The impact of the global financial crisis on the transition region

(so far)
Ralph de Haas
Office of the Chief Economist EBRD

Berlin, December 11th 2008

Overview
1. Impact crisis on transition region 2. Illustration: Kazakhstan & Central Asia 3. Policy response & lessons learned

Overview
1. Impact crisis on transition region 2. Illustration: Kazakhstan & Central Asia 3. Policy response & lessons learned

Emerging European growth model...



Capital from rich to poor

Large current account deficits Financed through FDI and foreign parent bank lending Unparalleled financial integration

Remarkably successful
Sustained high growth rates Unprecedented institutional transformation Strong public balance sheets and reserve accumulations due to commodity price booms

Public debt: low & decreasing

Public debt over GDP
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
ra zi l ex ic o do ne sia di a B In M

2002

2007

2002

2007

Th ai la nd K az ak hs ta n

in e

us sia

kr a

In

al tic s

SE E

 but private debt: high & increasing

Private ebt ver
120%

2002
100% 80% 60% 40% 20% 0%

2007

2002

2007

Th ai la nd K az ak hs ta n

do ne sia

kr ai ne

ra zi l

ex ic o

In

In

al t ic s

di a

us sia

SE E

...now under attack



But also vulnerable to current crisis

Large current account deficits, excessive credit growth, high private sector debt, reliance on parent bank funding...

Now hit with full force

Capital inflows slowing dramatically
 

Syndicated lending and bond markets dried up Will foreign parent banks be forced to deleverage?

Financial sector: deposit withdrawals + bank failures Currency movements, but no collapse yet... Real sector: industrial production dropping precipitously, sharp slow-down in export markets IMF packages (Hungary, Ukraine, Serbia, Bosnia, Latvia)

Until September 2008, emerging markets had largely decoupled

80 70 60 1400 50 40 1200 1000 2000 1800 1600

U.S. high-yield bond spreads

30 800

VX
20

600

M
10 0

G M G urope

400 200 0

/0 5/ 20 07 05 /0 7/ 20 07 05 /0 9/ 20 07 05 / /2 00 7 05 /0 /2 00 05 8 /0 /2 00 8 05 /0 5/ 20 08 05 /0 7/ 20 08 05 /0 9/ 20 08 05 / /2 00 8

/2 00 7 /0 05 05

/0

05

/2 00 7

Syndicated lending is sharply down, but parent bank financing has held up so far
Total net bank lending: still high ... in spite of declining wholesale lending
US$ B

US$ Bn

60 55 50 45 40

6 4

6
35

4
30 25

20 07 Q 1 20 07 Q 2 20 07 Q 3 20 07 Q 4 20 08 Q 1 20 08 Q 2

Q 4

Source: BIS

Source: Dealogic

                                 

   

Credit growth: still high and fairly resilient, except in Estonia, Latvia, and Kazakhstan

U N

K Z K

UK

NE

C N

In most countries, we expect growth to either slow sharply or stop in 200

.0 .0 2.0 growth (%) 0.0 .0 .0 200 .0 2.0 0.0 2.0 2.0 200 grow th (%) .0 I .0 .0 .0 J Y

Overview
1. Impact crisis on transition region 2. Illustration: Kazakhstan & Central Asia 3. Policy response & lessons learned

Kazakhstan: an early victim

 

Commodity-based, undiversified emerging market Very rapidly expanding banking system based on cheap foreign wholesale funding Limited real investment opportunities: real estate bubble High private external debt (mainly in foreign currency) Offsetting strength: very low public debt

 

Kazakhstan: an early victim

August 2007 banks cut off from Eurobonds and syndicated loans; September 2008: complete cut off Oil/copper prices no longer supporting Banks ration credit and increase lending rates. Bank funding now more expensive or unavailable for many Kazakh companies and households Construction sector frozen, real estate bubble deflates Government announces USD 21 billion (16% GDP) Stabilisation Plan, takes 25% stakes in 4 banks, and mulls restructuring ext. debt banks

950 850 750 650 550 450 350 250 150 50

Kazachstan Russia

Russia EMBI
80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5

Kaz Dev Bank 2013

Alliance Bank

BCC

KKB

BTA

ATF Bank

urbank

"

0 Jan 07

eb Mar 07 07

Apr May Jun 07 07 07

Jul 07

Aug Sep Oct 07 07 07

ov Dec 07 07

Jan 08

eb Mar 08 08

Apr May Jun 08 08 08

Jul 08

Aug Sep Oct 08 08 08

alyk Bank

ov 08

Kazakh growth tumbles

14.0 12.0

10.0

8.0

6.0

4.0

2.0

0.0 1997 2.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Contagion effects to rest Central Asia

Rest Central Asia not financially integrated: few direct

effects from scarce international liquidity (although microfinance institutions may be hurt!) subsidiaries is felt throughout the region materials etc.)

But contraction in lending by Kazakh bank Reduction in imports from Kazakhstan (building Workers remittances down (Uzbeks and Tajiks on

Kazakh construction sites)

(Positives: lower food and fuel prices)

Overview
1. Impact crisis on transition region 2. Illustration: Kazakhstan & Central Asia 3. Policy response & lessons learned

Fighting the crisis: domestic challenges



Protection and restructuring of core financial system

Develop stable deposit base and local currency lending Increase ownership transparency Maintaining micro and SME financing

In some countries, fiscal adjustment to soften the landing ahead of tightening external financing constraints

Prevent adverse spillovers from national rescue packages

In in a financially integrated system, national rescues can have adverse external effects


Passively: by drawing deposits and capital flows away from countries with weaker government support Actively: by impeding efforts of international banking groups to fund or recapitalise subsidiaries across borders.

These effects have contributed to the spread of the crisis to transition economies, and could become worse as the capitalization of banking groups deteriorates

Fighting the crisis: international challenges

 

Safeguard the stability of parent banks International institutions can help, either at the parent bank level (EIB) or at the subsidiary level (EBRD, IFC) Structure bank rescues in ways that do not adversely impact the transition region
No bailouts that discriminate against subsidiaries

Address supervisory and regulatory failures

Short term: host-home coordination Long term: centralization at EU (or global?) level