romania tourism report q1 2013

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Q1 2013www.businessmonitor.com

TOURISM REPORT

ROMANIA

INCLUDES BMI'S FORECASTS



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ROMANIA TOURISMREPORT Q1 2013INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2012



Romania Tourism Report Q1 2013




CONTENTS

Executive Summary......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................ 7

Romania Tourism Industry SWOT ...................... ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ ....... 7 Romania Political SWOT ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ..... 8 Romania Economic SWOT ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ... 8 Romania Business Environment SWOT.................... ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. .. 9

Industry Forecast Scenario .......................................................................................................................... 10 Arrivals ........... ............. ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ ........... 10

Table: Arrivals, 2010-2017 .................................................................................................................................................................................. 10 Accommodation .................. ............. ............ ............. ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ ............. .... 12

Table: Hotels Data, 2010-2017 (‘000, unless stated) ........................................................................................................................................... 12 Expenditure ............ ............. ............ ............. ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ ............. ............. .... 12

Table: Tourist Expenditure And Economic Impact, 2010-2017 ........................................................................................................................... 13 Inbound Tourism ............. ............ ............. ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ ............. ............. ........ 13

Table: Inbound Tourism, 2010-2017 .................................................................................................................................................................... 13 Outbound Tourism .................................................................................................................................................................................................... 14

Table: Outbound Tourism, 2010-2017 ................................................................................................................................................................. 14 Market Overview – Travel ............................................................................................................................. 15

Commercial Airlines ................................................................................................................................................................................................. 15 Global Oil Products Price Outlook ........................................................................................................................................................................... 19

Table: BMI’s Oil Price Forecasts And Bloomberg Consensus, Average Price (US$/bbl) ................................................................................... 19 Market Overview – Hospitality ...................................................................................................................... 28

Table: Key Players In The Romanian Hotel Industry ............ ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ 29 Accommodation Developments ....................... ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. ............ ............. . 30 Infrastructure ........... ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ .. 30

Risk/Reward Ratings ..................................................................................................................................... 32 Table: Central And Eastern Europe Tourism Risk/Reward Ratings ............ ............. ............. ............ ............. ............. ............ ............. ............. ... 32

BMI’s Security Ratings ...................... ............. ............. ............ ............. ............. ............. ............ ............. ............. ............ ............. ............. ............. . 32 Table: Europe Security Risk Ratings .................................................................................................................................................................... 33 Table: Europe State Terrorism Vulnerability To Terrorism Index ....................................................................................................................... 34

Europe Security Overview................ ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. ... 35 Strategic Outlook For The 2010s ......................................................................................................................................................................... 35 Europe In A Global Context ............. ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. ............. ........... 35 Europe’s Key Security Issues Over The Coming Decade ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ ...... 35

Global Assumptions ...................................................................................................................................... 42 Table: Global Assumptions, 2011-2017 ............................................................................................................................................................... 42 Table: Global & Regional Real GDP Growth, % chg y-o-y................................................................................................................................. 43 Table: Developed Market Exchange Rates, 2011-2014 ....................................................................................................................................... 44 Table: Emerging Market Exchange Rates, 2011-2014 ......................................................................................................................................... 44

Developed States ............. ............ ............. ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ ............. ............. ........ 44 Table: Developed States Real GDP Growth Forecasts, 2011-2014 (%) .............................................................................................................. 45

Emerging Markets ............. ............. ............ ............. ............. ............. ............ ............. ............. ............ ............. ............. ............. ............ ............. ...... 45 Table: Emerging Markets Real GDP Growth Forecasts, 2011-2014 (%) ............................................................................................................ 46




Table: BMI v Bloomberg Consensus Real GDP Growth Forecast, 2012-2013 (%) ............ ............. ............. ............. ............ ............. ............. .... 47 Company Profiles .......................................................................................................................................... 48

SIF Transilvania .................................................................................................................................................................................................. 48 Demographic Outlook ................................................................................................................................... 49

Table: Romania's Population By Age Group, 1990-2020 ('000) .......................................................................................................................... 50 Table: Romania's Population By Age Group, 1990-2020 (% of total) ................................................................................................................. 51 Table: Romania's Key Population Ratios, 1990-2020 .......................................................................................................................................... 52 Table: Romania's Rural And Urban Population, 1990-2020 ............................................................................................................................... 52

BMI Methodology ........................................................................................................................................... 53 How We Generate Our Industry Forecasts ............ ............. ............. ............. ............ ............. ............. ............. ............ ............. ............. ............ ....... 53 Tourism Industry ....................................................................................................................................................................................................... 53 Tourism Ratings – Methodology ............................................................................................................................................................................... 54

Table: Tourism Risk/Reward Rating Indicators ................................................................................................................................................... 55 Table: Weighting Of Components ........................................................................................................................................................................ 56

Sources...................................................................................................................................................................................................................... 56




Executive Summary

The Romania Tourism Report examines the long-term potential of the tourism sector but also highlights

short-term risks associated with the sharp slowdown in the eurozone – the major source region for

inbound tourists. Overall, the healthy rebound in the hospitality sector in 2011 (for both foreign and

domestic tourism) was broadly maintained in 2012. Further modest recovery is also anticipated over the

extended forecast period to 2017.

The report examines statistical data on the number of cross border foreign visitors by region and country

(including same-day visitors), flagging the changing dynamics over recent years, with the relative

importance of some traditional source markets showing signs of weakening.

Domestic tourism by Romanian residents is also considered, which is an area offering considerable

potential over the longer term as Romanian per capita incomes rise.

The report also looks at the growth strategies being employed by key players in the Romanian tourism

sector, particularly airlines, as opportunities emerge in a still nascent market. The collapse of Malév

Hungarian Airlines, which offered numerous routes to Romania, in February 2012 also offers

considerable opportunities for rival airlines.

There was been a broad upward trend in the growth of foreign visitors during January-August 2012.

Latest customs data for the period record positive growth of 5.7% year-on-year (y-o-y), after negative

growth at the beginning of the year. Indeed, in May and July, there was relatively strong growth year-on-

year in the number of visitors, of 9% and some 6% respectively, while in August growth was surprisingly

robust (+13% y-o-y).

During the first eight months of 2012, the hospitality sector reported a relatively strong set of results for

both foreign and domestic tourists, following a poor early start to the year. The total number of tourist

nights in all accommodation establishments increased 8.5% y-o-y, with both foreign and domestic tourist

nights up by a similar percentage (and somewhat below the growth rates recorded over the same period in

2011). Tourism growth in August however was weaker, with overall tourist nights up 6% y-o-y

(compared with over 23% y-o-y in August 2011), and foreign and domestic tourist numbers up 4% and

6% respectively.

Over the last quarter BMI have revised the following forecasts and views:

Given the relatively positive performance of foreign tourism recently, BMI has raised its annual

growth forecast for arrivals to grow by 3.5% over 2013.




BMI’s real GDP growth forecast for 2013 for the major source region, the eurozone, has been

edged down marginally to only 0.6% (compared with 0.9% previously).

Following a short spat of recent appreciation of the Romanian leu, BMI has returned to its

bearish view towards the currency. We now forecast the unit to reach RON4.4600/EUR by end-

2012, from a previous forecast of RON4.4100/EUR. Over the short term, a weakening leu will

be supportive of the tourism sector.




SWOT Analysis

Romania Tourism Industry SWOT

Strengths Multiple attractions, from skiing to coastal resorts and health holidays.

Competitive wages and other cost considerations make for an attractive investmentenvironment.

Weaknesses Coordinated government policies on tourism have been lacking.

There is a need to raise the quality of accommodation.

Growth in the hotel market is constrained by relatively poor infrastructure,particularly the road network.

Opportunities There is considerable market potential for the development of the wellness

business in Romania and medical tourism generally, especially spas and ecologicaltourism, which should also stimulate demand for waste management and pollutioncontrol companies.

The top end of the hotel market is underdeveloped and unutilised land along thepopular Black Sea coast is available.

Boosting domestic tourism.

There is potential for strong growth in cultural tourism.

Development of cruise tourism.

In 2006, the Blue Flag Programme – an ‘eco-label’ awarded to beaches andmarinas worldwide – assigned a number of flags to Romania for the first time.

Threats Ongoing anti-austerity protests across the country, which have at times beenviolent, could damage the country’s tourism reputation.




Romania Political SWOT

Strengths The establishment of formal and informal coalitions or groupings of minority parties

has, in the past, allowed successive administrations to implement importantaspects of the EU-mandated structural reform agenda in the national parliament.

Weaknesses Strained relations between Prime Minister Victor Ponta and President TraianBasescu meani political risks elevated for the foreseeable future.

Opportunities EU membership provides some support for further institutional development.

Threats The fiscal consolidation required by the EU and IMF, particularly the need to rein inthe bloated public sector, will keep political instability elevated, raising the risk ofmore populist political rhetoric, and hurting Romania's relations with the EU and

IMF.

Romania Economic SWOT

Strengths Despite the deep recession in 2009, a flexible currency and limited private sectorindebtedness provides some space for policymakers to stimulate growth.

Membership to the EU has deepened trade and capital market integration, fosteringcontinued convergence with other members of the bloc.

Weaknesses Pervasive corruption not only leaves Romania vulnerable to EU-imposed fines, butwill also impede efficient resource allocation over the long term.

Skills shortages may deepen over the longer term as qualified workers migrate toother parts of the EU in search of higher pay and better employment opportunities.

Opportunities Limited household indebtedness and a large consumer market provide some scopefor demand-led growth over the medium-to-long term.

Threats There is a persistent risk that the administration of Victor Ponta will fail to meet IMFconditions to release outstanding tranches from the country's financial bailout over

the next few quarters. This would seriously hurt investor confidence, and significantlyreduce external account stability.




Romania Business Environment SWOT

Strengths The Romanian authorities appear aware of the problems that plague the domestic

business environment, and are committed to enhancing transparency and openness. Openness to foreign investment has meant that many sectors, such as banking, are

dominated by large multinationals, which bring new expertise and managementtechniques to benefit the wider business environment.

Weaknesses Romania's overly rigid labour market, where hiring and firing regulations are morethan twice as inflexible as the European average, is an ongoing constraint toproductivity and new business start-ups.

Opportunities Integration with the markets of the EU has raised Romania's status as a cost-effective entry point through which to access other European economies.

Large-scale infrastructure improvement is ongoing, and will receive substantial

influxes of EU funds and loans over the coming years.

Threats Corruption remains a major problem, and is likely to continue deterring greater FDIinto Romania.




Industry Forecast Scenario

At the end of 2011, the National Association of Tourism Agencies (ANAT) highlighted a number of

important issues facing Romanian tourism. In particular, relatively high taxes compared to competitorcountries, such as Bulgaria, may be constraining tourism. Further, tourism promotion concentrates

heavily on foreign markets, while the vast majority of tourists are Romanian (overnight stays by domestic

visitors accounted for 83% of total nights in all accommodation establishments in 2011).

While accounting for only a relatively small proportion of GDP, there is considerable scope for the

development of the tourism sector (aiding economic development and job creation) as the country clearly

has significant attractions to foreign visitors. There is the potential for development of the skiing industry,

while impressive coastal resorts along the Black Sea have long been popular with domestic residents. The

mineral waters of mountainous Transylvania and a high number of spa resorts provide scope for health-

related activities, and the lakes of the Danube Delta (which cover an area of nearly 2,000 square miles)

are internationally renowned as a habitat for rare fish, bird, tree and plant species. There is also potential

for strong growth in cultural tourism. Sibiu, one of the largest cities in Transylvania, experienced a

marked increase in awareness of the city as a cultural destination after being chosen as a European Capital

of Culture in 2007. Cruise ship tourism in the Danube Delta has also experienced favourable growth in

recent years.

