The Impact of the Global Economic and Financial Crisis on Eastern Europe and Latin America The Impact of the Global Economic and Financial Crisis on CESEE and Latin America Juan Ruiz (Banco de España) Juan Ruiz (BdE)Peter Backé (OeNB) Based on Research Note by S. Gallego (BdE), S. Gardo (OeNB), R. Martin (OeNB), L. Molina (BdE) and J.M. Serena (BdE) VI International Meeting of Monetary Relations Policy Committee Advisors Frankfurt, Bogotá, 8-9 January April
Outline. Basic characteristics and stylized facts of the two regions. Vulnerabilities at the onset of the global financial crisis. The impact of the financial crisis on the two regions. Conclusions - -
Income levels in CESEE higher than in Latin America GDP per capita,, 7, 9 7, 9, 8, 8, 7, 7 8, 6 8, 6 5, 5 5, 5,, 9, 9, 6, 6,,, 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 CZ HU PL RO BG EE LV LT HR BR AR CL MX PE VE CO GDP per capit a (USD at PPP, lhs) GDP per capita (euro area =, rhs) Source: IMF-WEO Database. OeNB. BdE. - -
Higher openness in CESEE, exports biased towards manufactures, not commodities as in Latam Exports of goods and services % of GDP 9 9 8 8 7 7 6 6 5 5 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 CZ HU PL RO BG EE LV LT HR Manufactured goods Energy Food BR AR CL MX PE VE CO Metals Other goods Services Source: NCBs. OeNB. BdE. - -
CESEE region: particularly deep financial and banking integration Asset share of foreign banks in % 9 9 8 8 7 7 6 6 5 5 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 CZ HU PL RO BG EE LV LT HR BR AR CL MX PE VE CO Source: EBRD. BIS. IMF. OeNB. BdE. - 5 -
Assessing vulnerabilities prior to the 8 crisis Analytical focus: How vulnerable were the CESEE and Latin American regions at the onset of the global financial crisis compared to previous crisis episodes? Selected points in time correspond to previous crises impacting emerging markets: 998 (Russian crisis) and (Argentine crisis) Group of indicators: market sentiment, real, fiscal, monetary, banking and external Regional results refer to stylized averages and are thus not necessarily indicative for the vulnerability profile of individual countries - 6 -
Improved global investor sentiment CESEE: Sentiment indicators Measured as standard deviations from long-term averages. Closer to center means better market sentiment Latin America: Sentiment indicators Measured as standard deviations from long-term averages. Closer to center means better market sentiment Sovereign ratings - - Sovereign ratings - - CDS spreads Sovereign spreads CDS spreads Sovereign spreads Relative stock price Relative stock price 998 8 998 8 Source: JP Morgan, Moody's, Fitch, Standard and Poor's, Datastream. OeNB. BdE. - 7 -
but what about fundamentals? Markets were perhaps overoptimistic, what about fundamentals? The type of indicators we consider in the paper are: External indicators: BoP pressures, sovereign risk Banking indicators: imbalances in banking industry Fiscal indicators: pressures from public finances Monetary indicators: overextension of credit Real indicators: sustainable growth The indicators represent potential risks and serve as reasonably good leading indicators of crises (empirical analysis on paper) - 8 -
CESEE was not in a good starting position CESEE: vulnerabilities Measured as standard deviations from long-term averages. Closer to center means lower vulnerability External indicators Latin America: vulnerabilities Measured as standard deviations from long-term averages. Closer to center means lower vulnerability External indicators Monetary indicators - Banking indicators Monetary indicators - Banking indicators - - Real indicators Fiscal indicators Real indicators Fiscal indicators 998 8 Source: NCBs. OeNB. BdE. 998 8 In 8 Latin America was better prepared to weather external shocks than in previous crises Vulnerabilities in some CESEE countries had increased prior to the current crisis, notably as regards external, banking and some monetary indicators - 9 -
Capital flows to CESEE moderated more strongly than for Latin America, but remained positive in the crisis Capital flows Net flows in % of GDP 6 CESEE 6 Latin America 8 8 6 6 - - -6-6 Q 7 Q 7 Q 7 Q 7 Q 8 Q 8 Q 8 Q 8 Q 9 Q 9 Q 7 Q 7 Q 7 Q 7 Q 8 Q 8 Q 8 Q 8 Q 9 Q 9 Other investment (private) Other investment (public) FDI Portfolio investments* Total capital flows Source: NCBs. OeNB. BdE. *Including financial derivatives. - -
The policy response so far Monetary policy in most countries cautious until late 8 - and despite subsequent easing most CESEE and LA policy rates remained higher than in major industrialised economies. CESEE and LA authorities have taken extra-ordinary measures to stabilise financial systems and reduce real economy spillovers. LA central banks were also actively mitigating effects of credit contraction using FX reserves. For HU, LV and RO, IFI/EU support instrumental in stabilizing their economies. These programs might have also supported private flows to other CESEE countries. - -
