Transcript Some pertinent questions!

Dynamics of macroeconomic
stability and financial stability
Dr. Shamshad Akhtar
Governor
State Bank of Pakistan
January 14, 2008
Outline
I.
Conceptual Macroeconomic Framework and its
Interrelationships
II. Trends in Growth, Money and Prices
III. Financial Trends and Stability
2
Saving-Investment Gap and CAB
1. GDP = C + I + X – M
2. GDPNI = C + I + [X - M + YF + TRF]
CAB
3. GDPNIP + GDPNIG = CP + CG + IP + IG + CAB
4. GDPNIP - CP - IP + GDPNIG - CG - IG = CAB
SP
SG
5. [SP - IP] + [SG - IG] = CAB (or -SF)
How Saving-Investment gap is
financed?

Private sector can finance through
― Net foreign borrowing
― Loans from domestic banking system
― Net foreign direct investment

Government can finance the deficit by
― Borrowing from domestic banking system
― Selling bonds/bills
― Obtaining net foreign borrowings
CAB and Money supply

M2 = NFA + NDA
So

DM2 =
+
DNFA
[BoP]
D credit to government [Fiscal]
+
D credit to non-govt
[Real]
+
D OIN
Interrelationships Among Macroeconomic Accounts
REAL SECTOR
National Accounts
Private consumption
General government consumption
Private investment
General government investment
Exports of goods and nonfactor
services
Imports of goods and nonfactor
services
CENTRAL GOVERNMENT
Revenues
Grants
Expenditures
Current
Capital
Overall balance
Financing
Domestic financing (net)
Banking system
Nonbanking sector
External financing (net)
MONETARY SECTOR
EXTERNAL SECTOR
Monetary Authorities
Balance of Payments
CURRENT ACCOUNT
Exports of goods and nonfactor
services
Imports of goods and nonfactor
services
Factor services (net)
Transfers (net)
Official
Private
CAPITAL ACCOUNT
Direct investment
Medium/long-term capital (net)
Short-term capital (net)
Overall balance
Change in net foreign assets
Accounting identities
Strong accounting relationships
Net foreign assets
Net domestic assets:
Net credit to central govt..
Credit to banks
Other items (net)
Reserve money
Deposit Money Banks
Net foreign assets
Banks' reserves
Net domestic assets:
Net credit to central govt.
Credit to private sector
Other items (net)
Liabilities to monetary
authorities
Private sector deposits
II. Growth, Monetary Policy and
Inflation Dynamics
Long Term Trends in Inflation and GDP Growth
GDP
14.0
Inflation
High Inflation
12.0
10.0
8.0
6.0
4.0
Low Growth
2.0
FY07
FY04
FY01
FY98
FY95
FY92
FY89
FY86
FY83
FY80
FY77
FY74
FY71
FY68
FY65
FY62
FY59
FY56
0.0
Note: the trends are for 10-year moving averages.
8
After a loose monetary policy stance from FY02FY04… SBP had to enter into monetary tightening
phase
SBP 3-Day Repo Rate
24
20
Loose Monetary
Stance
12
8
Tight Monetary
Stance
4
Dec-07
Mar-07
Jun-06
Sep-05
Dec-04
Mar-04
Jun-03
Sep-02
Dec-01
Mar-01
Jun-00
Sep-99
Dec-98
Mar-98
Jun-97
0
Sep-96
percent
16
9
Monetary stimulus played a significant
role in growth revival…
FY07
FY06
FY05
FY04
5-years average
FY03
FY02
FY00
FY99
FY98
FY97
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
FY01
Real GDP growth
FY96
percent
Real GDP Growth
10
Growth picked-up – however, with money supply growth
outpacing nominal GDP growth CPI rose from 3.5% in FY02 to
9.3% in FY05
Inflation & Monetarty overhang
Monetary overhang
Inflation (rhs)
15.0
9.0
13.0
11.0
9.0
5.0
7.0
3.0
5.0
1.0
3.0
1.0
-1.0
-1.0
-3.0
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
FY96
FY95
-3.0
FY94
percent
7.0
11
Food prices are still a major source of volatility and recent price
hike; tight monetary policy helped in arresting demand driven
inflation as reflected in core inflation
Trends in Inflation (YoY)
Core (Non Food & Non Energy)
16
Core (20% trim)
Food
14
percent
12
10
8
6
4
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
Sep-06
Jul-06
May-06
Mar-06
Jan-06
Nov-05
Sep-05
Jul-05
May-05
Mar-05
Jan-05
2
12
Several Monetary Policy measures have been
taken to contain inflation since FY05

Changes in policy rate (i.e. SBP 3-day REPO rate):
– from 7.5% to 9.0% in April 2005;
– from 9.0% to 9.5% in July 2006;
– from 9.5% to 10.0% in July 2007.

