The economy and the banking
sector: recent developments
VÍTOR CONSTÂNCIO
January 2006
• Recent performance of the economy and prospects
– Factors behind the period of slow growth
• Challenges to the Banking Sector
– Regulatory changes and effects of the economic
environment
– Risk management (credit, liquidity, capital)
• Structural problems and long term economic
potential
GDP growth rates (%)
5
4
Portugal
3
Euro Area(*)
2
1
0
Diferential Portugal vs. Euro Area
-1
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Factors behind the period of slow growth
– Cyclical pattern of slight overheating and subsequent
deceleration associated with joining a monetary union
coming from a regime of higher inflation
– Pro-cyclical fiscal policy
– External demand shocks
– Significance of the oil shock
– Competitiveness problems in the context of enlargement
and globalisation
Investiment and domestic savings rate (% of GDP)
30
35
Investment
rate
30
28
26
24
22
25
Savings rate
20
18
20
16
14
15
12
05
20
04
20
03
20
02
20
01
20
00
20
99
98
97
96
95
94
10
93
10
Short term interest rates
Macroeconomic policy stance
20
18
16
14
12
10
8
6
4
2
0
1991
1990
1992
1993
1995
2001
-3
2000
2002
2003
2004
-2
1997
1999
-1
0
1
Primary deficit (ciclical adjusted without one-off measures)
2
Stability and growth programme
(a)
As a percentage of GDP
3,0
Main direct effects of consolidation measures
2,5
Revenue Expenditure
2,0
1,1
1,0
0,4
0,5
0,3
0,2
0,0
-0,1
-1,0
-0,6
-0,5
-0,3
-0,3
-1,8
-2,0
-3,0
2005
2006
2007
2008
2009
Accumulated
Source: Stability and growth programme, June 2005
(a) Yearly, direct effects of discretionary measures included in the SGP.
Growth rates of GDP, Domestic Demand and External
Demand directed to the Portuguese economy
15
13
External demand
11
9
Domestic demand
7
5
GDP
3
1
-1
-3
20
00
20
01
20
02
20
03
20
04
20
05
99
98
97
96
95
94
93
92
91
90
-5
Growth rates of external demand and portuguese
exports
14
12
10
External Demand
8
6
4
Exports
2
0
-2
-4
-6
96
97
98
99
2000
2001
2002
2003
Exports market quota
2004
2005
Competitiveness Indicators: relative ULC’s, CPI and export
prices with the 13 main trading partners (1995=100)
120
120
115
ULC's (total)
115
110
ULC's (manufacturing)110
105
105
CPI
100
100
95
90
Relative export
prices
95
90
85
85
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
(Source: BP AMECOe OECD)
Technological content of Exports (% of total )
Low technology
High technology
1985-89
2000-01
1985-89
2000-01
Variation
Euro Area
38
30
14
21
7
Ireland
49
14
30
46
16
Holand
42
31
19
35
16
Finland
59
38
9
32
23
Germany
26
21
15
21
6
France
38
28
14
21
7
Austria
51
37
12
18
6
Portugal
82
61
5
14
9
Italy
47
44
12
13
1
Belgium
54
41
9
12
3
Spain
57
41
6
11
5
ECB Occasional Paper “Competitiveness and export performance of the euro area” No. 30, 2005
Composition of Exports
1985-1989
2000-2004
Variação
Agriculture & Food, Wood,Cork,
Paper , Leather, Textiles,
Clothing, Footwear
61,1 %
40,2%
-20,9 p,p
Electronics, Machines,
Transport equipment,
Chemicals, Energy
27,0 %
45,8%
+18,8 p,p
Other
11,8 %
14,0%
+2,2 p,p
Bank of Portugal’s Economic Forecasts
2004
2005
2006
2007
1.3
0.3
0,8
1,0
Private Consumption
2.3
1.8
1.2
1.1
Public Consumption
2.6
1.1
0.7
0.4
Gross Fixed Investment
0.2
-3.1
-1.1
-0.8
2.1
0.6
0.6
0.6
Exports of goods and services
5.4
1.8
4.0
5.2
Imports of goods and services
6.8
2.4
2.8
3.2
Inflation rate (HICP)
2.5
2.1
2.5
2.3
Growth rates (%)
GDP
Domestic Demand
• Recent performance of the economy and prospects
– Factors behind the period of slow growth
• Challenges to the Banking Sector
– Regulatory changes and effects of the economic
environment
– Risk management (credit, liquidity, capital)
• Structural problems and long term economic
potential
Credit to households and non-financial firms
Return on Equity (ROE) (a)
18
14
12
10
8
(a): ROE defined as net profit over average own funds (consolidated accounts)
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
6
19
Percentagemg
16
Net Interest Inome (in % of average Total Assets)
4.5
4.0
3.5
%
3.0
2.5
2.0
1.5
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
1.0
Fees and commissions in % of average Total Assets
0.80
0.75
0.65
0.60
0.55
0.50
0.45
0.40
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
0.35
19
Percentageage
0.70
Staff Costs in % of average Total Assets
1.5
1.4
1.3
1.2
1.1
1.0
Consolidated accounts
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
19
94
0.9
Cost / Income Ratio (in %)
64
63
62
61
60
59
58
57
56
55
1998
1999
2000
2001
2002
2003
2004
Interbank liabilities (net of interbank assets)
In % of Total Assets
10
9
8
7
Total Banking Sector
6
5
4
Domestic Banks
3
2
1
0
1999
2000
2001
2002
2003
2004
Ratio of high liquid assets over interbank liabilities
140
130
130.6
131.8
121.6
120
124.6
110
104.3
106.6
100.7
98.9
100
101.4
93.4
88.7
90
91.5
87.4
86.8
80
Dez. 1998
Dez. 1999
Dez. 2000
Dez. 2001
Dez. 2002
Dez. 2003
Note: High liquid assets include Interbank Assets (Banks and Central Banks) and Public Sector securities.
