CESEE reunion with Europe Andrzej Sawiski, Warsaw School of - - PowerPoint PPT Presentation

CESEE reunion with Europe

Andrzej Sławiński, Warsaw School of Economics The CEEI Conference, OeNB, Vienna 25-26 November 2019

• 1. Exchange rate policy

• Initial fixing of the zloty enabled Poland to overcome

hyperinflation (600%)

• Its subsequent gradual floating facilitated adjustments in the

BOP

• Currency boards were a rational choice for the Baltic states

and Bulgaria, but exposed them to unsustainable lending booms The choices of exchange rate regimes in the early 1990s

Source: Eurostat; NBP

4

• 30,0
• 25,0
• 20,0
• 15,0
• 10,0
• 5,0

0,0 5,0 10,0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Current account balance (% of GDP)

Bulgaria Czechia Estonia Latvia Lithuania Hungary Poland Romania Slovakia

• Stabilizing speculation within the zloty’s band in the mid-

1990s

• Smoothing out the appreciation of the koruna in the early

2000s

• Successful defence of the forint’s 15% band in 2003
• Keeping the koruna’s ceiling of 2013-2017 with few

interventions The 1990s proved that interventions on FX markets can be effective

• 2. What made stabilizing inflation in the 2000s

easier than initially expected?

• Enhanced central banks’ credibility due to successful disinflations of

the 1990s

• CESEE countries’ increasing export potential allowed them to use

nominal appreciation as an inflation-stabilizing tool

• Global fall in inflation
• Participation in the European GVCs facilitated trade deficits

reduction and exchange rates stabilization

33,1 36,5 37,0 38,3 39,4 40,9 41,8 42,8 42,6 42,7 43,7 43,5 43,9 45,9 48,0 47,8 49,6 52,8 50,7 49,6 51,0 52,5 53,0 52,9 52,3 50,4 49,7 49,3 49,0 30,0 35,0 40,0 45,0 50,0 55,0

Global value chains (share in exports)

Source: UNCTAD statistics

%

• 7
• 5
• 3
• 1

1 3 5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

products related to GVC activities fuels & primary goods

• ther manufactured goods

The GVC impact on Poland’s trade balance

EUR bn

• 3. The 2007-2009 crisis:

Why was there no exit strategy in Poland?

Bank balance sheet Zloty appreciation

Mortgage loans indexed to

CHF CHF CHF PLN

FX loans complicated monetary policy

• Tightening LtV and DSTI ratios in 2006 directed FX loans

mainly to more affluent borrowers

• The way in which the bad debts problem was solved in

the early 1990s had long-term positive effects

Share of mortgage borrowers by income decile

Source: NBP calculations based on PHBS data Source: NBP calculations based on PHBS data

0% 5% 10% 15% 20% 25% 30% 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Per cent in a given income decile Income decile Households with PLN mortgage Households with FX mortgage

FX loans were granted mostly to high-earners

13

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 0 4 8 121620242832364044485256606468727680 Per cent Households with PLN mortgage Households with FX mortgage

Distribution of mortgage borrowers by DTI

• 4. The adoption of the euro

• Floating of the zloty brought some positive results, such as

reducing external imbalances and stabilizing the REER

• The small differences in economic developments in Slovakia

and the Czech Republic reflect diminishing importance of exchange rate regimes The 2007-2008 crisis made some new Member States cautious about the timing to join the Eurozone

Nominal and real effective exchange rates of the zloty (index, 2000M01 = 100)

Source: BIS and OECD data

70 80 90 100 110 120 130 140 150 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 NEER REER CPI REER ULC

• The decreasing exchange rate pass-through
• and the diminishing BS effect
• reduce the value of the option to wait

The contribution of selected factors to export volume growth and RER_ULC pass-through to export volume

RER_ULC pass-through to export volume (ERPT) = IRF of export volume growth/impulse of nominal effective exchange rate deflated by relative unit labour costs ERPT has been close to zero during last ten years. However, it can considerably increase close to the extreme points of the business cycle

• 20
• 15
• 10
• 5

5 10 15 20

GVC RER_ULC World demand Export world prices RER_ULC pass-through to Export volume

Shrinking BS effect

Source: Eurostat

• 5. Symptoms of financial integration

10-year TBs yield decomposition

Source: Jabłecki, Raczko, Wesołowski (2016 )

Public debt holders

Source: Jabłecki, Raczko, Wesołowski (2016)

• 5. What factors stabilize the EUR/PLN exchange rate?

24 Source: NBP

• 35%
• 30%
• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

EURUSD PLNUSD

• 15%
• 10%
• 5%

0% 5% 10% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

PLNEUR

5%

• 5%

• Compressed interest rate differential (fewer opportunities

for arbitrage)

• No substantial macroeconomic imbalances

• 6. General conclusions

• Economic reforms were introduced simultaneously with a

return to democracy, which made them socially acceptable

• Joining the European GVCs accelerated economic convergence

and facilitated rapid reduction of trade imbalances

• Economic and political transformation released the potential of

CESEE’s well-educated and egalitarian societies with long manufacturing traditions (e.g. Czech Republic)

• 7. New challenges: How to improve

non-price competitiveness?

• How to make institutions more effective in promoting

innovation?

• Inspirations can be drawn from a variety of sources: Israel,

Taiwan, Ireland, and Nordic countries