M. Singer – Sound currency: The Czech experience 1M. Singer – Sound money: Czech experience 1M. Singer – Czech Republic: Current Situation and Outlook 1M. Singer – Inside or Outside the Euro Area 1M. Singer – Recent Developments in the Czech Economy, Risks and Outlook 1M. Singer – Macroeconomic developments, monetary policy and financial sector 1M. Singer – The Czech economy and crisis in Eurozone: CNB view 1M. Singer – Czech economy and development in Europe: Outlook and Challenges 1M. Singer – Czech Republic: Can record low rates be sustained? 1M. Singer – Czech Republic: Future challenges and opportunities 1M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1M. Singer - Czech Republic: Staying Ahead of the Curve with Regard to Monetary Policy 1M. Singer: The economic and financial crisis from the point of view of the Czech banks 1M. Singer: Financial Crisis: Impacts on the CR and Lessons for the Supervisors 1M. Singer: Financial Crisis: Likely Impacts on the CR and Lessons for the SupervisorsM. Singer: Present Conditions, Monetary Policy and Outlook for CR 1M. Singer: Consumer protection in financial services: CNB approach 1
Sound Sound currencycurrency: : The Czech experienceThe Czech experience
Mont Pelerin Society for Czech Academia & BusinessPrague, 6 September 2012
MiroslavMiroslav SingerSingerGovernor, Czech National BankGovernor, Czech National Bank
M. Singer – Sound currency: The Czech experience 2
IntroductionIntroduction
•
The Czech economy has experienced four shocks (1990–1993, 1996–1998, 2001–2002 and 2008–2009)
•
Common feature of 1996–1998 and 2001–2002 shocks: mistakes made by main domestic economic policymakers
•
In this presentation, I will focus on twin (currency and banking sector) crisis of 1996–1998 and on assessing present stability of Czech currency
•
Methodological starting point: sound currency is result of:
1) appropriate monetary policy framework
2) correctly implemented macroeconomic policies
3) appropriate regulation and careful supervision of financial sector
M. Singer – Sound currency: The Czech experience 3
•
Strong demand
High wage growth (much higher than productivity growth)
High growth of private and public investment (infrastructure)
Strong credit growth
Strong capital inflow (high interest rate differential) •
Weak supply side
(underdeveloped markets, badly defined property
rights, malfunctioning legal and institutional framework, etc.) Emergence of external imbalance
•
Situation also complicated by errors in main statistical series (GDP, foreign trade, current account) preventing correct assessment of state of Czech economyIn 1996 the overheating proved to be unsustainable: the situation required adjustment and appropriate policy responses
Causes of twin crisis I: Causes of twin crisis I: Macroeconomic developmentsMacroeconomic developments
M. Singer – Sound currency: The Czech experience 4
Real wages and labour productivityReal wages and labour productivity
The wage-productivity mismatch peaked in 1995 (at 12 pp) and was still significant in 1996
-4
-2
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
y-o-
y ch
ange
s in
%
Real wages
Labour productivity
Source: CZSO
M. Singer – Sound currency: The Czech experience 5
External imbalance External imbalance
The external imbalance was widest in 1996
Source: CZSO
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
As
% o
f GD
P
Trade balance/GDP
Current account/GDP
M. Singer – Sound currency: The Czech experience 6
Monetary policy frameworkMonetary policy framework•
Fixed exchange rate regime
•
Money targeting•
Capital account liberalisation (managed and spontaneous); basically ended by entry into OECD in October 1995
•
“Impossible Trinity”:
(problematic) coexistence of:
Free capital flows
Fixed exchange rate
Independent monetary policy Capital account liberalisation undermined cohesion of monetary policy framework
necessitated change
of exchange rate regime
M. Singer – Sound currency: The Czech experience 7
•
Increase in interest rates (beginning of 1996) •
Widening of fluctuation band (end of February 1996, to ±7.5%)
•
1st stabilisation package in April 1997 (but not credible) This was not enough to persuade markets! speculative attack (in May 1997) abandonment of peg managed float depreciation of koruna inflationary expectations inflation
•
2nd stabilisation package in June:
Macro measures: fiscal tightening, wage freeze, import deposits
Micro measures: legal and institutional reforms•
Introduction of inflation targeting (since January 1998)
Efforts to rectify imbalancesEfforts to rectify imbalances
The price for rectifying the imbalances was the crisis of 1997–1998
M. Singer – Sound currency: The Czech experience 8
-6
-4
-2
0
2
4
6
8
95/I II III IV 96/I II III IV 97/I II III IV 98/I II III IV 99/I II III IV
y-o-
y ch
ange
in %
Data from 4Q/98Data from 4Q/99
Deceleration was steeper
Depression instead of growth
Actual growth was faster
Comparison of two GDP time seriesComparison of two GDP time series
More accurate and timely information on the cyclical position of the economy could have led to less restrictive policies
Source: CZSO
M. Singer – Sound currency: The Czech experience 9
Current account and trade balance in Current account and trade balance in 1996: Preliminary versus final data1996: Preliminary versus final data
