An Investigation of the Linkages Between European Union Equity Markets and Emerging Capital Market
Emerging markets in Europe: Real and financial integration with the European Union
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Transcript of Emerging markets in Europe: Real and financial integration with the European Union
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Emerging markets in Europe:Emerging markets in Europe: Real and financialReal and financial integration integration
with the European Unionwith the European Union
IADB, Washington April 10, 2003
Fabrizio CoricelliUniversity of Siena, CEU and CEPR
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Sudden stops in CEECs: Sudden stops in CEECs: exceptionexception
• Two cases of sudden stops. Czech Republic in 1997 and Bulgaria in 1996-97
• It would be interesting to compare with experience of LAC to highlight the causes and effects of sudden stops
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Czech RepublicCzech Republic
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1995 1996 1997 1998 1999 2000 2001 2002
gdp growth current account
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BulgariaBulgaria
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1995 1996 1997 1998 1999 2000 2001 2002
gdp growth current account
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Other CEECsOther CEECs
• CEECs were able to ride smoothly through the Russian crisis and the current slowdown of major industrial economies.
• Gdp growth resumed rather quickly after 1998
• Current account deficit remained large• Foreign bank loans were cut also to
CEECs, but only temporarily, and less than for other EMs.
• FDIs remained strong
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Growth and current account in Growth and current account in CEECsCEECs
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1995 1996 1997 1998 1999 2000 2001 2002
Gdp growth Current account
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The fall in bank loansThe fall in bank loans
Bank lending to emerging market countries
-50
-40
-30
-20
-10
0
10
20
30
40
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
(In bn US$)
Asia & Pacif ic Europe Latin America/Caribbean
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Much smaller in CEECsMuch smaller in CEECs
-20000
-15000
-10000
-5000
0
5000
10000
15000
Q2
1995
Q4
1995
Q2
1996
Q4
1996
Q2
1997
Q4
1997
Q2
1998
Q4
1998
Q2
1999
Q4
1999
Q1
2000
Q2
2000
Q3
2000
Q4
2000
Q1
2001
Q2
2001
Q3
2001
Q4
2001
Q1
2002
Q2
2002
Q3
2002
Totale CEECs Russia e Ukraine
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Czech RepublicCzech Republic
-2%
-1%
0%
1%
2%
3%
4%FDI/GDP Oher capital flows/GDP
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PolandPoland
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Q4
1997
Q1
1998
Q2
1998
Q3
1998
Q4
1998
Q1
1999
Q2
1999
Q3
1999
Q4
1999
Q1
2000
Q2
2000
Q3
2000
Q4
2000
Q1
2001
Q2
2001
Q3
2001
Q4
2001
Q1
2002
Q2
2002
Q3
2002
Q4
2002
FDI/GDP Other capital flows/GDP
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HungaryHungary
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Q3 19
97
Q1 19
98
Q3 19
98
Q1 19
99
Q3 19
99
Q1 20
00
Q3 20
00
Q1 20
01
Q3 20
01
Q1 20
02
FDI/GDP Other capital flows/GDP
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CEECs not very different from CEECs not very different from other EMsother EMs
• High volatility of main macroeconomic variables
• Debt to Gdp indicators• High share of foreign debt in total debt
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Macroeconomic volatilityMacroeconomic volatility
V o la ti l i ty( s ta n d a rd d e v ia t io n )
GDP Terms of trade
Real effective exchange rate
Real interest rate
Gov’t revenue/GDP
CEECs 4,10 4,40 12,66 6,34 2,31
Latin America 3,74 8,70 18,00 13,18 2,19
Emerging Asia
4,11 5,92 8,65 2,52 1,82
Advanced countries
2,09 3,73 5,90 2,07 1,02
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……..volatility..volatility
• Not due to terms of trade volatility (trade diversified)
• Real exchange rate more volatile: massive reallocation from tradable to non-tradable sectors
• Financial sector (still underdeveloped)?
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Small capital markets (2001)Small capital markets (2001)
Stock Public Private Bond, equity B+E+BA
market debt debt Bank and bank excl.
capitalization securities securities assets assets public.
