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Living through crisis! Where is the guide please? The global Financial crisis and SEE: Lessons for macroeconomic policy and financial stability Bank of Greece Altin Tanku Bank of Albania May 2010 The opinions expressed in this presentations are those of the author and do not represent the opinions of the Bank of Albania. Preview • Macroeconomic Policy Challenges, the policy makers view: – Past: • Preconditions Domestic and External vulnerabilities • Channels of transmission – Current: • Impact of the crisis • Short term outlook – Future: • Long run implications – Conclusions Preconditions Strong persistent growth (on average 6%) fueled by a strong aggregate demand and credit growth.* Private consumprion Gov. Consumption Investments Net exports Average contribution to GDP 76 11 38 -25 Source: Albanian Institute of Statistics * Bank of Albania Annual Reports and Monetary policy Declarations 2006-2009 Preconditions (cont.) Credit Developments 400 150 350 130 300 110 250 90 200 70 150 50 100 30 50 10 -10 Ja n0 M 5 ar -0 M 5 ay -0 5 Ju l-0 Se 5 p0 N 5 ov -0 Ja 5 n0 M 6 ar -0 M 6 ay -0 6 Ju l-0 Se 6 p0 N 6 ov -0 Ja 6 n0 M 7 ar -0 M 7 ay -0 7 Ju l-0 Se 7 p0 N 7 ov -0 Ja 7 n0 M 8 ar -0 M 8 ay -0 8 Ju l-0 Se 8 p08 - Credit in FX Source: Bank of Albania Credit in ALL Total Annual grow th FX Annual grow th ALL Preconditions (cont.) Most of credit is in foreign currency 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Source: Bank of Albania -0 8 -0 8 Se p l-0 8 Au g Ju n08 Ju -0 8 8 -0 8 ay M Ap r ar -0 08 Credit in ALL M Fe b- n08 Ja -0 7 -0 7 D ec -0 7 ct Credit in FX N ov -0 7 O -0 7 Se p l-0 7 Au g Ju -0 7 n07 Ju 7 -0 7 ay M Ap r 07 ar -0 M Fe b- n07 Ja D ec -0 6 0% Preconditions (cont.) Fast growing credit based on strong deposits Credit % of Deposits 100 80 60 40 20 0 05 na J ar M 05 ay M 05 5 6 7 8 6 7 8 6 7 8 6 7 8 5 5 6 6 7 7 08 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 l-0 l-0 l-0 l-0 r r r v v v y y y n n n p p p pu u u u a a a o o o a a a a a a e e e e J J J J J J J S N M S N M S N M S M M M FX Source: Bank of Albania ALL Total Preconditions (cont.) Well capitalized Banking system Capital Adequacy Ratio 40 30 20 10 0 -10 T 98 99 00 01 02 03 04 05 06 07 99 00 01 02 03 04 05 06 07 08 cccccccccnnnnnnnnnn19 e e e e e e e e e u u u u u u u u u u J J J J J J J J J J D D D D D D D D D IV Source: Bank of Albania Preconditions (cont.) – EU is the main trade and financial partner Imports Turkey 6% Italy 28% Germany 7% China 8% Other 36% Source: Bank of Albania Greece 15% Preconditions (cont.) Large trade and current account deficits with heavy reliance on remittances 1000 800 600 400 200 0 -200 -400 -600 -800 -1000 Q 01 1- Q 01 3- Q 02 1- Q 02 3- Q 03 1- Q 03 3- Q 04 1- Remittances Source: Bank of Albania Q 04 3- FDI Q 05 1- Q 05 3- Q PORTFOLIO 06 1- Q OIN 06 3- Q 07 1- Q 07 3- Trade Balance Q 08 1- Q 08 3- Q 09 1- Preconditions (cont.) Persistent Lek appreciation Lek-Euro Exchange rate 145 140 135 130 125 120 115 110 00 01 02 03 04 05 06 07 08 00 01 02 03 04 05 06 07 08 nnnnnnnnnululululululululula a a a a a a a a J J J J J J J J J J J J J J J J J J Source: Bank of Albania Crisis begins in USA and Europe September-October 2008 – Banks failures become a reality in US and Europe. – Full deposit insurance in Europe. – Slowdown in global economic activity. Expectations: – No real impact in Albanian banking and financial system, but suspicion and fear. – Significant effect in the real sector of the economy. Financial crisis reaches Albania • Fear contagion hits public. • Deposit withdrawals begin due to: – Fear – Full deposit insurance in Europe • Insurance arbitrage possibilities • Banks experience liquidity problems in foreign currency. – Overall credit slowdown, • Credit in foreign currency eventually stopped. De c0 Fe 6 b07 Ap r- 0 7 Ju n0 Au 7 g0 O 7 ct -0 De 7 c0 Fe 7 b08 Ap r- 0 8 Ju n0 Au 8 g0 O 8 ct -0 De 8 c0 Fe 8 b09 Ap r- 0 9 Ju n0 Au 9 g0 O 9 ct -0 De 9 c0 Fe 9 b10 Deposits Sep-2008=100% 110 105 100 95 90 85 80 75 70 65 60 ALLTime Deposits FX Time Deposits Financial crisis reaches Albania • Fear contagion hits public. • Deposit withdrawals begin due to: – Fear – Full deposit insurance in Europe • Insurance arbitrage possibilities • Banks experience liquidity problems in foreign currency. – Overall credit slowdown, • Credit in foreign currency eventually stopped. Ja n0 M 5 ar -0 M 5 ay -0 Ju 5 l- 0 Se 5 p0 N 5 ov -0 Ja 5 n0 M 6 ar -0 M 6 ay -0 Ju 6 l- 0 Se 6 p0 N 6 ov -0 Ja 6 n0 M 7 ar -0 M 7 ay -0 Ju 7 l- 0 7 Se p0 N 7 ov -0 Ja 7 n0 M 8 ar -0 M 8 ay -0 Ju 8 l- 0 Se 8 p0 N 8 ov -0 Ja 8 n0 M 9 ar -0 M 9 ay -0 Ju 9 l- 0 Se 9 p0 N 9 ov -0 Ja 9 n1 M 0 ar -1 0 Credit Developments 500 150 450 130 400 110 350 300 90 250 70 200 50 150 100 30 50 10 -10 Credit in FX Source: Bank of Albania Credit in ALL Total Annual grow th FX Annual grow th ALL Real sector crisis spreads to Albania 150 100 50 0 -50 Remittances and Trade activity shrink due to slowdown of real activity in EU -150 -200 -250 -300 -350 -400 -450 Ja n05 M ar -0 5 M ay -0 5 Ju l-0 5 Se p05 N ov -0 5 Ja n06 M ar -0 M 6 ay -0 6 Ju l-0 6 Se p06 N ov -0 6 Ja n07 M ar -0 7 M ay -0 7 Ju l-0 7 Se p07 N ov -0 7 Ja n08 M ar -0 8 M ay -0 8 Ju l-0 8 Se p08 N ov -0 8 Ja n09 M ar -0 M 9 ay -0 9 • Consumption & investments -100 Exports Imports Lek-Euro Exchange rate 145 140 Exchange rate starts to depreciate accompanied by increased volatility • Expected high pass-through to inflation* 135 130 125 120 115 Ja n00 Ju l-0 0 Ja n01 Ju l-0 1 Ja n02 Ju l-0 2 Ja n03 Ju l-0 3 Ja n04 Ju l-0 4 Ja n05 Ju l-0 5 Ja n06 Ju l-0 6 Ja n07 Ju l-0 7 Ja n08 Ju l-0 8 Ja n09 Ju l-0 9 110 Source: Bank of Albania * Tanku, Vika and Gjermeni (2007); and Istrefi and Semi (2007) Crisis: Back to Financial Channels • Non performing credits increase from 4.6 to above 10 percent due to*: – Exchange rate depreciation for unhedged borrowings in foreign currency, – Decrease in economic activity, – Slow down in credit growth. • Policy objective shifts toward financial stability. – Exchange rate is believed to be the most important and imminent threat to financial stability. • Banks face liquidity problems, but capital adequacy ratio remains above 17%. * Shijaku H., and Ceca K., (2009) Policy Response • Deal with liquidity problems • From fix amount to fix price repo. auctions • • • • Reduce interest rate to 5.25 Shift focus to financial stability Increase deposit insurance carefully Limited intervention in Forex market • Less than 60 million euro • For fixed period • Introduce temporary restrictions on profit distribution • March 2009 – March 2010 • Ask banks for recapitalization if needed (two cases) Monetary Agregates (annual growth rate) 35.0 25.0 15.0 5.0 -5.0 -15.0 7 8 9 7 8 9 7 8 9 0 7 8 9 0 7 7 8 8 9 9 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -1 -0 -0 -0 -1 l-0 l-0 l-0 r r r r v v v y y y n n n n p p p u u u a a a a o o o a a a J J J Ja Ja Ja Ja M Se N M Se N M Se N M M M M FX component Monetary base Currency outside depository corporations M1 Aggregate M2 Aggregate M3 Aggregate Policy Response • Deal with liquidity problems • From fix amount to fix price repo. auctions • • • • Reduce interest rate to 5.25 Shift focus to financial