dynamics of macroeconomic stability and financial stability dr. shamshad akhtar governor state bank...
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Dynamics of macroeconomic stability and financial stability
Dr. Shamshad Akhtar Governor
State Bank of Pakistan
January 14, 2008
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Outline
2
I. Conceptual Macroeconomic Framework and its Interrelationships
II. Trends in Growth, Money and Prices
III. Financial Trends and Stability
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1. GDP = C + I + X – M 2. GDPNI = C + I + [X - M + YF + TRF]
3. GDPNIP + GDPNIG = CP + CG + IP + IG + CAB 4. GDPNIP - CP - IP + GDPNIG - CG - IG = CAB
5. [SP - IP] + [SG - IG] = CAB (or -SF)
CAB
SP SG
Saving-Investment Gap and CAB
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How Saving-Investment gap is financed?
Private sector can finance through
― Net foreign borrowing
― Loans from domestic banking system
― Net foreign direct investment
Government can finance the deficit by
― Borrowing from domestic banking system
― Selling bonds/bills
― Obtaining net foreign borrowings
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CAB and Money supply
M2 = NFA + NDA
So
DM2 = DNFA [BoP]
+ D credit to government [Fiscal]
+ D credit to non-govt [Real]
+ D OIN
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CENTRAL GOVERNMENT
Interrelationships Among Macroeconomic Accounts
Accounting identities Strong accounting relationships
REAL SECTOR
Private consumptionGeneral government consumption
Private investmentGeneral government investment
Exports of goods and nonfactor servicesImports of goods and nonfactor services
National Accounts
EXTERNAL SECTOR
Balance of Payments
CURRENT ACCOUNT Exports of goods and nonfactor services Imports of goods and nonfactor services Factor services (net) Transfers (net) Official PrivateCAPITAL ACCOUNT Direct investment Medium/long-term capital (net) Short-term capital (net)
Overall balanceChange in net foreign assets
RevenuesGrants
Expenditures Current Capital
Overall balanceFinancing Domestic financing (net) Banking system Nonbanking sector External financing (net)
Net foreign assets
Net domestic assets: Net credit to central govt.. Credit to banks Other items (net)
Reserve money
Net foreign assets
Banks' reserves
Net domestic assets: Net credit to central govt. Credit to private sector Other items (net)
Liabilities to monetary authoritiesPrivate sector deposits
Monetary Authorities
Deposit Money Banks
MONETARY SECTOR
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II. Growth, Monetary Policy and Inflation Dynamics
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8
Long Term Trends in Inflation and GDP Growth
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
FY56
FY59
FY62
FY65
FY68
FY71
FY74
FY77
FY80
FY83
FY86
FY89
FY92
FY95
FY98
FY01
FY04
FY07
GDP Inflation
Low Growth
High Inflation
Note: the trends are for 10-year moving averages.
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0
4
8
12
16
20
24
Sep
-96
Jun
-97
Mar-
98
Dec
-98
Sep
-99
Jun
-00
Mar-
01
Dec
-01
Sep
-02
Jun
-03
Mar-
04
Dec
-04
Sep
-05
Jun
-06
Mar-
07
Dec
-07
per
cent
SBP 3-Day Repo Rate
After a loose monetary policy stance from FY02-FY04… SBP had to enter into monetary tightening phase
9
Loose Monetary Stance
Tight Monetary Stance
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10
Monetary stimulus played a significant role in growth revival…
0.01.02.03.04.05.06.07.08.09.0
10.0
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
perc
ent
Real GDP GrowthReal GDP growth 5-years average
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Growth picked-up – however, with money supply growth outpacing nominal GDP growth CPI rose from 3.5% in FY02 to 9.3% in FY05
11
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
13.0
15.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
FY9
4
FY9
5
FY9
6
FY9
7
FY9
8
FY9
9
FY0
0
FY0
1
FY0
2
FY0
3
FY0
4
FY0
5
FY
06
FY0
7
perc
en
t
Monetary overhang Inflation (rhs)
Inflation & Monetarty overhang
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Food prices are still a major source of volatility and recent price hike; tight monetary policy helped in arresting demand driven inflation as reflected in core inflation
12
2
4
6
8
10
12
14
16
Jan-
05
Ma
r-05
Ma
y-05
Jul-0
5
Sep-
05
No
v-0
5
Jan-
06
Ma
r-06
Ma
y-06
Jul-0
6
Sep-
06
No
v-0
6
Jan-
07
Ma
r-07
Ma
y-07
Jul-0
7
Sep-
07
No
v-0
7
perc
en
t
Core (Non Food & Non Energy) Core (20% trim) Food
Trends in Inflation (YoY)
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13
Changes in policy rate (i.e. SBP 3-day REPO rate):–from 7.5% to 9.0% in April 2005;–from 9.0% to 9.5% in July 2006;–from 9.5% to 10.0% in July 2007.
