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Evolution of the financial systemsEvolution of the financial systems in transition countries: in transition countries:
a comparativea comparative perspective.perspective.
Leszek BalcerowiczPresident of the National Bank of Poland
The Future of Domestic Capital Markets in Developing Countries
Washington, 15th April 2003
2
I. INITIAL CONDITIONS IN TRANSITION ECONOMIES:
1. THE ECONOMY WAS DOMINATED BY STATE-OWNERSHIP AND THE MARKET WAS ELIMINATED THROUGH CENTRAL PLANNING (THE MOST EXTREME FORM OF STATISM);
2. THE FINANCIAL SECTOR DISPLAYED A FAR-REACHING SIMILARITY:
– A MONOBANK STRUCTURE OF THE BANKING SYSTEM, NO INDEPENDENT CREDIT DECISIONS AND RISK MANAGEMENT;– NO PRUDENTIAL REGULATIONS AND SUPERVISION;– NO MONEY MARKET, NO STOCK EXCHANGE;– AN EXTREMELY LIMITED RANGE OF FINANCIAL INSTRUMENTS;– NEITHER INTERNAL NOR EXTERNAL CURRENCY CONVERTIBILITY.
3. SUCH A FINANCIAL SECTOR WAS:– SIMILAR TO THE ONE IN CHINA AT THE START OF ITS REFORMS; – EVEN MORE STATE-DOMINATED THAN THE BANKING SECTOR IN INDIA AND OTHER EMERGING ECONOMIES 12 YEARS AGO.
3
210,5
251,1224,7
9892,7
1306
9,75,1
91
26,3
1710,80
50
100
150
200
250
300
350
400
Source: EBRD Transition Report 2001.
4. MACROECONOMIC CONDITIONS IN TRANSITION ECONOMIES VARIED MUCH MORE THAN INSTITUTIONAL ONES, ESPECIALLY WITH RESPECT TO: A. INFLATION: HYPERINFLATION IN POLAND, THE FSU VS. MUCH LOWER INFLATION IN CZECHOSLOVAKIA, HUNGARY AND ROMANIA;
Inflation (annual average, in per cent), a year before transition began (1989 for Poland, Hungary, Slovenia, 1990 for Czech Rep., Slovakia, Bulgaria,
Romania, 1991 for the former Soviet Union countries).
4
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.
“Repressed” inflation 1987-1990
(difference between increase in real wages and real GDP from 1987 to 1990) 25,7
18
-7,1-7,7
16,813,6
12
-7,1-10
-5
0
5
10
15
20
25
30
Hungary Czech Rep. Slovakia Slovenia Poland Romania Bulgaria former SovietUnion
countries
Source: IMF World Economic Outlook, October 2000.
5
0
5
10
15
20
25
30
Ukraine Russia Poland Czech Rep. Slovenia Hungary Estonia
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), 2001.
Source: EBRD Transition Report 2002.
6
2. Credit to the private sector (% GDP), 2001..
Source: IMF International Financial Statistics.
0
5
10
15
20
25
30
35
40
45
Ukraine Russia Estonia Poland Hungary Slovakia Czech Rep. Slovenia
7
3. Credit to the private sector (% GDP) dynamics, 1996 - 2001
20
30
40
50
60
1996 1997 1998 1999 2000 2001
Slovenia Slovakia Poland Hungary Czech Rep.
Source: Stability and Structure of Financial Systems in CEC5, NBP, May 2002.
8
0
5
10
15
20
25
30
35
40
Bulgaria Czech Rep. Hungary Lithuania Poland Latvia Estonia
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
THE DIFFERENCES IN FINANCIAL SECTOR DEVELOPMENTS WERE LESS DUE TO THE DIFFERENT INITIAL CONDITIONS AND MORE TO THE DIFFERENCES IN THE QUALITY OF GENERAL AND SECTORAL POLICIES.
GENERAL POLICIES:• FISCAL AND EXCHANGE RATE POLICIES;• ENFORCING THE RULE OF LAW;•PROTECTION OF CREDITORS’ AND MINORITY SHAREHOLDERS’ RIGHTS;•LIBERALISATION.
FINANCIAL SECTOR
ENTERPRISE SECTOR
INITIAL CONDITION
S
• PRIVATISATION;• PRUDENTIAL REGULATION AND SUPERVISION;•RESTRUCTURING OF NON-PERFORMING LOANS.
• PRIVATISATION.
10
III. SOME SPECIFICITIES OF FINANCIAL SECTOR REFORMS IN ACCESSION COUNTRIES:
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.
• Internationally issued bonds as a % of total bonds outstanding, 2000.
0
5
10
15
20
25
30
35
40
Emerging Europe Latin America Asian Tigers
Source: BIS Papers No 11, The development of bond markets in emerging economies, BIS 2002.
11
0
20
40
60
80
100
120
• Private non-bank sector external loans from BIS reporting banks
as a % of credit to non-government, 2001.
Source: IMF International Financial Statistics and BIS Quarterly Review, September 2002.
12
2. RELATIVELY FAST BANK PRIVATISATION AND A LARGE ROLE OF FOREIGN INVESTORS.
• Share of state-owned banks assets in total banking assets (%), 2001.
0000
20
40
60
80
100
Source: Central bank’s Annual Reports and BIS Papers No 4, The banking industry in the emerging market economies, BIS 2001.
13
• Share of total banking assets controlled by foreign investors (%), 2001.
0
10
20
30
40
50
60
70
80
90
100
Source: Central bank’s Annual Reports and BIS Papers No 4, The banking industry in the emerging market economies, BIS 2001.