More accurate data at the start of 1997 could have influenced the form of the speculative attack on the koruna
-8,0
-10,6
-6,6
-9,2
-12
-10
-8
-6
-4
-2
0Current account balance/GDP Trade balance/GDP
as %
of G
DP
Preliminary data
Final data
Source: CZSO
M. Singer – Sound currency: The Czech experience 10
Causes of twin crisis II:Causes of twin crisis II: Banking sector developmentsBanking sector developments 1/21/2
•
Banking sector started from zero in 1990•
Division of “monobank”
(1990) two-tier system
•
Inherited problems (undercapitalisation, inherited bad loans, lack of long-term funds, lack of experienced and skilled managers)
•
Consolidation Programme I
(clean-up of balance sheets of banks KB, ČS and IPB; foundation of Konsolidační
Banka
in 1991) (total costs: around 7% of annual GDP of 1995)•
Entry of small banks (13 in 1990, 13 in 1991, 17 in 1992, 10 in 1993 and 4 in 1994) (undercapitalised, risky business policies)
M. Singer – Sound currency: The Czech experience 11
•
Consolidation Programme II
(1996) (aim: to prevent domino effect in small bank subsector; 15 out of 18 small banks participated) (costs: similar to CP I)
•
Stabilisation Programme (1996) (intended for 13 small banks; 5 out of 6 banks that participated were excluded; program
proved unsuccessful)•
Four state-owned banks:
inadequate management, low
profitability and competitiveness, wrong signals for resource allocation, major drain on public funds
The banking sector, and in particular the failure to privatise large banks in the more favourable pre-1998 period, started to hamper the incipient market system to an increasing extent
Causes of twin crisis II:Causes of twin crisis II: Banking sector developments Banking sector developments 2/22/2
M. Singer – Sound currency: The Czech experience 12
Anatomy of banking sector crisisAnatomy of banking sector crisis
Accumulation of bad loans
Capital inflow Non-market factors
Inadequate banking
supervision
Property and capital market
bubbles
Fraudulent behaviour
Rapid credit growth
Inadequate risk assessment
Rapid growth in bad loans became the main source of future difficulties in the banking sector
M. Singer – Sound currency: The Czech experience 13
Twin crisis Twin crisis •
Until first third of 1997, macroeconomic imbalances and banks’
problems developed more or less in parallel•
Sharp depreciation + dramatic interest rate increase + fiscal restrictions shock to banking sector of magnitude not usually simulated in bank stress tests
•
Outbreak of currency crisis and slide into recession caused two crises to merge into one –
twin crisis
•
Twin crisis was caused solely by bad policies:
Underestimation of symptoms of overheating and external imbalances; underestimation of Impossible Trinity and late exit from fixed exchange rate regime
Deferral of privatisation of large banks in 1994–1995
The twin crisis was an unforced crisis of domestic origin
M. Singer – Sound currency: The Czech experience 14
•
Banking sector:
Major state-funded clear-out of bad loans from banks’ balance sheets
Sale of large banks to private foreign owners•
Macroeconomic policies:
Macroeconomic restrictions (monetary and fiscal)
Introduction of consistent framework (inflation targeting + freely floating exchange rate)
The measures adopted as a result of the twin crisis put the economy on a long-term equilibrium path
Way out of crisisWay out of crisis
M. Singer – Sound currency: The Czech experience 15
Bank profitability and bad loans Bank profitability and bad loans
The clean-up and privatisation of large banks led to a big improvement in the characteristics of the banking sector
Source: CNB
-600
-400
-200
0
200
400
600
800
1 000
1 200
1 400
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 05H1
in 1
000
CZK
0
5
10
15
20
25
30
in %
Net profit per emloyee (left axis)Non-performing loans (as % of all loans) (right axis)
M. Singer – Sound currency: The Czech experience 16
•
Increased volatility of output, exchange rates and inflation during crisis + growth in general uncertainty negative impact on investment decision-making
•
Cumulative gap between potential and actual output paths in 1997–1998 could have reached around 4–5% of annual GDP (could have been even larger had gap not been closed in 1999)
•
Macroeconomic policy response (restriction) was in textbook contradiction with current (also textbook) consensus on macroeconomic policy response to current shocks to financial systems in advanced countries
The twin crisis was a costly lesson for the Czech economy
Costs of twin crisisCosts of twin crisis
M. Singer – Sound currency: The Czech experience 17
GDP in CZ 1997 Q1GDP in CZ 1997 Q1––2012 Q12012 Q1 quarterly quarterly yy--oo--yy; seasonally adjusted; seasonally adjusted
The decline in 1997–1998 was followed by a period of rapid growth ending with the financial crisis in 2008
-8
-6
-4
-2
0
2
4
6
8
10
1997
Q119
97Q4
1998
Q319
99Q2
2000
Q120
00Q4
2001
Q320
02Q2
2003
Q120
03Q4
2004
Q320
05Q2
2006
Q120
06Q4
2007
Q320
08Q2
2009
Q120
09Q4
2010
Q320
11Q2
2012
Q1
Source: Eurostat
M. Singer – Sound currency: The Czech experience 18
Consumer price index in CZConsumer price index in CZ ((yy--oo--yy changes in %)changes in %)
After the switch to inflation targeting (1998) inflation fell from 9–10% to a level regarded as price stability; the volatility was due mostly to exogenous shocks (VAT, crude oil, food, etc.)
