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Bank of Greece – University of Oxford (SEESOX) Conference
Challenges and Prospects of South East European Economies
in the wake of the financial crisis
Bank of Greece
Friday, 16 October 2009
Resilience of SEEs to the crisis
Paul Mylonas
Chief Economist, Chief of Strategy, National Bank of Greece Group
National Bank of Greece Group – Strategy & Economic Research
What people saw and what they expected
What happened and current prospects
Why a better-than-expected outcome
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Resilience of SEEs to the crisis
1
What people saw and what they expected
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Resilience of SEEs to the crisis
2
Booming activity, albeit from a low base … but above potential?
Real GDP
2002 - 2007 CAGR (%)
8
7
6
5
4
3
2
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Euro area
Egypt
Ukraine
Albania
Serbia
Bulgaria
Romania
Turkey
0
FYROM
1
Resilience of SEEs to the crisis
3
Evidence of excess demand reinforced by the build-up of a large external
imbalance
External Debt/GDP (%)
Current Account Balance/GDP (%)
120,0
10,0
5,0
100,0
0,0
80,0
-5,0
-10,0
60,0
-15,0
40,0
2002
2008
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2002
Resilience of SEEs to the crisis
Egypt
Ukraine
Albania
FYROM
Serbia
Romania
Turkey
Euro area
Egypt
Ukraine
Albania
FYROM
Serbia
0,0
Bulgaria
-30,0
Romania
20,0
Turkey
-25,0
Bulgaria
-20,0
2008
4
Additional indicators of imbalances – real exchange rate appreciation and large
credit impulse
2008 CPI-based REER
(2002 = 100)
Total Loans
2002 - 2008 CAGR (%)
140
70
60
130
50
40
120
30
20
110
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Resilience of SEEs to the crisis
Euro area
Egypt
Ukraine
Albania
FYROM
Serbia
Bulgaria
Romania
Turkey
Egypt
Ukraine
0
Albania
Serbia
Bulgaria
Romania
Turkey
100
FYROM
10
5
Banking sector imbalances: large share of F/X denominated loans and
dependence on foreign funding
Loans/Deposits (%)
FX Loans/Total Loans (%)
250,0
90,0
80,0
200,0
70,0
60,0
150,0
50,0
40,0
100,0
30,0
20,0
50,0
2002
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2002
Resilience of SEEs to the crisis
Egypt
Ukraine
Albania
Serbia
Bulgaria
Romania
Turkey
Egypt
Albania
2008
Ukraine
0,0
FYROM
Serbia
Bulgaria
Romania
Turkey
0,0
FYROM
10,0
2008
6
Very large real wage increases (again from a low base), but were they hampering
competitiveness? Also a house price bubble had emerged
Real Wages (2002-2008 CAGR)
18
House Price Inflation (according to market participants)
16
5-Year Growth
to Peak (%)
Decline from
the Peak (%)
Current
Thous. EUR / Sq. M.
