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Outlook for external financing of the public sector in Southeast Europe. Dubravko Mihaljek Bank for International Settlements Presentation at the Bank of Greece – University of Oxford (SEESOX) Conference - PowerPoint PPT Presentation
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1
Outlook for external financing of the public sector
in Southeast Europe
Dubravko MihaljekBank for International Settlements
Presentation at the Bank of Greece – University of Oxford (SEESOX) ConferenceAchieving sustainable growth in Southeast Europe: Macroeconomic policies, structural reforms, socio-political support and a sound financial system
Athens, 11 February 2011
The views expressed in this presentation are those of the author and not necessarily those of the BIS.
2
Outline
1. Global portfolio capital flows
Advanced economies vs. emerging markets
Emerging market regions
Central and eastern / Southeast Europe
2. Cross-border financing (bank lending and international bonds)
Emerging markets
Central and eastern Europe
3. Conclusion
3
Global portfolio capital flows
Advanced economies vs. emerging markets
Post-crisis portfolio inflows to EMEs peaked in Q3-Q4:2010
Jan-Feb 2011: shift to advanced economies, EM equity fund outflows strongest since 2008
Concerns: EM equity valuations, EM inflation, developments in Northern Africa
Why advanced economies?
• Mostly US equities – positive growth and earnings surprises in Q4:2010
• But also Australia, Japan, Italy and Spain
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Portfolio flows into advanced and emerging market funds1 In billions of US dollars
United States Other advanced economies2 Emerging market economies3
1 Quarterly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for exchange rate changes) to dedicated funds for individual countries and to emerging market funds for which country or at least regional decomposition is available.
Source: EPFR.
5
Portfolio capital flows (cont’d)
Emerging market regions (data through 2 Feb 2011)
Inflows peaked in October 2010
Sharp slowdown of portfolio inflows to emerging Asia and Latin America in Dec 2010–Jan 2011
Week from 26 Jan to 2 Feb 2011 – strongest outflows from equity funds to Asia in three years
Steady flows into CEE through January, but net outflows in the week from 26 Jan to 2 Feb 2011
Growth and interest rate differentials still likely to favour Asia and Latin America in 2011
6
Fund flows into emerging market funds1
In billions of US dollars
Asia Latin America CEE2
1 Sums across economies listed, monthly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for exchange rate changes) to dedicated funds for individual emerging market countries and to emerging market funds for which country or at least regional decomposition available. 2 Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey, Ukraine.
Source: EPFR.
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Inflation in emerging Asia Contribution to inflation1 Annual inflation rates2
1 Weighted average of China, Chinese Taipei, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand based on 2005 GDP and PPP exchange rates; in per cent. For Korea and Malaysia, the latest observation for core prices is November 2010. 2 In per cent. 3 Wholesale prices.
Sources: Bloomberg; CEIC; Datastream; national data.
Rising inflation – one reason why portfolio inflows to Asia are reversing
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Equity prices declining, local currency bond yields rising as a result of higher inflation in emerging Asia
Asset prices in emerging Asia Equity prices1 Local currency bond yields2
1 MSCI total return indices in local currency; January 2009 = 100. 2 Ten-year government bonds; in per cent.
Sources: CEIC, Datastream; national data.
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Portfolio capital flows (cont’d)
Central and eastern Europe – larger economies
Portfolio inflows peaked in Oct 2010
In central Europe, mostly flows into bond funds (especially Poland)
In Russia and Turkey, mostly flows into equity funds
Turkey – similar pattern of capital flows as emerging Asia and Latin America (decoupling from CEE?)
Russia – benefitting from rising oil prices
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Portfolio flows into larger CEE countries1 In billions of US dollars
Czech Republic (lhs) Hungary (lhs) Poland (lhs) Russia (rhs) Turkey (rhs)
1 Monthly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for exchange rate changes) to dedicated funds for individual emerging market countries and to emerging market funds for which country or at least regional decomposition is available.
Source: EPFR.
