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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]