Transcript 14-5_atanku

Living through crisis!
Where is the guide please?
The global Financial crisis and SEE: Lessons for
macroeconomic policy and financial stability
Bank of Greece
Altin Tanku
Bank of Albania
May 2010
The opinions expressed in this presentations are those of the author
and do not represent the opinions of the Bank of Albania.
Preview
• Macroeconomic Policy Challenges, the policy
makers view:
– Past:
• Preconditions Domestic and External vulnerabilities
• Channels of transmission
– Current:
• Impact of the crisis
• Short term outlook
– Future:
• Long run implications
– Conclusions
Preconditions
Strong persistent growth (on average 6%) fueled by a
strong aggregate demand and credit growth.*
Private consumprion
Gov. Consumption
Investments
Net exports
Average contribution to GDP
76
11
38
-25
Source: Albanian Institute of Statistics
* Bank of Albania Annual Reports and Monetary policy Declarations 2006-2009
Preconditions (cont.)
Credit Developments
400
150
350
130
300
110
250
90
200
70
150
50
100
30
50
10
-10
Ja
n0
M 5
ar
-0
M 5
ay
-0
5
Ju
l-0
Se 5
p0
N 5
ov
-0
Ja 5
n0
M 6
ar
-0
M 6
ay
-0
6
Ju
l-0
Se 6
p0
N 6
ov
-0
Ja 6
n0
M 7
ar
-0
M 7
ay
-0
7
Ju
l-0
Se 7
p0
N 7
ov
-0
Ja 7
n0
M 8
ar
-0
M 8
ay
-0
8
Ju
l-0
Se 8
p08
-
Credit in FX
Source: Bank of Albania
Credit in ALL
Total
Annual grow th FX
Annual grow th ALL
Preconditions (cont.)
Most of credit is in foreign currency
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Credit in FX
Source: Bank of Albania
-0
8
-0
8
Se
p
l-0
8
Au
g
Ju
n08
Ju
-0
8
8
-0
8
ay
M
Ap
r
ar
-0
08
Credit in ALL
M
Fe
b-
n08
Ja
-0
7
-0
7
D
ec
N
ov
ct
-0
7
-0
7
O
-0
7
Se
p
l-0
7
Au
g
Ju
-0
7
-0
7
Ju
n
7
-0
7
ay
M
Ap
r
07
ar
-0
M
-0
7
Fe
b-
Ja
n
D
ec
-0
6
0%
Preconditions (cont.)
Fast growing credit based on strong deposits
Credit % of Deposits
100
80
60
40
20
0
05
na
J
ar
M
05
ay
M
05
5
6
7
8
6
7
8
6
7
8
6
7
8
5
5
6
6
7
7
08
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
l-0
l-0
l-0
l-0
r
r
r
v
v
v
y
y
y
n
n
n
p
p
p
pu
u
u
u
a
a
a
o
o
o
a
a
a
a
a
a
e
e
e
e
J
J
J
J
J
J
J
S
N
M
S
N
M
S
N
M
S
M
M
M
FX
Source: Bank of Albania
ALL
Total
Preconditions (cont.)
Well capitalized Banking system
Capital Adequacy Ratio
40
30
20
10
0
-10
T
9
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
98
-9
-0
-0
-0
-0
-0
-0
-0
-0
-9
-0
-0
-0
-0
-0
-0
-0
-0
-0
c
c
c
c
c
c
c
c
c
n
n
n
n
n
n
n
n
n
n
19
e
e
e
e
e
e
e
e
e
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
D
D
D
D
D
D
D
D
D
IV
Source: Bank of Albania
Preconditions (cont.)
–
EU is the main trade and financial partner
Imports
Turkey
6%
Italy
28%
Germany
7%
China
8%
Other
36%
Source: Bank of Albania
Greece
15%
Preconditions (cont.)
