Transcript Mihaljekpresentation

Outlook for external financing of the public sector
in Southeast Europe
Dubravko Mihaljek
Bank for International Settlements
Presentation at the Bank of Greece – University of Oxford (SEESOX) Conference
Achieving sustainable growth in Southeast Europe: Macroeconomic policies, structural
reforms, socio-political support and a sound financial system
Athens, 11 February 2011
The views expressed in this presentation are those of the author and not necessarily those of the
BIS.
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Outline
1. Global portfolio capital flows
- Advanced economies vs. emerging markets
- Emerging market regions
- Central and eastern / Southeast Europe
2. Cross-border financing (bank lending and international bonds)
- Emerging markets
- Central and eastern Europe
3. Conclusion
2
Global portfolio capital flows
Advanced economies vs. emerging markets
 Post-crisis portfolio inflows to EMEs peaked in Q3-Q4:2010
 Jan-Feb 2011: shift to advanced economies, EM equity fund
outflows strongest since 2008
 Concerns: EM equity valuations, EM inflation, developments in
Northern Africa
 Why advanced economies?
• Mostly US equities – positive growth and earnings surprises in
Q4:2010
• But also Australia, Japan, Italy and Spain
3
Portfolio flows into advanced and emerging market funds
1
In billions of US dollars
United States
Other advanced economies
2
Emerging market economies
1
3
Quarterly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for exchange rate changes) to dedicated
funds for individual countries and to emerging market funds for which country or at least regional decomposition is available.
Source: EPFR.
4
Portfolio capital flows (cont’d)
Emerging market regions (data through 2 Feb 2011)
 Inflows peaked in October 2010
 Sharp slowdown of portfolio inflows to emerging Asia and Latin
America in Dec 2010–Jan 2011
 Week from 26 Jan to 2 Feb 2011 – strongest outflows from equity
funds to Asia in three years
 Steady flows into CEE through January, but net outflows in the week
from 26 Jan to 2 Feb 2011
 Growth and interest rate differentials still likely to favour Asia and
Latin America in 2011
5
Fund flows into emerging market funds
1
In billions of US dollars
Asia
Latin America
2
CEE
1
Sums across economies listed, monthly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for
exchange rate changes) to dedicated funds for individual emerging market countries and to emerging market funds for which country or
at least regional decomposition available. 2 Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Poland,
Romania, Russia, Serbia, Slovakia, Slovenia, Turkey, Ukraine.
Source: EPFR.
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Rising inflation – one reason why portfolio inflows to Asia are reversing
Contribution to inflation
1
Inflation in emerging Asia
Annual inflation rates
2
1
Weighted average of China, Chinese Taipei, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore
and Thailand based on 2005 GDP and PPP exchange rates; in per cent. For Korea and Malaysia, the latest observation for
core prices is November 2010. 2 In per cent. 3 Wholesale prices.
Sources: Bloomberg; CEIC; Datastream; national data.
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Equity prices declining, local currency bond yields rising as a result of higher
inflation in emerging Asia
Asset prices in emerging Asia
Equity prices
1
1
MSCI total return indices in local currency; January 2009 = 100.
Local currency bond yields
2
2
Ten-year government bonds; in per cent.
Sources: CEIC, Datastream; national data.
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Portfolio capital flows (cont’d)
Central and eastern Europe – larger economies
 Portfolio inflows peaked in Oct 2010
 In central Europe, mostly flows into bond funds (especially
Poland)
 In Russia and Turkey, mostly flows into equity funds
 Turkey – similar pattern of capital flows as emerging Asia and
Latin America (decoupling from CEE?)
 Russia – benefitting from rising oil prices
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Portfolio flows into larger CEE countries
1
In billions of US dollars
Czech Republic (lhs)
Hungary (lhs)
Poland (lhs)
Russia (rhs)
Turkey (rhs)
1
Monthly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for exchange rate changes) to
dedicated funds for individual emerging market countries and to emerging market funds for which country or at least regional
decomposition is available.
Source: EPFR.
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Portfolio capital flows (cont’d)
Southeast Europe
 Pattern of inflows differs from other emerging markets, CEE
 Much smaller inflows than to other CEE countries
 Mostly inflows into bond funds
 Some evidence of spillovers from Greece in 2010
11
Portfolio flows into emerging market funds
1
In billions of US dollars
Bulgaria (lhs)
Croatia (lhs)
Greece (lhs)
Romania (lhs)
Serbia (lhs)
Turkey (rhs)
1
Monthly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for exchange rate changes) to
dedicated funds for individual emerging market countries and to emerging market funds for which country or at least regional
decomposition is available.
