Download Macroeconomic Developments in Central European Economies

Macroeconomic Developments in
Central European Economies
Jan Frait
Presentation for
2nd Clearstream Summit for Enlarged Europe
Prague, Hotel Renaissance
May 18, 2006
I.
Current developments in CEC
Current developments in CEE
• CEE exhibit relatively fast growth, forecasts are optimistic.
GDP growth in CEC (%)
7
6
5
4
3
2
1
0
2001
2002
Czech Republic
2003
2004
Hungary
2005
Poland
2006f
2007f
Slovakia
Current developments in CEE
• EU membership boosted exports more than expected.
Growth in exports (y-o-y, %, NC)
30
25
20
15
10
5
0
-5
Czech Republic
2001
2002
Hungary
2003
Poland
2004
2005
Slovakia
2006f
2007f
Current developments in CEE
• Smaller countries are export-oriented and -dependent.
Exports as ratio to GDP (%, current prices)
100
90
80
70
60
50
40
30
20
10
0
Czech Republic
2001
2002
Hungary
2003
Poland
2004
2005
Slovakia
2006f
2007f
Current developments in CEE
• Inflation in CEE went to rather low levels during 2005.
Annual inflation in CEC (%)
9
8
7
6
5
4
3
2
1
0
2003
Czech Republic
2004
2005
Hungary
2006f
Poland
2007f
Slovakia
Current developments in CEE
• Short-term interest rates are converging to key currencies‘
levels.
3M interest rates (%)
18
16
14
12
10
8
6
4
2
0
Czech
Republic
2001
Hungary
2002
Poland
2003
Slovakia
eurozone12
2004
United
States
2005
Current developments in CEE
• Current account deficits relatively high in Hungary and
Slovakia, though financed by the FDI inflows.
Current account deficit (ratio to GDP in %)
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
Czech Republic
2003
Hungary
2004
Poland
2005
Slovakia
2006f
2007f
Current developments in CEE
• Fiscal deficits reveal structural problems and challenge
euroarea membership.
Public finance deficit (ratio to GDP in %)
0
-1
-2
-3
-4
-5
-6
-7
-8
Czech Republic
2003
Hungary
2004
Poland
2005
Slovakia
2006f
2007f
Current developments in CEE
• Introduction of the euro in CEE:
‹
‹
‹
‹
Slovenia – 2007
Slovakia – heading for 2009
Czech Republic – official date 2010, will be decided
only after this year‘s election
Hungary and Poland also not very certain
• Introduction of the euro in the Czech Republic:
‹
‹
‹
so far not a big topic for public and politicians,
„euro adoption strategy does not view Maastricht
criteria as sufficient conditions,
structural and cyclical alignment also important.
Current developments in CEE
• CEE currencies continue to appreciate in real terms – a
clear sign of real economic convergence.
Real appreciation against EUR (CPI based, %)
100
80
60
40
20
0
1993-05
1993-99
CZK
HUF
PLN
2000-05
SKK
Current developments in CEE
• With low inflation, CEE currencies appreciate also in
nominal terms after 2000.
Nominal appreciation against EUR (% )
20
10
0
-10
-20
-30
-40
-50
-60
-70
1993-05
1993-99
CZK
HUF
PLN
2000-05
SKK
Current developments in CEE
• CEE currencies thus have high returns in nominal and real
terms.
Adjusted yields (average 2000-04)
12
10
8
6
4
2
Ita
ly
nominal
Sp
ai
n
C
M
ze
ex
ch
ic
o
Re
pu
bl
ic
H
un
ga
ry
Po
la
nd
Sl
ov
ak
ia
-4
Sw
A
us
tr
al
ia
C
an
ad
a
-2
Ja
pa
n
itz
U
er
ni
la
te
nd
d
K
in
gd
U
ni
om
te
d
S
ta
te
s
G
er
m
an
y
0
real
II.
