OECD Seminar : „20 years after”

Panel 2 : Challenges and opportunities

Júlia KirályDeputy Governor, Magyar Nemzeti

Bank

„This time it was not us”

• The epicentre of the crisis was not in emerging markets

• It was originating from developed countries …– Macro imbalances (low interest rates, excess liquidity,

housing market boom, saving imbalance...)– Financial market imbalances (yield hunting and greedy

risk appetite, originate-to-distribute model and subprime lending, „toxic assets”: highly leveraged, structured products, high leverage, shadow banking system...)

• …and spreading towards East through trade and financial markets

• Strong financial and trade integration in the CEE region incl. Hungary has led to fast spill-over of the crisis

Strong financial and economic integration of the CEE countries

Source: EKB, Eurostat.

0

10

20

30

40

50

60

70

80

90

0 10 20 30 40 50 60 70 80

Exp

ort/

GD

P

Banking sector's foreign liabilities/ GDP %

%

Estonia

Latvia

Litvania

Slovakia

Hungary

Bulgaria

Czech Rep.

Romania

Poland

Level of foreign trade and financial integration in the countries of the region (2008)

Hungary’s high vulnerability triggered an avalanche

Integrated banking system with developed

countries

Overoptimistic expectations of the

households

„Fiscal alcoholism”

High inflation

Large public debt

Lending in foreign currency

Liberalised balance of capital

Exte

rnal d

ebt

High HUF yields

2. Banking sector risk

1. Government risk

150% loan to deposit ratio

Private sector is responsible for 2/3 of the external debt

Source: MNB.

Net external debt as a percentage of GDP

0

10

20

30

40

50

60

70

2002

Q1

Q2

Q3

Q4

2003

Q1

Q2

Q3

Q4

2004

Q1

Q2

Q3

Q4

2005

Q1

Q2

Q3

Q4

2006

Q1

Q2

Q3

Q4

2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

%

0

10

20

30

40

50

60

70%

Banking sector Corporate sector General government Net external debt

The currency mismatch of the private sector amounts to 40% of the GDP

Source: MNB.

Open FX position of the main sectors as a percentage of GDP

-10

0

10

20

30

40

50

60

70

2000

Q1

Q2

Q3

Q4

2001

Q1

Q2

Q3

Q4

2002

Q1

Q2

Q3

Q4

2003

Q1

Q2

Q3

Q4

2004

Q1

Q2

Q3

Q4

2005

Q1

Q2

Q3

Q4

2006

Q1

Q2

Q3

Q4

2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

%

-10

0

10

20

30

40

50

60

70%

Household sector Corporate sector General government Non-residents Net external debt

9th October 2008

– the fx swap interbank market collapsed– the secondary government paper market collapsed– the HUF depreciated hour by hour– the stock exchange trade was suspended because of

the price fall

Response to the crisis

• Immediate remedies for the liquidity crisis: – MNB: extended collaterals, LOLR in FX!, decreased reserve

requirement

– Foreign parent banks: replacing money market funds

• Fixing balance sheets:– Government: a sizeable and structural fiscal adjustment - pro-

cyclical effects (cut in social transfers, tax reshuffling: VAT and real estate tax↑, taxes on labor↓)

– Households: increase net saving position, decrease credit demand

– Companies: labor market adjustment, postponing investments

– Banks: deleverage, decrease L/D ratio and tighten credit conditions

• Monetary policy: focus on price stability AND financial stability (forced tightening, slow easing)

Hungarian banks withstand the shock

• Loan loss ratio is expected to triple in 2009 and slightly increase in 2010, while in the stress scenario it would be 5-6 times higher in 2010 than in 2008

• Strong capital position is expected to be kept along the baseline scenario (end-2010 CAR above 11%)

• Recapitalisation needs (EUR 400-600 million for the whole banking system) under a severe stress scenario are manageable

Consolidated loan los rates in the baseline and stress scenario

1.0

3.13.6 3.4

5.6

0.9

0

1

2

3

4

5

6Bas

elin

esc

enar

io

Bas

elin

esc

enar

io

Stre

sssc

enar

io

Stre

sssc

enar

io

2007 2008 2009 2010 2009 2010

0

1

2

3

4

5

6%%

Source: MNB.

Fast adjustment in the private and banking sector

Source: MNB.

Net financing position of the private sector and the loan-to-deposit ratio of the banking sector

120

130

140

150

160

170

120

130

140

150

160

170

The loan-to-deposit ratio (exchange rate adjusted)

% %

-10-8-6-4-2024

Mar

-06 Jun- 06 Sep- 06

Dec

-06 Mar

-07 Jun- 07 Sep- 07

Dec

-07 Mar

-08 Jun- 08 Sep- 08

Dec

-08 Mar

-09 Jun- 09

-10-8-6-4-2024

The net financing position of the private sector as a percentage of GDP HUF bn

Necessary adjustment can lead to deeper recession and slower recovery

Source: Eurostat, EC.

-25

-20

-15

-10

-5

0

5

10

151q

-00

3q-0

0

1q-0

1

3q-0

1

1q-0

2

3q-0

2

1q-0

3

3q-0

3

1q-0

4

3q-0

4

1q-0

5

3q-0

5

1q-0

6

3q-0

6

1q-0

7

3q-0

7

1q-0

8

3q-0

8

1q-0

9

3q-0

9

1q-1

0

3q-1

0

1q-1

1

3q-1

1

%

-25

-20

-15

-10

-5

0

5

10

15

%

BG CZ HU PL RO SK CY MT SI EE LT LV

Red lines: Baltic countriesBlue lines: Central EU. countriesGreen lines: Mediterranean countries

EC forecast

GDP growth rates in new EU countries

The potential output can be negatively affected by the crisis

• Productivity (TFP):

– Financing constraints disrupt daily operations

– Expenditure on innovation falls

– Sluggish reallocation between industries

• Labour input:

– Long-term unemployment erodes human capital

• Capital input:

– Capital accumulation slows down

– Excess capacities are scrapped

• But two country-specific factors reduce these negative effects:

– High risk premia fall with fiscal consolidation

– Government measures boost labor market participation

Financial crises reduce potential growthalthough their long-term impact varies:

Lower long-run potential growth rate (Japan)?

Full recovery in levels (Sweden)?

One-time loss in output level (Finland)?

Source: Impact of the current economic and financial crisis on potential output, European Economy, Occasional Papers No 49

IMF estimations– Growth regression– Potential growth is 0.6-

2.5 pp lower after the crisis

– Hungary is mostly affected through its debt burden

Source: IMF Regional Outlook Europe, October 2009, Box 5

MNB re-evaluated its projections in August

-1

0

1

2

3

4

5

620

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Contrib

utio

n to p

ote

ntia

l gro

wth

(per

centa

ge p

oin

t)

-1

0

1

2

3

4

5

6

Annual ch

ange (p

er cent)

TFP Labour Capital Potential growth rate (right scale)

Potential growth and its components in Hungary

Source: MNB.

…but Hungary with lower post-crisis potential output growth is not an

exception in CEEEuropean Commission estimations for the CEE region

– Potential growth slows to 2-2.5 per cent– No recovery to pre-crisis growth rates (contrary to the euro area)

Note: calculations for the EU-8 aggregate (BG, CZ, EE, LT, LV, PL, RO)

Source: Impact of the current economic and financial crisis on potential output, European Economy, Occasional Papers No 49

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