bank of greece – university of oxford (seesox) conference challenges and prospects of south east...

Bank of Greece – University of Oxford (SEESOX) Conference

Challenges and Prospects of South East European Economiesin the wake of the financial crisis

Bank of GreeceFriday, 16 October 2009

Resilience of SEEs to the crisisResilience of SEEs to the crisis

Paul Mylonas Chief Economist, Chief of Strategy, National Bank of Greece Group

National Bank of Greece Group – Strategy & Economic Research

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 1

What people saw and what they expected

What happened and current prospects

Why a better-than-expected outcome


What people saw and what they expected


Booming activity, albeit from a low base … but above potential?

Real GDP 2002 - 2007 CAGR (%)

0

1

2

3

4

5

6

7

8

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

Eu

ro a

rea


Evidence of excess demand reinforced by the build-up of a large external imbalance

Current Account Balance/GDP (%)

-30,0

-25,0

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

Eu

ro a

rea

2002 2008

External Debt/GDP (%)

0,0

20,0

40,0

60,0

80,0

100,0

120,0

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

2002 2008


Additional indicators of imbalances – real exchange rate appreciation and large credit impulse

2008 CPI-based REER (2002 = 100)

100

110

120

130

140

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

Total Loans2002 - 2008 CAGR (%)

0

10

20

30

40

50

60

70

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

Eu

ro a

rea


Banking sector imbalances: large share of F/X denominated loans and dependence on foreign funding

FX Loans/Total Loans (%)

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

2002 2008

Loans/Deposits (%)

0,0

50,0

100,0

150,0

200,0

250,0

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

2002 2008


Very large real wage increases (again from a low base), but were they hampering competitiveness? Also a house price bubble had emerged

Real Wages (2002-2008 CAGR)

-2

0

2

4

6

8

10

12

14

16

18

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

5-Year Growth Decline from Currentto Peak (%) the Peak (%) Thous. EUR / Sq. M.

Turkey c. 150 -15 1,4

Romania > 200 -45 1,4

Bulgaria c. 150 -15 1,2

Serbia c. 120 -20 1,6

FYROM c. 75 -5 0,9

Albania c. 115 - - - 0,9

Ukraine c. 700 -30 2,8

House Price Inflation (according to market participants)


With the global economy in turmoil, markets and analysts envisaged a grim end to the boom years

Eurobond Spreads (bps)

0

200

400

600

800

1000

1200

1400

01/0

7/08

26/0

7/08

20/0

8/08

14/0

9/08

09/1

0/08

03/1

1/08

28/1

1/08

Turkey Romania Bulgaria Serbia

FYROM Ukraine Egypt

2010F 2010F Base Bear

Turkey 3,5 8,0 8,0 15,0

Romania 3-4 9,0 13,0 18,0

Bulgaria 2,3 6,0 11,0 17,0

Serbia 5,8 9,0 16,0 22,0

FYROM 3-4 6,0 16,0 17,0

Albania 2-3 6,0 11,0 13,0

NPLs (% of Total Loans)

2008 2009F


What happened and current prospects


Much larger-than-initially-expected drop in output, similar to more advanced economies, and with a higher “β”…

Real GDP Growth (%, Q2:2008 - Q2 2009)

-22-20-18-16-14-12-10-8-6-4-202468

10

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Ukr

ain

e

Eg

ypt

Eu

ro a

rea

Q2:2008 Q3:2008 Q4:2008 Q1:2009 Q2:2009


… due to openness and manufacturing bias

Exports of Goods Exports of Manufactured Exports to the EU (% of GDP) Goods (% of Total Exports) (% of Total Exports)

Turkey 19,3 94,8 48,0

Romania 24,5 81,2 70,4

Bulgaria 44,6 68,4 60,0

Serbia 21,7 76,6 54,3

FYROM 41,3 77,2 59,0

Albania 10,4 75,8 79,2

Ukraine 37,4 76,6 27,1

Egypt 13,3 61,7 33,8

Exports - 2008


Further evidence of the important role of the inventory correction in the nascent recovery in exports

Exports and Euro area industrial production (y-o-y % change, Q1:2008 - Q3:2009)

-40

-30

-20

-10

0

10

20

30

40

50

Q1:2008 Q2:2008 Q3:2008 Q4:2008 Q1:2009 Q2:2009 Q3:2009

-20

-15

-10

-5

0

5

Turkey Romania Bulgaria Serbia Euro area

Euro area industrial production(rhs)

Exports and Euro area industrial production (y-o-y % change, Q1:2008 - Q3:2009)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

