credit growth in the baltics: what’s next?€¦ · andres sutt credit growth in the baltics:...
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Eesti PankBank of Estonia
Credit growth in the Baltics: What’s next?Andres SuttDeputy GovernorBank of Estonia
Andres Sutt Credit growth in the Baltics: What’s next? 2
Eesti PankBank of Estonia
Overview of the presentation
• What were the preconditions for financialdeepening in the Baltic countries?
• What have we achieved – too much too fast?
• What’s next?
Andres Sutt Credit growth in the Baltics: What’s next? 3
Eesti PankBank of Estonia
Financial sector plays a key rolein the development of modern economies
Source: World Bank. January 2007
Andres Sutt Credit growth in the Baltics: What’s next? 4
Eesti PankBank of Estonia
The Baltics:Favorable preconditions for financial deepening
2001-2005
0
1
2
3
4
5
6
7
8
9
GDP growth ...TFP …Capital/laborav
erag
e an
nual
% c
hang
e
Baltics
8 New Member States(2004)EU-15
1996-2000
0
1
2
3
4
5
6
7
8
9
GDP growth ...TFP …Capital/labor
aver
age
annu
al %
cha
nge
Baltics
8 New Member States (2004)EU-15
Low initial capital accumulation combined with fast productivity growthmeans high returns on investments.
Source: IMF 2007
Eesti PankBank of Estonia
What have we achieved –too much too fast?
Andres Sutt Credit growth in the Baltics: What’s next? 6
Eesti PankBank of Estonia
High international integration
Share of foreign banks (% of total assets, 2005)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
EE
SK LU CZ LT PL
HU FI LV UK IE MT
GR
CY
BE PT
SL
DK AT
FR ES
GE IT SE NL
from other countries
from EU countries
Source: EU Banking Structures. ECB: October 2006
Andres Sutt Credit growth in the Baltics: What’s next? 7
Eesti PankBank of Estonia
The Baltic share in group profits is much higherthan the share in assets
Swedbank SEB
0%
5%
10%
15%
20%
25%
2002 2004 Q1-32006
2002 2004 Q1-32006
Operating profit Total assets
Source: Banking groups’ financial reports
Andres Sutt Credit growth in the Baltics: What’s next? 8
Eesti PankBank of Estonia
Low interest margins – a sign of “home market” concept
Average interest margin on new housing loans
0,0%0,5%1,0%1,5%2,0%2,5%3,0%3,5%4,0%
2004
2005
2006
2007
Estonia Lithuania (EUR)Latvia (EUR) euroa area
Source: Bank of Estonia
Andres Sutt Credit growth in the Baltics: What’s next? 9
Eesti PankBank of Estonia
High credit growth
Growth of loans to private sector (% yoy)
01020304050607080
April 2
005
2006
2007
LithuaniaLatviaEstonia
Sources: central banks
Andres Sutt Credit growth in the Baltics: What’s next? 10
Eesti PankBank of Estonia
Corporate indebtedness approaching Nordic levels
Corporate sector debt to GDP
0%
20%
40%
60%
80%
100%
120%
Sweden Estonia Denmark Norway Latvia Finland Lithuania
2005 2006 estimate
Sources: Eurostat, central banks
Andres Sutt Credit growth in the Baltics: What’s next? 11
Eesti PankBank of Estonia
Household indebtedness: still low compared to Nordic neighbors ?
Household indebtednessdebt to disposable income
0%
50%
100%
150%
200%
250%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Estonia Latvia Lithuania Finland
Sweden Denmark
Sources: Eurostat, central banks
Andres Sutt Credit growth in the Baltics: What’s next? 12
Eesti PankBank of Estonia
Estonia: much of lending and leasing is into real estate
0 10 20 30 40 50 60 70
Other
Study Loans
Car leasing
Real Estate
Other ClosedSectors
Real Estateand Other
Trade
Hotels andrestaurants
Transport andcommunication
Manufacturing
Oth
erE
xpor
t orie
nted
Hou
seho
lds
Ent
erpr
ises
31.12.06 31.12.05 31.12.04 31.12.03
Source: Bank of Estonia
Andres Sutt Credit growth in the Baltics: What’s next? 13
Eesti PankBank of Estonia
But… housing conditions in the Baltics neededimprovement
• Raouli ettekandest
0
10
20
30
40
50
60
DK
(200
3)
SE (
2003
)
UK
(200
1)
NL
(200
0)
DE
(200
2)
AU (
2003
)
FR (
2002
)
FI (
2002
)
IE (
2002
)
MT
(200
2)
SI (
2002
)
CZ (
2001
)
HU
(20
01)
EE (
2004
)
SK (
2001
)
LT (
2003
)
LV (
2003
)
PL (
2002
)
(Square meters per capita)
Source: European Central Bank
Andres Sutt Credit growth in the Baltics: What’s next? 14
Eesti PankBank of Estonia
Real estate prices rise as income level increases
0
5000
10000
15000
20000
25000
30000
35000
0 1000 2000 3000 4000 5000 6000
Average house prices, EUR/m2
GD
P p
er h
ead,
EU
R
ITES
FR
BEDE
AT
SICZ
EE
PL
HU
LTBG
IEDKSE
FI
NL
SKLV
RO
Source: Ameco and B. Egert and D. Mihaljek (2007), “Determinants of house price dynamics in Central and Eastern Europe”. Note: GDP per head is adjusted for PPP. For Slovakia, whole country.
