Carlo Cottarelli, IMF CAPITAL MOVEMENTS TO EMERGING EUROPE AND EU CONVERGENCE: RECENT DEVELOPMENTS AND PROSPECTS ISTANBUL DECEMBER 2, 2005

Carlo Cottarelli, IMFCarlo Cottarelli, IMF

CAPITAL MOVEMENTS TO CAPITAL MOVEMENTS TO EMERGING EUROPE AND EU EMERGING EUROPE AND EU

CONVERGENCE: CONVERGENCE:

RECENT DEVELOPMENTS AND RECENT DEVELOPMENTS AND PROSPECTSPROSPECTS

ISTANBULISTANBULDECEMBER 2, 2005 DECEMBER 2, 2005

Carlo CottarelliCarlo Cottarelli

Figure 1. Emerging Markets' Gross and Net Issuance (in billions of U.S. dollars)

-10

0

10

20

30

40

50

60

70

80

90

1997

-Q1

1997

-Q3

1998

-Q1

1998

-Q3

1999

-Q1

1999

-Q3

2000

-Q1

2000

-Q3

2001

-Q1

2001

-Q3

2002

-Q1

2002

-Q3

2003

-Q1

2003

-Q3

2004

-Q1

2004

-Q3

2005

-Q1

Europe

Middle East and Africa

Latin America

Asia

Total Net Issuance


Figure 2. EMBIG Spreads and UST Yields

0

200

400

600

800

1000

1200

1400

1600

1800

12/3

1/19

97

3/31

/199

8

6/30

/199

8

9/30

/199

8

12/3

1/19

98

3/31

/199

9

6/30

/199

9

9/30

/199

9

12/3

1/19

99

3/31

/200

0

6/30

/200

0

9/30

/200

0

12/3

1/20

00

3/31

/200

1

6/30

/200

1

9/30

/200

1

12/3

1/20

01

3/31

/200

2

6/30

/200

2

9/30

/200

2

12/3

1/20

02

3/31

/200

3

6/30

/200

3

9/30

/200

3

12/3

1/20

03

3/31

/200

4

6/30

/200

4

9/30

/200

4

12/3

1/20

04

3/31

/200

5

6/30

/200

5

9/30

/200

5

3

3.5

4

4.5

5

5.5

6

6.5

7

10-year UST

EMBIG Spread

Russia

Brazil

US Stock Market

Argentina

Brazil/ENRON

Fed Starts raising rates

Ford/GM

Katrina


Figure 3. Evolution of Regional Shares in Gross Issuance

Asia

Latin America

Europe

Middle East and Africa

0

5

10

15

20

25

30

35

40

45

50

1997 1998 1999 2000 2001 2002 2003 2004 2005H1


Figure 4. Emerging Market Spreads (bps)

100

600

1100

1600

2100

2600

Dec

-97

Mar

-98

Jun-

98

Aug

-98

Nov

-98

Jan-

99

Apr

-99

Jul-

99

Sep-

99

Dec

-99

Feb-

00

May

-00

Jul-

00

Oct

-00

Jan-

01

Mar

-01

Jun-

01

Aug

-01

Nov

-01

Jan-

02

Apr

-02

Jul-

02

Sep-

02

Dec

-02

Feb-

03

May

-03

Jul-

03

Oct

-03

Jan-

04

Mar

-04

Jun-

04

Aug

-04

Nov

-04

Jan-

05

Apr

-05

Jul-

05

Europe

Latin America

Asia

EMBI Plus/Global


Figure 5. Consolidated Claims of BIS Reporting Banks on Banking Sector

0

2000

4000

6000

8000

10000

12000

14000

Q21990

Q21991

Q21992

Q21993

Q21994

Q21995

Q21996

Q21997

Q21998

Q21999

Q12000

Q32000

Q12001

Q32001

Q12002

Q32002

Q12003

Q32003

Q12004

Q32004

Q12005

Mill

ions

of

US

doll

ars

Bulgaria Croatia Czech Republic Estonia Hungary Latvia

Lithuania Poland Romania Slovakia Slovenia


Figure 6. BIS claims on banks in developing countries, by region(in percent of total BIS claims on banks in developing countries)

