Bojan Markovic EBRD Forces Shaping the Future of Europe and Much of the World Financial and macroeconomic challenges ICTF Annual Global Trade Symposium Ft Lauderdale, 14 November 2016 1
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 2
Economic growth slowed markedly since 2008, and finance is not sufficient to revive growth Sources: IMF, EBRD and authors calculations. 3
Growth 1993-2010 Convergence was traditionally driven by productivity growth in EBRD regions Total growth of real GDP (PPP) from 1993 to 2010 Sources: Transition Report 2013 4
Total factor productivity (log) due to catch-up in total factor productivity until mid-2000s Income per capita (log) 5
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 6
However, reforms stagnated in most EBRD regions, hampering stronger growth prospects Sources: Transition Report 2013 7
Income as a share of EU15 income While current pace of structural reforms is not enough to expedite convergence Sources: IMF, EBRD and authors calculations. 8
Income as a share of EU15 income reinvigoration of reforms can help achieve higher growth rates Sources: IMF, EBRD and authors calculations. 9
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 10
Key issues in rebalancing finance in post crisis period Large post-crisis investment gap: Limited new funding flows Stock of outstanding debt keeps growing and weighs on firms Credit growth constraints 11
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Unweighted average, % of GDP Unweighted average, % GDP Swift external adjustment after the crisis in the new EU member states Pre-crisis convergence largely driven by economic integration, high FDI and other capital inflows which have dried up since 2009 In Emerging Asia investment levels, if anything, are up 35 30 25 New EU member states Investment 35 30 25 Savings Emerging Asia Investment 20 15 Savings 20 15 10 10 5 5 0 0-5 -5 FDI, net Other capital flows, net Sources: IMF and authors calculations. Simple averages 12
Investment fell too far; needs to be scaled up by US$ 75 billion a year (conservative estimate) Estimated investment surplus/shortfall, 2009-13 Sources: Author s calculations 13
Key issues in rebalancing finance in post crisis period Large post-crisis investment gap: Limited new funding flows Stock of outstanding debt keeps growing and weighs on firms Credit growth constraints 14
Change in debt -to-gdp, % points Debt (% of GDP, unweighted average) In EBRD region, debt-to-gdp ratios increased at almost pre-crisis speed 30 Level of of debt (right) 150 20 140 10 130 0 120-10 110-20 100-30 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 90 Contribution of exchange rate Contribution of nominal debt Contribution of nominal GDP Sources: IMF, national authorities via CEIC Data, BIS and authors calculations. 15
In Emerging Asia, debt accumulation has accelerated post-crisis (less so on account of dollarization) Sources: IMF, national authorities via CEIC Data, BIS and authors calculations. 16
Key issues in rebalancing finance in post crisis period Large post-crisis investment gap: Limited new funding flows Stock of outstanding debt keeps growing and weighs on firms Credit growth constraints 17
Credit growth continues to decelerate Sources: IMF, national authorities via CEIC, BIS and authors calculations. Refers to Emerging Europe. 18
with constraints driven by supply side adjustment in external funding Sources: IMF, BIS and authors calculations. SE Europe excludes Cyprus and Greece. Percentages refer to the share of 2014 GDP. 19
Domestic deposits continued to expand, improving overall funding structure Main bank funding sources Source: BIS, National authorities via CEIC 20
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 21
In CESEE, multinational and cross-border banking expanded significantly Subsidiaries of Western European parent banks in EBRD region Source: Bankscope, bank websites 22
Globalisation has different implications for different regions Views on trade and foreign investment, 2014 Source: Ministry of Economic Affairs and Employment of Finland 23
Banking integration may be a double-edged sword, but challenges can be contained Bright sides of multinational banking Hardened the budget constraints of large and loss-making firms while improving access to credit for SMEs and retail customers Stabilising effect during local banking crises Improving corporate governance in the banking sector Dark sides of multinational banking May exacerbate local business and credit cycles due to a lack of relationship lending May transmit financial shocks across borders Bright examples of regional cooperation that prevented disorderly deleveraging Vienna Initiative Nordic-Baltic cooperation 24
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 25
Differences in outlook between the East and the West of the EBRD region are persistent Most countries in Central Asia and EEC are impacted by the continued recession in Russia and low commodity prices Elsewhere, economies continue to benefit from low commodity prices and accommodative monetary policy in the Eurozone Security concerns weigh heavily on the tourism industries of SEMED economies and Turkey, while SEE benefited from a stronger tourist season Source: IMF WEO; EBRD forecasts 26
Oil prices (Brent) have stabilised at around US$ 50, up from the low of US$ 28 in January 27 Source: Bloomberg
Following the UK referendum, markets have revised their expectations of monetary policy Expected paths of policy rates 28 Source: Bloomberg
Causing a fall in sovereign bond yields in AEs Yields on 10-year sovereign bonds 29 Source: Bloomberg
Decline in sovereign bond yields in advanced markets led to a partial recovery in capital inflows As the sovereign bond yields in advanced markets declined, following the UK referendum, the capital inflows to the EBRD region partially recovered in the first half of 2016. 30 Source: IIF; EBRD calculations
But NPLs remain high and rising in parts of EEC and Central Asia 31 Source: National authorities via CEIC
Persistent high NPLs can have high growth costs over 2 pp per annum According to a new EBRD study looking at episodes of high NPLs and NPL reductions 32 Source: Balgova, Nies and Plekhanov (2016), The economic impact of reducing non-performing loans, EBRD WP 193.