Despite this, the authorities have struggled to identify which aspects of local tourism should form thekeystone of their advertising campaigns. In comments to local press in 2005, officials said that intolerance

towards the local Roma community had damaged Romania’s image abroad and that it had the worst

reputation among Central and Eastern European (CEE) countries for its treatment of the Roma minority.

Images of the Roma culture and population are believed to be integral to any local tourism initiative, so

correcting the perception of intolerance will be paramount to any marketing drive.

Arrivals

Table: Arr ivals , 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Total Arrivals, '000 7,498 7,611 7,855 8,130 8,520 8,963 9,411 9,853

Total Arrivals, '000, %change y-o-y -1.0 1.5 3.2 3.5 4.8 5.2 5.0 4.7

f = BMI forecast. Arrivals is sum of regional arrivals. Proportions of UNWTO data were used to estimate mode oftransport historic data. Source: Institute of National Statistics (INS), World Tourism Organization (UNWTO)




Complete provisional customs data for 2011, which include figures for same-day visitors, show a 1.5%

increase in foreign arrivals. About 58% of total arrivals came from the EU. In order of importance, the

key source markets in the EU were: Hungary (about 35% of the total), Bulgaria (18%), Germany (8.7%),

Italy (8%) and Poland (6%). The relative importance of Hungary and Germany declined from 38.3% and

9.2% respectively in 2009.

There was been a broad upward trend in the growth of foreign visitors during January-August 2012.

Latest customs data for the period record positive growth of 5.7% y-o-y, after negative growth at the

beginning of the year. Indeed, in May and July, there was relatively strong growth year-on-year in the

number of visitors, of 9% and some 6% respectively, while in August growth was surprisingly robust

(+13% y-o-y). In the hospitality sector, meanwhile, guest numbers were also up favourably in the period

March to July.

Given the relatively positive performance of foreign tourism recently, BMI has raised its annual growth

forecast for arrivals to 3.5% over 2013. This would be a favourable outturn for the sector, given weaker

domestic demand conditions and the poor state of the eurozone – the major source region. The outlook is

strongly influenced by the macroeconomic backdrop facing the eurozone, which remains grim. Our

outlook remains the same, however: the eurozone is in for a protracted period of slow, painful internal

restructuring, characterised by weak economic activity. A sharp slowdown in growth is forecast in

Germany, from 3% in 2011 to 0.7% in 2012 (revised up from 0.4%), picking up to 1.5% (lowered from

2.0%) in 2013. The growth forecasts for Hungary (another key source market) have been revised slightly

to -1.2% and 1.2% in 2012 and 2013 respectively. After the sizeable weakness of the Romanian leu since

mid-2011 and a short spat of recent appreciation, we have returned to our bearish view towards the leu.

We now forecast the unit to reach RON4.4600/EUR by end-2012, from a previous forecast of

RON4.4100/EUR. Over the short term, a relatively weak leu will continue to be supportive of the tourism

sector.

The long-term outlook for arrivals is favourable, bolstered by the stimulus provided by the EU, the

establishment of tourism promotion offices overseas and an enhanced marketing programme to boost

interest in the country.




Accommodation

Table: Hotels Data, 2010-2017 (‘000, unless stated)

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Accommodation ('000; unless s tated)

Overnight stays in hotelsby tourists 12,732 14,301 15,021 15,064 15,125 15,194 15,264 15,333

Hotels ('000; unless stated)

Number of Hotels oraccomodationestablishments ('000) 185 175 177 179 181 183 185 188

f = BMI forecast. Tourists in hotels forecast using global GDP, Source: INS, UNWTO

During the first eight months of 2012, the hospitality sector reported a relatively strong set of results for

both foreign and domestic tourists, following a poor early start to the year. The total number of tourist

nights in all accommodation establishments increased 8.5% y-o-y, with both foreign and domestic tourist

nights up by a similar percentage (and somewhat below the growth rates recorded over the same period in

2011). Tourism growth in August however was weaker, with overall tourist nights up 6% y-o-y

(compared with over 23% y-o-y in August 2011), and foreign and domestic tourist numbers up 4% and

6% respectively.

Expenditure

Tourism expenditure in Romania accounted for an estimated 1.0% of GDP and the direct employment of

about 190,000 people in 2011 (according to revised data series). We calculate tourism expenditure at

more than US$1.8bn in 2011, growing favourably compared with a year earlier. Although this was partly

due to a positive outturn for the tourism sector, the relative strength of the Romanian leu boosted tourism

expenditure in US dollar terms. Tourism expenditure however is down relatively sharply compared with

its peak in 2008, when it reached over US$2.6bn (again partly due to exchange rate effects). BMI

forecasts a slight increase in tourism expenditure in 2012, as the tourism sector consolidates on 2011’s

recovery.




Table: Touri st Expenditu re And Economic Impact, 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Expenditure (%; unless stated)

Tourist expenditure(US$mn) 1,653.0 1,830.2 1,894.5 2,013.3 2,213.6 2,454.4 2,725.7 3,016.3

Tourism expenditurecontribution to GDP 1.0 1.0 1.1 1.2 1.2 1.2 1.2 1.2

Tourism expenditurecontribution to export ofgoods 3.3 2.9 3.2 3.5 3.5 3.5 3.5 3.5

Tourism expenditurecontribution to export ofservices 19.6 18.1 18.0 18.8 19.8 20.7 21.7 22.6

Economic Impact(EGPmn; unless stated)

Direct IndustryEmployment ('000) 220.3 187.8 195.3 199.0 204.6 211.0 218.4 226.3

e/f = BMI estimate/forecast, * Individual expenditure relates to investment in services with an identifiable individualconsumer, † Collective expenditure relates to investment in services that cannot be assigned to a particular group oftourists. Source: World Travel & Tourism Council, UNWTO

Inbound Tourism

Table: Inbound Tourism, 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Arr ival of tourists at natio nal b orders, by reg ion ('000; unless stated)

Europe 4,513.0 4,448.0 4,736.4 4,936.0 5,166.6 5,377.7 5,548.1 5,739.9

% change y-o-y -6.8 -1.4 6.5 4.2 4.7 4.1 3.2 3.5

Arr ival of tourists at natio nal b orders by country ('000)

Hungary 1,735.0 1,546.0 1,788.6 1,906.2 2,021.3 2,106.3 2,168.9 2,243.9

Moldova 1,216.0 1,330.0 1,169.9 1,150.6 1,175.8 1,196.1 1,211.8 1,231.7

Bulgaria 786.0 797.0 872.3 902.8 942.6 980.9 1,021.0 1,067.1

Ukraine 672.0 648.0 806.6 867.3 950.2 1,108.1 1,314.3 1,484.9

Germany 395.0 381.0 400.5 395.5 398.5 400.6 402.4 405.7

Italy 331.0 352.0 348.1 347.6 348.6 351.2 354.9 359.9

Turkey 265.0 271.0 244.8 248.7 260.2 269.5 280.5 295.7

Poland 238.0 250.0 259.1 288.5 336.0 390.5 417.8 446.0

Austria 177.0 193.0 194.6 200.8 203.4 206.5 210.6 215.4

France 131.0 153.0 148.1 148.8 150.1 151.6 153.6 156.1

f = BMI forecast. Source: UNWTO




Outbound Tourism

Table: Outbound Tourism, 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Expenditure (US$mn)

International tourismexpenditure of residents 1.9 1.9 1.9 2.0 2.3 2.6 2.9 3.1

Total Resident Departures 12,020.1 11,876.3 13,346.2 14,004.6 14,662.6 15,220.1 15,750.7 16,232.8

% change y-o-y -2.5 -1.2 12.4 4.9 4.7 3.8 3.5 3.1

Resident departures by destination region ('000; unless stated)

Africa 37.6 33.5 40.7 42.5 45.7 47.8 50.8 54.8

% change y-o-y -3.5 -10.7 21.5 4.3 7.6 4.6 6.3 7.8

North America 85.1 88.1 85.8 87.2 92.6 97.2 102.0 106.9

% change y-o-y 7.0 3.4 -2.6 1.7 6.1 5.0 5.0 4.8

Latin America 8.3 10.8 8.9 9.1 10.2 11.2 12.0 13.1

% change y-o-y 29.7 29.9 -17.7 2.9 11.8 9.3 7.5 9.4

Asia Pacific 0.9 0.9 0.8 0.9 1.0 1.1 1.2 1.3

% change y-o-y 0.1 6.7 -14.3 15.5 15.1 7.9 7.9 8.5

Europe 11,888.2 11,743.0 13,210.0 13,864.8 14,513.1 15,062.8 15,584.7 16,056.6

% change y-o-y -2.6 -1.2 12.5 5.0 4.7 3.8 3.5 3.0

Resident departures by destination country ('000)

Hungary 7,614.0 7,575.0 8,486.8 8,900.8 9,200.9 9,485.5 9,713.5 9,855.0

Bulgaria 1,445.3 1,499.4 1,622.3 1,707.8 1,836.6 1,926.6 2,024.1 2,134.5

Italy 908.0 905.2 897.1 895.4 901.5 906.6 911.0 915.5

Ukraine 910.5 735.2 1,055.7 1,155.0 1,274.5 1,372.3 1,489.7 1,624.7

Turkey 355.1 390.2 440.4 457.3 486.3 505.3 523.4 542.9

Greece 257.9 223.7 325.0 351.4 391.1 424.7 460.7 499.3

Germany 153.7 152.1 153.1 153.3 152.6 152.0 151.4 150.9

USA 69.4 74.8 73.7 75.5 80.1 83.9 88.0 92.5

Croatia 58.0 59.1 61.3 67.7 77.7 85.4 93.7 102.6

Czech Republic 50.8 58.1 43.7 50.1 57.5 63.4 69.0 74.7

f = BMI forecast. Source: UNWTO, INS




Market Overview – Travel

Romania’s largest airport is Bucharest Henri Coandă International Airport (BHCIA), 10 miles north of

the capital. It was founded in 1998 as Bucharest Otopeni International Airport.

The second largest passenger airport in Romania was Bucharest Baneasa Aurel Vlaicu International

Airport until it was converted into a business airport in early 2012. Passenger numbers at the airport rose

by over 13% in 2011 to approximately 2.4mn.

Commercial Airlines

The national flag carrier in Romania is state-owned Tarom, which has undergone significant

modernisation over the past 20 years. In August 2012, the airline’s fleet featured 23 aircraft, consisting of

Boeing 737s, Airbus A318s and 310s, and ATRs. The airline flies to most major European cities.

Despite modernisation, Tarom remains heavily dependent on state financiers. According to the Ministry

of Transport and Infrastructure, the airline will be partly privatised with control of the company

remaining in state hands.

In the wake of EU accession, which gave a significant boost to foreign visitor numbers to Romania,

During the winter schedule (December to March) 2010/2011, the airline commenced a service between

Bucharest and Salzburg. Following the closure of Malév Hungarian Airlines (see below) in February

2012, Tarom increased the frequency of flights on its Budapest-Bucharest route. During summer 2012

(March-October), Tarom increased the frequency of flights on a number of routes from Bucharest:

London Heathrow, Amsterdam, Nice and Dubrovnik, as well as on the following two internal flights,

Bucharest to Cluj-Napoca and Bucharest-Timisoara. Beginning December 2012, the airline will operate a

route between Iasi and Roma (three or four times a week). Further, from summer 2013, Tarom will

commence operating from Iasi Airport to other international destinations such as Torino, Verona, Paris

and London. During the same season, the carrier is considering operating new domestic flights on the

following routes: Iasi-Timisoara, Iasi-Cluj Napoca and Iasi-Constanta.

