economische vooruitzichten centraal-europa - juni 2013
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Economic Outlook
Our publications are available online at
www.kbc.be/economicoutlook/.
If you have any questions relating to the contents of this publication, contact: Dieter Guffens
(32) (0)2 429.62.87 E-mail: dieter.guffens@kb c.bePublisher: Johan Van Gompel, Havenlaan 2, 1080 BrusselAddress for correspondence & subscription management: KBC Groep NV, GCE, Havenlaan 2, 1080 Brussel.E-mail: [email protected] publication is jointly produced by KBC’s economists in Belgium and Central Europe. Neither the degree to whichthe hypotheses, risks and forecasts contained in this report reflec t market expectations, nor their effective chancesof realisation can be guaranteed. The forecasts are indicative. The information contained in this publication is gen-eral in nature and for information purposes only. It may not be considered as investment advice according to the Actof 6 April 1995 on the secondary markets, the legal status and supervision of investment companies, intermediariesand investment advisers. KBC cannot be held responsible for the accurac y or completeness of this information. Allhistorical rates/prices, statistics and graphs are up to date, up to and including 25 June 2013, unless otherwisestated. The views and forecasts provided are those prevailing on 20 June 2013.
Central Europe
• Fragile recovery in the cards• Czech floods in the spotlight
• Hungary exits from EDP procedure• Poland narrowly escapes recession• Economic prospects worsen in Slovakia• In the spotlight: Poland ready to join euro, but are the Poles?
Real GDP growth Inflation
2013 2014 2013 2014
Poland 1.1 2.3 1.1 1.9
Czech Republic -0.7 1.7 1.8 1.6
Hungary 0.3 1.5 2.3 3.2
Slovakia 0.5 1.5 1.5 1.5
Bulgaria 1.6 2.6 2.5 2.9
Russia 2.8 3.4 6.0 5.1
Turkey 4.1 4.7 6.6 6.4
Policy rates
25-06-2013 +3m +6m +12m
Poland 2.75 2.50 2.50 2.50
Czech Republic 0.05 0.05 0.05 0.05
Hungary 4.25 4.00 3.75 3.75
Slovakia (ECB) 0.50 0.50 0.50 0.50
Romania 5.25 5.25 5.25 5.25
Bulgaria - - - -
Russia 8.25 8.25 8.25 8.25
Turkey 4.50 4.50 5.00 5.00
Exchange rates
25-06-2013 +3m +6m +12m
PLN per EUR 4.31 4.20 4.15 4.10CZK per EUR 25.77 25.70 25.50 24.90
HUF per EUR 296.71 295.00 30 0.00 305.00
RON per EUR 4.51 4.35 4.35 4.35
BGN per EUR 1.96 1.96 1.96 1.96
RUB per EUR 42.96 42.50 42.00 41.50
TRY per EUR 2.55 2.50 2.50 2.50
10-year rates
25-06-2013 +3m +6m +12m
Poland 4.45 3.30 3.30 3.50Czech Republic 2.52 1.90 2.05 2.35
Hungary 6.75 5.75 5.75 5.75
Slovakia 2.77 2.40 2.50 3.00
Romania - - - -
Bulgaria - - - -
Russia 8.14 7.80 7.60 7.50
Turkey 8.59 7.80 8.00 8.30
June 2013
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-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2009 10 11 12 13
Record low policy rates across the region(in %)
Improving consumer confidence(deviation from LT average, 3-month moving average)
0
1
2
3
4
5
6
7
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10
2009 10 11 12 13
Czech Republic SlovakiaHungary BulgariaPoland
Czech Republic PolandHungary Euro Area
Economic Outlook Central Europe
General perspective
Fragile recovery in the cards
For years, most economies in Central
Europe were able to rely on the inward
flow of capital mainly from Western
Europe, generating strong growth fig-
ures and a steadily converging dynam-
ic. Today, however, they are operat-
ing in a different reality. The inward
flow of foreign investments has all but
dried up, as borne out by the recent
development towards an external bal-
ance in most economies. Moreover, the
economy in the euro area remains inthe doldrums, hampering an export-
led recovery. The disappointing export
performance, however, is only one side
of the story. Domestic demand is driv-
ing the economic weakness to an even
greater extent than foreign demand. In
Central Europe, too, 2012 was a year
of austerity imposed by the European
Commission as part of the Excessive
Deficit Procedure (EDP). Towards the end
of last year, economic activity in Poland
and Slovakia, traditionally strong playersin the region, also cooled off markedly,
while it was already depressed for some
time in Hungary and the Czech Republic.
