Central, Eastern and Southeastern Europe (CESEE) Recovery at risk? Central and Eastern Europe remains vulnerable to external funding threats. May 5, 214 James Roaf Senior Resident Representative IMF Regional Office for Central and Eastern Europe
Outline Outlook for the region External Funding patterns and risks Policy priorities 2
Growth picked up in 213H2 CESEE excl. RUS & TUR: Contributions to Real GDP Growth 1 (Percent) 5-5 -1 Real GDP growth Domestic Demand Net exports -15 29Q1 21Q1 211Q1 212Q1 213Q1 213Q4
Growth picked up in 213H2 CESEE excl. RUS & TUR: Contributions to Real GDP Growth 1 (Percent) 5-5 -1 Euro area - real GDP growth Real GDP growth Domestic Demand Net exports -15 29Q1 21Q1 211Q1 212Q1 213Q1 213Q4
Drivers of growth different across region... 8 CEE (Percent) 8 SEE Russia Turkey (Percent) (Percent) (Percent) 8 8 4 4 4 4-4 213Q1-4 213Q4 213Q1 Real GDP growth -4-4 213Q4 213Q1 213Q4 213Q1 213Q4 Consumption Investment Net exports
... but recovery is mostly creditless... 5 Credit to Nonfinancial Corporations (Percent, year-over-year, nominal exchange-rate adjusted) 4 3 TUR 2 1 RUS Baltics+CEE+SEE -1 Jan-9 Sep-1 May-12 Jan-14
... while external funding flows became more volatile post-taper talk 3 CESEE excl. RUS & TUR: Capital Flows (Billions of US dollars) 2 1 Total -1 Bank loans & other investment Portfolio investment -2 FDI 29:Q1 21:Q1 211:Q1 212:Q1 213:Q1 213:Q4
Growth is expected to accelerate... CESEE excl. RUS & TUR: Contributions to Real GDP Growth 1 (Percent) 5-5 -1 Euro area - real GDP growth Real GDP growth Domestic Demand Net exports -15 29Q1 21Q1 211Q1 212Q1 213Q1 213Q4
Growth is expected to accelerate... 1 CESEE excl. RUS & TUR: Contributions to Real GDP Growth (Percent) 5-5 -1 Euro area - real GDP growth Real GDP growth Domestic Demand Net exports -15 29Q1 21Q1 211Q1 212Q1 213Q1 213Q4 214 215
5 Real GDP Growth, 214 (Percent) 4 Oct 213 WEO 3 2 1...but projections have been revised downwards. HRV SRB RUS BLR BGR CZE HUN ROU BIH ALB TUR SVK EST POL MNE MKD LTU LVA UVK MDA -1 SVN -2
5 Real GDP Growth, 214 (Percent) LVA UVK MDA UVK LVA TUR MDA LTU MKD RUS MNE POL BLR EST POL SRB ALB ROU TUR SVK EST MNE BIH BGR BGR CZE HUN BLR RUS CZE HUN 4 Apr 214 WEO 3 2 1...but projections have been revised downwards. HRV SVN SRB -1 HRV SVN -2
Risks from geopolitical tensions: trade linkages with Russia and Ukraine Exports to Russia and Ukraine (Percent of trading partner GDP) > 1 5-1 2-5 - 2
> 75 5-75 25-5 - 25 Risks from geopolitical tensions: Dependence on Russian gas Imports of gas imports (Percent of total gas consumption)
Key Risks Protracted weak growth in euro area Increasing geopolitical tensions Global financial market volatility
CESEE External Funding Patterns and Risks 1 2 3 External Funding Structures External Funding Conditions Impact of Tighter Funding Conditions on Growth
CESEE External Funding Patterns and Risks 1 2 3 External Funding Structures External Funding Conditions Impact of Tighter Funding Conditions on Growth