Over the medium term, the proliferation of low-cost private carriers is likely to encroach on Tarom’s

market share. Low-cost airlines that have entered Romania include Wizz Air, easyJet, Germanwings

and Ryanair, while the dominant Romanian low-cost carrier is Blue Air.

Blue Air became operational in December 2004, setting out its stall aggressively. The entry of Blue Air

into the market followed that of Ukraine’s Volare in 2003. As of August 2012, it operated flights to 23

destinations in Europe and had a fleet of 10 Boeing aircraft (737-300s, 737-400s and 737-500s). The

airline offers European connections to Sibiu and Bacau, as well as a flight between Constanta and




Brussels. Blue Air also offers a domestic flight between Bucharest and Arad. Earlier in 2012, the airline

launched flights from Bacau to Catania. Since March, Blue Air only operates from BHCIA. In summer

2012, a new route started between Bucharest and Lisbon and additional flights were introduced between

London and Bacau.

Tarom’s position is also threatened by the competition regulations attached to the EU accession process –

from 2007 the country is tied to the open skies agreement that allows any EU airline company to fly

anywhere it chooses within union borders. A drastic increase in efficiency will be required, while the

importance of established relationships with EU operators will become all the more marked. One of

Tarom’s most important partners has been Austrian Airlines, which has been active in the Romanian

market since 1959. Austrian Airlines has a code-share agreement with Tarom, with flights between

Vienna and Bucharest, Timisoara, Chisinau, Cluj-Napoca, Sibiu and Iasi. Such strong links then allow for

onward connections to some 130 destinations in 66 countries from Vienna.

The German flag carrier Lufthansa is a major player in Romania, operating flights from Bucharest and

other cities in central and west Romania, such as Cluj-Napoca and Timisoara, to Düsseldorf, Frankfurt

and Munich (with these airports offering connections to other countries in Europe, Asia and the US).

On February 3 2012, the renationalised Hungarian state airline Malév ceased all flight activity to

minimise its losses after nearly 66 years of continuous operation. In January, Malév said it did not face an

immediate payment liability following an EU decision that Hungarian state aid given to the airline

between 2007 and 2010 was contrary to EU regulations. However, in the same month, the European

Commission ordered the grounding of all Malév flights to repay state aid worth about EUR130mn. On

February 2, the Hungarian government placed Malév under extraordinary protection from creditors and

appointed a receiver as the government prepared for possible stoppages of flights by the airline. Suppliers

quickly lost trust in Malév and sought payments for their services in advance and the situation soon

became untenable. Prior to the airline’s collapse it operated flights to the following destinations in

Romania: Bucharest, Târgu Mureş, Constanţa, Timişoara, Cluj-Napoca and Iasi. Numerous competitor

airlines, particularly low-cost carriers, have taken advantage of the grounding of Malév’s fleet to increase

their routes and market share.

Romanian airline Carpatair started operations in 1999. Carpatair and Alitalia signed a code-share

agreement, effective from winter 2011. Carpatair flights between Italy and Timisoara, and other

Romanian destinations, as well as the connecting flights from Timisoara to Moldova and Ukraine, will be

marketed by the Italian flag carrier under its own flight numbers. From March 2012, Carpatair opened a

base in Chisinauo (Moldova) to provide direct flights to Venice, Rome and Milan.

Hungarian low-cost carrier Wizz Air has made significant progress in capturing market share in CEE and

is now the largest budget airline in CEE. In line with its robust growth plan in the region, Wizz Air




ordered 50 180-seat Airbus A320s in October 2007, bringing its total order to 82 A320s with an option

for 25 more. The 50 new planes are to be delivered between 2011 and 2014, while the optional 25 applies

until 2016. The company has achieved a strong market position in Poland, Hungary, Bulgaria and

Romania, and also operates in Lithuania, Latvia, Croatia, Serbia, Slovenia, Ukraine and Macedonia. This

excellent result clearly indicates the growing demand for low-cost travel in the region.

Towards the end of 2012, Wizz Air provided flights on over 220 routes and had 15 operating bases:

Budapest (Hungary); Katowice, Warsaw, Gdansk, Poznan and Wrocław (Poland); Sofia (Bulgaria);

Bucharest, Cluj-Napoca, Timisoara and Tirgu Mures (Romania); Kiev (Ukraine); Prague (Czech

Republic); Vilnius (Lithuania); and Belgrade (Serbia). In 2011, the airline carried more than 11mn

passengers, representing solid annual growth of 15%. The average load factor during the year was over

84%, in line with previous years. In 2010, Wizz Air carried 9.6mn passengers, a robust increase of 23%

y-o-y. In October 2012, Wizz Air operated a fleet of 36 Airbus A320 aircraft.

In 2011, Wizz Air was Romania’s largest airline, with well over 2.5mn passengers. In June 2012, Wizz

Air increased frequencies on several existing services and launch two new routes from Bucharest to

Verona in Italy and Palma de Mallorca in Spain. It added a sixth Airbus A320 aircraft to its then base,

Bucharest Baneasa. As a result, from summer 2012, the number of destinations served from Bucharest by

Wizz Air will be 21. The carrier has also increased operations from Timisoara Airport in 2012, flying to

Dortmund (Germany) from March and to Paris Beauvais (France), London Luton (UK), Forli Bologna

and Rome Fiumicino (Rome) from June. These changes increase Wizz Air’s capacity in Timisoara by

20%, with passenger traffic forecast to increase to over 400,000 at the airport in 2012. In total, the airline

will operate 10 Airbus A320 aircraft from its four bases in Romania during the year. In March 2012,

Wizz Air moved its entire Bucharest Baneasa Airport-based operations to BHCIA. In June, the carrier

began operations from Arad International Airport to Milan-Bergamo (Italy), which should boost business

and leisure tourism between Romania and northern Italy. Arad International Airport is the fifth Romanian

airport to operate Wizz Air flights, reinforcing the carrier’s position as the country’s largest airline. From

September 2012, the airline started a new route between Kutaisi (Georgia) and Kiev (Ukraine).

Despite being Europe’s main low-cost carrier, Ryanair does not have extensive activities in Romania. Asof August 2012, the airline operated only two routes from Italy to Constanta.

In May 2011, Turkish low-cost carrier Pegasus Airlines introduced five weekly flights on the Bucharest-

Istanbul route. The airline has scheduled and charter flights to more than 100 destinations.

At the beginning of 2011, as part of a European expansion drive, Doha-based Qatar Airways entered the

Romanian market, with a new route to BHCIA.




Since February 2010, Austrian low-cost carrier Niki Luftfahrt has operated six flights per week on the

Henri Coandă-Vienna route.

The Ministry of Tourism negotiated with the German low-cost airline Air Berlin to start operations to

Constanta International Airport in 2010.

In 2008, two new airlines started operating at BHCIA: Scandinavian Airlines (SAS), with direct

connections to Copenhagen; and the national airline of Slovenia, Adria Airways, with flights to

Ljubljana. Aer Lingus started offering direct flights to Dublin. In addition, Swiss expanded its Geneva-

based network with the introduction of services to and from Bucharest.




Global Oil Products Price Outlook

BMI View: As expected, there were wild swings in oil prices in September. In the months ahead, the only

certainty in the oil market appears to be volatility, as supply fears due to political tensions around the

globe continue to compete with weak global demand in establishing oil prices. Volatile, sideways

trade will likely be a mainstay throughout the rest of the year, although Chinese stimulus, the results of

the US and Venezuelan elections and tensions across the MENA region could lead to temporary, but

significant spikes in oil prices - posing an upside risk to our 2012 forecast of US$110/bbl for Brent. We

believe that the impact of Iranian outages is already fully priced-in. As such, we expect fundamentals to

take centre stage going into 2013, and specifically demand-side factors to have the upper hand in

influencing oil prices, and forecast that the average price of Brent will be capped at about US$102/bbl.

Like Brent, WTI will trend downwards from a forecast of US$95/bbl in 2012 to US$92/bbl in 2013,

but this discount will narrow as North American producers take measures to overcome the supply glut at

Cushing.

Table: BMI’s Oil Price Forecasts And Bloomberg Consensus, Average Price (US$/bbl)

2011 2012f * 2013f 2014f

WTI, US$/bbl 95 95 92 91

Brent, US$/bbl 111 110 102 99

Brent-WTI Spread 16 15 10 8

WTI BloombergConsensus 94.45 93.70 91.49

Brent BloombergConsensus 111.76 107.09 101.64

Brent-WTI SpreadBloomberg Consensus 17.31 13.39 10.15

f = BMI forecast, * 2012 consensus = Q4 Bloomberg estimate + Q1-Q3 2012 average price. Source: BMI, Bloomberg

(consensus correct as of October 3 2012).

Our view that oil prices will remain volatile has played out well in September 2012. Despite

announcements of monetary expansion programmes in Europe and in the US, Brent traded at an average

of US$113.03 per barrel (bbl), only a slight US$1/bbl increase on the price in August. This confirms our

view that the market had already priced-in expectations that governments would take action to revive the

global economy in August. The marginal gains registered in September reflect these expectations, while

weak global macroeconomic data has tamed supply fears arising from political tensions in the oil-

producing Middle East and North Africa (MENA) region.




Brent Premium To Narrow

Front-Month Brent & WTI Crude, US$/bbl (weekly chart)

Source: BMI, Bloomberg

This is the picture that is likely to endure throughout the rest of 2012: supply fears arising from political

tensions will briefly prop up oil prices, which will fall again on the realisation that global demand remains

too weak to support such high prices. It means that broadly sideways trade will continue to last through

the year.

In 2013, we maintain that prices will trend lower, but remain high by historical standards. We forecast

Brent to average US$102/bbl and WTI to average US$92/bbl. The assumptions underpinning this view

are:

Political risks to supply dynamics will keep prices relatively elevated - especially in Libya and

Sudan. Held back by technical challenges and the continued political standstill with Kurdistan,

Iraqi production - which holds some of the most significant promise in terms of boosting global

supply - could underperform;

Nonetheless, weak global growth will prevent any prolonged upward swing in prices. We

forecast a slight global market surplus in 2013;

Our global production forecast show a healthy supply picture for 2013, with an additional 2.6mn

b/d of new production, compared to our forecast of 1.6mn b/d rise in consumption. This

theoretical surplus in the global oil markets - the first in five years- also underpins our oil price

view for the coming years;




Saudi Arabia to maintain its commitment to capping global oil prices, making up for supply

shortages with increased output;

The discount on WTI relative to Brent will continue, as liquids production from the US

continues to rise thanks to shale oil and Gulf of Mexico (GoM) production. The easing of

infrastructure bottlenecks, however, will lead to a narrowing in the WTI-Brent spread.

Volatile Ride Ahead

As expected, volatility was the name of the game for oil prices in September 2012. Announcements of the

ECB’s bond buying programme and a third round of quantitative easing (QE3) by the US Federal

Reserve sent oil prices climbing steadily up to a five-month high in mid-September. However, this rally

was abruptly ended by a flash crash that saw prices drop nearly US$10/bbl by September 19.

A key reason for the sudden correction was rumours of a ramp-up in Saudi crude oil production to tame

prices, which is likely to be true. After all, on September 10, when prices started climbing steadily

upwards, Saudi Arabian Minister of Oil Ali al-Naimi stated that current prices do not justify global supply

and demand dynamics.

