Macroeconomic Developments in Central European Economies

Transcription

1 Macroeconomic Developments in Central European Economies Jan Frait Presentation for 2nd Clearstream Summit for Enlarged Europe Prague, Hotel Renaissance May 18, 26

2 I. Current developments in CEC

3 Current developments in CEE CEE exhibit relatively fast growth, forecasts are optimistic GDP growth in CEC (%) f 27f Czech Republic Hungary Poland Slovakia

4 Current developments in CEE EU membership boosted exports more than expected Growth in exports (y-o-y, %, NC) -5 Czech Republic Hungary Poland Slovakia f 27f

5 Current developments in CEE Smaller countries are export-oriented and -dependent Exports as ratio to GDP (%, current prices) Czech Republic Hungary Poland Slovakia f 27f

6 Current developments in CEE Inflation in CEE went to rather low levels during Annual inflation in CEC (%) f 27f Czech Republic Hungary Poland Slovakia

7 Current developments in CEE Short-term interest rates are converging to key currencies levels Czech Republic 3M interest rates (%) Hungary Poland Slovakia eurozone12 United States

8 Current developments in CEE Current account deficits relatively high in Hungary and Slovakia, though financed by the FDI inflows Current account deficit (ratio to GDP in %) -1 Czech Republic Hungary Poland Slovakia f 27f

9 Current developments in CEE Fiscal deficits reveal structural problems and challenge euroarea membership. Public finance deficit (ratio to GDP in %) Czech Republic Hungary Poland Slovakia f 27f

10 Current developments in CEE Introduction of the euro in CEE: Slovenia 27 Slovakia heading for 29 Czech Republic official date 21, will be decided only after this year s election Hungary and Poland also not very certain Introduction of the euro in the Czech Republic: so far not a big topic for public and politicians, euro adoption strategy does not view Maastricht criteria as sufficient conditions, structural and cyclical alignment also important.

11 Current developments in CEE CEE currencies continue to appreciate in real terms a clear sign of real economic convergence. 1 Real appreciation against EUR (CPI based, %) CZK HUF PLN SKK

12 Current developments in CEE With low inflation, CEE currencies appreciate also in nominal terms after 2. Nominal appreciation against EUR (%) CZK HUF PLN SKK

13 Current developments in CEE CEE currencies thus have high returns in nominal and real terms. Adjusted yields (average 2-4) Australia Canada Japan Switzerland United Kingdom United States Germany Italy Spain Mexico Czech Republic Hungary Poland Slovakia -2-4 nominal real

14 II. Monetary policy of the Czech National Bank and the Czech Republic s macroeconomic outlook

15 Monetary policy of the CNB Czech National Bank (CNB) operates within inflation targeting regime current inflation target is set as 3 per cent headline inflation with a tolerance band of ± 1 per cent, policy framework is close to Bank of England or Sveriges Riksbank, exchange rate regime occasionaly managed floating (last interventions in forex market in 22). Inflation targeting is in place from 1998 actual inflation was often lower than targetted one, major factor behind undershooting faster than expected nominal exchange rate appreciation.

16 Monetary policy of the CNB Inflation targets have often been undershot consumer prices net inflation v % target % +/-,5p.b. (announced in December 1997) target ,5 +/-,5p.b. (announced in November 1998) target 2 4,5 +/- 1p.b. (announced in December 1997) target 21 3% +/- 1p.b. (announced in April 2) start of the target band 3-5 % target band (announced in April 21) end of the target band 2-4 % point target 3% since 26 (announced in March 24) 1/96 1/97 1/98 1/99 1/ 1/1 1/2 1/3 1/4 1/5 1/6 1/7

17 Monetary policy of the CNB Czech koruna appreciates steadily after 2 against EUR and USD depreciation band +/-7,5% Feb May in % 4 band +/-,5% Sep Feb the level of ER against the former currency basket (65% DEM, 35% USD) appreciation -16 targeting of M2 and until May 26, 1997 ER as well inflation targeting -2 1/91 1/92 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/ 1/1 1/2 1/3 1/4 1/5 1/6

