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Evolution of the financial systems
in transition countries:
a comparative perspective.
Leszek Balcerowicz
President of the National Bank of Poland
The Future of Domestic Capital
Markets in Developing Countries
Washington, 15th April 2003
1
I. INITIAL CONDITIONS IN TRANSITION ECONOMIES:
1. THE ECONOMY WAS DOMINATED BY STATE-OWNERSHIP
AND THE MARKET WAS ELIMINATED THROUGH CENTRAL
PLANNING (THE MOST EXTREME FORM OF STATISM);
2. THE FINANCIAL
SIMILARITY:
SECTOR
DISPLAYED
A
FAR-REACHING
–A
MONOBANK
STRUCTURE
OF
THE
BANKING
SYSTEM,
NO INDEPENDENT CREDIT DECISIONS AND RISK MANAGEMENT;
– NO PRUDENTIAL REGULATIONS AND SUPERVISION;
– NO MONEY MARKET, NO STOCK EXCHANGE;
– AN EXTREMELY LIMITED RANGE OF FINANCIAL INSTRUMENTS;
– NEITHER INTERNAL NOR EXTERNAL CURRENCY CONVERTIBILITY.
3. SUCH A FINANCIAL SECTOR WAS:
– SIMILAR TO THE ONE IN CHINA AT THE START OF ITS REFORMS;
– EVEN MORE STATE-DOMINATED THAN THE BANKING SECTOR IN
INDIA AND OTHER EMERGING ECONOMIES 12 YEARS AGO.
2
4. MACROECONOMIC CONDITIONS IN TRANSITION ECONOMIES VARIED MUCH
MORE THAN INSTITUTIONAL ONES, ESPECIALLY WITH RESPECT TO:
A. INFLATION: HYPERINFLATION IN POLAND, THE FSU VS. MUCH LOWER INFLATION
IN CZECHOSLOVAKIA, HUNGARY AND ROMANIA;
Inflation (annual average, in per cent), a year before transition began
(1989 for Poland, Hungary, Slovenia, 1990 for Czech Rep., Slovakia, Bulgaria, Romania,
1991 for the former Soviet Union countries).
1306
400
350
300
251,1
250
210,5
224,7
200
150
92,7
91
100
98
26,3
50
5,1
10,8
9,7
17
0
R
i
an
om
a
h
ec
z
C
p.
e
R
o
Sl
ki
va
y
ar
ng
a
H
u
B
ria
a
g
ul
U
e
ain
r
k
R
sia
us
a
ol
M
v
do
ia
n
to
s
E
th
Li
a
ni
a
u
P
d
an
l
o
ni
ve
a
o
Sl
Source: EBRD Transition Report 2001.
3
B. THE SIZE OF MONETARY OVERHANG DUE TO REPRESSED INFLATION:
LARGER IN THE FSU, BULGARIA, ROMANIA AND POLAND THAN IN HUNGARY
OR THE FORMER CZECHOSLOVAKIA.
“Repressed” inflation 1987-1990
30
(difference between increase in real wages and real GDP from 1987 to 1990)
25,7
25
20
16,8
18
Romania
Bulgaria
13,6
15
12
10
5
0
-5
-10
-7,7
-7,1
-7,1
Hungary
Czech Rep.
Slovakia
Slovenia
Poland
former Soviet
Union
countries
Source: IMF World Economic Outlook, October 2000.
4
II. SUBSEQUENT DEVELOPMENTS (TRANSITION) HAVE DIFFERED
SHARPLY AMONG THE TRANSITION ECONOMIES WITH RESPECT TO:
1. Stock market capitalisation, turnover and bond-market development
Stock market capitalisation (% GDP), 2001.
30
25
20
15
10
5
0
Ukraine
Russia
Poland
Czech Rep.
Slovenia
Hungary
Estonia
Source: EBRD Transition Report 2002.
5
2. Credit to the private sector (% GDP), 2001.
45
40
35
30
25
20
15
10
5
0
Ukraine
Russia
Estonia
Poland
Hungary
Slovakia
Czech Rep.
