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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 1 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 2 What people saw and what they expected

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

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

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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 6 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 7 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 8 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 9 What happened and current prospects

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 10 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 11 … due to openness and manufacturing bias

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 12 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 13 Contraction in activity reflects a sharp slowdown in exports and credit expansion

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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 15 … 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 16 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 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 18 Markets clearly have changed their mind regarding the outlook for SEE, as well

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

NBG - Strategy & Economic Research Resilience of SEEs to the crisis 20 EU MembershipGovernment EffectivenessIFI Support Turkey o Candidate country o 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 o Signed a 2-year agreement with the IMF in May 2009, amounting to EUR 12,9 bn. o 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 o Potential candidate country o 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 o Potential candidate country o Signed a Stabilisation and Association Agreement in October 2005 o EU Commission recommends entry talks with FYROM (14 October 2009) Strong centre-right coalition Government Remains open to seal a deal with the IMF if global conditions deteriorate further Albania o Potential candidate country o Signed a Stabilisation and Association Agreement in June 2006 Strong right-left coalition Government Remains open to seal a deal with the IMF if global conditions deteriorate further 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 EU membership (or on path towards) and/or IFI umbrella, combined with solid Governments (in most cases) provided much needed support…

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

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

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

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