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Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Financial Crisis and Consequences Vladimir Gligorov wiiw Spring Seminar 2009 27 March 2009, Vienna Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Causes of Current Crisis Lax monetary policy: low interest rates and strong credit expansion Global imbalances Deficit countries in Central, Eastern and South-eastern European Countries In the Balkans: low export capacity Wiener Institut für Internationale Wirtschaftsvergleiche Monetary policy The Vienna Institute for International Economic Studies www.wiiw.ac.at Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Boom-bust in housing starts compared with the counterfactual Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at wiiw Spring Seminar, 27 March 2009 6 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Why contagion? A more cautious banking sector puts the brakes on funding of - Private consumption, private investment, exports and imports - Real estate transactions Investors in financial markets have become more riskaware; the destination and composition of flows have changed to the disadvantage of emerging markets wiiw wiiw Spring Seminar, 27 March 2009 7 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? 1. Evidence from most recent developments Decline in industrial output Decline in foreign trade Decline GDP Decelerated inflation Real depreciation (not everywhere) wiiw wiiw Spring Seminar, 27 March 2009 8 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Industrial output decline Rates of change in %, monthly, year-on-year Candidate countries TR MK HR Potential candidates BA 20 15 RS Source: wiiw Monthly Database incorporating national statistics. Feb-09 Jan-09 Nov-08 Dec-08 Oct-08 Aug-08 Sep-08 Jun-08 Jul-08 May-08 Mar-08 Apr-08 Feb-08 Feb-09 Jan-09 Nov-08 Dec-08 Oct-08 Aug-08 Sep-08 Jun-08 Jul-08 May-08 Mar-08 Apr-08 Feb-08 Jan-08 -5 -10 -15 20 15 10 5 0 -5 -10 -15 -20 -25 Jan-08 40.9 10 5 0 -20 -25 ME wiiw wiiw Spring Seminar, 27 March 2009 9 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Exports of goods: decline after mid-2008 EU candidate countries, euro-based, January 2006 = 100 260 240 MK 220 200 180 160 TR 140 120 Jan-09 Jan-08 Jul-07 Jan-07 Jul-06 Jan-06 Source: wiiw Monthly Database incorporating national statistics. R Jul-08 HR 100 80 wiiw wiiw Spring Seminar, 27 March 2009 10 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Exports of goods: decline after mid-2008 Potential candidate countries, euro-based, January 2006 = 100 260 240 RS 220 200 BA 180 160 140 120 Jan-09 Jul-08 Jul-07 Jan-07 Jul-06 Jan-06 Source: wiiw Monthly Database incorporating national statistics. Jan-08 AL 100 80 wiiw wiiw Spring Seminar, 27 March 2009 11 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? GDP - shift from expansion to contraction Candidate countries, change in %, annual, year-on-year* 8 6 4 Macedonia 2 0 Turkey -2 Croatia -4 2006 2007 * 2008 wiiw estimate, 2009 wiiw forecast Source: wiiw Annual Database incorporating national statistics. 2008 2009 wiiw wiiw Spring Seminar, 27 March 2009 12 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? GDP - shift from expansion to contraction Potential candidate countries, change in %, annual, year-on-year* 11 10 9 Montenegro Serbia 8 7 6 5 Albania BA 4 3 2 1 0 -1 -2 -3 2006 2007 * 2008 wiiw estimate, 2009 wiiw forecast Source: wiiw Annual Database incorporating national statistics. 2008 2009 wiiw wiiw Spring Seminar, 27 March 2009 13 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Decelerating inflation CPI, monthly, change year-on-year in % 16 HR MK TR AL BA ME RS 12 11 10 9 8 7 6 5 4 3 2 1 0 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 * wiiw forecast Source: wiiw Monthly Database incorporating national statistics. wiiw wiiw Spring Seminar, 27 March 2009 14 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Currency Board or euro as legal tender: Producer prices vis-à-vis EU: mainly up EUR per unit of national currency, Jan 2007 = 100 Exchange rate nominal Exchange rate real Bosnia and Herzegovina 90 85 85 Source: wiiw Monthly Database incorporating national statistics. Jan-09 90 Sep-08 95 May-08 95 Jan-08 100 Sep-07 100 May-07 105 Jan-09 105 Sep-08 110 May-08 110 Jan-08 115 Sep-07 115 May-07 120 Jan-07 120 Jan-07 Montenegro wiiw wiiw Spring Seminar, 27 March 2009 15 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Countries with de-facto EUR peg Producer prices vis-à-vis EU: various patterns EUR per unit of national currency, Jan 2007 = 100 Exchange rate nominal 100 100 95 95 95 90 90 90 85 85 85 Jan-09 Sep-08 May-08 Jan-08 Sep-07 May-07 Jan-07 Source: wiiw Monthly Database incorporating national statistics. Jan-09 100 Sep-08 105 May-08 105 May-07 105 Jan-09 110 Sep-08 110 May-08 110 Jan-08 115 Sep-07 115 115 May-07 120 Jan-07 120 Jan-07 120 Jan-08 Macedonia Croatia Sep-07 Albania Exchange rate real wiiw wiiw Spring Seminar, 27 March 2009 16 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Countries with flexible exchange rate: Producer prices vis-à-vis EU: strong reversal EUR per unit of national currency, Jan 2007 = 100 Exchange rate nominal Exchange rate real 90 85 85 80 80 Source: wiiw Monthly Database incorporating national statistics. Jan-09 90 Sep-08 95 May-08 95 Sep-07 100 May-07 100 Jan-07 105 Jan-09 105 Sep-08 110 May-08 110 Jan-08 115 Sep-07 115 May-07 120 Jan-07 120 Jan-08 Turkey Serbia wiiw wiiw Spring Seminar, 27 March 2009 17 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? 