Slovenia
Source: IMF International Financial Statistics.
6
3. Credit to the private sector (% GDP) dynamics, 1996 - 2001
60
50
40
30
20
1996
1997
Slovenia
1998
Slovakia
1999
Poland
2000
Hungary
2001
Czech Rep.
Source: Stability and Structure of Financial Systems in CEC5, NBP, May 2002.
7
4. Share of non-performing loans and costs of banking restructuring.
The fiscal costs of the restructuring of banks differed markedly,
higher costs did not correlate with an improvement in banking sector performance.
Costs of Banking Sector Restructuring (% GDP), 1991-1998.
40
35
30
25
20
15
10
5
0
Bulgaria
Czech Rep.
Hungary
Lithuania
Poland
Latvia
Estonia
Source: Zoli, Cost and Effectiveness of Banking Sector Restructuring in Transition Economies, IMF WP/01/157, 2001.
8
THE DIFFERENCES IN FINANCIAL SECTOR DEVELOPMENTS WERE
LESS DUE TO THE DIFFERENT INITIAL CONDITIONS AND MORE TO
THE DIFFERENCES IN THE QUALITY OF GENERAL AND SECTORAL
POLICIES.
GENERAL POLICIES:
• FISCAL AND EXCHANGE RATE POLICIES;
• ENFORCING THE RULE OF LAW;
•PROTECTION OF CREDITORS’ AND
MINORITY SHAREHOLDERS’ RIGHTS;
•LIBERALISATION.
INITIAL
CONDITIONS
FINANCIAL
SECTOR
• PRIVATISATION;
• PRUDENTIAL REGULATION AND
SUPERVISION;
•RESTRUCTURING OF
NON-PERFORMING LOANS.
ENTERPRISE
SECTOR
• PRIVATISATION.
9
III. SOME SPECIFICITIES
IN ACCESSION COUNTRIES:
OF
FINANCIAL
SECTOR
REFORMS
1. FAST INTERNAL AND EXTERNAL FINANCIAL LIBERALISATION, ESPECIALLY
RELATIVE TO CHINA, INDIA AND THE ASIAN TIGERS. AS A RESULT THE ACCESSION
COUNTRIES HAVE BECOME FINANCIALLY VERY OPEN RELATIVE TO MOST OTHER
EMERGING ECONOMIES.
40
• Internationally issued bonds as a % of total bonds outstanding, 2000.
35
30
25
20
15
10
5
0
Emerging Europe
Latin America
Asian Tigers
Source: BIS Papers No 11, The development of bond markets in emerging economies, BIS 2002.
10
• Private non-bank sector external loans from BIS reporting banks
as a % of credit to non-government, 2001.
120
100
80
60
40
20
n
er
m
an
y
G
re
ec
e
G
Ja
pa
us
si
a
R
ia
In
d
M
e
So xic
o
ut
h
K
or
e
M a
al
ay
si
a
Th
ai
la
nd
In
do
ne
si
a
C
hi
na
hi
le
C
ra
zi
l
B
ia
Es
to
n
ar
y
un
g
H
la
nd
Po
ep
u
R
C
ze
ch
Sl
ov
en
i
a
bl
ic
0
Source: IMF International Financial Statistics and BIS Quarterly Review, September 2002.
11
2. RELATIVELY FAST BANK PRIVATISATION AND A LARGE ROLE
OF FOREIGN INVESTORS.
• Share of state-owned banks assets in total banking assets (%), 2001.
100
80
60
40
20
0
0
0
Ru
ssi
a
In
dia
Ch
ina
ala
ys
ia
M
d(
Ko
rea
20
00
)
o
ex
ic
Th
ai l
an
M
Ch
ile
il
Br
az
ia
Es
ton
ak
Re
p.
.
Sl
ov
hR
ep
ry
Hu
ng
a
nd
Po
la
Cz
ec
Sl
ov
en
ia
(2
00
2)
0
Source: Central bank’s Annual Reports and BIS Papers No 4, The banking industry in the emerging market economies, BIS 2001.
12
• Share of total banking assets controlled by foreign investors (%), 2001.