While catalysed by specific news relating to Saudi production, the pullback in oil prices from the key

resistance that we have been highlighting at around US$115-117/bbl bolsters out view that the Q312

bounce was temporary. Brent prices have not recovered to mid-September highs and have hovered within

the US$108-US$112/bbl range ever since. Optimism with regard to additional oil demand due tomonetary expansion was quickly pared down by weak Chinese and Japanese economic data. Other

upswings in oil prices in the second half of September, caused by the apparent ratcheting up of tensions in

Middle East that threatened to reduce available supply - the resurgence of violence in Libya following the

assassination of the US ambassador to the country, and the growing intensity of Iranian-Israeli rhetoric -

had limited effects in sustaining a rally.

Bulls Move Aside

The return of production at key North Sea fields such as Buzzard following the completion of

maintenance activity should also help loosen the Brent market until the end of 2012. Saudi production,

which we forecast to increase in the near term, will continue to help cap oil prices.




Saudi Crude To Cap Price Increases

Saudi Arabia – Crude Oil Production & Exports, 2012-2016 (‘000b/d)

f = BMI forecast. Source: BMI, EIA

Poor consumer confidence in Japan and a second consecutive month of weak monthly PMI data from

China should also slow the appetite for oil consumption in Asia. The ECB’s bond-buying programme

may have allayed fears in Europe but has not addressed fundamental weaknesses in some of the biggest

economies in the region - Spain, and increasingly France. These will continue to dampen oil demand and

ensure that supplies remain adequate for global needs.




Slight Surplus Expected

Global Oil Consumption & Production, 2012-2016 (‘000b/d)


The Chavez Effect

However, we acknowledge that there are considerable supply risks that could push prices above our 2012

and 2013 forecasts of US$110/bbl and US$102/bbl for Brent, respectively:

Tensions in the oil-producing Middle East - particularly a possible conflict between Iran and

Israel, the Syrian civil war, and the resurgence of violence in Iraq - continue to cast doubt over

the ability of key producers such as Libya and Iraq to meet supply requirements. This is

significant as an increase in Libyan and Iraqi volumes has helped make up for Iranian and

Sudanese crude outages in the global market;

It will take time for Sudanese oil to return to the market despite an agreement between South

Sudan and Sudan to resume oil exports;

The shut-in of the major Bonny crude pipeline in Nigeria following damage caused by oil

thieves.

In particular, we highlight the upcoming election in Venezuela, where the outcome could shake up global

crude supply and demand dynamics. In Venezuela, incumbent President Hugo Chavez will face his

toughest electoral test yet. Even if Chavez walks off with a narrow win, as our country risk team predicts,

there will still be much uncertainty about political continuity because of the poor state of the leader’s




health. Fears about disruptions to crude supplies from the OPEC producer could place upward pressure on

prices that could last into early 2013.

Venezuela’s Dependents Venezuela – Crude Oil Exports By Destination, 2010

Source: EIA

Nonetheless, we note that in reality, the effect of a prolonged Venezuelan supply shock could be limited.

The country’s biggest export-market, the US, would likely continue to see an increase in domestic crude

production that could push down its import requirement.

Elsewhere in the world, weak macroeconomics will continue to depress demand. In line with our view of

the impact of other supply fear on current oil prices, we would expect any price increase brought about by

political unrest in Venezuela to give way in 2013.




Posing Less Of A Fight For Global Oil Supplies

US – Crude Oil Production & Import Requirement, 2012-2016 (‘000 b/d)


Leaders And Prices

Chinese stimulus poses a slight upside demand risk to our 2012 forecast. The government is under

pressure to revive economic dynamism and boost political morale as it makes a historic generational

change in leadership this coming November. This would most likely be announced in conjunction with

the political changeover in the same month. Market anticipation of Chinese action in the run-up to

November could prevent oil prices from slipping too dramatically in October despite gloomy economic

data.

Yet, its impact could resemble that of the ECB and the Fed’s announcements: an initial rally, tapered by a

Saudi commitment to moderate prices and concerns about the efficacy of the stimulus thereafter.




Range-Bound Ahead

Front-Month Brent Crude, US$/bbl (weekly chart)

Source: BMI, Bloomberg

We are more bearish about prices going into 2013 than market consensus, based on our belief that the

market will eventually adjust to supply-demand fundamentals. The fall in prices in 2013 applies to both

Brent and WTI, though we expect the spread between the two benchmarks to narrow.

WTI’s discount to Brent will remain in place as US liquids production continues to push higher, thanks to

the US shale boom and from its offshore resources in the GoM. However, the supply glut at Cushing

because of a rapid expansion in output should ease further in 2013 as producers take steps to overcome

infrastructure bottlenecks. Recent developments include an increase in rail capacity for the transportation

of Bakken crude, which has helped to direct flows away from Cushing and towards regions where higher

prices can be obtained. It has also been announced that the crucial Spearhead pipeline, which links theChicago area to Cushing, will not be rationed in November as physical oil traders move to narrow the

WTI-Brent discount.




Closing The Gap

Brent & WTI Forward Futures Curve, 2012-2020 (US$/bbl)

Source: Bloomberg

These efforts will see the spread narrow alongside its European counterpart. Current futures contract

prices also show traders taking positions that reflect this movement. Nonetheless, a faster erosion of this

discount to Brent would likely only take place when an expected increase in pipeline capacity occurs in

2014.




Market Overview – Hospitality

Romania’s hotel industry has been undergoing significant expansion and modernisation. This was

assisted by EUR68mn of funding from the EU’s pre-accession programme for the purpose of modernisinghotels and guest houses. Much of the investment is concentrated on improving facilities in rural areas, in a

bid to support the rural economy and promote Romania as an ecological destination. Romania’s rural

tourism sector attracts about 90,000 visitors a year (foreign and domestic). Significant further expansion

of the hotel industry can be expected, with a need to raise the quality of accommodation. However,

growth in the hotel market, especially in provincial cities, is very much dependent on improvements in

infrastructure, particularly roads. In line with a recovery in the total number of tourist nights in 2011,

occupancy rates for all accommodation establishments increased by 1.1 percentage points, compared with

a year earlier, to 26.4%.

Internationally recognised luxury brands have an increasingly significant presence in Romania.

InterContinental Hotels Group (IHG), Accor, Marriott, Hilton, Rezidor, Howard Johnson and

Crowne Plaza all have hotels in the country and have benefited from the large increase in foreign arrivals

seen in recent years. Nevertheless, there is still significant scope for development of this segment.

Although data are poor, accommodation classified as four- or five-star in Romania is only a small

proportion of the accommodation available, while a large proportion is in the two-star category.

The main domestic player is SIF Transilvania

, which has about 50 hotels in its portfolio and is anentirely private and self-managed closed-end fund. The fund manages its own portfolio, made up of

stocks in a few hundred Romanian companies across various industries. At the end of 2011, the tourism

sector accounted for around 39% of the value of SIF Transilvania’s portfolio. The fund established

Transilvania Travel in 2003 to promote the group’s hotel portfolio. The accommodation facilities are

concentrated on the Black Sea coast, in the resorts of Eforie Nord, Eforie Sud, Neptun, Venus and Saturn,

and the health resorts and spas of Felix, Tusnad, Covasna and Buzias, known for their thermal and

mineral waters.

In November 2004, Unita Turism formed a hotel chain – the second largest in Romania – following a

merger with 13 other firms. Unita Turism Holding (UTH) controls hotels worth approximately

US$130mn, according to company officials. UTH directed a synergised modernisation strategy through

the investment of RON280bn (US$9.7mn) in 2005. The upgrade saw the group preside over hotels in the

three- and four-star categories.

Other significant local players include Ana Hotels, which has a network of seven facilities in Romania.

Of these establishments, two are Bucharest hotels, three are in a complex in the mountain resorts of

Brasov County in Transylvania and the remaining two are located in the Black Sea resort of Eforie Nord.

The two hotels in Bucharest are the five-star Crowne Plaza and the five-star Athénée Palace Hilton. In




2005, Ana Hotels became the majority owner of the Athénée Palace Hilton after the Athénée Phoenix

Group sold a 52% stake in the hotel in a transaction worth about US$30mn. Athénée Phoenix retains a

48% stake in the hotel.

Perla Majestic Group has eight tourist complexes and hotels in Romania, including one of the largest

hotels in the country – the four-star, 348-room Phoenicia Grand Hotel in north Bucharest. The

accommodation capacity of the group as a whole currently amounts to 2,800 rooms.

Table: Key Players In The Romanian Hotel Industr y

Revenue, US$mn Profit , US$mn Period

SIF Transilvania 106.8 68.1 2011

Unita Turism Holding 11.4 na 2010

Danubius Hotels Group 232.0 1.7 2011

na = not available. Source: Company reports, BMI

Romanian hotel chain Continental Hotels, based in Bucharest, has properties in Arad, Bucharest,

Oradea, Sibiu, Suceava, Tîrgu-Mureş, Turnu Severin, Portile de Fier and Timisu de Sus. Accor and

Continental have signed a memorandum of understanding for developing an Ibis-branded hotel network

in Romania. Romania has four Ibis hotels, with seven (with 1,600 rooms) more planned to open in the

main Romanian cities.

Hungary’s Danubius Hotels Group is a major player in the hospitality sector throughout Eastern Europe,

operating a network of 45 hotels and spa resorts across Hungary, Slovakia, the Czech Republic, Romania

(including three hotels in Sovata) and the UK. In preliminary results for 2011, consolidated group revenue

was up slightly by 2% in local currency terms to almost HUF44bn (US$232mn), while operating profit

rose sharply to HUF489mn (US$2.6mn), an annual increase of 37%. Sales revenue in Q411 also

improved to a relatively strong 11% y-o-y. After a very poor performance in 2009 and weak results in thefollowing year, Romanian hotels performed much better in 2011. Revenue rose by 11% (in Hungarian

forint terms) to more than HUF1.6bn (US$8.5mn) in 2011, while profit before tax increased sizeably, by

an annual 22% to HUF265mn (some US$1.4mn). The occupancy rate in Romanian hotels was up 1%

compared with 2010, at 57.7%, and the average room rate improved significantly, by over 15%. The

number of guests in 2011 rose by a favourable 20% to just under 44,000. The group reported a favourable

set of results for H112, with Romanian hotels recording an impressive 17% y-o-y increase in revenue (in

Hungarian forint terms). The Romanian sector saw a strong increase of 15% y-o-y in guest numbers,

while the occupancy rate was unchanged compared with H111 at 47.3%.




In May 2006 the European Spas Association accepted Romania as a full member of the organisation,

which represents 1,200 spa resorts in 22 European countries. Among other aims, the association seeks to

regulate professional training programmes and to maintain standards in European resorts.

Accommodation Developments

In Q312, Hilton Worldwide opened its second DoubleTree by Hilton property in Romania. The 147-room

DoubleTree by Hilton Oradea, in Oradea in northwest Romania, is owned by SIF Banat Crisana and SC

Calipso SA. The DoubleTree by Hilton Hotel Ploiesti, in Ploiesti in the south east central part of the

country (north of Bucharest), is due to open in July 2013.

In mid-2012, Marriott International signed a management agreement with Gica Popescu Hotels for the

147-room Courtyard by Marriott Bucharest. The hotel, the first of its brand in Romania, is due to open inBucharest city centre at the beginning of 2014 and will be the group’s second hotel in the capital.

The DoubleTree by Hilton brand made its debut in Romania with the 88-room DoubleTree by Hilton

Bucharest-Unirii Square, in the Romanian capital, in Q311 – the group’s third hotel in the country. The

hotel is a conversion project of the Bucharest City Unirii Square Hotel and is being operated by VIS 7

Import Export SRL, according to a franchise agreement.

Starwood Hotels & Resorts has announced its intention to enter the Romanian market, with a plan that

entails the affiliation of hotels in Bucharest and five other cities across the country in the coming years.

