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  1. 1. Evolution of the financial systems in transition countries: a comparative perspective. Leszek Balcerowicz President of the National Bank of Poland The Future of Domestic Capital Markets in Developing Countries Washington, 1 5 th April 2003
  2. 2. <ul><li>I . INITIAL CONDITIONS IN TRANSITION ECONOMIES: </li></ul><ul><li>1. THE ECONOMY WAS DOMINATED BY STATE-OWNERSHIP AND THE MARKET WAS ELIMINATED THROUGH CENTRAL PLANNING (THE MOST EXTREME FORM OF STATISM); </li></ul><ul><li>2. THE FINANCIAL SECTOR DISPLAYED A FAR-REACHING SIMILARITY: </li></ul><ul><ul><li>A MONOBANK STRUCTURE OF THE BANKING SYSTEM, NO INDEPENDENT CREDIT DECISIONS AND RISK MANAGEMENT; </li></ul></ul><ul><ul><li>NO PRUDENTIAL REGULATIONS AND SUPERVISION; </li></ul></ul><ul><ul><li>NO MONEY MARKET, NO STOCK EXCHANGE; </li></ul></ul><ul><ul><li>AN EXTREMELY LIMITED RANGE OF FINANCIAL INSTRUMENTS; </li></ul></ul><ul><ul><li>NEITHER INTERNAL NOR EXTERNAL CURRENCY CONVERTIBILITY. </li></ul></ul><ul><li>3. SUCH A FINANCIAL SECTOR WAS : </li></ul><ul><ul><li>SIMILAR TO THE ONE IN CHINA AT THE START OF ITS REFORMS; </li></ul></ul><ul><ul><li>EVEN MORE STATE-DOMINATED THAN THE BANKING SECTOR IN INDIA AND OTHER EMERGING ECONOMIES 12 YEARS AGO . </li></ul></ul>
  3. 3. Source: EBRD Transition Report 2001 . <ul><li>4. MACROECONOMIC CONDITIONS IN TRANSITION ECONOMIES VARIED MUCH MORE THAN INSTITUTIONAL ONES, ESPECIALLY WITH RESPECT TO: </li></ul><ul><li>A. INFLATION: HYPERINFLATION IN POLAND, THE FSU VS. MUCH LOWER INFLATION IN CZECHOSLOVAKIA, HUNGARY AND ROMANIA; </li></ul><ul><ul><li>Inflation (annual average, in per cent), a year before transition began </li></ul></ul><ul><li>(1989 for Poland, Hungary, Slovenia, 1990 for Czech Rep., Slovakia, Bulgaria, Romania, 1991 for the former Soviet Union countries). </li></ul>
  4. 4. <ul><ul><li>B. THE SIZE OF MONETARY OVERHANG DUE TO REPRESSED INFLATION: LARGER IN THE FSU, BULGARIA, ROMANIA AND POLAND THAN IN HUNGARY OR THE FORMER CZECHOSLOVAKIA . </li></ul></ul><ul><li>“ Repressed” inflation 1987-1990 </li></ul><ul><li>(difference between increase in real wages and real GDP from 1987 to 1990) </li></ul>Source: IMF World Economic Outlook, October 2000.
  5. 5. II. SUBSEQUENT DEVELOPMENTS (TRANSITION) HAVE DIFFERED SHARPLY AMONG THE TRANSITION ECONOMIES WITH RESPECT TO: 1. Stock market capitalisation, turnover and bond-market development Stock market capitalisation (% GDP), 200 1 . Source: EBRD Transition Report 200 2.
  6. 6. 2. Credit to the private sector (% GDP), 2001 . Source: IMF International Financial Statistics.
  7. 7. 3. Credit to the private sector (% GDP) dynamics, 1996 - 2001 Source : Stability and Structure of Financial Systems in CEC5, NBP, May 2002.
