The economy and the banking
sector: recent developments
VÍTOR CONSTÂNCIO
Banco de Portugal
The Economist Business
Roundtable, Lisbon 22 January 2008
• Macroeconomic outlook
• Consolidation of Public Finance
• Banking and Financial Stability issues
Main features of the economic outlook
•
A continued moderate recovery of economic activity in 2008 and 2009.
•
A decline in inflation to 2 per cent in 2009.
•
A correction of macroeconomic imbalances. A decline in the net external
borrowing requirements, reflecting the rebound in the households’ saving ratio
and the reduction in the fiscal deficit.
•
On the supply side, total factor productivity growth is estimated to play a
prominent role reflecting higher capacity utilisation rate and the restructuring in
the corporate sector.
On the demand side, the acceleration in economic activity is shaped by
domestic demand, since exports are projected to be less buoyant than in 2006
and 2007, evolving broadly in line with external demand.
•
•
The current projection embodies higher than usual uncertainty and clear
downward risks for economic activity related mostly with the international
economic and financial situation.
Outlook for the Portuguese economy
2008-2009*
2006
2007(e)
2008(p)
2009(p)
Real GDP
Private consumption
Government consumption
Gross fixed capital formation
Exports
Imports
1.2
1.2
-0.7
-1.8
9.1
4.3
1.9
1.2
0.0
2.6
7.0
4.1
2.0
1.1
0.0
3.3
4.9
2.9
2.3
1.6
0.4
3.1
6.0
3.7
Current + capital account (% of GDP)
-8.6
-8.2
-7.3
-6.4
3.0
2.4
2.4
2.0
HICP
*Published in the Banco de Portugal Winter 2007 Economic Bulletin, Jan 08
GROWTH FORECASTS FOR PORTUGAL
Date
2007
2008
Revision for
2008 in
relation to
previous
Date of
previous
forecast
GOVERNMENT
Oct 07
1.8
2.2
- 0.2
Jun 07
BANCO DE
PORTUGAL
Jan 08
1.9
2.0
-0.2
Jul 07
EUROPEAN
COMMISSION
Nov 07
1.8
2.0
-0.0
Apr 07
IMF
Oct 07
1.8
1.8
-0.2
Aug 07
•
Banco of Portugal’s Coincident Indicator of economic activity fell
sharply in December
6.0
5.0
Monthly coincident indicator of economic activity
GDP - Quarterly National Accounts
GDP - annual growth rate
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
1999
2001
2003
2005
2007(e)
2009(p)
Main features of the projection
• Economic activity is projected to grow at rates close to the
euro area in 2008 and in 2009.
Real GDP
Annual growth rate
5.0
4.0
Growth differential (in p.p.)
Portugal
Euro area
3.0
2.0
1.0
0.0
-1.0
-2.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(e)
(p)
(p)
Underlying assumptions
2007
2008
2009
Short-term interest rate (annual average)
4.3
4.5
4.1
Effective exchange rate (annual average appreciation)
3.9
3.5
0.0
Oil price ($US/bbl - annual average )
72
89
86
External demand (annual average growth)
5.7
5.4
5.7
Interest rates
Money market interest rates are assumed to ease as of early 2008, as a
result of the technical assumption of using financial markets expectations.
Risk premium of credit to NFC increased in the second half of 2007. The
projection considers a slight increase in the spread between bank lending
rates and money market interest rates, throughout the projection horizon.
Supply
•
Real GDP is projected to accelerate due to the acceleration in the
private sector, since economic activity in the public sector is envisaged to
decline marginally.
•
Output-gap gradually narrows, as real GDP grows above currently
available estimates for potential output.
Developments in economic activity
Output-gap
Rates of change, in percentage
In percentage points
5.0
6.0
GDP - Quarterly National Accounts (yoy)
5.0
3.0
GDP - annual growth rate
4.0
4.0
2.0
3.0
1.0
2.0
0.0
-1.0
1.0
-2.0
0.0
-3.0
-1.0
-4.0
-2.0
2005
2007(e)
2009(p)
2005
2003
2001
1999
1997
1995
1993
2009 (p)
2003
2007 (e)
2001
1991
-5.0
1989
-3.0
1999
Hodrick-Prescott
Baxter-King
Christiano-Fitzgerald
Supply
•
Total factor productivity is expected to play a major role in output growth in 2008
and in 2009, similarly to what happened in 2007.
•
The employment contribution is projected to increase, whereas the role of capital
is envisaged to remain modest.
•
In comparison with the post-1993 recession, the weaker economic growth
recorded in the period 2003-2009, reflects chiefly a lower contribution of capital
and employment to growth.
