Perspectives of CEEs Catching Up. Eva Zamrazilová. Member of the Board. 5th Moody s Annual CEE Credit Risk Conference 4 May 2011 Prague

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1 Perspectives of CEEs Catching Up Eva Zamrazilová Member of the Board 5th Moody s Annual CEE Credit Risk Conference 4 May 211 Prague

2 Pre-crisis Real and nominal convergence of the whole region Strong growth in most CEEs driven by foreign demand and strong FDI inflows Important role of manufacturing concentrated on procyclical industries in many CEEs Public finance structural deficits covered by growth High share of FX loans in some CEEs Crisis has stressed the differences within the region 2

3 Economic development level: closing the gap Catching up: GDP/ capita in EU 1, 2 and 21, in PPS, EU15 = BG CZ EE LV LT HU PL RO SI SK Source: IMF 7 % - 8 % of EMU average Sl, CZ, SK 5 6 % of EMU average - EE, HU, PL, LT, LV Around 4 % of EMU average BG, RO 3

4 FDI Stock FDI ,5 4,2 4,8 5 3,5 8, ,7 25 SL LT PL LV RO SK CZ EE BG HU FDI (thousands of USD, per capita, left axis) FDI (% of GDP, right axis) Source: UNCTAD CEEs important world recipient of FDI 4

5 FDI and trade openness Export (% of GDP) LV SI LT RO PL EE SK BG CZ HU LV SI LT RO PL EE BG SK CZ HU Tradable FDI (% of GDP) Source: OECD EXPORT (% OF GDP, 21, left axis) FDI in Tradables (% of GDP, right axis) Source: CEE s Economics and FI/FX Research I/211 FDI in tradables has fuelled CEEs exports Most CEEs are higly open and sensitive to EMU developments 5

6 Economic growth GDP (constant prices, yoy, %) BG CZ EE HU LV LT PL RO SK SI EMU Source: IMF F 212F CEEs recovered from recession in 21 For most CEEs recovery is expected to accelerate 6

7 External and domestic demand Exports (real, yoy, %) Domestic Demand (real, yoy, % ) BG CZ EE HU LV LT PL RO SK SI EMU BG CZ EE HU LV LT PL RO SK SI EMU F F Source: IMF Regional Economic Outlook Source: IMF Regional Economic Outlook Recovery driven mostly by the exports - upturn notably due to German rebound Domestic demand lags behind 7

8 Inflation CPI (average, yoy, %) CPI (average, yoy, %) BG CZ EE HU LV LT PL RO SK SI EMU Source: IMF F 212F F 212F 213F 214F 215F Euro area G7 Central and eastern Europe Source: IMF Inflationary prospects mixed Inflation outlook highest for RO and HU Risks of second-round effects of commodity prices are on the rise 8

9 Basic interest rates I/7 V/7 IX/7 I/8 V/8 IX/8 I/9 V/9 IX/9 I/1 V/1 IX/1 I/11 Source: central banks CZ HU LT PL RO SI, SK, EE Basic interest rates in most CEEs still at historic lows Monetary policy can be expected to react if the second-round effects risks materialize 9

10 Real Apreciation Nominal and real exchange rates 13 Real efective exchange rate (CPI - based), 1997 = I/ XI/ IX/1 VII/2 V/3 III/4 I/5 XI/5 IX/6 VII/7 V/8 III/9 I/1 XI/ EUR/CZK EURHUF EURPLN Source: EU calculation Source: CNB BG CZ HU PL RO SI CZK slightly above pre-crisis level PLN, HUF somewhat weaker Real appreciation tells the story about competitiveness 1

11 FX denominated loans FX banking loans in selected EU countries (% of total loans to g iven sector; end-21) CZ BG HU LT LV PL RO EE SI SK AT Households Corporates Source: national central banks Note: E E becom e A E me mbe r in January 21 1, FX loans dropped to 3.5 % for corporates and zero level for households. Countries with stable currencies, low inflation and IR pre-crisis have the lowest share of FX loans Currency risk for CEEs with high share of FX loans 11

12 Current account and external debt Current account (% of GDP) Gross foreign debt (% of GDP) F 8 212F F 212F -5-6 BG CZ EE HU LV LT PL RO SK SI EMU BG CZ EE HU LV LT PL RO SK SI Source:IMF Source: Uni Credit Economics and FI/FX Research Current accounts sustainable in most CEEs CZ, PL, RO seem to be best placed as for foreign indebtedness 12

13 Public finance Budget balance (% of GDP) General government debt (% of GDP) - -1, -2, -3, -4, -5, -6, -7, -8, -9, BG CZ EE HU LV LT PL RO SK SI EMU F 212F BG CZ EE HU LV LT PL RO SK SI F 212F Source: IMF Source: IMF Rising deficits in most CEEs due to declining incomes Rising cost of financing debts have forced some countries to limit deficits with drastic cuts CEEs governments less indebted than EMU countries 13

14 CEE s and public finance Maastricht criteria General government debt (% of GDP) HU PL LT SK CZ SI RO LV BG EE Source:IMF Budget deficit (% of GDP) 14

15 5Y CDS I-6 I-7 I-8 I-9 I-1 I-11 Czech Germ any Poland Hungary Grece Ireland Spain Portugal 15

16 Crisis changed the convergence model GDP (constant prices, %) F 212F 213F 214F 215F Cumulative real GDP growth (29-14) SLSK BG CZ RO LV EE SKSL HU LT Euro area G7 Central and eastern Europe -5 Public debt (21, % of GDP) Source: IMF Source: IMF Catching-up process will continue More indebted countries will catch-up at a lower pace 16

17 Summary Imbalances of all kinds are risky in particular for small open CEEs Macroeconomic and financial stability is crucial to weather external shocks and contagion The region is differentiated as for the scope of imbalances as well as macroeconomic and financial stability prospects Inflation has started to be an important threat to growth Lower risk tolerance will prevail in the near future 17

18 Thank you for your attention Eva Zamrazilová Member of the Board Czech National Bank