Resilience of SEEs to the crisis Bank of Greece – University of Oxford (SEESOX) Conference Challenges and Prospects of South East European Economies in the wake of the financial crisis Bank of Greece Friday, 16 October 2009 Resilience of SEEs to the crisis Paul Mylonas Chief Economist, Chief of Strategy, National Bank of Greece Group National Bank of Greece Group – Strategy & Economic Research

What people saw and what they expected What happened and current prospects Why a better-than-expected outcome NBG - Strategy & Economic Research Resilience of SEEs to the crisis 1

What people saw and what they expected NBG - Strategy & Economic Research Resilience of SEEs to the crisis 2

Booming activity, albeit from a low base … but above potential? NBG - Strategy & Economic Research Resilience of SEEs to the crisis 3

Evidence of excess demand reinforced by the build-up of a large external imbalance NBG - Strategy & Economic Research Resilience of SEEs to the crisis 4

Additional indicators of imbalances – real exchange rate appreciation and large credit impulse NBG - Strategy & Economic Research Resilience of SEEs to the crisis 5

Banking sector imbalances: large share of F/X denominated loans and dependence on foreign funding NBG - Strategy & Economic Research Resilience of SEEs to the crisis 6

Very large real wage increases (again from a low base), but were they hampering competitiveness? Also a house price bubble had emerged NBG - Strategy & Economic Research Resilience of SEEs to the crisis 7

With the global economy in turmoil, markets and analysts envisaged a grim end to the boom years NBG - Strategy & Economic Research Resilience of SEEs to the crisis 8 9

What happened and current prospects NBG - Strategy & Economic Research Resilience of SEEs to the crisis 9

Much larger-than-initially-expected drop in output, similar to more advanced economies, and with a higher “β”… NBG - Strategy & Economic Research Resilience of SEEs to the crisis 10

… due to openness and manufacturing bias NBG - Strategy & Economic Research Resilience of SEEs to the crisis 11

Further evidence of the important role of the inventory correction in the nascent recovery in exports NBG - Strategy & Economic Research Resilience of SEEs to the crisis 12

Contraction in activity reflects a sharp slowdown in exports and credit expansion NBG - Strategy & Economic Research Resilience of SEEs to the crisis 13

External imbalances correcting rapidly, despite drop in exports, reflecting … NBG - Strategy & Economic Research Resilience of SEEs to the crisis 14

-- yet better than expected … a cut-off of oxygen to the economy from large capital inflows of the past -- yet better than expected NBG - Strategy & Economic Research Resilience of SEEs to the crisis 15

As a result, FX reserves have not suffered greatly, and appear adequate in relation to the external financing gaps NBG - Strategy & Economic Research Resilience of SEEs to the crisis 16 17

Overall, leading and coincident indicators suggest that the worst is over, and activity will recover by Q4:2009 NBG - Strategy & Economic Research Resilience of SEEs to the crisis 17

Markets clearly have changed their mind regarding the outlook for SEE, as well NBG - Strategy & Economic Research Resilience of SEEs to the crisis 18 19

Why a better-than-expected outcome NBG - Strategy & Economic Research Resilience of SEEs to the crisis 19

Government Effectiveness EU membership (or on path towards) and/or IFI umbrella, combined with solid Governments (in most cases) provided much needed support… EU Membership Government Effectiveness IFI Support Turkey Candidate country Started negotiations in October 2005 Strong single party Government, especially after the July 2007 Constitutional Court decision Negotiations of a new agreement with the IMF are in progress Romania Member country since January 2007 Strong centre-left Government until its collapse in early-October 2009 Signed a 2-year agreement with the IMF in May 2009, amounting to EUR 12,9 bn. Further support is expected from the EU (EUR 5 bn), the World Bank (EUR 1 bn), and the EBRD, the EIB and the IFC (EUR 1 bn). Bulgaria Member country since January 2007 Strong centre-right Government took office in July 2009 Remains open to seal a deal with the IMF if global conditions deteriorate further Serbia Potential candidate country Signed a Stabilisation and Association Agreement in April 2008 Strong centre-left coalition Government Signed a 15-month agreement with the IMF in January 2009, amounting to EUR 2.9 bn. FYROM Signed a Stabilisation and Association Agreement in October 2005 EU Commission recommends entry talks with FYROM (14 October 2009) Strong centre-right coalition Government Albania Signed a Stabilisation and Association Agreement in June 2006 Strong right-left coalition Government Ukraine - - - Weak coalition Government until the January 2010 presidential elections Signed a 2-year agreement with the IMF in November 2008, amounting to USD 16.5 bn. Egypt Strong and pro-reform Government since July 2004 NBG - Strategy & Economic Research Resilience of SEEs to the crisis 20

… allowing monetary policy to be countercyclical (in contrast to other EM crises) NBG - Strategy & Economic Research Resilience of SEEs to the crisis 21

FP is also countercyclical, with automatic stabilizers allowed free reign, permitted by good initial debt conditions… NBG - Strategy & Economic Research Resilience of SEEs to the crisis 22

A traditional Achilles’ heel of EM crises -- the health of the banking system -- was in good shape NBG - Strategy & Economic Research Resilience of SEEs to the crisis 23

Several years of adjustment effort has made these economies very competitive NBG - Strategy & Economic Research Resilience of SEEs to the crisis 24

Thank you NBG - Strategy & Economic Research Resilience of SEEs to the crisis 25 26