18 Monetary policy of the CNB Real GDP (left axis) Potential output (left axis) Output gap (right axis) Actual output was often below potential (noninflationary output). CNB responded by keeping interest rates low, often below the ones in euro area. Current policy rate (2%) below the euro area (2,5%) and U.S. (5%) I/96 I/97 I/98 I/99 I/ I/1 I/2 I/3 I/4 I/5 I/6

19 Monetary policy of the CNB Long-term interest rates at or below EUR and USD after 22. Long-term interest rate differential q1 1997q3 1998q1 1998q3 1999q1 1999q3 2q1 2q3 21q1 21q3 22q1 22q3 23q1 23q3 24q1 24q3 25q1 25q3 IR differential (CZK 1Y - EUR 1Y) IR differential (CZK 1 Y - USD 1 Y)

20 Monetary policy of the CNB Monetary policy supported by relatively sound fiscal policy after 24. Deficit in % of GDP (ESA 95) KOPR 11/5 Notification 4/6 CNB's forecast 3. In ESA95, the deficit below 3 % of GDP since 24; CNB remains more optimistic than official plans for 26; However, there will be some fiscal expansion in 26-7.

21 5 Monetary policy of the CNB current macroeconomic forecast Inflation expected to move to upper part of tolerance band due to deregulation of administered prices and indirect tax hikes. 4 3 target band inflation target since 1/6 2 1 actual inflation inflation forecast monetary policy horizon -1 1/5 4/5 7/5 1/5 1/6 4/6 7/6 1/6 1/7 4/7 7/7 1/7

22 Monetary policy of the CNB current macroeconomic forecast Inflation net of direct effects of tax hikes should stay slightly below inflation target Inflation CPI (y-o-y) MP inflation -1 I/3 III I/4 III I/5 III I/6 III I/7 III

23 Monetary policy of the CNB current macroeconomic forecast y/y change Gross domestic product Household consumption Government consumption Fixed investment Exports Imports GDP growth will remain high in 26-7; Reflects the data for 25 and higher estimate of non-inflationary potential growth; Net exports will continue to support growth, together with acceleration of fixed investments and modest consumption growth.

24 III. Banking sector developments and credit expansion in CEE and NMS

25 Banking and credit expansion in CEE Financial sectors in CEE are EU-like: bank-dominated. Banking Sector Assets / Financial Sector Assets (%) 87,3% 76,% 7,7% AT SI SK PT 8,9% PL 74,1% 73,4% CZ HU 81,2% 75,5% EU12 GR 89,2% Source: CNB, CSO, ECB BE 89,6%

26 Banking and credit expansion in CEE Banking sectors in CEE are maily foreign-owned (roughly 9 per cent of assets controlled by banks with dominant foreing ownership). Banking sectors in CEE are relatively concentraded (5 largest banks have always more than 55 per cent share). Balance sheets have improved significantly, expansion of services boosted banks profits. (%) capital adequacy (25) nonperforming loans (25) provisions (25) return on equity (24) return on assets (24) CR Hungary Poland Slovakia

27 Banking and credit expansion in CEE Assets of banks and other financial institutions relative to GDP are rather low in NMS large room for future expansion? Financial Sector Assets and Bank's Assets relative to GDP (%) DK UK NL MT IE IE UK MT DE EU25 NL BE AT DK DE FR PTCY BE CY ES SEIT EU25 ATFRPT ES FI SEIT GR FI CZ SILTEE GRCZ HU SK PL SI LTEE HU SK LV PLLV Financial Sector Assets /GDP Bank's Assets / GDP Source: CNB, CSO, ECB

28 Banking and credit expansion in CEE Credit to firms and households in NMS is relatively low too Credit as ratio to GDP (%, end 24) MT NL IE DK DEPT UK AT SEES BE FR IT HULT EEFIGR CZ SI LVSKPL Total credit Credit to non-financial firms Household credits Source: CNB, CSO, ECB

