Gestion des crises macroéconomiques et financières dans les pays méditerranéens : leçons et perspectives ?

FEM34-24 | Janvier 2010


« Macro and financial crisis management in the south Mediterranean countries: Lessons and Prospects? »


Rym Ayadi, CEPS, Belgium


Emrah Arbak, CEPS, Belgium; Damyana Bakardzhieva, International University of Monaco, Monaco; Willem Pieter de Groen, CEPS, Belgium; Bassem Kamar, International University of Monaco, Monaco; Sami Mouley, ESSEC Tunis, Université de Tunis, Tunisia

Résumé :

The global financial crisis, which started in the summer of 2007 and deepened in the aftermath of the failure of Lehman Brothers in September 2008, has led to a virtual collapse in economic activity and increased financial volatility worldwide. For the developing countries, the main channel of transmission has been a drop in external transactions, such as trade, financial and capital flows, and remittances.While on average the economic slowdown has been modest, the emerging economies in the southern and eastern Mediterranean countries (SEMCs) are likely to experience a slow recovery, further hampered by the regional political instabilities brought on by the Arab spring. Limited external financing, little space for fiscal stimulus, a real appreciation of most domestic currencies, sluggish receipts from tourism and remittances, and increasing food and energy prices in the future will all continue to be a drag on growth for some time. Thus, the weaknesses in the short term are likely to persist, largely affected by the slow improvement in the world economy.On the external sector. A slowdown in exports is expected to continue as long as growth and unemployment figures for trading partners remain gloomy. Tourism and remittances have proved resilient so far, but with the global recession continuing and wealth effects settling in, countries in the region might not be able to sustain higher GDP growth. Similarly, global foreign direct investment (FDI) flows fell sharply and SEMCs are expected to continue to be directly affected by this trend. Competition to attract FDI will become even tougher as countries in the region continue to experience a downgrading trend as a result of political instabilities. On the real sector. The repercussions of the crisis continue to reverberate from the balance-of-payments to the real economy. Since external demand declined sharply, enhancing domestic demand remains the only way to increase growth, at least until trading partners show sustainable economic recovery. The lack of modern infrastructure to raise the region’s competitiveness and take full advantage of the growing global manufacturing and services trade can also pose a risk for investments and growth. On the monetary sector. With the decline in interest rates and inflation worldwide and also the decline in inflation in all the sampled countries, there seems to be room for adopting an expansionary monetary policy through decreasing interest rates to stimulate domestic demand. On banking and capital markets. Most of the SEMCs have been spared the negative impacts of the crisis during its initial phase in 2007-08. Banks in the region had little direct exposure to the toxic products that weakened the balance sheets of many banks in the US and the EU. Indeed, the impact of the financial crisis on the banking systems assessed by pre- and post-crisis comparisons of the liquidity, performance, efficiency and fragility showed divergent impacts between countries. Overall, the results underline that the impact of the financial crisis on the banking sectors in the SEMCs was very limited.The more developed banking sectors of Israel and Turkey were the only exceptions. In Israel both performance and efficiency deteriorated, while the system became more fragile. In Turkey both liquidity and performance worsened and the banking system became more fragile. The impact of the financial crisis on capital markets varied from country to country. In particular, as of November 2012, the Israeli, Tunisian and Turkish stock exchanges had outperformed the US Dow-Jones index during the global crisis. At the same time, the Egyptian, Jordanian, Palestinian and Syrian indices remained below their January 2007 levels.The correlation coefficients between the region’s stock markets and commodity indices highlight several interesting findings. The results show that the correlations clearly increased in Israel, Turkey, the US, and Europe after the crisis (up until the ousting of Mubarak). The same is also true only for grains in Egypt, especially after the onset of the Arab spring uprisings. The correlation with grains also increased in the post-crisis period, up until January 2011, for Palestine. The correlation of the market returns with Brent oil increased in Jordan, but only weakly so. The correlation of the market returns with the US and EU markets highlights a close relationship between these economies. Clearly, the correlation with the US and EU is extremely strong for Egypt, Israel and Turkey. The results show that the relationships have not increased after the crisis for most cases, except for Egypt (with the US only), Tunisia (only weakly) and Jordan (relatively strongly so). Even though Israel’s and Turkey’s stock markets display the closest interdependence with both the EU and the US, the relationship has not become more sensitive after the crisis or the ousting of Mubarak. Much like developing countries elsewhere, the economies in the region have implemented various initiatives to respond to the crises. To a large extent, fiscal measures have been the preferred instrument of choice, owing partly to the limited policy space that the authorities have in these countries. While these policies appear to have been successful, they have also put additional strain on existing and future fiscal pressures.On fiscal sustainability. The research reveals