Progress in Reducing Vulnerability of CEE Economies

From crisis to recovery: old and new challenges in Emerging Europe Frankfurt, July 5, 2011

Mark Allen Senior IMF Resident Representative for Central and

Eastern Europe

2

Outline

• How much has the vulnerability to crisis of CEE countries been reduced? • Look at elements of: Vulnerabilities to external shocks Financial sector vulnerability Fiscal vulnerability

• Based on vulnerability work by Fund staff

3

Current account deficits have been reined in …

Source: IMF, WEO database.

Current Account Balance (percent of GDP)

-25

-20

-15

-10

-5

0

5

10

2008 2009 2010 2011

4

-20

-15

-10

-5

0

5

10

15

20

25

-30 -25 -20 -15 -10 -5 0 5 10 15 20

… with import compression at first, followed by satisfactory export growth

Source: IMF, WEO database.

Change in Imports and Exports since 2008 (percent of 2008 GDP)

Change in imports

Cha

nge

in e

xpot

rs

2009

5

-20

-15

-10

-5

0

5

10

15

20

25

-30 -25 -20 -15 -10 -5 0 5 10 15 20

… with import compression at first, followed by satisfactory export growth

Source: IMF, WEO database.

Change in Imports and Exports since 2008 (percent of 2008 GDP)

Change in imports

Cha

nge

in e

xpot

rs

2010

6

-20

-15

-10

-5

0

5

10

15

20

25

-30 -25 -20 -15 -10 -5 0 5 10 15 20

… with import compression at first, followed by satisfactory export growth

Source: IMF, WEO database.

Change in Imports and Exports since 2008 (percent of 2008 GDP)

Change in imports

Cha

nge

in e

xpot

rs

2011

7

For floaters, domestic demand compression has been mitigated by exchange rate adjustment, …

Source: IMF, WEO database; Eurostat.

Domestic Demand (percent of GDP)

85

90

95

100

105

110

115

120

125 H

unga

ry

Cze

ch R

ep.

Cro

atia

Po

land

Ro

man

ia

Ukr

aine

2008 2009 2010 2011

80

85

90

95

100

105

110

115

120

2008 2009 2010

Czech Rep. Hungary Poland Romania

Real Effective Exchange Rate (ULC based, 2008Q1=100)

8

…but in the peggers, price adjustment is slower.

Source: IMF, WEO database; Eurostat.

Domestic Demand (percent of GDP)

85

90

95

100

105

110

115

120

125 H

unga

ry

Cze

ch R

ep.

Cro

atia

Po

land

Ro

man

ia

Ukr

aine

E

ston

ia

Slov

enia

Sl

ovak

ia

Latv

ia

Lith

uani

a Bu

lgar

ia

2008 2009 2010 2011

80

85

90

95

100

105

110

115

120

2008 2009 2010

Czech Rep. Hungary Poland Romania Bulgaria Estonia Latvia Lithuania Slovenia Slovakia

Real Effective Exchange Rate (ULC based, 2008Q1=100)

Domestic Demand (percent of GDP)

9

Bank exposure to CEE is falling as expected …

Source: BIS; IMF, WEO database.

BIS banks exposure as a percent of GDP (quarterly, peak = 100)

0

20

40

60

80

100

120

t-20 t-16 t-12 t-8 t-4 t t+4 t+8 t+12 t+16 t+20 t+24 t+28

Latin America (Dec 1983) Developing Asia (Sep 1997) CEE (Mar 2009)

10

…shifting the structure of capital flows.

Source: IMF, WEO database.

Net Capital Flows (percent of GDP)

-2

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012

Portfolio investment, net

Other investment, net

Direct investment, net

11

Private sector external debt often remains high.

Source: IMF staff.

Private Sector External Debt (percent of GDP)

0

20

40

60

80

100

120

140

2008 2009 2010 2011

12

But is becoming more serviceable and reserve cover is growing.

Source: JEDH database. IMF staff.

Gross External Debt (percent of exports)

0

50

100

150

200

250

300

350

400 C

zech

Rep

. Sl

ovak

ia

Lith

uani

a E

ston

ia

Pola

nd

Ukr

aine

Sl

oven

ia

Bulg

aria

H

unga

ry

Rom

ania

C

roat

ia

Latv

ia

2008 2009 2010 2011

0

50

100

150

200 Latvia

Croatia

Lithuania

Ukraine

Poland

Bulgaria

Romania

Hungary

Estonia

Serbia

B&H

Czech Rep.

