wiener institut für internationale wirtschaftsvergleiche the vienna institute for international...

Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Financial Crisis and Consequences

Vladimir Gligorov

wiiw Spring Seminar 2009 27 March 2009, Vienna



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Causes of Current Crisis

Lax monetary policy: low interest rates and strong

credit expansion Global imbalances Deficit countries in Central, Eastern and South-eastern

European Countries In the Balkans: low export capacity



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Monetary policy



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Boom-bust in housing starts compared with

the counterfactual



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wiiw Spring Seminar, 27 March 2009

Fragile Europe: the Path in and out of the Crisis – What Is to be Done?

Why contagion?

A more cautious banking sector puts the brakes on funding of- Private consumption, private investment,

exports and imports- Real estate transactions

Investors in financial markets have become more risk-aware; the destination and composition of flows have changed to the disadvantage of emerging markets

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1. Evidence from most recent developments

Decline in industrial output

Decline in foreign trade

Decline GDP

Decelerated inflation

Real depreciation (not everywhere)

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-25

-20

-15-10

-5

0

510

15

20

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

BA ME RS

-25

-20

-15

-10

-5

0

5

10

15

20

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

HR MK TR

Industrial output declineRates of change in %, monthly, year-on-year

Source: wiiw Monthly Database incorporating national statistics.

Candidate countries Potential candidates

40.9

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80

100

120

140

160

180

200

220

240

260Ja

n-06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

MK

TR

HR

R

Exports of goods: decline after mid-2008 EU candidate countries, euro-based, January 2006 = 100


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80

100

120

140

160

180

200

220

240

260Ja

n-06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

RS BA

AL

Exports of goods: decline after mid-2008 Potential candidate countries, euro-based, January 2006 = 100


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GDP - shift from expansion to contraction Candidate countries, change in %, annual, year-on-year*

-4

-2

0

2

4

6

8

2006 2007 2008 2009

* 2008 wiiw estimate, 2009 wiiw forecast

Macedonia

Turkey Croatia

Source: wiiw Annual Database incorporating national statistics.

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GDP - shift from expansion to contraction Potential candidate countries, change in %, annual, year-on-year*

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

2006 2007 2008 2009

Albania

Montenegro

BA

Serbia

* 2008 wiiw estimate, 2009 wiiw forecast


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0

1

2

3

4

5

6

7

8

9

10

11

12

Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

HR MK TR AL BA ME RS

Decelerating inflation CPI, monthly, change year-on-year in %

* wiiw forecast


16

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Currency Board or euro as legal tender:

Producer prices vis-à-vis EU: mainly upEUR per unit of national currency, Jan 2007 = 100


Bosnia and Herzegovina

85

90

95

100

105

110

115

120

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

Montenegro

85

90

95

100

105

110

115

120

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

Exchange rate nominal Exchange rate real

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Countries with de-facto EUR peg Producer prices vis-à-vis EU: various patternsEUR per unit of national currency, Jan 2007 = 100

Croatia

85

90

95

100

105

110

115

120

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

Macedonia

85

90

95

100

105

110

115

120

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

Albania

85

90

95

100

105

110

115

120

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09



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Countries with flexible exchange rate:

Producer prices vis-à-vis EU: strong reversal EUR per unit of national currency, Jan 2007 = 100


Serbia

80

85

90

95

100

105

110

115

120

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

Turkey

80

85

90

95

100

105

110

115

120

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9


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2. Imbalances

Imbalances:

Fiscal imbalances less alarming – so far

Alarming external deficits

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Relatively low government deficits, government debt and overall external debt in % of GDP, 2008

* External debt at end of 2007

Source: wiiw Database incorporating national statistics.

Gov. budget Gov. debt External debt

Croatia -2.3 54.5 96

Macedonia* -1.0 . 49

Turkey -1.3 35.1 47

Albania -4.0 53.5 20

BiH 2 20.0 16

Montenegro 2 . 14

Serbia -2.5 . 71

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0

10

20

30

40

50

60

70

BA MK ME HR RS AL TR

Exports Deficit

Imports of goods: intensity and coverage by exportsin % of GDP, 2008


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Deficit in trade with goods: coverage, 1-9 2008

0

20

40

60

80

100

120

140

Croatia Macedonia Turkey Albania BiH Montenegro Serbia

Services Income Current transfers Capital transfers

FDI P ortfolio investment Other investment Errors and om.

-40

-20

0C R O M A C T U R A L B B iH M O N S E R

Increase in currency reserves in % of trade deficit5 6 2 8 -111 4

Def

icit

in T

rade

with

Goo

ds =

100

Source: wiiw Database incorporating national statistics.