In this context, it is no surprise that
central banks in Central Europe, too, are
pursuing strong monetary easing. The
Hungarian central bank takes the prize
here, having cut its key interest rate by
25 basis points for eleven consecutive
months, taking it to a historically low
4.25%. For the moment, however, the
easing of the lending conditions for banks
is having virtually no impact in increasing
lending. It remains to be seen whether
specific measures recently launched in
a bid to reduce the cost of finance for
small and medium-sized enterprises will
offer a solution. The Polish central bank,
meanwhile, has already cut interest rates
by a total of 200 basis points duringthis cycle. In the Czech Republic, the
traditional interest rate channel has long
been exhausted, with the policy rate
at 0.05%. Intervention on the currency
exchange rate is an option that remains
on the table as a means of further eas-
ing the monetary reins, especially since
the recession proves to even deeper
than previously thought. First quarter
GDP growth contracted again by 1.1%
quarter-on-quarter.
Although the ongoing fiscal consoli-
dation will continue to be a drag on
domestic demand in the short to medi-
um-term, we believe the bottom of the
cycle in the region has been reached
and an, albeit modest, recovery is in the
cards. Consumer and producer confi-
dence show signs of improvement and
recent data on retail sales in Hungary
and the Czech Republic are encour-
aging. External demand should ben-
efit from an expanding business cycle
in the EMU, especially in Germany. The
next few months growth in industrial
production should start accelerating
again. Moreover, fiscal policy will be less
restrictive this year. Bulgaria, Hungary
and Romania became the first countries
to be able to shake off the EDP yoke.
Other countries (Czech Republic, Poland,
Slovakia) remain under the EDP umbrellafor the time being, but can look forward
to less severe fiscal consolidation this
year. In most countries, therefore, fiscal
policy in 2013 will be considerably less
restrictive than last year, something that
should help drag domestic demand out
of the mire.
Dieter Franceus ([email protected])KBC Group
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Quarter-on-quarterYear-on-year
-6
-4
-2
0
2
4
6
2008 09 10 11 12 13
Czech recession still continues(real GDP growth, in %)
Repo-rate Money relevant inflation (year-on-year)Inflation (year-on-year) CNB targetOutlook (year-on-year)
Low inflation warrants near-zero policy rate foran extended period of time
(in %)
Economic Outlook Central Europe
Czech Republic
Czech recession not yet over
Petr Dufek ([email protected])CSOB Czech Republic
The performance of the Czech economy
in the first quarter was much worse
than indicated by the initial forecasts of
about a month ago. Real GDP dropped
by 1.1% quarter-on-quarter and a huge
2.2% year-on-year. Household and gov-
ernment consumption went up vis-à-vis
late 2012, investment rose moderately,
exports improved slightly, while imports
stagnated. The poor growth figure can
mainly be explained by inventories, which
declined due to last year’s stockpiling ofrevenue stamps for tobacco products,
and lower stocks in the energy, retail
and wholesale sectors. The economic
performance was also affected by the
automotive industry, which faced weak
foreign demand in Q1. Nevertheless, the
economy is approaching its stabilisation
phase, which may be followed by the first
signs of recovery later this year. While the
overall 2013 growth rate will remain in the
red (our latest forecast is -0.7%), the long-
est recession of the Czech economy todate should end by the middle of this year.