Contribution of inputs to growth
Comparing contribution of inputs to growth
after the 1993 and 2003 recessions
Contribution to growth, in percentage points
Contribution to growth, in percentage points
3.0
3.0
Employment
Capital
Total factor productivity
2.5
Employment
Capital
Total factor productivity
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
2005
2006
2007 (e)
2008 (p)
2009 (p)
0.0
1993-1999
2003-2009
Demand
•
•
Domestic demand: increasing contribution, from 1.3 p.p. in 2007 to 1.8
p.p. in 2009, reflecting the rebound in private investment and
consumption.
Differences between business cycles are chiefly due to domestic
demand.
Breakdown of GDP growth
Breakdown of GDP growth 1993-99 vs 2003-09
Contributions to the rate of change in percentage points
Contributions to the rate of change in percentage points
8.0
6.0
4.0
8.0
Public consumption and investment
Imports
Exports
Private investment
Private consumption
GDP (% growth rate)
Public consumption and investment
Imports
Exports
Private investment
Private consumption
GDP (% growth rate)
6.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
2005
2006
2007 (e)
2008 (p)
2009 (p)
1993-1999
2003-2009
Private Consumption
•
•
•
Mild recovery of private consumption, accelerating from 1.2% in 2007 to
1.6% in 2009.
Private consumption is expected to grow at a slower pace than real
disposable income, fostering a recovery in households’ saving rate.
Private consumption growth is expected to remain below that of the euro
area.
Consumption, disposable income and saving rate
Private consumption
Rate of change, in percentage
Rate of change, in percentage
6.0
Change in the saving rate (in p.p.)
Private consumption
Real disposable income
5.0
6.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
1999
2001
2003
2005
2007 (e)
2009 (p)
Growth differential (in p.p.)
Portugal
Euro area
5.0
1997
1999
2001
2003
2005
2007 (e) 2009 (p)
Private Consumption
Consumer confidence indicator and
coincident indicator for private consumption
6
Monthly coincident indicator of private consumption (y-o-y)
10
7
Confidence consumer indicator (right-hand scale)
Consumption (annual rate of
change)
Consumption - Quarterly National
Accounts (y-o-y)
Financial situation over the next 12
months (right-hand scale)
6
0
5
5
-10
3
-20
2
-30
1
Per cent
4
s.r.e.
In percentage
4
-10
2
-15
-2
1999 2000 2001 2002 2003 2004 2005 2006 2007
•
-20
0
-50
-60
0
3
-40
-1
5
-5
1
0
10
-1
-25
-2
1999
-30
2001
2003
2005
2007(e)
2009(p)
The Coincident Indicator for consumption and the Consumer Confidence
Index continued to fall in November and December.
(s.r.e.)
7
Private consumption and financial situation
over the next 12 months
Gross Fixed Capital Formation
•
Recovery of GFCF from 2.6% in 2007 to 3.1% in 2009.
– The acceleration in GFCF, reflects the evolution of housing and business
investment and the stabilization, in real terms, of public investment.
– Projected business investment is in line with its empirical relationship with private
GDP growth.
Investment by institutional sector
Breakdown of GFCG
Contribution to the rate of change in percentage points
10
Business
8
Public
6
Housing
4
Total (% growth rate)
2
0
-2
-4
-6
-8
-10
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(e) (p) (p)
Business
Public (right scale)
Housing (right scale
Total
Exports
•
Exports are estimated to remain the most dynamic component of demand.
–
A significant deceleration is estimated to have occurred in the second half of 2007,
due to the evolution of the goods component, since services exports remained
buoyant.
–
Deceleration in 2008 (from 7.0% in 2007 to 4.9%) and acceleration in 2009 (to 6.0%),
in line with external demand, implying fairly constant market shares.
–
Projected exports are consistent with the gradual process of restructuring in the
manufacturing sector and some reallocation of resources to more technology- and
human capital-intensive products.
Exports and external demand
Rate of change, in percentage
14
Market share
Exports
External demand
12
10
8
6
4
2
0
-2
-4
-6
-8
1999
2001
2003
2005
2007 (e)
2009 (p)
Structure of Manufacturing Exports by
technological intensity (% of total)
Spain
Greece
Portugal
100
In %
80
60
40
20
0
1967 2004
1967 2004
1967 2004
Low Tech
Medium-Low Tech
Medium-High Tech
High Tech
S o uc e s : C he le m da t a ba s e a nd c a lc ula t io ns by B a nc o de P o rt uga l.