14
3. RAPID INTRODUCTION OF REGULATIONS PROTECTING CREDITORS’ AND SMALL SHAREHOLDERS’ RIGHTS, BUT MUCH SLOWER IMPROVEMENT IN THEIR ENFORCEMENT.
15
0
50
100
150
200
250
300
350
400
Pola
nd
Hun
gary
Slov
enia
Cze
ch R
ep.
Est
onia
Mex
ico
Indo
nesi
a (2
000)
Indi
a (1
997)
Tur
key
(200
0)
Bra
zil
Tha
ilan
d
Kor
ea
Chi
le
Chi
na (
2000
)
Mal
aysi
a
Aus
tria
Ger
man
y
USA
Uni
ted
Kin
gdom
Swit
zerl
and
IV. PRESENT RELATIVE POSITION OF ACCESSION COUNTRIES:
1. Relative size of the financial sector in accession countries is:– much smaller than in EU Members States and other developed economies and lower than in the Asian Tigers, Chile, Israel and China.– not very different from Mexico, Indonesia, India, Turkey and Brazil.
Credit to non-government and stock market capitalisation, % GDP, 2001
Source: IMF International Financial Statistics, FIBV and stock exchanges websites.
16
0
1
2
3
4
5
6
7
8
9
Est
on
ia
Hu
ng
ary
Po
lan
d
Slo
ven
ia
Cze
ch
Rep
.
Mex
ico
Ind
ia (
19
97
)
Tu
rkey
(2
00
0)
Ch
ile
Bra
zil
Isra
el
Ko
rea
Ch
ina
(20
00
)
US
A
Sw
itzer
lan
d
Un
ited
Kin
gd
om
Sp
ain
Jap
an
Ger
man
y
New
Zea
lan
d
Po
rtu
gal
Au
stri
a
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
3. Credit to non-government in accession countries is:– comparable to that in other developing countries (except for Chile, Israel, the Asian Tigers and China), – much lower than in developed countries (except for Denmark, Greece and Finland);– lower than indicated by the level of GDP per capita.
Credit to non-government as a % of GDP, 2001
0
20
40
60
80
100
120
140
160
0 5000 10000 15000 20000 25000 30000 35000 40000
USA
Denmark
Switzerland
Germany
Malaysia
Korea
China
Thailand
Chile
India
Indonesia
Brazil
RussiaMexico
Poland
Estonia
Hungary
Czech Rep.
Slovenia
Finland
Greece
Source: IMF International Financial Statistics.
Cre
dit
to n
on
-govern
men
t %
GD
P
GDP per capita PPP
18
4. The level of banking deposits in accession countries is: – similar to those in Latin American countries, Indonesia, India and Turkey;– lower than in the Asian Tigers and China;– 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 savings - insurance, investment funds, etc.).
Banking deposits as a % GDP, 2001
0
20
40
60
80
100
120
140
160
0 5000 10000 15000 20000 25000 30000 35000 40000
USA
Denmark
Switzerland
Germany
Malaysia
Korea
China
Thailand
ChileIndia
Indonesia
Brazil
RussiaMexico
Poland
Estonia
Hungary
Czech Rep.
SloveniaFinland
FranceCanada
Source: IMF International Financial Statistics.
Dep
osit
s
% G
DP
GDP per capita PPP
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..
21
59
22
58 60
37
102113
47
10
70
1024
31
130
165
0
20
40
60
80
100
120
140
160
180
Source: BIS Papers No 11, The development of bond markets in emerging economies, BIS 2002.
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.
0
10
20
30
40
50
60
70
80
Source: BIS Papers No 11, The development of bond markets in emerging economies, BIS 2002.
21
Source: FIBV and stock exchanges’ websites.
0
30
60
90
120
150
180
210
240
Po
lan
d
Cze
ch R
ep.
Slo
ven
ia
Hu
ng
ary
Est
on
ia
Ind
on
esia
Mex
ico
Th
aila
nd
Tu
rkey
Bra
sil
Ko
rea
Isra
el
Chin
a (2
00
0)
Chil
e
Mal
aysi
a
Au
stri
a
New
Zea
lan
d
Po
rtu
gal
Jap
an
Gre
ece
Un
ited
Sta
tes
Un
ited
Kin
gd
om
Fin
lan
d
Sw
itze
rlan
d
7. Stock market capitalisation in accession countries is:– much lower than in all advanced economies (except for Austria and New Zealand);– similar to that in Indonesia, Mexico, Thailand, Turkey and Brazil.
Stock market capitalisation, 2001.
22
Source: FIBV and stock exchanges’ websites..
0
10
20
30
40
50
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
0
20
40
60
80
100
120
140
160
180
200
Po
lan
d
Slo
ven
ia
Czech
Rep
.
Est
on
ia
Ch
ile
Ind
on
esi
a
Bra
sil
Isra
el
Mala
ysi
a
Tu
rkey
Ko
rea
Taiw
an
Au
stri
a
New
Zeala
nd
Po
rtu
gal
Jap
an
Au
stra
lia
Germ
an
y
US
A
Source: FIBV and stock exchanges’ websites..
9. Stock market turnover in accession countries is very low:– much lower than in all advanced economies (except for Austria);– similar to that in Chile, Indonesia, Brazil and Israel, but lower than in other emerging markets.
Stock market turnover (% GDP), 2001.
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
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 markets.
5. The future of stock markets in accession countries has not yet been decided. One possible solution is integration with one of Europe’s trading platforms.