Transcript Markets price in recovery in 2002

BULGARIA in 2015
Charles Robertson, Chief EMEA economist
[email protected]
+44 20 7767 5310
Elena Ganeva, Research Analyst
[email protected]
+359 2 917 6720
Best EMEA economics team 2004 Institutional Investor (March 2004)
October 2005
A presentation in two parts
 Part I
 Part II
EU entry, Euro adoption and an exit strategy
2005-2015 - Investing in the future
ING Bank N.V. – Sofia Branch
2
New Europe 2005
Estonia 2004
Latvia 2004
Lithuania 2004
Poland 2004
Czech Republic
2004
Slovakia
2004
Hungary 2004
Slovenia
2004
Croatia 2010+
Romania 2007
Bulgaria 2007
Turkey 2014+
EU members 2004
EU members 2007
In EU negotiations since 2005
Possible EU candidates
Not EU candidates
ING Bank N.V. – Sofia Branch
3
EU accession, the Euro and exit strategies
 EU entry 2007 and
 Euro adoption 2010
 Exiting the currency board into the euro
 Bulgaria has an exit strategy: euro adoption by 2010 – around
the same time as Hungary, Poland, Czech Republic and
Slovakia.
ING Bank N.V. – Sofia Branch
4
Timing: The EU and the Euro
Entry
applicatio
ns
Negotiatio
ns begun
EU
entry
EU MEMBERS (since 1960) and those in negotiations
Denmark
1961/67/71
1973
Ireland
1961/67/72
1973
UK
1961/67/71
1973
Greece
1975
1976
1981
Spain
1977
1979
1986
Portugal
1977
1978
1986
Austria
1989
1993
1995
Sweden
1991
1993
1995
Finland
1992
1993
1995
Cyprus
1990
1998
2004
Czech
1996
1998
2004
Republic
Estonia
1995
1998
2004
Hungary
1994
1998
2004
Poland
1994
1998
2004
Slovenia
1996
1998
2004
Malta
1990/98
2000
2004
Latvia
1995
2000
2004
Lithuania
1995
2000
2004
Slovakia
1995
2000
2004
Bulgaria
1995
2000
Jan-07
Romania
1995
2000
2007-08
NOT IN NEGOTIATIONS
Croatia
2003
2006
2010-11
Turkey
1987
2005
No (2014)
Albania
2007
2011
2014-2018
Macedonia
2004
2006-07
2011-15
Bosnia
2010-11
2013
2015-2018
Serbia
2008
2010
2014-18
Montenegro
ERM
membership
1979?
1979
(Oct 90-Sep 92)
Mar-98
Jun-89
Apr-92
Jan-95
Euro
adoption
Currenc
y
Oct-96
Apr-05
1999
2008-09
Kroner
Euro
Pound
Euro
Euro
Euro
Euro
Krona
Euro
Pound
2007-11
2010-14
Koruna
Free-float with euro reference
Jun-04
2007-2011
2006-2010
Jun-04
Apr-05
Apr-05
Jun-04
2006
1H 2007
2008+
2007-08
2010-14
2009-13
2007
2008
2008
2007
2009
2010
2012-13
Kroon
Forint
Zloty
Tolar
Lira
Lat
Litas
Koruna
Lev
Leu
ERM currency board to euro
Peg to euro with 15% bands
Free-float
ERM Peg to euro 15% bands
ERM Peg to euro 15% bands
ERM Peg to euro 15% bands
ERM Peg to euro 15% bands
Managed float with euro reference
Currency board to euro
Managed float to euro
2010+
No (2015)
2015+
2015+
2015+
2015+
2013+
No (2018)
2017+
2017+
2017+
2017+
Kuna
Lira
Lek
Denar
Marka
Dinar
1999
2001
1999
1999
1999
2008
2010
2014-2018
2015+
2000
Euro
Ukraine
2009
Italics = forecasts
Source: EU Commission, ING
2010
2017-2020
2017+
2020+
Hryvnya
ING Bank N.V. – Sofia Branch
Regime
5
ERM peg to euro with 2.25% bands
N/A
Free-float
N/A
N/A
N/A
N/A
Free-float
N/A
ERM Peg to euro 15% bands
Managed float vs euro
Free-float
Managed float vs euro
Tightly managed float vs euro
Currency board to euro
Free-float with euro reference
(Deutschemark adopted as only
legal tender in Nov 2000)
Managed float vs US dollar
Central
parity
rate
7.46
0.585
15.65
282.0
239.6
0.429
0.703
3.45
1.96
1.96
1
What is convergence?
