The Financial Crisis and Emerging Europe: What Happened and What s Next? Seminar with Romanian Trade Unions Bucharest, November 2, 21 Mark Allen Senior IMF Resident Representative for Central and Eastern Europe
I. Course of the crisis II. Why was Emerging Europe badly hit? III. Outlook for the Region
The crisis started in the USA financial sector. Bank CDS spreads (basis points) 6 Bear Stearns Lehman Turning point 5 4 United States Euro area United Kingdom 3 2 1 Source: Bloomberg
and rapidly spread to other sectors. Heat map Subprime RMBS Money markets Financial Institution Commercial MBS Prime RMBS Corporate credit Advanced Sovereigns Emerging Markets Jan-7 Jan-8 Jan-9 Jan-1 Source: Global Financial Stability Report, October 21
The financial shock caused a collapse in world trade Value of exports (percent change, year-on-year) 5 4 3 2 1-1 -2-3 -4 Advanced Economies Emer.& Develop. Eco. World Source: International Financial Statistics
and in global output. Change in real GDP (Year on year) 1 8 6 4 2-2 -4-6 Euro Area Japan United States Emer.& Develop. Eco. World 25 26 27 28 29 21 211 212 213 214 215 Source: World Economic Outlook, October 21
Central banks lowered interest rates to ease conditions. Policy rates (Percent) 6 EuroArea 5 4 3 UK USA Japan Switzerland 2 1 Source: Bloomberg
and then provided unconventional support. Total central bank assets (Jan-7 = 1) 4 Euro Area 35 UK USA 3 Japan 25 China 2 15 1 5 Source: Bloomberg
Banks have recognized losses and recapitalized. Capital raising (billions USD) 25 Expected additional writedowns / loss provisions (27q2-21q2) Realized writedowns / loss provisions (21q3-21q4) Implied cumulative loss rate (right scale) (percent) 8 2 7 6 15 5 4 1 3 5 2 1 Total United States Euro Area United Kingdom Other Mature Europe Asia
Source: World Economic Outlook, October 21 Advanced country public finances have weakened Public Debt (Percentage of GDP) 12 1 8 6 4 2 Advanced Economies Emer.& Develop. Eco. 2 22 24 26 28 21 212 214
and doubts about government solvency have grown The Four Phases of the Crisis (1-yr sovereign swap spreads, percent) 3 25 I. Financial crisis buildup II. Systemic outbreak III. Systemic response IV. Sovereign debt crisis 2 15 1 5 USA Germany Italy UK Japan Source: Bloomberg
although the deterioration was caused by recession. G-2 Advanced Economies: Increase in Public Debt, 28-15 (Total increase: 37 percentage points of GDP; 29 PPP weighted GDP) (28 215) Interest-growth dynamics (r-g) 7.2 Lending operations 4.1 Financial sector support 3.2 Fiscal stimulus 4.5 Revenue loss 18 Source: World Economic Outlook, April 21; Staff estimates
Source: World Economic Outlook, April 21 Global imbalances still need correction Current Account deficits (Billions of USD) 25 Other Developed Economies Other Euro Area Other Emerging Economies United States Japan Germany China World 2 15 1 5-5 -1-15
and not all currency movements are helping. US dollar exchange rates (Jan-25 = 1) 5 6 7 8 9 1 11 12 13 14 Euro Real (Brazil) Renminbi (China) Rupee (India) Yen (Japan) Won (Korea) 15 25 26 27 28 29 21
I. Course of the crisis II. Why was Emerging Europe badly hit? III. Outlook for the Region
Emerging Europe was among the fastest growing regions Real GDP per capita growth (average annual growth rates) 1 8 6 4 2-2 -4-6 China & India Emerging Europe 1995-22 23-27 1995-27 Sub- Saharan Africa Source: World Economic Outlook, October 21 Developing Asia ASEAN-5 ME & NA Western Hemisphere
but was most affected by crisis. Real GDP per capita growth (average annual growth rates) 1 8 6 4 2-2 -4-6 China & India 1995-22 23-27 28-29 1995-27 Emerging Europe Sub- Saharan Africa Source: World Economic Outlook, October 21 Developing Asia ASEAN-5 ME & NA Western Hemisphere
1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. Growth in Emerging Europe was fueled by a boom in domestic demand Real GDP growth, 23-28 1 14 12 1 8 6 4 2 Hungary Serbia B&H Albania Croatia Macedonia Average Estonia Bulgaria 2 4 6 8 1 12 14 Real domestic demand growth, 23-28 1 Latvia Lithuania Romania Ukraine Source: IMF, International Financial Statistics and World Economic Outlook database.
