Transcript Slide 1

Credit Rating of BH and
Perspectives for its Improvement
Kemal Kozarić, Ph.D. and Željko Šain, Ph.D.
Dubrovnik, December 8 and 9, 2011
Macroeconomic indicators for BH
2009
2010
KM 23.95 bill.
KM 24.75 bill.
KM 6.233
KM 6.440
Real Growth Rate
-3.2%
0.7%
2.2% (IMF proj.)
2.0% (other proj. and prognoses)
Growth Rate of Industrial Production
-3.3%
1.6%
4.5% (August 2011/2010)
0.0%
3.1%
3.9% (annual in August)
Unemployment Rate in BH
24.1%
27.1%
27.6 %
Average Wage at BH level
KM 790
KM 5.2 bill.
(21.7% GDP)
KM 1.48 bill.
(6.2% GDP)
KM 798
KM 6.25 bill.
(25.4 % GDP)
KM 1.36 bill.
(5.5% GDP)
KM 813 (August)
44.8%
52.1%
54.3% (January – August)
KM 353 millions
KM 340 millions
KM 193 mill. (first half of the year)
KM 6.212 bill.
KM 6.457 bill.
KM 6.265 bill. (August)
Gross Domestic Product (GDP)
.
GDP per capita
Average Annual Inflation
External Debt
Current Account Deficit
Coverage of Import by Export
DFI (estimate)
Foreign Exchange Reserves
2011
KM 6.19 bill. (June)
KM 971 mill (first half of the year)
2
Macroeconomic indicators for BH
 Rating of the macroeconomic situation in BH
 “Better than might be expected”?
 (evaluation by the part of academic and professional circles, EC, IMF,
and other international financial institutions)
 Worrying...  ... Catastrophic?
 (evaluation of the part of academic and professional circles, NGO, ... 
data on the growth of indebtedness, foreign trade deficit,
unemployment rate and overall economic activities in the real sector ...)
3
Macroeconomic indicators for BH
 Rating of the macroeconomic situation in BH
 Sovereign Credit Rating of BH as an indication of the macroeconomic
situation?
 Formal rating of two reputable rating agencies
 S&P: rating downgraded from B+ to B, on December 1, 2011, rating status
“on watch”
 Moody's: B2, rating changed from stable to negative since May 2011
 Negative outlook this year (mainly political reasons)
 After recent changes the credit ratings of S&P and Moody’s are on the same
level
4
Credit Rating
 Credit Rating is an assessment of general creditworthiness of a
certain debtor or a debt instrument – Securities or other financial
obligation, based on relevant risk factors
 Rating of a certain client is an assessment of its
creditworthiness, or “regular” servicing of obligations expressed
with the appropriate label
 Assessment/evaluation of Credit Rating:
 Internally developed quantitative models;
 Specialized rating agencies (Moody’s, Fitch, Standard & Poor’s…).
 Financial institutions using both models of rating development
5
Credit Rating
 Credit Rating provides internationally harmonized and recognized
framework for assessment and comparation of credit quality of
individual debtor and debt instruments (securities)
 Credit Rating in any way does not give an oppinion on how some
creditor (for example, a bank, a state) or investment is “good” or
“bad”, profitable, successful etc., but only and exclusively the
probability of return of “borrowed” funds within agreed time
 For smaller banks and SMEs there is usually no external rating
(not profitable)
6
Rating categories/labels
Moody’s
S&P and Fitch
Aaa
AAA
Aa1
AA+
Aa2
AA
Aa3
AA-
A1
A+
A2
A
A3
A-
Baa1
BBB+
Baa2
BBB
Baa3
BBB-
Ba1
BB+
Ba2
BB
Ba3
BB-
B1
B+
B2
B
B3
B-
Caa
CCC
Ca
CC
Definitions
High investment
grade
Investment
grade
Assets of good quality, great diversification and established size,
excellent market positioning, profiled management skills and very
good capacity to cover the debt
Good quality and liquidity of assests, promoted at various places in
the market, good quality of management and a good capacity to
cover the debt.
Medium investment
grade
Satisfactory quality and liquidity of assets, the average market
position and management quality, regular credit standards, the
average capacity to cover the debt.
Lower investment
grade
Acceptable quality and liquidity of assets, but with a noticeable
degree of risk, a weaker capacity to cover the debt.
Below investment
grade
Acceptable quality and liquidity of assets, although with a significant
degree of risk, low business diversification, limited liquidity and
limited margins of debt coverage .
Speculative grade
The loan under review, assets quality is acceptable, but with
temporary difficulties in liquidity level, the high financial “leverage”,
some weaknesses in management, positioning and market
positioning.
High risk
As above, but with evident difficulties, and debt management is
sometimes tense and hard. Uncertainty regarding the payment of
the interest rates, but not of the principal debt.
Non-investment
grade
High risk
Description
7
Country risk
 The possibility of non-compliance of obligations to the bank as a
result of actions of government or events in the debtors country
 The determinants of country risk:





