Download Dealing with Volatile Capital Flows – the Role of

Maja Kadievska-Vojnovik, MSc
Vice-governor
National Bank of the Republic of Macedonia
Sarajevo, June 6, 2014
1.
2.
3.
4.
5.
External funding structure in SEE countries
Crisis effects - capital flows volatility
Macroeconomic policy measures
Potential risks and vulnerabilities
Policy priorities
Both Southeastern European EU members (SEE-EU) and SEE non-EU countries are
almost equally dependant on FDI and cross-border lending, with each accounting
for 50-60% of their respective GDP


Portfolio investment is less important, and consists mostly of sovereign bonds

European Union countries are the main foreign creditors (90%)
SEE External Funding Patterns, by instrument and creditor
80
70
FDI and intercom. lending
Intercompany lending
FDI
80
70
Cross – border lending
Loans to banks
Other loans
Loans to GG
80
70
60
60
50
50
50
40
40
40
30
30
30
20
20
20
10
10
10
0
0
0
SEE-EU
SEE-nonEU
SEE-EU
Source: IMF, Central, Eastern, and Southeastern Europe, Regional Economic Issues, Apr 14
60
SEE-nonEU
Portfolio investments
Traded debt, GG
Traded debt, other
Traded equity
SEE-EU
SEE-nonEU


High reliance on foreign funding makes the SEE region sensitive to changes in
external financial conditions, as well as to rollover and FX risks (having in mind the
high level of financial euroization in the region)
The SEE-EU and SEE non-EU countries are highly financially opened, with gross
external debt between 40% up to 120.4% of GDP
Total External Debt to GDP (%)
140
2012
2013
2014
2015
120
100
80
60
40
20
0
BG
CRO
ROM
ALB
SEE-EU
Source: IMF, Central, Eastern, and Southeastern Europe, Regional Economic Issues, Apr 14
BH
MKD
SEE- non EU
MNG
SRB


Gross capital inflows to Emerging Europe* have declined strong in 2008, and again
in 2013.
The key driver of the recent reverse trend in gross capital inflows were higher U.S.
returns, that were pushed up by the “taper talk”
Capital inflows to Emerging Europe* ( % of GDP)
15
10
5
0
-5
-10
Source: IMF, World Economic Outlook, Apr 14
*Turkey, Poland, Romania, Hungary, Bulgaria, Serbia, Croatia, Lithuania, Albania, Bosnia and Herzegovina, Kosovo, Macedonia, and Montenegro
2013Q3
2013Q2
2013Q1
2012Q4
2012Q3
2012Q2
2012Q1
2011Q4
2011Q3
2011Q2
2011Q1
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
2009Q1
2008Q4
2008Q3
2008Q2
2008Q1
2007Q4
2007Q3
2007Q2
2007Q1
-15


The SEE countries were hit hard by the global financial crisis in 2008-2009, as
exports shrunk due to collapse in the global trade.
After a brief recovery, in 2012 there was a renewed slowdown as the region felt the
effects of the euro area crisis but, the slowdown was far less dramatic than in 2009.
GDP growth rates (y-o-y %)
CAD (% of GDP)
12
10
10
0
8
6
-10
4
-20
2
-30
0
-40
-2
-4
-50
-6
2007
2008
Albania
Montenegro
2009
2010
BH
Serbia
Source: IMF and national statistical offices
2011
2012
2013
Croatia
Macedonia
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
-60
-8
ALB
BH
CRO
MNG
SRB
Source: Central banks, national statistical offices, Eurostat, IMF and NBRM
calculations
MKD
Some of the SEE countries depend significantly on income transfers as external
funding source....
....but, this exposes countries to economic conditions in Diaspora’s host countries
Remittances and economic growth
Remittances by countries (as % of GDP)
12
10
50
6
40
4
30
2
20
8
10
6
0
0
-2
-4
-10
4
-6
-20
Remittances, net in SEE (q-o-q)
-30
CRO
MNG
SRB
MKD
Source: Central banks, national statistical offices, Eurostat, IMF and NBRM
calculations
*Data for Croatia and Montenegro refer to Other sectors' current
transfers.
Source:
Eurostat
Q1
BH
Q1
ALB
-40
EU 27 growth rate (q-o-q)
Q1
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
0
Q1
2
Q1
14
Remittances and economic growth
Q1