N o t e : T he a ggre ga t io n o f indus t rie s by t e c hno lo gic a l int e ns it y f o llo ws t he
O E C D m e t ho do lo gy. S e e 'O E C D S c ie nc e , T e c hno lo gy a nd Indus t ry
2006: Exports of goods and services
100%
Exports of goods
71%
Of which: Machines and equipment
14,1%
Metal products
5.9%
Vehicles and transportation equipment
9.4%
Plastics
3.7%
Paper and paper pulp
3.2%
Food products
3.0%
Chemicals
3.6%
Wood and cork products
3.0%
Textiles
3.4%
Footwear
2.7%
Cloth
5.1%
Exports of services
29%
Of which: turism
13.7%
Transportation services
6.5%
Services to firms
5.1%
Inflation prospects
•
Inflation is projected to decline from 2.4% in 2007 and 2008 to 2% in 2009
– In 2008, consumer prices are temporarily affected by the impact of food
commodities and oil prices.
– The deceleration to close to 2% in 2009 stems essentially from the evolution
in the energy component, which is assumed to follow futures’ markets.
•
HICP inflation is projected to remain relatively close to the euro area.
INFLATION
INFLATION
(Rate of change, in percentage)
Contrib. Total excl. Energy (p.p.)
Contrib. Energy (p.p.)
Total (%)
4.0
5.0
3.5
4.5
Differential (in p.p.)
Portugal
Euro Area
4.0
3.5
3.0
3.0
2.5
2.0
2.5
1.5
2.0
1.0
1.5
0.5
1.0
0.5
0.0
0.0
-0.5
1
-0.5
1997
1999
2001
2003
2005
2007 (e) 2009 (p)
2
3
2006
4
1
2
3
2007(e)
4
1
2
3
2008(p)
4
1
2
3
2009(p)
4
Current and capital account
External financing requirements are projected to decrease 1.8 p.p. of GDP
between 2007 and 2009
•
Trade balance deficit declines in a context of moderate domestic demand
growth.
10
CURRENT AND CAPITAL ACCOUNT
TRADE BALANCE
(% of GDP)
(% of GDP)
4
Capital account
Trade balance
Transfers account
Income account
Overall balance
5
2
Trade Balance - Energy goods
Trade Balance excl. energy goods
Trade Balance
0
-2
0
-4
-5
-6
-8
-10
-10
-12
-15
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(e) (p) (p)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(e)
(p)
(p)
Uncertainty and risks to the projection
• Higher than usual uncertainty and downward risks for
economic activity reflecting:
– Increased turbulence in international financial markets;
– The possibility of a stronger than currently envisaged slowdown in US
economy, in a context of still prevailing global macroeconomic
imbalances;
– The estimated deceleration of exports in the second half of 2007 may
imply market share losses, which might be more persistent than
projected.
As a result:
– The external demand may be lower then assumed, the interest rate
may be higher and the euro exchange rate may appreciate more
than in the central scenario;
– Private consumption, GFCF and exports may be directly affected
on the downside.
Uncertainty and risks to the projection
The balance of risks for inflation is
slightly on the downside.
The balance of risks for economic
activity is clearly on the downside
GDP
INFLATION
Rate of change, in percentage
Rate of change, in percentage
4
4
5
5
3
3
4
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
2004
2005
2006
2007
2008
-1
2009
0
2004
2005
2006
2007
2008
0
2009
• Macroeconomic outlook
• Consolidation of Public Finance
• Banking and Financial Stability issues
PUBLIC FINANCE
(In % of GDP)
2004
2005
2006
2007
Total Nominal Deficit
-3.4
-6.1
-3.9
-3.0
Total Structural Deficit (a)
-5.1
-5.7
-3.5
-2.4
Primary defict
-0.7
-3.5
-1.1
-0.1
Structural Primary Deficit(a)
-2.5
-3.1
-0.7
0.5
Public Debt ratio
58.3
63.7
64.8
64.4
(a): cyclically adjusted and without one-off measures
Sources: INE, Ministry of Finance and Banco de Portugal. Quarterly Economic Bulletin, Autumn 2007
Variation of primary deficits, revenues and
expenditures, cyclically adjusted and without one-off
measures (in % of GDP)
2000
2001
2002
2003
2004
2005
2006
2007
-1.5
-1
-0.5
Var Deficit
0
0.5
Var revenues
1
1.5
2
Var expenditures
2.5
Short term interest rates(3M )
Macroeconomic policy
-4
20
18
16
