An update on Current Issues in Banking for CE and the Baltics
Cecilia Hermansson Chief Economist
The current issues • • • • • • •
Why did it go wrong? Is the recession over? Effects of internal devaluation Financial stability is increasing Deleveraging takes time – the focus is on balance sheets Euro membership – Estonia first in line The medium and long term outlook
2
Important factors behind the Baltic crisis • • • •
• •
Credit expansion and weak risk assessments in banks Convergence process appeared automatic Race for market share Too little focus on macro economics at the banks’ management level – imbalances were building up Too expansionary economic policy in the region Weak cross border supervision and regulations
Current account balalance, % of GDP 15 10 5 0
Lithuania -5 -10 -15
Estonia
-20 -25
Latvia
-30 00
01
02
03
04
05
06
07
08
09
Source: Reuters EcoWin
3
GDP:
formally the recessions are over
Real GDP growth, qoq sa (% )
Real GDP, 2004=100 (swda) 5
150 0
140 130
-5
120
-10
110 100
-15 1Q 06
1Q 07 EE
1Q 08 LV
1Q 09
1Q 10
LT Source: Eurostat
90 1Q 05
1Q 06 EE
1Q 07
1Q 08 LV
1Q 09
1Q 10
LT Source: Eurostat
4
Outlook:
the Baltic economies will grow, but the speed of growth will depend on the success of structural reforms 2008
2009
2010f
2011f
-3.6 -4.6 2.8
-14.1 -18.0 -15.0
1.5 -2.5 -2.0
4.5 4.0 3.0
5.5 7.5 5.8
13.8 16.9 13.7
14.0 21.5 16.0
12.0 19.5 15.5
Consumer price index growth, % Estonia Latvia Lithuania
10.4 15.4 10.9
-0.1 3.5 4.5
0.5 -3.0 1.0
1.8 0.0 1.0
Real net wage growth, % Estonia Latvia Lithuania
3.2 6.3 10.1
-5.2 -5.9 -7.5
-5.3 -8.0 -5.0
1.5 2.0 0.0
GDP real growth, % Estonia Latvia Lithuania Jobseekers' rate, % of economically active Estonia Latvia Lithuania
Source: National Statis tics and Swedbank
5
Fiscal stance: further consolidation still necessary
Tax revenues and general government spending, % of GDP 50
Cyclically adjusted balance, % of GDP 0
40
-2
30
-4
20
-6
10 0
-8 EE Tax revenues, 2000-07 Tax revenues, 2008 Tax revenues, 2009 Spending, 2000-07 Spending, 2008 Spending, 2009
LV
LT
-10 2005
2006 EE
2007
2008 LV
2009 LT
Source: DG ECFIN Autumn2009 Source: Eurostat
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Prices: is the deflation story dead? Not yet. EE: Inflation, % 15
3
10
2
5
1
0
0
-5
-1
Jan.08
Jan.09
LT: Inflation,% 20
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Jan.10 LV : Inflation, %
15
6
20
4
10
4
15
3
5
2
10
2
0
0
5
1
-5
-2
0
0
-10
-4
-5
-1
-15 Jan.08
-6
-10
-2
Jan.09
Jan.10
Jan.08
CPI, mom (rs) * LT:
CPI, yoy
excluding refined petroleum products
PPI*, mom (rs)
Jan.09
PPI*, yoy
Source: CSBL, ESA, LSD
Jan.10
7
Labour market: sharp contraction in labour costs improves competitiveness‌ but what it takes?
Wage bill growth, % yoy
Jobseekers ratio
60
25
40
20
20
15
0
10
-20
5
-40 1Q 07
1Q 08 EE
1Q 09 LV
LT Source: CSBL, ESA, LSD
0 1Q 06
1Q 07
1Q 08 EE
1Q 09
LV LT Source: CSBL, ESA, LSD
8
Domestic demand: household consumption to remain weak as incomes shrink
Consumer confidence
Retail trade turnover, 2005=100 150
20
140
0
130 120 110
-20
100
-40
90 80 Jan.07
Jan.08 EE
Jan.09 LV
Jan.10
LT Source: Euros tat
-60 Jan.07
Jan.08 EE
Jan.09 LV
Jan.10
LT Source: Eurostat
9
Financial markets: relatively stable 0.7100
30
EUR/LVL (l.s.)
25
0.7075
EUR/LVL
0.7050
0.7025
3m Rigibor Eurobor spread (r.s)
15
10
Percent
20
0.7000 5 0.6975
0
0.6950
-5
06
07
08
09
10 Source: Reuters EcoWin
10
Risk assessment: gradually improving CDS rate spreads, 5 years, EUR (vs. Sweden)
1000 800 600 400 200 0 Jan.09
Apr.09 LV
J큰l.09 LT
EE
Okt.09 GR
ES
Jan.10 IR
Apr.10 Source: Reuters
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Deleveraging: nobody said it’s going to be easy Loans issued to retail and wholesale trade 60
1200
Weighted EUR average nominal interest rates (existing loan stock), % 8
40
800
6 4
20
400
2
0
0 1Q 05
1Q 06
1Q 07
1Q 08
% of value added (ls)
1Q 09
0 Jan.06
Jan.07
Jan.08
Households
LVLm (rs)
100
1500
75
1125
50
750
Jan.10
NFI
Source: CSBL, FCMC
Loans issued to manufacturing
Jan.09
Source: Bank of Latvia Weighted EUR average real interest rates (existing loan stock),% 15 10 5 0
25
375
-5 -10
0 1Q 05
0 1Q 06
1Q 07
% of value added (ls)
1Q 08
1Q 09 LVLm (rs) Source: CSBL, FCMC
-15 Jan.06
Jan.07
Jan.08
Households (CPI deflated) NFI (PPI deflated)
Jan.09
Jan.10
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Source: CSBL, Bank of Latvia
Institutions that handle impaired loans •
A Baltic Financial Restructuring and Recovery Unit was established within Swedbank May 2009.
•
Ektornet – was formed in 2009 – as an independent subsidiary of Swedbank with the aim to manage and develop the Group’s repossessed assets to minimise losses and if possible recover value in the long term.
13
Estonia becomes the 17th EMU member – implications for banks in the region Increased competition Stability for Latvia and Lithuania Easier to assess risks Improved chance for membership in Latvia and Lithuania
Easier to attract investments – more business opportunities
Competitiveness still in focus Budget discipline and inflation control
14
Medium and long term issues for the Baltic region and banks • • • • • •
Improved cross border supervison/regulations Aenimic growth prospects – deleveraging continues and how to balance local savings with local lending Convergence with the rest of EU not automatic Demography – aging, migration and labour shortages More structural reforms needed for growth and to counter new imbalances R&D – and how to increase value added in production – the banks can contribute to that process and to use the potential from globalisation
15
Thank you!