Average wages drop for thefirst time
First quarter data suggest a decline in
the average nominal wages, something
unheard-of thus far. While the drop by
2.2% in real wages is not a surprise, a
decline in nominal salaries is. The drop
is partly attributable to bonuses having
been paid out in advance in late 2012
before the imposition of an additional tax.
Still, this is only part of the explanation, as
wages are falling in 12 out of 19 sectors,
including the public sector. Another rea-
son is the lengthy recession, which limited
room for salary increases and the creation
of new jobs. While the unemployment
rate fell slightly last month, the only rea-
son for this was the commencement ofseasonal jobs, rather than a change in the
overall labour market trend.
Poor consumption, minimalinflation pressures
Weak domestic demand limits infla-
tion pressures. Year-on-year inflation, for
which the central bank sets its targets,
fell to 1.3% in May, while the ‘monetary
relevant inflation’, which the CNB also
takes into account, fell below the lowerthreshold of the tolerance inflation band.
This enables the central bank to maintain
its policy of technically zero interest rates
and to consider more monetary easing
alternatives. Currently, the only possible
instrument appears to be forex interven-
tions, which would keep the koruna at
weaker levels. However, as the koruna
is currently already weaker than CNB
forecasts, actual forex interventions will
not be on the agenda anytime soon. For
the moment, only ‘verbal interventions’
on the forex market are likely.
Floods in the spotlight
Recently, a large area of the Czech
Republic has been affected by floods,
which led to damage in excess of CZK
10 bn. In view of the positive state
budget developments and given theexisting budgetary reserves, the use of
public funds to remedy the damage will
not generate any pressures for addi-
tional financing by the State. The Czech
Republic continues to be a very credible
debtor in Europe, evidence of which is
the spread between Czech and German
yields and the evolution of CDS. Even
before the floods, the Ministry of Finance
had declared less ambitious budgetary
targets for the coming years, because
of the need to reduce restrictions on therecession-struck economy. This will be
helped by the fact that the government’s
cost of financing is very low. Hence the
public sector’s investment activity will
likely be renewed for the first time in
years, and this may have positive effects
on GDP growth in the years to come.
-1.0
-0.5
0.0
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1.0
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3.0
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01/2009 10/09 07/10 04/11 01/12 10/12 07/13
Outlook
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Economic Outlook Central Europe
Hungary
Hungary exits from EDP procedure
Central bank continues the easing cycle(in %)
First quarter real GDP growth surprised on the upside(in %)
0
2
4
6
8
10
12
2006 07 08 09 10 11 12 13
Year-on-yearQuarter-on-quarter
Policy rateHeadline CPI (year-on-year)Core CPI (year-on-year)
David Nemeth ([email protected])K&H Bank ZRT
After 9 years, the European Council has
stopped the excessive deficit procedure
against Hungary. The Council found that
the Hungarian government had shown a
strict fiscal policy and remained commit-
ted to keep the budget deficit below 3%
of GDP. As the Commission found risks
in Hungary’s convergence program and
forecasted a deficit of 3.3% of GDP in
2014, the government announced addi-
tional fiscal adjustments: public expen-
ditures were cut, public investment andreconstructions had to be financed by
new one-off revenues and an increase of
sector-specific taxes, such as bank, ener-
gy, financial transaction and (possibly)
advertisement taxes is on the table. The
second and the third step may be intro-
duced only if the budget deficit exceeds
the 3%-norm, while the government
may be using the third pillar mainly to
underline that Hungary is fully committed
to keep the budget on track. Also, the
budget will be supported by the fact thatHungary came out of recession (0.7%
quarter-on-quarter Q1 GDP growth).
Still, rating agencies may remain cau-
tious towards Hungary, because of the
unfavourable track record close to par-
liamentary elections (next elections are
due May 2014). Hence, we expect that
in the best case the ‘negative’ rating
outlook of Hungary will be modified to
‘stable’ in the coming months, while an
upgrade back to investment grade is not
expected before 2H2014.
