Wednesday, May 13
Jesmin Rahman, Deputy Chief, Emerging Europe Regional Division, International Monetary Fund
Plamen Iossifov, Senior Economist, International Monetary Fund
Mathias Lahnsteiner, Senior Economist, Oesterreichische Nationalbank
Martin Schindler, Deputy Director, Joint Vienna Institute
On May 13, 2015, Jesmin Rahman, Deputy Chief, and Plamen Iossifov, Senior Economist, in the IMF European Department, presented the Spring 2015 Central, Eastern, and Southeastern Europe (CESEE) Regional Economic Issues Report titled “CESEE Outlook: Mind the Credit Gaps!” The event was held at the Joint Vienna Institute (JVI) as part of the IMF course on Macroeconomic Management and Fiscal Policy and open to the public.
Ms. Rahman opened by discussing the growth outlook and the balance of risks for CESEE countries. Much of the region is recovering, she said, but at three different speeds: solid growth in Central Europe, Turkey, and the Baltic countries; sluggish growth in Southeastern Europe (SEE); and recession in the Commonwealth of Independent States (CIS). The growth disparities stem from the differing impacts of external shocks—lower oil prices, a stronger momentum for euro area growth, and geopolitical tensions—and from incomplete repair of balance sheets and from structural weaknesses, especially in some SEE and CIS countries.
After the 2008–09 global financial crisis, the drop in incomes and spike in risk premia made legacy private debt burdens no longer sustainable in many countries in the region. This triggered a prolonged process of deleveraging, with households cutting back on consumption and firms on investment, and using the freed-up funds to repay debt or build up equity. The resulting downward pressure on domestic demand exacerbated the decline in economic activity. As a result, sluggish credit growth and feeble investment rates are common challenges across the CESEE region, delaying the upswing of the credit cycle and holding back a more robust recovery and income convergence.
Mr. Iossifov presented the main findings of the report concerning the state of repair of private balance sheets across CESEE countries, based on the notion of “credit gaps,” which are discussed at great length in the report. In a nutshell, the report’s analysis compares the current level of private sector debt to a time-varying benchmark derived from the estimated long-term relationship between such debt and its fundamental determinants. CESEE countries were then grouped into four classes based on combinations of positive or negative gaps between the current level of private debt and its trend, and between the growth rate of private credit and the rate implied by the model (Figure 1).
The analysis suggests that the post-crisis deleveraging has not been sufficient to align private debt with fundamentals in a number of CESEE countries, Mr. Iossifov said. Although the region as a whole shows signs of turning a corner, in many instances debt remains above fundamentals-consistent values, acting as a drag on credit and real growth. As of 2013, Bulgaria, Croatia, FYR Macedonia, and Romania were among countries with positive credit gaps (i.e., private debt exceeding the model-based values), though the rate of growth was below the pace of adjustment predicted by the model. Ukraine, Turkey and Russia stand out as particularly exposed to negative shocks, with continued rapid credit growth and debts above the level consistent with fundamentals. However, more recently CIS countries have faced tighter financing conditions and experienced a significant deceleration of corporate credit growth.
The presenters concluded by summarizing policies needed over the medium term in countries where excessive debt burdens continue to weigh on the economy. Where policy space exists, accommodative monetary and fiscal policies should be used to support the economic recovery and balance sheet repair. However, some SEE and CIS countries may find it difficult to grow out of debt without major structural and institutional reforms to address high rates of nonperforming loans, labor market rigidities (to facilitate the adjustment), and advancing the structural reform agenda to raise the efficiency of debt workout mechanisms and private contract enforcement as well as further enhance the infrastructure and human capital to boost productivity.
Mathias Lahnsteiner, Senior Economist in the Foreign Research Division of the Oesterreichische Nationalbank (OeNB) provided insightful discussion points. As a starting point, he complemented the discussion on the growth outlook by presenting the OeNB’s CESEE forecast. Regarding the private sector debt issue, he suggested that the analysis of credit growth dynamics in the run-up to the crisis might reveal additional country-specific interpretations of subsequent private sector credit developments. By looking at the deviations (in percentage points) of the observed private credit-to-GDP ratio from its long-run equilibrium, Mr. Lahnsteiner showed that there were signs for a need for deleveraging in some CESEE countries (e.g., in the Baltics, Bulgaria, Hungary and Croatia) in 2008-09. By contrast, the private credit-to-GDP ratio was lower than what the economic fundamentals would predict in some other countries (e.g. Czech Republic, Poland, Slovak Republic). Interestingly, up to 2014, the private credit-to-GDP ratio declined in the first group of countries (accompanied by a reduction of net external liabilities of the banking sectors), while it rose in the second group of countries. Mr. Lahnsteiner also pointed to the marked increases of the private credit-to-GDP ratio and the banking sector’s net external liabilities in Turkey from 2009 to 2014.
The lively Q&A session that followed demonstrated the huge interest in JVI countries for country-specific policies to address unsettled legacies of the crisis and boost economic growth in the medium term.
Irina Bunda, Economist, JVI