Q2
Q3
Q4
2008
Q2
Q3
Q4
2009
Q2
Q3
Q4
2010
Q2
Q3
Q4
2011
Q2
Q3
Q4
2012
Q2
Q3
Q4
2013
Q2
Q3
Q4

-8
-10
Composition of financial account, % of GDP
50
40
30
20
10
0
-10
Albania
FDI, net
BH
Croatia
Portfolio investment, net
Source: Central banks, national statistical offices, Eurostat, IMF and NBRM calculations
Montenegro
Serbia
Other investment, net
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
-20
2007
2008
2009
2010
2011
2012
2013

Remarkable increase in financial inflows to developing countries implied investment
and growth opportunities in “normal” times...
...but, it also amplified the transmission of global financial shocks, when financial
inflows fell abruptly.
2007
2008
2009
2010
2011
2012
2013

Macedonia
Financial account
The sharp tightening of the financial conditions on the global markets after 2007
resulted in decreasing of FDI in the SEE.
 In such circumstances, SEE countries mostly relied on official borrowing as a source
for external funding.

Eurobonds
Country
Eurobonds issued beginning from 2009
Maturity
Albania
2010 - 300 EUR mil.
_2015
Serbia
2011 - 2.000 USD mil.
_2021
2012 - 750 USD mil.
_2017
2013 - 1.500 USD mil. and 1.000 USD mil.
2020 and 2018, respectively
2009 - 750 EUR mil. and 1.500 USD mil.
2015 and 2019, respectively
2010 - 1.250 USD mil.
_2020
2011 - 1.500 USD mil. and 750 EUR mil.
2021 and 2018, respectively
2012 - 1.500 USD mil.
_2017
2013 - 1.500 USD mil. and 1.750 USD mil.
2023 and 2024, respectively
2010 - 154,36 EUR mil.
_2015
2011 - 141,8 EUR mil.
_2016
2013 - 80 EUR mil.
_2016
2014 - 280 EUR mil.
_2019
2009 - 175 EUR mil.
_2013
Croatia
Montenegro
Macedonia
Source: Bloomberg
Revisions occurred in credit ratings of the SEE countries during the financial crisis in
2009 and economic and sovereign crisis in 2011

Ratings
2007
2009
2010
2011
2012
2013
2014
B1
B1
B1
B+
B1
B+
B1
B+
B1
B
B1
B
BBBB-
BBBB-
BBBB-
BB
BB-
BBBB-
B1
BBBB-
B1
BBB+
B2
B2
B+
B2
B+
B2
B
B3
B
B3
B
B3
B
Albania
Moody's
S&P
Fitch
Serbia
Moody's
S&P
Fitch
BH
Moody's
S&P
Fitch
Macedonia
Moody's
S&P
Fitch
BBBBB+
BB
BB+
BB
BB+
BB
BB+
BB
BB+
BBBB+
BBBB+
Romania
Moody's
S&P
Fitch
Baa3
BBBBBB
Baa3
BB+
BB+
Baa3
BB+
BB+
Baa3
BB+
BBB-
Baa3
BB+
BBB-
Baa3
BB+
BBB-
Baa3
BBBBBB-
Bulgarija
Moody's
S&P
Fitch
Baa3
BBB+
BBB
Baa3
BBB
BBB-
Baa3
BBB
BBB-
Baa2
BBB
BBB-
Baa2
BBB
BBB-
Baa2
BBB
BBB-
Baa2
BBB
BBB-
Croatia
Moody's
S&P
Fitch
Baa3
BBB
BBB-
Baa3
BBB
BBB-
Baa3
BBBBBB-
Baa3
BBBBBB-
Baa3
BB+
BBB-
Ba1
BB+
BB+
Ba1
BB
BB+




The public debt went on a rising track, contributing to external vulnerabilities build-up.
As governments of SEE countries were undertaking discretionary fiscal stimulus to
support economy, the fiscal balances deteriorated sharply.
Fiscal policies are under pressures as the countries struggle to reduce their budget
deficits or to comply with loan requirements by the IMF.
In Macedonia, fiscal policy was actively used to give impulse to economic growth,
through large-scale public investment projects.
Fiscal balances, in % of GDP
Gross external debt, in % of GDP
8.0
120
6.0
100
4.0
80
2.0
60
0.0
40
-2.0
20
-4.0
0
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
-6.0
-8.0
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
-10.0
ALB
BH
Source: IMF and central banks
CRO
MNG
SRB
MKD
ALB
BH
Public
CRO
Private
MNG*
SRB
MKD
Gross external debt
*Data for private sector debt of Montenegro are IMF estimates, as private debt
statistics are not officially published.
Source: Central banks, national statistical offices, Eurostat, IMF and NBRM calculations
 As capital flows fell in 2008, decline in available financing particularly from
parent banks was registered and credit conditions tightened significantly.
External position of BIS – reporting banks vis-àvis CESEE
(Billions of US dollars)
Source: IMF, Central, Eastern, and Southeastern Europe, Regional Economic Issues, Apr. 2014
Sound initial conditions (high capitalization levels), traditional banking model and low
exposure to riskier financial instruments contained direct spillovers during the early
stage of the crisis.
Credit growth, %
NPL` s in % of total credit
60
30
50
25
40
20
30
20
15
10
10
0
5
-10
-20
0
ALB
BH
Source: IMF and central banks
CRO
MNG
SRB
MKD
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013

