Harald Hirschhofer

Ständiger Vertreter für Serbien und Montenegro/Resistant Representative for Serbia and Montenegro, International

Monetary Fund (IMF), Österreich/AustriaFinanzbereich in den CEE-Ländern. Wie können Makro-Risiken reduziert werden?

Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities?

Central and Eastern Europe Economic ForumVelden Austria, 19 September 2007

IMF Resident RepresentativeHarald Hirschhofer

FINANCIAL SECTOR IN CEE

How to Reduce Macro-Prudential Vulnerabilities?

3

Stages of Convergence – Expansion and Reorientation

Anticipated Positive Productivity Shock with External Finance

Source: IMF staff simulation.

Consumption

0.96

0.97

0.98

0.99

1

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Relative price of nontradables

0.98

0.99

1

1.01

1.02

1.03

1.04

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

GDP

0.96

0.97

0.98

0.99

1

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Current Account

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

4

Will Convergence Expectations Be Met?

Ireland or Portugal?

Source: IMF staff estimates.

Per Capita GDP: Deviation from EU-6(In $US)

-20000

-15000

-10000

-5000

0

5000

10000

15000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-20000

-15000

-10000

-5000

0

5000

10000

15000

Source: IMF staff estimates.Note: EU-6: Austria, Belgium, France, Germany, Italy, Netherlands.

Per Capita GDP: Deviation from EU-6(In $US)

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

5

CEE Macroeconomic Vulnerabilities Booming domestic demand and consumption fuelled by:

• Income, profit, and asset price expectations• Rapid wage growth and inadequate public sector policies• Rapid credit growth

.. led to very high current account deficits and external debt

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

100

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

100

Current account balance External debtin percent of GDP

6

Financial Sector Expansion Brings Macro-Risks

Strong FDI and credit growth have contributed to economic growth But the credit has been absorbed mostly by the non-tradable sector

Source: National authorities.

Note: Emerging Europe: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Ukraine.

Composition of Credit to NFCs in Emerging Europe(In percent of GDP)

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006

0

5

10

15

20

25

30

Real Estate and Construction

Other Nontradables

Tradables

7

Financial Sector Vulnerabilities

High acquisition/implementation costs and ambitious profit targets lead to aggressive competition and risk taking – the 200 percent market share problem.

Weak institutional infrastructure: accounting, bankruptcy and legal procedures, corporate governance…

Risk assessment cannot draw on historic experience

Are credit risks properly priced?

8

To Reduce Current Account Deficits, Resources Need To Reach The Tradable

Sector

Macro measures to enhance supply and restrict demand

Financial sector measures to insure financial sector stability and efficient markets

9

Macro-Measures To Tighten Demand Tight monetary policy to keep inflation under control Prudent fiscal policy

Complicated by surpluses, windfall tax revenues, privatization proceeds, unemployment

Change expenditure composition: less consumption, better infrastructure investment

Source: WEO.

Fiscal and Current Account Imbalances(In percent of GDP)

-25

-20

-15

-10

-5

0

5

10

15

Hu

ng

ary

Po

lan

d

Cze

ch

Rep

ub

lic

Slo

va

k R

epu

blic

Alb

an

ia

Cro

atia

Tu

rkey

Ro

ma

nia

Se

rbia

Ukra

ine

Lith

ua

nia

Ma

ce

do

nia

La

tvia

Bo

sn

ia &

He

rzeg

ovin

a

Esto

nia

Bu

lga

ria

General Government Balance

CA Balance

10

Accelerate Structural Reform

Liberalize and ensure competition

Privatize to strengthen incentives and investment: growth, fiscal performance, and jobs

Bankruptcy returns assets into production processFiscal impact of Privatization1 in Serbia, 2003-2007 H1

(In million RSD)

2003 2004 2005 2006 2007 H1 Total fiscal contribution (1+2+3)

-15.5

-8.3

414.7

947.6

502.4

(1) Corporate Income Tax 3.9 1.7 3.4 88.9 123.9 (2) Subsidies 19.5 10 11.5 0.0 0.0 (3) Budget financing costs reduction 0.0 0.0 422.8 858.7 378.5

1 Sample of 30 companies privatized in 2005

11

Banking Sector Measures

Correctly price risks and use prudential measures

Improve consumer protection

Reconsider mortgage subsidy programs

Strengthen risk-based supervision and international cooperation among supervisors

12

Deepen Financial Markets

Strengthen regulatory framework for trading, brokers, insurance, institutional investors, investment funds, disclosure and listing standards

Strengthen institutions, such as credit bureaus, bankruptcy courts, data filing systems, and corporate registries

But allow institutional investors to invest abroad for risk diversification