 Convergence is an over-used term. Initially it referred simply to
convergence to the Maastricht criteria, with implications for bond
and equity investors resulting from converging interest rates to
low German levels.
 But, convergence has also been associated with political,
regulatory and macro-economic convergence towards west
European levels.
 We are confident that Bulgaria and Romania are convergence
countries; Turkey and Ukraine also offer potential convergence
gains if they join both the EU and Euro.
ING Bank N.V. – Sofia Branch
6
External debt compression
 In 2002 Bulgaria paid up to 4pps more than
Eurobond spreads over Bunds (bps)
Germany to borrow on the international
Lithuania, Slovakia and Poland lagged by 2 years and 8 months
capital markets, now it pays less than 50bp
500
more
450
 Over a two- year time horizon Bulgaria
400
350
should trade through current new EU
300
members like Poland or Hungary as it is
250
likely to adopt the euro earlier
200
 Today 10Y Eurobonds of the new EU
150
member states trade at some 20bps over
100
Bunds, 10-15bps tighter than a year ago
50
Bulgaria'13
Romania'12
Slovakia'10
Poland'10
ING Bank N.V. – Sofia Branch
Mar/07
Sep/06
Mar/06
Sep/05
Mar/05
Sep/04
Mar/04
Sep/03
Mar/03
Sep/02
Mar/02
0
Lithuania'08
7
Maastricht criteria
Criteria cannot be met before 2008
Timetable - How quickly after EU entry can
a country join the Euro
€ minus 2+ years
Join ERM - possible only after EU entry
(eg, Jan-Feb 2007)
€ minus 12 months
Budget/debt criteria
(eg, 2008)
€ minus 7-11 months
CPI/interest rates criteria
(eg, mid-2009)
Enter
€
(eg. 1 Jan 2010)
ING Bank N.V. – Sofia Branch
•Exchange rate mechanism (ERM)
membership for two years. Note Estonia
joined in June 2004, less than two
months after joining EU in May 2004.
•The budget deficit must be no more
than 3% of GDP.
•Long-term (ten-year) interest rates must
be within 2% of the average of the three
EU countries used in inflation criterion –
this will be done by the markets
whenever they see EU entry as credible.
•Inflation within 1.5% of the best three
EU countries record on price stability
(ie, around 2.0-2.5%).
•Government debt (internal and external)
must be no more than 60% of GDP, or
falling towards this level.
•Central bank must be independent.
8
Maastricht criteria - public debt
Public debt – an easy one
• Government debt (internal and external) must be no more than 60% of GDP, or falling towards this level.
• Both first and subsequent EU enlargement countries tend to have low debt (public debt, external and internal),
decreasing the risks of a financing crisis, with the exception of Turkey.
• In 2002-04, all central/east European applicants had a public debt to GDP ratio below the 60% level, unlike the
Eurozone, where the average ratio was 70% of GDP in 2004 (half the Eurozone was below 60%).
2004 Public debt (% of GDP)
100
80
60
40
20
ING Bank N.V. – Sofia Branch
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Maastricht criteria – long bonds
10Y local spreads over bunds – when the market believes it happens
• Long-term (ten-year) interest rates must be within 2% of the average of the three EU countries with the lowest
inflation - the markets do this when they see euro entry as credible. Italy, Spain and Portugal all met this criterion
in early 1997, one full year before it was necessary.
• However, we can see volatility in the meantime. In central Europe, spreads were around 200bp in 2002-03, but
have since risen to above 400 in Hungary.
•
Bond yields in Bulgaria are already close to Eurozone levels because of currency board arrangement
900
Italy
Greece
700
Czech (2001 +)
Poland (2001+)
600
Bulgaria (2004+)
800
500
400
300
200
100
ING Bank N.V. – Sofia Branch
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A03
A02
A01
A00
A99
A98
A97
A96
A95
A94
A93
-100
A92
A91
0
Maastricht criteria – budget deficit
Budget deficit – more difficult – will governments do it?
2004 Budget balance
Turkey
Poland
Hungary
Croatia
Czech
•The budget deficit must be no more than
3% of GDP. Unlike Italy or Greece,
candidate countries do not have very
high debt levels and apart from Hungary,
they do not pay high interest rates either.
So less easy to cut the deficit simply via
fall in interest rates. But growth is faster
than it was in EU in mid-1990s.
