The New Role of Growth Financing

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1 OMV Aktiengesellschaft The New Role of Growth Financing Conference on European Economic Integration Vienna, 15 November 2010 Wolfgang Ruttenstorfer CEO and Chairman of the Executive Board OMV Aktiengesellschaft Move & More.

2 FDI in CESEE recent arrivals CESEE countries started to be FDI recipients after communist regime collapse Larger populations in CESEE tend to attract more FDI, having a broader area to develop Countries in CESEE have fewer restrictions on foreign equity ownership than those in the CIS FDI inflows led to an increase in economic growth Real GDP growth Rate Unemployment rate in %, annual average Value % -83% -64% -108% -52% -36% 7,3 6,2 6,8 6,3 6 4, ,7 1,4 0,5 1 0,6 Value ,1 7-61% -83% -64% -52% -36% -108% 8,9 10,0 6,7 6,9 6,5 6,8 5,6 9,6 7,1 8,2 6,9 6,4 5,8 5,3 7, ,2-5,4-5 -6,3-7,1 EU27 CESEE Bulgaria Hungary Poland Romania 2 0 EU27 CESSE Bulgaria Poland Romania Hungary 2007 GDP 2008 GDP 2009 GDP 2007 Unemployment 2008 Unemployment 2009 Unemployment 2 OMV Aktiengesellschaft, Vienna, November 2010 FDI inward flows evolution (in %) Source: UNCTAD FDI statistics database and Eurostat

3 The Old Story of Boom and Bust Applies to CESEE Low Global Interest Rates Higher levels of debt public and private. Need to be repaid Low Financial Deepening in CESEE Countries Spurred Bank Competition (main financing channel) Rapid increase in domestic credit unsustainable, the boom cycle Change in external conditions has lead to a bust cycle Markets demand a return to a more stable and sustainable macro policies risk reassessment Low Level of Perceived Risk in hindsight risk was more elevated Resumption of economic growth would depend on finding alternative financing sources 3 OMV Aktiengesellschaft, Vienna, November 2010

4 Measures Aiming at Bridging Financing Gap in CESEE Macro imbalances and/or policy weaknesses magnified the effects of financial crisis it was an urgent need to secure funding Borrowing becoming more difficult for CESEE, risk premia increasing FDI an engine of growth in CESEE - dried up EU s medium-term assistance facility activated for the first time in 15 years with its ceiling increased fourfold to EUR 50 bn International support programmes (EU, IMF, WB, etc) launched for Hungary, Latvia, Romania, Ukraine, Serbia Vienna Initiative parent banks pledging to maintain their exposure to CESEE countries, roll over loans and recapitalize their affiliates 4 OMV Aktiengesellschaft, Vienna, November 2010

5 Case Study Romania. Lessons learnt 8,5 GDP evolution ,2 7,9 6,3 7,3-7, ,30% 8,60% CPI Index evolution ,87% 6,57% 6,30% 4,74% Unsustainable pre-crisis economic growth concealed imbalances Price controls still in place Competitiveness in several sectors lower compared to average EU Legislation instability - a major cause of uncertainty for investments High level of foreign denominated loans make the private sector vulnerable to FX movements Ratio of bank loans to deposits greater than one -> increasing reliance on foreign financing Adoption of clear measures in various areas are critical for restoring sustainable growth Global Competitiveness Index (Rank out of 133) Czech Republic Poland Hungary Romania Bulgaria Germany *1 is the highest rank 5 OMV Aktiengesellschaft, Vienna, November 2010

6 Case Study Romania. Way forward Stabilizing the macroeconomic environment resolving macro imbalances (budget deficit, public debt growth, unemployment rate, inflation) Switch from consumption driven growth to investment and capital-enhancing productivity growth Targeting tax policies for growth reduce labour taxes; maintain a low level of capital tax Transforming the public sector increase public sector efficiency Reforming the legal system adjust labour legislation to reduce hiring and firing costs Building the infrastructure for a modern economy promote co-financing projects Leveraging EU funding authorities with concentrated expertise and good management Supporting further investments, both FDI and domestic - develop capital markets as alternative fund raising for the private sector Supporting SME business development Implementing better public governance 6 OMV Aktiengesellschaft, Vienna, November 2010

7 Financing alternatives for CESEE Need to diversify away from bank financing and increase capital markets financing. Most banks are still saddled with non-performing loans and the quality of some assets is doubtful would result in more cautious lending Stimulate FDI through economic re-launch Boost competitiveness and domestic consumption Develop capital markets and private equities - to reduce financing dependence on banking, through: Good governance Clean and transparent economic policies Public sector institutions credibility Stimulate banks to take more risk to finance companies, especially SME, through: Extending the range and quality of collateral through guarantees Credit risk insurance schemes Make full use of available EU structural funds 7 OMV Aktiengesellschaft, Vienna, November 2010

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