Transcript Liquidity Management and Forecasting

Macroeconomic Challenges
for New EU Member States:
Romania a Case in Point
by
Tonny Lybek
IMF’s Resident Representative in Romania and Bulgaria
[email protected]
at
European Policies Initiative
Open Society Institute & World Bank
Sofia
October 19, 2009
1
Agenda
 I: World Economic Outlook
 II: Regional Outlook:
 From excessive credit growth to a credit crunch
 III: The role of the IMF
 IV: Romania as a case in point
 V: Conclusion
2
I.1 Global Outlook
 Deepest global recession since the 1930’s!
 In 2009, world growth expected to decline by
1.1 percent for the first time in 60 years.
 Selected indicators:
 International trade
 Commodity prices
 Capital flows slowing down
 Type of shock: how long will it last?
 Financial shocks typically last longer
 No obvious locomotive
 Signs of recovery? Risks have moderated!
3
I.2 World Economic Outlook
Real GDP and World Trade, Annual Change in Percent
2007
2008
Time of projection:
World output
Advanced economies
United States
Euro area
Germany
France
Italy
Spain
Japan
United Kingdom
European Union
World trade volume
Imports of advanced economies
Imports of emerg. & dev. countries
Exports of advanced economies
Exports of emerg. & dev. countries
2009
April
June
Sep
2010
April
June
Sep
5.2
3.0
-1.3
-1.4
-1.1
1.9
2.5
3.1
2.7
2.1
2.7
2.5
2.3
1.6
3.6
2.3
2.6
3.1
0.6
0.4
0.7
1.2
0.3
-1.0
0.9
-0.7
0.7
1.0
-3.8
-2.8
-4.2
-5.6
-3.0
-4.4
-3.0
-6.2
-4.1
-4.0
-3.8
-2.6
-4.8
-6.2
-3.0
-5.1
-4.0
-6.0
-3.8
-4.6
-3.4
-2.7
-4.2
-5.3
-2.4
-5.1
-3.8
-5.4
-4.4
-4.2
0.0
0.0
-0.4
-1.0
0.4
-0.4
-0.7
0.5
-0.4
-0.3
0.6
0.8
-0.3
-0.6
0.5
-0.1
-0.8
1.7
0.1
-0.1
1.3
1.5
0.3
0.3
0.9
0.2
-0.7
1.7
0.9
0.5
7.3
4.7
13.8
6.3
9.8
3.0
0.5
9.4
1.9
4.6
-11.0
-12.1
-8.8
-13.5
-6.4
-12.2 -11.9
-13.5 -13.7
-9.6 -9.5
-14.9 -13.6
-6.5 -7.2
0.6
0.4
0.6
0.5
1.2
1.0
0.6
0.8
1.3
1.4
2.5
1.2
4.6
2.0
3.6
Source: Table 1.1 in World Economic Outlook, April 2009; Table 1 in World Economic Outlook Update , July 2009,
IMF; and Table 1.1 in World Economic Outlook, October 2009 , IMF.
4
II.1 Regional Outlook
 The Good Times 2003–07—Catching-up:
 Central and Eastern Europe (CEE) real GDP growth averaged 6%:
 Strong global GDP growth boosted exports of CEE.
 Capital inflows boosted domestic demand:
– Liberalized, integrated, preparing for EU accession.
– Western Banks expanded aggressively in Emerging Europe.
 Fiscal deficits reduced and public debt ratios declined:
– Except in Hungary (public debt) and Romania (fiscal deficit)
 Public finances looked much better than they were!
 Vulnerabilities building-up:
 Current account deficits widened to unsustainable levels!
 Exposures to Western European banks increased!
 Credit growth was very rapid => asset price booms;
 Much of the lending was in foreign currency
 Private sector external debt increased to very high levels!
5
II.2 Current Account Deficits Increased
6
II.3 Increasing Exposure to Western Banks
7
II.4 Much of The Lending in FX
8
II.5 Impact of The Global Crisis
 Lower external demand
 Slowdown in capital inflows:
 Foreign direct investment (FDI)
 Funding of—mainly foreign-owned—banks
 Direct borrowing by non-financial companies
 Slow-down in domestic demand:
 Uncertainty about employment
 Slower wage growth and lower remittances
 Wealth effects (asset prices)
 Some already ripe for a home-grown crisis:
 IMF has tried to stress differences in the region!
9
II.6 Regional Economic Outlook
Real GDP, Annual Change in Percent
2007
2008
Time of projection
Baltics
Estonia
Latvia
Lithuania
2009
April
June
Sep
2010
April
June
Sep
… -14.0
… -18.0
… -18.5
-1.0
-2.0
-3.0
…
…
…
-2.6
-4.0
-4.0
-3.3
-0.7
…
…
-6.7
1.0
-0.4
1.3
…
…
-0.9
2.2
-3.5
-3.5
-4.1
-7.0
…
-8.0
-6.5
-5.2
-8.5
-1.0
0.3
0.0
-2.5
…
1.7
-2.5
0.4
0.5
7.2
10.0
8.9
-3.6
-4.6
3.0
-10.0
-12.0
-10.0
Central Europe
Hungary
Poland
1.2
6.8
0.6
4.9
Southeastern Europe
Bulgaria
Croatia
Romania
6.2
5.5
6.2
6.0
2.4
7.1
Source: Table 2.4 in World Economic Outlook, April 2009; Table 1 in World Economic Outlook Update ,
July 2009, IMF; and Table A4 in World Economic Outlook, October 2009, IMF.
10
III.1 The Role of The IMF
 Mitigating the impact of the global crisis:
 Reform of IMF facilities:
 Streamlining conditionality:
– Focus on macroeconomic stability
– Reduce detailed structural conditionality
 Adjust set of facilities:
– Introduce Flexible Credit Line (FCL)
– Enhance Stand-By Arrangement (SBA)
 Increase access to funding
 Further encourage policy coordination:
 Macroeconomic policies
 Financial sector regulation
11
III.2 IMF Lending Activities
IMF Lending Arrangements, September 30, 2009
Member
Belarus
Bosnia and Herzegovina
Hungary
Iceland
Latvia
Romania
Serbia
Ukraine
Poland
Total Europe
Total
Date of
Expiration Total Amount Undrawn
Outstanding
Arrangement
In billions of SDR
SBA
SBA
SBA
SBA
SBA
SBA
SBA
SBA
FCL
12-Jan-09
8-Jul-09
6-Nov-08
19-Nov-08
23-Dec-08
4-May-09
16-Jan-09
5-Nov-08
6-May-09
o/w Europe in percent
11-Apr-10
30-Jun-10
5-Apr-10
18-Nov-10
22-Mar-11
3-May-11
15-Apr-11
4-Nov-10
5-May-10
2.3
1.0
10.5
1.4
1.5
11.4
2.6
11.0
13.7
55.5
108.8
1.3
0.8
2.9
0.8
0.8
5.4
1.9
4.0
13.7
31.7
79.1
1.0
0.2
7.6
0.6
0.7
6.1
0.7
7.0
0.0
23.8
30.3
51.0
40.0
78.6
Source: International Monetary Fund.
Note: 1 SDR = 1.08200 €
12
IV.1 Romania: A Case in Point
 Global crisis made it increasingly
difficult to secure external financing:
 Large short-term private debt
 Large fiscal imbalances even in good
years, make financing challenging
during a recession
=> Emerging credibility problem!
=> In need of a “safety belt”!!
13
IV.2 Romania’s Package
 Joint package supporting Romania’s program!
 Size of the “safety belt” (€20 billion over 2 years):
 IMF: May 4; 24-month Stand-By Arrangement with exceptional access
€12.95 billion (1110.77% of quota). Interest rate about 3½% and
repayment over 3–5 years.
 EU*: May 5; ECOFIN Council approved the framework for a €5 billion
loan, a maximum of five installments over 24 months (on top of preand post-accession funds and the advance payment of structural
funds in 2009). Interest rate is libor + spread and an “average maturity
of maximum 7 years”.
 World Bank*: 2009–10, 3 DPLs of total €1 billion. Interest rate will
depend on the maturity, currency, and if fixed or floating rate.
 EBRD and other multilateral IFIs (EIB): various projects, about €1
billion.
*Also budget support
14
IV.2 Romania’s Economic Program
 Foreign banks committed to maintain exposure
 Government addresses fiscal imbalances:
 Fiscal consolidation: ensure sustainability!
 Improve fiscal governance: ensure predictability!
 NBR continues to maintain sound banking system:
 Ensure prompt and early action
 Price stability remains primary objective of
monetary policy
=> Reduce uncertainty and “noise”!
=> Facilitate more efficient financial intermediation!
15
IV.3 Ensure Fiscal Sustainability
 Budget deficits: March adjustment
 2009
 2010
 2011




