south-eastern europe - effects of crisis and the way forward
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South-eastern Europe - Effects of Crisis and The Way Forward. Anita Angelovska- Bežoska National Bank of the Republic of Macedonia Belgrade, November 2012. Commonalities and differences among SEE countries before the crisis. Growth accelerated sharply in SEE-6 countries... - PowerPoint PPT PresentationTRANSCRIPT
South-eastern Europe -Effects of Crisis and The Way
Forward
Anita Angelovska-Bežoska National Bank of the Republic of Macedonia
Belgrade, November 2012
Commonalities and differences among SEE countries before the crisis
Growth accelerated sharply in SEE-6 countries... ...mostly driven by domestic demand (consumption) ... ...supported by rapid credit growth... ...fueled also by rising capital inflows
0.0
2.0
4.0
6.0
8.0
10.0
12.0
ALB B&H CRO MKD MNE SRB SEE 6 average
GDP growth rates before the crisis
2004 2005 2006
2007 2008
Source: WEO database - October 2012
-3.0
0.0
3.0
6.0
9.0
B&H MKD CRO ALB
Composition of pre-crisis real GDP growth in SEE (in p.p., average for 2004-2007*)
Net exports
Domestic demand
GDP growth (in %)
* 2006-2007 for Bosnia. Sources: IMF WEO Database October 2012, AMECO Database, national statistical offices
Commonalities and differences among SEE countries before the crisis
Widening current account deficits...
-51,0
-41,0
-31,0
-21,0
-11,0
-1,0ALB B&H CRO MKD MNE SRB
SEE 6 average
CAD in % of GDP
2005 2006 2007 2008 2009
Source: Central banks websites and IMF IFS database.
...amidst growing external indebtedness in some of the countries
20,030,040,050,060,070,080,090,0
100,0110,0
ALB
B&H
CRO
MKD
MNE
SRB
SEE
6 av
erag
e
Gross external debt in % of GDP
2005 20062007 20082009
Source: Central banks websites,WB, WEOdatabaseand IMF Country reports.
Commonalities and differences among SEE countries before the crisis (2)
Accumulation of external vulnerabilities (varying degrees) Declining competitiveness, high current account deficits and rising external debt
Sound financial systems: well-capitalized and liquid banks in the run-up to the crisis, though rising reliance on external financing in some countries
Policy responses to contain accumulation of vulnerabilities Monetary policy response (exchange-rate and euroisation limitations) Macro prudential measures Fiscal policy (budget deficit below 3% of GDP/government debt on a declining path)
Crisis spillover effects due to strong trade and financial linkages
Massive fall in exports and lower capital inflows undermined the pre-crisis growth model
-30,0
-20,0
-10,0
0,0
10,0
20,0
30,0
ALB B&H CRO MKD MNE SRB SEE 6 average
Volume of exports of goods and services,y-o-y change, in %
2004-2007 average 2008 2009 2010 2011
Source: WEO database October 2012.
0,05,0
10,015,020,025,030,035,040,0
ALB B&H CRO MKD MNE SRB SEE 6 average
SEE 6 average,
excl. MNE
FDI in % of GDP
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.Source: Central banks websites., WEO database
Sharp reversal in economic trends
With both foreign trade and domestic demand channels in work
Most severely hit countries with highest internal and external imbalances
5,0
10,0
15,0
20,0
25,0
30,0
35,0
40,0
ALB B&H CRO MKD SRB SEE 5 average
Unemployment rate (% of total labor force)
2004-2007 average 2008 2009 2010 2011
Source: WEO database -October 2012.
80
85
90
95
100
105
110
115
2008 2009 2010 2011
GDP levels before and after the crisis (2008=100)
ALB B&H CROMKD MNE SRB
Source: WEO Database October 2012
Overall, banking systems remained stable Sound initial conditions, traditional banking model and low exposure to
riskier financial instruments contained direct spillovers during the early stage of the crisis (deposit withdrawal posed a challenge)
Considerable second-round effects as the worsened economic outlook pushed credit markets into bust cycle and triggered a rise in NPLs
0,0
5,0
10,0
15,0
20,0
25,0
ALB B&H CRO MKD MNE SRB SEE 6 average
NPLs in % of total loans
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.
-12,0
-7,0
-2,0
3,0
8,0
13,0
18,0
23,0
28,0
ALB B&H CRO MKD MNE SRB SEE 6 average
Credit in % of GDP, 12-month change
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.
In the midstream of the crisis profitability eroded...
