1. Crisis Hits Home Stress-Testing Households in Europe and Central Asia
5/8/2018
Crisis Hits Home Stress-Testing Households in Europe and Central Asia
Luca Barbone
Director, Poverty Reduction and Economic Management
December 7, 2009

2. Headlines Eastern Europe and Central Asia hardest hit region
5/8/2018
Headlines
Eastern Europe and Central Asia hardest hit region
Poverty will increase
Joblessness on the rise and falling real earnings and remittances
Costs of repaying loans increasing for households
Middle income countries particularly affected

3. Outline
Macroeconomic shocks and household welfare – the framework for analysis
Household vulnerabilities and stress-tests
Policy responses

4. Macro Shocks and Household Welfare: Framework

5. 5/8/2018
Why this book?
Challenge: How to assess the impact of the crisis on households when real-time household data are not available? Approach: Use pre-crisis household data and macro projections to simulate, or stress-test, the impact of key economic shocks
Novel dataset: Comparable cross-country data on household indebtedness for a large group of ECA countries
Rich results: Differential impact on household welfare across countries and across households within a country.
Source A: ECA databank: 25 ECA countries, latest available data. Standardized consumption aggregates and other variables.
Source B: SILC database 2007 round. Includes 8 EU countries (income data and most of the financial shocks).
Unemployment, interest, exchange rates shocks are based real country level data coming from national accounts, datastream, ILO, WEO, WDI.
Income shocks based on the IMF projections (April 2008, January 2009, April 2009 projections.

6. How to assess the impact on families

7. Household Vulnerabilities and Stress-Tests

8. Income and employment shocks
Vulnerabilities
Poverty is shallow, may rise fast in crisis
Household incomes falling through reduced remittances and reduced labor earnings
Stress-testing
Simulate the impact of the crisis on poverty using country-level GDP projections
Results
Poverty will increase

9. ECA region hit particularly hard
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ECA region hit particularly hard

10. EU10 countries affected seriously by the crisis
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EU10 countries affected seriously by the crisis
Source: Eurostat

11. … with remittances also falling
Dollar value of recorded remittances to Tajikistan fell by 36% in the first 5 months of Simulated impact on poverty 50% fall in remittances suggest headcount increase to 7 percentage points.
In Armenia poverty headcount may rise from 18 to 27 percent because remittances and labor slowdown. 11

12. Poverty will rise… This graph needs to be redone,
with a stacked bar chart with both
Poverty (<$2.50) and vulnerability
( )
Based on 25 out of 29 ECA countries (95% of ECA population). Pre crisis projections are based on WEO April 2008, 12 12

13. …and middle income countries are hardest hit
This graph needs to be redone,
with a stacked bar chart with both
Poverty (<$2.50) and vulnerability
( )
Regional overview masks heterogeneity of impact within countries. 13 13

14. Poverty is also rising in Bulgaria
This graph needs to be redone,
with a stacked bar chart with both
Poverty (<$2.50) and vulnerability
( )
Source WEO October 2009 14 14

15. Credit market shocks Vulnerabilities High and rising household debt
5/8/2018
Credit market shocks
Vulnerabilities
High and rising household debt
Significant exposure to foreign exchange and interest rate risks
Stress-Testing
Simulates the impact of interest rate, exchange rate and unemployment shocks on households’ debt service burdens
Results
The share of households unable to meet debt service obligations could increase significantly
Vulnerabilities
Household debt represents a quarter of GDP in the EU10. Older EU member countries is 65 percent of GDP.
As household debt has grown, shift towards housing loans/mortgage debt on liabilities side of balance sheet and increasing share of equities and pension and mutual funds of the asset side.
Mortgage/housing loans account for 40 percent of total household liabilities in Bulgaria, Croatia and Hungary and up to 60 percent in the Czech Republic. In Romania and Bulgaria, consumer credit is main form of household loans.
Mortgage debt in Serbia grew at 96% in 2007, and by 86% in Albania. In Russia, CB reports that mortgage lending grew by factor of 2.6 in 2007.
The magnitude of the hypothetical shocks has been driven by actual changes in the recent months for each country, also simulated uniform shocks across the countries(25% exchange rates depreciation)
Financial margin as disposable income left after deduction of debt and basic living costs as a key for the analysis

16. High household indebtedness
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1. Households’ debt represents over a quarter of GDP in EU10 (average EU 65%). Estonia close to 50% of GDP
2. Mortgage and housing loans account for 40% of households’ liabilities in Bulgaria, Croatia, Hungary and 60% in Czech Republic.
3. Mortgage debt has increased multiple times in Mortgage debt in Serbia grew by 96% in 2007, 86% in Albania

17. High exposure to foreign exchange risk…
5/8/2018
High exposure to foreign exchange risk…
Ukraine’s, where 70% of the loans are indexed to USD, average US dollars exchange rate depreciated by 40% in July 09 to Sep 08. Poland 22%, Hungary 13% depreciated against euro. In Serbia 81% of the loans are foreign-currency-denominated. Balkans have the highest while Czech and Slovak is the lowest foreign currency denominated loans.
House prices fell (Latvia 36%)
Simulations on households’ indebtness are based on EU-SILC 2007 survey and includes mortgage debt, interest payments and disposable income. Few countries supplemented by HBS data where debt information where available

18. …and to interest rate shocks
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…and to interest rate shocks
As mortgage payments represent a considerable share of households’ income the impact of the interest rates shock is significant. In Hungary mortgage interest payment among the poor represent 10% of household’s income; in Latvia 15%. Slovak young workers spend 10% on mortgage interest.

19. Share of borrowers at risk increases
5/8/2018
Share of borrowers at risk increases
Unemployment shocks stress testing: random and parsimonious probability model for become unemployed. The income of the unemployed is deducted from the households disposable income.
Interest and exchange rates shocks are based on the maximum value of the shocks between 2007 and A severe 5% interest rates shock in Estonia, Lithuania and Hungary can increase the share of vulnerable households by 20 percentage points.

20. Delinquency rates are rising

21. Rising food and fuel prices
5/8/2018
Rising food and fuel prices
Vulnerabilities
Food share of poor is higher than non-poor
Despite declining international food prices, domestic prices are still high with currencies depreciating
Utility prices are increasing in many countries
Stress-testing
Simulate the impact of higher food and utility prices on household consumption and poverty levels
Results
Net food consumers see poverty increases (e.g Kyrgyz Republic)
Food represents 1/3 of total consumption among new EU countries and 2/3 among LIC-CIS.
5% relative increase in food prices worsen poverty by 3 percentage points. Te poor burden majority of impact.

22. Policy Responses

23. Policy Responses-Short term
Avoid across the board spending cuts, instead make smart expenditure choices
Scale up well-targeted social assistance programs
Protect critical maintenance expenditures (e.g. roads)
Employment shocks – unemployment insurance, workfare schemes
Credit market shocks – facilitating household debt restructuring

24. Policy responses – longer term
Reducing vulnerabilities at the macro-economic and household level, e.g.:
Prudent macro-management
Diversified sources of economic growth to limit exposure to sectoral shocks
Improved financial sector macro-prudential regulations
Promoting household financial literacy
Strengthened social protection systems.