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Portfolio capital flows (cont’d)
Southeast Europe
Pattern of inflows differs from other emerging markets, CEE
Much smaller inflows than to other CEE countries
Mostly inflows into bond funds
Some evidence of spillovers from Greece in 2010
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Portfolio flows into emerging market funds1 In billions of US dollars
Bulgaria (lhs) Croatia (lhs) Greece (lhs) Romania (lhs) Serbia (lhs) Turkey (rhs)
1 Monthly sums of weekly data until February 2, 2011. Data cover net portfolio flows (adjusted for exchange rate changes) to dedicated funds for individual emerging market countries and to emerging market funds for which country or at least regional decomposition is available.
Source: EPFR.
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Cross-border banking flows
Resumption of cross-border bank lending to emerging Asia and Latin America in 2010: Q1–Q3 inflows exceeded pre-crisis (full-year) peak from 2007
Bank lending to CEE was the last to recover among EM regions (Q3:2010 vs. Q3:2009 in Asia)
Some slowdown in bank lending to Asia, increase to Latin America and CEE in Q3:2010
Bank lending to CEE unlikely to recover to pre-crisis peaks → Not surprising, inflows before the crisis were not sustainable (26% of gross inflows of private capital to EMEs in 2006, vs. only 11% of EMEs’ GDP)
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Table 1 Cross-border bank lending to emerging market economies1 In billions of US dollars
2009 2010 2007 2008 2009
Q4 Q1 Q2 Q3
Total EMEs 512 111 –153 68 116 93 107
Asia 111 –65 10 46 72 47 46
Hong Kong and Singapore 140 39 –49 32 40 40 19
Latin America 61 15 –21 6 17 15 30
CEE2 200 123 –93 –16 –13 –8 11 1 External loans of BIS reporting banks (on the residence basis) vis-à-vis individual emerging market economies; exchange rate adjusted changes in gross amounts outstanding. Does not include changes in reporting banks’ holdings of emerging market securities. 2 Total of 10 new EU member states from central and eastern Europe, south-eastern Europe (including Turkey), Russia, Ukraine and Kazakhstan.
Source: BIS, locational banking statistics.
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Cross-border financing of CEE economies
Very slow recovery in cross-border bank lending Still no cross-border bank lending to Southeast Europe in
Q3:2010
• Cross-border lending to banks resumed on a larger scale only in Albania, Croatia, FYR Macedonia and Turkey
• …and to the non-bank sector only in Bulgaria and Croatia
(Note: lending to the “non-bank” sector includes the public sector)
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Cross-border lending to CEE during the crisis
Cross border financing of CEE economies1 In billions of US dollars
2008 2009 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
Central Europe and Baltics2
Cross border loans 56 –23 –16 –3 –3 –2 –6 –1 4
International debt securities3 22 38 4 9 13 12 13 4 5
Southeast Europe4
Cross border loans 51 –16 –9 –2 –5 –1 –3 0 0
International debt securities3 –0 8 2 2 1 3 2 1 3
Memo: Greece
Cross border loans 7 9 5 5 5 –6 8 –0 –11
International debt securities3 44 68 34 32 7 –5 23 33 5 1 External loans of BIS reporting banks vis-à-vis individual countries, exchange rate adjusted changes in gross amounts outstanding in US dollars. 2 Total of Czech Republic, Hungary, Poland, Slovakia, Slovenia, Estonia, Latvia and Lithuania. 3 Net issuance of all issuers (sovereign and corporate), by nationality of issuer. 4 Total of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR of Macedonia, Montenegro, Romania, Serbia and Turkey.
Source: BIS, banking and international financial statistics.
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Change in external loans vis-à-vis the banks in CEE1 Estimated exchange rate adjusted changes, in millions of USD
2007 2008 2009 1Q10 2Q10 3Q10
Central Europe2 39,951 25,554 –18,201 –1,417 3,867 4,844
Baltic Republics3 13,178 7,883 –6,728 –3,449 –747 –1,341
Southeast Europe: 17,088 20,033 –4,780 2,087 3,202 1,583
Bulgaria 2,118 5,208 –858 –622 –504 28
Croatia –890 569 2,391 –348 208 –1,882
Romania 12,671 8,828 –4,868 121 –957 272
Turkey 3,087 4,426 –2,743 2,906 5,376 3,383
Albania 150 –157 50 172 –254 37
Bosnia-Herzegovina 612 419 –265 –88 –232 –110
FYR of Macedonia 31 –53 90 –32 20 40
Serbia –1,165 493 1,509 –25 –420 –191
Montenegro 474 300 –86 3 –35 6
Memo:
Greece 18,939 1,233 7,839 9,139 –4,593 –11,958 1 External loans of BIS reporting banks.
