Warsaw, 6 th September 2004 HOUSEHOLD WEALTH IN THE NEW EUROPE COUNTRIES

Warsaw, 6th September 2004

HOUSEHOLD WEALTH IN THE NEW EUROPE COUNTRIES

2

AGENDA

Overview

Wealth and Debt

Savings patterns

Asset allocation in the New Europe

Conclusions

3

THE NEW EUROPEAN MARKET – THE CHALLENGE OF REBUILDING A HOMOGENEOUS MARKET THROUGH THE CONVERGENCE IN LIVING STANDARDS

Year 2003 data

Population mln.

EU-15(1)

380

NE-12(2)

177

Per capita Fin. Wealth, Euro 1,897

Per Capita GDP, Euro 24,174 3,998

Per capita Liabilities, Euro

50% of EU15 population, but only 2% of financial wealth

Low financial penetrationRelatively high home

ownership

41,628(4)

Home ownership

14,498(4) 362

62%64%

# of Bank Accounts / Inhabitants 53%134%

Note: (1) As of 2002; (2) The NE(12) – New Europe - definition includes 8 CEECs new EU members, plus other candidate or EU approaching countries (I.e. Bulgaria, Romania, Croatia and Turkey). Malta and Cyprus are excluded. Slovenia has been excluded due to unavailability of data on personal fin.assets; (3) As of 2002; (4) Proxy for the EU aggregate including Italy, France, Germany, The Netherlands, Spain and UK. Source: PFA Database, New Europe Research Network and Eurostat

ITALY(3)

76%

57

21,930

35,800

5,296

63%

4

0

40

80

120

160

200

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Despite high involuntary saving in the pre-transition period, real value of assets erosion

Financial and banking crisis during the first years of transition adding to the accumulation problems

Central European countries successful in transition benefiting for a longer time of wealth accumulation (strong economic growth, price stabilisation and increasing overall stability)

16% 21% 26%34% 34%

47% 49% 50% 50% 52%68% 73%

170%

Rom

ania

Lith

uani

a

Est

onia

Latv

ia

Bul

garia NE

Slo

vaki

a

Tur

key

Pol

and

Hun

gary

Cro

atia

Cze

ch R

.

EU

Households’ Financial Wealth as % of GDP (2003) Financial Wealth Developments (1993-2000)(2)

WEALTH IS ONLY 47% OF GDP, WHILE 170% AT THE EU15 LEVEL

Italy(1) =163%Portugal(1) = 195%

Note: (1) As of 2002; (2) Proxy for individuals’ financial wealth using total retail deposits in the Czech R., Hungary, Poland and Slovakia

Source: New Europe Research Network

Jan ‘93= 100(1)

5

STRONG DISPARITIES AMONG COUNTRIES, WHILE BEING RICH IS A MATTER OF FLOWS RATHER THAN OF STOCKS

Note: (1) As of 2002. Proxy for the EU aggregate including Italy, France, Germany, The Netherlands, Spain and UK; (2) As of 2002.

Source: PFA Database, New Europe Research Network

Per capita Financial Wealth

2003 – EUR

338773 883

1246 1251

22832628

3630 3796

5592

1424

0

1,000

2,000

3,000

4,000

5,000

6,000

Ro

ma

nia

Bu

lga

ria

Lit

hu

an

ia

La

tvia

Es

ton

ia

Tu

rke

y

Po

lan

d

Slo

va

kia

Hu

ng

ary

Cro

ati

a

Cze

ch

R.

40,000

Average NE = 1,897

Average EU(1) = 41,628

Italy(2) = 35,800

2003 EUR

NE average per capita wealth is less than 5% of EU15 level

Strong direct relationship between per capita income and per capita wealth, meaning that accumulation is a matter of flows

Wealth is accumulated by working population while the poorest share is not able to save

Romania

Bulgaria

Lithuania

LatviaEstonia

TurkeyPoland

Slovakia

Croatia

Hungary

Czech R.

0

1,000

2,000

3,000

4,000

5,000

6,000

0 2,000 4,000 6,000 8,000 10,000

Per capita GDP

Pe

r c

ap

ita

we

alt

h

6

Lending growth is a consequence of structural development of the market

Credit boom driven by the level of consumption and decreasing cost of debt Strong selection on clients – only the richest share of the population, young individuals,

with high income and wealth

HOUSEHOLDS’ LIABILITIES

percentage of GDP and billion € - 2003

STRUCTURAL DEVELOPEMENT OF THE LENDING MARKET, BUT STILL LOW DEBT COMPARED TO EU LEVELS

Note: (1) As of 2002. (2) As of 2002. EU aggregate includes Italy, France, Germany, The Netherlands, Spain and UK


Lith

uani

a

Rom

ania

Tur

key

Latv

ia

Slo

vaki

a

Bul

gari

a

Cze

chR

.

