Download The Impact of the Financial Crisis on Transition

Regional financial integration and
the impact of the financial crisis
Ralph de Haas
Office of the Chief Economist
EBRD
Black Sea Conference on Regional
Integration and Inclusive Growth
Athens, 23/24-02-2009
Overview

Financial integration

Impact crisis on growth

Crisis response
Emerging European growth model
based on financial integration

’Capital from rich to poor’
– Unparalleled process of financial integration
– Allowed large current account deficits
– Financed through FDI and foreign bank lending

Has been remarkably successful
– Sustained high growth rates
– Unprecedented institutional transformation
– Strong public balance sheets
Financial integration resulted in large current account
deficits, more than in other emerging markets
US$ bn
FDI and CA balance (% GDP, in 2007)
15%
SEE
10%
Baltics
Ukraine
Thailand Russia
5%
CE
Indonesia Brazil
0%
-5%
FDI comparator countries
CA balance comparator countries
-10%
-15%
-20%
FDI EBRD countries
CA balance EBRD countries
Mexico
India
Kazakhstan
Substantial build up of private debt
Private debt over GDP
120%
2002 2007
2002
2007
100%
80%
60%
40%
20%
Ba
lti
cs
CE
SE
E
kr
ain
e
U
Ru
ss
ia
Th
ai
la
nd
K
az
ak
hs
ta
n
In
do
ne
sia
In
di
a
ex
ic
o
M
Br
az
il
0%
Maturing syndicated loans in 2009
Syndicated loans maturing in 2009 (US$ billion)
Russian Federation
29.5
Turkey
12.3
3.3
Kazakhstan
Ukraine
2.4
Bulgaria
1.3
Romania
1.2
0.1
Georgia
0
5
10
15
20
25
30
Externally financed growth model
now under attack...

Depth of financial integration increased vulnerability of the region
– Large current account deficits, excessive credit growth, high private
sector debt

Though structure of foreign funding - FDI and intra-bank lending has (as yet) added resiliance

Region is now hit with full force
– Capital inflows slowing dramatically

Syndicated lending and bond markets dried up

Will foreign parent banks continue to subsidiaries?
– Deposit withdrawals and bank failures
– Very substantial currency devaluations
– Industrial production dropping precipitously, sharp slow-down in export
markets
… but longer-term benefits of
financial integration likely to stay

Built-up stock of physical and human capital

FDI-related transfer of industrial know-how

Financial infrastructure and know-how in place (e.g.
local banks as arrangers syndications)

Advantages foreign-bank ownership (cf. Kazakhstan…)

Improved risk management

Increased ownership transparency

New lending technologies such as credit scoring

Committed parent banks…
Overview

Financial integration

Impact crisis on growth

Crisis response
The crisis hit hard in Q4 2008, and
output fell sharply across the region
Industrial production growth
CDS spreads, latest vs. August 08
1000
900
649 590
667
800
600
39
87
96
Nov-08
0%
-5%
-10%
-15%
217
300
157 168
-20%
-25%
-30%
0
Aug-08
latest
figures: difference in bps
ar
ia
st
on
ia
La
t
Li via
th
ua
ni
a
P
ol
an
d
R
us
si
S
lo a
va
ki
S
lo a
ve
n
U ia
kr
ai
ne
E
ul
g
Ge
rm
an
y
UK
Sp
ai
Sl n
ov
a
Gr k
ee
c
Po e
la
Hu nd
ng
a
Cr ry
oa
tia
Se
rb
Bu ia
lg
a
Ro ria
m
an
i
Ru a
Ka
s
za sia
kh
st
an
La
tv
Uk ia
ra
in
e
-35%
B
100
2817
275
400
200
440
341 214 308
500
Oct-08
5%
Spread widening
in bps
700
Sep-08
10%
2009 GDP growth, %
Growth forecast 2009 reduced by 1-6
points for all countries in the region
-6.0
12.0
TKM
10.0
8.0
6.0
-4.0
AZB
ARM
MNG
TAJ UZB
4.0
ALB
KYR
FYRoM
Georgia
MTN
SVK
Bulgaria
2.0
BEL
MOL
POL
Romania
Russia
SLV
KAZ
0.0
CZR
CRO
SER
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
-2.0
LIT
Turkey
EST
-4.0
LAT
Ukraine
-6.0
2008 GDP growth, %
From the financial crisis to a crisis of
transition?
Direct effects



Financial development likely to regress, with most
immediate impact on SME sector
FDI may fall sharply → less transfer of skills
Private sector participation in large infrastructure
more difficult (but more needed)
Effects via policies and reform reversals

Large-scale privatisations could be reversed

Trade liberalisation challenged (particularly in
countries that are not members or candidates of EU)
A cautionary tale: transition reversals
during/after the Russian 1998 crisis
Russia: Transition Indicators, 1996-2008
4
3.5
3
2.5
2
1.5
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
EBRD 9 (avg. incl. infr.)
Financial Institutions
Enterprises
Overall infrastructure reform
Markets and Trade
Overview

Financial integration

Impact crisis on growth

Crisis response
Fighting the crisis: Short run

Monetary and fiscal policies: no one-size-fits-all.
Right policies depend on:
– strength of public balance sheet
– credibility of monetary and fiscal institutions
– currency composition of debt
– state of domestic demand

The overriding challenge (almost everywhere): to
protect the core banking system. May require crossborder coordination of recapitalization of parents and
subsidiaries.

Another key challenge: maintaining SME financing
Fighting the crisis: international challenges

Need to safeguard the stability of parent banks and
banking systems in transition region

Crisis-management so far at national level (except
ECB liquidity support & IMF packages)

Problems:
1. Negative spillovers by drawing deposits and capital flows from
countries unable to provide sufficient government support
2. ‘Protectionist’ approach prevents ‘leaking’ of support
packages: impedes efforts of multinational banks to fund or
recapitalise subsidiaries across borders
3. Absence of co-ordination between host and home authorities,
parent banks, and subsidiaries: inaction and under-provision
of financial support
Joint IFI Initiative (1)

Objective: joint work to address funding needs in a
co-ordinated manner

Need for a flexible co-ordination framework that
brings together key stakeholders:
– Home-country authorities
– Host-country authorities
– IFIs (EBRD, EIB, IFC/World Bank)
– Parent banks and subsidiaries
Joint IFI Initiative (2): burden-sharing

Parent banks: contributions expected in terms of
maintaining capital and funding commitments

IFIs: complementary contributions in line with
capacity to deliver

Host governments: liquidity support, capital
injections, deposit insurance (if and when needed)
Note: possible need for currency swaps in tandem with LC
liquidity support

Home governments: follow up on implementation of
national support packages
Joint IFI Initiative (3): three platforms
1. IFI discussions with regional banking groups
to discuss business plans and funding needs
2. IFI coordination with home and host country
authorities (Vienna meeting)
3. Host-country co-ordination of stakeholders
Thank you