2. Imbalances Imbalances: Fiscal imbalances less alarming – so far Alarming external deficits wiiw wiiw Spring Seminar, 27 March 2009 18 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Relatively low government deficits, government debt and overall external debt in % of GDP, 2008 Gov. budget Gov. debt External debt Croatia -2.3 54.5 96 Macedonia* -1.0 . 49 Turkey -1.3 35.1 47 Albania -4.0 53.5 20 BiH 2 20.0 16 Montenegro 2 . 14 -2.5 . 71 Serbia * External debt at end of 2007 Source: wiiw Database incorporating national statistics. wiiw wiiw Spring Seminar, 27 March 2009 19 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Imports of goods: intensity and coverage by exports in % of GDP, 2008 70 Exports 60 Deficit 50 40 30 20 10 0 BA MK ME HR RS AL TR wiiw Source: wiiw Annual Database incorporating national statistics. wiiw Spring Seminar, 27 March 2009 20 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Deficit in trade with goods: coverage, 1-9 2008 Services Inco me Current transfers Capital transfers FDI P o rtfo lio investment Other investment Errors and o m. 140 120 100 80 60 40 20 0 Croatia Macedonia Turkey Albania BiH Montenegro Serbia 0 -20 -40 Increase in currency reserves in % of trade deficit 5 11 2 4 6 Source: wiiw Database incorporating national statistics. 8 -1 wiiw wiiw Spring Seminar, 27 March 2009 21 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? 3. Potential trouble Lack of external means for the financing of external deficits and debt refinancing More balanced current account becoming a must Either more exports or less imports (goods and services) Allowing for nominal depreciation as one alternative (additional burden to households and companies with foreign currency debt) Wage deflation in the context of strong GDP decline as a second alternative wiiw wiiw Spring Seminar, 27 March 2009 22 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? 4. Southeastern Europe’s prospects 2009 GDP decline 2010 GDP stagnation 2011 some GDP growth again, provided the international business climate improves 2012 ff. growing GDP, but at rates lower than in 2003-07 Gradual return of FDI inflow wiiw wiiw Spring Seminar, 27 March 2009 23 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? 5. Financial risks wiiw wiiw Spring Seminar, 27 March 2009 24 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? What do we see in the financial indicators? High current account deficits In most cases – worsening So, financing them is the key issue wiiw wiiw Spring Seminar, 27 March 2009 25 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Current account balance in % of GDP AL BA HR RS TR ME MK 30 20 10 0 -10 -20 -30 -40 -50 -60 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 q2'08 q3'08 q4'08 wiiw wiiw Spring Seminar, 27 March 2009 26 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Governments’ foreign debt Mostly not very high And the share in total foreign debt - declining wiiw wiiw Spring Seminar, 27 March 2009 27 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? General government share in gross external debt in % BA HR RS TR MK q2'08 q3'08 q4'08 40 35 30 25 20 15 10 5 0 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 wiiw wiiw Spring Seminar, 27 March 2009 28 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Short-term debt In a couple of cases too high In a number of cases increasing wiiw wiiw Spring Seminar, 27 March 2009 29 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Short-term foreign debt in % of foreign exchange reserves (excluding gold) AL BA HR RS TR ME MK 180 160 140 120 100 80 60 40 20 0 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 q2'08 q3'08 wiiw wiiw Spring Seminar, 27 March 2009 30 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Banks and risks Credit expansion decelerating Leverage ratios relatively low Risks, however, increasing by most measures Some countries facing bigger problems than others Banks rely significantly on foreign liabilities Foreign currency loans important Not enough data to say something on non-performing loans wiiw wiiw Spring Seminar, 27 March 2009 31 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Bank loans to non-financial private sector growth in %, eop month (year-on-year) BA HR RS TR ME MK 250 200 150 100 50 0 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 q2'08 q3'08 q4'08 wiiw wiiw Spring Seminar, 27 March 2009 32 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? 