Sources: BIS, locational banking statistics.
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Change in external loans vis-à-vis the non-bank sector in CEE1 Estimated exchange rate adjusted changes, in millions of USD
2007 2008 2009 1Q10 2Q10 3Q10
Central Europe2 16,521 20,786 3,859 –370 –2,969 1,218
Baltic Republics3 3,783 1,587 –2,141 –508 –792 –488
Southeast Europe: 34,780 31,070 –11,579 –4,858 –3,108 –1,484
Bulgaria 1,550 3,562 –350 –276 2 115
Croatia 5,168 4,318 –600 –462 –103 234
Romania 5,676 7,853 –865 –1,397 –756 –376
Turkey 19,457 13,503 –9,376 –2,434 –2,169 –1,198
Albania –23 529 107 19 22 20
Bosnia-Herzegovina 270 249 175 –32 –52 –2
FYR of Macedonia 85 155 8 8 6 6
Serbia 2,408 652 –902 –177 –93 –258
Montenegro 189 249 224 –107 35 –25
Memo:
Greece –4,159 5,538 681 –940 4,119 876 1 External loans of BIS reporting banks.
Sources: BIS, locational banking statistics.
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Cross-border financing of CEE economies (cont’d)
International bond financing more resilient – despite the crisis, many CEE countries placed sovereign bonds in 2009 and 2010
But this came at a price: bond and CDS spreads remain quite high and fairly volatile
FX reserves position of several countries weakened in 2010
But coverage of short-term debt by FX reserves mostly good in SEE
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Bond spreads for selected countries1
Euro EMBI Global I Euro EMBI Global II Government bond spreads2
1 Spreads over benchmark euro area bonds, in basis points. 2 For Greece, 5-year government bond spread. 3 For Albania, 5-year bond; for FYR of Macedonia, 10-year bond.
Sources: Datastream; JPMorgan Chase.
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CDS spreads1
1 Senior five-year CDS mid spread, in euros. Five-day moving averages; in basis points.
Source: Datastream.
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Foreign exchange reserves and measures of adequacy
Foreign exchange reserves
As a percentage of:
Outstanding year-end position, USD bn
GDP Imports Broad money
Ratio of FX reserves to short-term
debt1
2009 2010 Change
in 20102
2009 2010 2009 2010 2009 2010 2009 2010
Bulgaria 16.1 14.4 –1.7 34.2 32.2 72.8 61.6 45.2 42.2 1.4 1.7
Croatia 14.4 13.7 –0.8 21.3 22.8 68.0 68.2 31.8 31.3 0.7 0.8
Romania 39.3 42.3 3.0 24.4 26.7 72.2 69.1 60.6 68.8 1.3 1.5
Turkey 69.2 77.5 7.8 11.3 10.6 49.1 41.8 20.0 19.0 1.3 1.3
Albania 2.2 2.3 0.0 18.2 20.2 49.0 50.9 24.0 24.7 1.8 2.0
Bosnia-Herzegovina 3.2 2.3 –1.0 19.0 14.3 36.6 25.1 30.7 22.4 1.7 1.4
FYR of Macedonia 2.0 1.9 –0.1 20.9 20.0 38.9 36.0 39.1 37.1 3.1 3.6
Serbia 14.7 12.1 –1.9 34.3 31.0 91.9 72.2 80.5 69.5 5.0 7.0 1 Short-term external debt defined as short-term liabilities to BIS reporting banks: consolidated cross-border claims of all BIS reporting banks on countries outside the reporting area with a maturity up to and including one year plus international debt securities outstanding with a maturity of up to one year. 2 From end-2009.
Sources: IMF; national data; BIS.
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Conclusion
Uncertainty about prospects for external financing of public sector in SEE:
Global capital flows no longer favouring emerging markets as in 2010. But still to early to see the trend
Within emerging Europe, SEE not a focus of international investors (except Turkey)
Resumption of cross-border lending very slow International bond issuance more reliable – but costly –
source of public sector external financing FX reserves buffer generally seems adequate