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 33
Oil prices (Brent) have stabilised at around US$ 50, up from the low of US$ 28 in January 34 Source: Bloomberg
Currencies of major oil exporters adjusted, broadly preserving local currency price of oil 35 Source: Bloomberg
Although net oil importers benefit from lower energy prices Per cent of GDP Turkmenistan Azerbaijan Kazakhstan Russia Belarus Albania Estonia Egypt Ukraine Romania Tunisia FYR Macedonia Poland Slovenia Montenegro Bulgaria Tajikistan Latvia Croatia Slovak Rep. Serbia Georgia Hungary Turkey Cyprus Lithuania Moldova Mongolia BiH Morocco Kyrgyz Rep. Jordan 15 10 5 0-5 -10-15 -20-25 -30-35 -40-45 -50 Net oil imports Source: IMF World Economic Outlook 36
countries like Turkey face additional challenges, which will lead to growth moderating Following 4% growth in 2015, economy grew by 3.9% y-o-y in the first half of 2016, with positive effects of 30% hike in minimum wage and higher government spending, being offset by a sharp fall in tourism receipts, following terrorist incidents in early 2016. Current account deficit fell from 5.7% in 2014 to 4.3% of rolling GDP in August 2016, driven by the decline in energy import bill on the back of falling oil prices. In the remainder of 2016 and in 2017, positive effect of measures to revive consumption and some recovery in tourism in 2017 will be more than offset by lower private investments due to rising cost of production, higher cost of funding due to rating downgrades and slightly higher oil prices. Yet, current account and thus the refinancing needs remain relatively high, with lasting rebalancing hinging on improved competitiveness and structural reforms. 37
While tourism income declined in SEMED, it has been performing better in SEE Monthly tourist arrivals index, SEMED (Jan 2014=100) Monthly tourist arrivals index, SEE (Jan 2014=100) 38 Source: National Authorities via Haver, EBRD calculations
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 39
Swift expansion of debt in China poses risks to the global growth outlook Household and corporate debt, % of GDP Source: BIS 40
Outline Longer term view: Finance and growth Need for structural reforms Rebalancing finance in post-crisis period Global vs local finance Macroeconomic prospects and challenges Macroeconomic prospects Oil prices China Brexit 41
While Brexit has short and long-term implications for the UK Short-term effects (deviations from the baseline growth, all values by 2018) Long-term cumulative effects (% of GDP, diamonds denote midpoint estimates) 2.5 year cumulative growth effect ranges from -1 to -6 per cent. Long-term forecasts (up to 15 years) have an even wider range (+4 to -14 per cent) with the more optimistic scenarios assessing a strong positive impact e.g. from unilateral reduction of import tariffs. 42
it may have several implications for countries in Europe and beyond In the short term, the EU may be politically weakened and inward looking, as its institutions struggle to come to terms with the new situation. Supporting reforms in partner countries will be less of a priority in comparison. In the medium to long term, impact on individual EBRD CoOs could be substantial and will depend mostly on the EU s ability to manage Brexit and will be mostly indirect, channelled through: Trade, financial and labour links with Eurozone EU transfers Support for reforms and reform momentum Competing geopolitical influences
Three medium-term institutional scenarios emerge 1. Well managed divorce and functional extended family smooth UK exit, with single market, Eurozone and Schengen preserved 2. Messy divorce and dysfunctional extended family divisive negotiations between UK and EU, putting pressures on the single market, Eurozone and Schengen EU institutions and policies are internally challenged, making common approach to challenges more difficult EU becomes less engaged in the enlargement process Less support is obtained for reforms and transformation Competing geopolitical influences in neighbouring and partner countries may arise 3. Further disintegration with geopolitics taking over UK exits the EU without clear future relationship agreed, triggering political and economic disintegration within the Eurozone and the EU
Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Soft Brexit Hard Brexit Relatively mild effects for soft but large downside risks for hard Brexit scenario Indirect channels: are more important than Impact via eurozone growth Potential slowdown in structural reforms in accession countries Reduction in EU transfers 0-1 The direct channel Slowdown in the UK via financial, trade and labour linkages Difference in GDP level in case of cumulatively 5% lower UK GDP by 2021, compared to the no-brexit baseline -2-3 -4-5 Direct channel (financial, trade and labour flows) Indirect channel (financial, trade and labour flows) Indirect channel (reform momentum) Indirect channel (EU transfers) -6 SEE excl. Greece Ukraine Greece CEB excl. Poland Turkey EEC excl. Ukraine Russia Poland Central Asia SEMED 45 Source: EBRD calculations based on a GVAR model see Transition Report 2016-2017.
Brexit s impact will vary among EU members, depending on their connectedness with the UK Countries with high exposure Countries with significant exposure Countries with niche exposure Countries with low exposure Source: Global Counsel, Brexit: The Impact on the UK and the EU, 2015
Bojan Markovic EBRD Forces Shaping the Future of Europe and Much of the World Financial and macroeconomic challenges ICTF Annual Global Trade Symposium Ft Lauderdale, 14 November 2016 47