Large trade and current account deficits with heavy reliance on remittances
1000
800
600
400
200
0
-200
-400
-600
-800
-1000
Q
01
1-
Q
01
3-
Q
02
1-
Q
02
3-
Q
03
1-
Q
03
3-
Q
04
1-
Remittances
Source: Bank of Albania
Q
04
3-
FDI
Q
05
1-
Q
05
3-
Q
PORTFOLIO
06
1-
Q
OIN
06
3-
Q
07
1-
Q
07
3-
Trade Balance
Q
08
1-
Q
08
3-
Q
09
1-
Preconditions (cont.)
Persistent Lek appreciation
Lek-Euro Exchange rate
145
140
135
130
125
120
115
110
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8
-0
-0
-0
-0
-0
-0
-0
-0
-0
l-0
l-0
l-0
l-0
l-0
l-0
l-0
l-0
l-0
n
n
n
n
n
n
n
n
n
u
u
u
u
u
u
u
u
u
J
J
J
J
J
J
J
J
J
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Source: Bank of Albania
Crisis begins in USA and Europe
September-October 2008
– Banks failures become a reality in US and Europe.
– Full deposit insurance in Europe.
– Slowdown in global economic activity.
Expectations:
– No real impact in Albanian banking and financial
system, but suspicion and fear.
– Significant effect in the real sector of the economy.
Financial crisis reaches Albania
• Fear contagion hits public.
• Deposit withdrawals begin due to:
– Fear
– Full deposit insurance in Europe
• Insurance arbitrage possibilities
• Banks experience liquidity problems in foreign
currency.
– Overall credit slowdown,
• Credit in foreign currency eventually stopped.
De
c0
Fe 6
b07
Ap
r- 0
7
Ju
n0
Au 7
g0
O 7
ct
-0
De 7
c0
Fe 7
b08
Ap
r- 0
8
Ju
n0
Au 8
g0
O 8
ct
-0
De 8
c0
Fe 8
b09
Ap
r- 0
9
Ju
n0
Au 9
g0
O 9
ct
-0
De 9
c0
Fe 9
b10
Deposits Sep-2008=100%
110
105
100
95
90
85
80
75
70
65
60
ALLTime Deposits
FX Time Deposits
Financial crisis reaches Albania
• Fear contagion hits public.
• Deposit withdrawals begin due to:
– Fear
– Full deposit insurance in Europe
• Insurance arbitrage possibilities
• Banks experience liquidity problems in foreign
currency.
– Overall credit slowdown,
• Credit in foreign currency eventually stopped.
Ja
n0
M 5
ar
-0
M 5
ay
-0
Ju 5
l- 0
Se 5
p0
N 5
ov
-0
Ja 5
n0
M 6
ar
-0
M 6
ay
-0
Ju 6
l- 0
Se 6
p0
N 6
ov
-0
Ja 6
n0
M 7
ar
-0
M 7
ay
-0
Ju 7
l- 0
7
Se
p0
N 7
ov
-0
Ja 7
n0
M 8
ar
-0
M 8
ay
-0
Ju 8
l- 0
Se 8
p0
N 8
ov
-0
Ja 8
n0
M 9
ar
-0
M 9
ay
-0
Ju 9
l- 0
Se 9
p0
N 9
ov
-0
Ja 9
n1
M 0
ar
-1
0
Credit Developments
500
150
450
130
400
110
350
300
90
250
70
200
50
150
100
30
50
10
-10
Credit in FX
Source: Bank of Albania
Credit in ALL
Total
Annual grow th FX
Annual grow th ALL
Real sector crisis spreads to Albania
150
100
50
0
-50
Remittances and Trade activity
shrink due to slowdown of real
activity in EU
-150
