Experiences with the monetary transmission mechanism in Poland

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Evolution of the financial systems in transition
countries a comparative perspective.
Leszek Balcerowicz President of the National Bank
of Poland
The Future of Domestic Capital Markets in
Developing Countries Washington, 15th April 2003
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• I. INITIAL CONDITIONS IN TRANSITION ECONOMIES
• 1. THE ECONOMY WAS DOMINATED BY STATE-OWNERSHIP
  AND THE MARKET WAS ELIMINATED THROUGH CENTRAL
  PLANNING (THE MOST EXTREME FORM OF STATISM)
• 2. THE FINANCIAL SECTOR DISPLAYED A FAR-REACHING
  SIMILARITY
• A MONOBANK STRUCTURE OF THE BANKING SYSTEM, NO
  INDEPENDENT CREDIT DECISIONS AND RISK MANAGEMENT
• NO PRUDENTIAL REGULATIONS AND SUPERVISION
• NO MONEY MARKET, NO STOCK EXCHANGE
• AN EXTREMELY LIMITED RANGE OF FINANCIAL
  INSTRUMENTS
• NEITHER INTERNAL NOR EXTERNAL CURRENCY
  CONVERTIBILITY.
• 3. SUCH A FINANCIAL SECTOR WAS
• SIMILAR TO THE ONE IN CHINA AT THE START OF ITS
  REFORMS
• EVEN MORE STATE-DOMINATED THAN THE BANKING
  SECTOR IN INDIA AND OTHER EMERGING ECONOMIES 12
  YEARS AGO.

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4. MACROECONOMIC CONDITIONS IN TRANSITION
ECONOMIES VARIED MUCH MORE THAN INSTITUTIONAL
ONES, ESPECIALLY WITH RESPECT TO A. INFLATION
HYPERINFLATION IN POLAND, THE FSU VS. MUCH LOWER
INFLATION IN CZECHOSLOVAKIA, HUNGARY AND
ROMANIA Inflation (annual average, in per
cent), a year before transition began (1989 for
Poland, Hungary, Slovenia, 1990 for Czech Rep.,
Slovakia, Bulgaria, Romania, 1991 for the former
Soviet Union countries).
Source EBRD Transition Report 2001.
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B. THE SIZE OF MONETARY OVERHANG DUE TO REPRESSED
INFLATION LARGER IN THE FSU, BULGARIA, ROMANIA
AND POLAND THAN IN HUNGARY OR THE FORMER
CZECHOSLOVAKIA. Repressed inflation
1987-1990 (difference between increase in real
wages and real GDP from 1987 to 1990)
Source IMF World Economic Outlook, October 2000.
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II. SUBSEQUENT DEVELOPMENTS (TRANSITION) HAVE
DIFFERED SHARPLY AMONG THE TRANSITION ECONOMIES
WITH RESPECT TO 1. Stock market capitalisation,
turnover and bond-market development Stock market
capitalisation ( GDP), 2001.
Source EBRD Transition Report 2002.
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2. Credit to the private sector ( GDP), 2001.
Source IMF International Financial Statistics.
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3. Credit to the private sector ( GDP) dynamics,
1996 - 2001
Source Stability and Structure of Financial
Systems in CEC5, NBP, May 2002.
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4. Share of non-performing loans and costs of
banking restructuring. The fiscal costs of the
restructuring of banks differed markedly, higher
costs did not correlate with an improvement in
banking sector performance. Costs of Banking
Sector Restructuring ( GDP), 1991-1998.
Source Zoli, Cost and Effectiveness of Banking
Sector Restructuring in Transition Economies, IMF
WP/01/157, 2001.
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THE DIFFERENCES IN FINANCIAL SECTOR DEVELOPMENTS
WERE LESS DUE TO THE DIFFERENT INITIAL CONDITIONS
AND MORE TO THE DIFFERENCES IN THE QUALITY OF
GENERAL AND SECTORAL POLICIES.

• GENERAL POLICIES
• FISCAL AND EXCHANGE RATE POLICIES
• ENFORCING THE RULE OF LAW
• PROTECTION OF CREDITORS AND MINORITY
  SHAREHOLDERS RIGHTS
• LIBERALISATION.

ENTERPRISE SECTOR
INITIAL CONDITIONS
FINANCIAL SECTOR

• PRIVATISATION
• PRUDENTIAL REGULATION AND SUPERVISION
• RESTRUCTURING OF NON-PERFORMING LOANS.

• PRIVATISATION.

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• III. SOME SPECIFICITIES OF FINANCIAL SECTOR
  REFORMS IN ACCESSION COUNTRIES
• 1. FAST INTERNAL AND EXTERNAL FINANCIAL
  LIBERALISATION, ESPECIALLY RELATIVE TO CHINA,
  INDIA AND THE ASIAN TIGERS. AS A RESULT THE
  ACCESSION COUNTRIES HAVE BECOME FINANCIALLY VERY
  OPEN RELATIVE TO MOST OTHER EMERGING ECONOMIES.
• Internationally issued bonds as a of total
  bonds outstanding, 2000.