Reports have said the global hospitality company Dolce Hotels & Resorts is considering entering

Romania.

Infrastructure

Despite EUR1.4bn being allocated for road construction in Romania in 2012, our outlook for the sector

remains cautious, as it is unclear how this will be funded and whether projects can be efficiently

implemented. We base this view on the country’s weak economic outlook, a history of poor road

construction and the failure to successfully complete the flagship Transylvania Motorway project.

According to the Romanian government agency in charge of awarding road construction orders, National

Company for Motorways & National Roads, the Cernavoda-Constanta, Bucharest-Ploiesti and Timisoara-

Arad sections, as well as the Arad and Constanta bypasses, will be completed in 2012. Many of these

were initially planned for delivery in 2011 but were delayed for various reasons, including the

cancellation of contracts with general contractors and a shortage of funds. However, what is more

noteworthy is the marginal progress made with the flagship EUR2.2bn (US$2.8bn) Transylvania




Motorway Project – ‘the new route between the Black Sea and Western Europe’. Our outlook for this

large new infrastructure scheme is cautious, primarily due to Romania’s economic outlook for 2012.

Other strategies are also being pursued in Transylvania, including the reconstruction of the Târgu Mureş-

Sovata railway line, which would provide a major boost to tourism in the region.

In a potential boost to tourism, the ANT and the National Geographic Society have agreed on a three-year

programme to promote Romanian tourism, including drawing up an e-map of Romania with all its tourist

attractions, a national ‘geo-tourism’ strategy (tourism that sustains or enhances the geographical character

of the place being visited – its environment, culture, aesthetics, heritage and the wellbeing of its residents)

and a travel guide, published in 2007. The agreement is part of a development programme, worth

US$2mn, financed by the US Agency for International Development (USAID). Besides a programme

aimed at the development of agricultural companies and an eco-tourism strategy, USAID is also financing

a project for the development of Romania’s tourism designed for small and medium-sized enterprises. In

particular, the ANT-USAID project will work to invest in rural tourism to promote sustainable

development by putting tourism revenue back into local communities and respecting local ecological

balances.




Risk/Reward Ratings

Table: Central And Eastern Europe Tourism Risk/Reward Ratings

Rewards Risks

TourismMarket

CountryStructure Limits

MarketRisk

CountryRisk Risks

TourismRRR Rank

Estonia 57 53 56.5 65 80 73.6 62 1=

Lithuania 61 58 60.0 60 75 68.1 62 1=

Hungary 47 75 57.9 60 80 70.9 62 1=

Turkey 68 43 58.4 56 57 56.4 58 4

Greece 63 54 59.7 50 53 51.3 57 5

Latvia 52 43 52.2 59 72 66.2 56 6

Croatia 49 57 52.2 64 62 62.9 55 7=

Czech Republic 33 69 47.6 71 73 72.0 55 7=

Bulgaria 36 55 44.1 62 54 63.1 50 8

Russia 32 54 40.7 65 65 65.0 48 9

Poland 18 67 38.0 50 69 60.6 45 10

Romania 22 54 34.7 63 69 66.4 44 11=

Ukraine 28 63 42.1 53 46 49.5 44 11=

Scores out of 100, with 100 the best. Source: BMI

BMI’s Security Ratings

BMI’s Security Ratings service, which integrates closely with our Country Risk service, offer a

comprehensive comparative analysis of security risk across three key areas – interstate conflict, terrorism

and physical safety for expatriate workers – across major states in each region. Furthermore, the ratingsare combined to form a composite security rating to provide an overall guide to long-term trends and

risks. Finally, we integrate our short-term political and economic ratings with the terrorism rating, to

indicate a state’s vulnerability to a sustained terrorist campaign or major terrorist attack. In all instances,

the rated period is two years, with each country assigned a score out of 100, with a low score indicating a

high level of risk. This section will provide you initially with our regional ratings table, before evaluating

regional and then country-specific risks that have affected our rating.




Table: Europe Security Risk Ratings

Interstate Terror ism Criminal

Compositedomestic

security risk

rating Rank

Compositesecurity risk

rating Rank

Slovenia 97 99 92 96 1 96 1

Poland 98 93 78 86 2= 90 2

Czech Rep. 97 93 78 86 2= 89 3=

Germany 100 82 84 83 6= 89 3=

Slovakia 97 92 77 84 5 89 3=

UK 95 75 95 85 4 88 6

France 96 77 89 83 6= 87 7

Hungary 93 89 71 80 9 84 8=

Romania 95 94 63 78 10 84 8=

Italy 98 78 71 75 11= 82 10=

Spain 97 63 85 74 13 82 10=

Croatia 94 92 58 75 11= 81 12

Bulgaria 97 89 49 69 14= 78 13=

Belarus 71 96 69 82 8 78 13=

Kazakhstan 88 79 58 69 14= 75 15

Turkmenistan 82 79 53 66 17= 71 16

Greece 73 71 65 68 16 70 17

Turkey 76 60 65 63 19 67 18

Russia 80 64 39 52 23 61 19=

Ukraine 51 90 42 66 17= 61 19=

Uzbekistan 74 57 52 55 22 61 19=

Kyrgyzstan 73 60 41 50 24 58 22

Bosnia-Herzegovina 49 67 51 59 21 56 23

Serbia 47 67 52 60 20 55 24

Tajikistan 69 49 35 42 25 51 25

Scores out of 100, with 100 the best; The ‘Composite security risk rating’ is the principal rating. It comprises ‘Interstate’ – the risk ofbecoming a primary party to an interstate conflict that threatens significant damage to homeland; ‘Terrorism’ – the risk of terroristgroups (domestic or international) being able to launch a major attack/sustained campaign; and ‘Criminal’ – the risk of (politicallymotivated) violence against expatriate workers. Each of the three risks is given equal weighting. The ‘Composite domestic securityrisk rating’ comprises ‘Terrorism’ and ‘Criminal’, each of which is given equal weighting. Each rating (State, Terrorism, Criminal) isassessed subjectively by our analysts within a clearly defined methodology, incorporating a minimum of six conceptually distinctelements. Source: BMI




Table: Europe State Terror ism Vulnerabilit y To Terror ism Index

State Terrorism

Short-term

political

Short-term

economic Composite Regional rank

Czech Rep. 93 81 60 82 1

Poland 93 75 63 81 2

Slovenia 99 60 62 80 3=

Germany 82 85 70 80 3=

Slovakia 92 60 73 79 5

Romania 94 57 57 76 6

Croatia 92 65 53 75 7=

Bulgaria 89 70 53 75 7=France 77 81 65 75 7=

UK 75 81 66 74 10=

Belarus 96 47 57 74 10=

Italy 78 73 63 73 12=

Hungary 89 60 53 73 12=

Ukraine 90 67 43 72 14

Russia 64 74 77 70 15

Spain 63 69 54 62 16

Turkey 60 65 52 59 17=

Serbia 67 59 43 59 17=

Kazakhstan 79 71 72 58 19

Turkmenistan 79 81 61 55 20

Bosnia-Herzegovina 67 29 53 54 21

Greece 71 32 22 49 22

Uzbekistan 57 70 63 44 23

Kyrgyzstan 60 38 33 38 24

Tajikistan 49 56 46 36 25

Scores out of 100, with 100 the best; The ‘State vulnerability to terrorism index (SVT)’ is the principal rating. Itcomprises the ‘Terrorism’ and BMI’s country risk ‘Short-term political’ and ‘Short-term economic’ ratings, which aregiven equal weighting. The SVT quantifies the exposure of a state to a successful major terrorist attack/campaign,evaluating first how likely one is (Terrorism) before considering the vulnerability of the political and economicenvironment to a sudden shock. As such, it incorporates subjective analysis of 15 conceptually separate analyticalelements, as well as 13 separate objective data points. Source: BMI




Europe Security Overview

Strategic Outlook For The 2010s

Although Europe is one of the most stable regions in the world, it will still face challenges to its security

over the coming decade. These include the unity of the EU, relations with Russia and Turkey, the

reconstruction of post-Qadhafi Libya, Islamist terrorism, the possibility of renewed instability in the

Balkans, and organised crime. Nonetheless, European states are well-equipped militarily, economically

and in terms of expertise to deal with most of these challenges.

Europe In A Global Context

The EU collectively represents the biggest economy in the world, with a GDP of US$17.5trn, and has a

population of 502mn. Moreover, the expansion of the EU still has further to run over the coming decade.

Europe is also the most integrated region in the world, thanks to the existence of the EU, the eurozone and

NATO and a highly developed transport network. Overall, despite weaknesses in individual countries’

economies, few would question Europe’s relevance in the world.

Europe also has a high concentration of militarily powerful countries, with the UK, France and Russia all

permanent members of the UN Security Council. They are also fully-fledged nuclear powers. Germany

too, despite its absence from the Security Council and its non-nuclear status, is a major military power.

Although these countries’ armies are by no means the largest in the world, they are among the best trainedand best equipped, and they have formidable military-industrial complexes, which produce substantial

arms for international export.

Owing to its geographical position, Europe is largely free from the threat of external (outside Europe)

military attack. The main political and security threats stem from within the EU and within individual

member states, and from transcontinental threats, such as Islamist terrorism and organised crime.

Europe’s Key Security Issues Over The Coming Decade

The Future Of The Eurozone And EU

Following the Greek sovereign debt crisis in early 2010, and its spread across southern Europe in 2011-

2012, the survival of the eurozone and even the EU itself has been called into question. Although such

speculation was once confined to fringe media, it is now being taken seriously as a risk by investors.

Although a break-up of the eurozone/EU is very much a wildcard scenario, it would jeopardise European

security by undermining intergovernmental cooperation on a host of issues ranging from economic

management to border security and migration. The absence of a core institutional component of European

integration could also undermine trust between European countries and encourage more unilateralist and

assertive behaviour, which could destabilise the balance of power within Europe.




EU Expansion

Assuming the EU survives in its present form, the key strategic question is how far it should expand,

especially with regard to whether Turkey ought to join (see below). Croatia is expected to join in 2013,

but other aspiring members, such as Bosnia, Serbia, Montenegro, Macedonia and Albania, have no clear

timetable, which suggests they are unlikely to join before 2020. Overall, EU policymakers appear divided

over the expansion issue. Those who favour a looser union favour expansion, whereas those who favour

deeper integration feel that enlargement is reaching its limits.

In terms of security, NATO expansion has generally outpaced EU expansion, with NATO having taken in

Croatia and Albania in 2009, and the alliance will probably invite other South East European states to join

before this decade is over. The expansion of NATO should reassure non-EU countries that they will not

be left behind politically. The prospect of EU/NATO membership serves as a policy anchor for Europe’s

peripheral states.

NATO Expansion And Relations With The US

We expect NATO to remain the cornerstone of European security over the coming decade. Several

Western European states have previously spoken of the need to make Europe more militarily self-reliant,

but high fiscal deficits will prevent this. In addition, NATO’s Eastern European members are extremely

keen to ensure that the US remains committed to the continent.

Overall, while we expect the US to retain a substantial military presence in Europe (it has 55,000 troops

in Germany and more than 9,000 each in Italy and the UK), Washington is likely to focus more of its

attention on Asia, particularly China and its environs, namely the South China Sea and North Korea, as

well as the Indian Ocean basin over the coming decade.

Following the accession of Croatia and Albania in 2009, NATO has 28 members, including the US and

Canada. The alliance is likely to eventually absorb the remaining former Yugoslav states, but we have

major doubts about whether it will grant Ukraine and Georgia membership. Ukraine seems to have drifted

back into Russia’s orbit in recent years, and in any case public support for NATO membership is low.