3m...BOR-3mEURIBOR spread in percentage points, eop month AL HR RS MK 20 15 10 5 0 -5 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 q2'08 q3'08 q4'08 wiiw wiiw Spring Seminar, 27 March 2009 33 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? TED spread (3m...BOR-3mT-Bill) spread in percentage points, eop month AL HR RS MK 14 12 10 8 6 4 2 0 -2 -4 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 q2'08 q3'08 q4'08 wiiw wiiw Spring Seminar, 27 March 2009 34 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Leverage, banking sector assets to capital ratio, eop month BA HR q4'07 q1'08 RS ME MK 14 12 10 8 6 4 2 0 q1'07 q2'07 q3'07 Source: National bank of the respective country. q2'08 q3'08 q4'08 wiiw wiiw Spring Seminar, 27 March 2009 35 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Share of banks’ external debt in assets in %, eop month BA HR q4'07 q1'08 RS TR MK 30 25 20 15 10 5 0 q1'07 q2'07 q3'07 Source: National bank of the respective country. q2'08 q3'08 q4'08 wiiw wiiw Spring Seminar, 27 March 2009 36 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Share of loans in foreign currency in % of total loans, eop month AL BA HR MK 80 70 60 50 40 30 20 10 0 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 q2'08 q3'08 q4'08 wiiw wiiw Spring Seminar, 27 March 2009 37 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Share of non-performing loans in % of total loans, eop month AL HR MK 12 10 8 6 4 2 0 q1'07 q2'07 q3'07 Source: National bank of the respective country. q4'07 q1'08 q2'08 wiiw wiiw Spring Seminar, 27 March 2009 38 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Real estate bubble? Construction slowing down Prices for apartments declining However, not enough data to say more on that wiiw wiiw Spring Seminar, 27 March 2009 39 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Growth in apartment prices in %, CPI deflated (year-on-year) HR* RS* 30 25 20 15 10 5 0 -5 -10 q1'07 q2'07 q3'07 * Data refer to half year. Source: National bank of the respective country. q4'07 q1'08 q2'08 wiiw wiiw Spring Seminar, 27 March 2009 40 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Construction sector growth less GDP growth in % (year-on-year) HR RS TR MK 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 q1'07 q2'07 q3'07 * Data refer to half year. Source: National bank of the respective country. q4'07 q1'08 q2'08 q3'08 wiiw wiiw Spring Seminar, 27 March 2009 41 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Development of income inequality in Central Europe, Baltic States, SEE and CIS, 1989-2006 unweighted averages of Gini coefficients (income based) Central Europe SEE Transition countries (polynomial trend) Polynomisch (Transition countries) CIS Baltics 45 Gini coefficient 40 35 30 25 20 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: UNU-WIDER: World Inequality Database Version 2.0c, w iiw calculations. wiiw wiiw Spring Seminar, 27 March 2009 42 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Income inequality in world regions unweighted averages of Gini coefficients (income based), 2003 55 Sub-Saharan Africa Latin America 50 China 45 Gini coefficient South Asia East Asia Russia 40 CIS USA Middle East & North Africa 35 SEE 30 Central Europe & Baltics Western Europe 25 Source: UNU-WIDER: World Inequality Database Version 2.0b , own calculations. wiiw wiiw Spring Seminar, 27 March 2009 43 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Distribution of income & source of income Correlation of functional distribution and inequality in transition countries CE & Baltics, SEE and CIS 50 2002 Gini coefficient 45 y = -0.40x + 48.75 2 R = 0.27 40 35 30 25 20 15 15 20 25 30 35 40 45 50 55 Compensation of employees, in % of GDP Sources: AMECO database, CIS STAT database, UNU-WIDER: World Inequality Database Version 2.0c . wiiw wiiw Spring Seminar, 27 March 2009 44 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Role of labour market institutions Correlation of coverage rate of collective agreements in transition countries, 2001 45 40 Central Europe, 2001 & Baltics BGR, ROU, HRV Gini coefficient 35 y = -0.15x + 36.80 30 2 R = 0.44 25 20 15 10 0 20 40 60 80 100 coverage rate of collective agreements Sources: Schroeder (2004), UNU-WIDER: World Inequality Database Version 2.0a. wiiw wiiw Spring Seminar, 27 March 2009 45 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Main causes of inequality development in transition Loss in output and increase of unemployment Rising wage inequalities due to liberalization of labour market regulations Industrial employment and productivity growth reducing inequality Dampening effect of public expenditure While price and trade liberalization reduced