Falling inflation, slowlyaccelerating production
Inflation moderated to 1.8% year-on-
year in May thanks to the fall in fuel
and regulated prices, the latter through
a government-induced decrease of util-ity costs. Although the Q1 GDP growth
figure looks quite favourable at first
sight, it is affected by a strong statisti-
cal base effect from a better agriculture
performance compared to the extremely
poor harvest in 2012. Still, the figure
confirmed that Hungary may return to
a growth path between 1.5% and 2%
from 2014 onwards. The external posi-
tion is further improving thanks to the
positive current account balance and the
very fast deleveraging of the economy,but this rebalancing weighs on eco-
nomic growth. Despite the exchange
rate fixation mechanism introduced by
the government, the households’ non-
performing loan (NPL) ratio is increasing.
The peak of the NPL ratio is expected at
18%. The stability report of the National
Bank of Hungary (NBH) highlighted that
the bank sector is fundamentally healthy,
although its vulnerability increased late
2012. Still, only in an extreme negative
scenario, some banks may need addi-
tional capital.
Good news are alreadypriced in the market
The NBH continues its gradual and cau-
tious rate cut cycle. Its base rate was
lowered by 2.75%- points, reaching the
historically low level of 4.25%. The NBHbases its monetary easing on three pillars:
the ongoing loose monetary policy in the
major developed economies, the infla-
tion rate being well below the inflation
target of 3% and the tight fiscal policy
which has helped to moderate Hungary’s
required sovereign risk premium back to
2010’s levels. We expect a further 50 bp
of rate cuts for the next 3 months. The
deteriorating international environment
and discussions on the exit of the US FED
resulted in sharp increases of both devel-oped and emerging market bond yields,
and put substantial pressure on HUF
yields, with 10-year bond yields being
pushed up by around 200 basis points up
to a maximum of 6.7%. We expect the
5- and 10-year bond yields to slightly fall
again, and trade between 5.3% and 6%.
-10
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-6
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-2
0
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4
2008 09 10 11 12 13
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Economic Outlook Central Europe
Poland
Poland narrowly escapes recession
Private consumption Change in inventoriesPublic consumption Net exportsGross fixed capital formation Real GDP growth
-6
-4
-2
0
2
4
6
8
10
12
2005 06 07 08 09 10 11 12 13
Weakening real GDP only supported by net exports(growth contribution, year-on-year in %)
CPIWages in enterprise sector
-2
3
8
13
18
2007 08 09 10 11 12 13
Labour market weakness depresses real wage growth(year-on-year, in %)
Jaroslaw Antonik ([email protected])KBC Towarzystwo Fund. Inwest. A.S.
Weak macroeconomic data released in
the first quarter of 2013 were also
reflected in GDP figures. In the first
quarter, real GDP growth decreased to
0.5% year-on-year (yoy) from 0.7% in
the previous quarter. On a quarter-on-
quarter (qoq) basis, the growth rate
was 0.1%. In that sense, the Polish
economy avoided a technical recession
of two consecutive quarters of nega-
tive growth. The contribution to real
GDP growth was the following: privateconsumption -0.1%, investments -0.3%,
change of inventories -0.5%, net export
+1.4%.
The decomposition of GDP growth thus
confirmed the weakness of domestic
demand, including private consumption.
Consumption remained at the level of
the previous year (0.0% yoy), govern-
ment consumption continued to decline
(-0.5% yoy). Investments reduced its
negative dynamic (-2.0% comparedto -4.1 % in the previous quarter).
However, it is still too early to announce
a turning point.
Weak consumer demand reflects the
impact of several factors. First of all, the
unfavourable situation on the labour
market, where we see a further increase
of the unemployment rate. In April it
reached 14% (compared to 12.9% in the
previous year). In the light of the labor
market weakness, real wage growth will
probably remain absent, leading house-
holds to further decrease an already low
savings rate. All in all, we expect the
recovery in private consumption to be
slow. Economic activity should improve
in 2H13 but will remain modest as the
producer confidence in manufacturing
(PMI) is still below the neutral level of 50.