Source: EPFR.
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Cross-border banking flows
 Resumption of cross-border bank lending to emerging Asia
and Latin America in 2010: Q1–Q3 inflows exceeded precrisis (full-year) peak from 2007
 Bank lending to CEE was the last to recover among EM
regions (Q3:2010 vs. Q3:2009 in Asia)
 Some slowdown in bank lending to Asia, increase to Latin
America and CEE in Q3:2010
 Bank lending to CEE unlikely to recover to pre-crisis peaks
→ Not surprising, inflows before the crisis were not
sustainable (26% of gross inflows of private capital to
EMEs in 2006, vs. only 11% of EMEs’ GDP)
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Table 1
Cross-border bank lending to emerging market economies
1
In billions of US dollars
2007
2008
2009
2009
2010
Q4
Q1
Q2
Q3
512
111
–153
68
116
93
107
Asia
111
–65
10
46
72
47
46
Hong Kong and Singapore
140
39
–49
32
40
40
19
61
15
–21
6
17
15
30
200
123
–93
–16
–13
–8
11
Total EMEs
Latin America
2
CEE
1
External loans of BIS reporting banks (on the residence basis) vis-à-vis individual emerging market economies; exchange
rate adjusted changes in gross amounts outstanding. Does not include changes in reporting banks’ holdings of emerging
market securities. 2 Total of 10 new EU member states from central and eastern Europe, south-eastern Europe (including
Turkey), Russia, Ukraine and Kazakhstan.
Source: BIS, locational banking statistics.
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Cross-border financing of CEE economies
 Very slow recovery in cross-border bank lending
 Still no cross-border bank lending to Southeast Europe in
Q3:2010
• Cross-border lending to banks resumed on a larger
scale only in Albania, Croatia, FYR Macedonia and
Turkey
• …and to the non-bank sector only in Bulgaria and
Croatia
(Note: lending to the “non-bank” sector includes the
public sector)
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Cross-border lending to CEE during the crisis
Cross border financing of CEE economies
1
In billions of US dollars
2008
2009
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
56
22
–23
38
–16
4
–3
9
–3
13
–2
12
–6
13
–1
4
4
5
51
–0
–16
8
–9
2
–2
2
–5
1
–1
3
–3
2
0
1
0
3
7
44
9
68
5
34
5
32
5
7
–6
–5
8
23
–0
33
–11
5
2
Central Europe and Baltics
Cross border loans
3
International debt securities
4
Southeast Europe
Cross border loans
3
International debt securities
Memo: Greece
Cross border loans
3
International debt securities
1
External loans of BIS reporting banks vis-à-vis individual countries, exchange rate adjusted changes in gross amounts
outstanding in US dollars. 2 Total of Czech Republic, Hungary, Poland, Slovakia, Slovenia, Estonia, Latvia and Lithuania.
3
Net issuance of all issuers (sovereign and corporate), by nationality of issuer. 4 Total of Albania, Bosnia and Herzegovina,
Bulgaria, Croatia, FYR of Macedonia, Montenegro, Romania, Serbia and Turkey.
Source: BIS, banking and international financial statistics.
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1
Change in external loans vis-à-vis the banks in CEE
Estimated exchange rate adjusted changes, in millions of USD
2007
2
Central Europe
3
Baltic Republics
Southeast Europe:
Bulgaria
Croatia
Romania
Turkey
Albania
Bosnia-Herzegovina
FYR of Macedonia
Serbia
Montenegro
Memo:
Greece
1
2008
2009
1Q10
2Q10
3Q10
39,951
13,178
17,088
2,118
–890
12,671
3,087
150
612
31
–1,165
474
25,554
7,883
20,033
5,208
569
8,828
4,426
–157
419
–53
493
300
–18,201
–6,728
–4,780
–858
2,391
–4,868
–2,743
50
–265
90
1,509
–86
–1,417
–3,449
2,087
–622
–348
121
2,906
172
–88
–32
–25
3
3,867
–747
3,202
–504
208
–957
5,376
–254
–232
20
–420
–35
4,844
–1,341
1,583
28
–1,882
272
3,383
37
–110
40
–191
6
18,939
1,233
7,839
9,139
–4,593
–11,958
External loans of BIS reporting banks.