inequality via job creation, (public utilities infrastructure) privatization did opposite Economic integration via exports had positive effects on equality wiiw wiiw Spring Seminar, 27 March 2009 46 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? The outcome Croatia: Under the assumption of a mild recession, the Gini increases by 0.3pp to 31.2 Hungary: Under the assumption of a strong recession, the Gini increases by 0.9pp to 27.0 Ukraine: Under the assumption of a heavy recession, the Gini increases by 1.2pp to 31.1 Doubling the drop in industrial & overall employment and the increase in unemployment raises the Gini to: HR 31.6; HU 27.3; UA 31.9 wiiw wiiw Spring Seminar, 27 March 2009 47 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Crisis impact on inequality Given the extent of the recession, the model suggest an increase of inequality from 0.3pp to 1.2pp (0.7pp to 2pp) In general income inequality does not change rapidly Still absolute poverty will be on the rise with average income levels falling Stronger fiscal expansion could reduce the increase of inequality 1pp more government expenditures reduces Gini by 0.1pp wiiw wiiw Spring Seminar, 27 March 2009 48 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Conclusions Risks have increased Not primarily because of the health of the banks (though Montenegro is different) But because of high demand for foreign financing that has become scarce Which drives growth down Which in turn pushes the risks up wiiw wiiw Spring Seminar, 27 March 2009 49 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? What is to be done? Stabilization is the key in the short run In the medium run, it is a question whether it might be necessary to move from a neoclassical to a mercantilistic growth strategy The choice may depend on the policy of the EU wiiw wiiw Spring Seminar, 27 March 2009 50 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Rast na kratak rok • Trenutna kretanja, ocenjena na osnovu dostupnih • • • • podataka, su veoma negativna Industrijska proizvodnja se smanjuje po visokoj stopi gotovo svuda – takođe u Hrvatskoj Spolja trgovina se takođe smanjuje gotovo svuda – isto i u Hrvatskoj Inflacija se usporava, a preti i deflacija, praktično svuda Ova kretanja implicraju značajnan pad bruto domaćeg proizvoda, praktično svuda, a u Hrvatskoj do 4 ili 5% wiiw wiiw Spring Seminar, 27 March 2009 51 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Stabilnost na kratak rok • S obzirom na pad proizvodnje, reč je o “igri sa negativnom sumom”, dakle o • • • • • • raspodeli gubitaka Ovo ide uz promene u relativnim cenama Od kojih je ključan realni tečaj – dakle odnos između (uprošćeno govoreći) izvoza i unutrašnje potrošnje Budući da se smanjuje izvoz, finansiranje postojećih obaveza zavisi od smanjenja potrošnje ili od mera za povećavanje izvoza Ovo poslednje podrazumeva depresijaciju realnog kursa, bilo preko deflacije ili preko nominalne depresijacije Za razliku od okolnosti kada nominalna depresijacija podstiče inflaciju, u deflatornom okruženju je moguća relaksacija monetarne politike čak i uz depresijaciju tečaja Osnovna pretnja stabilnosti jeste prinudna devalvacija usled suviše jakih deflatornih pritisaka wiiw wiiw Spring Seminar, 27 March 2009 52 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Zaključci G20 i MMF • Ključan zaključak jeste da se održi kratkoročna stabilnost i da se • • • • • • podstakne globalna tražnja Ključnu ulogu ima MMF – triplira se njegova kreditna sposobnost i značajno povećava sposobnost da podrži likvidnost MMF se reformiše, pri čemu su ključni sledeći elementi Cilj je održanje rasta a ne samo stabilnosti Monetarni i fiskalni uslovi se rukovode održivošću, dok su kvantitativni kriteriji indikativni, a ne bezuslovni Strukturni kriteriji su takođe indikativni, a ne obavezujući MMF ima ključni zadatak da podrži globalnu tražnju i da obezbedi da ne dođe do sloma sistema tečajeva što bi vodilo finansijskom haosu i rastu protekcionizma wiiw wiiw Spring Seminar, 27 March 2009 53 Fragile Europe: the Path in and out of the Crisis – What Is to be Done? Srednjoročne perspektive • Najvažnije pitanje izbora metoda stabilizacije jeste šta to znači za razvoj na • • • • • • srednji rok? Ovde je važno poći od pretpostavke da je malo verovatno da će rast na srednji rok moći da se finansira na isti način kao i u prethodnom periodu Kako će se onda hrvatska privreda vratiti na put visokih stopa rasta? Ukoliko ne dođe do korekcije realnog tečaja, dakle ukoliko se samo recesijom očuva nominalni tečaj, postoji opasnost da će to imati za posledicu produženu stagnaciju ili preovladavanje niske stope rasta Ovo zato što će rast morati mnogo više da se finansira povećanjem unutrašnje štednje, a mnogo manje kreditima i ulaganjima iz inostranstva To znači da je potrebno značajno povećati konkurentnost hrvatske privrede To je problem i većine drugih zemalja u tranziciji wiiw