Turkey
c. 150
-15
1,4
Romania
> 200
-45
1,4
Bulgaria
c. 150
-15
1,2
Serbia
c. 120
-20
1,6
FYROM
c. 75
-5
0,9
Albania
c. 115
---
0,9
Ukraine
c. 700
-30
2,8
14
12
10
8
6
4
2
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Egypt
Ukraine
Albania
Serbia
Bulgaria
Romania
-2
FYROM
0
Resilience of SEEs to the crisis
7
With the global economy in turmoil, markets and analysts envisaged a grim end
to the boom years
Eurobond Spreads (bps)
1400
1200
NPLs (% of Total Loans)
2008
2009F
2010F
Base
2010F
Bear
Turkey
3,5
8,0
8,0
15,0
600
Romania
3-4
9,0
13,0
18,0
400
Bulgaria
2,3
6,0
11,0
17,0
200
Serbia
5,8
9,0
16,0
22,0
FYROM
3-4
6,0
16,0
17,0
Albania
2-3
6,0
11,0
13,0
1000
800
Turkey
Romania
Bulgaria
FYROM
Ukraine
Egypt
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28/11/08
03/11/08
09/10/08
14/09/08
20/08/08
26/07/08
01/07/08
0
Serbia
Resilience of SEEs to the crisis
8
What happened and current prospects
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Resilience of SEEs to the crisis
9
Much larger-than-initially-expected drop in output, similar to more advanced
economies, and with a higher “β”…
Q2:2008
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Q3:2008
Q4:2008
Q1:2009
Euro area
Egypt
FYROM
Serbia
Bulgaria
Romania
Turkey
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
-20
-22
Ukraine
Real GDP Growth (%, Q2:2008 - Q2 2009)
Q2:2009
Resilience of SEEs to the crisis
10
… due to openness and manufacturing bias
Exports - 2008
Exports of Goods
(% of GDP)
Exports of Manufactured
Goods (% of Total Exports)
Exports to the EU
(% of Total Exports)
Turkey
19,3
94,8
48,0
Romania
24,5
81,2
70,4
Bulgaria
44,6
68,4
60,0
Serbia
21,7
76,6
54,3
FYROM
41,3
77,2
59,0
Albania
10,4
75,8
79,2
Ukraine
37,4
76,6
27,1
Egypt
13,3
61,7
33,8
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Resilience of SEEs to the crisis
11
Further evidence of the important role of the inventory correction in the nascent
recovery in exports
Exports and Euro area industrial production
(y-o-y % change, Q1:2008 - Q3:2009)
Exports and Euro area industrial production
(y-o-y % change, Q1:2008 - Q3:2009)
50
5
60
40
50
0
30
0
40
30
20
-5
10
20
-5
10
0
0
-10
-10
-10
-10
-20
-20
-30
5
70
-15
Euro area industrial production
(rhs)
-20
Turkey
Q3:2008 Q4:2008 Q1:2009
Rom ania
Bulgaria
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-40
-15
Euro area industrial production
(rhs)
-50
-40
Q1:2008 Q2:2008
-30
Q2:2009 Q3:2009
Serbia
Euro area
-20
-60
Q1:2008
FYROM
Q2:2008 Q3:2008
Albania
Q4:2008 Q1:2009 Q2:2009
Ukraine
Resilience of SEEs to the crisis
Egypt
Q3:2009
Euro area
12
Contraction in activity reflects a sharp slowdown in exports and credit
expansion
Loans (y-o-y % change)
70
60
50
Impact on growth (pps)
40
Depreciation
Exports
Capital
excl. IMF
Growth difference
2009 2008
Turkey
1,0
-3,2
-4,9
-6,5
20
Romania
2,4
-15,5
-15,2
-13,1
10
Bulgaria
---
-10,5
-29,8
-10,8
Serbia
2,0
-5,7
-11,3
-9,4
July 2008
Egypt
Ukraine
Albania
Serbia
Bulgaria
Romania
Turkey
0
FYROM
30
July 2009
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Resilience of SEEs to the crisis
13
External imbalances correcting rapidly, despite drop in exports, reflecting …
Net FDI Inflows (% of GDP)
Current Account Balance (% of GDP)
9
2
8
0
7
-2
6
-4
5
-6
4
-8
3
H1:2008
H1:2009
H1:2008
Egypt
Ukraine
Albania
FYROM
Serbia
Bulgaria
Turkey
Egypt
Ukraine
Albania
FYROM
Serbia
-14
Bulgaria
0
Romania
-12
Turkey
1
Romania
-10
2
H1:2009
Coverage Ratio (FDI/CAD, %)
Turkey
Romania
Bulgaria
Serbia
FYROM
Albania
Ukraine
Egypt
H1:2008
31,6
58,5
62,8
46,8
67,8
30,1
79,5
---
H1:2009
50,0
126,3
57,9
90,0
24,3
61,0
283,3
200,0
