Vulnerability Analysis of the SEE-6 Countries before and during the Crisis
A vulnerability analysis undertaken by the National Bank of the Republic of Macedonia (NBRM) reveals that significant shifts occurred in the main vulnerability areas of the SEE-6 region in the periods before and during the crisis, reflecting a sharp reversal in the main economic trends. The pre-crisis period was characterized by strong domestic demand, fuelled by the credit expansion and funds from abroad, which in turn caused the external sector balances to worsen. Thus, the vulnerability analysis shows the external sector (current account deficit and ratio of foreign assets to potential claims in foreign currency) and strong credit growth to have been the main vulnerabilities areas at the end of 2008. As previously explained, the widening of the current account deficit in the SEE-6 countries was partly affected by the strong FDI inflows that caused higher imports of machines and equipment at the early stage of setting up new entities as well as imports of raw materials from abroad for these entities, in most of the cases. Over a longer horizon, the overall net impact of their operations on external balances should turn positive. However, not all FDI undertakings had import components. Additionally, the relatively high level of domestic consumption in the pre-crisis period was also supported by intensive lending by domestic banks, which significantly contributed to the current account deficit deterioration as well. Thus, the pre-crisis deterioration of the external balances as well as strong credit growth were raising the issue of long-run sustainability. In addition, the slowdown of deposit growth relative to GDP has been also listed among the potential vulnerabilities, pointing out the first round of impact of the crisis, which was already present at the end of 2008 (see Figure 11.13).
During the crisis, vulnerabilities shifted to the government sector, non-performing loans and the banking sector’s sources of financing. The lower budget revenues against the backdrop of the economic slump together with the increased countercyclical budget expenditures led to a widening of the budget deficit (in four of the SEE-6 countries) that was reflected in an increase of government debt in some of the countries.
Figure 11.13 Vulnerability in the SEE-6 countries before and during the crisis (in numbers of countries)
The banking systems of the SEE-6 countries were faced with numerous challenges during the crisis. The worsening quality of the credit portfolio seems to be the most pronounced challenge, being registered in four of the SEE-6 countries. The worsened economic outlook influenced the repayment ability of banks’ credit clients which resulted in a continuous increase of non-performing loans. In some of the countries, these developments affected both banks’ profitability and their liquidity. In addition, banks felt the force of the crisis through the more evident scarcity of sources of financing. The stronger impact was on the foreign liabilities of foreign-owned banks, which shrank significantly during the crisis due to liquidity and other budget constraints of the foreign (mainly European Union-based) parent banks. Deposit growth was initially affected by short episodes of deposit withdrawal during the first wave of the crisis due to uncertainty and the pressure of psychological factors. Later on, the deposit dynamics accommodated downward in line with the slowdown in economic growth.