1.1% of GDP
August adjustment 0.8 % of GDP
March
August
-4.6%
-7.3%
-3⅔%
-5.9%
better than-3%
-4.3%
Public salaries
Vulnerable groups
Arrears of general government
Government guarantees
 Balance following factors:
 Back on a sustainable path
 Realistic financing
 Avoid excessive cuts exacerbating the recession
16
IV.4 Ensure Fiscal Predictability
 Tax administration
 Restructuring of public sector
 *Public compensation reform (“unitary public pay law):




Simplified pay scale, reduce reliance on bonuses
More transparent
Equity
Save resources
 Better monitoring of public enterprises
 *Fiscal responsibility act:
 Multi-year budgets
 Independent fiscal council
 Local governments and self-financed units
 *Pension reform:
 Broaden coverage
 Index to inflation instead of wages
 Increase gradually the retirement age
* New legislation
17
IV.5 Market Reactions
1400
EURNM CDS Spreads 5-year
(In basis points)
Bulgaria
Czech Republic
Estonia
Latvia
Lithuania
Hungary
Poland
Romania
Slovak Republic
1200
1000
800
600
400
200
0
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
18
V Conclusion
 Global financial crisis is deep!
 The IMF is mitigating the crisis by:
 Providing financing to smooth the adjustment:
– Should not be an excuse to delay structural reforms!
 Functioning as an external anchor provided authorities
are committed!
 Further encourage global policy coordination:
 Macroeconomic policies
 Financial sector regulation
 Adjustments are necessary:
 Credible, sustainable, and predictable fiscal policies
 Prudential regulation allowing adequate buffers
19
Thank
you
very
much
for
your
attention
20