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Yields correct downwards at 3-month T-bills auction. Investors demonstrated ample demand at the 3-month T-bills auction organised by the State Debt Management Agency (AKK). Total valid bids amounted to HUF 97.4bn against the HUF 25bn offer of AKK, which was entirely placed. The average yield achieved at the auction stood at 7.94%, which is 8bps below the average yield achieved at the previous tender for similar papers (on Dec 5) and 6bps below Monday’s secondary market benchmark. Meanwhile the HUF reached a 9-month high on Tuesday trading at 254.00/10 against the EUR late in the day. We note that EUR/HUF 255 level was defended by some option barriers and the HUF earlier bounced back its attempts to break it. Last night’s decision of the FOMC to keep rates on hold in the US came as no surprise and no significant impact should be exerted on emerging market currencies. In fact the Fed statement included the same paragraph on inflation as at the October’s sitting and despite the slightly more concerned stance over growth (especially housing market) it still appears early for rate cuts in the US. The next auctions organised by AKK are scheduled for Wednesday and Thursday when HUF 30bn in 6-month and HUF 40bn in 12-month T-bills will be offered, respectively.

EC: Hungary with limited progress in National Reform Programme implementation. Hungary has made limited progress in the implementation of its National Reform Programme (NRP), the EC said in its 2006 Annual Progress Report on Growth and Jobs . On the positive side the commission welcomed recently undertaken corrective measures for budget deficit reduction both on the revenue and expenditure sides. Among the strengths in NPR’s implementation were also outlined the reform of the unemployment benefit system and the lift of the restrictions to market entry in certain areas (more specifically the easing of the regime in the retail pharmaceutical segment). In order to meet the commitments made at the 2006 Spring European Council, the EC recommends strict implementation of the fiscal consolidation, with “increased reliance on the expenditure side”. Among the most important recommendations for the sustainability of the public finances are steps for further limitation of early retirement as well as reduction in the number of new people receiving disability pensions.

Monetary base falls by 2.6% m/m to HUF 2,563.5bn as of end-November. The monetary base fell by 2.6% m/m (HUF 68.9bn) to HUF 2,563.5bn as of end-November, the preliminary data of the central bank revealed. The drop was entirely triggered by the monthly average stock of other monetary financial institutions’ overnight deposits, which after the temporary strong increase in the previous month decreased by HUF 91.5bn to HUF 8.3bn. On the other hand, currency in circulation grew by HUF 22.6bn m/m and accounted for 75.6% of the monetary base as of end-November. The third component, the stock of MFIs’ current account balances, remained largely unchanged m/m. Thus the monetary base annualised m/m growth was 5.4% y/y in November, accelerating from 2.4% y/y in October. The NBH added that the net position of the government improved by HUF 25.3bn in November on the back of HUF 4.8bn drop in the stock of loans outstanding and HUF 20.5bn rise in the deposits of the sub-sector.

Our optimism about a US soft landing based on lower oil prices has been encouraged by wage increases improving households’ spending power. Expect no quick change in the Fed rate.

Local currency appreciates for fourth consecutive month. The local currency appreciated for the fourth month in a row against euro, consolidating its real (CPI adjusted) monthly gain to 1.8%. The local currency thus confirms the steady appreciation path interrupted during May-July when the local currency lost ground against euro. In real y/y terms, RON gained 7.5% against euro and 17.9% y/y against the US dollar. Bloomberg recently concluded that Romania's currency surpassed all European currencies to become the world's best performer this year and predicting that it is poised for more gains because foreign investment may double as the country enters the European Union. RON rose 20% against the dollar in 2006 says Bloomberg mentioning nominal terms, passing a six-year high, fuelled by investments from foreign companies.

A slimmer Citigroup? Is BarCap and Credit Suisse a better fit? And Abigail’s Awards for for the best in banking in 2006.

Domestic banks need to prepare for competition from foreign banks. According to News agency Xinhua , China Construction Bank's Chief Risk consultant Zhu Xiaohuang stated that as a result of the opening up of China's financial sector, domestic banks will face greater challenges from foreign banks. At the same time, many new opportunities will present themselves. Zhu said by the end of June 2006, 71 foreign-invested banks has set up 214 agencies dealing in local currency banking in 25 cities in China. In addition, 26 overseas financial institutes has purchased shares worth USD 17.9bn in 18 domestic companies.