Source BIS Papers No 11, The development of bond
markets in emerging economies, BIS 2002.
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• Private non-bank sector external loans from BIS
  reporting banks as a of credit to
  non-government, 2001.

Source IMF International Financial Statistics
and BIS Quarterly Review, September 2002.
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• 2. RELATIVELY FAST BANK PRIVATISATION AND A LARGE
  ROLE OF FOREIGN INVESTORS.
• Share of state-owned banks assets in total
  banking assets (), 2001.

Source Central banks Annual Reports and BIS
Papers No 4, The banking industry in the emerging
market economies, BIS 2001.
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• Share of total banking assets controlled by
  foreign investors (), 2001.

Source Central banks Annual Reports and BIS
Papers No 4, The banking industry in the emerging
market economies, BIS 2001.
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3. RAPID INTRODUCTION OF REGULATIONS PROTECTING
CREDITORS AND SMALL SHAREHOLDERS RIGHTS, BUT
MUCH SLOWER IMPROVEMENT IN THEIR ENFORCEMENT.
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• IV. PRESENT RELATIVE POSITION OF ACCESSION
  COUNTRIES
• 1. Relative size of the financial sector in
  accession countries is
• much smaller than in EU Members States and other
  developed economies and lower than in the Asian
  Tigers, Chile, Israel and China.
• not very different from Mexico, Indonesia,
  India, Turkey and Brazil.
• Credit to non-government and stock market
  capitalisation, GDP, 2001

Source IMF International Financial Statistics,
FIBV and stock exchanges websites.
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2. The financial sector in accession countries is
bank-dominated, with limited importance of
capital and commercial debt markets. The ratio of
credit to stock market capitalization is similar
to that in bank-based developed countries
(Germany, Japan, Portugal, New Zealand) and much
lower than in Austria. Credit to non-government
vs. stock market capitalisation, 2001 (ratio as a
).
Source IMF International Financial Statistics,
FIBV and stock exchanges websites.
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• 3. Credit to non-government in accession
  countries is
• comparable to that in other developing countries
  (except for Chile, Israel, the Asian Tigers and
  China),
• much lower than in developed countries (except
  for Denmark, Greece and Finland)
• lower than indicated by the level of GDP per
  capita.
• Credit to non-government as a of GDP, 2001

Credit to non-government GDP
GDP per capita PPP
Source IMF International Financial Statistics.
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• 4. The level of banking deposits in accession
  countries is
• similar to those in Latin American countries,
  Indonesia, India and Turkey
• lower than in the Asian Tigers and China
• lower than in developed countries with
  bank-based financial systems, but not very
  different from those in Canada, Denmark, Finland,
  France and the US (i.e. countries with other more
  developed forms of savings - insurance,
  investment funds, etc.).
• Banking deposits as a GDP, 2001

Deposits GDP
GDP per capita PPP
Source IMF International Financial Statistics.
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5. Bond market development in accession countries
is similar to that in other emerging economies
(except for Malaysia and Korea), but this is
mainly due to issues of public sector bonds.
Total bonds outstanding as a of GDP, 2000.
Source BIS Papers No 11, The development of bond
markets in emerging economies, BIS 2002.
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6. Outstanding amounts of private sector bonds
are very low, but this is a common feature of
emerging economies (except for Malaysia, Korea,
Hong Kong, Singapore and Chile). Total private
sector bonds outstanding as a of GDP, 2000.
Source BIS Papers No 11, The development of bond
markets in emerging economies, BIS 2002.
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• 7. Stock market capitalisation in accession
  countries is
• much lower than in all advanced economies
  (except for Austria and New Zealand)
• similar to that in Indonesia, Mexico, Thailand,
  Turkey and Brazil.
• Stock market capitalisation, 2001.

Source FIBV and stock exchanges websites.
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8. Stock market capitalisation in accession
countries is not very different from levels
prevailing in EU economies ten years ago. Stock
market capitalisation more advanced transition
countries, 2001 vs. advanced economies, 1992.
Source FIBV and stock exchanges websites.
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• 9. Stock market turnover in accession countries
  is very low
• much lower than in all advanced economies
  (except for Austria)
• similar to that in Chile, Indonesia, Brazil and
  Israel, but lower than in other emerging markets.
  
• Stock market turnover ( GDP), 2001.

Source FIBV and stock exchanges websites.
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V. The accession countries financial systems are
highly integrated with the EU financial
market 1. Financial markets legal framework is
fully harmonized with EU standards. Banking
directives were from the very beginning a
hallmark on which the national law and prudential
regulations were modeled. 2. Most banks in
accession countries are controlled by foreign
banking groups. 3. Foreign investors are also
active in other financial services (insurance,
investment funds).
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4. The best domestic companies have already
gained access to foreign financing, either
through direct loans from mother companies abroad
or loans from foreign banks, or through issues of
debt securities and GDRs/ADRs on external capital
markets. 5. The future of stock markets in
accession countries has not yet been decided. One
possible solution is integration with one of
Europes trading platforms.