financial turmoil and transition countries fabrizio coricelli university of siena and ebrd istanbul...
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Financial turmoil and Financial turmoil and Transition CountriesTransition Countries
Fabrizio CoricelliFabrizio Coricelli
University of Siena and EBRDUniversity of Siena and EBRD
Istanbul June 25, 2008Istanbul June 25, 2008
No decoupling, but transition countries No decoupling, but transition countries have weathered the storm…so farhave weathered the storm…so far
Spreads have increased, from extremely low levels
Stock markets have been hit
Growth forecast revised downward, but moderately
With a few exceptions foreign lending has continued
Some countries, Russia in primis is seen as a “safe heaven” by international investors and rating agencies (high commodity prices, large stock of foreign reserves main strength, large presence of the state in the economy)
CDS spreads significantly increased CDS spreads significantly increased (latest data for March 2008)(latest data for March 2008)
234
146
149163
173152
116105
163
74
3650
0
50
100
150
200
250
300
350
Slovak
Czech
Poland
Hungary
Russia
Croat
ia
Bulgaria
Romania
Ukrai
ne
Serbia
Latvia
Kazak
hstan
Jun-07 latest figures: difference in bps
Spread widening in bps
Equity markets fellEquity markets fell
MSCI Em. Europe equity index over the past year
0.8
0.9
1.0
1.1
1.2
1.3
1.4
Mar
-08
Jan-
08
Dec-0
7
Oct-07
Aug-0
7
Jul-0
7
May
-07
absolute terms
relative to all emerging markets
relative to world
But risks have increasedBut risks have increased
The transition region has benefited from the surge in capital flows to emerging markets in the past few years
Domestic credit has boomed, funded by foreign lending
In most countries, credit --and growth-- has been concentrated in real estate, construction and financial sector
Transition countries the only area in the emerging world with a current account deficit
Largest imbalances in the Baltic states, Bulgaria, Romania and Kazakhstan
Capital inflows: A large share to Capital inflows: A large share to transition countries transition countries (US$ bn(US$ bn))
0
100
200
300
400
500
600
2000 2001 2002 2003 2004 2005 2006 2007
Africa
Asia
Western Hem.
Transition Countries
Current account balance (% of GDP)Current account balance (% of GDP)
-10%
-5%
0%
5%
10%
15%
20%
2000 2001 2002 2003 2004 2005 2006 2007
AfricaAsiaWestern Hem.Transition Countries excl. Russia
Extremely rapid credit growth, though Extremely rapid credit growth, though from a low basefrom a low base
Key risks have not been sufficiently Key risks have not been sufficiently notednoted
We may have been looking at the wrong indicators (CA, borowing requirements)
Recycling of petrodollars, the cycle in commodity prices and associated inflationary pressure, are perhaps the key issues to look at.
Relevance of the Calvo-Talvi view for transition countries (for the commodity exporters of the CIS): they question the relevance relevance of aggregate current account and net capital flows for countries that experienced positive developments in the terms of trade
Recycling of petrodollarsRecycling of petrodollars
IMF estimates that 50% of foreign deposits of oil exporting countries have been channelled through credit to Central-Eastern Europe
Credit boom in transition countries funded through foreign borrowing
If commodity prices reverse their trend, CEE countries that absorbed large share of commodity surpluses will suffer
Commodity exporters in the CIS will suffer as well, if not more
Highest share of bank loans in transition countriesHighest share of bank loans in transition countriesShares in total capital inflows to each region (2007)Shares in total capital inflows to each region (2007)
0%
10%
20%
30%
40%
50%
60%
70%
80%
FDI Loans Portfolio
Africa AsiaCentral-Eastern Europe CISWestern Hem.
Sectoral imbalances and sudden stop Sectoral imbalances and sudden stop (Calvo-Talvi view)(Calvo-Talvi view)
Large surplus in the energy sector, combined with growing indebtedness of non-energy sectors, especially non tradables (financial sector, construction and real estate)
A sudden stop in capital inflows in these sectors may induce a sharp fall in output
Resources of surplus sectors may not be easily transferred to sectors starved with funds. One reason is that the surplus sector may invest abroad (capital outflows).
If surplus is in the hand of the state, the transfer may be easier. Example of Kazakhstan
Inflows and outflowsInflows and outflows
CIS
-15%
-10%
-5%
0%
5%
10%
15%
20%
2000 2001 2002 2003 2004 2005 2006 2007
net inflows current account
outflows inflows
Cent. & East. Europe
-10%
-5%
0%
5%
10%
15%
2000 2001 2002 2003 2004 2005 2006 2007
net inflows current account
outflows inflows
Inflation acceleratingInflation accelerating
Monetary expansion fuelled inflation, together with boom in commodity prices
Large share of food in CPI, especially in CIS countries
Inflation accelerated especially in countries with peg to the US$: see comparison between Russia and Ukraine
Response to inflation: tightening of monetary policy in several transition countries, which combined with possible stop in foreign financing could imply a sharp contraction in output
0%
10%
20%
30%
40%
50%
60%
Ukraine Romania Kazakhstan Bulgaria Russia Poland
Share of food and non-alcoholic Share of food and non-alcoholic beverages in CPI basketbeverages in CPI basket
Inflation (12-month changes)Inflation (12-month changes)
0
5
10
15
20
25
30
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-0
4
Nov-0
4
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep-0
5
Nov-0
5
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep-0
6
Nov-0
6
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep-0
7
Nov-0
7
Jan-
08
Mar
-08
Russia Ukraine
A few comments on the episode of A few comments on the episode of sudden stop in Kazakhstansudden stop in Kazakhstan
Kazakhstan an interesting case, as it is the only country that experienced a sudden stop following the financial turmoil
Such sudden stop has induces a slowdown of the economy but not a deep crisis
Sudden stop in KazakhstanSudden stop in Kazakhstan
After the summer of 2007 foreign inflows stopped and domestic credit stopped as well
In real terms there was a decline in the stocks
Growth slowed down but there was no crisis
Sharp decline in growth rates, but no Sharp decline in growth rates, but no recession thanks to commodity productionrecession thanks to commodity production
No crisis yet, thanks to high No crisis yet, thanks to high commodity pricescommodity prices
High oil and gas prices have helped to avoid a deep crisis, in spite of a sudden stop in capital inflows
Role of the State: initial defence of the exchange rate followed by commitment to bail out banks, real estate companies and the construction sector
Government steps in Government steps in
Targeting of resources raised from the energy sector to other sectors in needs of financing
Pledge budgetary funds for construction sector
Announce readiness to use oil stabilization fund to support banking sector
Benefits in the short run, but risks in the longer run, as the reform process slows down.