The IMF, CESEE and Banking

34th BACEE Regional Banking Conference

Budapest, April 10-11, 2017

Bas B. Bakker Senior Regional Resident Representative

for Central and Eastern Europe

The IMF has had close involvement with CESEE since early transition

2

It supported the transition to market economies with Financing Technical Assistance Training

It provide financial help and TA during the 2008/09 crisis and beyond

0

2

4

6

8

10

12

14

16

1990 1994 1998 2002 2006 2010 2014

Two waves of IMF programs: early transition and post-2008

3

2017

19992008

2000

2001

2009

2015

20162013

2004

19931994

2008

2015

2004

2016

2002(SRB and MNE)

2015

20142011

CE

SEE

Baltics

CIS

Note: Years indicate start date of arrangement.

Number of countries with active IMF arrangements in CESEE

Note: Dashed pattern shows precautionary programs.

Latest IMF arrangements by country

Most countries had banking crisis in 1990s

Many of the IMF programs originated in banking sector problems

4

Banking crises

After banking crises in 1990s, banking systems were opened to foreign investors

5

Much of the banking system in non-CIS CESEE is foreign owned

0

10

20

30

40

50

60

70

80

90

100

RUS SVN UKR BLR LVA POL SRB BGR HUN CZE BIH ALB HRV ROU LTU EST SVK

Market share of foreign-owned banks, 2015(Percent of total assets)

Note: for BLR and LTU data for 2014.

In pre-crisis boom years, CESEE was very profitable…

Credit was growing rapidly Interest rate margins were relatively high Return on equity and capital was great

6

Between 2003 and 2008 there were large funding flows of Western European banks to CESEE…

7

0

100

200

300

400

500

600

700

800

900

1,000

2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1

CESEE

CESEE excl. RUS and TUR

External position of BIS-reporting banks on all sectors(billion of USD, FX change adjusted)

…which fueled and financed a credit boom…

8

0

20

40

60

80

100

120

BLR

UVK TU

RAL

BM

DA

ROU

SRB

RUS

MKD SV

KPO

LCZ

EBI

HLT

UH

RVH

UN

BGR

UKR

SVN

MN

ELV

AES

T

Change during 2003-08 2003

Credit-to-GDP ratio and its change(Percent of GDP)

ALB

BLR

BIH

BGR

HRVCZE

EST

HUN

LVA

LTU

MKD

MDA

POLROU

RUS

SVK

SVN

TUR

UKR

y = 0.6915x + 3.9528R² = 0.5733

0

2

4

6

8

10

12

-5 0 5 10

Ann

ual i

ncre

ase

of c

redi

t-to

-G

DP

ratio

Annual increase of foreign-funding -to-GDP ratio

Increase of credit-to-GDP ratio and increase of foreign funding to banks

…which led to high current account deficits and overheating economies

9Note: For EST, LVA and LTU: 2007.

After Lehman Brothers this suddenly stopped

As parent banks got under pressure they could no longer send new funding to CESEE

Credit booms suddenly stopped Domestic demand plunged just as exports

dried up as well Result was deep recession

10

IMF provided financial assistance to many countries

11

Vienna Initiative helped prevent uncoordinated withdrawal of foreign banks

Launched in January 2009, as a framework for safeguarding the financial stability of emerging Europe at the height of the global economic crisis;

The main objectives were: Prevent a large-scale and uncoordinated withdrawal

of cross-border bank groups from the region; Ensure that parent bank groups maintain their

exposures and recapitalise their subsidiaries in emerging Europe

These objectives were achieved and a potentially region-wide systemic crisis in emerging Europe’s banking sector was avoided.

