Titel

1
Assessment of private sector credit developments
in CESEE countries 11th ECB-CFS conference on
The Market for Retail Financial Services
Development, Integration, and Economic
Effects Prague, October 21, 2008 Based on
research and analytical work by Peter Backé,
Markus Eller (OeNB) Balázs Égert (OECD,
Economics Department) and Tina Zumer (Banka
Slovenije) in essence an update of ECB working
paper No. 687, Oct. 2006
2
Overview

• Basic definitions and methodological framework
• Deviation of realized private credit to GDP from
  its long-run equilibrium in 11 CESEE countries
• Recent credit growth developments and
  sustainability considerations

3
Basic Definitions

• Financial deepening
• domestic private credit to non-banks in of GDP
  increases as a function of underlying
  fundamentals
• Baseline equation
• Fundamentals GDP per capita, bank credit to the
  government in of GDP (crowding-out effects),
  lending interest rates, producer price inflation,
  interest spread (proxy for financial
  liberalization)
• Behavioral definition of equilibrium
• Equilibrium level of private-sector credit to
  GDP as justified by fundamentals
• Deviations from equilibrium cannot be
  explained by fundamentals

4
Methodological Setting (1)

• Two-stage panel out-of-sample approach
• As proposed by Maeso-Fernandez, Osbat, Schnatz
  (2005), Economic Systems, for equilibrium
  exchange rate estimations
• (1) Estimation stage (in-sample panel)
• Verify for the baseline equation the presence of
  cointegration
• Estimate the long-run relationship among
  integrated variables in the panel framework
• fixed-effect OLS (FE-OLS)
• panel dynamic OLS (DOLS)
• mean group estimation (MGE) following Pesaran,
  Shin, Smith (1999)
• Various subpanels large and small OECD
  countries, non-European emerging market
  economies, CESEE countries

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Methodological Setting (2)

• (2) Simulation stage fit equilibrium levels
• Apply the structural relationship of stage (1) to
  get equilibrium private-sector credit to GDP
  levels,
• i.e., calculate fitted values for Cp/GDP, using
  the estimated long-run coefficients of stage (1)
  and realized values for the fundamentals
• Crucial issue upwards bias of stage-1-estimates
  b/c of initial undershooting in the case of
  transition countries
• Solution out-of-sample
• Use stage-1-estimates for non-transition
  benchmark countries to calculate the fits in
  stage (2) for transition countries
• Remarks / Prerequisites
• For country-specific constant terms the largest
  and smallest estimates for stage-1 country-fixed
  effects are used spectrum of equilibrium credit
  ratios
• Long-run parameter homogeneity b/w benchmark
  countries and transition countries (i.e. ongoing
  structural convergence)
• Stable structural relationship in benchmark
  countries over time (for updates required)

6
Stage (1) Data and Results

• Data
• Quarterly data for 43 countries
• Observations up to Q4/2004, starting dates for
  the subpanels
• OECD countries 1975-1980
• Non-European emerging market economies 1980-1993
• Transition economies (11 CESEEs) 1996
• Results
• GDP per capita positive for EMEs, not always
  significant for CEE
• Public sector borrowing negative for EMEs and
  CEE (crowding out), not however for SEE
• Lending rates negative for CEE, but not for SEE
  and EMEs
• Inflation rate strongly negative for EMEs and
  SEE, not however for CEE
• Size of spread (meant to capture degree of
  financial liberalization) negative for CEE/SEE,
  but not for EMEs

7
Stage (2) Results (1)

• Stage (1) equation, suited most for
  extrapolation
• fixed-effect OLS for small OECD economies (AT,
  AU, BE, CA, DK, FI, GR, IE, NL, NZ, NO, PT, ES,
  SE)
• Criterion coefficients with theoretically
  predicted sign, significance, robustness

• Deviations of the observed private credit-to-GDP
  ratio from its long-run equilibrium, in
  percentage points, up to Q1/2008, BALTIC STATES

8
Stage (2) Results (2)

• Deviations of the observed private credit-to-GDP
  ratio from its long-run equilibrium, in
  percentage points, up to Q1/2008, CENTRAL EUROPE

9
Stage (2) Results (3)

• Deviations of the observed private credit-to-GDP
  ratio from its long-run equilibrium, in
  percentage points, up to Q1/2008, SOUTH EASTERN
  EUROPE

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Classifications of Results (1)

• Type of deviations of the observed private credit
  to GDP ratio from its long-run equilibrium
• Within the estimated equilibrium range, but more
  tilted towards a deviation at the overshooting
  side Latvia and Bulgaria, indicating credit
  growth possibly beyond the equilibrium (catch-up)
  path
• Within the estimated equilibrium range, but more
  tilted towards a deviation at the undershooting
  side Estonia, Lithuania, Hungary, Slovenia, and
  Croatia
• Below but coming very close to the estimated
  equilibrium range Czech Republic, Slovakia, and
  Poland
• Still below the estimated equilibrium range
  Romania

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Classifications of Results (2)

• Overall dynamics of observed private credit
  levels relative to the long-run equilibrium
• Strong upwards dynamics until 2007 especially in
  the Baltic states and Bulgaria continued until
  Q1/2008 in Hungary, Slovenia, and Romania
• Indications of a recent trend reversal in Latvia
  and Croatia since Q2/2007 in Estonia, Lithuania,
  Bulgaria, and Slovakia since Q4/2007
• No major change in observed relative to estimated
  equilibrium credit levels in the Czech Republic
  and Poland in recent times

12
Recent nominal private credit growth rates
13
Recent real private credit growth rates
14
Still comparatively low degree of financial
intermediation, but strong catching-up vis-à-vis
the euro area
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General Assessment

• Private sector credit levels lie within or come
  close to their equilibrium ranges in most CESEE
  countries
• Leverage effect (loosening of credit constraints
  and gained access to finance)
• Improvement in fundamentals (increasing both
  equilibria and actual credit levels)
• Future credit growth in CESEE countries will
  (have to) be more moderate and take place in line
  with further improvements in underlying
  fundamentals (catching-up, macro stability,
  financial sector development).
• The recent slowdown of credit growth in some
  CESEE countries seems to be a sign that credit
  developments are shifting towards a more
  sustainable path.
• At the current juncture, the policy challenge is
  to ensure that this process takes place in an
  orderly fashion.

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Appendix I Initial Undershooting Biased
Estimation
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Appendix II Stage (1) Results