Monetary policy of the
Czech National Bank
and
the Czech Republic‘s
macroeconomic outlook
Monetary policy of the CNB
• Czech National Bank (CNB) operates within inflation
targeting regime
‹
‹
‹
current inflation target is set as 3 per cent headline inflation
with a tolerance band of ± 1 per cent,
policy framework is close to Bank of England or Sveriges
Riksbank,
exchange rate regime – occasionaly managed floating (last
interventions in forex market in 2002).
• Inflation targeting is in place from 1998
‹
‹
actual inflation was often lower than targetted one,
major factor behind undershooting – faster than expected
nominal exchange rate appreciation.
Monetary policy of the CNB
•
Inflation targets have often been undershot.
14
13
consumer prices
12
net inflation
11
10
9
8
target 1998
6% +/- 0,5p.b.
(announced in
December 1997)
v%
7
6
target 2000
4,5 +/- 1p.b.
(announced in
December 1997)
start of the
target band
3-5%
end of the
target band
2-4%
5
target 1999
4,5 +/- 0,5p.b.
(announced in
November 1998)
4
3
target band
2002-2005
(announced
in April 2001)
point target 3%
since 2006
(announced
in March 2004)
2
target 2001
3% +/- 1p.b.
(announced
in April 2000)
1
0
1/96
-1
1/97
1/98
1/99
1/00
1/01
1/02
1/03
1/04
1/05
1/06
1/07
Monetary policy of the CNB
Czech koruna appreciates steadily after 2000 against EUR and USD.
16
12
depreciation
band +/-7,5%
Feb 28.1996 - May 27.1997
8
4
in %
•
the level of ER
against the former
currency basket
(65% DEM, 35% USD)
band +/-0,5%
Sep 27. 1992 - Feb 2.1996
0
-4
-8
-12
appreciation
targeting of M2 and until
May 26, 1997 ER as well
-16
inflation targeting
-20
1/91
1/92
1/93
1/94
1/95
1/96
1/97
1/98
1/99
1/00
1/01
1/02
1/03
1/04
1/05
1/06
Monetary policy of the CNB
500
2
0
•
460
-2
-4
420
•
-6
380
-8
Real GDP (left axis)
Potential output (left axis)
Output gap (right axis)
340
300
I/96
I/97
I/98
I/99
I/00
I/01
I/02
I/03
I/04
I/05
-10
-12
-14
I/06
•
Actual output was often
below potential (noninflationary output).
CNB responded by
keeping interest rates
low, often below the ones
in euro area.
Current policy rate (2%)
below the euro area
(2,5%) and U.S. (5%).
Monetary policy of the CNB
Long-term interest rates at or below EUR and USD after 2002.
Long-term interest rate differential
10
8
6
4
2
0
19
97
q
0
97 1
19 q0
98 3
19 q0
98 1
19 q0
99 3
19 q0
99 1
20 q0
00 3
20 q0
00 1
20 q0
01 3
20 q0
01 1
20 q0
02 3
20 q0
02 1
20 q0
03 3
20 q0
03 1
20 q0
04 3
q
20 0 1
0
20 4 q0
05 3
q
20 0 1
05
q0
3
-2
19
•
IR differential (CZK 10Y - EUR 10Y)
IR differential (CZK 10 Y - USD 10 Y)
Monetary policy of the CNB
•
Monetary policy supported by relatively sound fiscal policy after 2004.
12
12
10
8
6 .6
6 .6
3 .0
3 .3
2 .4
4
2 .6
2 .6
3 .8
3 .6
4 .7
6
3 .1
2 .9
2 .9
D eficit in % of G D P (E SA 95)
.4
14
2
0
2003
2004
KOPR 11/05
2005
Notification 04/06
2006
2007
CNB's forecast
• In ESA95, the
deficit below
3 % of GDP
since 2004;
• CNB remains
more optimistic
than official plans
for 2006;
• However, there
will be some fiscal
expansion in
2006-07.
Monetary policy of the CNB –
current macroeconomic forecast
•
Inflation expected to move to upper part of tolerance band due to
deregulation of administered prices and indirect tax hikes.
5
4
3
inflation target since 1/06
target band
2
inflation forecast
1
monetary
policy
horizon
actual inflation
0
-1
1/05
4/05
7/05
10/05
1/06
4/06
7/06
10/06
1/07
4/07
7/07
10/07
Monetary policy of the CNB –
current macroeconomic forecast
•
Inflation net of direct effects of tax hikes should stay slightly below
inflation target.
