Transcript Trade, capital flows and credit growth in CEE

Growth of bank credit in central and eastern Europe:
housing markets and the role of foreign-owned banks
Dubravko Mihaljek
Senior Economist
Bank for International Settlements
Presentation at the 12th Dubrovnik Economic Conference
Dubrovnik, 29-30 June 2006
The views expressed are those of the author and not necessarily those of the BIS.
1
Outline
1. Common trends in credit growth
2. Housing markets
3. Foreign-owned banks
4. Policy challenges
2
Rapid growth of bank credit to the private sector
Bank credit to the private sector, 2002-05
700
600
500
50
38
38
38
40
35
40
34
33
30
400
17
17
20
13
300
15
20
14
6
3
200
6
4
10
0
100
0
-10
SCG ROM LAT
BUL
ALB
LIT
EST TUR HUN BIH
Nominal growth (cumulative, in percent) (lhs)
SVN HRV MAK
SKA CZE POL EUR
Real growth (% per year, compound rate) (rhs)
Note: ALB=Albania, BIH=Bosnia-Herzegovina, BUL=Bulgaria, CZE=Czech Republic; EST=Estonia, EUR=Euro area; HRV=Croatia,
HUN=Hungary, LAT=Latvia, LIT=Lithuania, MAK=Macedonia, POL=Poland, ROM=Romania, SCG=Serbia-Montenegro, SVK=Slovakia,
SVN=Slovenia, TUR=Turkey.
Sources: IMF, International Financial Statistics; national data; author's estimates.
3
Determinants of rapid credit growth in CEE
 GDP and income growth, greater macro stability
 Financial deepening
 Global and regional factors (EU accession,
institutional reforms)
 Competition among banks
 Property markets in CEE/SEE started to develop
4
Macroeconomic setting (1)
5-6% growth on average since 2004
Main contribution from domestic demand (incl. investment)
Table 1
Average
New EU members
Non-EU countries
Memo: Euro area
Real GDP growth in central and eastern Europe1
2003
2004
2005
2006
4.7
5.2
4.2
0.7
6.2
5.9
6.5
2.0
5.7
6.3
5.1
1.3
5.6
6.1
5.0
2.1
1
Annual percentage changes.
Sources: European Commission, Economic Forecasts, Spring 2006; IMF, World Economic Outlook, April 2006.
5
Macroeconomic setting (2)
Inflation declining but still relatively high on average; overall, greater
price stability
Table 2
Average
New EU members
Non-EU countries
Memo: Euro area
Consumer price inflation in central and eastern Europe1
2003
2004
2005
2006
5.0
2.9
7.2
2.1
4.9
4.3
5.5
2.1
4.7
3.3
6.0
2.2
3.8
3.2
4.5
2.2
1
Annual percentage changes.
Sources: European Commission, Economic Forecasts, Spring 2006; national data.
6
Macroeconomic setting (3)
Narrowing fiscal deficits (though still large in few countries); less
crowding out of the private sector
Table 3
Average
New EU members
Non-EU countries
Memo: Euro area
Fiscal balances in central and eastern Europe1
2003
2004
2005
2006
–3.3
–3.0
–3.7
–3.0
–2.1
–2.3
–1.9
–2.8
–1.5
–1.8
–1.3
–2.4
–1.5
–2.5
–0.5
–2.4
1
Percent of GDP.
Sources: European Commission, Economic Forecasts, Spring 2006; national data.
7
Determinants of credit growth: financial deepening
(1)
Although increasing, levels of financial intermediation are still low,
including in the new member states …
Bank credit as a percent of GDP
100
Credit to the private sector
Claims on central government
80
60
50
40
72
34
26
20
45
25
0
11
10
6
12
11
31
55
46
47
42
24
14
26
28
10
11
26
21
9
13
4
5
1999 2004 1999 2004 1999 2004 1999 2004 1999 2004 1999 2004 1999 2004 1999 2004
CZ
HU
SI
LV
EE
SK
PL
LT
Sources: IMF; national data; author's estimates.
