RZB sees new CEFTA as big opportunity for Southeastern Europe.

On the occasion of a conference focusing on Southeastern Europe (SEE)Raiffeisen Research, the research unit of RZB Group, issued its latestanalysis about the region. The countries of SEE are expected to show areal growth rate of their Gross Domestic Product (GDP) by approximately6 per cent this year and remain one of the engines of European growth.The EU accession of Bulgaria and Romania and the modification of theCentral European Free Trade Agreement (CEFTA) will prolong this trend.The RZB Group is represented in the region via its subsidiary RaiffeisenInternational Bank-Holding AG with banks in seven markets. With totalassets amounting to 14.0 billion Euros, some 600 business outlets andemploying approximately 12,100 people (all data as of 30 June 2006) itranks among the leading banks in SEE.

The EU is by far the most important trading partner for SEE. In 2005,total trade between the EU and SEE amounted to 79 billion Euros, anincrease of 53 per cent compared to 2001. The EU has offeredpreferential access to the Western Balkans since 2001– since that time, exports from these countries to the EU have grown by 38 per cent. Trade between SEE countries has been boosted by the establishment of bilateral Free Trade Agreements. Trade within the region increased from 2.6 billion Euros in 2002 to more than 3.5 billion Euros in 2004. For instance, Croatia increased its trade with its regional neighbours by 27 per cent, while Bosnia and Herzegovina boosted its regional trade by 63 per cent. The enlargement and modernisation of the CEFTA will build on these encouraging results. TheAgreement will consolidate the bilateral trade concessions, which are currently included in 31 different bilateral Free Trade Agreements – which already liberalise more than 90 per cent of trade in the region, including almost all trade in industrial products.

Currently, the volume of trade between SEE countries is relatively lowas a result of the disruption in economic cooperation during the lastdecade. Also, many unsolved political issues and the restructuring ofthe individual national economies has hindered a recovery in regionaltrade. The current members of CEFTA, namely Bulgaria, Croatia, Romaniaand Macedonia, most probably will be joined by Albania, Bosnia andHerzegovina, Serbia, Montenegro, Kosovo and Moldova. Bulgaria andRomania will be obliged to leave the organisation after obtaining fullEU membership at the start of 2007. Until then, the"new CEFTA" willcover an area with a population of just above 55 million or around 12per cent of EU population. The latest data suggest that GDP of the newCEFTA members amounts to more than 200 billion Euros, representingaround 1.8 per cent of the current GDP of the EU.

Attracting FDI remains on the priority list

Strong economic activity is generating pressures on import growth, notonly due to high household consumption but also as a result of therecent strong investment cycle in the SEE region. Still struggling tosignificantly improve goods exports, especially to the EU market, mostof the countries face high trade deficits. Unfavourable trends ininternational trade in goods have significantly contributed to theexternal imbalances of the SEE countries and are thus in partresponsible for generating the current account deficits. The mostdesirable way to finance such deficits is via foreign direct investment(FDI), i.e. inflows of non-speculative long-term foreign capital. Forthe new members of the EU, FDI has had a proven positive impact onexports and production growth, job creation and in improving efficiencyat the microeconomic level. Over the last couple of years strong growthin FDI was seen in the region, especially in Romania and Bulgaria.Foreign investors'' increased interest came as a result of the EUperspective for the region, lower average labour costs than in the newMember States, proximity to the EU market, robust economic growth andongoing reforms. The privatisation process in SEE countries contributedpositively to the increase of FDI inflows. In the coming yearsprivatisation receipts should remain high, since a still significantproportion of assets is in government hands in SEE countries.Liberalisation in the transportation and communication sector, utilityservices and privatisation of financial institutions might continue togenerate strong flows of foreign capital to the region in the comingyears. Most of the SEE countries have recently adopted proactiveinvestment promotion policies, offering various incentives, as theyrealize the importance of FDI for economic growth.

Still the FDI stock per capita in the region is significantly lower thanin Central Europe. It amounts to slightly more than 1,000 Euros comparedto some 2,900 Euros per capita in Central Europe. Therefore, SEEcountries are focusing their attention on attracting more FDI, throughwhich the national economies can encourage production and the import ofknow-how, can increase employment, infrastructure development, and helpto reduce poverty, etc. Therefore, the countries are looking forinnovative ways. For example, on 30 June 2006, the Serbian governmentenacted the"Regulation Setting the Conditions for and Way of AttractingDirect Investments", which provides for pecuniary incentives from thebudget for the newly employed. Montenegro published a FDI incentivestrategy in July 2006. And Albania aims to attract investors with asell-off, calling the strategy"Albania for 1 EUR". However, before FDIis flowing in, demands such as political stability, infrastructureimprovement, quality of education have to be met. The first steps havealready been taking and with joint action SEE might cause some surprises.

Promising Equity Markets

Once again stock markets in the South East European region put in a verygood performance during the first nine months of 2006. The BucharestStock Exchange (BSE) posted good performance so far in 2006, with theEUR-based BET index gaining 23.6 per cent YTD. Market capitalisationwent up by 24.2 per cent YTD, on the back of share price appreciationalmost across the board as well as new arrivals to the market, mostimportant of which is Transelectrica. The EUR-based BET-FI (comprisesfive local investment funds) gained by impressive 191.1 per cent in2005, but has only posted a 7.8 per cent increase so far this year,mainly due to uncertainties resulting from changing ownership limitlegislation.

The Croatian equity market managed to show– mainly driven by the Pliva takeover story – a quite high return of 47 per cent in the first three quarters of the year. The Serbian indices as well as the Bulgarian indices strongly performed and climbed to record-high levels in the third quarter of 2006. Last but not least in Bosnia and Herzegovina optimism prevailed on the local stock exchanges.

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Raiffeisen Zentralbank Osterreich AG (RZB) is the central institution ofthe Austrian Raiffeisen Banking Group, the country''s largest bankinggroup. It is a leading corporate and investment bank in Austria and alsoconsiders Central and Eastern Europe (CEE) as its home market. Vialisted subsidiary Raiffeisen International Bank-Holding AG, it operatesone of the leading banking networks in CEE with subsidiary banks andfinance leasing companies in 16 markets. More than11 million customersare attended to through more than 2,700 business outlets. Representativeoffices in Lithuania and Moldova complement the group''s presence in theregion. Raiffeisen International''s shares are traded on the Vienna StockExchange. RZB owns 70 per cent, the balance is free-float.

For further information please contact Andreas Ecker (+43-1-71707-1753,andreas.ecker@rzb.at) or Lars Hofer (+43-1-71 707-1930,lars.hofer@ri.co.at).http://www.rzb.at, http://www.ri.co.at.