dealing with v olatile capital flows – the central bankers’ perspective
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Dealing with V olatile Capital Flows – the central bankers’ perspective. Maja Kadievska-Vojnovik, MSc Vice-governor National Bank of the Republic of Macedonia Sarajevo, June 6, 2014. Content. External funding structure in SEE countries Crisis effects - capital flows volatility - PowerPoint PPT PresentationTRANSCRIPT
Dealing with Volatile Capital Flows – the central
bankers’ perspectiveMaja Kadievska-Vojnovik, MSc
Vice-governorNational Bank of the Republic of Macedonia
Sarajevo, June 6, 2014
1. External funding structure in SEE countries2. Crisis effects - capital flows volatility3. Macroeconomic policy measures4. Potential risks and vulnerabilities5. Policy priorities
Content
Both Southeastern European EU members (SEE-EU) and SEE non-EU countries are almost equally dependant on FDI and cross-border lending, with each accounting for 50-60% of their respective GDP
Portfolio investment is less important, and consists mostly of sovereign bonds
European Union countries are the main foreign creditors (90%)
1. External funding structure in SEE (1)
SEE External Funding Patterns, by instrument and creditor
Source: IMF, Central, Eastern, and Southeastern Europe, Regional Economic Issues, Apr 14
SEE-EU SEE-nonEU0
10
20
30
40
50
60
70
80
Intercompany lending FDI
FDI and intercom. lending
SEE-EU SEE-nonEU0
10
20
30
40
50
60
70
80Loans to banksOther loansLoans to GG
Cross – border lending
SEE-EU SEE-nonEU0
10
20
30
40
50
60
70
80Traded debt, GGTraded debt, otherTraded equity
Portfolio invest-ments
High reliance on foreign funding makes the SEE region sensitive to changes in external financial conditions, as well as to rollover and FX risks (having in mind the high level of financial euroization in the region)
The SEE-EU and SEE non-EU countries are highly financially opened, with gross external debt between 40% up to 120.4% of GDP
1. External funding structure in SEE (2)
Total External Debt to GDP (%)
Source: IMF, Central, Eastern, and Southeastern Europe, Regional Economic Issues, Apr 14
BG CRO ROM ALB BH MKD MNG SRB0
20406080
100120140 2012 2013 2014 2015
SEE-EU SEE- non EU
Gross capital inflows to Emerging Europe* have declined strong in 2008, and again in 2013.
The key driver of the recent reverse trend in gross capital inflows were higher U.S. returns, that were pushed up by the “taper talk”
*Turkey, Poland, Romania, Hungary, Bulgaria, Serbia, Croatia, Lithuania, Albania, Bosnia and Herzegovina, Kosovo, Macedonia, and Montenegro
2. Crisis effects - capital flows volatility
Capital inflows to Emerging Europe* ( % of GDP)
Source: IMF, World Economic Outlook, Apr 14
2007
Q120
07Q2
2007
Q320
07Q4
2008
Q120
08Q2
2008
Q320
08Q4
2009
Q120
09Q2
2009
Q320
09Q4
2010
Q120
10Q2
2010
Q320
10Q4
2011
Q120
11Q2
2011
Q320
11Q4
2012
Q120
12Q2
2012
Q320
12Q4
2013
Q120
13Q2
2013
Q3
-15
-10
-5
0
5
10
15
20
The SEE countries were hit hard by the global financial crisis in 2008-2009, as exports shrunk due to collapse in the global trade.
After a brief recovery, in 2012 there was a renewed slowdown as the region felt the effects of the euro area crisis but, the slowdown was far less dramatic than in 2009.
2. Crises effects - capital flows volatility – impact through CA channel –
GDP growth rates (y-o-y %) CAD (% of GDP)
Source: IMF and national statistical offices Source: Central banks, national statistical offices, Eurostat, IMF and NBRM calculations
2007 2008 2009 2010 2011 2012 2013-8-6-4-202468
1012
Albania BH Croatia MontenegroSerbia Macedonia
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
ALB BH CRO MNG SRB MKD
-60
-50
-40
-30
-20
-10
0
10
Some of the SEE countries depend significantly on income transfers as external funding source....
....but, this exposes countries to economic conditions in Diaspora’s host countries
2. Crises effects - capital flows volatility – impact through CA channel –
Remittances and economic growth Remittances and economic growth
Source: Central banks, national statistical offices, Eurostat, IMF and NBRM calculations
Source: Eurostat
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
ALB BH CRO MNG SRB MKD
0
2
4
6
8
10
12
14 Remittances by countries (as % of GDP)
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4-40-30-20-10
01020304050
-10
-8
-6
-4
-2
0
2
4
6
Remittances, net in SEE (q-o-q)
*Data for Croatia and Montenegro refer to Other sectors' current transfers.