Changes in CRR and SLR
– Current CRR are: 7% for demand & time liabilities of less than one
year;
– Earlier CRR were 3% for time liabilities above 6 month maturity and
7% for demand and less than 6 months time liabilities;

Aggressive liquidity management through OMOs
13
Monetary tightening partly diluted due to SBP refinancing schemes and high government borrowings;
both issues addressed in FY08…
Reserve Money Flows (cumulative) during FY07
Rise in NFA due to receipt of external
financing by the government, though
substantially sterilized
250
Rise in RM due to
subsidized financing
200
100
50
0
SBP NFA
Reserve money
Jun
May
Apr
Mar
Feb
Jan
Dec
Nov
Oct
Sep
Aug
-50
Jul
billion Rupees
150
SBP NDA
14
Rising international food and oil prices
remain key risk for FY08…
While monetary policy is ready to contain demand pull
inflationary pressures, cost push factors may pose threat to
price stability in FY08.
Among others, the key problems are:
1. Rising global commodity prices, in particular steep uptrend
in international oil prices.
2. Domestic agriculture crops outcome (particularly wheat,
sugarcane & gram) during FY07 was good. However poor
demand-supply management has led to crisis situation in the
country.
3. Rising per capita incomes, but shortages emerged because of
fluctuations in productive sectors or problems with
15
distribution of commodities.
Measures to further arrest inflationary
trends…
 Besides increase in SBP policy rate, SBP recommended the
government to retire SBP debt in FY08 (by Rs 62.7 billion) to
ease reserve money growth
 Introduced policy to reduce commercial banks’ reliance on
refinance facilities (envisaged a 30 percent reduction in
outstanding refinance at end June 2007 during FY08 without
affecting the overall availability of credit to the exporters).
 Stepping forward towards a more market based credit
allocation mechanism the age old credit planning exercise
has been abandoned completely.
 SBP has been encouraging long term paper issuance with
regular frequency to transfer government reliance from SBP
to private financing sources
16
Growing macroeconomic Imbalances are now posing
renewed challenges

July-November data reveals that both fiscal and external
account deficit will be higher than original projections.

Borrowing from central bank to finance budget is
significant and such borrowing is likely to augment
inflationary pressures since output will be impacted by
the recent disruptions.

The central bank will have to take appropriate measures
to further contain demand pressures augmented by
fiscal and external deficits.