-200
-250
-300
-350
-400
-450
Ja
n05
M
ar
-0
5
M
ay
-0
5
Ju
l-0
5
Se
p05
N
ov
-0
5
Ja
n06
M
ar
-0
6
M
ay
-0
6
Ju
l-0
6
Se
p06
N
ov
-0
6
Ja
n07
M
ar
-0
7
M
ay
-0
7
Ju
l-0
7
Se
p07
N
ov
-0
7
Ja
n08
M
ar
-0
8
M
ay
-0
8
Ju
l-0
8
Se
p08
N
ov
-0
8
Ja
n09
M
ar
-0
9
M
ay
-0
9
• Consumption & investments
-100
Exports
Imports
Lek-Euro Exchange rate
145
140
Exchange rate starts to depreciate
accompanied by increased volatility
• Expected high pass-through to
inflation*
135
130
125
120
115
Ja
n00
Ju
l-0
0
Ja
n01
Ju
l-0
1
Ja
n02
Ju
l-0
2
Ja
n03
Ju
l-0
3
Ja
n04
Ju
l-0
4
Ja
n05
Ju
l-0
5
Ja
n06
Ju
l-0
6
Ja
n07
Ju
l-0
7
Ja
n08
Ju
l-0
8
Ja
n09
Ju
l-0
9
110
Source: Bank of Albania
* Tanku, Vika and Gjermeni (2007); and Istrefi and Semi (2007)
Crisis: Back to Financial Channels
• Non performing credits increase from 4.6 to above 10
percent due to*:
– Exchange rate depreciation for unhedged borrowings in foreign
currency,
– Decrease in economic activity,
– Slow down in credit growth.
• Policy objective shifts toward financial stability.
– Exchange rate is believed to be the most important and
imminent threat to financial stability.
• Banks face liquidity problems, but capital adequacy
ratio remains above 17%.
* Shijaku H., and Ceca K., (2009)
Policy Response
• Deal with liquidity problems
• From fix amount to fix price repo. auctions
•
•
•
•
Reduce interest rate to 5.25
Shift focus to financial stability
Increase deposit insurance carefully
Limited intervention in Forex market
• Less than 60 million euro
• For fixed period
• Introduce temporary restrictions on profit distribution
• March 2009 – March 2010
• Ask banks for recapitalization if needed (two cases)
Monetary Agregates (annual growth rate)
35.0
25.0
15.0
5.0
-5.0
-15.0
7
8
9
7
8
9
7
8
9
0
7
8
9
0
7
7
8
8
9
9
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-0
-1
-0
-0
-0
-1
l-0
l-0
l-0
r
r
r
r
v
v
v
y
y
y
n
n
n
n
p
p
p
u
u
u
a
a
a
a
o
o
o
a
a
a
J
J
J
Ja
Ja
Ja
Ja
M
Se
N
M
Se
N
M
Se
N
M
M
M
M
FX component
Monetary base
Currency outside depository corporations
M1 Aggregate
M2 Aggregate
M3 Aggregate
Policy Response
• Deal with liquidity problems
• From fix amount to fix price repo. auctions
•
•
•
•
Reduce interest rate to 5.25
Shift focus to financial stability
Increase deposit insurance carefully
Limited intervention in Forex market
• Less than 60 million euro
• For fixed period
• Introduce temporary restrictions on profit distribution
• March 2009 – March 2010
• Ask banks for recapitalization if needed (two cases)
Preconditions (cont.)