Remarkable increase in financial inflows to developing countries implied investment and growth opportunities in “normal” times...
...but, it also amplified the transmission of global financial shocks, when financial inflows fell abruptly.
2. Crisis effects - capital flows volatility – impact through financial channel –
Composition of financial account, % of GDP
Source: Central banks, national statistical offices, Eurostat, IMF and NBRM calculations
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
Albania BH Croatia Montenegro Serbia Macedonia
-20
-10
0
10
20
30
40
50
FDI, net Portfolio investment, net Other investment, net Financial account
The sharp tightening of the financial conditions on the global markets after 2007 resulted in decreasing of FDI in the SEE. In such circumstances, SEE countries mostly relied on official borrowing as a source for external funding.
2. Crisis effects - capital flows volatility – impact through financial channel –
Eurobonds
Source: Bloomberg
Country Eurobonds issued beginning from 2009 Maturity
Albania 2010 - 300 EUR mil. _2015Serbia 2011 - 2.000 USD mil. _2021
2012 - 750 USD mil. _2017 2013 - 1.500 USD mil. and 1.000 USD mil. 2020 and 2018, respectively
Croatia 2009 - 750 EUR mil. and 1.500 USD mil. 2015 and 2019, respectively 2010 - 1.250 USD mil. _2020
2011 - 1.500 USD mil. and 750 EUR mil. 2021 and 2018, respectively 2012 - 1.500 USD mil. _2017
2013 - 1.500 USD mil. and 1.750 USD mil. 2023 and 2024, respectivelyMontenegro 2010 - 154,36 EUR mil. _2015
2011 - 141,8 EUR mil. _2016 2013 - 80 EUR mil. _2016 2014 - 280 EUR mil. _2019
Macedonia 2009 - 175 EUR mil. _2013
Revisions occurred in credit ratings of the SEE countries during the financial crisis in 2009 and economic and sovereign crisis in 2011
2. Criss effects - capital flows volatility - Countries risks -
Ratings
2007 2009 2010 2011 2012 2013 2014Moody's B1 B1 B1 B1 B1 B1 B1
S&P B+ B+ B+ B BFitch
Moody's B1 B1S&P BB- BB- BB- BB BB- BB- BB-Fitch BB- BB- BB- BB- BB- BB- B+
Moody's B2 B2 B2 B2 B3 B3 B3S&P B+ B+ B B B BFitch
Moody'sS&P BBB- BB BB BB BB BB- BB-Fitch BB+ BB+ BB+ BB+ BB+ BB+ BB+
Moody's Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3S&P BBB- BB+ BB+ BB+ BB+ BB+ BBB-Fitch BBB BB+ BB+ BBB- BBB- BBB- BBB-
Moody's Baa3 Baa3 Baa3 Baa2 Baa2 Baa2 Baa2S&P BBB+ BBB BBB BBB BBB BBB BBBFitch BBB BBB- BBB- BBB- BBB- BBB- BBB-
Moody's Baa3 Baa3 Baa3 Baa3 Baa3 Ba1 Ba1S&P BBB BBB BBB- BBB- BB+ BB+ BBFitch BBB- BBB- BBB- BBB- BBB- BB+ BB+
Croatia
Albania
Serbia
BH
Macedonia
Romania
Bulgarija
The public debt went on a rising track, contributing to external vulnerabilities build-up.
As governments of SEE countries were undertaking discretionary fiscal stimulus to support economy, the fiscal balances deteriorated sharply.
Fiscal policies are under pressures as the countries struggle to reduce their budget deficits or to comply with loan requirements by the IMF.
In Macedonia, fiscal policy was actively used to give impulse to economic growth, through large-scale public investment projects.
2. Crisis effects - capital flows volatility - public finances under pressure -
Fiscal balances, in % of GDP Gross external debt, in % of GDP
Source: IMF and central banks Source: Central banks, national statistical offices, Eurostat, IMF and NBRM calculations
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
ALB BH CRO MNG SRB MKD
-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
ALB BH CRO MNG* SRB MKD
020406080
100120
Public Private Gross external debt*Data for private sector debt of Montenegro are IMF estimates, as private debt statistics are not officially published.