1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. which was in turn driven by domestic credit Real domestic demand growth, 23-28 1 14 12 1 8 6 4 2 Latvia Romania Estonia Russia Moldova Bulgaria Slovak Republic Serbia Turkey Macedonia, FYR Croatia Poland Albania B&H Czech Republic Hungary Belarus Montenegro Ukraine Lithuania 2 4 6 8 Real private sector credit growth, 23-28 1 Source: IMF, International Financial Statistics and World Economic Outlook database.
1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. financed by bank inflows... Change in private sector credit to GDP, 23-28 1 6 5 Ukraine Bulgaria Latvia Estonia 4 Lithuania 3 Albania Hungary Czech Republic B&H Romania 2 Russia Poland Croatia Turkey 1 Belarus Slovak Republic -1 1 2 3 4 Change in external position of BIS-reporting banks, 23-28 1 Source: IMF, International Financial Statistics and World Economic Outlook database.
Source: World Economic Outlook, October 21 1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. and other capital inflows. Cumulative Net Capital Inflows, 23-28 1 (percent of 23 GDP) 3 25 2 15 1 5-5 Portfolio FDI Other Total
Source: Haver Analytics This lead to increased inflation Consumer Price Inflation (annual percent change) 3 25 2 15 1 5 June-8 January-6
Source: Haver Analytics; country statistical offices 1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. and asset price bubbles. Change in Real Estate Prices, 23-28 1 (percentage change) 35 3 25 2 15 1 5
Sources: National authorities; and IMF, International Financial Statistics. Foreign exchange lending become popular Total Private Sector Credit by Currency, 28 (percentage of GDP) 1 8 6 4 2 Foreign currency indexed Foreign currency National currency
and foreign currency mortgages Source: IMF, International Financial Statistics reached high levels. Foreign Currency Loans to Households, 28 (Percentage of GDP) 4 35 3 25 2 15 1 5
Source: BIS Bank inflows suddenly stopped External positions of reporting banks (USD billions, estimated exchange rate adjusted changes) 5 4 3 2 Other Emerging Europe Ukraine SEE-Non-EU SEE-EU Baltics CEE3 1-1 -2-3 Excludes: Russia, Turkey
and exports shrank Real Exports (Seasonally adjusted, index Sep-8=1) 12 11 1 9 8 7 6 5 Bulgaria Croatia Hungary Poland Romania Russia Ukraine Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Source: Eurostat, Haver Analytics, and IMF staff calculations
and consumption had to adjust. Real Private Consumption (Seasonally adjusted, index Sep-8=1) 15 1 95 9 85 Bulgaria Croatia Hungary Poland Romania Russia Ukraine Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Source: Eurostat, Haver Analytics, and IMF staff calculations
Output fell as consumption fell. GDP real growth (year on year) 1 5-5 -1-15 Bulgaria Hungary Poland Romania Serbia, Republic of Ukraine 25 26 27 28 29 21 Source: World Economic Outlook, October 21
1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. Fiscal expenditures kept pace with Real expenditure growth, 23-28 1 booming revenues 14 12 1 8 6 4 2 Ukraine Romania Belarus Montenegro Russia Latvia Moldova Lithuania Kosovo Estonia Albania B&H Serbia Poland Bulgaria Macedonia, FYR Croatia Turkey Hungary 2 4 6 8 1 12 14 Real revenue growth, 23-28 1 45 degree line Source: IMF, World Economic Outlook, October 21
until the recession led to wider deficits. Change in Fiscal Balance 28-21 (percent of GDP) 9% 6% 3% % -3% -6% -9% -12% Change in Expenditures 28-21 Change in Revenues 28-21 Change in Fiscal Balance 28-21 Projected Fiscal Balance 21 Source: World Economic Outlook, June 21
1 As the boom in the Baltic states ended in 27, data for the Baltics refer to 22 7. The race was not to the swift Average real GDP growth, 23-213 6 5 4 3 2 1 Albania Slovak Republic Kosovo Poland Turkey Russia Serbia Moldova Montenegro Macedonia, FYR B&H Bulgaria Ukraine Lithuania Romania Czech Republic Latvia Estonia Croatia Hungary 2 4 6 8 1 Average real GDP growth, 23-28 1 Source: IMF, World Economic Outlook and IMF staff calculations.