The cyclical slowdown and especially the
decrease of private consumption growth
imply the absence of any inflation pres-
sure. In May, CPI inflation dropped to
0.5%, slightly above market expecta-
tions and significantly below the infla-
tion target of 2.5% of the Polish central
bank. Core inflation also stayed on a low
level (1%) and so did inflation expecta-
tions. CPI inflation will remain low in
the coming months, supported by lower
natural gas and electricity tariffs andthe lack of sizeable changes of com-
modity prices. Additionally, demand for
household and corporate credit remains
subdued.
The Monetary Policy Council (MPC)
decided to cut its policy rate by 25 basis
points to 2,75% on its June’s meeting, in
line with market expectations. The finan-
cial markets received a clear message
from the central bank’s governor that,
although the easing cycle is not finished
yet, it is nevertheless coming to an end.
He also said that at the July meeting
the Council should be ready for an even
clearer signal. As a consequence, July
might mark the end of the easing cycle.
The weak GDP data created some risk for
public finances. In 2013, the deficit-to-
GDP ratio will probably rise compared tothe previous year but it shouldn’t exceed
4%. The Polish government is strongly
committed to maintain fiscal discipline
and amendments to the budget are very
likely. According to the Prime Minister,
the government will decide after June
whether any amendments are needed.
Nevertheless, taking into account that
the Polish macroeconomic situation is
favourable compared to the rest of the
EU countries, ant that Fitch raised its
rating outlook for the Polish sovereign,there is still room for a rating upgrade
later this year. This is especially the case
considering that the cyclical trough of
Polish economic growth is behind us
and the next quarters will probably show
some signs of further improvement.
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Economic Outlook Central Europe
Slovakia
Worsening economic prospects
Favourable inflation dynamics(year-on-year, in %)
Real GDP growth clearly slowing down(in %)
Year-on-yearQuarter-on-quarter
HeadlineCore
-10
-5
0
5
10
15
2001 02 03 04 05 06 07 08 09 10 11 12 13
Marek Gabris ([email protected])CSOB Slovakia
The Slovak economic growth was 0.6%
year-on-year (yoy) in the first quarter
2013 after the result of 0.7% yoy in the
final quarter of 2012. The economy grew
by 2.0% for the whole year of 2012,
reflecting a deceleration mainly in the
second half of the year.
The main engine of growth was still net
foreign demand. All other components of
GDP contributed negatively to economic
growth. Final consumption decreasedby 0.9% yoy, negatively affected by low
consumer confidence, higher propensity
to save and high unemployment. Real
wage growth (the first after two con-
secutive years of decline) was not a suf-
ficient stimulus for households to boost
their consumption. The final consump-
tion of government decreased by 0.6%
yoy, affected by the fiscal consolidation
package. Gross fixed capital formation
dipped by 8.4% yoy in Q1 2013. This is
also negative from a longer term per-spective as the long lasting dip could
affect the potential growth. On balance,
prospects for economic growth in 2013
worsened, implying that the economy
could probably grow around 0.5% yoy
as the outlook for Slovakia’s main trad-
ing partners is also clouded.
Inflation is gradually declining as there
are basically no demand pulled pres-
sures and energy prices are falling.
Harmonized inflation dipped from 2.5%
yoy at the beginning of 2012 to 1.8%
yoy in May and we expect a further
decline during the summer.
Foreign trade is booking new record
surpluses. The merchandise trade surplus
for the first four months is 1.9bn EUR
or 66% higher compared to the same
period of 2012. The main reason is fasterreduction of import growth compared to
export growth. However, the export sur-
prised in April by jumping up again and
the growth rate reached almost 10%
year-on-year. But we expect it was more
related to one-off factor than a change
in trend as economic growth is deceler-
ating. However, export-oriented indus-
tries like the automotive sector should
still stay the main driver of growth as
the unemployment rate is expected to
stay high above 14% for the rest of theyear. This will negatively affect domestic
demand, on top of the impact of fiscal
consolidation.