12

By 2010, crisis seemed over

Risk premia had declined sharply Region started growing again Bank exposure to region stopped falling

13

0

50

100

150

200

250

2008 2009 2010 2011 2012 2013

Then euro area crisis broke

14

0

1

2

3

4

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013

Portugal

Greece

SpainIreland

10-year Government Bond CDS spreads(Percent)

Bank deleveraging resumed

15

100

200

300

400

500

600

700

800

900

1,000

2003:Q1 2007:Q3 2012:Q1 2016:Q3

US$319b(9% of 2016 GDP)

US$224b(15% of 2016 GDP)

CESEE

CESEE excl. RUS and TUR

Bank’s external claims on all sectors(billions of USD, FX change adjusted)

CESEE’s economy experienced another downturn

16

-16

-12

-8

-4

0

4

8

12

2007 2009 2011 2013

GDP growth(Percent)

SEE-EU

SEE non-EU

-16

-12

-8

-4

0

4

8

12

2007 2009 2011 2013

Baltics

European CIS

CE-5

Many SEE countries asked for IMF assistance

17

In 2014-16 CIS was hit by recession

18

-16

-14

-12

-10

-8

-6

-4

-2

0

Ukraine Belarus Russia

Collapse of commodity prices

Sudden stop in capital flows to Russia, result of sanctions on Russia

Conflict in Ukraine

Change in GDP(percent)

Between 2013-15

Between 2013-16

Moldova and Ukraine got help from the IMF

19Note: UKR had a Stand-By Arrangement program in 2014-15.

5 611

1113

5 66

69

2 4 3

0

20

40

60

80

100

120

140

160

180

200

2013 14Q2 14Q4 15Q2 15Q4 16Q2 16Q4

Solvent Declared insolvent

Number of Banks in Ukraine

Banking problems played prominent role in programs

20

Non-performing loans to total loans(Percent)

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014 2015 2016

Ukraine

Moldova

In total 87 banks lost license; representing 30% of sector’s assets at end-2013

More recently, external position of BIS reporting banks in CESEE excl. Russia and Turkey appears to have stabilized…

21

0

100

200

300

400

500

600

700

800

900

1,000

2003:Q1 2005:Q1 2007:Q1 2009:Q1 2011:Q1 2013:Q1 2015:Q1

CESEE

CESEE excl. RUS and TUR

External position of BIS-reporting banks on all sectors(billion of USD, FX change adjusted)

…as loan to deposit ratios in many countries have been reduced to much safer levels

22

0

50

100

150

200

250

ALB

MD

A

CZE

BGR

HU

N

SVN

MKD UKV

ROU

RUS

SRB

POL

LTU

BIH

SVK

HRV LV

A

EST

BLR

UKR TU

R

2016

2008

Domestic Loan to Domestic Deposit Ratio(Percent)

CIS is now recovering; growth in non-CIS CESEE continues to be strong

23

-15

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

PPP weighted real GDP growth(Percent)

CIS

Other CESEE

CIS excl. RUS

-1

0

1

2

3

4

5

CIS Euro area Baltics CE-5 SEE non-EU SEE EU

All regions are now showing positive growth

24

GDP growth (Percent)

2016 Forecast for 2017

Unemployment in New Member States coming down rapidly

25

-4

-2

0

2

4

6

8

10

12

14

2007 2009 2011 2013 2015

Cumulative changes in unemployment rate(2008Q1=0, seasonally adjusted)

LTU

EST

LVA

HUNPOL SVK

CZEROU

SVN

HRV

BGR

-4

-2

0

2

4

6

8

10

12

14

2007 2009 2011 2013 2015

Crisis legacies remain: high NPLs (especially in SEE and UKR)

26

0

5

10

15

20

25

30

35

EST TUR LVA POL SVK CZE LTU MKD SVN RUS HUN ROM BLR BIH MNE MDA HRV ALB BGR SRB UKR

2012

2016

Non-performing loans to total loans, end 2016(Percent)

Note: for MNE data for 2012 and 2015.

High public debt

27

Public debt(Percent of GDP)

Since early 1990s CESEE has made tremendous progress

28

Banking sector has played an important role in this convergence

But banking sector has also contributed to problems

Not enough risk aversion during booms; very risk averse during busts

Foreign funding has exacerbated boom-busts

29

Thank you