I. Course of the crisis II. Why was Emerging Europe badly hit? III. Outlook for the Region
Source: World Economic Outlook Emerging Europe is relatively open to trade Import and Export as a share of GDP (27, percent) 18 16 14 12 1 8 6 4 2
Source: Direction of Trade Statistics; World Economic Outlook, April 21 and particularly dependent on eurozone conditions. Merchandise exports to Euro Area as a share of GDP (27-29 average, percent) 5 45 4 35 3 25 2 15 1 5 - EU Members - Euro Members - Others
Emerging Europe represents small part of EU economy Each hexagon represents 5.7 billion euro of GDP. Approximately the size of the economy of Malta.
Countries with deepest recessions are recovering slower 8 Average GDP growth, 21-211 7 6 5 4 3 2 1 Estonia Lithuania Latvia Hungary Montenegro Romania Moldova Serbia B&H Bulgaria Croatia GDP growth in 29 Belarus Macedonia Kosovo Poland Albania -1-2 -15-1 -5 5 1 Source: IMF, World Economic Outlook
but growth has resumed almost everywhere GDP real growth (year on year) 1 5-5 -1-15 Bulgaria Hungary Poland Romania Serbia, Republic of Ukraine 25 26 27 28 29 21 211 212 213 214 215 Source: World Economic Outlook, October 21
although several years progress has been lost. GDP volume (25 = 1) 155 15 145 14 135 13 125 12 115 11 15 1 95 Estimated 21 difference from 28 GDP level: Bulgaria Hungary Poland Romania Serbia, Republic of Ukraine - 5.% - 5.8% +5.1% - 8.9% - 1.5% - 12.% 25 26 27 28 29 21 211 212 213 214 215 Source: World Economic Outlook, October 21
Industrial production is recovering Industrial production (Year on year change) 14 13 12 11 1 9 8 Czech Rep. Poland Slovakia Poland Hungary, Romania Romania Croatia, Bulgaria, Serbia Croatia Czech Republic Slovak Republic Hungary Serbia, Republic of Bulgaria 7 28 29 21 Source: International Financial Statistics
making improvement in labor market possible Unemployment rate 25 2 Bulgaria Hungary Poland Romania Serbia, Republic of Ukraine 15 1 5 25 26 27 28 29 21 211 212 213 214 215 Source: World Economic Outlook, October 21
and many countries are becoming more competitive. Gross Real Wage Growth (average of the year-over-year growth for the months, in percent) 2 15 1 5-5 January September 28 January June 21-1 Lithuania Hungary Estonia Croatia B&H Macedonia Poland Romania Serbia Source: Haver Analytics; EMED Emerging EMEA; and IMF staff calculations. Ukraine Bulgaria
Source: World Economic Outlook, October 21 Fiscal deficits are being corrected Fiscal Deficit (percentage of GDP) 6 4 2-2 -4-6 -8 Bulgaria Poland Serbia, Republic of Hungary Romania Ukraine -1 25 26 27 28 29 21 211 212
Source: World Economic Outlook, October 21 but debt levels have increased... Fiscal Debt (percentage of GDP) 1 9 8 7 6 5 4 3 2 1 Bulgaria Poland Serbia, Republic of Hungary Romania Ukraine 25 26 27 28 29 21 211 212