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Resilience of SEEs to the crisis
14
… a cut-off of oxygen to the economy from large capital inflows of the past
-- yet better than expected
Other Net Capital Inflows (% of GDP)
12
10
8
6
4
2
0
-2
-4
H1:2008
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Egypt
Ukraine
Albania
Serbia
Bulgaria
Romania
Turkey
-8
FYROM
-6
H1:2009
Resilience of SEEs to the crisis
15
As a result, FX reserves have not suffered greatly, and appear adequate in
relation to the external financing gaps
FX Reserves
(EUR billion - July 2008 - September 2009)
FX Reserves
(EUR billion - July 2008 - September 2009)
60
16
55
14
50
12
45
10
40
8
35
6
30
Turkey
Rom ania
Egypt
Bulgaria
Ukraine
Serbia
FYROM
09:2009
08:2009
07:2009
06:2009
05:2009
04:2009
03:2009
02:2009
01:2009
12:2008
11:2008
10:2008
09:2008
07:2008
09:2009
08:2009
07:2009
06:2009
05:2009
04:2009
03:2009
02:2009
01:2009
12:2008
11:2008
10:2008
0
09:2008
15
08:2008
2
07:2008
20
08:2008
4
25
Albania
Estimate of 2009 FX Reserves Losses / August 2009 FX Reserves (%) -- excluding IFI's Support
Turkey
Romania
Bulgaria
Serbia
FYROM
Albania
Ukraine
17,4
31,0
17,7
19,0
22,3
9,4
55,9
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Resilience of SEEs to the crisis
16
Overall, leading and coincident indicators suggest that the worst is over, and
activity will recover by Q4:2009
Q1:2009
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Q2:2009
Q3:2009
Q4:2009
Egypt
Ukraine
Albania
Serbia
Bulgaria
Romania
Turkey
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
-20
-22
FYROM
Real GDP Growth (%, 2009 - 2010)
2010
Resilience of SEEs to the crisis
17
Turkey
Rom ania
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Bulgaria
Serbia
FYROM
Ukraine
Resilience of SEEs to the crisis
01/10/09
01/09/09
0
01/08/09
0
01/07/09
200
01/06/09
200
01/05/09
400
01/04/09
400
01/02/09
01/03/09
600
01/01/09
600
01/12/08
800
01/11/08
800
01/10/08
1000
01/09/08
Eurobond Spreads (bps)
01/08/08
1000
01/07/08
1200
01/06/08
1200
01/05/08
1400
01/04/08
1400
01/02/08
01/03/08
01/01/08
01/09/09
01/10/09
01/08/09
01/06/09
01/07/09
01/05/09
01/04/09
01/02/09
01/03/09
01/01/09
01/12/08
01/11/08
01/10/08
01/09/08
01/08/08
01/07/08
01/06/08
01/05/08
01/04/08
01/02/08
01/03/08
01/01/08
Markets clearly have changed their mind regarding the outlook for SEE, as well
Eurobond Spreads (bps)
Egypt
18
Why a better-than-expected outcome
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Resilience of SEEs to the crisis
19
EU membership (or on path towards) and/or IFI umbrella, combined with solid
Governments (in most cases) provided much needed support…
EU Membership
Turkey
Government Effectiveness
IFI Support
o
Candidate country
Strong single party Government, especially after
Negotiations of a new agreement with the IMF are in
o
Started negotiations in October 2005
the July 2007 Constitutional Court decision
progress
Member country since January 2007
Strong centre-left Government until its collapse in
o
early-October 2009
Signed a 2-year agreement with the IMF in May
2009, amounting to EUR 12,9 bn.
o
Romania
Further support is expected from the EU (EUR 5
bn), the World Bank (EUR 1 bn), and the EBRD, the
EIB and the IFC (EUR 1 bn).
Member country since January 2007
Bulgaria
Serbia
o
Potential candidate country
o
Signed a Stabilisation and Association
Strong centre-right Government took office in July
Remains open to seal a deal with the IMF if global
2009
conditions deteriorate further
Strong centre-left coalition Government
Signed a 15-month agreement with the IMF in January
2009, amounting to EUR 2.9 bn.