Africa & Middle East

Asia & Pacific

Europe

Latin America/Caribbean

0

10

20

30

40

50

60

Q2

19

90

Q

2 1

99

1

Q

2 1

99

2

Q

2 1

99

3

Q

2 1

99

4

Q

2 1

99

5

Q

2 1

99

6

Q

2 1

99

7

Q

2 1

99

8

Q

2 1

99

9

Q

1 2

00

0

Q

3 2

00

0

Q

1 2

00

1

Q

3 2

00

1

Q

1 2

00

2

Q

3 2

00

2

Q

1 2

00

3

Q

3 2

00

3

Q

1 2

00

4

Q

3 2

00

4

Q

1 2

00

5


Figure 7. GDP per Capita ( PPP), as a share of euro area

Slovenia

Slovak Republic

Romania

Poland Lithuania

Latvia

Hungary Estonia

Czech Republic

Croatia

Bulgaria

RegionalAverage

20

30

40

50

60

70

80

20 30 40 50 60 70 80

1995

2004


Figure 8. Emerging Europe. Deterioration in Average Current Account Positions

Current Account Balance (in percent of GDP)

CA adjusted for FDI (in percent of GDP)

-7

-6

-5

-4

-3

-2

-1

0

1

2

2000 2001 2002 2003 2004


Figure 9. Nominal Interest Rate Convergence: Yields on 10 year government bonds (differentials with Germany)

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

Jan-

01

Mar

-01

May

-01

Jul-

01

Sep-

01

Nov

-01

Jan-

02

Mar

-02

May

-02

Jul-

02

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-

04

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-

05

Sep-

05

Czech Republic

Latvia

Lithuania

Hungary

Poland

Slovenia

Slovak Republic

Estonia


Table 1 – Exchange rate regimes in Emerging EuropeTable 1 – Exchange rate regimes in Emerging Europe

Bulgaria Bulgaria Currency Board Currency Board

CroatiaCroatia Quasi-peg Quasi-peg

Czech RepublicCzech Republic Float (limited intervention)Float (limited intervention)

EstoniaEstonia Currency board and ERM IICurrency board and ERM II

HungaryHungary Managed float within large bandManaged float within large band

LatviaLatvia Peg and ERMIIPeg and ERMII

LithuaniaLithuania Currency board and ERMIICurrency board and ERMII

PolandPoland Managed FloatManaged Float

RomaniaRomania Managed FloatManaged Float

SlovakiaSlovakia Managed float with sizable intervention and stability Managed float with sizable intervention and stability

SloveniaSlovenia De facto peg and ERM IIDe facto peg and ERM II


Figure 10. Rolling Correlations of Local with German Yields

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Jan-

02

Mar

-02

May

-02

Jul-

02

Sep

-02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-

03

Sep

-03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-

04

Sep

-04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-

05

Sep

-05

Czech Republic

Hungary

Poland

Slovak Republic


Figure 11. Bank Credit to the Private Sector RatiosRelative to Euro Area Levels (Euro Area =100)

0

10

20

30

40

50

60

Bulgaria Croatia CzechRepublic

Estonia Hungary Latvia Lithuania Poland Romania SlovakRepublic

Slovenia

1999

2004


Figure 12. Credit Growth and Current Account Deficits

SVN

SVK

ROM

POL

LIT

LAT

HUN

EST

CZE

HRV

BGR

-10

-5

0

5

10

15

20

25

0 2 4 6 8 10 12

Current Account Deficit (in percent of GDP)

Ch

ange

in C

red

it t

o G

DP

rat

io


Table 2. Vulnerability Indicators: Number of Emerging European Countries per Quartile

1st quartile 2nd quartile 1st quartile 2nd quartileExternal sector 1/Current account balance 7 10 8 10Current account minus FDI 5 8 5 8External financing requirement 8 10 6 10External financing from private sector 7 9 3 7

GIR/short-term debt 3 9 3 6Gross external debt 6 8 3 6Short-term debt 8 10 7 10

Fiscal sector 1/Fiscal balance 5 5 3 4Primary balance 6 10 4 8Amortization of debt 2 6 ... ...Gross public debt 0 2 0 3External public debt 0 2 1 1

Banking sectorNPL ratio 1 3 0 4CAR 2 5 0 2ROA 3 8 1 3

Change in credit/GDP 5 8 2 6

1/ In percent of GDP unless otherwise indicated.

2005 2001


Figure 13. Actual vs Predicted Bank Credit to the Private Sector (in percent of GDP)

0

10

20

30

40

50

60

70

80

90

Bulgaria Croatia CzechRepublic

Estonia Hungary Latvia Lithuania Poland Romania SlovakRepublic

Slovenia

Actual, 2004

Predicted Value

Documents

Carlo Cottarelli, IMF CAPITAL MOVEMENTS TO EMERGING EUROPE AND EU CONVERGENCE: RECENT DEVELOPMENTS AND PROSPECTS ISTANBUL DECEMBER 2, 2005