NATO’s willingness to admit Georgia was dealt a severe blow by the Russian invasion in August 2008,

which resulted in the secession of Georgia’s breakaway territories of Abkhazia and South Ossetia and

their formal recognition by Moscow. The Kremlin has since strengthened its military capabilities in the

two regions, meaning that it could apply even greater pressure against Tbilisi in a future crisis. Given that

no major European state or the US is willing to risk a total break in relations with Russia over Georgia,

the latter’s chances of joining NATO are low.

A bigger question concerning NATO is whether it is still flexible enough in a post-Cold War

environment. NATO’s first full-scale war against a sovereign state, the Federal Republic of Yugoslavia,




in 1999 revealed a substantial gap between the military capabilities of Western Europe and the US. The

US supplied the bulk of the aircraft used to bomb Yugoslavia and flew the vast majority of sorties. NATO

was marginalised during the invasions of Afghanistan (2001) and Iraq (2003), as Washington chose to

create ‘coalitions of the willing’, but the alliance has since played a key role in Afghanistan, although the

US still supplies two-thirds of the 113,000 foreign troops there (as of September 2012).

Meanwhile, NATO experienced major difficulties in its air campaign in Libya, prompting the then-US

defence secretary, Bob Gates, to warn in June 2011 that the alliance risks ‘irrelevance’, because of

European reluctance to spend more on their armed forces. The subsequent political, economic and

military exhaustion of NATO states is a major reason why the West has not intervened in Syria in support

of the rebels fighting the regime of Bashar al-Assad. In addition, Syria is much more heavily armed than

Libya was in 2011, suggesting that NATO would have to commit greater resources to overthrow Assad.

The problem facing NATO in the future is that the bigger it becomes, the greater its security

commitments, the less the sense of common threats and the more complicated its decision-making

processes. Thus, NATO could increasingly come to resemble a political organisation rather than a

military alliance over the next decade.

Post-Qadhafi Libya

The uncertain security situation in Libya following the collapse of the Qadhafi regime in August 2011

poses a major security challenge for Europe. The West intervened militarily on behalf of the rebels

fighting the regime of Muammar Qadhafi, but the former rebels are fragmented politically, geographically

and ideologically, and could require many months to restore a sense of normality to Libya, and years to

build a democracy.

Overall, the collapse of Qadhafi’s regime does not necessarily entail peace in Libya. The country’s

regional and tribal divisions suggest that instability could prevail for some time. Finally, there is a real

risk that Islamist militants, namely al-Qaeda in the Islamic Maghreb, could take advantage of the security

vacuum to establish deeper roots in Libya, thereby posing a threat to European countries.

Relations With Russia

Russia presents challenges and opportunities for Europe. Gone are the days when the powerful Soviet

army threatened to overrun Western Europe. The Russian military struggled for more than a decade to

bring the tiny breakaway republic of Chechnya to heel. In addition, even though Russia defeated Georgia

decisively in the August 2008 war, that conflict revealed many shortcomings within the Russian armed

forces.

Russia’s strategy has always been to drive a wedge between Europe and the US, for fear that the

combined economic and military resources of the two giants could be marshalled against Moscow’s




interests. Now that the EU includes many former Communist states, there are divisions within Europe

between countries that view Russia with suspicion (eg: Poland and the Baltic states), and those that seek

major business opportunities there (eg: Germany, France and perhaps the UK).

We expect these divisions to prevail for the foreseeable future. Russia will continue to oppose moves by

Eastern European states to host military installations used for the US’ planned ballistic missile defence

system. (Romania in May 2011 agreed to host a US missile base in the south of the country, which would

become operational in 2015.) Washington’s stated reason for building missile defences is to protect

Europe and itself from missiles launched from Iran, but Russia sees this as a means eventually to

counteract its own nuclear arsenal. Therefore, we expect continued tensions between Russia and the US in

Europe, despite talk of a ‘reset’ in bilateral relations.

Russia’s public behaviour towards Europe, and vice versa, could become cooler following the return of

Vladimir Putin as president in May 2012. While he and former president Dmitry Medvedev, now prime

minister, favour a strong Russia on the global stage, Medvedev previously adopted a more conciliatory

stance towards the West, mainly for the purpose of attracting European investment and technology to

modernise Russia’s economy.

Relations With Turkey

One of the biggest questions for Europe is whether Turkey will join the EU. Turkey is a major emerging

economy and has the second-largest military in NATO after the US. It also borders key Middle Eastern

states such as Syria, Iraq and Iran. For many years, Turkey has been enacting economic, political and

social reforms designed to bring its governance standards into line with EU norms, but there are many in

the Turkish establishment who feel that Brussels will keep setting the bar higher to delay Turkey’s

accession.

Many European leaders publicly question Turkey’s legitimacy as a potential EU member. The ‘Turkey

question’ has been complicated by substantial changes within the Turkish polity under Prime Minister

Recep Tayyip Erdogan and his moderate Islamist AKP party. Erdogan appears to be steering Turkey

away from the West in favour of closer ties with Russia and the Middle East. We therefore see a

possibility that Turkey will remain outside the EU indefinitely.

This need not be a security problem for Europe, so long as Turkey remains friendly with the EU and a

member of NATO. However, should Turkey embark on a more anti-Western course, this could lead to

renewed tensions with Greece over the future of Cyprus and the Eastern Mediterranean, and by extension,

disputes with the EU. Furthermore, increasing tensions with Israel since autumn 2011 have raised the

spectre of a clash between the two states. The vast natural gas reserves in the Eastern Mediterranean are

emerging as a geopolitical flashpoint.




The Balkans

The Balkans have seen a decade of peace following the wars in the 1990s and the near-collapse of

Macedonia in 2001, but tensions persist. Serbia resents the formal secession of Kosovo in 2008 and the

Serbs who still live in the north of the new country continue to seek autonomy from the Albanian

majority. Bosnia-Herzegovina has experienced a deterioration in relations between its Croatian, Bosniak

(Muslim) and Serbian communities.

Republika Srpska President Milorad Dodik said in mid-2011 that Bosnia can only survive if the Serbian

entity had de facto independence within a confederation model. While we do not expect an outright return

to war, we do not rule out the possibility of inter-ethnic violence, which would threaten the already weak

fabric of the Balkan states. In the event of renewed hostilities, the EU has very limited means with which

to intervene militarily, and the US could not necessarily be relied on, especially if it is still committed to

Afghanistan or a future conflict elsewhere.

Organised Crime

Organised crime will remain a security concern. The flourishing of mafia groups is a legacy of the

collapse of communism in Eastern Europe and the wars in the former Yugoslavia, which led to an

explosion of black market activities. The Balkans will remain a key centre of organised crime, mainly

because it is the principal transport corridor for the trafficking of drugs, weapons and people to Europe

from the Middle East and Asia.

Although most Eastern European states have made substantial economic progress towards converging

with Western European norms, several countries remain beset by institutional weaknesses and corruption.

Overall, Europe’s affluence means that it will remain a key market for drugs and prostitution, demands

that will be provided for by organised criminal groups. In addition, Europe’s attractiveness as a labour

market to people in places as far afield as Africa and China means there is considerable people trafficking

to the EU.

According to a UN Globalization of Crime report, published in June 2010, sex trafficking in Europe

generates US$3.0bn a year, and the trafficking of migrant workers into the US and Europe US$7.0bn

annually. In addition, Europe’s heroin market is worth US$20bn annually and the counterfeit goods

market more than US$10bn.

Islamist Terrorism

Over the past 10 years, two European capitals, Madrid and London, have been attacked by Islamist

terrorists, with many casualties. In addition, there have been several foiled international terror plots, such

as the 2006 plot to bomb several transatlantic flights departing from Europe and an apparent plan to carry

out attacks in Britain, France and Germany in autumn 2010. In December 2010, a suicide bomber killed

himself in Stockholm in what was Sweden’s first such attack.




Europe’s proximity to the Middle East and North Africa and its substantial immigrant Muslim population

have fuelled fears that the continent is especially vulnerable to terrorist attacks, particularly by Islamists

seeking to drive a wedge between Europe and the US by punishing the former for the latter’s foreign

policy. Aside from the possibility that terrorists could slip into Europe to carry out attacks, there are

concerns that Europe’s home-grown (second- or third-generation) Muslim populations could become

radicalised.

Europe (excluding Turkey, but including Russia) has 44mn Muslims, according to a 2011 report by the

Pew Research Centre. While the overwhelming majority are law abiding, there are a handful of Islamist

organisations whose public profiles are far in excess of the support that they command. Consequently,

far-right anti-immigration parties in Western Europe have seized on comments by Islamist extremist

groups to promote a rabidly anti-Islam stance, heightening fears of political violence. These concerns

were reinforced in July 2011, when far-right, anti-Islam extremist Anders Breivik detonated a car bomb

outside government buildings in Oslo and killed dozens of teenagers on Utoeya island in Norway.

The scope for cultural incidents, such as the printing of cartoons of Muhammad by a Danish newspaper in

late 2005 and France’s decision in July 2010 to ban the wearing of the full burqa in public, to inflame

anger within Muslim communities will remain salient for the foreseeable future.

Greater Black Sea Region

We expect the Greater Black Sea region to rise in prominence over the coming decade. The Black Sea’s

significance stems from its location between the Eastern Balkans, Turkey and the Caucasus. It is the

region where the interests of NATO and Russia most visibly overlap and is a key energy corridor for

Europe. In this regard, Russia and several European states have been backing rival gas pipelines schemes

in the region. Moscow is promoting the construction of the South Stream pipeline, which will run from

Russia under the Black Sea to Bulgaria, with a northern branch running via Serbia and Hungary to

Austria and a southern branch passing through Greece to Italy.

The EU is promoting the Nabucco West pipeline project, which in combination with the proposed Trans-

Anatolian Gas Pipeline (TANAP), would connect Azerbaijan and Georgia via Turkey, Bulgaria,

Romania, and Hungary to Austria. Nabucco West and its main rival in the race to pipe gas from the

Caspian Sea’s Shah Deniz II field, the Trans-Adriatic Pipeline (TAP), aim to bypass Russian

infrastructure and political control. Ultimately, both South Stream and the combination of either Nabucco

West or TAP with TANAP could go forward, given that Russia and Europe have the incentives to build

them. However, this raises the risk of overcapacity at some stage over the coming years.

Russia has strengthened its military position in the Black Sea by renewing the lease on its naval base in

Sevastopol, Ukraine, until 2042 in an agreement signed in April 2010. It also deployed advanced S-300

air defence missiles in the Georgian breakaway state of Abkhazia in August 2010 and extended its




military presence in Armenia until 2044. Turkey’s increasingly close ties with Russia should benefit both

countries’ security.

Nonetheless, Russia’s position in the Greater Black Sea region could be weakened if the Islamist

insurgencies in the North Caucasus surge dramatically. For its part, the US has signed agreements with

Bulgaria and Romania to use several of their military bases, which would allow up to 2,500 and 1,600

American troops to be stationed in the respective countries. However, critics fear these bases could be

used for logistical purposes in a putative US attack on Iran, potentially leading to reprisals.

Overall, we do not believe any of the major powers are in a position single-handedly to dominate the

Greater Black Sea region. This means it will remain contested space for the foreseeable future.

Armenia-Azerbaijan Dispute

In 2011 there was a rise tensions between Armenia and Azerbaijan over the disputed territory of

Nagorno-Karabakh, which is within Azerbaijan but has been controlled by Armenia since a ceasefire was

reached in 1994 after a three-year war. Azerbaijan has repeatedly threatened to use force to reclaim the

region, potentially becoming emboldened by its oil wealth and close ties with the West. However,

Armenia hosts Russian military forces, meaning that Moscow would probably intervene to prevent any

new offensive. The regional power dynamics are further complicated by Azerbaijan’s close relations with

Turkey and the US.