stability Increase deposit insurance carefully Limited intervention in Forex market • Less than 60 million euro • For fixed period • Introduce temporary restrictions on profit distribution • March 2009 – March 2010 • Ask banks for recapitalization if needed (two cases) Preconditions (cont.) Important historical events • • March 1997 April 2002 20,000 15,000 10,000 5,000 0 -5,000 -10,000 -15,000 -20,000 9 6 96 96 96 9 7 97 97 97 9 8 98 98 98 9 9 99 99 99 0 0 00 00 00 0 1 01 01 01 0 2 02 02 02 0 3 03 03 03 0 4 04 04 04 0 5 05 05 05 0 6 n- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- anJ J O J O J J O J J O J O J J O Ja A J A J A J A J A J A J A J A J A J A J O O O O All Demand Deposits Source: Bank of Albania ALL Time Deposits FX Time Deposits Policy Response • Deal with liquidity problems • From fix amount to fix price repo. auctions • • • • Reduce interest rate to 5.25 Shift focus to financial stability Increase deposit insurance carefully Limited intervention in Forex market • Less than 60 million euro • For fixed period • Introduce temporary restrictions on profit distribution • March 2009 – March 2010 • Ask banks for recapitalization if needed (two cases) Czech koruna Hungarian forint Polish zloty Romanian leu Albanian Lek Turkish lira Serbian denar 3/15/2010 1/15/2010 11/15/2009 9/15/2009 7/15/2009 5/15/2009 3/15/2009 1/15/2009 11/15/2008 9/15/2008 7/15/2008 5/15/2008 3/15/2008 1/15/2008 11/15/2007 9/15/2007 7/15/2007 5/15/2007 3/15/2007 1/15/2007 11/15/2006 9/15/2006 7/15/2006 5/15/2006 3/15/2006 1/15/2006 11/15/2005 9/15/2005 PERCENT CHANGE, 2006 = 0 Short term effects New economic trends • Monetary base grows but Credit does not • Monetary base grows but Money growth slows down • Private investments slows • Remittances decrease • Credit slowdown stops the money creation in FX resulting in reduced FX supply • Exchange rate depreciates; inflation stays within objective – due to decline of commodity prices – due to slowdown in economic activity * Bank of Albania estimation Crisis: Back to Real economy 30% 40% 20% 30% Corporate YoY growth 50% 10% Liquidity 20% 0% 10% Liquidity_FX 60% Feb-10 Oct-09 Dec-09 Aug-09 Jun-09 Feb-09 Apr-09 Dec-08 Aug-08 Oct-08 Jun-08 Feb-08 Apr-08 Dec-07 Oct-07 Aug-07 Jun-07 Apr-07 Feb-07 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 -10% 0% Liquidity_Lek 40% Total Investment_Lek Contribution of 50% YoY growth 70% Investment_FX 60% 80% Investments Outlook assessment 8 7 INSTAT YoY growth rate, % 6 5 4 September 3 2 June 1 May Source: Bank of Albania macro econometric model MEAM 20 10 Q 2 20 10 Q 1 20 09 Q 4 20 09 Q 3 20 09 Q 2 20 09 Q 1 20 08 Q 4 20 08 Q 3 20 08 Q 2 20 08 Q 1 0 Short run Financial Stability Outlook • Deposits recover trend but credit doesn’t. • Credit slowdown continues – NPL growth slows, but continues to grow (above 11 percent) • Exchange rate is estimated to be close to its short run equilibrium – Based on monetary approach Short run Financial Stability Outlook • Current Account Deficit remains a problem despite a relatively fast adjustment in trade balance – Twin deficits; – Bank of Albania model shows slow or no adjustment unless inflation kicks in; – Supply side shocks are important; – Wealth effects adjustment is not happening Short run Financial Stability Outlook • Current Account Deficit remains a problem despite a relatively fast adjustment in trade balance – Twin deficits; – Bank of Albania model shows slow or no adjustment unless inflation kicks in; – Supply side shocks are important; – Wealth effects adjustment is not happening 25 140 120 20 120 100 15 80 10 80 60 5 60 40 0 40 20 -5 