Important historical events
•
•
March 1997
April 2002
20,000
15,000
10,000
5,000
0
-5,000
-10,000
-15,000
-20,000
9 6 96 96 96 9 7 97 97 97 9 8 98 98 98 9 9 99 99 99 0 0 00 00 00 0 1 01 01 01 0 2 02 02 02 0 3 03 03 03 0 4 04 04 04 0 5 05 05 05 0 6
n- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- an- pr- ul- ct- anJ
J O
J O
J
J O
J
J O
J O
J
J O
Ja A
J
A
J
A
J
A
J
A
J
A
J
A
J
A
J
A
J
A
J
O
O
O
O
All Demand Deposits
Source: Bank of Albania
ALL Time Deposits
FX Time Deposits
Policy Response
• Deal with liquidity problems
• From fix amount to fix price repo. auctions
•
•
•
•
Reduce interest rate to 5.25
Shift focus to financial stability
Increase deposit insurance carefully
Limited intervention in Forex market
• Less than 60 million euro
• For fixed period
• Introduce temporary restrictions on profit distribution
• March 2009 – March 2010
• Ask banks for recapitalization if needed (two cases)
Czech koruna
Hungarian forint
Polish zloty
Romanian leu
Albanian Lek
Turkish lira
Serbian denar
3/15/2010
1/15/2010
11/15/2009
9/15/2009
7/15/2009
5/15/2009
3/15/2009
1/15/2009
11/15/2008
9/15/2008
7/15/2008
5/15/2008
3/15/2008
1/15/2008
11/15/2007
9/15/2007
7/15/2007
5/15/2007
3/15/2007
1/15/2007
11/15/2006
9/15/2006
7/15/2006
5/15/2006
3/15/2006
1/15/2006
11/15/2005
9/15/2005
PERCENT CHANGE, 2006 = 0
Short term effects
New economic trends
• Monetary base grows but Credit does not
• Monetary base grows but Money growth slows down
• Private investments slows
• Remittances decrease
• Credit slowdown stops the money creation in FX resulting in
reduced FX supply
• Exchange rate depreciates; inflation stays within objective
– due to decline of commodity prices
– due to slowdown in economic activity
* Bank of Albania estimation
Crisis: Back to Real economy
30%
40%
20%
30%
Corporate YoY growth
50%
10%
Liquidity
20%
0%
10%
Liquidity_FX
60%
Feb-10
Oct-09
Dec-09
Aug-09
Jun-09
Feb-09
Apr-09
Dec-08
Aug-08
Oct-08
Jun-08
Feb-08
Apr-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Feb-07
Apr-07
Jun-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
-10%
0%
Liquidity_Lek
40%
Total
Investment_Lek
Contribution of
50%
YoY growth
70%
Investment_FX
60%
80%
Investments
Outlook assessment
8
7
INSTAT
YoY growth rate, %
6
5
4
September
3
2
June
1
May
Source: Bank of Albania macro econometric model MEAM
20
10
Q
2
20
10
Q
1
20
09
Q
4
20
09
Q
3
20
09
Q
2
20
09
Q
1
20
08
Q
4
20
08
Q
3
20
08
Q
2
20
08
Q
1
0
Short run Financial Stability Outlook
• Deposits recover trend but credit doesn’t.
• Credit slowdown continues
– NPL growth slows, but continues to grow (above 11
percent)
• Exchange rate is estimated to be close to its
short run equilibrium
– Based on monetary approach
Short run Financial Stability Outlook
• Current Account Deficit remains a problem
despite a relatively fast adjustment in trade
balance
– Twin deficits;
– Bank of Albania model shows slow or no adjustment
unless inflation kicks in;
– Supply side shocks are important;
– Wealth effects adjustment is not happening
Short run Financial Stability Outlook
• Current Account Deficit remains a problem
despite a relatively fast adjustment in trade
balance
– Twin deficits;
– Bank of Albania model shows slow or no adjustment
unless inflation kicks in;
– Supply side shocks are important;
– Wealth effects adjustment is not happening
25
140
120
20
120
100
15
80
10
80
60
5
60
40
0
40
20
-5
20
-50.0
-
in %
140
in %
160
-30.0
30
-10.0
160
30.0
180
180
annual changes
200
-10
-
10.0
100
50.0
35
annual changes
40
Rent index
200
House price index
Q1-10
Q3-09
Q1-09
Q3-08
Q1-08
Q3-07
Q1-07
Q3-06
Q1-06
Q3-05
Q1-05
Q3-04
Q1-04
Q3-03
Q1-03
Q3-02
Q1-02
Q3-01
Q1-01
Q3-00
Q1-00
Q3-99
Q1-99
Q3-98
Q4-09
Q2-09
Q4-08
Q2-08
Q4-07
Q2-07
Q4-06
Q2-06
Q4-05
Q2-05
Q4-04
Q2-04
Q4-03
Q2-03
Q4-02
Q2-02
Q4-01
Q2-01
Q4-00
Q2-00
Q4-99
Q2-99
Q4-98
Q2-98
Long run Outlook
• First: be Positive
• Second: watch out for
– Current account deficits,
– Fiscal developments,
• New fiscal rule
– Potential persistent shocks
• Risks to potential growth
• Unit root vs. Mean reverting nature of current shocks.