The fiscal situation is relatively favour-
able as the tax revenues are slightly
above expectations during the first five
months of 2012. The IMF latest review
also confirmed the possibility to reach
the fiscal goal to get deficit under the
3% threshold even despite the poorer
prospects of growth for the remainder
of the year.
The Smer party (Social Democrats) still
has the highest popularity in opinion
polls, with popular support increasing
from 39.0% in April to 40.8% in May.
The second most popular political party
are the Christian Democrats (KDH) with
10.8%, followed by Ordinary People(OLaNO, 7.8%), SDKU 7.3%, Most (eth-
nic Hungarians, 6.1%) and New Majority
(new party of former minister of justice
Mr Lipsic, 5.1%). Mr Fico (current PM
and head of the ruling Smer party)
announced in his press article that he
could be a candidate in the presidential
elections in May 2014.
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0
1
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3
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2008 09 10 11 12 13
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Economic Outlook
Bulgaria
New government faces challenging environment
Benign inflationary environment(year-on-year, in %)
Labour market weakness persists
Unemployment rate (seasonally adjusted, in %, left-hand scale)Year-on-year change in registered unemployment (thousand, right-handscale)
CPI inflationPPI inflation
-100
-50
0
50
100
150
0
2
4
6
8
10
12
14
2006 07 08 09 10 11 12 13
Bulgaria’s economy has been stuck in
low gear for several years. In the pre-
crisis environment Bulgaria was ben-
efitting from a continuing inflow of for-
eign direct investments. When external
financing dried up abruptly in 2009, eco-
nomic activity collapsed. Since then the
economy has gone through some neces-
sary adjustments and the unsustainable
current account deficit has been largely
corrected. Economic growth, however,
has been lackluster at best and outputhas still not fully recovered to the pre-cri-
sis level. Overall, 2012 real GDP growth
was only 0.8%, decelerating from 1.8%
in 2011. In the first quarter of 2013, real
GDP growth eased further, expanding
by 0.4% year-on-year. On the one hand
external demand continues to suffer
from the financial and economic tur-
bulence in the euro area. On the other
hand fiscal consolidation and continuing
labour market weakness keep exerting a
drag on domestic demand.
Nevertheless, we expect growth dynam-
ics to improve significantly in the second
half of 2013. There are several reasons to
support this argument. The first reason
is that Bulgaria’s export sector should
benefit from the better growth outlook
in the European Union. Secondly, fis-
cal policy will most likely become more
supportive. Bulgaria ended 2012 with a
government deficit of only 0.8% of GDP,
much lower than expected thanks to
stronger VAT revenues. Although fiscal
prudence is admirable, this was perhaps
not the appropriate policy approach
given the combination of poor growth
and comfortable fiscal fundamentals.
The European Commission already lift-
ed the Excessive Deficit Procedure for
Bulgaria in the summer of 2012. Thirdly,
consumer confidence in May was at thehighest level in 27 months. Inflation
has been subdued, largely due to sev-
eral government-induced energy price
cuts. This is most visible in the producer
price inflation indicator which has turned
negative on a year-on-year basis.
In February, social protests against the
widespread poverty and low standards
of living led to the resignation of the
centre-right government. After a high-
ly polarized campaign, May electionsfinally resulted in a Socialist-led minority
government. The new cabinet needs the
support of the nationalist Attack party,
making effective governing all the more
difficult. New prime minister Plamen
Oresharski expressed this concern with
the statement that Bulgaria is in a deep
institutional crisis, continuing economic
depression and worsening disintegra-
tion of society. He also said that the
government should play a more promi-
nent role in the economy. However, it
remains to be seen whether this minority
government will be able to tackle the
numerous social and economic problems
Bulgaria faces. It is essential to reduce
unemployment which remains stub-
bornly high (12.3%). Several structural
reforms in the labour market are needed
to improve the quality and productivity
of the labour force. This is all the moreimportant given the shrinking working-
age population due to the unfavorable
demographic outlook and ongoing emi-
gration.
-15
-10
-5
0
5
10
15
2009 10 11 12 13
Central Europe
Dieter Franceus ([email protected])KBC Group
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