although sovereign debt is lower than in GIIPS. Sovereign Debt to GDP (percent) 16 14 12 1 8 6 4 2 Czech Republic Romania Croatia Ukraine Greece Italy Spain Austria 23 25 27 29 211 213 Source: World Economic Outlook, April 21 Hungary Slovak Republic Serbia, Republic of Ireland Portugal EU NMS Other Emerging Europe GIIPS
Spreads in Emerging Europe have fallen. 5yr CDS spreads (basis points) 6 5 4 Bulgaria Hungary Poland Romania Ukraine 3 2 1 25 26 27 28 Source: Bloomberg
Spreads in Emerging Europe have fallen. 5yr CDS spreads (basis points) 6 18 16 5 14 12 4 1 3 8 6 2 4 2 1 25 26 27 28 Source: Bloomberg Bulgaria Hungary Poland Romania Ukraine
Source: International Financial Statistics Capital inflows are less buoyant Inflows to Emerging Europe (billions USD) 5 4 3 2 1-1 Bulgaria Hungary Poland Romania Serbia Ukraine Total -2 25 26 27 28 29 21
Source: International Financial Statistics Capital inflows are less buoyant Inflows to Emerging Europe (billions USD) 5 4 3 2 1-1 Direct investment Portfolio investment Other Total -2 25 26 27 28 29 21
as part of post-crisis deleveraging. Foreign Banks Exposure in relation to GDP (peak = 1) 1 9 8 7 6 5 4 3 2 1 Asia (Sep 1997) t-2 t-15 t-1 t-5 t t+5 t+1 t+15 t+2 t+25 t+3 Source: BIS; IMF, International Financial Statistics Emerging Europe (Jun 28) Latin America (Dec 1983)
Emerging Europe credit growth is still tied to cross-border flows. Cross-border bank deleveraging (peak = 1) 8 BIS Cross-Border Bank Flows, 29Q3 to 21Q1 (percent of GDP) 4-4 -8 Hungary Ukraine Russia Estonia Lithuania Poland Czech Romania Central and Eastern Europe Emerging markets and other countries Latvia Croatia Bulgaria Turkey -12-1 -5 5 1 Real Growth in Credit to the Private Sector, 29Q3 to 21Q1 (percent)
Source: World Economic Outlook, October 21 NPLs are peaking. 45 Non-performing loans (As 4 a percent of total loans) 35 3 25 2 15 1 5 Bulgaria Poland Serbia Hungary Romania Ukraine 25 26 27 28 29 21q1
and credit growth remains very restrained. Private Credit Growth (percent, year-on-year) 8 6 4 Bulgaria Hungary Poland Romania Serbia, Republic of Ukraine 2-2 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Source: International Financial Statistics
Sovereign creditworthiness directly affects that of banks Change in local senior financial CDS 5 4 3 2 1 October 29 to June 21 Greece October 29 to February 21 Portugal Italy Spain Ireland Greece Austria Spain Portugal Belgium -1 1 2 3 4 5 6 Percent change in sovereign CDS Source: Bloomberg
Domestic and a feedback loop ties sovereign strains to banking system SOVEREIGN E. Similar Sovereign come under pressure B. Increase in bank funding cost C. Erosion in potential for official support A. Mark to market fall in value of govt. bonds held by local banks BANKS I. Increase in contingent liabilities of govt. Foreign SOVEREIGN I. Increase in contingent liabilities of govt. D. Mark to market fall in value of govt. bonds held by foreign banks F. Contagion channels (A,B, & C as above) G. Rise in Counter-party risk BANKS H. Withdrawal of funding for risky banks
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