House price in capitals and income levels in EU (2005)
Andres Sutt Credit growth in the Baltics: What’s next? 15
Eesti PankBank of Estonia
Credit quality is high (in line with the economiccycle)
Non-performing loans to total loans, % (2006)
0
2
4
6
8
10
12
14
16
Esto
nia
Latv
ia
Lith
uani
a
Bul
garia
Hun
gary
Rus
sia
Slov
akC
zech
Rep
.Po
land
Finl
and
Sw
eden
Irela
nd UK
Fran
ce
Ger
man
yIta
ly
Indi
aC
hina
Mal
aysi
aTh
aila
ndIn
done
sia
Aust
ralia
Can
ada
US
Japa
n
Source: IMF Global Financial Stability Report, April 2007
Baltics CEE Western Europe Asia Other
Eesti PankBank of Estonia
What’s next: soft landing or a collision course?
Andres Sutt Credit growth in the Baltics: What’s next? 17
Eesti PankBank of Estonia
The current cycle has peaked ...
Sources: past data from national stastistical offices; government forecasts for Latviaand Lithuania, central bank forecast for Estonia
GDP growth (%, 2007-2009 central bank forecasts)
0
2
4
6
8
10
12
14
2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f
EstoniaLatviaLithuania
Andres Sutt Credit growth in the Baltics: What’s next? 18
Eesti PankBank of Estonia
and lending growth is stabilizing in all three Baltic countries…
Sources: central banks
Growth of loans to private sector (% yoy)
01020304050607080
April 2
005
2006
2007
LithuaniaLatviaEstonia
Andres Sutt Credit growth in the Baltics: What’s next? 19
Eesti PankBank of Estonia
… which is even more clearly evident when zooming in to look at Estonia
Quarterly credit flows from domestic banksy/y growth
-30%
0%
30%
60%
90%
120%
150%
30.0
6.06
30.0
7.06
30.0
8.06
30.0
9.06
30.1
0.06
30.1
1.06
30.1
2.06
30.0
1.07
28.0
2.07
30.0
3.07
30.0
4.07
households enterprises total
Source: Bank of Estonia
Andres Sutt Credit growth in the Baltics: What’s next? 20
Eesti PankBank of Estonia
Following these principles helps Baltic policymakers to support soft landing
• Open and flexible markets
• A prudent fiscal stance
• A monetary system that anchors inflation expectations
• Effective financial sector supervision and cross-border cooperation between supervisors of home and host countries
Andres Sutt Credit growth in the Baltics: What’s next? 21
Eesti PankBank of Estonia
In longer term, investment and lending in the Baltic states will still be attractive
0123456789
20 40 60 80 100 120GDP per capita in PPS (2000), EU25=100
Aver
age
annu
al r
eal G
DP
grow
th (
2001
-20
05),
%
LVEE
LT
Lower GDP level implies a faster growth rate
Eesti PankBank of Estonia
Thank you for your attention!
Andres Sutt Credit growth in the Baltics: What’s next? 23
Eesti PankBank of Estonia
Bank of Estonia forecast for 2007-2009 2005 2006 2007 2008 2009 GDP (EEK bn) 173.1 204.6 239.1 272.2 303.0Real GDP growth (%) 10.5 11.4 8.4 6.5 5.6HICP (%) 4.1 4.4 5.1 5.6 4.3Current account (% of GDP) -10.5 -14.8 -15.2 -13.8 -12.6Real private consumption growth (%) 7.9 15.8 14.7 9.9 7.3Real investment growth (%) 12.7 19.7 14.8 5.9 3.7Real export growth (%) 21.5 10.0 8.2 7.5 6.8Real import growth (%) 15.9 14.7 12.9 7.7 6.4Unemployment rate (%) 7.9 5.9 5.5 5.9 6.3Change in the number of the employed (%) 2.0 6.4 1.3 0.1 -0.3Value added growth per employee (%) 8.3 4.7 7.0 6.4 5.9Real wage growth (%) 8.3 12.6 12.7 8.8 6.0Average gross wage growth (%) 11.4 16.2 18.5 14.3 10.6Nominal credit growth (%) 50.4 51.6 37.3 22.7 14.7External debt (% of GDP) 86.0 95.8 103.0 107.1 110.9