Iran also has strong interests in the South Caucasus. Thus, any new Armenia-Azerbaijan conflict, which

could start by miscalculation, could drag in regional powers, leading to a global crisis. Given that

Azerbaijan is a major oil producer and the fact that the Baku-Tbilisi-Ceyhan pipeline passes relatively

close to the frozen conflict zone, events there have significant implications for world oil prices and

European security.




Global Assumptions

Our global aggregate real GDP growth forecast for 2012 remains 2.6%, though it has dipped slightly for

2013 to 3.0% from 3.1% previously. Our overall outlook on the global economy remains unchanged.

Most of our high-frequency global indicators suggest that output growth is slowing and global trade is

stagnant at best, while demand and confidence are at cyclically low levels. Inflation continues to trend

down as well. Since mid-2010, we have argued that the global economy is on the cusp of recession but

that it would probably take a major policy error to tip it over the edge. The potential for recession still

looms large, with China facing a hard landing amid a major economic transition, the eurozone contracting

and the US facing a fiscal emergency in the new year.

Table: Global Assumptions, 2011-2017

2011 2012f 2013f 2014f 2015f 2016f 2017f

Real GDP Grow th (%)

US 1.7 2 2.1 2.5 2.5 2.3 2.4

Eurozone 1.6 -0.6 0.6 1.4 1.7 1.9 1.9

Japan -0.7 1.5 1.2 1.2 1.2 1.2 1.3

China 9.1 7.5 7.1 6 6 6.1 6

World 3.1 2.6 3 3.3 3.5 3.5 3.5

Consumer Inflation (ave)

US 3 2.1 2 2 2.2 2.2 2.3

Eurozone 2.6 2 1.7 1.8 1.9 2.1 2.2

Japan -0.2 0.1 0.4 0.8 1.3 1.8 2.3

China 5.6 3 3 2.9 2.8 2.7 2.7

World 4.1 3.4 3.3 3.2 3.2 3.2 3.3

Interest Rates (eop)

Fed Funds Rate 0 0 0 0 0 1 2.25

ECB Refinancing Rate 1 0.5 0.5 0.5 0.5 1 1.5

Japan Overnight Call Rate 0.1 0.1 0.1 0.1 0.1 0.25 0.5

Exchange Rates (ave)

US$/EUR 1.39 1.27 1.22 1.2 1.2 1.2 1.2

JPY/US$ 79.74 78 75 78 82.25 84.75 85.25

CNY/US$ 6.46 6.35 6.45 6.55 6.6 6.6 6.6

Oil Prices (ave)

OPEC Basket (US$/bbl) 107.52 107.05 99.1 96.15 95.2 93.25 93.3

Brent Crude (US$/bbl) 111.05 110 102 99 98 96 96

Source: BMI




Stimulatory policy looks to be confined to the monetary rather than fiscal side for the foreseeable

future. In line with our long-standing view, the latter part of 2012 has seen an impressive degree of

monetary stimulus, with the European Central Bank (ECB), the US Federal Reserve (Fed) and the Bank

of Japan (BoJ) all announcing newly accommodative policies in September. The Fed took the biggest step

with ‘QE3’: it will commence open-ended purchases of mortgage-backed securities of US$40bn a month

until ‘after’ the economy improves, and indicated that the Fed funds rate would be anchored at 0-0.25%

until at least mid-2015. The BoJ also decided to expand its government bond buying programme. The

ECB, meanwhile, has revealed a framework allowing unlimited sterilised government bond purchases

focused at the short end of the yield curve, dependent on a sovereign issuer committing to a formal

macroeconomic adjustment programme. In addition, there will be no explicit cap on bond yields, the

central bank will surrender its preferred creditor status and the Securities Market Program will expire. We

have pushed back our expectations for central bank tightening accordingly, with the first Fed funds and

ECB refinancing rate hikes only in 2016, as opposed to 2014 in our previous set of forecasts. While these

measures will not solve the many problems plaguing the global economy – and in fact may cause a few of

their own – they are a step in the right direction given the inaction on the fiscal front.

Most major emerging market central banks have also joined the monetary easing. However, they will be

more concerned about inflation, particularly as their populaces would be harder hit by higher food and

energy commodity prices in the wake of monetary stimulus in the developed world. Emerging market

central bankers face a tough set of choices, as they may have to decide whether to prioritise currency

competitiveness or domestic price stability.

Table: Global & Regional Real GDP Growth, % chg y-o-y

2011 2012f 2013f 2014f

World 3.1 2.6 3 3.3

Developed States 1.4 1 1.5 2

Emerging Markets 5.6 4.9 5 5

Asia (excl. Japan) 7.2 6 6.2 5.8

Latin America 4.1 3.1 3.5 3.5

Emerging Europe 4.8 2.8 3.5 4.1

Sub-Saharan Africa 3.9 5.1 5.7 6

Middle East and North Africa 3.2 5.6 4 4.3

f = BMI forecast. Source: BMI




Table: Developed Market Exchange Rates, 2011-2014

2011 2012f 2013f 2014f

Eurozone US$/EUR, ave 1.39 1.27 1.22 1.20

Japan JPY/US$, ave 79.74 78.00 75.00 78.00

Switzerland CHF/US$, ave 0.89 0.94 1.03 1.07

UK US$/GBP, ave 1.61 1.57 1.58 1.60


Table: Emerging Market Exchange Rates, 2011-2014

2011 2012f 2013f 2014f

China CNY/US$, ave 6.46 6.35 6.45 6.55

South Korea KRW/US$, ave 1,107.84 1,175.00 1,150.00 1,100.00

India INR/US$, ave 46.67 53.5 50.00 47.50

Brazil BRL/US$, ave 1.68 2.00 2.15 2.28

Mexico MXN/US$, ave 12.44 13.05 12.80 12.60

Russia RUB/US$, ave 29.41 31.72 33.00 32.75

Turkey TRY/US$, ave 1.68 1.81 1.77 1.72

South Africa ZAR/US$, ave 7.26 8.20 8.00 8.00


Developed States

Our developed state aggregate growth estimate for 2012 has ticked down to 1.0% from 1.1%, while

remaining steady at 1.5% for 2013. Our eurozone projection for 2013 is down to 0.6% (compared with

0.7% previously). Notably, we have revised our real GDP growth forecasts for France and Italy down for

2013, and now see no Italian growth in 2013. The announcement of a framework for the ECB to purchase

government bonds, a constructive ruling from Germany’s constitutional court and a victory for pro-euro

centrist parties in the Netherlands have been broadly supportive of efforts by policymakers to contain the

eurozone crisis. However, with the exception perhaps of the Dutch election, these policy events have met

- rather than exceeded - expectations, and the crisis is still far from over. Meanwhile, we have bumped up

our Swedish growth expectation to 1.1% for 2012 from 0.5% owing to stronger-than-expected first-half

growth figures, though we have lowered our 2013 forecast to 2.0% from 2.3%.




Table: Developed States Real GDP Growth Forecasts, 2011-2014 (%)

2011 2012f 2013f 2014f

Developed States Aggregate Growth 1.4 1 1.5 2

G7 1.4 1.3 1.6 2.1

Eurozone 1.6 -0.6 0.6 1.4

EU-27 1.7 -0.3 0.9 1.7

Selected Developed States

Australia 2.1 2.1 0.9 2.3

Austria 2.7 0.6 1.2 1.5

Belgium 1.8 0.5 1.1 1.6

Canada 2.5 2 2.1 2.7

Denmark 1 0.5 1.2 1.7

Finland 2.8 0.1 1.6 1.9

France 1.8 -0.2 0.6 1.4

Germany 3 0.7 1.5 1.9

Ireland 1.4 -0.5 0.3 1.4

Italy 0.5 -2.3 0 1.1

Japan -0.7 1.5 1.2 1.2

Netherlands 1.2 -0.6 0.6 0.9

Norway 1.6 1.4 0.8 0.6

Portugal -1.6 -3.4 -1.7 0.1

Spain 0.8 -2.1 -0.5 0.5

Sweden 3.9 1.1 2 3.8

Switzerland 2.1 0.7 1.5 1.8

UK 1 0.2 1.7 2.3

US 1.7 2 2.1 2.5

Source: BMI

Emerging Markets

Emerging markets are set to grow by 4.9% in real terms in 2012, remaining relatively steady in 2013 at

5.0%. The latter represents a decline from our previous forecast of 5.2%, however, as our aggregate

forecasts have fallen for each region in 2013. The biggest downward revision among individual countriessince our last monthly update is Argentina, which we see experiencing major economic difficulty and a




significant currency devaluation in 2013. Its growth forecast for that year has been reduced accordingly,

to 0.9% from 3.7%. Other major downward revisions are in Indonesia, South Korea and Hungary, all of

which will face both domestic and external headwinds to growth in 2013.

Table: Emerging Markets Real GDP Growth Forecasts, 2011-2014 (%)

2011 2012f 2013f 2014f

Emerging Markets Aggregate Growth 5.6 4.9 5.0 5.0

Latin America 4.1 3.1 3.5 3.5

Argentina 8.9 3.0 0.9 2.6

Brazil 2.7 1.8 3.7 3.7

Mexico 3.9 3.8 3.4 3.0

Middle East 3.2 5.6 4.0 4.3

Sub-Saharan Africa 3.9 5.1 5.7 6.0

South Africa 3.1 2.5 3.3 3.9

Nigeria 7.4 7.1 7.3 7.2

Saudi Arabia 7.1 5.2 4.5 3.5

UAE 4.2 2.9 3.5 4.5

Egypt 1.8 2.3 3.1 5.3

Emerging Asia 7.2 6.0 6.2 5.8

China 9.1 7.5 7.1 6.0

Hong Kong 5.0 1.8 3.5 3.6

India 6.5 5.9 7.2 6.6

Indonesia 6.5 6.0 5.6 6.5

Malaysia 5.1 3.8 4.6 4.3

Singapore 4.9 2.6 3.6 3.4

South Korea 3.7 1.9 3.0 4.6

Taiwan 4.0 1.6 4.2 5.0

Thailand 0.1 4.0 4.4 4.4

Emerging Europe 4.8 2.8 3.5 4.1

Russia 4.3 3.4 3.6 3.7

Turkey 8.5 3.0 4.7 5.2

Czech Republic 1.7 -0.7 0.8 1.9

Hungary 1.7 -1.2 1.2 2.3

Poland 4.3 2.5 2.7 3.6





We are below-consensus on growth in 2012 for the US, the eurozone, China, Japan, Russia and Brazil,

according to the Bloomberg survey of analysts. For 2013, we are significantly below consensus on China

and Brazil.

Table: BMI v Bloomberg Consensus Real GDP Growth Forecast, 2012-2013 (%)

US Eurozone Japan Brazil China Russia India

Bloomberg Consensus,2012 2.2 -0.5 2.3 1.9 7.7 3.9 na

BMI 2 -0.6 1.5 1.8 7.5 3.4 5.9

Bloomberg Consensus,2013 2.1 0.4 1.2 4.1 8 3.7 6

BMI 2.1 0.6 1.2 3.7 7.1 3.6 7.2

na = not available. Source: BMI, Bloomberg




Company Profi les

SIF Transilvania

Overview SIF Transilvania, successor of the Private Ownership Fund III Transilvania, was established in

November 1996 and is the dominant domestic player in the Romanian hospitality sector with a

portfolio of about 50 hotels. SIF Transilvania is an entirely private and self-managed closed-end

fund, which managed a portfolio of 241 companies at the end of 2011 (down from 254 a year

earlier) across various industries in Romania, including machine building, chemical industry, food

and beverages, finance and banking, shipping and tourism.