Positive Shocks to Outlook
8
7
INSTAT
Investment
YoY growth rate, %
6
5
Export
s
Euro/Lek
4
3
Outlook
2
1
20
10
Q2
20
10
Q1
20
09
Q4
20
09
Q3
20
09
Q2
20
09
Q1
20
08
Q4
20
08
Q3
20
08
Q2
20
08
Q1
0
Scenario
Outlook
Investment shock
Eur/Lek shock
Export shock
Inflation (pp)
0.68
0.71
1.14
0.69
Source: Bank of Albania macro econometric model MEAM
Output Gap
0
-0.5
-1
-1.5
%
-2
-2.5
-3
-3.5
-4
-4.5
-5
1
2
3
Quarters
y
y_potential
4
L-R implications of S-R actions
To credit or not to credit-that is the question
– Credit is good for investment, consumption
and growth
– Credit is bad for non performing loans
• New model of growth
– What model?
– Regional model?
– Bank of Albania opens the debate!
LR implications, SR actions
• Monetary policy similar to ECB
– Two pillars approach,
• Implicit inflation targeting with leading indicators:
– Forecasted inflation
– M3
• Money multiplier has slowed down significantly
due to current credit crunch.
• If current changes were structural, then policy must adjust
and reset targets for M2 or shift to M2.
• Shift operational targets
• from money to interest rate
Conclusions
• Crisis affected Albanian economy immediately in
financial and real sector.
– Small open economies are at the mercy of global developments.
• Albanian economy is fully financially integrated, if not in
all markets segments and products, it is in sentiments.
– Toxic assets and/or hot money are not necessary conditions for
crisis.
• Understanding the nature and persistence of current
shocks is important not only for SR economic recovery
but also for LR policy.
– Price stability versus Financial stability;
– Monetary Policy may need to readjust to new realities.
Studies & Data
•
•
•
•
•
•
•
•
•
•
•
•
Bank of Albania, Annual Report, 2006–2008.
Bank of Albania, Monetary Policy Declaration, 2006–2009.
Dushku, E., (2008). “Financial markets development and economic growth” Bank of Albania
Working Papers, Forthcoming.
Gëdeshi, I., (2009). The relationship between migration and socio-economic changes in
Albania CSES WP, 2009
“Albania Fact Sheet”, Nexus Migration Development Initiative. Presented at the “Friday
Seminar Series” of the Bank of Albania, February 2009.
Kota, V., Elona D., Jakab, Z. M., (2007). “The Macro-econometric Model of Albania (MEAM): A
follow-up.” Monetary Policy Strategies for Small Economies, ed. Fullani A., Bank of Albania,
June 2009.
Shijaku, H., and Kliti C., “Indirect credit risk stress-testing in Albania.” Bank of Albania Working
Papers, Forthcoming
Tanku, A., Vika, I., and Gjermeni, M, (2007). “The role of the Exchange Rate in Inflation
Targeting – What do we do?” Monetary Policy Strategies for Small Economies, ed. Fullani A.,
Bank of Albania, June 2009.
Vika, I., (2006). “Measuring import and export functions in Albania.” Bank of Albania Working
Papers, March 2009.
Bank of Albania
Institute of Statistics (INSTAT)
Center for Social and Economic Studies, Tirana, Albania