100
90
80
70
60
50
40
30
20
10
ss
ia
Ru
ia
In
d
in
a
Ch
K
M
or
al
ea
ay
sia
(2
00
0)
H
on
g
Ko
ng
Si
ng
ap
or
e
co
M
ex
i
ile
Ch
Br
az
il
Po
lan
d
Cz
ec
h
Re
p.
Sl
ov
ak
Re
p.
Es
to
ni
a
Sl
ov
en
i
a(
20
02
)
0
Source: Central bank’s Annual Reports and BIS Papers No 4, The banking industry in the emerging market economies, BIS 2001.
13
3. RAPID INTRODUCTION OF REGULATIONS
PROTECTING CREDITORS’ AND SMALL
SHAREHOLDERS’ RIGHTS, BUT MUCH
SLOWER
IMPROVEMENT
IN
THEIR
ENFORCEMENT.
14
IV. PRESENT RELATIVE POSITION OF ACCESSION COUNTRIES:
1. Relative size of the financial sector in accession countries is:
– much smaller than in EU Members States and other developed
economies and lower than in the Asian Tigers, Chile, Israel and China.
– not very different from Mexico, Indonesia, India, Turkey and Brazil.
Credit to non-government and stock market capitalisation, % GDP, 2001
400
350
300
250
200
150
100
50
Switzerland
United Kingdom
USA
Germany
Austria
Malaysia
China (2000)
Chile
Korea
Thailand
Brazil
Turkey (2000)
India (1997)
Indonesia (2000)
Mexico
Estonia
Czech Rep.
Slovenia
Hungary
Poland
0
Source: IMF International Financial Statistics, FIBV and stock exchanges websites.
15
2. The financial sector in accession countries is bank-dominated, with limited
importance of capital and commercial debt markets. The ratio of credit to
stock market capitalization is similar to that in bank-based developed
countries (Germany, Japan, Portugal, New Zealand) and much lower than in
Austria.
9
Credit to non-government vs. stock market capitalisation, 2001 (ratio as a %).
8
7
6
5
4
3
2
Source: IMF International Financial Statistics, FIBV and stock exchanges’ websites.
16
Austria
Portugal
New Zealand
Germany
Japan
Spain
United Kingdom
Switzerland
USA
China (2000)
Korea
Israel
Brazil
Chile
Turkey (2000)
India (1997)
Mexico
Czech Rep.
Slovenia
Poland
Hungary
0
Estonia
1
3. Credit to non-government in accession countries is:
– comparable to that in other developing countries (except for Chile, Israel,
the Asian Tigers and China),
– much lower than in developed countries (except for Denmark, Greece and Finland);
– lower than indicated by the level of GDP per capita.
Credit to non-government as a % of GDP, 2001
160
Malaysia
Switzerland
Credit to non-government % GDP
140
China
Germany
120
Thailand
100
Korea
80
Chile
USA
Finland
60
Estonia
40
India
20
Czech Rep.
Poland
Brazil
Hungary
Denmark
Greece
Slovenia
Indonesia
Russia
Mexico
0
0
5000
10000
15000
20000
25000
30000
35000
40000
GDP per capita PPP
Source: IMF International Financial Statistics.
17
4. The level of banking deposits in accession countries is:
– similar to those in Latin American countries, Indonesia, India and Turkey;
– lower than in the Asian Tigers and China;
– lower than in developed countries with bank-based financial systems, but not
very different from those in Canada, Denmark, Finland, France and the US (i.e.
countries with other more developed forms of savings - insurance, investment
funds, etc.).
Banking deposits as a % GDP, 2001
160
140
Deposits % GDP
China
Switzerland
120
Malaysia
100
Thailand
Germany
Korea
80
Czech Rep.
France
USA
Canada
60
Indonesia
Slovenia
Poland
India
40
Brazil
20
Russia
Finland
Chile Hungary
Denmark
Estonia
Mexico
0
0
5000
10000
15000
20000
25000
30000
35000
40000
GDP per capita PPP
Source: IMF International Financial Statistics.