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
ALB B&H CRO MKD MNE SRB SEE 6 average
Return on assets, ROA %
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.
...but financial stability was not under threat
Sound capitalization levels strongly contributed to banking sector’s resilience, despite the somewhat lower solvency ratio
8,010,012,014,016,018,020,022,024,026,028,0
ALB B&H CRO MKD MNE SRB SEE 6 average
CARRegulatory capital to risk-weighted assets (% )
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.
10,0
15,0
20,0
25,0
30,0
35,0
40,0
45,0
B&H CRO MKD MNE SRB SEE 5 average
Liquidity ratio, liquid assets to total assets in %
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.
Public finances under pressure...
Larger public deficits – automatic stabilizers’ effect and counter-cyclical expansionary spending
Rising public debt
-8,0-7,0-6,0-5,0-4,0-3,0-2,0-1,00,01,02,0
ALB B&H CRO MKD MNE SRBSEE 6
average
Fiscal balance (% of GDP)
2004-2007 average 2008 2009 2010 2011
Source: WEO database - October 2012
10,0
20,0
30,0
40,0
50,0
60,0
70,0
ALB B&H CRO MKD MNE SRB SEE 6 average
Gross public debt (% of GDP)
2004-2007 average 2008 2009 2010 2011
Source: WEO database, October2012.
...contributing to external vulnerabilities build-up
External debt on a rising track, partly due to governments’ increased accumulation of foreign debt
10,020,030,040,050,060,070,080,090,0
100,0110,0
ALB B&H CRO MKD MNE SRB SEE 6 average
Gross external debt in % of GDP
2004-2007 average 2008 2009 2010
Source: Central banks websites, WB, WEOdatabaseand IMF Country reports.
Monetary Policy Response Stronger countercyclical responses in countries with floating exchange rate only,
where a currency depreciation was allowed in order to mitigate the impact of the crisis
Conventional and unconventional measures undertaken, balancing between the need for mitigating the crisis impact and maintaining stable currency
Interventions on the forex market, while bolstering foreign reserves level with external financing (IMF support to part of the region)
3,0
5,0
7,0
9,0
11,0
13,0
15,0
17,0
19,0
XII.2
006
XII.2
007
XII.2
008
XII.2
009
XII.2
010
XII.2
011
Central Bank policy rate(end-period, in % )
ALB SRB MKD CRO
Source: Central banks websites.
Looking ahead: A growth-enhancing model, with limited space for policy maneuver?
Growth acceleration – a key priority for the region The room for growth-oriented macro-policies is rather limited Fiscal retrenchment – inevitable for medium-term fiscal sustainability
Pro-cyclical tightening in structural terms already in place Fiscal rules, embedded within the legislation (Croatia and Serbia) However, the SEE-6 fiscal outlook is still facing numerous challenges
-8,0-7,0-6,0-5,0-4,0-3,0-2,0-1,00,0
ALB B&H CRO MNE SRBSEE 5
average
Fiscal balance, in % of GDP (plan starts after 2011)
2011 2012 2013 2014 2015Source: Country Fiscal Strategies and IMF Country Reports.
30,035,040,045,050,055,060,065,070,0
ALB B&H CRO MNE SRB SEE 5 average
Public debt, in % of GDP (plan starts after 2011)
2011 2012 2013 2014 2015
Source: Country Fiscal Strategies and IMF Country Reports.
Looking ahead: A growth-enhancing model, with limited space for policy maneuver?
Buffers in foreign reserves need to be built further, or to be maintained in countries with fixed exchange rate, in order to counter external vulnerability risks – narrowed room for countercyclical monetary policy
At the current juncture, when inflation pressures in the region are building up, the room for accommodative monetary policy might be limited even in countries with a flexible exchange rate
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
0,0 50,0 100,0 150,0 200,0 250,0 300,0 350,0 400,0
External vulnerabilities indicators
MNE*CRO*
SRB
B&HMKD
ALB
GFR, ST debt coverage, in %
GFR,
in m
onth
s of
pro
sp. i
mpo
rts
* For Croatia no available data for GFR in months of prosp.imports indicator, for Montenegro no available data for GFR ST debt coverage indicator.Source: EBRD.