  8. 8. 4 . Share of non-performing loans and costs of banking restructuring. The fiscal costs of the restructuring of banks differed markedly, higher costs did not correlate with an improvement in banking sector performance. Costs of Banking Sector Restructuring (% GDP), 1991-1998. Source: Zoli, Cost and Effectiveness of Banking Sector Restructuring in Transition Economies, IMF WP/01/157, 2001.
  9. 9. THE DIFFERENCES IN FINANCIAL SECTOR D EVELOPMENTS WERE LESS DUE TO THE DIFFERENT INITIAL CONDITIONS AND MORE TO THE DIFFERENCE S IN THE QUALITY OF GENERAL AND SECTORAL POLICIES. <ul><li>GENERAL POLICIES: </li></ul><ul><li>FISCAL AND EXCHANGE RATE POLICIES; </li></ul><ul><li>ENFORCING THE RULE OF LAW; </li></ul><ul><li>PROTECTION OF CREDITORS’ AND MINORITY SHAREHOLDERS’ RIGHTS; </li></ul><ul><li>LIBERALISATION. </li></ul>FINANCIAL SECTOR ENTERPRISE SECTOR INITIAL CONDITIONS <ul><li>PRIVATISATION; </li></ul><ul><li>PRUDENTIAL REGULATION AND SUPERVISION; </li></ul><ul><li>RESTRUCTURING OF NON-PERFORMING LOANS. </li></ul><ul><li>PRIVATISATION. </li></ul>
  10. 10. <ul><li>III. SOME SPECIFICITIES OF FINANCIAL SECTOR REFORMS IN ACCESSION COUNTRIES: </li></ul><ul><li>1. FAST INTERNAL AND EXTERNAL FINANCIAL LIBERALISATION, ESPECIALLY RELATIVE TO CHINA, INDIA AND THE ASIAN TIGERS. AS A RESULT THE ACCESSION COUNTRIES HAVE BECOME FINANCIALLY VERY OPEN RELATIVE TO MOST OTHER EMERGING ECONOMIES. </li></ul><ul><li>Internationally issued bonds as a % of total bonds outstanding, 2000. </li></ul>Source: BIS Papers No 11 , The development of bond markets in emerging economies , BIS 200 2.
  11. 11. <ul><li>Private non-bank sector external loans from BIS reporting banks as a % of credit to non-government, 2001. </li></ul>Source: IMF International Financial Statistics and BIS Quarterly Review, September 2002.
  12. 12. <ul><li>2. RELATIVELY FAST BANK PRIVATISATION AND A LARGE ROLE OF FOREIGN INVESTORS . </li></ul><ul><li>Share of state-owned banks assets in total banking assets (%), 200 1 . </li></ul>Source: Central bank’s Annual Reports and BIS Papers No 4, The banking industry in the emerging market economies, BIS 2001.
  13. 13. <ul><li>Share of total banking assets controlled by foreign investors (%), 200 1 . </li></ul>Source: Central bank’s Annual Reports and BIS Papers No 4, The banking industry in the emerging market economies, BIS 2001.
  14. 14. 3. RAPID INTRODUCTION OF REGULATIONS PROTECTING CREDITORS’ AND SMALL SHAREHOLDERS’ RIGHTS, BUT MUCH SLOWER IMPROVEMENT IN THEIR ENFORCEMENT.
  15. 15. <ul><li>IV. PRESENT RELATIVE POSITION OF ACCESSION COUNTRIES: </li></ul><ul><li>1 . R elative size of the financial sector in accession countries is: </li></ul><ul><ul><li>much smaller than in EU Members States and other developed economies and lower than in the Asian Tigers, Chile, Israel and China. </li></ul></ul><ul><ul><li>not very different from Mexico, Indonesia, India, Turkey and Brazil . </li></ul></ul><ul><li>Credit to non-government and stock market capitalisation, % GDP, 2001 </li></ul>Source: IMF International Financial Statistics, FIBV and stock exchanges websites.