Worsened economic outlook pushed credit markets into bust cycle and triggered a rise
in NPL`s.
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013

ALB
BH
CRO
MNG
SRB
MKD
Source: IMF and central banks
Vienna Initiative –helped countries to avoid a massive and
sudden deleveraging by cross-border bank groups.
Macroeconomic policy measures
FX
interventio
ns
Allow
exchange
rate
depreciati
ons
Counter
cyclical fiscal
policy
Stricter
capital
requirements
Market
absorption?
Tighter
macro
prudential
rules?
FX reserve
buffers?
Increase
interest
rates
Prudential measures
Scope for
tighter
monetary
policy?
Scope for
fiscal
stabilization
?
Source: World Bank
Decreased
capital
inflows
Targeted
prudential
measures?
Capital
controls?
Limits on
bank`s open
FX position
Easing
capital inflow
regulation
Structural/f
inancial
market
reforms?
Temporary
restriction
on capital
outflow

Different impacts on FX markets among SEE countries:
◦ In countries with floating exchange rate, currency depreciation was allowed in order
to mitigate the impact on crisis.
◦ In countries with fixed rates, interventions on the FX market enabled stability of
domestic currency.
Nominal exchange rates
(national currency per EUR)
FX reserves, % of GDP
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
0.0
ALB
Source: Central banks
BH
CRO
SRB
MKD
Source: Central banks, national statistical offices, Eurostat, IMF and NBRM
calculations
From the conventional measures almost all countries adopted easing cycle of interest
rates of the monetary policy.
However, in some countries major consequence of the limitations faced by monetary
policy, macro prudential measures (mostly in RR) were extensively employed
by all SEE countries to address inflation and financial stability risks.


Interest rates, in %
Reserve requirements by country
Country
20
Albania
Serbia
18
16
14
12
50% - liabilities in FX currency – FX
currency-indexed liabilities in dinars
10
8
Croatia
6
4
Montenegro
Albania
Source: Central banks
Croatia
Serbia
09/2013
05/2013
01/2013
09/2012
05/2012
01/2012
09/2011
05/2011
01/2011
09/2010
05/2010
01/2010
09/2009
05/2009
01/2009
09/2008
05/2008
01/2008
09/2007
05/2007
01/2007
2
0
Current RR ratios
10%
5% - liabilities in dom. currency up to 2y
0% - liabilities in dom. currency over 2y
29% - liabilities in FX currency up to 2y
22% - liabilities in FX currency over 2y
Macedonia
12%
Changes in RR (beginning from 2008)
The RR base has been reduced for certain loans
approved in 2008-2014.
In 2010, RR base in FX currency was extended by
FX-indexed dinar liabilities.
In 2011, maturity differentiation of dinar and FX
currency RR ratios.
Increase of foreign currency RR, which is allocated
in dinars.
Cummulative decrease of RR ratio by 5 p.p.
In 2011, termination of the RR remuneration
9,5% - on part of the base comprised of
demand deposits and deposits with the
In 2011, decrease of RR ratio by 0,5 p.p.
agreed maturity up to 1y
8,5% - on part of the base comprised of
In 2011, decrease of RR ratio by 1,5 p.p.
deposits with the agreed maturity over 1y
In 2014, decrease of the remuneration amount
Macedonia
8% - liabilities in domestic currency
20% - liabilities in domestic currency with
FX clause
15% - liabilities in foreign currency
Source: Central banks
In 2013, decrease by 2 p.p.
Differentiation by currency from July 11, 2009
onwards.
Cummulative increase for 5 p.p.
In recent years, NBRM undertook few changes in the RR structure in order to address
some structural issues in the Macedonian economy and banking system:
Lowering maturity mismatch in banks balance
sheet– created from dominance of the short-term
deposits
Decreasing of the systemic risk in banking sector
created by the high degree of FX deposits in the
liabilities, which influence the monetary transmission
- Sep. 2011 – introducing 0% RR for banks’ liabilities to
private persons with contractual maturity of over 2
years.
- July 2013 – encouraging savings in domestic currency by
lowering the RR ratio for liabilities in domestic currency
(from 10% to 8%).
•
100
90
100
Maturity composition of household deposits
80
80
70
70
60
60
50
Long term deposits
50
Short term deposits
40
40
30
30
20
20
10
10
0
0
I.05
I.06
Source: NBRM
I.07
I.08
I.09
I.10
I.11
I.12
I.13
Currency composition of household deposits
90
I.14
FX deposits
I.05
I.06
Source: NBRM
I.07
I.08
Domestic currency deposits
I.09
I.10
I.11
I.12
I.13
I.14
Increasing of credit supply quality for systemically
important sectors that generate net-FX inflows and
sectors that can contribute to lowering the energy
dependence of the economy
Broadening of the scope of banks funding sources
and establishing new market segments in order to
boost competition and increase efficiency of the
allocation of free resources
o-
o-
6
2,000
Bank 10
Bank 6
Bank 2
Source: NBRM
Bank 9
Bank 5
Bank 1
Bank 8
Bank 4
No. of banks (r.h.s )
Effect of reducing RR base
Effect of 0% RR ratio on FX deposits
Effect of 0% RR ratio on Den. deposits
Bank 7
Bank 3
Source: NBRM
04.2014
03.2014
0
02.2014
0
01.2014
04.2014
03.2014
02.2014
01.2014
12.2013
11.2013
10.2013
09.2013
08.2013
07.2013
06.2013
05.2013
04.2013
03.2013
02.2013
01.2013
0
500
12.2013
1,000
1,000
2
11.2013
2,000
1,500
10.2013
4
3,000
09.2013
4,000
08.2013
5,000
2,500
07.2013
6,000
3,000
8
06.2013
7,000
05.2013
10
8,000
3,507
3,191
3,500
04.2013
12
9,000
01.2013
10,000
Effects of the measures in RR
in Den. mil.
4,000
03.2013
No. of
banks
New loans extended to net exporters and
domestic producers of electricity
in Den. mil.
July 2013 – introducing 0% for banks’ liabilities to
nonresidents with contractual maturity of over 1 year.
02.2013
Nov. 2012 – possibility to decrease RR for the amount of
newly granted credits to net-exporters and domestic
electricity producers.