Changes in CRR and SLR–Current CRR are: 7% for demand & time liabilities of less than
one year;–Earlier CRR were 3% for time liabilities above 6 month maturity
and 7% for demand and less than 6 months time liabilities;
Aggressive liquidity management through OMOs
Several Monetary Policy measures have been taken to contain inflation since FY05
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-50
0
50
100
150
200
250
Jul
Au
g
Sep Oct
No
v
Dec Jan
Feb
Mar
Ap
r
May Jun
bil
lio
n R
up
ees
SBP NFA Reserve money SBP NDA
Reserve Money Flows (cumulative) during FY07Rise in NFA due to receipt of external financing by the government, though substantially sterilized
Rise in RM due to subsidized financing
Monetary tightening partly diluted due to SBP re-financing schemes and high government borrowings; both issues addressed in FY08…
14
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Rising international food and oil prices remain key risk for FY08…
While monetary policy is ready to contain demand pull inflationary pressures, cost push factors may pose threat to price stability in FY08.
Among others, the key problems are:
1. Rising global commodity prices, in particular steep uptrend in international oil prices.
2. Domestic agriculture crops outcome (particularly wheat, sugarcane & gram) during FY07 was good. However poor demand-supply management has led to crisis situation in the country.
3. Rising per capita incomes, but shortages emerged because of fluctuations in productive sectors or problems with distribution of commodities. 15
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Measures to further arrest inflationary trends…
Besides increase in SBP policy rate, SBP recommended the government to retire SBP debt in FY08 (by Rs 62.7 billion) to ease reserve money growth
Introduced policy to reduce commercial banks’ reliance on refinance facilities (envisaged a 30 percent reduction in outstanding refinance at end June 2007 during FY08 without affecting the overall availability of credit to the exporters).
Stepping forward towards a more market based credit allocation mechanism the age old credit planning exercise has been abandoned completely.
SBP has been encouraging long term paper issuance with regular frequency to transfer government reliance from SBP to private financing sources
16
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Growing macroeconomic Imbalances are now posing renewed challenges
July-November data reveals that both fiscal and external account deficit will be higher than original projections.
Borrowing from central bank to finance budget is significant and such borrowing is likely to augment inflationary pressures since output will be impacted by the recent disruptions.
The central bank will have to take appropriate measures to further contain demand pressures augmented by fiscal and external deficits.
Extent of monetary tightening would depend on fiscal restraints.
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FINANCIAL SECTOR STABILITY
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Financial Sector is bank dominated…
20
30
40
50
60
70
80
CY00 CY01 CY02 CY03 CY04 CY05 CY06
Perc
ent s
hare
in A
sset
s
Banks Others
19
Composition of Financial Sector Assets
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Ownership Structure of the Banking Sector
10
20
30
40
50
60
70
80
90C
Y00
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
H1-
CY
07
perc
ent of to
tal ass
ets
PSCBs LPBs
20
At present the banking sector is predominantly owned by private sector…
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Foreign stake is rising in Pakistan’s banking sector…
21
0
10
20
30
40
50
60
70
80
CY04 CY05 CY06
per
cent
Pakistani Foreign
Position ofShareholding
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Assets of the Banking System
40
42
44
46
48
50
52
54
56
58C
Y00
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
H1-
CY
07
per
cent
of G
DP
22
Banking sector assets are growing rapidly…
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Banks’ Non-Performing Loans
0
5
10
15
20
25C
Y00
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
H1-
CY
07
per
cent
Net NPLs to Net Advances NPLs to Advances
23
Encouragingly rapid growth is accompanied with improvement in asset quality…
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Indicators of Capital Adequacy
24
Increased capital requirement, with improved asset quality, has enhanced soundness of financial sector…
2
4
6
8
10
12
14
16C
Y00
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
H1
-CY
07
per
cent
CAR Tier 1 capital to RWA
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Net NPL to Capital Ratio
25
Banks are well capitalized…
0
40
80
120
160C
Y00
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
H1
-C
Y07
per
cent
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After Tax Return on Assets
26
Banks’ profitability has reached an all time high…
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5C
Y00
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
H1-
CY
07
per
cent
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The 2.1 percent ROA during CY06 is significantly higher than the international norms of around 1.0 percent….
27
percent
CY01 CY02 CY03 CY04 CY05 CY06
Pakistan -0.5 0.1 1 1.2 1.9 2.1
Bagladesh 0.7 0.5 0.5 0.7 0.8 N.A.
India* 0.5 0.8 1 1.2 0.9 N.A.
