Banking in CEE: less growth, more balance
Gianfranco Bisagni, Matteo Ferrazzi and Pia Pumberger
CENTRAL EASTERN EUROPE AND THE ECONOMIC ENvIRONMENT
Central Eastern European (CEE1) economies are no longer at the centre of the financial storm as it was the case in 2008-2009, when many CEE countries were under the fire of rating agencies and had to ask for the support of the International Monetary Fund (IMF).2 Growth has regained some strength, too. However, the recovery has been more sluggish in many of the CEE economies than in other emerging markets;3 moreover, the CEE countries are, at least indirectly, exposed to the sovereign debt crisis in the euro area: they feel the effect of the financial stress (and economic slowdown) spilling over from the western part of Europe.
Following the recent economic and financial crisis, Western Europe experienced a weakening of growth momentum and an increase of market pressure related to the debt vulnerabilities in the so-called ‘peripheries’. The country picture is highly heterogeneous: while Germany and France showed a positive gross domestic product (GDP) development (following the relevant drop in 2009), Italy and Spain are facing severe recessions. Crisis countries (such as Italy and Spain) as well as ‘programme countries’ (Greece, Ireland, Portugal) are taking measures to reduce their deficits, but this is having an impact in terms of growth for the whole euro area. However, the developments in 2012 led to an increased strengthening of the euro area, credibly indicating the authorities’ determination to avoid a break-up of the European Monetary Union (EMU), especially following the European Central Bank (ECB)’s Outright Monetary Transactions (OMT) initiative. The renewed market optimism during 2012 and the reduced financial stress will have a positive impact on EMU-wide real economy.
This said, CEE GDP growth forecasts have been progressively marked
Figure 15.1 Economic performance in the euro area and CEE (real GDP growth in %)
down due to weakening momentum in Western Europe, but the financial conditions were more relaxed during the second half of 2012. It is not only the trade channel (via exports) or the financial market sentiment which is having an impact on CEE economies, but also the linkages with the Western European banking sector (the top financial players operating in CEE are from Austria, Italy and France). Still, CEE is set to significantly outperform EMU. Convergence will continue, but at a lower pace than in the first part of the 2000s (see Figure 15.1). What is also different from before is the increased heterogeneity in the economic performance: it is crucial not to consider the CEE region as a uniform bloc. Hungary, the Czech Republic and Romania were in technical recession during 2012; Poland, Slovakia, Ukraine and Russia all displayed steady growth in 2010 and 2011, even if they gradually lost steam in 2012.4 In general, the larger and less open economies (Turkey, Russia and Poland) with a greater reliance on domestic markets show resilience in the face of global headwinds.
The size of the shock observed during the peak of the crisis, as well as the performance of the CEE region in the post-crisis period, stem from structural differences among the different economies. The Commonwealth of Independent States (CIS), and Russia in particular, are very much dependent on the commodity cycle; Central European economies are more stable, structurally solid, but exposed to German demand and Western European’s manufacturing cycle; South-Eastern Europe (SEE) is more vulnerable and dependent on foreign refinancing, given the high foreign debt levels. The different country risk profiles should continue to drive significant divergence in banking sectors’ performance also in the years to come. Over the medium to long term, banks in CEE should maintain enough potential to generate a growth higher than average in the EU, in terms of both volumes and profitability. One of the drivers of growth is the still relevant difference in the financial penetration rate compared to Western Europe. The ratio of banking assets in per cent of GDP is as yet half as big as the correspondent ratio of the euro area. If we compare the banking penetration of CEE with that of other emerging markets, the potential is also clear. On the consumer side, retail volumes in CEE correspond to around 100 per cent of disposable income, while they exceed 390 per cent of disposable income in Western Europe, Asia and North America (only Latin America having a lower ratio than CEE). On the corporate side, corporate volumes are less than 60 per cent of GDP in CEE and Latin America, and close to 100 per cent or higher in the Middle East, Western Europe and Asia, according to the estimates of McKinsey Global Banking Pools.