8
Financial deepening
(2)
… and even more so in south-eastern Europe (except for Croatia)
Bank credit as a percent of GDP
Claims on central government
Credit to the private sector
80
60
21
57
20
37
HR
BH
10
BG
MK
2004
1999
2004
4
TR
SCG
8
5
31
28
10
RO
2004
19
1999
27
2004
26
1999
30
6
2004
2004
1999
2004
10
24
21
2004
12
5
1999
11
1999
0
4
37
45
1999
46
20
1999
40
AL
Sources: IMF; national data; author's estimates.
9
Global and regional factors
Rapid convergence of interest rates to euro area levels
10
Competition among banks
Narrowing of intermediation margins
Representative commercial bank interest rates
Lending rate
End-2000 1
Deposit rate
End-2005 1
End-2000 1
Interbank lending rate
End-2005 1
End-2000 1
End-2005 1
Czech Republic
Hungary
Poland
Slovakia
Slovenia
6.9
12.7
20.9
13.4
15.8
5.6
8.0
6.2
6.7
7.7
3.2
9.5
15.0
6.9
10.1
1.1
5.5
2.5
2.3
3.1
5.4
12.3
19.4
8.1
12.2
2.2
6.5
4.6
3.1
4.0
Estonia
Latvia
Lithuania
7.1
13.2
11.3
4.8
5.5
5.8
4.2
4.4
3.4
2.1
2.5
1.5
6.1
8.7
5.4
2.6
2.5
3.1
Bulgaria
Croatia
Romania
Turkey
11.6
10.8
53.2
…
7.1
11.1
15.7
…
3.1
3.5
32.4
68.2
3.0
1.7
4.2
20.5
2.7
4.5
49.1
65.0
2.1
4.4
5.2
13.9
Average
16.1
7.7
13.7
4.2
16.6
4.5
4.4
3.6
2.2
2.2
4.9
2.5
Memo: Austria
1
Or the latest period available.
Sources: IMF; national data ; author’s estimates .
11
Housing markets in CEE
 Housing supply limited in many regions
 Housing demand rising
• Domestic factors (income growth, housing
finance, demographics)
• External demand for second homes in SEE
(EU demographics, low interest rates)
• Investment demand (commercial property)
 Risks of strong growth in property prices exist;
policies to focus on the supply side
12
Development of property markets
Key contribution of housing loans to credit growth
Housing loans and private sector credit growth, 2003–05
Table 2
Countries
Growth of private sector credit
1
Contribution to growth of private
2
sector credit
Household
Corporate
Total
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Romania
Serbia
Slovakia
Slovenia
Average
Household
Housing
Consumer
Corporate
Total
Housing
Consumer
28.7
8.4
11.1
40.7
12.3
16.4
27.6
30.8
25.2
3.7
40.0
63.3
16.7
32.3
56.8
28.5
53.2
67.1
64.8
61.4
35.4
105.0
114.8
23.3
39.6
64.2
26.1
60.0
68.9
67.8
…
34.9
…
51.5
13.7
23.3
34.2
44.2
42.4
3.3
42.9
…
15.6
…
50.5
22.4
10.7
45.4
40.8
43.0
59.0
50.7
48.4
27.0
78.0
49.5
62.7
89.3
54.6
59.2
57.0
41.0
49.3
51.6
73.0
22.0
17.3
24.9
69.9
47.5
43.9
35.5
40.7
46.1
…
51.7
…
32.1
37.9
19.4
7.0
15.8
6.4
0.3
3.2
…
15.2
…
22.3
53.1
55.5
30.1
43.3
55.4
41.9
15.3
1
Annual growth rate of private sector credit (excluding credit to financial intermediaries), 2003–05; in percent.
2
Data for 2005 are for the latest month available.
Percentage contribution to the annual growth rate of private
sector credit; average for 2003–05 (for Slovakia, 2004–05). Based on monthly data.
Sources: Central banks; author’s estimates.
13
Is rapid increase in property prices a concern?
Growth of housing loans and house prices closely correlated
House prices and housing loans, 1997-05 1
(annual percentage changes)
50
40
y = 0.14x + 3.5
R2 = 0.20
House prices
30
20
10
0
-20
30
80
130
180
-10
-20
Housing loans
1
Annual percentage changes; data for Croatia, the Czech Republic, Estonia, Hungary, Lithuania and Poland.
Sources: National data; author's estimates.
14
House price increases: is there a bubble?
