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2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.
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2007. Harald Hirschhofer. Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities? CEE-Wirtschaftsforum 2007. Forum Velden.

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  • 1. Harald Hirschhofer Ständiger Vertreter für Serbien und Montenegro/Resistant Representative for Serbia and Montenegro, International Monetary Fund (IMF), Österreich/Austria Finanzbereich in den CEE-Ländern. Wie können Makro-Risiken reduziert werden? Financial Sector in CEE. How to Reduce Macro-Prudential Vulnerabilities?
  • 2. Central and Eastern Europe Economic Forum Velden Austria, 19 September 2007 FINANCIAL SECTOR IN CEE How to Reduce Macro-Prudential Vulnerabilities? IMF Resident Representative Harald Hirschhofer
  • 3. Stages of Convergence – Expansion and Reorientation Anticipated Positive Productivity Shock with External Finance 1.07 1.04 Consumption Relative price of nontradables 1.06 1.05 1.03 1.04 1.02 1.03 1.02 1.01 1.01 1 1 0.99 0.98 0.99 0.97 0.96 0.98 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1.07 0.5 Current Account 1.06 GDP 0 1.05 1.04 -0.5 1.03 -1 1.02 1.01 -1.5 1 0.99 -2 0.98 -2.5 0.97 0.96 -3 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Source: IMF staff simulation.
  • 4. Will Convergence Expectations Be Met? Ireland or Portugal? 20000 20000 15000 15000 Per Capita GDP: Deviation from EU-6 Per Capita GDP: Deviation from EU-6 (In $US) (In $US) 15000 15000 10000 10000 10000 10000 5000 5000 5000 5000 0 0 0 0 -5000 -5000 -5000 -5000 -10000 -10000 -10000 -10000 -15000 -15000 -15000 -15000 -20000 -20000 -20000 -20000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: IMF staff estimates. Source: IMF staff estimates. Note: EU-6: Austria, Belgium, France, Germany, Italy, Netherlands. 4
  • 5. CEE Macroeconomic Vulnerabilities  Booming domestic demand and consumption fuelled by: • Income, profit, and asset price expectations • Rapid wage growth and inadequate public sector policies • Rapid credit growth  .. led to very high current account deficits and external debt Current account balance External debt in percent of GDP 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 c c li li ro ia ia ia ia ry ub ia e ub ia a R ia nd ey ia R ia eg on n an ni an ar an ga sn ch at v ak b ep ai rk ep la en o lg at hu v er ed m z e ro 5 lb kr o un st o u L lo S u B nt P o ac T C it A E U B H R L o M M C S
  • 6. Financial Sector Expansion Brings Macro-Risks  Strong FDI and credit growth have contributed to economic growth  But the credit has been absorbed mostly by the non-tradable sector 30 30 Composition of Credit to NFCs in Emerging Europe (In percent of GDP) 25 25 Real Estate and Construction Other Nontradables 20 Tradables 20 15 15 10 10 5 5 0 0 2000 2001 2002 2003 2004 2005 2006 Source: National authorities. Note: Emerging Europe: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Ukraine. 6
  • 7. Financial Sector Vulnerabilities  High acquisition/implementation costs and ambitious profit targets lead to aggressive competition and risk taking – the 200 percent market share problem.  Weak institutional infrastructure: accounting, bankruptcy and legal procedures, corporate governance…  Risk assessment cannot draw on historic experience  Are credit risks properly priced? 7
  • 8. To Reduce Current Account Deficits, Resources Need To Reach The Tradable Sector  Macro measures to enhance supply and restrict demand  Financial sector measures to insure financial sector stability and efficient markets 8
  • 9. Macro-Measures To Tighten Demand  Tight monetary policy to keep inflation under control  Prudent fiscal policy  Complicated by surpluses, windfall tax revenues, privatization proceeds, unemployment  Change expenditure composition: less consumption, better infrastructure investment 15 Fiscal and Current Account Imbalances (In percent of GDP) General Government Balance 10 CA Balance 5 0 -5 -10 -15 -20 Bosnia & Herzegovina Slovak Republic Czech Republic -25 Macedonia Lithuania Romania Hungary Bulgaria Ukraine Albania Estonia Croatia Poland Turkey Serbia Latvia 9 Source: WEO.
  • 10. Accelerate Structural Reform  Liberalize and ensure competition  Privatize to strengthen incentives and investment: growth, fiscal performance, and jobs  Bankruptcy returns assets into production process Fiscal impact of Privatization1 in Serbia, 2003-2007 H1 (In million RSD) 2003 2004 2005 2006 2007 H1 Total fiscal contribution (1+2+3) -15.5 -8.3 414.7 947.6 502.4 (1) Corporate Income Tax 3.9 1.7 3.4 88.9 123.9 (2) Subsidies 19.5 10 11.5 0.0 0.0 (3) Budget financing costs reduction 0.0 0.0 422.8 858.7 378.5 1 Sample of 30 companies privatized in 2005 10
  • 11. Banking Sector Measures  Correctly price risks and use prudential measures  Improve consumer protection  Reconsider mortgage subsidy programs  Strengthen risk-based supervision and international cooperation among supervisors 11
  • 12. Deepen Financial Markets  Strengthen regulatory framework for trading, brokers, insurance, institutional investors, investment funds, disclosure and listing standards  Strengthen institutions, such as credit bureaus, bankruptcy courts, data filing systems, and corporate registries  But allow institutional investors to invest abroad for risk diversification 12

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