29 Banking and credit expansion in CEE With decline in inflation and central banks rates, lending rates went down to rather low levels too. 25 Average lending rates in CE countries (% p.a.) Q1 2Q3 21Q1 21Q3 22Q1 22Q3 23Q1 23Q3 24Q1 24Q3 25Q1 25Q3 Czech Republic Hungary Poland Slovak Republic

30 Banking and credit expansion in CEE Low rates (demand side) and struggle for the market share and profit by banks (supply side) contributed to lending boom credit to households goes up rapidly, housing credit became a major business, dear consumption credit retains surprising dynamics, corporate lending is gaining strength as well, now banks start to focus on SMEs.

31 Current developments in NMS Restructured banks began to extend credit to corporate sector as well as to the households Y-o-Y changes in non-financial firms credit to GDP (%) CR HU PO SK EU Source, CNB, ECB

32 Banking and credit expansion in CEE Corporate credit growth differs among NMS, relatively mild in CEE Growth in corporate debt (av , %) CR Source: BIS Hungary Poland Slovakia Estonia Latvia Lithuania Slovenia Croatia

33 Banking and credit expansion in CEE Housing credit has been going up quite fast, the Baltics play the lead Growth in housing debt (av , %) CR Source: BIS Hungary Poland Slovakia Estonia Latvia Lithuania Slovenia Croatia

34 Banking and credit expansion in CEE Explanation for boom in housing credit going up from scratch in absolute terms. Housing credit per head (in ths EUR) CR Hungary Poland Slovakia Slovenia EU

35 Banking and credit expansion in CEE Indebtedness in CEE also low in relative terms Debt as ratio to GDP (%) CR Hungary Poland Slovakia Eurozone corporate debt (24) housing debt (25)

36 Banking and credit expansion in CEE 4 Housing debt is exposing households to currency risk in some countries. The share of foreign currency loans in selected CEE (%) Czech Republic Hungary Poland Slovakia Czech Republic Hungary Poland Slovakia Share of FX loans in total loans to customers Share of FX loans in loans to households Source: Magyar Nemzeti Bank RFS, April September 25

37 Banking and credit expansion in CEE There are fears that the mix of credit boom and optimistic expectations may support investments of speculative kind and create asset bubbles similar to those experienced by many developed economies in the past. Central banks in NMS focus on financial stability issues and provide financial stability reports. Some central banks believe in bening neglect scenario while some other view credit dynamics as a risk (mainly these in countries with foreign currency lending). Some countries try to act: the impact of measures weak as in some industrial countries.

38 Banking and credit expansion in CEE IMF World Economic Outlook (September 25, p. 13): "in cases where house price inflation remains robust, a combination of moral suasion and if necessary prudential measures could help limit potential risks; over the long term, regulatory features - including those that potentially constrain supply - that may exacerbate price pressures need also to be addressed". prudential measures: higher and differentiated capital requirements, tighter loan classification and provisioning rules, dynamic provisioning, stricter assessment of collateral, tighter eligibility criteria for certain loans, supervisory measures: increasing disclosure requirements, closer inspection, periodic stress testing.

39 Banking and credit expansion in CEE A typical applicant of measures is a developing or a transitional country in a major problems. Measures are difficult to apply in reality due to competition from non-banking subjects and foreign banks and their local branches. Basel2 rules together with international accounting rules make the application of some nonstandard measures not so easy. The risks stemming from high credit dynamics are a worldwide phenomenon requiring world-wide approach. Coping with excessive credit growth will be a major challenge for authorities in the years ahead.

40 Jan Frait is one of seven members of the Czech National Bank board ( Presentation was prepared with the assistance from Luboš Komárek the advisor to the board member. Presentation may not necessarily reflect the opinions of the board of the Czech National Bank.