Credit growth in the Baltics: What’s next?€¦ · Andres Sutt Credit growth in the Baltics:...

Eesti PankBank of Estonia

Credit growth in the Baltics: What’s next?Andres SuttDeputy GovernorBank of Estonia

Andres Sutt Credit growth in the Baltics: What’s next? 2


Overview of the presentation

• What were the preconditions for financialdeepening in the Baltic countries?

• What have we achieved – too much too fast?

• What’s next?



Financial sector plays a key rolein the development of modern economies

Source: World Bank. January 2007



The Baltics:Favorable preconditions for financial deepening

2001-2005

0

1

2

3

4

5

6

7

8

9

GDP growth ...TFP …Capital/laborav

erag

e an

nual

% c

hang

e

Baltics

8 New Member States(2004)EU-15

1996-2000

0

1

2

3

4

5

6

7

8

9

GDP growth ...TFP …Capital/labor

aver

age

annu

al %

cha

nge

Baltics

8 New Member States (2004)EU-15

Low initial capital accumulation combined with fast productivity growthmeans high returns on investments.

Source: IMF 2007


What have we achieved –too much too fast?



High international integration

Share of foreign banks (% of total assets, 2005)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EE

SK LU CZ LT PL

HU FI LV UK IE MT

GR

CY

BE PT

SL

DK AT

FR ES

GE IT SE NL

from other countries

from EU countries

Source: EU Banking Structures. ECB: October 2006



The Baltic share in group profits is much higherthan the share in assets

Swedbank SEB

0%

5%

10%

15%

20%

25%

2002 2004 Q1-32006

2002 2004 Q1-32006

Operating profit Total assets

Source: Banking groups’ financial reports



Low interest margins – a sign of “home market” concept

Average interest margin on new housing loans

0,0%0,5%1,0%1,5%2,0%2,5%3,0%3,5%4,0%

2004

2005

2006

2007

Estonia Lithuania (EUR)Latvia (EUR) euroa area

Source: Bank of Estonia



High credit growth

Growth of loans to private sector (% yoy)

01020304050607080

April 2

005

2006

2007

LithuaniaLatviaEstonia

Sources: central banks



Corporate indebtedness approaching Nordic levels

Corporate sector debt to GDP

0%

20%

40%

60%

80%

100%

120%

Sweden Estonia Denmark Norway Latvia Finland Lithuania

2005 2006 estimate

Sources: Eurostat, central banks



Household indebtedness: still low compared to Nordic neighbors ?

Household indebtednessdebt to disposable income

0%

50%

100%

150%

200%

250%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Estonia Latvia Lithuania Finland

Sweden Denmark

Sources: Eurostat, central banks



Estonia: much of lending and leasing is into real estate

0 10 20 30 40 50 60 70

Other

Study Loans

Car leasing

Real Estate

Other ClosedSectors

Real Estateand Other

Trade

Hotels andrestaurants

Transport andcommunication

Manufacturing

Oth

erE

xpor

t orie

nted

Hou

seho

lds

Ent

erpr

ises

31.12.06 31.12.05 31.12.04 31.12.03




But… housing conditions in the Baltics neededimprovement

• Raouli ettekandest

0

10

20

30

40

50

60

DK

(200

3)

SE (

2003

)

UK

(200

1)

NL

(200

0)

DE

(200

2)

AU (

2003

)

FR (

2002

)

FI (

2002

)

IE (

2002

)

MT

(200

2)

SI (

2002

)

CZ (

2001

)

HU

(20

01)

EE (

2004

)

SK (

2001

)

LT (

2003

)

LV (

2003

)

PL (

2002

)

(Square meters per capita)

Source: European Central Bank



Real estate prices rise as income level increases

0

5000

10000

15000

20000

25000

30000

35000

0 1000 2000 3000 4000 5000 6000

Average house prices, EUR/m2

GD

P p

er h

ead,

EU

R

ITES

FR

BEDE

AT

SICZ

EE

PL

HU

LTBG

IEDKSE

FI

NL

SKLV

RO

Source: Ameco and B. Egert and D. Mihaljek (2007), “Determinants of house price dynamics in Central and Eastern Europe”. Note: GDP per head is adjusted for PPP. For Slovakia, whole country.

House price in capitals and income levels in EU (2005)



Credit quality is high (in line with the economiccycle)

Non-performing loans to total loans, % (2006)

0

2

4

6

8

10

12

14

16

Esto

nia

Latv

ia

Lith

uani

a

Bul

garia

Hun

gary

Rus

sia

Slov

akC

zech

Rep

.Po

land

Finl

and

Sw

eden

Irela

nd UK

Fran

ce

Ger

man

yIta

ly

Indi

aC

hina

Mal

aysi

aTh

aila

ndIn

done

sia

Aust

ralia

Can

ada

US

Japa

n

Source: IMF Global Financial Stability Report, April 2007

Baltics CEE Western Europe Asia Other


What’s next: soft landing or a collision course?



The current cycle has peaked ...

Sources: past data from national stastistical offices; government forecasts for Latviaand Lithuania, central bank forecast for Estonia

GDP growth (%, 2007-2009 central bank forecasts)

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f

EstoniaLatviaLithuania



and lending growth is stabilizing in all three Baltic countries…

Sources: central banks

Growth of loans to private sector (% yoy)

01020304050607080

April 2

005

2006

2007

LithuaniaLatviaEstonia



… which is even more clearly evident when zooming in to look at Estonia

Quarterly credit flows from domestic banksy/y growth

-30%

0%

30%

60%

90%

120%

150%

30.0

6.06

30.0

7.06

30.0

8.06

30.0

9.06

30.1

0.06

30.1

1.06

30.1

2.06

30.0

1.07

28.0

2.07

30.0

3.07

30.0

4.07

households enterprises total




Following these principles helps Baltic policymakers to support soft landing

• Open and flexible markets

• A prudent fiscal stance

• A monetary system that anchors inflation expectations

• Effective financial sector supervision and cross-border cooperation between supervisors of home and host countries



In longer term, investment and lending in the Baltic states will still be attractive

0123456789

20 40 60 80 100 120GDP per capita in PPS (2000), EU25=100

Aver

age

annu

al r

eal G

DP

grow

th (

2001

-20

05),

%

LVEE

LT

Lower GDP level implies a faster growth rate


Thank you for your attention!



Bank of Estonia forecast for 2007-2009 2005 2006 2007 2008 2009 GDP (EEK bn) 173.1 204.6 239.1 272.2 303.0Real GDP growth (%) 10.5 11.4 8.4 6.5 5.6HICP (%) 4.1 4.4 5.1 5.6 4.3Current account (% of GDP) -10.5 -14.8 -15.2 -13.8 -12.6Real private consumption growth (%) 7.9 15.8 14.7 9.9 7.3Real investment growth (%) 12.7 19.7 14.8 5.9 3.7Real export growth (%) 21.5 10.0 8.2 7.5 6.8Real import growth (%) 15.9 14.7 12.9 7.7 6.4Unemployment rate (%) 7.9 5.9 5.5 5.9 6.3Change in the number of the employed (%) 2.0 6.4 1.3 0.1 -0.3Value added growth per employee (%) 8.3 4.7 7.0 6.4 5.9Real wage growth (%) 8.3 12.6 12.7 8.8 6.0Average gross wage growth (%) 11.4 16.2 18.5 14.3 10.6Nominal credit growth (%) 50.4 51.6 37.3 22.7 14.7External debt (% of GDP) 86.0 95.8 103.0 107.1 110.9

Credit growth in the Baltics: What’s next?€¦ · Andres Sutt Credit growth in the Baltics:...

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