Est

onia

Pol

and

Hun

gary

Cro

atia

NE

EU

3.2% 4.0% 4.5% 5.0% 7.1% 7.4% 9.3% 11.1% 12.5% 16.5%

29.1%

9.1%

59.3%

0.5 1.8 9.10.4 2.1 1.3 7.3

0.721.7

11.7

7.2

63.9

4,568

Italy(1) = 24%Portugal(1) = 71%

Spain(1)=53%

(2)

7

AGENDA

Overview

Wealth and debt

Savings patterns


Conclusions

8

SAVING AND NET FINANCIAL WEALTH ACCUMULATION – STRONG DIFFERENCES ACROSS COUNTRIES

Central European countries present a substantially higher households saving ratio, with an unstable trend

Slovakia and Hungary show low or negative net financial accumulation, signalling that savings are directed outside the financial sector – towards real estate

In Bulgaria and Romania, given the low level of per capita income, still a large number of individuals can not afford a strong saving pattern

Note: National Accounts for all countries except for Croatia where data are estimated by Zagrebacka Banka Research; data on gross savings ratio are as of 2002 for Poland and Hungary, 2001 for Estonia and Latvia, 2000 for Lithuania and Romania while 2003 for the remaining countries; (1)Gross savings over gross disposable income. Gross savings is equal to gross disposable income less consumption; (2) Changes in wealth and liabilities are measured considering the change from 2001 to 2002. Source: PFA Database, New Europe Research Network, National Statistical Office

Bu

lgar

ia

Cro

atia

Cze

ch R

.

Hu

ng

ary

Po

lan

d

Ro

man

ia

Slo

vaki

a

Tu

rkey

Est

on

ia

Lit

hu

ania

Lat

via

Gross saving ratio %(1) Change in Household Wealth as % of GDP(2)

Change in Household Liabilities as % of GDP(2) Net change in Household Wealth as % of GDP

-2%

0%

2%

4%

6%

8%

10%

12%

14%

9

SAVING BEHAVIOUR BY INCOME GROUPS – LOW INCOME POPULATION STILL UNABLE TO SAVE

Saving propensity is increasing, as income increases, in a more than proportional way In Bulgaria, given very low absolute income levels, a large share of the population can not

afford saving. Only the rich can save Also in Poland and Hungary, saving of lower income classes is substantially lower than in

higher income groups

-0.2

-0.1

0.0

0.1

0.2

0.3

1 2 3 4 5

Income quintiles - 1 means lowest

Sav

ing

rat

io

Bulgaria Hungary Poland

HOUSEHOLDS SAVING RATIO – BY INCOME QUINTILES(1)

Source: (1) C. Denizer (2000) ‘Household Saving in Transition Economies’, World Bank

10

HOUSEHOLDS SAVING BEHAVIOUR - THE IMPACT OF CONVERGENCE

REAL CONVERGENCE

(Expected increase in income)

Increase in the number of households able to save - higher share of population

above the income threshold for saving

Increase in consumption/investment appetite - pressure for equalisation of

consumption and for house purchase, etc.

Uncertain impact on saving

propensity and on net financial

wealth accumulation

No, provided:

• Fiscal discipline• CA financed by FDI

Can this endanger the story of catching up and sustanaible

growth?

11

THE ROLE OF POLICY MAKERS AND FINANCIAL INSTITUTIONS

Fiscal discipline

Competitiveness

Credit quality

Policy-makers

Financial Institutions

Support to consumption and intermediation

Focus Actions

Control on budget spending (avoiding crowding out effects)

Infrastructures development Fiscal competitiveness Legal and regulatory framework Support to SME

Monitoring credit quality without excessive burden on market development

In low income countries: traditional intermediation, gradual timing mismatch coverage and support to FDI

In medium income countries: lending to support anticipation of consumption (target selection), supply of more sophisticated products and support to FDI

12

AGENDA

Overview

Asset Allocation in the NE: present and prospective

Portfolio allocation choices in the New Europe

Past convergence experiences

Lessons for New Europe

Conclusions

13

HOUSEHOLD FINANCIAL ASSETS – PRESENT ALLOCATION

FINANCIAL ASSETS (STOCKS) OF HOUSEHOLDS (S.14) 2003 - € million and % of total wealth

6,063 16,864 57,056 36,847 87,230 7,380 14,136 101,544

Currency demand - consumption driven

Bank deposit - most relevant component, strongly decreasing

Securities relevance dependent on Government debt size – low except Turkey, Hungary, Poland and Romania

Equities mostly a consequence of the privatisation process. Sizable role in Czech R, Romania, Turkey and Poland

Mutual funds perceived as advanced and innovative products. Switch is a function of relative wealth and expected returns

Pension funds and life insurance growth strongly connected with timing of the reform, level of development of the market and tax treatment

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bul

gari

a

Cro

atia

Cze

ch R

.