Q1:2008 Q2:2008 Q3:2008 Q4:2008 Q1:2009 Q2:2009 Q3:2009

-20

-15

-10

-5

0

5

FYROM Albania Ukraine Egypt Euro area

Euro area industrial production(rhs)


Loans (y-o-y % change)

0

10

20

30

40

50

60

70

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

July 2008 July 2009

Contraction in activity reflects a sharp slowdown in exports and credit expansion

Capital Growth differenceexcl. IMF 2009 2008

Turkey 1,0 -3,2 -4,9 -6,5

Romania 2,4 -15,5 -15,2 -13,1

Bulgaria - - - -10,5 -29,8 -10,8

Serbia 2,0 -5,7 -11,3 -9,4

Depreciation Exports

Impact on growth (pps)


External imbalances correcting rapidly, despite drop in exports, reflecting …

Current Account Balance (% of GDP)

-14

-12

-10

-8

-6

-4

-2

0

2

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

H1:2008 H1:2009

Net FDI Inflows (% of GDP)

0

1

2

3

4

5

6

7

8

9

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

H1:2008 H1:2009

Turkey Romania Bulgaria Serbia FYROM Albania Ukraine Egypt

H1:2008 31,6 58,5 62,8 46,8 67,8 30,1 79,5 - - -

H1:2009 50,0 126,3 57,9 90,0 24,3 61,0 283,3 200,0

Coverage Ratio (FDI/CAD, %)


… a cut-off of oxygen to the economy from large capital inflows of the past -- yet better than expected

Other Net Capital Inflows (% of GDP)

-8

-6

-4

-2

0

2

4

6

8

10

12

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

H1:2008 H1:2009


As a result, FX reserves have not suffered greatly, and appear adequate in relation to the external financing gaps

FX Reserves (EUR billion - July 2008 - September 2009)

15

20

25

30

35

40

45

50

55

60

07:2

008

08:2

008

09:2

008

10:2

008

11:2

008

12:2

008

01:2

009

02:2

009

03:2

009

04:2

009

05:2

009

06:2

009

07:2

009

08:2

009

09:2

009

Turkey Romania Egypt Ukraine

FX Reserves (EUR billion - July 2008 - September 2009)

0

2

4

6

8

10

12

14

16

07:2

008

08:2

008

09:2

008

10:2

008

11:2

008

12:2

008

01:2

009

02:2

009

03:2

009

04:2

009

05:2

009

06:2

009

07:2

009

08:2

009

09:2

009

Bulgaria Serbia FYROM Albania

Turkey Romania Bulgaria Serbia FYROM Albania Ukraine

17,4 31,0 17,7 19,0 22,3 9,4 55,9

Estimate of 2009 FX Reserves Losses / August 2009 FX Reserves (%) -- excluding IFI's Support


Overall, leading and coincident indicators suggest that the worst is over, and activity will recover by Q4:2009

Real GDP Growth (%, 2009 - 2010)

-22-20-18-16-14-12-10-8-6-4-202468

10

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

Q1:2009 Q2:2009 Q3:2009 Q4:2009 2010


Markets clearly have changed their mind regarding the outlook for SEE, as well


0

200

400

600

800

1000

1200

1400

01/0

1/08

01/0

2/08

01/0

3/08

01/0

4/08

01/0

5/08

01/0

6/08

01/0

7/08

01/0

8/08

01/0

9/08

01/1

0/08

01/1

1/08

01/1

2/08

01/0

1/09

01/0

2/09

01/0

3/09

01/0

4/09

01/0

5/09

01/0

6/09

01/0

7/09

01/0

8/09

01/0

9/09

01/1

0/09

Turkey Romania Bulgaria Serbia


0

200

400

600

800

1000

1200

1400

01/0

1/08

01/0

2/08

01/0

3/08

01/0

4/08

01/0

5/08

01/0

6/08

01/0

7/08

01/0

8/08

01/0

9/08

01/1

0/08

01/1

1/08

01/1

2/08

01/0

1/09

01/0

2/09

01/0

3/09

01/0

4/09

01/0

5/09

01/0

6/09

01/0

7/09

01/0

8/09

01/0

9/09

01/1

0/09

FYROM Ukraine Egypt


Why a better-than-expected outcome


EU Membership Government Effectiveness IFI Support

Turkey

o Candidate country

o Started negotiations in October 2005

Strong single party Government, especially after the

July 2007 Constitutional Court decision

Negotiations of a new agreement with the IMF are in

progress

Romania

Member country since January 2007 Strong centre-left Government until its collapse in

early-October 2009

o Signed a 2-year agreement with the IMF in May

2009, amounting to EUR 12,9 bn.

o Further support is expected from the EU (EUR 5

bn), the World Bank (EUR 1 bn), and the EBRD, the

EIB and the IFC (EUR 1 bn).