-2
0
2
4
6
8
10
12
14
16
1/96 8 3 10 5
12/9 7 2 9 4 11 6
1/03 8 3 10 5
12/0 7 2 9 4 11 6
1/10 8 3 10 5
12/1
y-o-
y ch
ange
s in
%
Source: CZSO
M. Singer – Sound currency: The Czech experience 19
Equilibrium and nominal exchange Equilibrium and nominal exchange rate of koruna rate of koruna (CZK/EUR)(CZK/EUR)
The exchange rate of the koruna has been close to its equilibrium values since 1997
Source: Komárek L., Motl M. (2012)Note: Equilibrium
band based
on BEER (Behavioral
Equilibrium
Exchange Rate) and
FEER (Fundamental
Equilibrium
Exchange Rate)
22
24
26
28
30
32
34
36
38
40
42
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1222
24
26
28
30
32
34
36
38
40
42
Equilibrium band Nominal CZK/EUR
M. Singer – Sound currency: The Czech experience 20
““Magic triangleMagic triangle””
The vertices of the triangle and the relationships between them all contribute to stability/instability of the economy
Financial sector
Macroeconomic and exchange rate
frameworkEnterprises
M. Singer – Sound currency: The Czech experience 21
““Magic triangleMagic triangle””: Then and now: Then and now•
Banking sector:
1997: was not stabilised, banks were inefficient, toxic assets accumulated
2012: is well capitalised, highly profitable and resilient to shocks•
Macroeconomic framework:
1997: growing inconsistency source of sys. instability and shocks
2012: is not internally inconsistent; is anchor for economy and buffer against external shocks (current crisis); however, exchange rate
can
be source of short-term shocks in the event of monetary policy mistakes (e.g. 2001–2002)
•
Enterprise sector:
1997: had only just come into being and was vulnerable
2012: is competitive and much more resilient
The entire triangle is now in infinitely better shape than during the 1996–1998 crisis
M. Singer – Sound currency: The Czech experience 22
Role of supervision: Then and nowRole of supervision: Then and now•
Factors formerly weakening role of banking supervision:
Limited circle of people, who inevitably knew each other
State representatives sitting “on other side of table”
(in banks)
“No time”
for standard supervisory procedures (only choice available in some phases: bail it out or close it down)
•
Role of supervision now:
No major or systemic sources of risk in banking sector
Integration of supervision (2006) was big step forward in safeguarding financial sector stability (closer relationship with monetary policy)
Foreign ownership of sector reduces conflict of interests of supervisory staff
•
Main risk: shift of supervision to supranational level Domestic financial market supervision conditions are better now than they were then
M. Singer – Sound currency: The Czech experience 23
Macroeconomic stability: Macroeconomic stability: Then and now Then and now
•
First half of 1990s: period of stability and transformation
Currency peg (despite relatively high inflation) was anchor for economy undergoing systemic changes
•
1996–1998: period of instability (home-made) •
1999–2008: period of stability and growth
Consistent monetary policy framework; nominal appreciation; disinflation and attainment of price stability; rapid growth
•
2008–2012: financial and debt crisis (external)
Main negative impacts: via foreign trade
Pre-crisis policies proved fully effective The former problem areas are now acting as buffers against the crisis
M. Singer – Sound currency: The Czech experience 24
SummarySummary
•
Twin crisis (1997–1998) was caused by domestic factors and inappropriate domestic policies (too long-lasting fixed exchange rate strategy and deferred privatisation of banks)
•
Rectification of domestic mistakes kicked off period of rapid growth
•
Former sources of shocks (monetary policy framework and financial sector) turned into absorbers of external shocks
•
Transfer of financial market supervision to supranational level will pose risk to financial stabilityIn the 1990s the risks of instability were mostly of a domestic nature, whereas external risks now predominate and will continue to do so
M. Singer – Sound currency: The Czech experience 25
Thank youThank you
Miroslav
[email protected]: +420 224 412 000
Česká
národní
banka Na Příkopě
28
115 03 Praha
1