High dependence on external funding 16 12 Baltics CEE Gross External Liabilities (Percent of GDP) SEE 28 8 East3 CESEE RUS TUR 4
High dependence on external funding 16 Baltics CEE Gross External Liabilities (Percent of GDP) 12 Baltics CEE SEE SEE 212 East3 CESEE 8 East3 RUS RUS TUR TUR CESEE 4
High dependence on external funding 16 Baltics CEE Gross External Liabilities (Percent of GDP) 12 Baltics CEE SEE SEE 212 East3 CESEE 8 East3 RUS RUS TUR TUR CESEE Average of other EMs 4
Significant share is FDIs 16 Baltics CEE Gross External Liabilities (Percent of GDP) SEE 212 12 East3 CESEE TUR 8 RUS 4
Significant share is FDIs 16 Baltics CEE Gross External Liabilities (Percent of GDP) SEE 212 12 FDI stock East3 CESEE TUR 8 RUS 4
Private sector accounts for most of the external debt 16 Baltics CEE External Debt (Percent of GDP) 12 SEE 212 East3 Public Private CESEE TUR 8 RUS 4
Private sector accounts for most of the external debt 16 12 Baltics External Debt (Percent of GDP) 212 Public Private 8 CEE SEE East3 TUR CESEE 4 RUS Average of other EMs
Rebalancing is taking place in some countries Public sector external debt 4 3 2 1 Change in external debt 28-212 (percent of GDP) Bosnia and Herzegovina Lithuania Latvia Bulgaria Serbia increase in external debt Belarus Macedonia Hungary Poland -1-3 -2-1 1 2 3 4 45 degrees Russia Albania Turkey Private sector external debt Romania Croatia 19
Funding structure matters 12 9 Private External Debt Structures (Percent of GDP, 212) Debt securities Direct cross-border lending Parent bank lending Inter-company lending 6 3 LVA HUN EST BGR HRV SVN SRB MDA UKR ROU BIH MKD POL LTU CZE SVK BLR TUR RUS ALB UVK
Taking out funding from affiliated entities gives a different picture Private External Funding from Non-Affiliated Sources 6 5 (Percent of GDP, 212) Debt securities Direct cross-border lending 4 3 2 1 LVA HUN EST BGR HRV SVN SRB MDA UKR ROU BIH MKD POL LTU CZE SVK BLR TUR RUS ALB UVK
FX risks arise from external borrowing, but also from FX or FX-linked domestic loans FX or FX-Linked Loans to Nonfinancial Private Sector 1 (Percent of GDP, 213) 8 FX or FX-linked domestic loans Direct cross-border lending to nonfinancial private sector 6 4 2 HRV SRB UKR MKD HUN BLR ROU TUR ALB POL RUS
Public sector is exposed to foreign funding and exchange rate risks as well 8 6 Public Debt and Foreign Exchange Risks (Percent of GDP, 213) Rest Public debt exposed to FX risk 4 2 HUN SVN ALB SRB HRV POL SVK CZE BIH LTU ROU BLR TUR MKD LVA BGR RUS EST
Some countries have both high external and fiscal financing needs 3 Financing Needs (Percent of GDP, 214) ALB Fiscal financing needs 2 1 RUS SRB POL CZE BIH HUN HRV SVN MKD ROU SVK LTU BLR TUR BGR LVA 1 2 3 4 External financing needs EST
Some countries have both high external and fiscal financing needs 3 Financing Needs (Percent of GDP, 214) ALB Median Fiscal financing needs 2 1 RUS SRB POL CZE BIH HUN HRV SVN MKD ROU SVK LTU BLR TUR BGR Median LVA 1 2 3 4 External financing needs EST
Highly concentrated investor base The top 5 creditors accounted for around 55 percent of total crossborder lending to the region in 212.
