Central, Eastern and Southeastern Europe (CESEE) Recovery at risk? - CEE external vulnerability and Poland Article IV preliminary conclusions CASE, Warsaw - May 27, 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 Poland Article IV 2
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 8 Russia 8 Turkey (Percent) (Percent) (Percent) 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 214 215
...but projections have been revised downwards. Real GDP Growth, 214 (Percent) 5 Oct 213 WEO 4 TUR TUR LTU LTU MKD MKD RUS RUS 3 BLR BLR ROU ROU BIH ALB BIH ALB SRB SRB 2 HRV HRV 1-1 -2 SVN SVN BGR BGR CZE CZE HUN HUN EST EST SVK SVK MNE MNE POL POL MDA MDA UVK UVK LVA LVA
...but projections have been revised downwards. Real GDP Growth, 214 (Percent) 5 Apr 214 WEO 4 TUR RUS 3 BLR SRB 2 HRV SRB 1 SVN -1-2 HRV SVN HUN BGRCZE BLR BGR RUS CZE HUN LTU MKD LTU MKD POL MNE EST SVK TUR SVK EST MNE POL ROU ROU ALB BIH ALB BIH MDA MDA LVA LVA UVK UVK
Key Risks Protracted weak growth in euro area Increasing geopolitical tensions Global financial market volatility
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)
CESEE External Funding Patterns and Risks 1 2 External Funding Structures External Funding Conditions
CESEE External Funding Patterns and Risks 1 2 External Funding Structures External Funding Conditions
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 Average of other EMs 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 8 Baltics CEE SEE SEE 212 East3 East3 RUS TUR TUR Public Private CESEE CESEE 4 RUS Average of other EMs
Funding structure matters Private External Debt Structures (Percent of GDP, 212) 12 Debt securities Direct cross-border lending Parent bank lending Inter-company lending 9 6 3 UVK ALB RUS TUR BLR SVK CZE LTU POL MKD BIH ROU UKR MDA SRB SVN HRV BGR EST HUN LVA
Taking out funding from affiliated entities gives a different picture Private External Funding from Non-Affiliated Sources (Percent of GDP, 212) 6 Debt securities Direct cross-border lending 5 4 3 2 1 UVK ALB RUS TUR BLR SVK CZE LTU POL MKD BIH ROU UKR MDA SRB SVN HRV BGR EST HUN LVA
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 8 (Percent of GDP, 213) 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 Public Debt and Foreign Exchange Risks (Percent of GDP, 213) 8 Rest Public debt exposed to FX risk 6 4 2 EST RUS BGR LVA MKD TUR BLR ROU LTU BIH CZE SVK POL HRV SRB ALB SVN HUN
Some countries have both high external and fiscal financing needs Financing Needs (Percent of GDP, 214) Fiscal financing needs 3 ALB Median HRV HUN 2 SRB SVN BLR MKD POL 1 CZE BIH ROU SVK LTU LVA BGR RUS Median TUR EST 1 2 External financing needs 3 4
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 External Fundamentals BLR EST SVN HRV TUR HUN SRB Stock Vulnerability Flow Vulnerability
CESEE External Funding Patterns and Risks 1 2 External Funding Structures External Funding Conditions
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 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 May 22, 213 Jan 21, 214 Jan-13 Jul-13 Jan-14 Apr-14
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 31
Medium term policy priorities Rebuild Fiscal Buffers Address Crisis Legacies Address Structural Weaknesses Diversify Funding Sources 32
Outline Outlook for the region External funding patterns and risks Policy priorities Poland Article IV 33
Main messages from annual consultation Steady recovery from 212-13 slowdown External risks remain, FCL helps Inflation low, challenge for monetary policy Fiscal consolidation at appropriate pace Pension system changes don t address legacy issues Financial sector resilient, but supervisory framework needs further work Labor market and business climate reforms needed 34
Recovery picking up momentum 5 Real GDP growth Back 4 3 1 CESEE Poland Euro Zone -1 21 211 212 213 214 215 35
Real rates rising as inflation falls 6. (percent) Back Policy rate 4.5 3. 1.5 y/y inflation rate 28 29 21 211 212 213 214 36
Calibrated fiscal policy -2-4 -5 (percent of GDP) Structural deficit Headline deficit Back -7-8 27 28 29 21 211 212 213 214 215 37
Pension changes Improve fiscal aggregates by about 3 percent of GDP in present value terms But implicit liabilities rise in turn Liquidity in bond and equity markets could fall Legacy flaws pose long-term risks fix zero floor in indexation mechanism align disability pension formula with regular benefits address imbalances in special occupational schemes low replacement rates threaten old-age poverty and fiscal pressures Back 38
Main messages from annual consultation Steady recovery from 212-13 slowdown External risks remain, FCL helps Inflation low, challenge for monetary policy Fiscal consolidation at appropriate pace Pension system changes don t address legacy issues Financial sector resilient, but supervisory framework needs further work fix legal and tax obstacles to NPL resolution restructure credit unions finalize Systemic Risk Board legislation Back 39
Business climate Doing Business 214 rank Denmark UK Finland Sweden Ireland Lithuania Germany Estonia Latvia Macedonia Netherlands Austria Portugal Slovenia Belgium France Cyprus Montenegro Poland Slovakia Spain Hungary Bulgaria Luxembourg Italy Turkey Greece Romania Czech Rep. Kosovo Croatia Albania Serbia Malta Bosnia 5 1 15 Back 4
Thank you! 41