Financial System and Economy and the Reponses to the Financial Crisis Belgrade - November 2012 Financial System and Economy and the Reponses to the Financial Crisis South Eastern Europe region Albania, Bosnia, Bulgaria, Croatia, FYR Macedonia, Montenegro, Romania, Serbia

Financial crisis and South Eastern Europe - Second wave Second wave of the global financial crisis that started in 2008 First wave in part tacked by the Joint IFI Action Plan of 2009-10 Economic recovery appeared to be taking hold in 2010-2011 But continuing Eurozone crisis impacting SEE Due to close links to troubled euro zone countries Causing feeble or no growth and financial distress in SEE Falling investment Transition achievements are, once again, at increasing risk Exports to the Eurozone are declining High NPL ratios persist in banking systems Contribute to low credit growth Unemployment has remained high Government debt is climbing 21/04/2017

Real GDP growth (per cent) Source: EBRD, Regional Economic Prospects, July 2012

Net FDI (in USD million) Source: IMF, WEO May 2012

Non-performing loans (per cent of total credit) *Data refer to end of 2011 or latest available Source: National central banks

General government gross debt (per cent of GDP) Source: IMF, WEO May 2012

External debt (per cent of GDP) Source: IMF, WEO May 2012

Unemployment rate (per cent) Source: IMF, WEO May 2012; MONSTAT (Montenegro)

Share of FX-denominated loans and FX-indexed loans (per cent of total loans) Source: National central banks

Bank Deleveraging continues second wave of the global Euro zone-based parent banks are under severe stress And have systemic subsidiaries and branches in many SEE countries With less external funding available, real credit continues to contract Withdrawal of cross-border flows from the region put pressure on exchange rates bank balance sheets although differences among countries and bank groups are significant. This has reduced both activity levels and investment resulted in lower credit demand impacted credit quality and set in place a prolonged negative feedback loop between the real and financial sectors 21/04/2017

SEE – Difficult Outlook GDP growth is expected to slow down substantially in 2012 and 2013 Euro area crisis will continue to negatively impact growth and exports from the region as well as the availability of finance for the region’s banks and therefore credit growth Real activity in the Eurozone will suffer due to fiscal contraction and credit decline although a full scale credit crunch should be avoided as the ECB has shown it will provide the necessary liquidity to the financial system Countries that are the most integrated with the Euro area will slow down somewhat more than previously predicted Exports to and FDI and bank funding from the Eurozone will continue to fall for these countries as the Euro area stagnates SEE regions will slow down this year even more than previously forecast 21/04/2017

Support from MFIs and international community EBRD has broadly maintained crisis level lending volumes since 2009 Annual SEE investments about EUR 1.5 billion with significant policy dialogue and technical assistance World Bank and EIB are actively engaged in the region as well. IMF and the European Commission have continued to play an active role During the first phase of the crisis, jointly with the World Bank and EIB, EBRD successfully mounted what has become known as the Joint IFI Action Plan, which provided significant financial support to systemic banks in emerging Europe at the height of the crisis in 2009-10. Banks continue to need both financing and restructuring without which they would be a drag on future growth 21/04/2017

EBRD Financial Institutions Portfolio: South-Eastern Europe 21/04/2017

Coming out of the crisis Countries in the region are better prepared now, having made important adjustments in fiscal and current accounts, increased domestic savings, improved deposit insurance schemes and improved bank balance sheets thanks in part to parent bank’s commitment in 2009/10 under the Vienna Initiative. The key needs: liquidity, capital, and restructuring/consolidation. IFIs can provide additional funding to address balance sheet mismatches, in particular the short tenor of wholesale funding. IFIs can mobilize equity capital Innovative instruments - risk-sharing, securitization, NPLs and distressed assets are needed Well-coordinated technical assistance 21/04/2017

Challenges for national governments SEE Countries have a good record of responsible policies since the start of the crisis, While structural reforms need to continue, growth will be lagging, and competitiveness and employment will deteriorate irrespective of the external environment. Eurozone periphery crisis highlights the challenge for the region’s governments. SEE, vulnerable region, due in part to its strong financial, trade and remittance links with Greece and Italy. The financial sector transmission channels are particularly strong in Bulgaria, Romania and Serbia, where Greek banking groups still hold significant market share (somewhere below 30% and 20%) and lending is financed to a certain extent through parent bank support. 21/04/2017

Sovereign ratings (long-term sovereign debt, August 15, 2012) Source: S&P, Moody’s, Fitch.

Remittances (per cent of GDP) Source: World Bank

World Bank Ease of Doing Business, 2012 Source: World Bank Doing Business Report, 2012

Future support from international agencies for recovery and growth Lending to banks to support strategic priorities of MSME and EE Develop capital markets, investing in bonds issued by local banks Work with Greek bank subsidiaries, trade finance, swaps, credit lines and equity Support restructuring efforts of the banking sector Mobilize other investors to help address NPLs on bank balance sheets Corporate working capital, refinancing of maturing loans/bonds Corporate restructuring, foreign investors, mid-sized companies Infrastructural projects, use of EU structural funds Policy Dialogue – bank and corporate restructuring, regulatory issues, state aid provisions, governance Full Forum of the Vienna 2 Initiative in Brussels on November 9, 2012 21/04/2017