House prices1
2001
2002
2003
2004
2005
14.7
22.0
19.4
–2.5
…
…
4.8
10.9
9.2
0.9
Poland
–1.6
–9.5
12.3
…
…
Croatia
–4.4
0.7
2.4
13.2
22.5
Estonia
34.0
30.7
14.0
28.0
21.3
Lithuania
24.0
10.1
18.3
10.1
45.3
Czech Republic
Hungary
1
Annual percentage changes. Data refer mainly to house prices in urban centres.
Sources: Central banks; real estate firms; author’s estimates.
15
Role of foreign-owned banks in credit expansion
 Impact on credit expansion – not as obvious as it seems
 Impact on credit allocation and bank efficiency – on the
whole positive
 Macroeconomic effects – some undesirable consequences
• Credit expansion funded by external borrowing
• Foreign currency lending
• Risk of overheating
• Rising household indebtedness and widening external
imbalances
16
Impact of foreign-owned banks on credit expansion
Not as obvious as it seems
Foreign-owned banks and credit growth in CEE, 1997, 2000 and 2004
Private sector credit as % of GDP
70
60
50
40
30
y = 0.075x + 25.02
R2 = 0.023
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Market share of foreign-owned banks (% of total banking sector assets)
Sources: Bank Austria - Creditanstalt; author's estimates.
17
Impact of foreign-owned banks on credit allocation
Composition of bank lending has improved
Composition of commercial bank lending1
Government
1999
Bulgaria
Croatia
Czech Rep.
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Slovenia
Turkey
Average
Euro area
21
21
6
3
43
11
29
5
35
29
22
3
19
…
2003
8
8
31
6
13
10
20
6
9
49
22
4
16
11
2
Household
Corporate
2004
–3
8
25
4
9
9
4
7
5
49
22
4
12
11
1999
65
65
83
71
49
76
62
62
62
64
52
86
66
…
2003
67
68
45
52
57
63
63
53
68
37
57
76
59
41
2004
70
42
45
50
57
59
70
46
68
34
55
71
56
41
1999
14
14
12
26
8
13
8
33
3
7
26
11
15
...
2003
25
25
25
43
30
28
17
31
23
14
21
20
25
48
2004
33
50
30
45
32
32
26
46
27
17
23
25
32
49
1
In percent of total credit, excluding interbank credit and credit to non-bank financial institutions. End of period or
2
for 2004, latest available period. Net claims on government for most countries.
Sources: Central banks; IMF; author’s estimates.
18
Impact of foreign-owned banks on bank efficiency (1)
Prudential indicators have strengthened
Prudential indicators
(in percent)
Countries
Average
High share of
foreign banks7
Lower share of
foreign banks8
Memo: Austria
2
Nonperforming
loans2
Capital
adequacy3
Loan-loss
provisions4
Return on
equity
Return on
assets
1999
2004
1999
2004
2000
2004
1999
2004
1999
2004
16.5
6.8
20.3
16.9
58.5
63.6
–0.7
14.7
–0.1
1.4
14.9
3.8
22.2
14.2
59.9
56.8
8.6
17.8
1.1
1.5
17.9
9.5
18.7
19.4
56.8
69.4
13.7
14.5
1.4
1.6
1.5
13.9
14.7
…
…
6.9
9.3
0.3
1.5
1.7
3
4
Ratio of bank provisions for loan losses to
Risk-weighted capital-asset ratios.
As percent of total loans.
7
Average for the countries with a share of foreign bank ownership higher than or
non-performing loans.
8
Average for the countries with a share of foreign bank
equal to 70% of total banking sector assets.
ownership lower than 70% of total banking sector assets.
Sources: Central banks; IMF; author’s estimates.
19
Impact of foreign-owned banks on bank efficiency (2)
Less interest income, more fee income
20
Impact of foreign-owned banks on bank efficiency (3)
Lower operating costs
21
Macroeconomic effects (1)
Clear role of cross-border loan flows in credit expansion
But household indebtedness generally low
22
Macroeconomic effects (2)
Foreign currency lending – risk of currency mismatches
Foreign currency deposits and loans, 2005
Shere in total private sector deposits/loans, in percent
90
FX deposits
82
FX loans
77
80
72
70
65
60
50
72
49
48 48
52
52
48
40
31
30
20
28
15
10
0
BG
HR
RO
SCG
BH
AL
MK
Source: Central banks.