To sum up: sources of external funding risks Stock vulnerabilities Flow vulnerabilities External fundamentals Stock of debt External financing needs Exchange rate misalignment External funding from non-affiliated sources Fiscal financing needs Reserve buffers Debt denominated or linked to FX Funding costs
Countries susceptible to external funding risks Stock Vulnerability Flow Vulnerability External Fundamentals EST SVN HRV HUN SRB HRV HUN SRB BLR TUR BLR
Countries susceptible to external funding risks External Fundamentals BLR EST SVN Stock Vulnerability HRV HUN SRB TUR Flow Vulnerability
CESEE External Funding Patterns and Risks 1 2 3 External Funding Structures External Funding Conditions Impact of Tighter Funding Conditions on Growth
CESEE region has undergone large scale foreign bank funding reduction since the crisis External Position of BIS-Reporting Banks, 23:Q1-213:Q3 1 75 (Billions of US dollars, exchange-rate adjusted vis-à-vis all sectors) CESEE CESEE ex. RUS & TUR 5 25 23:Q1 26:Q3 21:Q1 213:Q3
CESEE region has undergone large scale foreign bank funding reduction since the crisis External Position of BIS-Reporting Banks, 23:Q1-213:Q3 1 75 (Billions of US dollars, exchange-rate adjusted vis-à-vis all sectors) CESEE CESEE ex. RUS & TUR 5 25 Oct-8 Sep-11 May-13 23:Q1 26:Q3 21:Q1 213:Q3
Reversal of portfolio inflows since taper talk Cumulative EPFR Flows into CESEE ETFs and Mutual Funds 4 25 Bond Equity (Billions of US dollars) 1-5 Jan-3 Jul-7 Jan-12 Apr-14
Reversal of portfolio inflows since taper talk Cumulative EPFR Flows into CESEE ETFs and Mutual Funds 4 25 Bond Equity (Billions of US dollars) 1 Oct-8 Sep-11 May-13-5 Jan-3 Jul-7 Jan-12 Apr-14
accompanied by a divergence in bond market spreads 18 16 EMBIG Spreads Indices, Jan 213 - Apr 214 (May 21, 213 = 1) BLR RUS TUR & UKR (simple avg.) Others (simple avg.) 14 12 1 8 Jan-13 Jul-13 Jan-14 Apr-14
accompanied by a divergence in bond market spreads 18 16 EMBIG Spreads Indices, Jan 213 - Apr 214 (May 21, 213 = 1) BLR RUS TUR & UKR (simple avg.) Others (simple avg.) 14 12 1 8 May 22, 213 Jan 21, 214 Jan-13 Jul-13 Jan-14 Apr-14
CESEE External Funding Patterns and Risks 1 2 3 External Funding Structures External Funding Conditions Impact of Tighter Funding Conditions on Growth
Scenario: Faster US recovery and monetary policy normalization 4 3M US Treasury Bill Rates (Percent, April 214 WEO) 3 2 1 214 215 216 217 218
Scenario: Faster US recovery and monetary policy normalization 4 3 3M US Treasury Bill Rates (Percent, April 214 WEO) Baseline Faster US recovery (scenario) 2 1 214 215 216 217 218
Impact on CESEE Real GDP (Percent difference) 2.5 Public Debt/GDP (ppt difference) 4 External Debt/GDP (ppt difference) -.5-1. 2. 1.5 2-2 min-max range average -1.5 1. -4-2..5-6 -2.5 213 14 15 16 17 213 14 15 16 17 (Deviation from baseline) -8 213 14 15 16 17
While external factors are important, domestic fundamentals also matter 1 External and Domestic Drivers (Percent of variance) External factors Domestic factors Residual 75 5 25 CDS/EMBIG spreads Local bond yields Portfolio flows Cross-border bank flows
Near term policy priorities Monetary & Exchange Rate Flexibility Targeted Liquidity Provision Active Debt Management International Cooperation 37
Medium term policy priorities Rebuild Fiscal Buffers Address Crisis Legacies Address Structural Weaknesses Diversify Funding Sources 38
39
Two possible paths: with / without risk premium shocks.2 Euro Area Core: Real GDP (Deviations from baseline, percent difference).1 -.1 -.2 -.3 Scenario 1: Faster US recovery Scenario 2: Faster US recovery plus risk premium shocks -.4 213 214 215 216 217
CESEE growth and debt dynamics under Faster US recovery.3 Real GDP (Percent difference).1 Public Debt/GDP (ppt difference).8 External Debt/GDP (ppt difference).2.3.1 -.1 -.2 -.2 -.7 -.1 -.3-1.2 213 14 15 16 17 213 14 15 16 17 213 14 15 16 17