Central and Eastern Europe: Central and Eastern Europe: Global spillovers and external vulnerabilities ICEG Annual Conference Brussels, May 28 Christoph Rosenberg International Monetary Fund
Overview The CEEs macro picture is still largely unaffected by the global credit crunch Large external imbalances in some CEE countries are raising concerns Policy agenda
Macro Outlook
Growth is expected to slow, due to spillovers from the US and the Eurozone 12 Annual GDP growth (percent) 8 6 4 CE4 Baltics Bulgaria & Romania 2 Euro area United States -2-4 -6-8 1997 1998 1999 2 21 22 23 24 25 26 27 28p 29p Source: WEO April 28.
Emerging Europe is not immune to the deterioration in global sentiment Emerging Europe: Confidence Indicators, January 26 February 28 (Percentage balance) 12 8 6 4 2 Industrial confidence indicator Consumer confidence indicator (right scale) -2-4 -6-8 - -12-14 -16-18 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8
Inflation is picking up, mainly in the fixed exchange rate countries. 2 18 16 14 Annual average CPI (percent) 12 Baltics 8 6 4 CE4 Bulgaria & Romania World 2 Euro area 1997 1998 1999 2 21 22 23 24 25 26 27 28p 29p Source: WEO April 28.
This is partly due to the high share of food in the CPI basket Share of Food Expenditures and Per Capita Income in European Countries, 27 6 6 Weight of food in CPI (percent) 5 4 3 2 5 4 3 2 3.75 4.25 4.75 Log of PPP per capita income (U.S. dollars)
The baseline outlook is for a soft landing, but downside risks have increased: Exports: slowdown in Europe and US could be more protracted than in the baseline Inflation: global commodity price boom, domestic wage pressures Profitability and asset quality: wage pressures and housing bubbles may make FDI less attractive External funding: vulnerable to a slow-down of petrodollar flows Financial contagion: tighter lending standards, increased funding cost
Financial Markets and External Imbalances
Borrowing costs have increased Emerging Europe: Sovereign and Corporate Bond Spreads, January 27 March 28 (Basis points) 45 4 35 3 25 2 Corporate bonds 45 4 35 3 25 2 15 5 Sovereign bonds 15 5 Jan-7 Feb-7 Mar-7 May-7 Jun-7 Jul-7 Sep-7 Oct-7 Dec-7 Jan-8 Feb-8
particularly in countries with large external imbalances. Emerging Europe: Bond Spreads and Current Account Deficits Cnange in EMBI spreads since January 1, 27 1/ 14 12 8 6 4 2 Latvia Bulgaria Lithuania Romania Slovak Republic Hungary Poland Czech Republic -25-2 -15 - -5 5 Current account deficit in 27 (percent of GDP) 14 12 8 6 4 2 Source: IMF.
Current account deficits are especially high in the Baltics and South-Eastern Europe Current account deficit (in percent of GDP) Emerging Asia 5-5 Latin America Central Europe - Baltics -15 Bulgaria & Romania -2 2 1 2 3 4 5 6 7 8p 9p Source: IMF WEO April 27.
and closely related to financial deepening 7 6 Change in credit to private sector 22-27 (in ppt of GDP) Change in external private debt 22-27 (in ppt of GDP) 5 4 3 2 N.A. - EE LV BG LT RO HU SI CZ PL SK Sources: National authorities; and IMF staff calculations.
Are large external imbalances a risk? Optimists: The EU s halo effect (about bp) Favorable structure of financing (EU funds, remittances, FDI, low portfolio inflows) Presence of large EU banks Pessimists: Historical evidence of large capital inflows and sudden stops EU accession does not provide enough assurance of good policies and protection against financing shortfalls Foreign capital mainly goes to the non-tradable sector => questions about countries long-term capacity to repay Markets are punishing countries with large imbalances
C/A deficits in some countries are much higher than supported by fundamentals Current Account Balances and Model Predictions (Percent of GDP) -2-4 -6-8 - -12-14 -16-18 Latvia Sources: IMF, World Economic Outlook; and IMF staff calculations. Estonia Bulgaria Romania Current account model predictions, emerging Europe Current account balances, emerging Europe, average 23-7 Current account model predictions, Asia Lithuania Hungary Slovak Rep. Czech Rep. Poland Slovenia -2-4 -6-8 - -12-14 -16-18
External imbalances: Concerns Credit is concentrated on households and nontradables 4 Credit to Nonfinancial Corporations, 2-27 4 35 Credit to Households, 2-27 35 35 3 Real estate and construction Other nontradables Tradables 35 3 3 25 Housing purposes Consumer and other 3 25 Credit (percent of GDP) 25 2 15 25 2 15 Credit (percent of GDP) 2 15 2 15 5 5 5 5 2 21 22 23 24 25 26 27 2 21 22 23 24 25 26 27
Macro Policies
Monetary conditions are loose Emerging Europe: Lending Interest Rate Taylor Rule Interest Rate, 23 7 6 6 2 Southeastern Europe Central-eastern Europe 2-2 -2-6 Baltics -6 - - -14-14 Other emerging Europe -18 23 24 25 26 27-18
There is room for more fiscal consolidation Change in Actual and Structural Fiscal Balances, 23 7 1/ (Percent of GDP) 8 8 6 6 4 4 2 2-2 -4-6 Change in structural balances Change in actual balances -2-4 Latvia Estonia Ukraine Romania Moldova Lithuania Russia /2 Slovak Rep. Serbia Bulgaria Macedonia, FYR Albania Hungary Czech Rep. Belarus Poland Turkey Bosnia and Herz. Croatia
Does the global slowdown call for a fiscal stimulus? The IMF has supported anticyclical easing in US and some other countries Considerations in Central and Eastern Europe: Relatively little fiscal space (deficits are close to EDP / Maastricht limits, public debt is relatively high) Growth is not expected to slow down by much (no recession) Monetary policy is tightening => Letting automatic stabilizers work is for the time being the best course of action
Policy agenda Monetary policy: address inflationary pressures, but keep an eye on interest differentials which could induce short-term capital inflows Fiscal policy: let automatic stabilizers work, but no room for additional stimulus Financial sector supervision: watch crossborder exposures, encourage the build-up of capital buffers Prepare for euro adoption by creating flexible economies and sound institutions