Political risk
Economic risk
Risk of transfers
Risk of default
Risk of guarantee
 Management of country risk:
 The adoption of formal policies for management of country risk
 Internal monitoring
 The mechanism of reporting to the bank management
The elements that determine country risk
Political elements:






Political stability
The attitude toward foreign investors
The issue of privatization/nationalization
Monetary inflation
Balance of payments
The behaviour of bureaucracy
Operating elements:







Economic growth
Currency convertibility
Legal effect of contracts
Professional services and contractual relations
Utility services (fax, phone)
Labour/productivity costs
Local management and partners
Financial elements:







Currency convertibility
Short-term loans
Long-term loans/capital risk
Inflation
Balance of payments
Legal effect of contracts
The behaviour of bureaucracy
Elements of nationalization:




The attitude toward foreign investors and profit
Nationalization
Currency convertibility
Bureaucracy
The structure of strategic risk
business
corporate
management
culture of
risk
market
STRATEGIC
RISK OF THE
COMPONENT
clients
people
competition
regulation
Macroeconomic indicators for BH
 Expectation and estimates for the future  How to reach
sustainable economic development ?
 2012 and short term
  debt crisis in the EU and slowdown in economic growth (recession
or crisis with a double bottom) and implications for SE Europe, Western
Balkans, Bosnia and Herzegovina
 “Long” term
  Is there potential for healthy growth of the real sector based on
growth of employment, domestic demand and export?
  Is it (only) the capital/money that is missing?
11
Macroeconomic indicators for BH
 Expectation and estimates for the future  How to reach
sustainable economic development?
REAL SECTOR


FINANCIAL SECTOR
(How and why is the global/financial crisis created and how to resolve it?)
12
The structure of the financial sector in BH
 Banking sector dominates the financial sector in BH  main
source and channel for financing the real sector (and people)
 High percentage of foreign ownership is a potential risk because
strategic decisions are made out of reach of monetary authorities
of BH
 Relatively small share of other financial intermediaries
 Table: The value of the assets of financial intermediaries
2007
Value, KM
millions
Banks
2008
Share, %
Value, KM
millions
2009
Share, %
Value, KM
millions
2010
Share, %
Value, KM
millions
Share, %
19.570
79,8
20.815
80,8
20.604
82,7
20.416
84,3
Investments funds
1.762
7,2
1.225
4,8
871
3,5
888
3,7
Leasing companies
1.378
5,6
1.607
6,2
1.416
5,7
1.108
4,6
Insurance and reinsurance companies
853
3,5
890
3,5
940
3,8
941
3,9
Microcredit organisations
946
3,9
1.213
4,7
1.087
4,4
856
3,5
Total
24.510
25.749
24.919
24.210
13
Banking sector in BH
 The financial sector “bank dominated” :
 84% of total assets of the financial sector (at the end of 2010)
 The dominance of foreign banking groups:
 95% of total assets and 82% of action/equity capital is concentrated in
banks with majority foreign ownership
 The significance of “Vienna Initiative” (external debt of the banking
sector – 29.5% of total liabilities)
 High liquidity
 Good capital adequacy (16.1% in 2010, 15.5% in Q1, 2011)
 Endangered profitability
 Loss in 2010
 NPL (non-performing loans) – growth
14
Profitability and level of NPLs
.
11.60%
12%
10%
11.8%
200.0
143.4
150.0
8%
6%
4%
5.90%
83.0
83.0
3.09%
3.02%
100.0
50.0
2%
18.2
0%
0.0
2007
2007
2008
2008
2009
2009
2010
2010
2011 (I-VI) 2011 (I-VI)
-2%
-50.0
-4%
-6%
-100.0
-8%
-124.3
-150.0
-10%
-12%
-200.0
NPL
Profitability in KM million
15
Savings – the other side of the coin?
 Surveys of Visa company:
 33.2% of BH citizens saving
 61% do not save or have no money to save
 73.1% of citizens borrowing money
 75% borrowing money from the banks
 17.8% from parents
 13.2% from friends
16
Loans
In KM millions
31. 12. 2008.
Amount
Share
31. 12. 2009.
Amount
Share
31. 12. 2010.
Amount
Share
30. 06. 2011.
Amount
Share
14.040
100 %
13.496
100 %
13.936
100 %
14.407
100 %
6.633
47 %
6.474
48 %
6.732
48 %
7.086
49 %
-Public companies
222
2%
237
2%
309
2%
350
2%
-Government institutions
231
1%
343
2%
436
3%
445
3%
6.687
48 %
6.292
47 %
6.314
46 %
6.412
45 %
267
2%
150
1%
145
1%
114
1%
TOTAL LOANS
Out of these:
-Private companies
-Households
-Other sectors
 The loans to private companies increased by KM 354 millions or
5%, the loans to households increased by KM 98 millions or
1.5%, total loans increased by KM 471 millions or 3.4%.
17
The debt crisis in the Euro Zone – a risk of new
recession and/or the crisis with a double bottom?
 Started and culminated in Greece  threat of bankruptcy, leaving
the Euro Zone...
 Continued in Ireland and Portugal