Agreement in April 2008
o
Potential candidate country
o
Signed a Stabilisation and Association
Strong centre-right coalition Government
Remains open to seal a deal with the IMF if global
conditions deteriorate further
Agreement in October 2005
FYROM
o
EU Commission recommends entry talks
with FYROM (14 October 2009)
Albania
o
Potential candidate country
o
Signed a Stabilisation and Association
Strong right-left coalition Government
Remains open to seal a deal with the IMF if global
conditions deteriorate further
Agreement in June 2006
---
Ukraine
---
Weak coalition Government until the January 2010
Signed a 2-year agreement with the IMF in November
presidential elections
2008, amounting to USD 16.5 bn.
Strong and pro-reform Government since July 2004
---
Egypt
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Resilience of SEEs to the crisis
20
… allowing monetary policy to be countercyclical (in contrast to other EM
crises)
Inflation (%)
Policy Rate (%)
25
18
16
20
14
12
15
10
8
10
6
4
5
October 2008
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Sep. 08
Resilience of SEEs to the crisis
Egypt
Ukraine
Albania
Serbia
Bulgaria
Romania
Turkey
Egypt
Albania
October 2009
Ukraine
0
FYROM
Serbia
Romania
Turkey
0
FYROM
2
Sep. 09
21
FP is also countercyclical, with automatic stabilizers allowed free reign,
permitted by good initial debt conditions…
Fiscal Balance (% of GDP)
2002-2007
Average
2008
Jan. 08 /
Aug. 08
Jan. 09 /
Aug. 09
2009F
-4,0
-1,8
0,5
-3,3
-6,2
Romania
-1,7 *
-4,9
-1,1
-4,3
-8,0
Bulgaria
1,8
3,0
6,9
-0,7
-2,5
Serbia
-1,7
-2,4
-0,4
-2,4
-5,2
FYROM
-1,1
-1,0
1,6
-1,7
-4,0
Albania
-5,0
-6,0
-0,9
-4,5
-8,3
Ukraine
-1,7
-3,2
n.a.
n.a.
-7,2
Egypt
-8,2
-6,9
4,4
4,8
-8,5
Turkey
* 2005-2007 Average
Public Debt (% of GDP)
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2002
2008
Change
Turkey
70,5
39,5
-31,0
Romania
28,9
21,8
-7,1
Bulgaria
56,4
16,7
-39,7
Serbia
84,8
31,5
-53,3
FYROM
43,1
24,4
-18,7
Albania
65,0
57,7
-7,3
Ukraine
35,7
19,9
-15,8
Egypt
101,1
74,2
-26,9
Resilience of SEEs to the crisis
22
A traditional Achilles’ heel of EM crises -- the health of the banking system -was in good shape
Banking Sector Indicators - 2008
Capital adequacy
ratio (%)
ROAE (%)
NPL
Ratio (%)
Loans
% of GDP
Loans/Deposits
%
FX Loans/
Total Loans (%)
Foreign ownership
(% of total assets)
Turkey
14,0
16,7
3,5
35,7
79,2
28,9
16,0
Romania
13,8
17,0
4,5*
37,9
136,1
57,8
85,9
Bulgaria
14,9
16,2
2,3
71,5
141,6
56,3
83,9
Serbia
21,9
9,3
5,8
39,0
139,4
42,0
75,3
FYROM
16,2
12,5
6,8*
42,8
101,3
57
92,7
Albania
17,2
11,4
6,5*
35,6
64
71,3
94,0
Ukraine
14,0
8,5
3,9
72,3
212,1
61,8
50,2
Egypt
n.a.
14,4
15,0
40,6
56,9
27,9
55,0
* Non-standard definition
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Resilience of SEEs to the crisis
23
Several years of adjustment effort has made these economies very competitive
Competitiveness Indicators - 2008
Average monthly
wage, EUR
Corporate tax
rate (%)
Turkey
581
20,0
Romania
438
16,0
1.792
0,3
Bulgaria
264
10,0
3.784
0,2
Serbia
403
10,0
1.463
0,2
FYROM
263
10,0
1.157
0,1
Albania
299
10,0
659
0,1
Ukraine
234
25,0
588
0,4
Egypt
130
20,0
416
0,1
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2002-2008 FDI
per capita
685
Gain in export market share
between 2004 and 2009 (pps)
Resilience of SEEs to the crisis
0,9
24
Thank you
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Resilience of SEEs to the crisis
25