20 -50.0 - in % 140 in % 160 -30.0 30 -10.0 160 30.0 180 180 annual changes 200 -10 - 10.0 100 50.0 35 annual changes 40 Rent index 200 House price index Q1-10 Q3-09 Q1-09 Q3-08 Q1-08 Q3-07 Q1-07 Q3-06 Q1-06 Q3-05 Q1-05 Q3-04 Q1-04 Q3-03 Q1-03 Q3-02 Q1-02 Q3-01 Q1-01 Q3-00 Q1-00 Q3-99 Q1-99 Q3-98 Q4-09 Q2-09 Q4-08 Q2-08 Q4-07 Q2-07 Q4-06 Q2-06 Q4-05 Q2-05 Q4-04 Q2-04 Q4-03 Q2-03 Q4-02 Q2-02 Q4-01 Q2-01 Q4-00 Q2-00 Q4-99 Q2-99 Q4-98 Q2-98 Long run Outlook • First: be Positive • Second: watch out for – Current account deficits, – Fiscal developments, • New fiscal rule – Potential persistent shocks • Risks to potential growth • Unit root vs. Mean reverting nature of current shocks. Positive Shocks to Outlook 8 7 INSTAT Investment YoY growth rate, % 6 5 Export s Euro/Lek 4 3 Outlook 2 1 20 10 Q2 20 10 Q1 20 09 Q4 20 09 Q3 20 09 Q2 20 09 Q1 20 08 Q4 20 08 Q3 20 08 Q2 20 08 Q1 0 Scenario Outlook Investment shock Eur/Lek shock Export shock Inflation (pp) 0.68 0.71 1.14 0.69 Source: Bank of Albania macro econometric model MEAM Output Gap 0 -0.5 -1 -1.5 % -2 -2.5 -3 -3.5 -4 -4.5 -5 1 2 3 Quarters y y_potential 4 L-R implications of S-R actions To credit or not to credit-that is the question – Credit is good for investment, consumption and growth – Credit is bad for non performing loans • New model of growth – What model? – Regional model? – Bank of Albania opens the debate! LR implications, SR actions • Monetary policy similar to ECB – Two pillars approach, • Implicit inflation targeting with leading indicators: – Forecasted inflation – M3 • Money multiplier has slowed down significantly due to current credit crunch. • If current changes were structural, then policy must adjust and reset targets for M2 or shift to M2. • Shift operational targets • from money to interest rate Conclusions • Crisis affected Albanian economy immediately in financial and real sector. – Small open economies are at the mercy of global developments. • Albanian economy is fully financially integrated, if not in all markets segments and products, it is in sentiments. – Toxic assets and/or hot money are not necessary conditions for crisis. • Understanding the nature and persistence of current shocks is important not only for SR economic recovery but also for LR policy. – Price stability versus Financial stability; – Monetary Policy may need to readjust to new realities. Studies & Data • • • • • • • • • • • • Bank of Albania, Annual Report, 2006–2008. Bank of Albania, Monetary Policy Declaration, 2006–2009. Dushku, E., (2008). “Financial markets development and economic growth” Bank of Albania Working Papers, Forthcoming. Gëdeshi, I., (2009). The relationship between migration and socio-economic changes in Albania CSES WP, 2009 “Albania Fact Sheet”, Nexus Migration Development Initiative. Presented at the “Friday Seminar Series” of the Bank of Albania, February 2009. Kota, V., Elona D., Jakab, Z. M., (2007). “The Macro-econometric Model of Albania (MEAM): A follow-up.” Monetary Policy Strategies for Small Economies, ed. Fullani A., Bank of Albania, June 2009. Shijaku, H., and Kliti C., “Indirect credit risk stress-testing in Albania.” Bank of Albania Working Papers, Forthcoming Tanku, A., Vika, I., and Gjermeni, M, (2007). “The role of the Exchange Rate in Inflation Targeting – What do we do?” Monetary Policy Strategies for Small Economies, ed. Fullani A., Bank of Albania, June 2009. Vika, I., (2006). “Measuring import and export functions in Albania.” Bank of Albania Working Papers, March 2009. Bank of Albania Institute of Statistics (INSTAT) Center for Social and Economic Studies, Tirana, Albania