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3. Potential trouble

Lack of external means for the financing of external

deficits and debt refinancing

More balanced current account becoming a must

Either more exports or less imports (goods and

services)

Allowing for nominal depreciation as one alternative

(additional burden to households and companies with

foreign currency debt)

Wage deflation in the context of strong GDP decline as

a second alternative

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4. Southeastern Europe’s prospects

2009 GDP decline

2010 GDP stagnation

2011 some GDP growth again, provided the

international business climate improves

2012 ff. growing GDP, but at rates lower than in

2003-07

Gradual return of FDI inflow

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5. Financial risks

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What do we see in the financial

indicators?

High current account deficits In most cases – worsening So, financing them is the key issue

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Current account balance in % of GDP

-60

-50

-40

-30

-20-10

0

10

20

30

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

AL BA HR RS TR ME MK

Source: National bank of the respective country.

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Governments’ foreign debt

Mostly not very high And the share in total foreign debt - declining

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General government share in gross external debt in %


0

5

10

15

20

25

30

35

40

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

BA HR RS TR MK

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Short-term debt

In a couple of cases too high In a number of cases increasing

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Short-term foreign debt in % of foreign exchange reserves (excluding gold)


0

20

40

60

80100

120

140

160

180

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08

AL BA HR RS TR ME MK

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Banks and risks

Credit expansion decelerating

Leverage ratios relatively low

Risks, however, increasing by most measures

Some countries facing bigger problems than others

Banks rely significantly on foreign liabilities

Foreign currency loans important

Not enough data to say something on non-performing loans

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Bank loans to non-financial private sector growth in %, eop month (year-on-year)


0

50

100

150

200

250

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

BA HR RS TR ME MK

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3m...BOR-3mEURIBOR

spread in percentage points, eop month


-5

0

5

10

15

20

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

AL HR RS MK

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TED spread (3m...BOR-3mT-Bill)spread in percentage points, eop month


-4

-2

0

2

46

8

10

12

14

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

AL HR RS MK

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Leverage, banking sector assets to capital ratio, eop month


0

2

4

6

8

10

12

14

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

BA HR RS ME MK

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Share of banks’ external debt in assets in %, eop month


0

5

10

15

20

25

30

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

BA HR RS TR MK

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Share of loans in foreign currency in % of total loans, eop month


0

10

20

30

40

50

60

70

80

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08

AL BA HR MK

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Share of non-performing loans in % of total loans, eop month


0

2

4

6

8

10

12

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08

AL HR MK

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Real estate bubble?

Construction slowing down

Prices for apartments declining

However, not enough data to say more on that

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Growth in apartment prices in %, CPI deflated (year-on-year)

* Data refer to half year.


-10

-5

0

5

10

15

20

25

30

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08

HR* RS*

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Construction sector growth less GDP growth in % (year-on-year)

* Data refer to half year.


-10-8-6-4-202468

1012

q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08

HR RS TR MK

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20

25

30

35

40

45

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Gin

i coe

ffici

ent

Central Europe CIS

SEE BalticsPolynomisch (Transition countries)

Source: UNU-WIDER: World Inequality Database Version 2.0c, w iiw calculations.

Transition countries (polynomial trend)

Development of income inequality in Central Europe, Baltic States, SEE and CIS, 1989-2006unweighted averages of Gini coefficients (income based)

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Income inequality in world regions unweighted averages of Gini coefficients (income based), 2003

SEE

CIS

East AsiaRussia

USAMiddle East

& North Africa

South Asia

Sub-Saharan AfricaLatin America

Central Europe & Baltics

Western Europe

China

25

30

35

40

45

50

55

Gin

i co

eff

icie

nt

Source: UNU-WIDER: World Inequality Database Version 2.0b , own calculations.

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Distribution of income & source of income

Correlation of functional distribution and inequality in transition countriesCE & Baltics, SEE and CIS

y = -0.40x + 48.752

R = 0.27

15

20

25

30

35

40

45

50

15 20 25 30 35 40 45 50 55

Compensation of employees, in % of GDP

Gin

i co

eff

icie

nt

2002

Sources: AMECO database, CIS STAT database, UNU-WIDER: World Inequality Database Version 2.0c .

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y = -0.15x + 36.80

R2 = 0.44

10

15

20

25

30

35

40

45

0 20 40 60 80 100

coverage rate of collective agreements

Gin

i co

effi

cie

nt

2001

Correlation of coverage rate of collective agreements in transition countries, 2001

Sources: Schroeder (2004), UNU-WIDER: World Inequality Database Version 2.0a.

