carlos da silva costa governor of the banco de portugal
TRANSCRIPT
Carlos da Silva Costa • Governor of the Banco de Portugal28 May 2018
Economic development, financing, credit cycles and financial crisesThe Portuguese case
30th Aniversary of Afi
2 • 28 May 2018
Outline
1. 1995-2007
Capital inflows from euro adoption misallocated, leading to macroeconomic
imbalances
2. 2008-2010
Global crisis tackled through fiscal expansion disregarding accumulated imbalances
3. 2011 onwards
Macroeconomic rebalancing and financial deleveraging: notable progress, but no
room for complacency
3 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
Euro brought increased access to capital since mid-90’s.
Interest rates plummeted…
10,5
2,6
4,7
11,9
3,93,2
4,5
4 • 28 May 2018* In the case of Households, interest revenues and expenses are taken into account, producing an estimate of the impact onnet losses from interests.
1. 1995-2007 – Capital inflows and macro imbalances
… providing significant reductions in interest expenses…
Estimated impact of implicit interest rate evolution on interest expenses* As a percentage of GDP
Cumulative impactover the periodAs a percentage of GDP
-2,3
-1,6
-1,4
5 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
… and generating a credit boom.
52
2824
131
73
58
59
30
105
90
6 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
The banking system channeled foreign funds to domestic residents.
(Short-term) loans used to finance (long-term) domestic credit.
156
89
7 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
Credit expansion was used to strongly increase consumption and investment, which, in
turn, accelerated imports…
Imports
Public consumptionInvestmentPrivate consumptionGDP
Index 2007
193
139138135133
8 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
…with a consequent deterioration in the current account…
-2,5
-3,6
-8,6
100
90
9 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
… and increasing exposure to foreign markets / dependence on foreign savings
10 • 28 May 2018
Investment surge financed through the credit expansion mainly channeled towards
non-tradable sectors, typically associated to relatively low returns…
1. 1995-2007 – Capital inflows and macro imbalances
8
16
10
12
11 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
… hampering productivity and potential GDP growth, cornerstones of debt
sustainability.
Average95-00
0,64
Average01-07
0,18
Average95-00
3,03
Average01-07
1,49
0,9
0,2
3,3
0,8
12 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
The public sector exacerbated the leveraging dynamics, adopting fiscal expansion as
private savings contracted.
-3,6
13 • 28 May 2018
1. 1995-2007 – Capital inflows and macro imbalances
In the early 00’s, as interest rates stabilized and growth slowed, general government
deficit and debt increased.
14 • 28 May 2018
2. 2008-2010 – A crisis leading to financial stress
Expansionary fiscal policy adopted in response to the 2008 global crisis disregarded
indebtedness levels, competitiveness vulnerability and investors’ fears.
15 • 28 May 2018
2. 2008-2010 – A crisis leading to financial stress
GDP responded in the short-term, but potential growth kept downward trend.
16 • 28 May 2018
2. 2008-2010 – A crisis leading to financial stress
As investors’ concerns grew, public debt marginal interest rates increased, up until the
sudden stop in foreign lending and subsequent financial assistance program (April 2011).
10Y30.12.2011
13,4
10Y18.08.1997
6,4
17 • 28 May 2018
• In the context of a monetary union, a sizeable credit boom, coupled with such an imbalance
between savings and investment, immediately translates into indebtedness and external
imbalance, putting macroeconomic stability and debt sustainability at risk.
• By priorly channeling available capital to non-productive – instead of productive – and
indirectly productive – instead of directly productive – investment, economic agents limit and
delay return.
• By privileging non-tradable sectors – instead of tradable –, investors hinder the economy’s
ability to generate long-term sustainable growth, the major guarantee of debt sustainability.
• On top of such a set of choices, two economic policy stances become indispensable:
macroprudential and fiscal countercyclical action. In their absence, vulnerability mounts.
Lessons to take away
18 • 28 May 2018
3. 2011 onwards – Rebalancingremains a challenge
The Economic and Financial Assistance Program (EFAP) with the European
Commission, ECB and IMF targeted three major adjustment needs:
A. Fiscal consolidation
B. Financial stability
C. Structural macroeconomic reform
19 • 28 May 2018
3. 2011 onwards – Rebalancingremains a challenge
A. Significant progress in Fiscal consolidation, but debt and external exposure remain
high. Further progress is needed in order to fit (i) public provision of goods and
services to (ii) social needs and (iii) accepted tax burden.
20 • 28 May 2018
3. 2011 onwards – Rebalancingremains a challenge
B. Financial stability conditions also improved markedly…
7,6
14,5
89
93
21 • 28 May 2018
3. 2011 onwards – Rebalancingremains a challenge
B. … but risks still loom.
2,9
11,8
22 • 28 May 2018
3. 2011 onwards – Rebalancingremains a challenge
C. Structural macroeconomic reform poses continuous challenges. Further
resource reallocation towards tradable sectors remains urgent…
23 • 28 May 2018
3. 2011 onwards – Rebalancingremains a challenge
C. … and although competitiveness has improved…
24 • 28 May 2018
C. … both productivity and potential GDP growth must raise.
3. 2011 onwards – Rebalancingremains a challenge
25 • 28 May 2018
Challenges for the coming future
Ensuring potential GDP growth is
• sustainable, providing real convergence
• and inclusive, promoting structural employment.
Attract investment Spur productivity
• Proceed with banking-sector balance sheet
cleanup
• Reinforce firm capitalization
• Promote new financing channels
• Minimize uncertainty
• Proceed with fiscal consolidation
• Promote tax and regulatory stability
• Promote resource reallocation towards
tradables
• Fight red tape
• Ensure private sector extracts full benefits
from public infrastructure
• Spur innovation and its translation into
market value
• Promote human capital (re)qualification