Korea 0.7 0.6 0.2 0.9 1.2 1.3
Singapore 1 0.8 1.1 1.3 1.2 1.2
Thailand 1.5 0.2 0.7 1.3 1.5 1.5
SriLanka 0.7 1.1 1.4 1.4 1.3 N.A.
source: Global Financial Stability Rports, IMF
*ROA before tax
Table: Return on Assets
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Financial Soundness Index (FSI) witnessed that the performance of the banking system has improved substantially over the last five years….
28
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
CY9
7
CY9
8
CY9
9
CY0
0
CY01
CY0
2
CY03
CY0
4
CY0
5
CY06
H1-
CY0
7
Financial Soundness Index
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Mutual funds are the fastest growing sub-groups within NBFIs…
29
Composition of NBFIs’ Assets
0
10
20
30
40
50
60
FY02 FY03 FY04 FY05 FY06
perc
ent
Mutual Funds DFIs Others
other includes Discounting, Housing finance, Investment Finance, Leasing, Modaraba and Venture Capital
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Insurance penetration is increasing in a steadfast manner…
30
Asset Structure of Insurance and Reinsurance Sectors
0
50
100
150
200
250
300
2003 2004 2005 2006
Reinsurance Life Non Life
billio
n r
up
ees
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By now market capitalization has surged to 48.5% of GDP…
31
Market Capitalization of Karachi Stock Exchange
0
5
10
15
20
25
30
35
40
45
50
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
per
cent
of G
DP
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Banking Sector Growth complements KSE growth…
Banks have played a major role in the growth of the KSE-100 index by contributing more than 30 percent in KSE market capitalization
32
05
101520253035
Bank
s
Oil
& G
as
Mar
ketin
g
Oil
& G
as
Exp
lora
tion
Cem
ent
Tech
& C
omm
Perc
ent o
f mar
ket c
apit
aliz
atio
n
June-06 March-07 June-07
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Foreign participation in KSE is rising…
Foreign participation in KSE market capitalization has increased to 7 percent
33
2
3
4
5
6
7
8
Oct
-05
Dec
-05
Feb-
06
Apr
-06
Jun-
06
Aug
-06
Oct
-06
Dec
-06
Feb-
07
Apr
-07
Jun-
07
Aug
-07
Oct
-07
Dec
-07
perc
ent o
f mar
ket
capi
taliz
ation
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Future Agenda
Continued effective monetary policy conduct and management
Macroeconomic stability prerequisite for financial sector growth
Consolidation and growth in banking sector
Introduction of Basel II along with strengthening of risk management
Continued strengthening and improvement in governance structure of regulators
Broaden and deepen financial sector reformsoDiversification of financial sectoroAugmenting robustness of banking sectoroEnhancing financial services penetration
•Islamic banking•Microfinance
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Concluded
35
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Maturity Mismatches & SBP motive
36
24
26
28
30
32
34
Q2-
CY0
2
Q4-
CY0
2
Q2-
CY0
3
Q4-
CY0
3
Q2-
CY0
4
Q4-
CY0
4
Q2-
CY0
5
Q4-
CY0
5
Q2-
CY0
6
Q4-
CY0
6
Q2-
CY0
7
per
cent
Asset Maturing After One Year
(9.0
)
12.0
7.6
0.6
-10
-5
0
5
10
15
20
Up
to 3
-m
3-m
to 1
-yr
1 to
5 y
rs
5 to
10
yrs
per
cent
of A
sset
s
GAP Analysis -End June 2007
The maturity mismatched aspect has increased for banks operation in Pakistan during recent years. However, SBP has introduced tiered cash reserves requirements for demand and time liabilities to encourage banks to mobilize long term deposits.
Some extra slides…
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0
2
4
6
8
10
12
FY02 FY03 FY04 FY05 FY06 FY07 FY08*
per
cen
t
SBP Policy rate Average O/N rate Coefficient of variation
SBP Policy rate and Overnight Repo rate in Interbank Market
*: up to January 10, 2008
37
Proactive liquidity management has reduced volatility in short-term interest rates…
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38
Responsiveness of private sector credit to lending rates has increased…
-5
0
5
10
15
20
25
30
35
40
FY76
FY77
FY78
FY79
FY80
FY81
FY82
FY83
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
Regulated interest rates Market based interest rates
per
cent
Growth in Private Sector credit Real lending rate
Real Lending Rates and Private Sector Credit
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FX Reserve Adequacy
39
FX
Reserves* Import Coverage
Reserves to Short Term Liabilities
FY00 1973.6 10.7 1FY01 3231.6 16.5 1FY02 6435.2 35.5 3.3FY03 10769 49.3 7.6FY04 12389 47.2 10.1FY05 12598 35 8.6FY06 13122 27.8 9.4FY07 15634 30.2 7.88-Jan-08 15334.5 28.8 n.a *: Gross FX reserves including SBP and Scheduled banks Reserves