Looking ahead: A growth-enhancing model: the role of the domestic banking system at the current juncture
How to cope with the weak bank’s portfolios, since they act as a potential drag on economic activity through:
currently high stock of NPLs which pose a constraint to credit diminished investment incentives of the overextended borrowers - assets are kept
instead of being used for more productive uses
Three years after crisis, credit growth remains subdued reflecting low credit demand as well as weakened credit supply due to high NPLs empirical evidence for CESEE shows a 5 % increase of NPL reduces credit growth by 2 p.p.
through credit supply effects
De-leveraging of the foreign partner banks no foreign capital available imposing additional constraints to branches in the SEE countries
Vienna 2.0 initiative renewed from Jan.2012 as a response to renewed risks for the region from the eurozone crisis
• Focus on fostering home and host authority coordination in support of stable cross-border banking and guarding against disorderly deleveraging
Looking ahead: A growth-enhancing model: the role of the domestic banking system at the current juncture
The role of foreign financing diminishing - more focus on domestic sources
Most countries have available space for additional financial support of the real economy
However, the deteriorated portfolio quality and the weak economy constrain a stronger credit growth
-12,0
-7,0
-2,0
3,0
8,0
13,0
ALB B&H CRO MKD MNE SRB SEE 6 average
Foreign liabilities in % of GDP, 12-month change
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.
10,030,050,070,090,0
110,0130,0150,0170,0190,0210,0
ALB B&H CRO MKD MNE SRB SEE 6 average
Credit to deposits ratio, in %
2005-2007 average 2008 2009 2010 2011
Source: Central banks websites.
Looking ahead: A growth enhancing model: correcting past mistakes and dealing with structural rigidities
Redefining the economic growth model towards more balanced growth - Moving away from consumption-based towards investment and export led growth
Attracting non-debt capital inflows in the tradable sector – increasing
competitiveness
24 2442 51
26
76 7658 49
74
0%10%20%30%40%50%60%70%80%90%
100%
CRO B&H ALB MKD SRB
Foreign direct investments by activities (in %)
Tradable activities Nontradable activities*Source: Cetral banks' websites. Data refers to the FDI stock at the end of 2011. For Albania, latest available data (end of 2010) are used. For Serbia, data on FDI flows are used.
HUNCZE
SVK
POL
EST
LTU
LVA CRO
ALB
BUL
ROM
SRB
MKD
0
10
20
30
40
50
60
70
80
90
0 5 10 15 20
Expo
rt/G
DP
Tradable FDI/GDP
FDI in tradables and export performance
Source: Presentation by Christos Papazoglou, "Pre-crisis lessons and post-crisis challenges for SEE economies", Bank of Greece
Looking ahead: A growth enhancing model: correcting past mistakes and dealing with structural rigidities
The need for structural reforms and enhanced competiveness emphasized with the latest crisis – removing bottlenecks in the investment climate
The region lags behind OECD (Global Competitiveness Index - average of around 4 in SEE and around 5 in OECD) Structural reforms necessary for income convergence and EU integration
0
20
40
60
80
100
120
140
ALB B&H CRO MKD MNE SRB
DB ranking on the ease of doing business (1=best performer)
20112012
Source: Doing Business database.
33.23.43.63.8
44.24.44.64.8
5
ALB B&H CRO MKD MNE SRB OECD average
Global Competitiveness Index 2012-2013
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
Looking ahead: A growth enhancing model: correcting past mistakes and dealing with structural rigidities
Main issues to be addressed: infrastructure enhancement, increase of institutional quality, increase of efficiency and innovations...
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Basic requirements
Institutions Infrastructure Health & prim. educ.
Global Competitiveness Index 2012-2013 Basic requirements, Score
ALB B&H CRO
MKD MNE SRB
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Efficiency enhancers
Higher education and training
Labor market efficiency
Technological readiness
Global Competitiveness Index 2012-2013 Efficiency enhancers, Score
ALB B&H CROMKD MNE SRB
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
0.0
1.0
2.0
3.0
4.0
5.0
Innovation and sophistication factors
Business sophistication
Innovation
Global Competitiveness Index 2012-2013 Innovation and sophistication factors, Score
ALB B&H CROMKD MNE SRB
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
Concluding Remarks
Growth acceleration amidst preserved macro stability – remains the main challenge for the region
The fiscal space for countercyclical response is rather limited, although there is room for maneuver in some countries
Constraints on conventional monetary policy for growth accommodation are present ...
...but macro-prudential measures can be undertaken in a countercyclical manner
The soundness of the banking system – strength of the region
Existing space for the banking system to be used as a financial support for growth
Efforts for systemic NPL resolution can enhance banks’ role in growth support
Enhancing structural reforms and allocating capital in tradable sector – a key priority of the region in devising a sustainable new growth model