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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... ...mostly driven by domestic demand (consumption) ... ...supported by rapid credit growth... ...fueled also by rising capital inflows 9.0 Composition of pre-crisis real GDP growth in SEE (in p.p., average for 2004-2007*) GDP growth rates before the crisis 12.0 10.0 Net exports 6.0 2004 2005 2007 2008 2006 8.0 3.0 Domestic demand 6.0 4.0 0.0 GDP growth (in %) -3.0 B&H MKD CRO ALB * 2006-2007 for Bosnia. Sources: IMF WEO Database October 2012, AMECO Database, national statistical offices 2.0 0.0 ALB B&H Source: WEO database - October 2012 CRO MKD MNE SRB SEE 6 average Commonalities and differences among SEE countries before the crisis Widening current account deficits... ...amidst growing external indebtedness in some of the countries CAD in % of GDP ALB B&H CRO MKD MNE -1,0 -11,0 Gross external debt in % of GDP SRB SEE 6 average 110,0 100,0 2005 2006 90,0 2007 2008 80,0 2009 70,0 60,0 -21,0 50,0 40,0 30,0 -31,0 -51,0 So urce: Central banks websites and IMF IFS database. Source: Central banks websites, WB, WEO database and IMF Country reports. SEE 6 average 2009 SRB 2008 MNE 2007 MKD 2006 CRO 2005 B&H -41,0 ALB 20,0 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) No rating downgrade for any country - only worsened future outlooks Crisis spillover effects due to strong trade and financial linkages FDI in % of GDP Volume of exports of goods and services, y-o-y change, in % 2004-2007 average 2008 2009 2010 2005-2007 average 2011 30,0 2008 2009 2010 2011 40,0 35,0 20,0 30,0 10,0 25,0 20,0 0,0 15,0 10,0 -10,0 5,0 -20,0 0,0 ALB -30,0 ALB B&H Source: WEO database October 2012. CRO MKD MNE SRB SEE 6 average B&H CRO Source: Central banks websites., websites. WEO database MKD MNE SRB SEE 6 SEE 6 average average, excl. MNE Massive fall in exports and lower capital inflows undermined the pre-crisis growth model Sharp reversal in economic trends With both foreign trade and domestic demand channels in work 115 Unemployment rate GDP levels before and after the crisis (2008=100) (% of total labor force) 40,0 110 2004-2007 average 2008 2009 2010 2011 35,0 105 30,0 100 25,0 95 20,0 90 85 ALB B&H CRO MKD MNE SRB 15,0 10,0 80 2008 2009 Source: WEO Database October 2012 2010 2011 5,0 ALB B&H Source: WEO database -October 2012. CRO MKD SRB Most severely hit countries with highest internal and external imbalances SEE 5 average 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) NPLs in % of total loans Credit in % of GDP, 12-month change 28,0 2005-2007 average 2008 2009 2010 2011 23,0 25,0 2005-2007 average 2008 2009 2010 2011 20,0 18,0 13,0 15,0 8,0 10,0 3,0 -2,0 5,0 -7,0 0,0 -12,0 ALB B&H Source: Central banks websites. CRO MKD MNE SRB SEE 6 average ALB B&H Source: Central banks websites. CRO MKD MNE SRB SEE 6 average Considerable second-round effects as the worsened economic outlook pushed credit markets into bust cycle and triggered a rise in NPLs In the midstream of the crisis profitability eroded... Return on assets, ROA % 3,0 2005-2007 average 2008 2009 2010 2011 2,0 1,0 0,0 -1,0 -2,0 -3,0 ALB B&H Source: Central banks websites. CRO MKD MNE SRB SEE 6 average ...but financial stability was not under threat CAR Liquidity ratio, liquid assets to total assets in % 45,0 2005-2007 average 2008 2009 2010 Regulatory capital to risk-weighted assets (%) 2011 40,0 28,0 2005-2007 average 2008 2009 2010 2011 26,0 24,0 35,0 22,0 30,0 20,0 18,0 25,0 16,0 20,0 14,0 15,0 12,0 10,0 10,0 B&H CRO Source: Central banks websites. MKD MNE SRB SEE 5 average 8,0 ALB B&H Source: Central banks websites. CRO MKD MNE SRB SEE 6 average Sound capitalization levels strongly contributed to banking sector’s resilience, despite the somewhat lower solvency ratio Public finances under pressure... Larger public deficits – automatic stabilizers’ effect and counter-cyclical expansionary spending Rising public debt Gross public debt (% of GDP) Fiscal balance (% of GDP) ALB B&H CRO MNE MKD SRB SEE 6 average 2,0 70,0 2004-2007 average 