EU-15 86% 62% 88% 417% 652% 590%
Emerging ec. 27% 21% 11% 140% 243% 222%
LAC 22% 27% 10% 84% 157% 130%
Europe 9% 32% 3% 59% 119% 87%
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Debt indicatorsDebt indicators
Public debtin % GDP
Public foreign% of total
Public debt % of revenues
Public foreign% of revenues
Bulgaria 80.6 91.4 185.3 39.8Czech Rep. 17.3 10.5 42.6 4.3Estonia 5.3 67.4 13.6 26.2Hungary 58.2 n.a. 126.8 n.a.Latvia 13.0 60.9 43.3 18.3Lithuania 28.3 77.8 93.7 23.5Poland 40.9 48.8 103.3 19.3Romania 31.6 44.9 100.3 14.1Slovakia 32.8 49.0 92.9 17.3Slovenia 25.8 48.8 60.3 20.9
avg. CEECs 33.4 55.5 86.2 20.4EU 64.2
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Key favourable factorsKey favourable factors
• Parallel growth of trade and financial integration
• High degree of trade openness, and especially trade integration with the EU
• Relatively large tax base• “Anchor” of EU accession (political
economy factors as well)
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Trade and financial opening Trade and financial opening hand in handhand in hand
0
10
20
30
40
50
60
70
80
90
0 20 40 60 80 100 120 140 160
trade openness
fin
anci
al o
pen
nes
s
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Trade integration and financial Trade integration and financial flowsflows
• Parallel growth of trade and financial links with EU.
• Bulow and Rogoff (1989) channel: trade openness increases incentives of borrowers to service their debt.
• Plus, better information flows. • A recent paper by the Bundesbank finds
a significant effect on bank loans of German banks of the trade integration with Germany
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Trade opennessTrade openness
0
20
40
60
80
100
120
140
160
Latin America Asia CEECs
Average
min
max
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Integration with Eurozone Integration with Eurozone Trade with Eurozone/GDPTrade with Eurozone/GDP
0
10
20
30
40
50
60
70
Belgiu
m-L
ux.
Hunga
ry
Czech
Rep
.
Eston
ia
Slove
nia
Slova
k Rep
.
Hollan
d
Irelan
d
Bulga
ria
Portu
gal
Austri
a
Roman
ia
Latv
ia
Polan
d
Lith
uani
a
Spain
Franc
e
Ger
man
y
Finlan
dIta
ly
Gre
ece
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Example: HungaryExample: Hungary
• Hungary, the country with the highest ratio of debt to GDP inherited from the pre-reform regime, that did not restructure the debt.
• Debt to GDP declined slightly, but debt to exports was sharply reduced.
• Spectacular increase in trade openness. Ratio of exports to GDP more than doubled in 7 years.
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Hungary cont….Hungary cont….
0
50
100
150
200
250
300
1994 1995 1996 1997 1998 1999 2000 2001
External debt/GDP
External debt/Exports
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Intra-industry trade
• Trade openness tends to increase specialization and output volatility.
• Much less true if trade is intra-industry (Smithian division of labor, and “external” economies of scale)
• Implication: dependence on the EU business cycle more and more important, but
• More diversified industrial structure
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Intra-industry trade with Intra-industry trade with Eurozone/GDPEurozone/GDP
0
10
20
30
40
50
60
70
Belgiu
m-L
ux.
Hunga
ry
Czech
Rep
.
Eston
ia
Slove
nia
Slova
k Rep
.
Hollan
d
Irelan
d
Bulga
ria
Portu
gal
Austri
a
Roman
ia
Latv
ia
Polan
d
Lith
uani
a
Spain
Franc
e
Ger
man
y
Finlan
dIta
ly
Gre
ece
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Output co-movement with EUOutput co-movement with EU
Industrial production annual changes 3month moving average
-10%
-5%
0%
5%
10%
15%
20%
25%
Jan-94 Feb-95 Mar-96 Apr-97 May-98 Jun-99 Jul-00 Aug-01 Sep-02
-4%
-2%
0%
2%
4%
6%
8%eu (right axis)hungaryPoland
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Large tax base:Large tax base: Government revenue/GdpGovernment revenue/Gdp
0
10
20
30
40
50
1995 1996 1997 1998 1999 2000 2001
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EU “anchor” and Institutional EU “anchor” and Institutional reformsreforms
• Importing institutions (against Rodrik’s view)
• May not be optimal, but more credible• “Credibility bonus”• Accession: anchor for market
expectations• Interest rate convergence• Expectations are of a fast entry in
Eurozone
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Interest rate spreadsInterest rate spreadsshort-term rates CEECs-Euriborshort-term rates CEECs-Euribor
- 5
0
5
10
15
20
25
gen- 96 giu- 97 nov- 98 apr- 00 set- 01 feb- 03
Poland Hungary Czech Rep.
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Risks ahead and open research Risks ahead and open research agendaagenda
• So far underdeveloped capital markets
• After entry in EU (next year):• Full liberalization of K-flows• Short term K-flows bound to
increase?• Exchange rate policy?• Fiscal rules?