  16. 16. 2. The financial sector in accession countries is bank-dominated, with limited importance of capital and commercial debt markets. The ratio of credit to stock market capitalization is similar to that in bank-based developed countries (Germany, Japan, Portugal, New Zealand) and much lower than in Austria. Credit to non-government vs. stock market capitalisation, 2001 ( ratio as a %) . Source: IMF International Financial Statistics, FIBV and stock exchanges’ websites.
  17. 17. <ul><li>3. Credit to non-government in accession countries is: </li></ul><ul><ul><li>comparable to that in other developing countries (except for Chile, Israel, the Asian Tigers and China), </li></ul></ul><ul><ul><li>much lower than in developed countries (except for Denmark, Greece and Finland); </li></ul></ul><ul><ul><li>lower than indicated by the level of GDP per capita. </li></ul></ul><ul><ul><li>Credit to non-government as a % of GDP, 2001 </li></ul></ul>Source: IMF International Financial Statistic s . Credit to non-government % GDP GDP per capita PPP
  18. 18. <ul><li>4. The l evel of banking deposits in accession countries is: </li></ul><ul><ul><li>similar to those in Latin American countries, Indonesia, India and Turkey; </li></ul></ul><ul><ul><li>lower than in the Asian Tigers and China; </li></ul></ul><ul><ul><li>lower than in developed countries with bank-based financial systems, but not very different from those in Canada, Denmark, Finland, France and the US (i.e. countries with other more developed forms of saving s - insurance, investment funds, etc.). </li></ul></ul><ul><li>Banking deposits as a % GDP, 2001 </li></ul>Source: IMF International Financial Statistics. Deposits % GDP GDP per capita PPP
  19. 19. 5. Bond market development in accession countries is similar to that in other emerging economies (except for Malaysia and Korea), but this is mainly due to issues of public sector bonds. Total bonds outstanding as a % of GDP, 2000 . Source: BIS Papers No 11 , The development of bond markets in emerging economies , BIS 200 2.
  20. 20. 6. Outstanding amounts of private sector bonds are very low, but this is a common feature of emerging economies (except for Malaysia, Korea, Hong Kong , Singapore and Chile). Total private sector bonds outstanding as a % of GDP, 2000. Source: BIS Papers No 11 , The development of bond markets in emerging economies , BIS 200 2.
  21. 21. Source: FIBV and stock exchanges’ websites . <ul><li>7. Stock market capitalisation in accession countries is: </li></ul><ul><ul><li>much lower than in all advanced economies (except for Austria and New Zealand); </li></ul></ul><ul><ul><li>similar to that in Indonesia, Mexico, Thailand, Turkey and Brazil. </li></ul></ul><ul><ul><li>Stock market capitalisation, 2001 . </li></ul></ul>
  22. 22. Source: FIBV and stock exchanges’ websites . 8. Stock market capitalisation in accession countries is not very different from levels prevailing in EU economies ten years ago. Stock market capitalisation: more advanced transition countries, 2001 vs. advanced economies, 1992.
  23. 23. Source: FIBV and stock exchanges’ websites . <ul><li>9. Stock market turnover in accession countries is very low: </li></ul><ul><ul><li>much lower than in all advanced economies (except for Austria); </li></ul></ul><ul><ul><li>similar to that in Chile, Indonesia, Brazil and Israel, but lower than in other emerging markets. </li></ul></ul><ul><li>Stock market turnover (% GDP), 2001. </li></ul>
  24. 24. V. The accession countries’ financial systems are highly integrated with the EU financial market: 1. Financial market’s legal framework is fully harmonized with EU standards. Banking directives were from the very beginning a hallmark on which the national law and prudential regulations were modeled. 2. Most banks in accession countries are controlled by foreign banking groups . 3. Foreign investors are also active in other financial services (insurance, investment funds).
  25. 25. 4. The best domestic companies have already gained access to foreign financing, either through direct loans from mother companies abroad or loans from foreign banks, or through issues of debt securities and GDRs/ADRs on external capital market s . 5. The future of stock markets in accession countries ha s not yet been decided. One possible solution is integration with one of Europe’s trading platforms.

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