18
5. Bond market development in accession countries is similar to that in other
emerging economies (except for Malaysia and Korea), but this is mainly due to
issues of public sector bonds.
Total bonds outstanding as a % of GDP, 2000.
180
165
160
130
140
113
120
102
100
70
80
59
60
60
58
47
40
21
37
22
31
10
20
24
10
St
ate
s
n
ni
te
d
Ja
pa
U
gd
om
Ki
n
in
a
Ch
U
ni
te
d
ia
In
d
M
al
ay
sia
Ru
ss
ia
or
ea
K
on
es
ia
In
d
ail
an
d
Th
ile
Ch
Br
az
il
Po
lan
d
Cz
ec
h
Re
p.
H
un
ga
ry
M
ex
ic
o
0
Source: BIS Papers No 11, The development of bond markets in emerging economies, BIS 2002.
19
6. Outstanding amounts of private sector bonds are very low, but this is
a common feature of emerging economies (except for Malaysia, Korea,
Hong Kong, Singapore and Chile).
Total private sector bonds outstanding as a % of GDP, 2000.
80
70
60
50
40
30
20
10
0
y
ep. xico
gar
R
n
Me
Hu zech
C
l
e
s ia iland orea aysia ussia
azi Chil
e
r
n
a
l
B
o
K
R
Th
Ma
Ind
ia
Ind
ina apa n tate s gdom
h
S
C
J
n
e d d Ki
t
i
Un nite
U
Source: BIS Papers No 11, The development of bond markets in emerging economies, BIS 2002.
20
7. Stock market capitalisation in accession countries is:
– much lower than in all advanced economies (except for Austria and
New Zealand);
– similar to that in Indonesia, Mexico, Thailand, Turkey and Brazil.
Stock market capitalisation, 2001.
240
210
180
150
120
90
60
21
Switzerland
Finland
United States
Greece
Japan
Portugal
New Zealand
Austria
Malaysia
Chile
China (2000)
Israel
United Kingdom
Source: FIBV and stock exchanges’ websites.
Korea
Brasil
Turkey
Thailand
Mexico
Indonesia
Estonia
Hungary
Czech Rep.
Poland
0
Slovenia
30
8. Stock market capitalisation in accession countries is not very different
from levels prevailing in EU economies ten years ago.
Stock market capitalisation:
more advanced transition countries, 2001 vs. advanced economies, 1992.
50
40
30
20
10
s
er
lan
d
an
y
Ne
th
Ge
rm
ain
Sp
tri
a
Au
s
Gr
ee
ce
Fi
nl
an
d
Cr
oa
Cz
tia
ec
hR
ep
ub
lic
Sl
ov
en
ia
Hu
ng
ar
y
Es
to
ni
a
Po
rtu
ga
l
Po
lan
d
0
Source: FIBV and stock exchanges’ websites.
22
9. Stock market turnover in accession countries is very low:
– much lower than in all advanced economies (except for Austria);
– similar to that in Chile, Indonesia, Brazil and Israel, but lower than in
other emerging markets.
Stock market turnover (% GDP), 2001.
200
180
160
140
120
100
80
60
40
USA
Germany
Australia
Japan
Portugal
Austria
Taiwan
Korea
Turkey
New Zealand
Source: FIBV and stock exchanges’ websites.
Malaysia
Israel
Brasil
Indonesia
Chile
Estonia
Slovenia
Poland
0
Czech Rep.
20
23
V. The accession countries’ financial systems are highly
integrated with the EU financial market:
1. Financial market’s legal framework is fully harmonized with
EU standards. Banking directives were from the very beginning
a hallmark on which the national law and prudential
regulations were modeled.
2. Most banks in accession
by foreign banking groups.
countries
are
controlled
3. Foreign investors are also active in other financial services
(insurance, investment funds).
24
4. The best domestic companies have already gained access to
foreign financing, either through direct loans from mother
companies abroad or loans from foreign banks, or through
issues of debt securities and GDRs/ADRs on external capital
markets.
5. The future of stock markets in accession countries has not
yet been decided. One possible solution is integration with
one of Europe’s trading platforms.
25