Central Europe, Baltics & BGR, ROU, HRV

Role of labour market institutions

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Main causes of inequality development

in transition

Loss in output and increase of unemployment

Rising wage inequalities due to liberalization of labour market

regulations

Industrial employment and productivity growth reducing inequality

Dampening effect of public expenditure

While price and trade liberalization reduced inequality via job

creation, (public utilities infrastructure) privatization did opposite

Economic integration via exports had positive effects on equality

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The outcome

Croatia: Under the assumption of a mild recession, the Gini increases by 0.3pp to 31.2

Hungary: Under the assumption of a strong recession, the Gini increases by 0.9pp to 27.0

Ukraine: Under the assumption of a heavy recession, the Gini increases by 1.2pp to 31.1

Doubling the drop in industrial & overall employment and the increase in unemployment raises the Gini to: HR 31.6; HU 27.3; UA 31.9

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Crisis impact on inequality

Given the extent of the recession, the model suggest an

increase of inequality from 0.3pp to 1.2pp (0.7pp to 2pp)

In general income inequality does not change rapidly

Still absolute poverty will be on the rise with average income

levels falling

Stronger fiscal expansion could reduce the increase of

inequality

1pp more government expenditures reduces Gini by 0.1pp

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Conclusions

Risks have increased

Not primarily because of the health of the banks

(though Montenegro is different)

But because of high demand for foreign financing that

has become scarce

Which drives growth down

Which in turn pushes the risks up

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What is to be done?

Stabilization is the key in the short run

In the medium run, it is a question whether it might be

necessary to move from a neoclassical to a

mercantilistic growth strategy

The choice may depend on the policy of the EU

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Rast na kratak rok

• Trenutna kretanja, ocenjena na osnovu dostupnih podataka, su veoma negativna

• Industrijska proizvodnja se smanjuje po visokoj stopi gotovo svuda – takođe u Hrvatskoj

• Spolja trgovina se takođe smanjuje gotovo svuda – isto i u Hrvatskoj

• Inflacija se usporava, a preti i deflacija, praktično svuda• Ova kretanja implicraju značajnan pad bruto domaćeg

proizvoda, praktično svuda, a u Hrvatskoj do 4 ili 5%

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Stabilnost na kratak rok

• S obzirom na pad proizvodnje, reč je o “igri sa negativnom sumom”, dakle o raspodeli gubitaka

• Ovo ide uz promene u relativnim cenama• Od kojih je ključan realni tečaj – dakle odnos između (uprošćeno govoreći)

izvoza i unutrašnje potrošnje• Budući da se smanjuje izvoz, finansiranje postojećih obaveza zavisi od

smanjenja potrošnje ili od mera za povećavanje izvoza• Ovo poslednje podrazumeva depresijaciju realnog kursa, bilo preko deflacije

ili preko nominalne depresijacije• Za razliku od okolnosti kada nominalna depresijacija podstiče inflaciju, u

deflatornom okruženju je moguća relaksacija monetarne politike čak i uz depresijaciju tečaja

• Osnovna pretnja stabilnosti jeste prinudna devalvacija usled suviše jakih deflatornih pritisaka

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Zaključci G20 i MMF

• Ključan zaključak jeste da se održi kratkoročna stabilnost i da se podstakne globalna tražnja

• Ključnu ulogu ima MMF – triplira se njegova kreditna sposobnost i značajno povećava sposobnost da podrži likvidnost

• MMF se reformiše, pri čemu su ključni sledeći elementi• Cilj je održanje rasta a ne samo stabilnosti• Monetarni i fiskalni uslovi se rukovode održivošću, dok su

kvantitativni kriteriji indikativni, a ne bezuslovni• Strukturni kriteriji su takođe indikativni, a ne obavezujući• MMF ima ključni zadatak da podrži globalnu tražnju i da obezbedi da

ne dođe do sloma sistema tečajeva što bi vodilo finansijskom haosu i rastu protekcionizma

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Srednjoročne perspektive

• Najvažnije pitanje izbora metoda stabilizacije jeste šta to znači za razvoj na srednji rok?

• Ovde je važno poći od pretpostavke da je malo verovatno da će rast na srednji rok moći da se finansira na isti način kao i u prethodnom periodu

• Kako će se onda hrvatska privreda vratiti na put visokih stopa rasta?• Ukoliko ne dođe do korekcije realnog tečaja, dakle ukoliko se samo

recesijom očuva nominalni tečaj, postoji opasnost da će to imati za posledicu produženu stagnaciju ili preovladavanje niske stope rasta

• Ovo zato što će rast morati mnogo više da se finansira povećanjem unutrašnje štednje, a mnogo manje kreditima i ulaganjima iz inostranstva

• To znači da je potrebno značajno povećati konkurentnost hrvatske privrede• To je problem i većine drugih zemalja u tranziciji

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