5
4
3
2
1
Inflation CPI (y-o-y)
MP inflation
0
-1
I/03
III
I/04
III
I/05
III
I/06
III
I/07
III
Monetary policy of the CNB –
current macroeconomic forecast
y/y change
2005
2006
2007
6.0
6.1
5.4
Household consumption
2.6
2.8
2.9
Government consumption
0.8
1.0
-0.4
Fixed investment
3.7
6.8
6.4
Exports
11.1
10.2
9.5
Imports
4.8
8.1
8.9
Gross domestic product
• GDP growth will remain high in 2006-07;
• Reflects the data for 2005 and higher estimate of non-inflationary
potential growth;
• Net exports will continue to support growth, together with
acceleration of fixed investments and modest consumption growth.
III.
Banking sector developments
and credit expansion
in CEE and NMS
Banking and credit expansion in CEE
•
Financial sectors in CEE are EU-like: bank-dominated.
Banking Sector Assets / Financial Sector Assets (%)
SK 87,3%
100
70,7% SI
80
PT 80,9%
60
40
76,0% AT
PL 74,1%
20
0
73,4% CZ
75,5%
HU 81,2%
EU12
Source: CNB, CSO, ECB
GR 89,2%
BE 89,6%
Banking and credit expansion in CEE
• Banking sectors in CEE are maily foreign-owned (roughly
90 per cent of assets controlled by banks with dominant
foreing ownership).
• Banking sectors in CEE are relatively concentraded (5
largest banks have always more than 55 per cent share).
• Balance sheets have improved significantly, expansion of
services boosted banks‘ profits.
(%)
capital adequacy
(2005)
CR
Hungary
Poland
Slovakia
12.4
11.4
15.4
17.0
nonperforming
loans (2005)
4.4
3.6
6.0
6.3
provisions
(2005)
return on equity
(2004)
return on
assets (2004)
2.8
1.9
5.5
4.9
23.4
25.2
17.6
11.9
1.3
2.0
1.4
1.0
Banking and credit expansion in CEE
•
Assets of banks and other financial institutions relative to GDP are
rather low in NMS – large room for future expansion?
700
600
500
400
300
200
100
0
Financial Sector Assets and Bank's Assets relative
to GDP (%)
DK
UK
NL
MT
IE
IE
MT
UK
DE
EU25
BE AT
NL
DK
FR PT CY
DE
BE
CY ESSE
EU25 ATFR
IT
PT
ES
FI
SE
GR
IT
CZSI LTEE
FI
HUSK
GR
PL
CZ SI LTEE SK
HU PL LV
LV
Financial Sector Assets /GDP
Source: CNB, CSO, ECB
Bank's Assets / GDP
Banking and credit expansion in CEE
• Credit to firms and households in NMS is relatively
low too.
Credit as ratio to GDP (%, end 2004)
MT
NL IE
DK
200
150
100
50
AT
ES
SE
BE
FR
IT
GR
EEFI
HULT
SI
PLCZ
SK
LV
UK
DEPT
0
Total credit
Credit to non-financial firms
Source: CNB, CSO, ECB
Household credits
Banking and credit expansion in CEE
• With decline in inflation and central banks‘ rates, lending
rates went down to rather low levels too.
Average lending rates in CE countries (% p.a.)
25
20
15
10
5
20
00
Q
1
20
00
Q
3
20
01
Q
1
20
01
Q
3
20
02
Q
1
20
02
Q
3
20
03
Q
1
20
03
Q
3
20
04
Q
1
20
04
Q
3
20
05
Q
1
20
05
Q
3
0
Czech Republic
Hungary
Poland
Slovak Republic
Banking and credit expansion in CEE
• Low rates (demand side) and struggle for the market share
and profit by banks (supply side) contributed to lending
boom
‹
‹
‹
‹
‹
credit to households goes up rapidly,
housing credit became a major business,
„dear“ consumption credit retains surprising dynamics,
corporate lending is gaining strength as well,
now banks start to focus on SMEs.