Maastricht
Ukraine
Serbia
Romania
Bulgaria
Budget deficit (% of GDP)
0
-2
-4
-6
-8
-10
Italy (1999) Spain (1999)
Russia
-8
-7
-6
-5
-4
-3
-2
-1
ING Bank N.V. – Sofia Branch
0
1
2
Euro - 5
Euro - 3
Euro - 1
3
11
Portugal
(1999)
Greece
(2001)
Euro - 4
Euro - 2 (Maastricht)
Year of Euro adoption
Maastricht criteria
Inflation – only needs to be met once
• Inflation within 1.5% of the three EU countries showing best price stability (this excludes deflation countries) so
on past precedent the range could be 2.0-4.2%
Lowest average CPI and EU and Maastricht limit
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1991
1992
1993
1994
1995
1996
1997
1998
Inflation rate of low est three EU members
ING Bank N.V. – Sofia Branch
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1999
2000
2001
Maastricht upper limit
2002
2003
2004
Maastricht criteria CPI Part II
Many countries joining the EU have lower inflation than existing Eurozone inflation
countries, we urge the EU to only consider the Eurozone countries when setting the
inflation and long-bond criteria.
ING Bank N.V. – Sofia Branch
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Eu
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14
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12
11
10
9
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6
5
4
3
2
1
0
-1
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2004 average inflation
2007-15: EU entry and its effects
 While financial markets focus on euro adoption – and falling interest rates/currency stability –
as the biggest consequences of EU enlargement, Bulgaria already has low interest rates and a
stable currency. Euro adoption will secure these gains, but the boost to Bulgaria may be less
than elsewhere.
 However, EU enlargement and euro adoption is not just an issue of interest rates. Other gains
include:
 Free movement of labour – likely to improve from 2007 and be free of restrictions by
2014.
 Recognition of qualifications.
 For the economy, the benefits include:
 Huge EU transfers to the Bulgarian economy.
 Free trade and cheap wages encouraging investment.
 In addition, we can assume continuation of the lending boom.
ING Bank N.V. – Sofia Branch
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New Europe 2015
Serbia 2015+
FYROM 2015++
Turkey 2014+
EU members 2004
EU members 2007
In EU negotiations since 2005
Possible EU candidates
Not EU candidates
ING Bank N.V. – Sofia Branch
15
Bulgaria may receive €2bn annually by 2015
• One big benefit of joining the EU is the
money that comes from EU membership usually 3-4% of GDP each year for the
poorest members. EU GDP was €9,324bn
in 2003 and the EU budget was €100bn
but EU spending on new countries was
only €4bn (Bulgaria received roughly
€0.4bn).
EU budget spending by country in 2000
(EURbn)
Austria and
Ireland 4.0
10 new entrants
3.3
France
12.2
• But in 10 years time, perhaps €40bn of the
Benelux 4.3
€160bn EU budget (1% of 2015 EU GDP),
will be spent on new countries.
Sweden,
Finland,
Denmark 4.2
Portugal
3.2
• If Bulgarian GDP in 2010 is €33bn, then
Spain
10.9
3% of GDP would imply €1.0bn annually. If
Bulgarian GDP in 2015 is €47bn, then 4%
of GDP would imply €1.9bn in annual flows
– just over 1% of the EU budget.
Greece
5.6
UK
7.8
Italy
10.8
• This flow - via the current and capital
Germany
10.2
ING Bank N.V. – Sofia Branch
account - will boost infrastructure and
growth.
16
Fitting into the EU
How big are these countries’ % of EU27 GDP/population in 2004
 Receiving 1% of the budget would be much larger than Bulgaria’s economic weight would
suggest - which in 2004 was just 0.2% of EU-27 GDP. However, with 2% of the EU population, 1%
of the budget is arguably less than it should receive.
 The government can use its population weight in EU voting, to help win EU financial support.
EU27 GDP
Finl/Irel/Lux
3%
EU27 Population
Finl/Ire/Lith
Slovakia/
3%
Denmark 2%
Romania 1% Bulgaria
0%
Denmark 2%
Greece/Port
3%
Poland 2%
Austria 2%
9 entrants 3%
0%
Germany
17%
Austria 2%
Bulgaria 2%
Sweden 2%
Portugal 2%
Hungary 2%
Belgium 2%
Czech 2%
Greece 2%
Netherlands
3%
Romania
5%
Germany
21%
Sweden 3%
Belgium 3%
Netherlands
5%
Spain
8%
Latv/Slove/Est
1%
Cyp/Lux/Mal
UK
15%
UK
12%
Poland
8%
Italy
13%
ING Bank N.V. – Sofia Branch
France
12%
Spain
8%
France
16%
17
Italy
12%
Fitting into the EU - Politically
Number of votes each country has/will have in the EU Council
 In 2007 when Bulgaria enters the EU, new EU
France, Germany, UK, Italy
29
members will account for 22% of the population,
Spain, Poland
27
32% of the votes (based on the Nice treaty - see
Romania
15
left) … and 32% of the EU budget?