Dez. 2004
Non Performing Loans in % of Total Credit
7.0
7.0
Total
Households - total
Households - housing
Non Financial Firms
6.0
5.0
6.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
Dez-97
Dez-98
Dez-99
Dez-00
Dez-01
Dez-02
Dez-03
0.0
Dez-04
HOUSEHOLDS INDEBTEDNESS AND INTEREST PAID
As a pe rce ntage of dis pos able incom e
7.0
120
Indebtedness
6.5
80
6.0
60
5.5
40
5.0
20
4.5
0
4.0
Per cent
100
1998
1999
2000
2001
2002
2003
2004 2005E
Per cent
Interest paid (right-hand scale)
The aggregate debtto-assets ratio
increased but net
wealth is estimated at
a comfortable 400
percent of disposable
income. Household
debt is mainly
comprised of housing
mortgages, with direct
coverage by nonfinancial assets
(housing – in
particular for owner
occupation).
HOUSE PRICES IN PORTUGAL
year-on-year grow th rates
10
Hous e prices - nom inal year-on-year growth rates
8
Hous e prices - real year-on-year growth rates
Percentage
6
4
2
0
Dez-94
Dez-95
Dez-96
Dez-97
-2
-4
Source: Conf idencial Imobiliário New sletter.
Dez-98
Dez-99
Dez-00
Dez-01
Dez-02
Dez-03
Dez-04
Total Provisions in % of Non Performing loans
150
140
130
120
110
100
90
80
70
Dez.95
Dez.96
Dez.97
Dez.98
Dez.99
Dez.00
Dez.01
Dez.02
Dez.03
Dez.04
Regulatory Capital Ratio (own funds)
15
14
13
12
11
10
9
8
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Capital Access Index (2005)
1. U.K.
2. Hong-Kong
3. Singapore
4. USA
5. Sweden
6. Denemark
7. Australia
8. Norway
9. Finland
10. Ireland
10. Canada
12. Switzerland
13. Netherlands
14. New
15.Germany
16.Malasya
17. Spain
18. Chile
19.Japan
20.France
21.Estonia
22.Austria
23.South Korea
24.South Africa
25.Taiwan
26.Portugal
27.Israel
28.Belgium
29.Greece
30.Thailand
31.Italy
Source: Milken Institute, USA
8,01
7,84
7,77
7,75
7,62
7,61
7,6
7,47
7,46
7,42
7,42
7,39
7,2
7,04
6,93
6,88
6,8
«Ranks 121
6,78
6,76 countries
6,62
according to
6,59
the ability of
6,41
6,37
new and
6,36
existing
6,34
6,31
entrepreneurs
6,19
to finance their
6,17
strategies and
5,85
5,71
investments for
5,66
job creation
and capital
formation»
• Recent performance of the economy and prospects
– Factors behind the period of slow growth
• Challenges to the Banking Sector
– Regulatory changes and effects of the economic
environment
– Risk management (credit, liquidity, capital)
• Structural problems and long term economic
potential
Growth competitiveness index ( WORLD FORUM 2005)
Total
Quality of
Institutions
Technological
absortion
Macroeconomic
environment
Finland
1
5
2
4
USA
2
18
1
23
Sweden
3
17
4
12
Denmark
4
2
5
3
Taiwan
5
26
3
17
Singapore
6
4
10
1
Iceland
7
3
9
11
Switzerland
8
9
6
13
Norway
9
6
13
2
10
10
14
14
Portugal
22
15
20
37
Spain
29
38
27
24
Ireland
26
13
31
7
Greece
46
43
37
51
Australia
..................................................
World Bank Indicators of «Governance» (2004)
0
20
40
60
80
Germany
Portugal
Spain
Poland
Voice and
accountability
Political stability
Germany
Portugal
Spain
Poland
Government
efficiency
Germany
Portugal
Spain
Poland
Quality of regulation
Germany
Portugal
Spain
Poland
Rule of law
Poland
Control of
corruption
Germany
Portugal
Spain
Poland
Source: World Bank “ Governance Indicators for 1996-2004” , 2005
Germany
Portugal
Spain
100
Index of economic freedom (Fraser Institute 2003)
Hong Kong
Singapore
USA
New Zealand
Switzerland
U.K.
Canada
Ireland
Australia
Luxembourg
Unit. Arab
Estonia
Netherlands
Iceland
Austria
Denmark
Finland
Germany
Belgium
Chile
Costa Rica
Sweden
Bahrain
Taiwan
Norway
Botswana
Japan
Spain
Portugal
Cyprus
France
Greece
Lithuania
Malta
34º in127 countries
0
1
2
3
4
5
6
7
8
9
10
OECD Regulation Index (1998-2003)
Source:OECD «PRODUCT MARKET REGULATION IN OECD COUNTRIES: 1998 TO 2003»
OECD Regulation Index (1998-2003)
Source:OECD «PRODUCT MARKET REGULATION IN OECD COUNTRIES: 1998 TO 2003»
OECD Regulation Index (1998-2003)
Source:OECD «PRODUCT MARKET REGULATION IN OECD COUNTRIES: 1998 TO 2003»
• Recent performance of the economy and prospects
– Factors behind the period of slow growth
• Challenges to the Banking Sector
– Regulatory changes and effects of the economic
environment
– Risk management (credit, liquidity, capital)
• Structural problems and long term economic
potential