BulgariaMember country since January 2007 Strong centre-right Government took office in July

2009

Remains open to seal a deal with the IMF if global

conditions deteriorate further

Serbia

o Potential candidate country

o Signed a Stabilisation and Association

Agreement in April 2008

Strong centre-left coalition Government Signed a 15-month agreement with the IMF in January

2009, amounting to EUR 2.9 bn.

FYROM



Agreement in October 2005

o EU Commission recommends entry talks

with FYROM (14 October 2009)

Strong centre-right coalition Government Remains open to seal a deal with the IMF if global


Albania



Agreement in June 2006

Strong right-left coalition Government Remains open to seal a deal with the IMF if global


Ukraine- - - Weak coalition Government until the January 2010

presidential elections

Signed a 2-year agreement with the IMF in November

2008, amounting to USD 16.5 bn.

Egypt- - - Strong and pro-reform Government since July 2004 - - -

EU membership (or on path towards) and/or IFI umbrella, combined with solid Governments (in most cases) provided much needed support…


… allowing monetary policy to be countercyclical (in contrast to other EM crises)

Policy Rate (%)

0

2

4

6

8

10

12

14

16

18

Tu

rkey

Ro

man

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

October 2008 October 2009

Inflation (%)

0

5

10

15

20

25

Tu

rkey

Ro

man

ia

Bu

lgar

ia

Ser

bia

FY

RO

M

Alb

ania

Ukr

ain

e

Eg

ypt

Sep. 08 Sep. 09


FP is also countercyclical, with automatic stabilizers allowed free reign, permitted by good initial debt conditions…

Turkey 70,5 39,5 -31,0

Romania 28,9 21,8 -7,1

Bulgaria 56,4 16,7 -39,7

Serbia 84,8 31,5 -53,3

FYROM 43,1 24,4 -18,7

Albania 65,0 57,7 -7,3

Ukraine 35,7 19,9 -15,8

Egypt 101,1 74,2 -26,9

Public Debt (% of GDP)

2002 2008 Change

2002-2007 Jan. 08 / Jan. 09 / Average Aug. 08 Aug. 09

Turkey -4,0 -1,8 0,5 -3,3 -6,2

Romania -1,7 * -4,9 -1,1 -4,3 -8,0

Bulgaria 1,8 3,0 6,9 -0,7 -2,5

Serbia -1,7 -2,4 -0,4 -2,4 -5,2

FYROM -1,1 -1,0 1,6 -1,7 -4,0

Albania -5,0 -6,0 -0,9 -4,5 -8,3

Ukraine -1,7 -3,2 n.a. n.a. -7,2

Egypt -8,2 -6,9 4,4 4,8 -8,5

* 2005-2007 Average

2009F

Fiscal Balance (% of GDP)

2008

A traditional Achilles’ heel of EM crises -- the health of the banking system -- was in good shape


Capital adequacy NPL Loans Loans/Deposits FX Loans/ Foreign ownership ratio (%) Ratio (%) % of GDP % Total Loans (%) (% of total assets)

Turkey 14,0 16,7 3,5 35,7 79,2 28,9 16,0

Romania 13,8 17,0 4,5* 37,9 136,1 57,8 85,9

Bulgaria 14,9 16,2 2,3 71,5 141,6 56,3 83,9

Serbia 21,9 9,3 5,8 39,0 139,4 42,0 75,3

FYROM 16,2 12,5 6,8* 42,8 101,3 57 92,7

Albania 17,2 11,4 6,5* 35,6 64 71,3 94,0

Ukraine 14,0 8,5 3,9 72,3 212,1 61,8 50,2

Egypt n.a. 14,4 15,0 40,6 56,9 27,9 55,0

* Non-standard definition

Banking Sector Indicators - 2008

ROAE (%)

Several years of adjustment effort has made these economies very competitive


Average monthly Corporate tax 2002-2008 FDI Gain in export market share wage, EUR rate (%) per capita between 2004 and 2009 (pps)

Turkey 581 20,0 685 0,9

Romania 438 16,0 1.792 0,3

Bulgaria 264 10,0 3.784 0,2

Serbia 403 10,0 1.463 0,2

FYROM 263 10,0 1.157 0,1

Albania 299 10,0 659 0,1

Ukraine 234 25,0 588 0,4

Egypt 130 20,0 416 0,1

Competitiveness Indicators - 2008


Thank you

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