Hun

gary

Pol

and

Rom

ania

Slo

vaki

a

Turk

ey EU

Currency DepositsSecurities other than shares Listed sharesMutual funds Insurance technical reservesPension funds


14

AGENDA

Overview

Asset Allocation in the NE: present and prospective




Conclusions

15

ITALY AND NEW EUROPE: SOME PARALLELS IN CONVERGENCE?

Italy has gone through a convergence process with a strong decrease of the risk premium on its bonds

Unfortunately however, in the short term, the end of the Italian convergence has coincided with the equity market bubble and this has made the transition bumpier

0

4

8

12

16

20

ITALY INTERBANK1 MTH

40%

25%

31%

20%

14%

27%

10% 12%

4%

17%

1995 2000

Insurance technical

reserves

Mutual funds

Shares and other

equity, excluding

mutual funds shares

Securities other then

shares

Currency and deposits

Household financial asset composition 1995-2000

40%

25%

31%

20%

14%

27%

10% 12%

4%

17%

1995 2000

Insurance technical

reserves

Mutual funds

Shares and other

equity, excluding

mutual funds shares

Securities other then

shares

Currency and deposits

16

AGENDA

New Europe market overview

Asset Allocation in the NE: present and perspective




Conclusions

17

FORCES DRIVING CHANGES

Interest rates convergence towards EU levels

Decreasing overall risk driving reduction in government bond spread over EU yield curve

Macroeconomic environment

Integration into a pan-European market

More opportunities with lower risks

Pension reform

Financial markets

Expectation for increase in personal income and wealth

Individuals

Less attractiveness for traditional banking products

Switch towards more diversified and structured products searching for higher returns

18

0%

4%

8%

12%

16%

20%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Volatility

Exp

ecte

d r

etu

rn

ASSET ALLOCATION: FORESEEABLE TRENDS IN THE NEW EUROPE

COMPARISON WITH EU LONG-TERM FRONTIER(1)

New Europe

Europe

HU

PL

CR

SKEurope

Up to now, the shift has been towards combinations of lower yield and slightly higher risk, as capital markets are not jet integrated at the international level – the situation is likely to change with full convergence

Efficient frontiers for all Central and East European countries tend to lie above the EU target Macroeconomic convergence will lead to convergence of the efficient frontier towards the EU one

Note: (1) X denotes the combination of expected return and risk associated to country specific households’ portfolio in 2003

19

Personal Financial Assets – forecasts 2003 – 2007

EUR mln

Source: New Europe Research Network. NE aggregate including only Poland, Croatia, The Czech R., Slovakia, Turkey, Romania and Bulgaria

CAGR 13%

ASSET ALLOCATION – PENSION, INSURANCE AND MUTUAL FUNDS THE LEADING PRODUCTS IN THE REGION

0

100,000

200,000

300,000

400,000

500,000

600,000

2003 2007

Currency Bank deposit retail

Securities Listed shares

Mutual funds Insurance technical reserves

Pension funds assets

CAGR ’03-07

Currency 9%

Bank deposits retail 8%

Securities 17%

Listed shares 15%

Mutual funds 29%

Insurance techn. Reserves 19%

Pension funds assets 27%

20

AGENDA

Overview


Conclusions

21

CONCLUSIONS

Significant convergence challenge in terms of wealth

Being “rich” is a matter of flows, with no significant role for heritage. Increasing indebtedness, to finance consumption, still with strong selection

Real convergence will imply a non increasing saving propensity pattern, still compatible with real convergence success and financial sector growth

Authorities and financial players can play a role in supporting real convergence

Authorities by supporting competitiveness, fiscal control and credit quality monitoring

Financial institutions by providing adequate credit, financial products and supporting FDI

Macroeconomic stabilisation and infrastructure changes driving new financial allocation choices

On the overall, structural transformation of the financial sector infrastructure, with gradual evolution towards the market, still with a central role played by banking institutions

Documents

Warsaw, 6 th September 2004 HOUSEHOLD WEALTH IN THE NEW EUROPE COUNTRIES