(Countries: “PIGS” – the members of the Euro Zone)
 Endangered Spain, Italy...?
 Indicator  share of public debt in GDP, the level of budget
deficit, unemployment rate
 Consequence  decline in sovereign credit rating, growth of the
loans price, inability in public debt servicing, help from the IMF
and the EU, the domino effect, the survival of the euro and the
18
Euro Zone...,
The debt crisis in the Euro Zone – a risk of new
recession and/or the crisis with a double bottom?
RANKING OF SELECTED COUNTRIES BY THE PARTICIPATION OF PUBLIC DEBT IN GDP
S. nr.
Country
GDP in USD
billions
Public debt as
% in GDP
Note/comment (SB)
1.
Japan
5,5
233
Most of the debt is in the hands of local creditors
2.
Greece
0,3
166
Bankruptcy avoided so far
3.
Italy
2,1
121
Credit rating downgraded
4.
Ireland
0,2
109
Rating downgraded, uses a package of assistance
5
USA
14,5
100
"Technical" bankruptcy avoided during summer, for first time
credit rating downgraded
6.
France
2,6
87
Rating AAA, „on watch“
7.
Germany
3,3
83
Rating AAA
8.
G. Britain
2,3
81
Rating AAA
9.
Spain
1,4
56
Rating downgraded
10.
Portugal
0,2
39 (only Sp. banks)
Rating downgraded, uses a package of assistance
11.
China
5,9
?
Foreign exchange reserves more than billion 3,2
Source: ST invest, 24.10.2011, weekly newsletter, 34/2011
19
Public debt as % in GDP in the countries of
the region
RANKING OF SELECTED COUNTRIES BY THE PARTICIPATION OF PUBLIC DEBT IN GDP
R.No.
1.
2.
3.
4.
5
6.
Country
Albania
Bosnia and Herzegovina
Croatia
Macedonia
Montenegro
Serbia
Public debt as
% in GDP
59.4
39.6
47.5
26.3
43.1
44.1
Source: IMF, World Economic Outlook 10.2011
20
The debt crisis in the Euro Zone – a risk of new
recession and/or the crisis with a double bottom?
Projections of economic growth (original/corected) in %
Region/country
World
Euro Zona
USA
Japan
2011
4.0
1.6
1.5
-0.5
4.3
2.0
2.5
-0.7
2012
4.0
1.1
1.8
2.3
4.5
1.7
2.7
2.9
Source: IMF, World Economic Outlook, September 2011
21
The debt crisis in the Euro Zone – a risk of new
recession and/or the crisis with a double bottom?
Projections of economic growth (original/corrected) in %
Region/country
World
Euro Zona
USA
UK
2011.
3.1 2.6
1.7 1.6
2.6 1.5
1.4 1.0
2012.
3.4 2.7
1.8 0.8
2.8 1.8
1.7 1.2
2013.
3.4 3.1
2.1 1.5
2.9 2.6
- 2.1
Source: Fitch Rating Agency– Global Economic Outlook, October 2011
22
The debt crisis in the Euro Zone – a risk of new
recession and/or the crisis with a double bottom?
 The escalation of debt crisis (hesitation and mismatching attitude
of the EU?)
 despite agreed and received assistance, the bankruptcy is
threatening to Greece (Portugal and Ireland  slightly better
condition)
 more and more serious situation in Spain and italy (Franch rating
“on watch”)
 The exposure of european banks  “trigger” of the banking
crisis?
 Quarterly data  generally slowdown of economic growth and
export, threatening inflation, “high unemployment”

23
 Nouriel Rubini  The chances for new recession bigger than 50%
How to ensure a better credit rating in the future?
 For better credit rating in the future, we should:
 Provide political stability;
 Create a better macroeconomic environment;
 Raise awareness of responsibility for credit rating (governments,
ministries, regulators, the CBBH, the real sector);
 Assure budget discipline (reduce the budget deficit and adopt budgets
for all levels in time, particularly for BH);
 Remove the administrative barriers for corporate sector
 and, the most important, remember that the above items are not oneshot measures, but a continuous process.
24
Thank you for your attention
http://www.cbbh.ba
25