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Regional macroeconomic processes in
nutshell
Mai 2010
OTP Bank
Research Center
1
How the crisis pushed the region into recession?
What is happening right now?
Which policy mix to follow?
How OTP sees the future of the region?
2
Five main factors pushed the region into recession at the beginning of the crisis and
made the banking system vulnerable
External factors
Domestic factors
Falling external demand for exports
• Demand for main export goods of the
region - investment and durable consumer
goods and tourism services - falls much
sharply, than for non durable consumer
goods.
Sudden stop in capital flows
• Convergence and the growth of CEE relies
heavily on capital absorption.
• Sudden stop in capital flows & lending:
domestic demand collapsed.
Fiscal adjustments
• Fall in revenues (lower economic activity)
• Rising expenditures (higher unemployment)
• Adjustment should be done ASAP!!!
Depreciation
• Where FX lending is strong, depreciation, higher
debt burden and lower bank lending also cut back
consumption and investment
Labor adjustment
• Lower output: lower employment
• This may last for many years, and also pull
consumption back.
Source: OTP Research
3
With the sudden stop of capital flows regional capital absorption comes to an end, C/A
deficits are down…
Current account deficit to GDP (%)
Russia
Ukraine
Bulgaria
Romania
Croatia
Slovakia
Serbia
Montenegro
Hungary
Source: Consensus Economics, Eurostat
4
Resulting also in a sharp drop in bank lending
Private sector loan flows (in % of GDP)
Source: Consensus Economics, Eurostat
5
And a drastic fall in domestic demand…
Domestic demand (in % of GDP)
Source: Consensus Economics, Eurostat
6
How the crisis pushed the region into recession?
What is happening right now?
Which policy mix to follow?
How OTP sees the future of the region?
7
With Greece new phase of the crisis has started?
Subprime
crisis &
decoupling
story
Fall of
Lehman &
widespread
credit crisis
Consolidation,
hope of V
shaped
recovery
From:
2007
Q4. 2008.
Q2. 2009
Until:
Q3. 2008.
Q1. 2009.
Q2. 2010 ???
Who:
Only developed
countries
Everyone,
especially CEE
countries with high
fiscal or C/A deficit
Everywhere
Sovereign
defaults also in
the developed
world???
Q2. 2010 ???
????
Countries with
unsustainable debt
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Why Greece? Debt sustainability in focus
Public debt to GDP (%)
1. After Nov. 2009 it
became very
clear, that the
debt path is not
sustainable
2.Manipulated
statistics
3. Nothing until
January
4. Low adjustment,
too optimistic
conditions in
January (rates,
growth, spreads)
5. Eur 45 bn. was
far from enough
Source: Eurostat, OTP Bank Estimations
9
Why Greece? II. After the EUR 110 bn package and a fiscal restriction of 11% the debt
sustainability is still dubious
Public debt to GDP (%)
1. Too slow
adjustment
(nothing happens
in 2011)
2. Debt ratio peak
is too high
3. Low adjustment:
below 100% only
in 2050?
4. Package is not
supported by
residents
5. How will the
budget be
financed after
2013?
Source: Consensus Economics, Eurostat
10
Who’s next?
Public
Source:, Eurostat
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What to do?
Fiscal policy:
• Debt sustainability is a must
• Adjustment should be carried out as
soon as possible
• In the lack of puffers (very low debt or
fiscal reserves) no room for counter
cyclical policy
Monetary policy:
• Textbook says to depreciate in the case
of an external demand shock
• Depreciation is dangerous in the case of
debt euroisation
• Effect of depreciation to growth, through:
• Exports: +, marginally decreasing
• FX debt burden: -, linear
• Precautionary savings: -, marg. incr.
• Bank lending: -, marginally increasing
• So depreciation above 10-15% will
have recessionary effects
(contractional depreciation)
Peak of Non performing loan rates (%)
60
50
Thailand 1999
Indonesia 1999
40
Ukraine 2009
30
Malaysia 1999
20
Korea 1999
Sweden 1993
10
Hungary 2009
Bulgaria 2009
Hong Kong
0
0
25 50 75 100 125 150 175 200 225 250 275 300 325 350
Depreciation (%)
Source: IMF, World Bank
12
How the crisis pushed the region into recession?
What is happening right now?
Which policy mix to follow?
How OTP sees the future of the region?
13
As it became clear that the developed world would fall into recession,
expectations on divergence emerged…
Evolution of expected GDP growth for developed and CEE
countries, 2009 (%)
Convergence
Divergence
Source: Consensus Economics
14
Convergence will return in 2010 or 2011 latest as the main drivers of convergence are intact
The pace of convergence depends on growth in the core counties
Theory and empirical
evidence:
• Convergence goes on
until core countries do
not fall into recession.
• During a crisis export
demand falls, capital
flows reverse, spreads
rise resulting in a
temporary divergence.
• After the core counties
start to grow again,
convergence process
revives with some delay
Main drivers are intact:
• Labor is still cheap (-40% even if we take into account productivity)
• EU is still a unified market
• Integrated banking system
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Adjusted fiscal and external position, higher growth potential: CEE countries
are likely to outperform developed countries again after the crisis
Budget deficit 2010-2012 Change in public debt to GDP
Potential growth after
avergae (in % of GDP)
between 2010-2012 között (%-point) the crisis (%)
Debt to GDP, 2009
(in % of GDP)
Countries facing
structural
problems due to
the crisis
Greece
110
Ireland
66
UK
68
Small open
economies in
CEE
Netherland
73
France
76
Commodity
exporters
78
23
Emerging
countries with
huge domestic
markets
Russia
China
6.0
1.4
4.5
5.0
3.4
8
55
16
source: EU Commission, Bloomberg, Focus Economics, IMF, IIF, OTP Bank
5.5
0.4
5.5
3.0
-4.0
2.1
1.7
1.7
3
2.8
3.0
4.0
4.0
4.5
4.2
5.0
-3.0
2.4
60
India
0.5
4.0
3.2
34
Brazil
1.7
4.2
35
Ukraine
1.0
1.8
1.8
13.9
7.5
2.0
1.8
7.0
4.6
3.0
Hungary
Slovakia
2.0
2.0
38
Romania
9.5
5.6
16
Croatia
24.0
13.0
3.8
Germany
Bulgaria
30.0
12.0
35
1.4
35.0
13.5
70
Denmark
25.0
12.0
84
USA
Balanced
developed
countries
Trade effects
7.0
8.0
16
But risks are still remarkable
What can be expected for the coming years:
• Root sign recovery: Modest growth after rebuilding stocks, construction will not be a
driver any more
• Much lower capital and loan flows: risk aversion, higher, than the pre-crisis spreads, new
banking regulation, fiscal policies should be built on lower employment numbers
• Rising unemployment for at least H2 2010, but negative risks are dominating
• Construction will fall everywhere
Main risks:
• External: Another wave of recession
• Fiscal adjustment will be forced out in many developed countries
• The role of quantitative easing in the fast recovery is not known
• How much funds were misallocated before the crisis? Are there any output gap?
• Country specific:
• Wrong economic policies
• Structural problems: high share of construction, rigid labor markets
Source: Consensus Economics, Eurostat
17
Thank you for your attention!
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