While a large share of FDI in total external financing for the region provides a degree
of stability, high reliance on foreign funding exposes countries to external
shocks
Sizable gross external debt and rollover needs
Foreign currency exposure compounded by a high degree of euroization of the
domestic financial system
Countries tend to borrow from relatively few common creditors and some depend on
income transfers
Vulnerabilities may stem from three sources-stock, flow, and external fundamentals
Private sector
Stock
Public sector
Stock
Flow
Flow
Domestic
credit to
Private
External
Loan to Current
private
debt from
debt
deposit account
sector in FX less stable
falling
ratio balance (%
or FXsource (%
due (% of
(Decembe of GDP,
linked (% of of GDP,
GDP,
r 2013)
2014)
GDP, end- end-2012)
2014)
2013)
Serbia
Croatia
B&H
Albania
Macedonia
35
26
55
46
37
19
23
10
24
Threshold CESEE
29
Source: CESEE REI SPRING 2014
114
External
fundamentals
Public debt Stock of
Fiscal
exposed to public
financing
FX risk (% debt (% of
needs (% of
of GDP,
GDP,
GDP, 2014)
end-2013) 2013)
Average
CDS
spreads,
May 22
2013 March
31,2014
Exchange
rate
Reserves
misalignme buffers
nt
-5
16
51
66
19
374
Moderate
215%
109
1
30
36
60
20
332
Moderate
97%
125
-8
14
30
43
5
/
Moderate
120%
53
-10
3
19
70
28
/
None
164%
23
91
-4
18
30
36
14
/
Moderate
103%
30
110
-6
18
29
60
18
200
Significant
75%

“Lessons” in coping with sudden stops in capital inflows
◦ Monetary and exchange rate policies can and should be used during episodes of
market volatility.
◦ Preventive measures (such as securing external credit lines) and targeted liquidity
provision could be helpful.

Structural priorities for SEE economies:
◦ Most countries still need to address crisis legacies, including high levels of NPL`s.
◦ Strengthening fiscal positions without jeopardizing the ongoing economic
recovery.
◦ Boost growth potential through structural reforms.
◦ Greater use of macroprudential tools to prevent external vulnerabilities building
up again and to improve external funding structure.
THANK YOU FOR YOUR ATTENTION
http://www.nbrm.mk
[email protected]