Study Tour for Russian Member Universities
of the Vi Network
Geneva, 24 March 2009
The current financial crisis:
Eastern Europe and Russia
Jörg Mayer
UNCTAD
Overview
• UNCTAD’s take on the crisis
• Main transmission channels
• The sharply increased external
indebtedness of firms and households
• The limited usefulness of large foreignexchange reserves as self-insurance
• Conclusions
1. UNCTAD’s take on the crisis
• Burst of US house price bubble trigger, not cause;
• Financial deregulation enhances the pro-cyclicality
of financial markets;
• Absence of international monetary system
facilitates exchange-rate speculation;
• Faith in efficiency of deregulated financial markets
created illusion of risk-free profits through speculative
finance in many areas;
• Crisis in form of debt deflation: level of borrowing
needs to be adjusted to diminished revenues;
2. Main transmission channels
• Trade (global economic slowdown):
– Decline in global aggregate demand;
– Sharp decline in primary commodity prices;
• Finance (global deleveraging):
– Sharp reduction in working capital credit and in crossborder lending to banks and non-financial firms causes
difficulty in rolling over external debt;
– Hedge funds and institutional investors exit emerging
markets;
– Depreciation of financial (e.g. equities) and real (e.g. in
extractive industries) assets forces a rouble depreciation;
Global output is contracting for the first time in
60 years and no region escapes from the crisis
Real output growth, 2004–2009, per cent
10
8
6
2004
2005
4
2006
2007
2
2008
2009
0
-2
-4
World
Developed
countries
Developing
countries
South-Eastern
Europe and CIS
Global trade volume is falling steeply
Change in export volume, 2004–2009, year-on-year, per cent
16
12
8
4
0
-4
-8
World
Developed countries
Other countries
2008M11
2008M9
2008M7
2008M5
2008M3
2008M1
2007M11
2007M9
2007M7
2007M5
2007M3
2007M1
2006M11
2006M9
2006M7
2006M5
2006M3
2006M1
2005M11
2005M9
2005M7
2005M5
2005M3
2005M1
-12
Primary commodity prices declined steeply,
but remain above long-term trends
Primary commodity prices, 2000–2009, index numbers 2000=100
500
450
400
350
300
250
200
150
100
50
0
January
2000
January
2001
January
2002
Food
January
2003
January
2004
Agricultural raw matl.
January
2005
January
2006
Minerals, Ores & Metals
January
2007
Crude petroleum
January
2008
January
2009
Rouble REER and oil prices are linked
Rouble exchange rates and oil price, 2000–09, index numbers 2000=100
500
200
450
180
400
160
350
140
300
120
250
100
200
80
150
60
100
40
50
20
0
January
2000
January
2001
January
2002
Crude petroleum (left scale)
January
2003
January
2004
January
2005
January
2006
January
2007
REER based on relative consumer prices (right scale)
January
2008
0
January
2009
NEER (right scale)
POLAND
RUSSIA
HUNGARY
UKRAINE
07.10.2008
07.07.2008
07.04.2008
07.01.2008
07.10.2007
07.07.2007
07.04.2007
07.01.2007
07.10.2006
07.07.2006
07.04.2006
07.01.2006
07.10.2005
07.07.2005
07.04.2005
07.01.2005
07.10.2004
07.07.2004
07.04.2004
07.01.2004
07.10.2003
07.07.2003
07.04.2003
07.01.2003
Emerging market bond spreads have risen
sharply, but less than in 1997–1998
Emerging markets bond spreads, selected countries, basis points, 01/2003 – 12/2008
3000
2500
2000
1500
1000
500
0
3. The sharply increased external
indebtedness of firms and households
• Low international interest rates and ample liquidity
made portfolio managers look for new markets;
• Improved risk rating of emerging markets following
financial liberalization and sustained fast growth;
• Firms choose foreign borrowing to finance
investment if useful for managing exchange-rate risk
(e.g. their cash inflows are in foreign currency);
• Empirical evidence: mostly done by large firms in
banking, infrastructure or extractive industry sectors.
Foreign borrowing by financial and nonfinancial firms strongly increased after 2001
Foreign borrowing by firms, selected regions, $ bn, 1999–2006
160
140
120
100
80
60
40
20
0
1999
2000
2001
2002
2003
2004
2005
Latin America and the Caribbean
East Asia and Pacific
Europe and Central Asia
Sub-Saharan Africa
Middle East and North Africa
South Asia
2006
Risks of firms borrowing overseas
• Fairly stable exchange rates may lead firms with
cash inflows in domestic currency to hold unhedged
foreign positions – vulnerable to depreciation;
• Sudden decline in mineral and petroleum prices:
– Reduced foreign-currency cash inflows;
– Reduced value of collateralized assets in extractive industries
– Reduced value of equity holdings in extractive industries
• Sudden change in external financial conditions can
make (short-term) liability positions unsustainable;
• Balance sheets of banks borrowing overseas but
lending to households for consumption, or in
construction or other non-tradable sectors are
subject to currency mismatch.
4. The limited usefulness of large
holdings of reserves as self-insurance
• Lessons of Asian and Russian crises in 19971998 include need to:
– prevent vulnerability from currency and maturity
mismatches in private balance sheets and external
payments;
– check financial and investment bubbles;
– build adequate self-insurance against sudden
stops and reversals of capital inflows through the
accumulation of foreign exchange reserves at
times of surges in capital inflows.
Russia’s foreign exchange reserves had strongly
increased, but recently sharply declined
Foreign exchange reserves, Russian Federation, January 1995 – December 2008
9
700
8
600
7
500
6
5
400
4
300
3
200
2
100
1
0
1995
0
1996
1997
1998
1999
2000
2001
2002
Share in world total (left scale)
2003
2004
2005
Value ($ billion) (right scale)
2006
2007
2008
Large reserves cannot solve all problems
• Foreign-exchange reserves are subject to exchangerate risk;
• Net amount of capital inflows can be reduced by
allowing private capital outflows – but difficult to
reverse when inflows stop;
• Official reserves cannot prevent:
– Currency and maturity mismatches in balance sheets;
– Vulnerability to shocks associated with greater presence of
foreigners in domestic asset markets;
• Financial integration raises capital account volatility.
5. Conclusions
• The global economic slowdown requires strong,
global and coordinated counter-cyclical measures;
• Need for global monetary and financial rules and reassessment of benefits of national and international
financial liberalisation;
• Need to strengthen prudential regulation and
supervision particularly to avoid currency and
maturity mismatches by firms;
• Need to complement the traditional microeconomic
focus of prudential regulation and supervision with a
macroeconomic perspective by introducing explicit
counter-cyclical features.
Большое спасибо
за внимание
[email protected]