In order to promote the group’s hotel portfolio on the domestic and international tourist markets,

the fund established Transilvania Travel in 2003. The accommodation facilities – with a total of

over 9,700 rooms (as of 2007) – are concentrated on the Black Sea coast, in the resorts of EforieNord, Eforie Sud, Neptun, Venus and Saturn, and the health resorts (spas) of Felix, Tusnad,

Covasna and Buzias, famous for their thermal and mineral waters. Many of the hotels have been

renovated to meet high international standards.

In its prelinminary financial results for 2011, SIF Transilvania posted total income of RON325.9mn

(US$106.8mn), a substantial increase compared with RON121.5mn in 2010. Total expenses

came in at RON77.6mn, up 66% y-o-y. After a sizeable annual fall in net profit in 2010, profit

trebled in 2011, to RON207.7m (US$68.1mn).

By the end of 2011, some 38.7% of SIF Transilvania’s portfolio was in the tourism sector, a

marked increase on 31.5% at the end of the previous year.

Key Statistics Total income: US$106.8mn (2011)

Net profit: US$68.1mn (2011)

Number of hotels/companies: 47 (June 2009)

Number of rooms: 9,700 (2007)

Key Personnel President: Mihai Fercala

Company Details Address: 2, Nicolae Iorga Street, 2200 Brasov, Romania

Tel: +40 268 413 752/401 142

Website: www.transif.ro




Demographic Outlook

Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only

is the total population of a country a key variable in consumer demand, but an understanding of thedemographic profile is key to understanding issues ranging from future population trends to productivity

growth and government spending requirements.

The accompanying charts detail Romania's population pyramid for 2011, the change in the structure of

the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life

expectancy. The tables show key datapoints from all of these charts, in addition to important metrics

including the dependency ratio and the urban/rural split.

Source: World Bank, UN, BMI




Table: Romania's Population By Age Group, 1990-2020 ('000)

1990 1995 2000 2005 2010 2012f 2015f 2020f

Total 23,207 22,681 22,192 21,772 21,486 21,388 21,240 20,970

0-4 years 1,805 1,230 1,141 1,068 1,079 1,101 1,088 1,046

5-9 years 1,698 1,746 1,211 1,129 1,061 1,059 1,079 1,085

10-14 years 1,966 1,669 1,733 1,204 1,124 1,102 1,062 1,077

15-19 years 1,879 1,964 1,643 1,715 1,194 1,121 1,123 1,059

20-24 years 1,974 1,822 1,908 1,606 1,695 1,526 1,188 1,117

25-29 years 1,394 1,861 1,756 1,863 1,582 1,627 1,686 1,180

30-34 years 1,708 1,305 1,802 1,716 1,839 1,746 1,573 1,677 35-39 years 1,720 1,629 1,257 1,764 1,693 1,749 1,828 1,562

40-44 years 1,437 1,641 1,577 1,223 1,735 1,756 1,675 1,809

45-49 years 1,197 1,380 1,579 1,529 1,194 1,360 1,705 1,647

50-54 years 1,441 1,128 1,313 1,517 1,480 1,316 1,161 1,662

55-59 years 1,354 1,347 1,055 1,241 1,447 1,473 1,417 1,116

60-64 years 1,219 1,240 1,232 975 1,158 1,246 1,355 1,335

65-69 years 981 1,077 1,094 1,101 882 909 1,050 1,240

70-74 years

488

807

892

921

942

848

756

913

75+ years 944 837 997 1,200 1,381 1,448 1,495 1,444

f = BMI forecast. Source: World Bank, UN, BMI




Table: Romania's Popu lation By Age Group, 1990-2020 (% of total)

1990 1995 2000 2005 2010 2012f 2015f 2020f

0-4 years 7.78 5.42 5.14 4.91 5.02 5.15 5.12 4.99

5-9 years 7.32 7.70 5.46 5.18 4.94 4.95 5.08 5.17

10-14 years 8.47 7.36 7.81 5.53 5.23 5.15 5.00 5.14

15-19 years 8.10 8.66 7.41 7.88 5.56 5.24 5.29 5.05

20-24 years 8.51 8.03 8.60 7.38 7.89 7.13 5.59 5.33

25-29 years 6.01 8.20 7.91 8.56 7.36 7.61 7.94 5.63

30-34 years 7.36 5.75 8.12 7.88 8.56 8.16 7.41 8.00

35-39 years 7.41 7.18 5.67 8.10 7.88 8.18 8.61 7.45 40-44 years 6.19 7.24 7.10 5.62 8.07 8.21 7.89 8.63

45-49 years 5.16 6.08 7.12 7.02 5.56 6.36 8.03 7.86

50-54 years 6.21 4.97 5.91 6.97 6.89 6.16 5.47 7.93

55-59 years 5.83 5.94 4.76 5.70 6.73 6.88 6.67 5.32

60-64 years 5.25 5.47 5.55 4.48 5.39 5.83 6.38 6.37

65-69 years 4.23 4.75 4.93 5.06 4.10 4.25 4.94 5.91

70-74 years 2.10 3.56 4.02 4.23 4.39 3.97 3.56 4.36

75+ years

4.07

3.69

4.49

5.51

6.43

6.77

7.04

6.89

f = BMI forecast. Source: World Bank, UN, BMI




Table: Romania's Key Population Ratios, 1990-2020

1990 1995 2000 2005 2010 2012f 2015f 2020f

Dependent ratio, % oftotal working age

1 51.4 48.1 46.7 43.7 43.1 43.3 44.4 48.0

Dependent population,total, '000

2 7,882 7,365 7,069 6,622 6,469 6,468 6,530 6,805

Active population, % oftotal 3 66.0 67.5 68.1 69.6 69.9 69.8 69.3 67.5

Active population, total,'000

4 15,324 15,316 15,123 15,150 15,017 14,920 14,710 14,165

Youth population, % oftotal working age

5 35.7 30.3 27.0 22.4 21.7 21.9 21.9 22.6

Youth population, total,'000 6 5,469 4,644 4,086 3,400 3,264 3,262 3,228 3,207

Pensionable population,% of total working age

7 15.8 17.8 19.7 21.3 21.3 21.5 22.4 25.4

Pensionable population,'000

8 2,414 2,721 2,983 3,222 3,205 3,205 3,301 3,598

f = BMI forecast;1 0>15 plus 65+, as % of total working age population;

2 0>15 plus 65+;

3 15-64, as % of total

population;4 15-64;

5 0>15, % of total working age population;

6 0>15;

7 65+, % of total working age population;

8 65+.


Table: Romania's Rural And Urban Population, 1990-2020

1990 1995 2000 2005 2010 2012 2015 2020

Urban population, % oftotal 53.2 54.0 53.5 53.7 54.4 54.9 55.6 57.3

Rural population, % oftotal 46.8 46.0 46.5 46.3 45.6 45.1 44.4 42.7

Urban population, '000 12,346.1 12,247.7 12,007.0 11,617.6 11,688.6 11,737.5 11,809.4 12,015.6

Rural population, '000 10,860.9 10,433.3 10,436.0 10,016.7 9,797.8 9,650.0 9,430.5 8,954.1





BMI Methodology

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The

precise form of time-series model we use varies from industry to industry, in each case being determined,

as per standard practice, by the prevailing features of the industry data being examined. For example, data

for some industries may be particularly prone to seasonality, ie seasonal trends. In other industries, there

may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than

cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the

use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the

variable’s own history as explanatory information. For example, when forecasting oil prices, we can

include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable’s own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data

quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a

basis for analysis and forecasting.

It must be remembered that human intervention plays a necessary and desirable part in all of our industry

forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks,

anomalous data, turning points and seasonal features where a purely mechanical forecasting process

would not.

Tourism Industry

There are a number of principal criteria that drive our forecasts for each tourism sector variable. Figures

for the tourism sector data are based, where possible, on industry associations/operators,

government/ministry sources and official data. Where these are unavailable, tourism forecasts are based

on a range of variables:

Government policy, industry trends, expenditure levels stated in international and national press;

Industry trends, expenditure levels stated in tourism company official financial reports/releases;




Likely expenditure/growth patterns owing to international developments/demographic patterns;

Likely alterations in expenditure patterns owing to economic/political activity.

Tourism Ratings – Methodology

Our approach in BMI’s Tourism Risk/Reward Ratings is threefold. First, we seek to capture the

operational dangers to companies operating in this industry globally. Second, we attempt to identify

objective indicators that may serve as proxies for indicators traditionally evaluated on a subjective basis.

Finally, we include aspects of BMI’s proprietary Country Risk Ratings (CRR) that are relevant to the

tourism industry. Overall, the ratings system, which integrates with those of all industries covered by

BMI, offers an industry-leading insight into the prospects/risks for companies across the globe.

Ratings System

Conceptually the ratings system divides into two distinct areas:

Rewards

Evaluation of sector’s size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development.

Risks

Evaluation of industry-specific dangers and those emanating from the state’s political/economic profile

that call into question the likelihood of anticipated returns being realised over the assessed time period.

Indicators

The following indicators have been used. The rating uses three subjectively-measured indicators, and 41

separate indicators/datasets.




Table: Tourism Risk/Reward Rating Indicators

Indicator Rationale

Rewards

Market Structure

International tourism revenue,US$bn The larger the sector the greater the opportunities available.

Revenue growth, % chg y-o-y Rapid growth will result in increased opportunities.

Tourism employment, % of total Proxy for extent to which economy is already oriented towards the sector.

Country Structure

Physical infrastructure

Rating from BMI’s Country Risk Ratings (CRR). Poor power, water or transport

infrastructures serve as bottlenecks to sector development.

Labour costsRating from CRR to denote cost of labour. High costs will hinder international

competitiveness and vice versa.

Risks

Market Risks

Security/external risksSubjective evaluation against BMI-defined criteria. The tourism industry is especially

vulnerable to security risks.

Environmental issuesSubjective rating of changes to perceived risk of natural disaster. The tourismindustry is especially vulnerable to shocks emanating from natural disasters.

Country Risk

Long-term external risk

Rating from CRR, to denote vulnerability to external shock, the principal cause ofeconomic crises. Such a crisis will complicate long-term planning by suggesting risk

of growth volatility and cutting access to investment funding domestically.

Regional competitivenessSubjective rating evaluating changes in sector’s cost competitiveness in relation tokey peers. Demand in the tourism industry is highly vulnerable to changes in price.

Market opennessSubjective rating from CRR, to denote predictability of openness to foreign

investment trade.

Bureaucracy Rating from CRR to denote ease of conducting business in the state.

Legal frameworkRating from CRR, to denote strength of legal institutions in each state. Security of

investment can be a key risk in some emerging markets.

CorruptionRating from CRR, to denote risk of additional illegal costs/possibility of opacity in

tendering/business operations affecting companies’ ability to compete.

Source: BMI

Weighting

Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents

equal weight. Consequently, the following weight has been adopted.




Table: Weighting Of Components

Component Weighting

Rewards 70%, of which

– Tourism market 65%

– Country structure 35%

Risks 30%, of which

– Tendering process 40%

– Country risk 60%

Source: BMI

Sources

Sources used in tourism reports include national industry associations, government ministries, global

tourism organisations, officially released tourism company results and international and national news

agencies.



Reproducedwithpermissionof thecopyrightowner. Further reproductionprohibitedwithoutpermission.

romania tourism report q1 2013

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