Netherlands
13
 Bulgaria will have 2.9% of the EU votes … 2.9%
Belgium, Czech Republic ,
Greece, Hungary , Portugal
12
Austria, Bulgaria , Sweden
10
Denmark, Finland, Ireland,
Lithuania , Slovakia
Cyprus , Estonia , Latvia ,
Luxembourg, Slovenia
Malta
of the EU budget in 2007 could be €2.7bn
 Current EU constitution requires 55% of countries
with 65% of population to approve. Proposed but
7
not ratified changes suggested majority voting
instead. (Bulgaria – 1 of 27 countries means 4% of
4
3
EU votes, but this is influenced by the 2% weight
of population)
NB : We assume Turkey would have 29 votes
and Croatia 7 votes
ING Bank N.V. – Sofia Branch
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Investment via the banking sector
Increasing indebtedness, Greece from 34%/GDP to 74%/GDP
 Until the late 1990s it was
Lending to private sector as % of GDP (1995)
140
120
100
80
60
40
20
0
not possible for
households to be indebted,
and lending to corporates
was unsafe and sometimes
politically motivated.
R
U
S
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C
(9
8)
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(9
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 Lending fell sharply after
1996, but is now growing
strongly, up 10% of GDP in
just 2004 alone.
Lending to private sector as % of GDP (2004)
180
160
140
120
100
80
60
40
20
0
 The credit boom will be the
single biggest factor
driving economic growth in
the next 5 years, but also a
factor widening the current
account deficit. The
U
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R ey
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G e
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Sl ce
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government must aim to
ING Bank N.V. – Sofia Branch
19
compensate for this by
reducing its debt level.
It is a healthy banking sector
• Bulgaria has a healthy financial sector. Privatisation has brought in
significant funds for Bulgaria, helping offset the current account deficit.
Foreign ownership has also brought in expertise and advanced banking
products. Foreign banks are less likely to suffer liquidity squeezes as
they have easy and relatively cheap access to funds.
Bank
Main foreign shareholder
Initial amount paid
Milestones
DSK
OTP (100%)
€311m
Bulbank AD
UniCredito Italiano (85.2%)
US$ 325m
United Bulgarian
Bank (UBB)
NBG (99.9%)
US$ 207m / 21m
Est 1951, priv 1 Oct
03
Est 1964, purch
2000
Est 1992, purch
2000/02, priv 1997
Raiffeisenbank
Bulgaria
First Investment
Bank
Biochim Bank
Raiffeisen International Bank
Holding - 100%
EPIC (20%), EBRD (20%), 2
Bulgarian businessmen
Bank Austria CA (99.6%)
-
€1,144m
-
€1,140m
ING Bank N.V. – Sofia Branch
€83m
20
Est 1987, purch
2002
Asset value as of
1Q04
€2,028m
€1,689m
€1,383m
€1,120m
Wages data – 2004 and 2005 implied
 Wages in Bulgaria are roughly 10% of the level in the EU, and 35-40% of the levels in central Europe.
In nominal terms, the difference in wages between the EU and Bulgaria is now 25 Euros per hour,
compared to 22 Euros per hour in 2000. It has grown wider, making Bulgaria relatively more attractive
than previously.
 Wages have risen to 2 Euros per hour in Bulgaria, up 45% over four years. While rapid, it is slower
than rises in central Europe of up to 85% in Hungary.
 With central Europe now in the EU, foreign direct investors start looking farther afield for cheap
manufacturing bases for Bulgaria.
 However, investors also go to countries with the best infrastructure and this is where EU cash is vital for
Bulgaria.