Extent of monetary tightening would depend on fiscal
restraints.
FINANCIAL SECTOR STABILITY
Financial Sector is bank dominated…
Composition of Financial Sector Assets
Percent share in Assets
80
70
60
50
40
30
20
CY00
Banks
CY01
CY02
CY03
CY04
CY05
CY06
Others
19
At present the banking sector is
predominantly owned by private sector…
Ownership Structure of the Banking Sector
90
70
60
50
40
30
20
PSCBs
H1-CY07
CY06
CY05
CY04
CY03
CY02
CY01
10
CY00
percent of total assets
80
LPBs
20
Foreign stake is rising in Pakistan’s
banking sector…
Position of Shareholding
80
70
percent
60
50
40
30
20
10
0
CY04
Pakistani
CY05
CY06
Foreign
21
Banking sector assets are growing
rapidly…
Assets of the Banking System
58
56
52
50
48
46
44
42
H1-CY07
CY06
CY05
CY04
CY03
CY02
CY01
40
CY00
percent of GDP
54
22
Encouragingly rapid growth is accompanied
with improvement in asset quality…
Banks’ Non-Performing Loans
25
20
10
5
Net NPLs to Net Advances
H1-CY07
CY06
CY05
CY04
CY03
CY02
CY01
0
CY00
percent
15
NPLs to Advances
23
Increased capital requirement, with improved asset
quality, has enhanced soundness of financial
sector…
Indicators of Capital Adequacy
16
14
10
8
6
4
CY06
CY05
CY03
CY04
Tier 1 capital to RWA
H1 -CY07
CAR
CY02
CY01
2
CY00
percent
12
24
Banks are well capitalized…
Net NPL to Capital Ratio
160
80
40
H1 CY07
CY06
CY05
CY04
CY03
CY02
CY01
0
CY00
percent
120
25
Banks’ profitability has reached an all
time high…
After Tax Return on Assets
2.5
2.0
1.0
0.5
0.0
-0.5
H1-CY07
CY06
CY05
CY04
CY03
CY02
CY01
-1.0
CY00
percent
1.5
26
The 2.1 percent ROA during CY06 is significantly
higher than the international norms of around 1.0
percent….
Table: Return on Assets
percent
CY01
CY02
CY03
Pakistan
-0.5
0.1
1
Bagladesh
0.7
0.5
0.5
India*
0.5
0.8
1
Korea
0.7
0.6
0.2
Singapore
1
0.8
1.1
Thailand
1.5
0.2
0.7
SriLanka
0.7
1.1
1.4
source: Global Financial Stability Rports, IMF
*ROA before tax
CY04
1.2
0.7
1.2
0.9
1.3
1.3
1.4
CY05
1.9
0.8
0.9
1.2
1.2
1.5
1.3
CY06
2.1
N.A.
N.A.
1.3
1.2
1.5
N.A.
27
Financial Soundness Index (FSI) witnessed that the
performance of the banking system has improved
substantially over the last five years….
Financial Soundness Index
1.2
0.8
0.4
0.0
-0.4
-0.8
H1-CY07
CY06
CY05
CY04
CY03
CY02
CY01
CY00
CY99
CY98
CY97
-1.2
28
Mutual funds are the fastest growing subgroups within NBFIs…
Composition of NBFIs’ Assets
60
50
percent
40
30
20
10
0
FY02
FY03
Mutual Funds
FY04
DFIs
FY05
FY06
Others
other includes Discounting, Housing finance, Investment Finance, Leasing, Modaraba and
Venture Capital
29
Insurance penetration is increasing in a
steadfast manner…
Asset Structure of Insurance and Reinsurance Sectors
300
250
billion rupees
200
150
100
50
0
2003
Reins urance
2004
2005
Life
2006
Non Life
30
By now market capitalization has surged
to 48.5% of GDP…
Market Capitalization of Karachi Stock Exchange
50
45
percent of GDP
40
35
30
25
20
15
10
5
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
31
Banking Sector Growth complements KSE
growth…
June-06
March-07
Tech & Comm
Cement
Oil & Gas
Exploration
Oil & Gas
Marketing
35
30
25
20
15
10
5
0
Banks
Percent of market capitalization
Banks have played a major role in the growth of the KSE-100 index by
contributing more than 30 percent in KSE market capitalization
June-07
32
Foreign participation in KSE is rising…
8
7
6
5
4
3
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Apr-06
Feb-06
Dec-05
2
Oct-05
percent of market capitalization
Foreign participation in KSE market capitalization has increased to
7 percent
33
Future Agenda
 Continued effective monetary policy conduct and management
 Macroeconomic stability prerequisite for financial sector growth
 Consolidation and growth in banking sector
 Introduction
management
of
Basel
II
along
with
strengthening
of
risk
 Continued strengthening and improvement in governance structure
of regulators
 Broaden and deepen financial sector reforms
o
Diversification of financial sector
o
Augmenting robustness of banking sector
o
Enhancing financial services penetration
•
Islamic banking
•
Microfinance
Concluded
35
Some extra slides…
Maturity Mismatches & SBP motive
The maturity mismatched aspect has increased for banks
operation in Pakistan during recent years. However, SBP has
introduced tiered cash reserves requirements for demand and
time liabilities to encourage banks to mobilize long term
deposits.
28
26
10
7.6
15
5
0
-5
0.6
30
5 to 10 yrs
1 to 5 yrs
3-m to 1-yr
Q2-CY07
Q4-CY06
Q2-CY06
Q4-CY05
Q2-CY05
Q4-CY04
Q2-CY04
Q4-CY03
Q2-CY03
Q4-CY02
Upto 3-m
-10
24
Q2-CY02
percent
32
(9.0)
percent of Assets
34
12.0
GAP Analysis -End June 2007
20
Asset Maturing After One Year
36
Proactive liquidity management has reduced
volatility in short-term interest rates…
SBP Policy rate and Overnight Repo rate in Interbank Market
SBP Policy rate
Average O/N rate
Coefficient of variation
12
10
percent
8
6
4
2
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08*
*: up to January 10, 2008
37
Responsiveness of private sector credit to
lending rates has increased…
Real Lending Rates and Private Sector Credit
Gro wth in Private Sector credit
Real lending rate
40
35
30
20
15
10
5
0
-5
FY76
FY77
FY78
FY79
FY80
FY81
FY82
FY83
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
percent
25
Regulated interest rates
Market based interest rates
38
FX Reserve Adequacy
Reserves to Short
FX Reserves*
Import Coverage
Term Liabilities
FY00
1973.6
10.7
1
FY01
3231.6
16.5
1
FY02
6435.2
35.5
3.3
FY03
10769
49.3
7.6
FY04
12389
47.2
10.1
FY05
12598
35
8.6
FY06
13122
27.8
9.4
FY07
15634
30.2
7.8
8-Jan-08
15334.5
28.8
n.a
*: Gross FX reserves including SBP and Scheduled banks Reserves
39