2008 2009 2010 2011 60,0 1,0 50,0 0,0 -1,0 40,0 -2,0 -3,0 30,0 -4,0 20,0 -5,0 -6,0 -7,0 -8,0 10,0 2004-2007 average Source: WEO database - October 2012 2008 2009 2010 2011 ALB B&H CRO Source: WEO database, October 2012. MKD MNE SRB SEE 6 average ...contributing to external vulnerabilities build-up External debt on a rising track, partly due to governments’ increased accumulation of foreign debt Gross external debt in % of GDP 110,0 2004-2007 average 2008 2009 2010 100,0 90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 ALB B&H CRO MKD MNE Source: Central banks websites, WB, WEO database and IMF Country reports. SRB SEE 6 average 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) Central Bank policy rate (end-period, in %) 19,0 ALB 17,0 SRB MKD CRO 15,0 13,0 11,0 9,0 7,0 5,0 Source: Central banks websites. XII.2011 XII.2010 XII.2009 XII.2008 XII.2007 XII.2006 3,0 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 Fiscal balance, in % of GDP Public debt, in % of GDP (plan starts after 2011) ALB B&H CRO MNE (plan starts after 2011) SRB SEE 5 average 0,0 70,0 -1,0 2012 2013 2014 2015 65,0 -2,0 60,0 -3,0 55,0 -4,0 50,0 -5,0 45,0 -6,0 40,0 -7,0 -8,0 2011 35,0 2011 2012 2013 Source: Country Fiscal Strategies and IMF Country Reports. 2014 2015 30,0 ALB B&H CRO MNE Source: Country Fiscal Strategies and IMF Country Reports. 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 SRB SEE 5 average 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 External vulnerabilities indicators GFR, in months of prosp. imports 8,0 SRB 7,0 6,0 ALB 5,0 4,0 MKD B&H 3,0 2,0 MNE* 1,0 CRO* 0,0 0,0 50,0 100,0 150,0 200,0 250,0 300,0 350,0 400,0 GFR, ST debt coverage, in % * 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 Foreign liabilities in % of GDP, 12-month change 13,0 2005-2007 average 2008 2009 2010 2011 Credit to deposits ratio, in % 210,0 190,0 2005-2007 average 2008 2009 2010 2011 170,0 8,0 150,0 130,0 3,0 110,0 90,0 -2,0 70,0 50,0 -7,0 30,0 10,0 -12,0 ALB B&H Source: Central banks websites. CRO MKD MNE SRB SEE 6 average ALB B&H Source: Central banks websites. CRO MKD MNE SRB SEE 6 average 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 Foreign direct investments by activities FDI in tradables and export performance 90 (in %) SVK 80 100% CZE HUN EST 70 80% 60 BUL LTU Export/GDP 50 40 LVA SRB ALB 20 58 70% MKD 60% CRO 50% POL 30 90% 76 40% 30% ROM 10 10% 0 5 10 Tradable FDI/GDP 74 76 42 20% 0 49 15 Source: Presentation by Christos Papazoglou, "Pre-crisis lessons and post-crisis challenges for SEE economies", Bank of Greece 20 24 24 CRO B&H 51 26 0% Tradable activities ALB MKD SRB 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. 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 Global Competitiveness Index 2012-2013 DB ranking on the ease of doing business (1=best performer) 5 140 4.8 120 2011 4.6 2012 4.4 100 4.2 4 80 3.8 60 3.6 40 3.4 3.2 20 3 ALB 0 ALB B&H Source: Doing Business database. CRO MKD MNE SRB B&H CRO MKD MNE SRB OECD average 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... 7.0 Global Competitiveness Index 2012-2013 Basic requirements, Score 6.0 5.0 ALB B&H CRO MKD MNE SRB 4.0 3.0 2.0 1.0 0.0 Basic requirements 6.0 Global Competitiveness Index 2012-2013 Efficiency enhancers, Score 5.0 ALB B&H CRO MKD MNE SRB Institutions Infrastructure Health & prim. educ. Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score) 5.0 Global Competitiveness Index 2012-2013 Innovation and sophistication factors, Score 4.0 ALB B&H CRO MKD MNE SRB 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 Efficiency enhancers Higher education and training Labor market efficiency Technological readiness Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score) Innovation and sophistication factors Business sophistication Innovation Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score) Concluding Remarks Growth acceleration amidst preserved macro stabilty – 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 THANK YOU FOR YOUR ATTENTION http://www.nbrm.mk [email protected]