Sources: BIS, locational banking statistics.
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1
Change in external loans vis-à-vis the non-bank sector in CEE
Estimated exchange rate adjusted changes, in millions of USD
2007
2
Central Europe
3
Baltic Republics
Southeast Europe:
Bulgaria
Croatia
Romania
Turkey
Albania
Bosnia-Herzegovina
FYR of Macedonia
Serbia
Montenegro
Memo:
Greece
1
2008
2009
1Q10
2Q10
3Q10
16,521
3,783
34,780
1,550
5,168
5,676
19,457
–23
270
85
2,408
189
20,786
1,587
31,070
3,562
4,318
7,853
13,503
529
249
155
652
249
3,859
–2,141
–11,579
–350
–600
–865
–9,376
107
175
8
–902
224
–370
–508
–4,858
–276
–462
–1,397
–2,434
19
–32
8
–177
–107
–2,969
–792
–3,108
2
–103
–756
–2,169
22
–52
6
–93
35
1,218
–488
–1,484
115
234
–376
–1,198
20
–2
6
–258
–25
–4,159
5,538
681
–940
4,119
876
External loans of BIS reporting banks.
Sources: BIS, locational banking statistics.
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Cross-border financing of CEE economies
(cont’d)
 International bond financing more resilient – despite the
crisis, many CEE countries placed sovereign bonds in
2009 and 2010
 But this came at a price: bond and CDS spreads remain
quite high and fairly volatile
 FX reserves position of several countries weakened in
2010
 But coverage of short-term debt by FX reserves mostly
good in SEE
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Bond spreads for selected countries
Euro EMBI Global I
1
Euro EMBI Global II
Spreads over benchmark euro area bonds, in basis points.
for FYR of Macedonia, 10-year bond.
2
1
Government bond spreads2
For Greece, 5-year government bond spread. 3 For Albania, 5-year bond;
Sources: Datastream; JPMorgan Chase.
20
CDS spreads
1
1
Senior five-year CDS mid spread, in euros. Five-day moving averages; in basis points.
Source: Datastream.
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Foreign exchange reserves and measures of adequacy
Foreign exchange reserves
Outstanding yearend position, USD bn
Bulgaria
Croatia
Romania
Turkey
Albania
Bosnia-Herzegovina
FYR of Macedonia
Serbia
2009
2010
16.1
14.4
39.3
69.2
2.2
3.2
2.0
14.7
14.4
13.7
42.3
77.5
2.3
2.3
1.9
12.1
Change
As a percentage of:
GDP
Imports
Broad money
Ratio of FX
reserves to
short-term
1
debt
2
2009
2010
2009
2010
2009
2010
2009
2010
–1.7
–0.8
3.0
7.8
0.0
–1.0
–0.1
–1.9
34.2
21.3
24.4
11.3
18.2
19.0
20.9
34.3
32.2
22.8
26.7
10.6
20.2
14.3
20.0
31.0
72.8
68.0
72.2
49.1
49.0
36.6
38.9
91.9
61.6
68.2
69.1
41.8
50.9
25.1
36.0
72.2
45.2
31.8
60.6
20.0
24.0
30.7
39.1
80.5
42.2
31.3
68.8
19.0
24.7
22.4
37.1
69.5
1.4
0.7
1.3
1.3
1.8
1.7
3.1
5.0
1.7
0.8
1.5
1.3
2.0
1.4
3.6
7.0
in 2010
1
Short-term external debt defined as short-term liabilities to BIS reporting banks: consolidated cross-border claims of all BIS
reporting banks on countries outside the reporting area with a maturity up to and including one year plus international debt
securities outstanding with a maturity of up to one year. 2 From end-2009.
Sources: IMF; national data; BIS.
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Conclusion
Uncertainty about prospects for external financing of public
sector in SEE:
 Global capital flows no longer favouring emerging markets as
in 2010. But still to early to see the trend
 Within emerging Europe, SEE not a focus of international
investors (except Turkey)
 Resumption of cross-border lending very slow
 International bond issuance more reliable – but costly –
source of public sector external financing
 FX reserves buffer generally seems adequate
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