2. Crisis effects - capital flows volatility – impact through banking/credit channel –
As capital flows fell in 2008, decline in available financing particularly from parent banks was registered and credit conditions tightened significantly. External position of BIS – reporting banks
vis-à-vis CESEE (Billions of US dollars)
Source: IMF, Central, Eastern, and Southeastern Europe, Regional Economic Issues, Apr. 2014
Worsened economic outlook pushed credit markets into bust cycle and triggered a rise in NPL`s.
Sound initial conditions (high capitalization levels), traditional banking model and low exposure to riskier financial instruments contained direct spillovers during the early stage of the crisis.
2. Crisis effects - capital flows volatility – impact through banking/credit channel –
Credit growth, % NPL` s in % of total credit
Source: IMF and central banks Source: IMF and central banks
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
ALB BH CRO MNG SRB MKD
-20-10
0102030405060
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
ALB BH CRO MNG SRB MKD
0
5
10
15
20
25
30
Vienna Initiative –helped countries to avoid a massive and sudden deleveraging by cross-border bank groups.
Decreased capital inflows
3. Macroeconomic policy measures
FX interventi
ons
Increase interest
rates
Counter cyclical fiscal policy
Allow exchange rate
depreciations
Stricter capital
requirements
Limits on bank`s open FX position
Easing capital inflow
regulation
Temporary restriction on capital outflow
Prudential measuresMacroeconomic policy measures
Source: World Bank
Different impacts on FX markets among SEE countries:◦ In countries with floating exchange rate, currency depreciation was
allowed in order to mitigate the impact on crisis.◦ In countries with fixed rates, interventions on the FX market enabled
stability of domestic currency.
3. Macroeconomic policy measures - interventions on FX markets -
Nominal exchange rates (national currency per EUR)
FX reserves, % of GDP
Source: Central banks Source: Central banks, national statistical offices, Eurostat, IMF and NBRM calculations
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
ALB BH CRO SRB MKD
0.05.0
10.015.020.025.030.035.040.045.0
From the conventional measures almost all countries adopted easing cycle of interest rates of the monetary policy.
However, in some countries major consequence of the limitations faced by monetary policy, macro prudential measures (mostly in RR) were extensively employed by all SEE countries to address inflation and financial stability risks.
3. Macroeconomic policy measures - monetary policy responses -
Interest rates, in % Reserve requirements by country
Source: Central banks Source: Central banks
01/2
007
05/2
007
08/2
007
10/2
007
01/2
008
04/2
008
07/2
008
10/2
008
01/2
009
04/2
009
07/2
009
10/2
009
01/2
010
04/2
010
07/2
010
10/2
010
01/2
011
04/2
011
07/2
011
10/2
011
01/2
012
04/2
012
07/2
012
10/2
012
01/2
013
04/2
013
07/2
013
10/2
013
02468
101214161820
Albania Croatia SerbiaMacedonia
Country Current RR ratios Changes in RR (beginning from 2008)Albania 10%Serbia 5% - liabilities in dom. currency up to 2y
0% - liabilities in dom. currency over 2y29% - liabilities in FX currency up to 2y22% - liabilities in FX currency over 2y
50% - liabilities in FX currency – FX currency-indexed liabilities in dinars
Croatia 12% Cummulative decrease of RR ratio by 5 p.p. In 2011, termination of the RR remuneration
Montenegro9,5% - on part of the base comprised of demand deposits and deposits with the agreed maturity up to 1y
In 2011, decrease of RR ratio by 0,5 p.p.
8,5% - on part of the base comprised of deposits with the agreed maturity over 1y In 2011, decrease of RR ratio by 1,5 p.p.
In 2014, decrease of the remuneration amount Macedonia 8% - liabilities in domestic currency In 2013, decrease by 2 p.p.
20% - liabilities in domestic currency with FX clause
Differentiation by currency from July 11, 2009 onwards.
15% - liabilities in foreign currency Cummulative increase for 5 p.p.
The RR base has been reduced for certain loans approved in 2008-2014. In 2010, RR base in FX currency was extended by FX-indexed dinar liabilities. In 2011, maturity differentiation of dinar and FX currency RR ratios. Increase of foreign currency RR, which is allocated in dinars.
In recent years, NBRM undertook few changes in the RR structure in order to address some structural issues in the Macedonian economy and banking system:
3. Macroeconomic policy measures – case of Macedonia –
Lowering maturity mismatch in banks balance sheet– created from dominance of the short-term deposits• - Sep. 2011 – introducing 0% RR for banks’ liabilities to private persons with contractual maturity of over 2 years.