14
12
10
8
6
4
2
2005
0
-3
1991
1990
1992
1993
1995
2001
2000
2002
2003
2004
-2
1997
2007
1999
2006
-1
0
1
Primary deficit (cyclically adjusted without one-off measures)
2
Budget deficits and Debt ratios in 2007
110%
Ita
100%
Gre
Debt ratios
90%
Bel
80%
70%
Prt
Fr
60%
50%
UK
Ger
Aus
Hol
Swe
Spain
40%
30%
Fin
Den
Irl
20%
-4.0% -3.0% -2.0% -1.0%
0.0%
1.0%
Budget deficits
Source: Autumn Forecasts 2007, E.Commission
2.0%
3.0%
4.0%
5.0%
• Macroeconomic outlook
• Consolidation of Public Finance
• Banking and Financial Stability issues
Banking Sector Indicators
Jun
2006
Dez 2006
Jun 2007
Capital Ratio
11,5%
10,9%
10,2 %
(P)
Non performing loans (% of total credit)
1,44%
1,28%
1,29%
Net interest margin (% of Assets)
1,87%
1,89%
1,92%
Other revenues (Fees and Commissions,
trading etc) in % of Assets
1,63%
1,55%
1,52%
51,7%
53,5%
Cost – Income ratio
Return on Assets (ROA)
Return on Capital (ROE)
48,8%
(55,0%)
(55,1%)
1,44%
1,30%
(1,20%)
(1,18%)
23,6
20,6%
(19,8%)
(18,9%)
1,36%
20,6%
Stock Markets - Portuguese and European
200.00
PSI Banks
180.00
PSI20
160.00
140.00
EuroStoxx
120.00
100.00
EuroStoxx Banks
Jan-08
Nov-07
Set-07
Jul-07
Mai-07
Mar-07
Jan-07
Nov-06
Set-06
Jul-06
Mai-06
Mar-06
Jan-06
80.00
Jan-08
Dez-07
Dez-07
Dez-07
Nov-07
Nov-07
Out-07
Out-07
Set-07
80
Set-07
Ago-07
Ago-07
Jul-07
Jul-07
Jul-07
Jun-07
Jun-07
Mai-07
Mai-07
Abr-07
Abr-07
Mar-07
Mar-07
Fev-07
Fev-07
Jan-07
Jan-07
Jan-07
STOCK MARKETS - PORTUGUESE AND EUROPEAN
140
130
PSI Banks
120
110
100
90
EuroStoxx Banks
70
Premium of 5 years CDS (subordinated debt)
European financial sector
Data on 21st Jan 08
Spreads of bonds issued by Portuguese Banks over
the european index for the banking sector
Data on 21st Jan 08
FITCH’s Banking Systmic Risk Report (Sept 2007)
Macro-prudential Indicator
Categories of
Banking Risk
1
A
2
3
Nº of
Countries
UK US Hol Spain Lux,
Swiss.
Australia
7
Canada
Korea,
Iceland,
South
Africa
30
B
Austria,
Chile,
Germany,
Japan….
Belgium, Portugal, France,
Finland, Greece, Sweden,
Denmark ...(in a total of 18
countries)
C
Cyprus
Malasia ...
Brasil, Latvia Malta
Slovenia...
D
China
Hungary
Poland…
Bulgaria India Romenia
Venezuela TurKey Ukrane...
E
Argentina
Bolívia ...
Armenia
Nº of
Countries
34
9
Russia
28
13
45
Source: FITCH « Bank Systemic Risk Report», September 2007
8
87
•
•
IMF Public Information Notice (PIN) No. 07/126
October 11, 2007
«Portugal’s financial system remains sound and well supervised and
appears to have weathered the recent tensions in financial markets
relatively well, though risks remain. While intensified competition
has resulted in a slight deterioration in banks’ liquidity ratios,
average loan-to-value ratios are in line with other EU countries, and
nonperforming loans remain low. High household and corporate
debt remains the main source of risk to the financial system, but the
Financial Sector Assessment Program (FSAP) exercise last year
found that the financial system could withstand even severe
macroeconomic disturbances. »
CONCLUSIONS
•
After an estimated increase of 1.9% in 2007, real GDP is projected to grow
2.0% in 2008 and 2.3% in 2009, which is relatively close to the euro area
projections.
•
The inflation rate is projected to decrease to 2.0% in 2009 (2.4% in 2007 and
2008).
•
The uncertainty and risks of the current projection are unusually high, difficult
to quantify and associated, in particular, to international developments.
•
The correction of the economic imbalances is expected to continue. A special
focus should be placed on...
– ...the ongoing fiscal consolidation process;
– ...the improvement of the external financing requirements of the economy.
•
The Banking sector continued to show resilience to the recent turmoil, did not
register any losses directly associated with it , but in common with other
european banks is facing the problems stemming from the liquidity situation in
different market segments