Current developments in NMS
Restructured banks began to extend credit to corporate sector as well
as to the households.
Y-o-Y changes in non-financial firms credit to GDP (% )
3
1
-1
-3
-5
2002
Source, CNB, ECB
2003
2004
EU
SK
PO
HU
-7
CR
•
Banking and credit expansion in CEE
Corporate credit growth differs among NMS, relatively mild in CEE.
Growth in corporate debt (av. 2003- 2005, %)
Source: BIS
ro
at
ia
C
ni
a
Sl
ov
e
ni
a
Li
th
ua
La
tv
ia
ia
to
n
Es
ki
a
Sl
ov
a
d
Po
la
n
H
un
g
ar
y
R
45
40
35
30
25
20
15
10
5
0
C
•
Banking and credit expansion in CEE
Housing credit has been going up quite fast, the Baltics play the lead.
Growth in housing debt (av. 2003- 2005, %)
Source: BIS
ro
at
ia
C
Sl
ov
e
ni
a
ni
a
Li
th
ua
La
tv
ia
ia
Es
to
n
a
Sl
ov
a
ki
d
la
n
Po
H
un
g
ar
y
R
80
70
60
50
40
30
20
10
0
C
•
Banking and credit expansion in CEE
•
Explanation for boom in housing credit – going up from scratch in
absolute terms.
Housing credit per head (in ths EUR)
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
CR
Hungary
Poland
2002
Slovakia
2003
2004
Slovenia
EU
Banking and credit expansion in CEE
•
Indebtedness in CEE also low in relative terms...
Debt as ratio to GDP (% )
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
CR
Hungary
Poland
Slovakia
Eurozone
corporate debt (2004) housing debt (2005)
Banking and credit expansion in CEE
•
Housing debt is exposing households to currency risk in some
countries.
The share of foreign currency loans in selected CEE (%)
40
30
20
10
0
Czech
Republic
Hungary
Poland
Slovakia
Czech
Republic
Share of FX loans in total loans to customers
Source: Magyar Nemzeti Bank RFS, April 2006
2002
Hungary
Poland
Slovakia
Share of FX loans in loans to households
2003
2004
September 2005
Banking and credit expansion in CEE
• There are fears that the mix of credit boom and optimistic
expectations may support investments of speculative kind
and create asset bubbles similar to those experienced by
many developed economies in the past.
• Central banks in NMS focus on financial stability issues
and provide financial stability reports.
• Some central banks believe in bening neglect scenario
while some other view credit dynamics as a risk (mainly
these in countries with foreign currency lending).
• Some countries try to act: the impact of measures weak as
in some industrial countries.
Banking and credit expansion in CEE
• IMF World Economic Outlook (September 2005, p. 13):
‹
‹
‹
"in cases where house price inflation remains robust, a
combination of moral suasion and if necessary prudential
measures could help limit potential risks; over the long term,
regulatory features - including those that potentially constrain
supply - that may exacerbate price pressures need also to
be addressed"….
prudential measures: higher and differentiated capital
requirements, tighter loan classification and provisioning
rules, dynamic provisioning, stricter assessment of collateral,
tighter eligibility criteria for certain loans,
supervisory measures: increasing disclosure requirements,
closer inspection, periodic stress testing.
Banking and credit expansion in CEE
• A typical applicant of „measures“ is a developing or a
transitional country in a major problems.
• „Measures“ are difficult to apply in reality due to
competition from non-banking subjects and foreign banks
and their local branches.
• Basel2 rules together with international accounting rules
make the application of some nonstandard measures not
so easy.
• The risks stemming from high credit dynamics are a worldwide phenomenon requiring world-wide approach.
• Coping with excessive credit growth will be a major
challenge for authorities in the years ahead.
• Jan Frait ([email protected]) is one of seven members of
the Czech National Bank board (www.cnb.cz)
• Presentation was prepared with the assistance from Luboš
Komárek ([email protected]), the advisor to the
board member.
• Presentation may not necessarily reflect the opinions of
the board of the Czech National Bank.