23
Macroeconomic effects – risk of overheating?
GDP growth rates not far from potential
Investment rates at or below long-term averages
Actual and potential growth rates in CEE
New member
states
Potential
growth
rate
Actual
growth
rate
2001-05
EU candidates and
aspirants
Potential
growth
rate
Actual
growth
rate
2001-05
Czech Republic
3.6
3.6
Bulgaria
4.9
4.9
Hungary
3.4
4.0
Croatia
4.9
4.4
Poland
3.9
3.0
Romania
5.3
5.7
Slovakia
5.0
4.9
Turkey
6.7
4.5
Slovenia
3.5
3.4
Albania
6.2
5.4
Estonia
7.2
7.6
Bosnia-Herzegovina
5.4
5.0
Latvia
8.1
8.1
Macedonia
3.4
1.4
Lithuania
6.5
7.6
Serbia-Montenegro
4.7
5.1
Sources: European Commission (2006); IMF, WEO, April 2006; author’s estimates.
24
Is the widening of external deficits a concern?
 CA deficits in CEE due to factors characteristic for the
stage of development (income level, high capital building)
 During 2000-03, the increase in deficits could be entirely
explained by higher investment
 But during 2004-05, ¼ of the increase in CA deficits was
due to higher consumption (especially SK and RO)
25
CA deficits for the most part due to higher investment
Table 5
Changes in external balances, investment and saving, 2004–051
Current
account
balance
Average
Countries with
wider CA deficit2
Countries with
narrower CA deficit3
Gross fixed
capital
formation
Domestic
saving
Budget
balance
–0.6
1.4
0.8
1.8
–3.1
2.4
–0.7
2.1
1.3
0.6
1.9
1.5
1
Cumulative changes during 2004 and 2005, in percentage points of GDP.
Bulgaria, Latvia, Lithuania, Romania, Slovakia, Slovenia, Turkey.
3
Albania, Bosnia and Herzegovina, Croatia, Czech Republic, Estonia, Hungary, Macedonia, Poland, Serbia
and Montenegro.
Sources: European Commission, Economic Forecasts, Spring 2006; IMF, WEO, April 2006; author’s estimates.
2
26
Other mitigating factors
 Evidence of quick reversal of CA deficits without major
growth slowdown (AL, BG, HR 2003-04; MK; SK 2002-03)
 Consumer credit booms tend to be self-correcting (build-up
of the stock of consumer durables tends to level off)
 Purchasing power gains associated with RER appreciation
were only used for additional consumption once the gains
actually occurred, not in anticipation thereof
(Deutsche Bundesbank DP 32/2005)
27
Composition of capital flows is changing (2)
Composition of net capital flows
(In percent of total net flows, average of country groups)
80
61
60
40
43
34
37
New member states
41
48
43
South-eastern Europe
55
51
48
31
22
20
2 5
11
6 5
21
12
20
14
18
0
-20
-14
-14
-40
2003
2004
2005
2003
FDI
2004
2005 2003
Equity flows
2004
2005
Bond issuance
2003
2004
2005
Cross-border bank
loans
Sources: IMF; author's estimates.
28
Policy challenges
 Maintaining financial stability
 Avoiding risk of overheating
 Preventing property price bubbles
 Containing current account deficits
29
Factors complicating policy responses in CEE
 Very small, very open economies
 Rapidly catching up with the EU (Balassa-Samuelson effect,
RER appreciation)
 Banking systems mostly foreign-owned
 Strong capital inflows, easy global financing conditions
30
Policy responses so far
 Raise interest rates – Romania, Slovakia
 Tighten prudential regulations – Baltics, Croatia
 Strengthen banking supervision – Baltics, Hungary, Slovakia,
Slovenia
 Moral suasion – Baltics, Croatia, Hungary
 Administrative measures (credit ceilings) – Bulgaria
31
Policy responses under consideration
 Raise interest rates – there are limits to domestic interest rate
policy with low global interest rates, fixed ERs, free capital
flows, but global rates are now rising
 Retain some capital controls (non-EU countries only)
 Allow capital outflows
 Clarify existing policies:
• focus on disinflation
• allow nominal ER to appreciate (managed and floating
regimes)
 Tighten fiscal policy (already tight in many countries)
32