2009 2011

Gross Reserves to Short-term External Debt* (percent)

* debt at remaining maturity

13

… But some external financing needs remain high.

Source: IMF staff.

Total External Financing Requirement (percent of GDP)

-10

0

10

20

30

40

50

60

70

80 20

07

2009

20

11

2007

20

09

2011

2007

20

09

2011

2007

20

09

2011

2007

20

09

2011

2007

20

09

2011

2007

20

09

2011

2007

20

09

2011

2007

20

09

2011

2007

20

09

2011

B&H Poland Serbia Romania Ukraine Lithuania Bulgaria Croatia Hungary Latvia

Maturing External Debt

Current Account Deficit

14

The growth of credit to GDP has reversed…

Source: Haver.

Domestic Credit to GDP (year on year percent change)

Hungary

Poland

Latvia

Lithuania

Bulgaria

Romania

Czech Rep.

Croatia

Ukraine

Estonia

Balti

cs

CE

E

SEE

N

on-E

U

2011 2005 2006 2007 2008 2009 2010

< -15% 0% > 15%

15

…and asset price bubbles have deflated.

Source: IMF, IFS; Global Property Guide; Eurostat.

Housing Prices (percent change from 2004Q1, CPI deflated)

0

50

100

150

200

250

300

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

Sofia Prague Tallinn Riga Vilnius Budapest Warsaw Bucharest Ljubljana Bratislava

Stock Markets (stock market indices, 2005=100)

-30

0

30

60

90

120

150

180 H

unga

ry

Serb

ia

Cro

atia

Sl

oven

ia

Cze

ch R

ep.

Slov

akia

Li

thua

nia

Pola

nd

Est

onia

Bu

lgar

ia

Latv

ia

Ukr

aine

Peak Current

16

The resulting increases in NPLs seem to be peaking

Source: IMF staff.

Non-Performing Loans (percent of total loans)

0

5

10

15

20

2007 2008 2009 2010

17

Loan to deposit ratios are generally improving,

Source: IMF staff.

Loan-to-Deposit Ratio (loans as a mulitple of deposits)

0

0.5

1

1.5

2

2.5

2007 2008 2009 2010

18

..banks are becoming better capitalized,…

Source: IMF staff.

Banks’ Capitalization (regulatory capital to risk-weighted assets)

0

5

10

15

20

25 2008 2010

19

…and the effects of the credit boom are receding.

Source: IMF staff.

3-year Cumulative Change in Credit-to-GDP ratio (credit to private sector)

-5 0 5

10 15 20 25 30 35 40 Lithuania

Ukraine

Hungary

Romania

Croatia Poland

Serbia

Bulgaria

Latvia

2007 2009 2011

20

The crisis revealed the weaknesses in fiscal positions

Source: IMF, WEO database.

Headline and Cyclically Adjusted Fiscal Balance (2007-2009, percent of GDP)

-10

-8

-6

-4

-2

0

2

4

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 Cyclicaly Adjusted Balance

Fisc

al B

alan

ce

2007-2009

21

… and consolidation is taking place gradually.

Source: IMF, WEO database.

Fiscal Balance (percent of GDP)

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2007 2008 2009 2010 2011 2012

CEE4 Baltics SEE Croatia Ukraine

22

A legacy is the sharp increase in public debt.

Source: IMF, WEO database.

Public Debt (percent of GDP)

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011

CEE4 Baltics SEE Croatia Ukraine

23

… whose structure is in some cases susceptible to roll-over risk.

Source: IMF staff.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Slov

akia

C

zech

Rep

. U

krai

ne

Rom

ania

Po

land

Bu

lgar

ia

Est

onia

H

unga

ry

Slov

enia

Li

thua

nia

Latv

ia

Resident Nonresident Nonresident Holdings of Public Debt, 2010 (percent of total)

0

10

20

30

40

50

60

70 Bu

lgar

ia

B&H

U

krai

ne

Latv

ia

Lith

uani

a Ro

man

ia

Pola

nd

Cro

atia

Se

rbia

H

unga

ry

Gross Public Debt Short-Term Debt

Gross and Short-Term Public Debt at Remaining Maturity

(percent of GDP)

24

Conclusions

• Countries situations vary

• In general external vulnerability down

• Financial sector vulnerability shows some improvement

• Fiscal vulnerability has risen sharply

• All remain at concerning levels

• Further consolidation needed for next few years

25

Thank you