Tax revenues surge 12.4% y/y in Jan-Nov. The amount of net tax revenues surged by 12.4% in annual terms in the first eleven months of the year, reaching a total of ALL 71bn (EUR 579mn) according to the latest report of the General Taxation Directorate. The net tax income in November alone amounted to ALL 7bn and posted an annual increase of nearly 28%. Value added and corporate profit tax contributed the most to the total amount of revenues in Jan-Nov, by about 20% each. In addition, excise and personal income tax added about 12% and 10% respectively to the total net revenues. All of these also posted considerable annual growth rates ranging between 14% (VAT) and 20.4% (corporate profit). The amount of taxes collected from small businesses continued to decline in November as in the previous months of the year. Tax income from small businesses was only ALL 2.4bn in Jan-Nov, dropping by 28% in an annual comparison. This resulted from the 50% cut in the rates paid by small businesses and the smaller number of companies registered under this category as criteria for qualifying under this group have been more vigorously monitored. The results for the eleven months of the year also show very strong growth of social insurance contributions of 52% y/y pointing to a successful curbing of the shadow of economy. Tax revenues, ALL mn Nov % y/y Jan-Nov % y/y Total Tax Revenue (collected) 7,113 26.4 72,533 11.8 From which: - - - - VAT (gross) 2,636 34.8 22,388 11.8 - VAT (net) 2,537 39.5 21,084 14.0 - VAT (currently reimbursed) 99 -27.3 1,304 -14.9 Excise Tax 715 34.4 8,199 16.7 Profit Tax 1,978 29.3 20,545 20.4 Personal Income Tax 718 36.1 7,283 17.8 Small Business Tax 80 -51.2 2,371 -27.6 Land Tax - - - - Building Tax - - - - National Taxes (fees) 619 -0.1 7,210 -8.4 Road Circulation Tax 236 1.8 3,226 4.7 Solidarity Tax (debtors 31.12.02) 0 -61.3 8 76.9 Gambling & Casinos 126 103.1 1,250 267.7 Others 1 -71.3 17 -10.4 Administrative Fines 4 117.4 37 257.0 Total Tax Revenue (net) 7,014 27.7 71,229 12.4 Insurance Contributions 2,672 -2.9 33,605 52.0 Source: General Taxation Directorate

A slimmer Citigroup? Is BarCap and Credit Suisse a better fit? And Abigail’s Awards for for the best in banking in 2006.

Ecobank launches credit card. Nigerian newspaper The Guardian reported that Ecobank Nigeria Plc (Ecobank) has recently launched Ecobank naira credit card. Ecobank’s Managing Director/Chief Executive Officer Ecobank Nigeria said that the credit card is denominated in Naira and would be an added service to the bank’s customers. Ecobank Nigeria is a member of Ecobank group. The Managing Director and Chief Executive Officer of Ecobank Nigeria group currently said that the bank has its presence in 15 West African and central African countries.

FinMin pays USD 38.25mn coupon on Eurobonds. FinMin paid USD 38.25mn (UAH 191.25mn) coupon on its Eurobonds issued back in 2003 for USD 1bn. The bonds will mature in 2013 and have annualized yield of 7.65% per year, which is paid semi annually. JP Morgan Europe Limited, UBS Limited, and Dresdner Bank AG London Branch were the organizers of the deal. To compare in 2006 FinMin so far placed UAH 1,142.527mn (USD 228.5mn) Eurobonds.

Government sells emission credits for HUF 2.12bn at online auction. The government sold 1.197mn emission credits for a total of HUF 2.12bn (EUR 8.25mn), MTI News Agency reported quoting official from the auction’s organiser Vertis. The average price per unit at the tender was EUR 7.42 or EUR 0.52 above the starting price. The auction was organised through the Emissions Trade System (ETS) trade platform and was the first such sale organised online. It was also the largest one since the introduction of ETS. We note that Hungary allocated 31.7mn tonnes of CO2 per year in 2005-2007. The National Distribution Plan stipulates that that 2.5% of that amount could be allocated for sale (slightly more than 2.3mn tonnes).