WAGES IN EUROS
SINCE 2000 (%ch)
WAGES SINCE 2000
2004
2005F
2004
2005F
2004
2005F
EU
25.7
27.0
13.3
18
3.0
4.3
Czech Republic
5.7
5.8
45.5
47.5
1.8
1.9
Hungary
6.7
7.3
75.5
84.0
2.9
3.5
Poland
4.7
4.9
4.6
8.6
0.2
0.4
Slovakia
4.4
4.7
45.0
52.0
1.4
1.7
Bulgaria
1.9
2.0
40.8
43.8
0.6
0.7
Romania
1.3
1.8
29.7
62.2
0.5
0.9
ING Bank N.V. – Sofia Branch
21
PPP implies stable/stronger currencies
Implied PPP currency over/undervaluation
1.8
Cheap
Expensive
1.6
1.4
(baskets)
1.2
1.0
0.8
0.6
0.4
0.2
UK
US
ain
Sp
nd
lga
ria
Ph
ilip
pin
es
Cz
B
r
ec
h R azil
ep
ub
lic
Hu
ng
ary
So
uth
Afr
ica
Ka
za
kh
sta
n
Ro
ma
nia
Ch
Ru
ile
ss
ia
(re
g)
Isr
ae
l
Ta
iwa
Ho
n
ng
Ko
ng
Tu
rke
y
Ru
ss
ia
Bu
ia
Po
la
na
va
k
nti
Slo
xic
o
Ar
ge
Me
ina
rai
ne
Uk
Ch
Ind
ia
0.0
• Lastly it is worth noting that the currency does not appear to be overvalued.
• ING’s own purchasing power parity basket of goods (23 imported and local
products) shows how much lower prices are in Sofia, Warsaw, etc compared to
Madrid in Spain, a relatively cheap EU member state.
• With prices in Sofia for these goods 27% cheaper than in Madrid, the currency
does not look overvalued.
ING Bank N.V. – Sofia Branch
22
Conclusions
Keeping fiscal policy tight is the best way to support growth
 Responsible fiscal policies have allowed Bulgaria to reduce debt levels, both external debt
and public debt levels, contributing to falling interest servicing costs.
 The EU accession process has also been supportive and remains so.
 Prospective euro adoption in 2010 should ensure debt servicing costs will continue to fall,
while also providing an “exit strategy” for Bulgaria.
 EU accession means big financial transfers to Bulgaria, helping the balance of payments
while boosting investment and making Bulgaria more attractive for FDI.
 A healthy privatised and foreign owned banking sector should boost consumption and
investment, fuelling growth.
 Cheap wages and free trade with the EU should see Bulgaria further integrate in the EU
economy and attract more foreign direct investment.
 But future stability requires governments to stick to the responsible fiscal policies of recent
years and try to restrain the current account deficit.
ING Bank N.V. – Sofia Branch
23
EU – less forgiving political climate
The risk of delay is some 20% for Bulgaria and 35% for Romania
 Romania and Bulgaria hope to enter EU in 2007
 Safety clauses that could delay the entry till 2008 concentrate on
Justice
Environment
Home affairs
 October EU report will shed some light on the likely entry dates
but the final decision will likely be taken in 2006
 From economic point of view the result of delayed EU accession
is not necessarily a clear cut – less money from convergence
funds but one more year to prepare better.
ING Bank N.V. – Sofia Branch
25
Population 2004
Population can give
Lithuan
4m
Est
1m
some idea of potential.
The great untapped
markets in EMEA
Russia
143m
Poland
39m
Czech Rep
10m
Latv
2m
appear to be outside
Ukraine
47m
the 1st convergence
Kazakhstan
15m
Slovakia
5m
group, like Ukraine and
Egypt.
Hungary
10m
Romania
22m
Slov
2m
Each square
represents 1.5m
Bulgaria
8m
people.
Turkey
70m
Croatia
5m
Israel
6m
EU members 2004
EU members 2007
In EU negotiations from 2005
Egypt
78m
South Africa
44m
Possible EU candidate
Not EU candidates
ING Bank N.V. – Sofia Branch
26
GDP 2004
This map shows
Est
$11b
Latv
$14bn
EMEA countries in
terms of GDP, with
Lithuania
$22bn
Poland
$246bn
each square worth
Russia
$583bn
US$4bn.
Ukraine
$65bn
The disproportionate
Kazakhstan
$41bn
Slovakia
$42bn
Czech Republic
$108bn
population) of the new
Romania
$74bn
EU entrants highlights
Israel
$118bn
Hungary
$101bn
EU members 2004
Note France’s nominal
Turkey
$302bn
GDP in 2004 was
Croatia
$35bn
around US$2,050bn,
South Africa
$215bn
EU members 2007
In EU negotiations from 2005
Possible EU candidate
similar to the
US$2,111bn total.
Egypt
$78bn
Not EU candidates
ING Bank N.V. – Sofia Branch
the positive impact of
convergence on GDP.
Bulgaria
$24bn
Slovenia
$32bn
size (compared to
27