves have broadly stabilized since mid-April, covering now a comfortable 7 months of imports, with external buffers including the oil fund are substantial at US$35bn, or 55% of GDP. Sovereign Net Financial Assets stood at 60% of GDP at the end of 2014. Inevitably, the devaluation has pushed inflation sharply higher, likely to reach 8-9% in 2015, up from 3.8% in 2014. Inflation would have been even higher had it not been for lower demand and the government’s price stabilization measures early this year.The fiscal deficit is set to rise to about 7% of GDP, up from 3% last year, but the government plans to adjust its fiscal spending to take into account the substantially lower oil prices. IMF expects non-oil GDP growth to decelerate to 3.5% this year as the sizable fall in export revenue and the slowdown in public investment will spillover in the private sector demand. Overall GDP growth is set to slow down to 1.8% this year, from 2.8% last year. As one would expect, the drop in oil price has raised the importance of diversification away from hydrocarbons. But for private investment to flourish Azerbaijan requires comprehensive reforms – areas in need of improvement include ease of doing business, barriers to competition, governance, government effectiveness, control of corruption, rule of law, and the independence of the judiciary. We highlight the banking sector as a potential vulnerability. Bank asset quality, capital, profitability and funding have all been negatively affected by the devaluation and weaker oil prices. Many loans were issued to borrowers that do not have FX revenues. A sharp rise in dollarization is also affecting banks’ capital and Manat liquidity. Not surprisingly, earlier this week, Moody's downgraded the outlook on Azerbaijan's banking system to negative from stable. The IMF also feels there is a lot of room for improvement in banking regulation and supervision.  

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Latvia tempting Estonian companies with tax regime

Asked On: June 17, 2015

Question: What exactly are the new Estonian taxes that have been approved and how are they different from the old taxes?  

Answers: A number of changes in Estonian taxes were passed on June 15 after a long debate and amidst political controversy as the opposition tied the vote on taxes to a no-confidence vote, which the government obviously survived.  The recently raised taxes – mostly excise duties on alcohol, tobacco and fuels, as well as VAT on accommodation services – are part of the government’s budget strategy aiming at keeping the structural budget position of the general government in surplus, while covering expenditure related to defence or child benefits. In more detail, the government decided: •To raise alcohol excise tax by 15% from February 1, 2016;  •To raise tobacco excise tax (in addition to the earlier established 5%) by 3% in 2016-2018, with the 2016 raise coming into effect in July 2016; •To raise alcohol and tobacco excise taxes by 10% in 2019 and 2020 (except excise tax on wine and tax on fermented beverages, which will rise 20%); •To increase petrol excise tax by 10% in the next three years, from the current €422.77; •To raise excise tax on diesel fuel by 14% from January 2016, and in 2017-2018 by 10%. The excise tax for diesel is currently €392.92. An amendment to the VAT law was also passed, raising VAT rate for accommodation establishments from 9% to 14% in 2017.   

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Hungary’s MET, Croatia’s PPD reportedly set to buy stake in Petrokemija

Asked On: June 15, 2015

Question: Thank you for the article. Maybe a difficult question to answer, but is there any indication on why the investors who showed interest last year dropped out?

Answers: There is no official indication why the four companies which submitted non-binding bids last year, i.e. Poland's Grupa Azoty Austria's Borealis, the Czech Republic's Agrofert and Hungary's Nitrogenmuvek, part of Bige Holding,  are no longer interested in acquiring a stake in Petrokemija. Croatia, which owned at that time 43.83% of Petrokemija, was planning to retain a stake of at least 25% plus one share in the company after the privatisation. However, no binding bid arrived before the March 12, 2014 deadline expired. The reasons why the investors did not file binding bids might be on the one hand Petrokemija’s financial situation (the company has been posting loss since 2009, except 2011) and the required capex to improve profitability and on the other hand the still high prices it pays for gas supplies.  Despite being one of the largest consumers of gas in Croatia, Petrokemija has historically failed to secure favourable pricing for the gas it uses from its traditional supplier, Croatian oil and gas company INA, partially owned by Hungary’s MOL. The cost of gas accounts for 70% of Petrokemija’s expenditure, Petrokemija CEO Nenad Zecevic warned in March quoted by news agency Hina. Zecevic said at that time that the management was working on reducing the price of gas and that the current contract was in force until October. These might be the reasons why investors still stay away from troubled Petrokemija.   MET, like INA, is partially owned by MOL which is interested in keeping Petrokemija as a sure buyer of INA’s gas. Local media speculated that Petrokemija could end up in bankruptcy should MET and Croatian natural gas distribution company Prvo Plinarsko Drustvo (PPD), which are performing due diligence at the company, decide not to file bids. Vecernji List claimed Croatia which is reportedly planning to offer 44% in Petrokemija might make a compromise and offer a majority stake as Petrokemija is big company, contributing 0.9% to the country’s GDP. Croatia now owns 79.85% in Petrokemija through its state property management agency DUUDI.

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