Decreasing of the systemic risk in banking sector created by the high degree of FX deposits in the liabilities, which influence the monetary transmission- July 2013 – encouraging savings in domestic currency by lowering the RR ratio for liabilities in domestic currency (from 10% to 8%).
I.05 I.06 I.07 I.08 I.09 I.10 I.11 I.12 I.13 I.140
102030405060708090
100Maturity composition of household
deposits
Long term deposits Short term deposits
Source: NBRM
I.05 I.06 I.07 I.08 I.09 I.10 I.11 I.12 I.13 I.140
102030405060708090
100
FX deposits Domestic currency deposits
Currency composition of household deposits
Source: NBRM
3. Macroeconomic policy measures – case of Macedonia –
Increasing of credit supply quality for systemically important sectors that generate net-FX inflows and sectors that can contribute to lowering the energy dependence of the economy o- Nov. 2012 – possibility to decrease RR for the amount of newly granted credits to net-exporters and domestic electricity producers.
Broadening of the scope of banks funding sources and establishing new market segments in order to boost competition and increase efficiency of the allocation of free resourceso- July 2013 – introducing 0% for banks’ liabilities to nonresidents with contractual maturity of over 1 year.
01.2
013
02.2
013
03.2
013
04.2
013
05.2
013
06.2
013
07.2
013
08.2
013
09.2
013
10.2
013
11.2
013
12.2
013
01.2
014
02.2
014
03.2
014
04.2
014
0500
1,0001,5002,0002,5003,0003,5004,000 3,191
3,507
Effect of reducing RR baseEffect of 0% RR ratio on FX deposits
in Den. mil. Effects of the measures in RR
01.2
013
02.2
013
03.2
013
04.2
013
05.2
013
06.2
013
07.2
013
08.2
013
09.2
013
10.2
013
11.2
013
12.2
013
01.2
014
02.2
014
03.2
014
04.2
014
01,0002,0003,0004,0005,0006,0007,0008,0009,000
10,000
0
2
4
6
8
10
12
Bank 10 Bank 9 Bank 8 Bank 7 Bank 6 Bank 5 Bank 4 Bank 3Bank 2 Bank 1 No. of banks (r.h.s )
in Den. mil. No. of banks
New loans extended to net exporters and domestic producers of electricity
Source: NBRM Source: NBRM
While a large share of FDI in total external financing for the region provides a degree of stability, high reliance on foreign funding exposes countries to external shocks
Sizable gross external debt and rollover needs Foreign currency exposure compounded by a high degree of euroization
of the domestic financial system Countries tend to borrow from relatively few common creditors and some
depend on income transfers Vulnerabilities may stem from three sources-stock, flow, and external
fundamentals
4. Potential risks and vulnerabilities
Private sector Public sectorExternal
fundamentals Stock Flow Stock Flow
Domestic credit to private
sector in FX or FX-linked (% of GDP,
end-2013)
Private debt from less stable source (% of GDP,
end-2012)
Loan to deposit
ratio (December 2013)
Current account balance
(% of GDP, 2014)
External debt
falling due (% of GDP, 2014)
Public debt exposed to FX risk (% of GDP,
end-2013)
Stock of public
debt (% of GDP, 2013)
Fiscal financing needs (% of GDP, 2014)
Average CDS
spreads, May 22 2013 - March
31,2014
Exchange rate
misalignment
Reserves buffers
Serbia 35 26 114 -5 16 51 66 19 374 Moderate 215%Croatia 55 46 109 1 30 36 60 20 332 Moderate 97%B&H 37 19 125 -8 14 30 43 5 / Moderate 120%Albania 23 10 53 -10 3 19 70 28 / None 164%Macedonia 24 23 91 -4 18 30 36 14 / Moderate 103%Threshold CESEE 29 30 110 -6 18 29 60 18 200 Significan
t 75%
Source: CESEE REI SPRING 2014
“Lessons” in coping with sudden stops in capital inflows ◦ Monetary and exchange rate policies can and should be used during
episodes of market volatility.◦ Preventive measures (such as securing external credit lines) and
targeted liquidity provision could be helpful. Structural priorities for SEE economies:
◦ Most countries still need to address crisis legacies, including high levels of NPL`s.
◦ Strengthening fiscal positions without jeopardizing the ongoing economic recovery.
◦ Boost growth potential through structural reforms. ◦ Greater use of macroprudential tools to prevent external vulnerabilities
building up again and to improve external funding structure.
5. Policy priorities