The fiscal room for manoeuvre tended to be larger in Latin America than in CESEE Public Finances in CESEE - Public Finances in Latam - 9 9 6 Estonia Bulgaria 6 Chile Mexico Argentina Budget deficit (% of GDP) -6-9 Romania Lithuania Croatia Poland Czech Rep. Hungary Budget deficit (% of GDP) -6-9 Peru Venezuela Colombia Brazil - Latvia - -5 6 8 Public debt (% of GDP) Source: EU Commission - Autumn 9 Forecast. OeNB. -5 6 8 Public debt (% of GDP) Source: IMF. OeNB. BdE. - -
Better short-term cyclical outlook for Latin America, surrounded by a high degree of uncertainty % 5-5 - -5 - Source: FMI GDP GROWTH (*) Region average - - 9 9 CESEE region Latin America Real economic downturn more pronounced in CESEE Real channel of contagion (exports) Higher vulnerabilities Latam enjoys better growth prospects in short run Medium term: High uncertainty CESEE: advantage of an EU anchor Latam: payoff from reduced vulnertabilities - -
Conclusions CESEE and Latin America differ in terms of some important basic features Booming economic conditions before the global crisis were largely driven by capital inflows, but was also supported by region-specific features Notable differences in macrofinancial vulnerabilities before the crisis with considerable cross-country variation within the two regions, especially in CESEE Latin America: economic policies played important role in reducing vulnerabilities Initially, both regions remarkably resilient against the crisis, but hit hard after the Lehman collapse; CESEE hit more strongly given higher trade openness and a more pronounced drop in (previously higher) capital inflows The worst case of a fully-fledged financial meltdown did not materialize in either region Integration into European banking networks turned out to be an asset for CESEE The economic downturn has reached a bottom in both regions, short-term outlook for Latin America better, while medium-term growth perspectives similar for both regions - -
Thank you for your attention! - 5 -
Annex: Detailed vulnerability indicators - 6 -
Improved real economic conditions CESEE: Real indicators Latin America: Real indicators Export s Industrial output - - CPI Expor t s Industrial output - - CPI N om inal int erest r at e N om inal int erest rat e 998 8 998 8 Source: NCBs. OeNB. BdE. - 7 -
and sounder public finances in both regions CESEE: Fiscal indicators Latin America: Fiscal indicators Int erest payments/budget revenues - - Int erest payments/budget revenues - - Public debt Budget balance Public debt Budget balance 998 8 998 8 Source: NCBs. OeNB. BdE. - 8 -
Monetary vulnerabilities have risen in CESEE region CESEE: Monet ar y indicat or s Lat in Am er ica: Monet ar y indicat or s Domest ic credit - - Domest ic credit - - M Domest ic deposits M Domest ic deposits 998 8 998 8 Source: NCBs. OeNB. BdE. - 9 -
as have some indicators for banking sector risks, CESEE: Banking indicators Latin America: Banking indicators Relat ive st ock price LT FX dep.rating Loan-to-deposit rat io - - RO E N PL Relat ive st ock price LT FX dep.rating Loan-to-deposit rat io - - ROE N PL FX loans Foreign liab. /foreign asset s FX loans Foreign liab. /foreign asset s CAR CAR 998 8 998 8 Source: NCBs. OeNB. BdE. - -
and external indicators also deteriorated in CESEE CESEE: Ext er nal indicat or s Latin America: External indicators Basic balance N FA Current account balance - - FDI Net Portfolio Basic balance Ext ernal debt ser vice Current account balance - - FDI Net Portfolio External debt ST debt /FX reserves N FA External debt ST debt /FX reserves 998 8 998 8 Source: NCBs. OeNB. BdE. - -
Another look at the overall vulnerability picture Group Indicator CESEE Latin America EMBI spreads ++ ++ Sentiment indicators CDS sovereign spreads ++ ++ Sovereign rating (average of Fitch, Moody's and S&P) ++ ++ Relative stock exchange index (to world index) ++ ++ Current account balance - - ++ FDI +/- - - Basic balance - - ++ External indicators Short-term debt over foreign exchange reserves - - ++ External debt (and external debt service) - - ++ Net portfolio investment inflows - - +/- Net foreign assets (NFA) - - ++ Domestic banks' foreign liabilities over foreign assets - - ++ Long-term foreign exchange deposit rating (Moody's) ++ ++ Relative stock price index for domestic banks +/- +/- Banking indicators Loan-to-deposit ratio - - ++ Share of foreign exchange loans in total loans - - ++ Non-performing loans (NPL) ++ ++ Capital adequacy ratio (CAR) - - ++ Return on equity (RoE) ++ ++ Budget balance ++ ++ Fiscal indicators Public debt +/- ++ Interest payments over budget revenues ++ ++ Real M growth - - +/- Monetary indicators Real deposit growth +/- +/- Real credit growth - - - - Industrial output growth +/- ++ Real indicators Nominal interest rates ++ ++ Consumer price inflation ++ ++ Export growth ++ ++ Number of indicators improving compared to earlier crisis episodes Summary Number of indicators deteriorating compared to earlier crisis episodes Number of indicators in line with earlier crisis episodes 5 Note: ++ / - - = improvement / deterioration vis-à-vis both previous crisis episodes; +/- = similar to previous crisis episodes - -