several vulnerabilities of the Tunisian and Egyptian economies that clearly undermine their debt sustainability. One important conclusion from the debt sustainability scenario analysis performed is that political instability has significant implications on debt sustainability. Political stability is crucial for investments ? both domestic and foreign ? in Egypt and Tunisia. With political uncertainty, investments tend to decline, remain low and take time to pick-up. This means lower production (lower GDP), which might also translate into higher unemployment (as the population and the labour force increase every year). Lower production also means lower profits for investors and lower income for workers, leading to lower revenues for the government. As seen from their budgets, tax revenues are forecasted based on highly optimistic assumptions that do not really take into account the possibility for a lower level of private investment and therefore lower level of tax revenue. The direct implication of such an optimistic assumption is an increase in the budget deficit and in the debt ratio, beyond the level the government expected.Another implication of the political instability is the loss of trust on the part of the international community in political transitions. This can lead to downgrades of the countries’ credit ratings and an increase of their interest rates for borrowing on the international markets. This can also make it much more difficult for the government to finance its deficit or to refinance its existing debt, putting further pressure on debt sustainability. A second important conclusion is related to expenditures. Indeed, the revolutions demanded more social justice and more employment opportunities, but increasing current expenditures would be a big mistake. Any government that is freshly elected, and seeks re-election or more power, would be tempted to increase wages and increase hiring in the public sector to satisfy the population. Such an action, however, would have dramatic implications for the future and would be a heavy weight to carry for years to come. The situation in Tunisia is much better than in Egypt, where the deficit and the debt ratio are already very high, but the implications for debt sustainability are the same. Finally, it is clear that the exchange rate could be a factor in debt sustainability. On the one hand, maintaining a fixed exchange rate at an overvalued level is harmful for the whole economy and is obviously unsustainable. On the other hand, the devaluation of the currency can lead to serious implications for debt sustainability. The case of Egypt is worth mentioning, the sharp decline in the official reserves, combined with an appreciation of the real effective exchange rate over the past 10 years, reflect the urgent need for an exchange-rate correction. The recent depreciation is a step in the right direction, but the continuous interventions from the Central Bank can be harmful. The Gulf countries’ deposits in the Egyptian Central Bank are absorbed by the market right away, leading to the need for more borrowing. The mismanagement of the exchange rate in Egypt is only leading to higher debt without any stabilisation of the market. Therefore, and in the absence of alternatives, the Central Bank should allow the exchange rate to float and depreciate. This will increase the debt ratio, indeed, but it will avoid accumulating more and more foreign debt, and ultimately having to devalue the currency, resulting in an even higher debt.On monetary policy. There appears to be homogeneity in the operational framework followed by central banks, despite some differences in the specificities. Although price stability was announced as the final objective of the unconventional measures, errors in the monitoring and controlling of the interest rate forced monetary authorities to shift the intermediate objectives to targeting money supply and credit aggregates. The specificities are mainly visible in the oil-exporting countries (i.e. Algeria and Libya) that followed restrictive monetary policies controlling the monetary base to absorb the structural excess liquidity in the banking system. In the other countries, monetary authorities have adjusted their key policy interest rates to maintain positive real interest rates. In general, the low interest rates in combination with a broad range of monetary policy instruments revamped economic growth in most of the countries, except for the crisis countries (i.e. Tunisia and Egypt). Low operational independence and a slow adjustment characterise the formal procedures that central banks in the region, with the exception of Turkey and Morocco, use to target inflation. Excessive use of subsidies and price controls seem to be the main obstacles to adopt explicit inflation targets. Turning to exchange rate policy, monetary authorities in a floating exchange rate regime in general target the real effective exchange rate, whereas they aim at a constant nominal exchange rate, if the currency is pegged or linked for example to the dollar or SDR.While inflation in these countries usually depends on international energy and food prices as well as domestic tensions and demand, thorough econometric analysis suggests that inflation is determined by a combination of the items above and the monetary transmission channels.However it appears that the adjustment mechanism of the interest rate is relatively weak, or the interest rate is slightly volatile in response to price fluctuations. In turn, active control offsets inflation corrections. Hence, the central bank interest is thus more important for exchange rate stability than the real stability.To conclude we recommend the establishment of a (systemic) risk management system. In this context, an early warning system (EWS) and effective early prevention system was implemented in Tunisia to prevent systemic risks and crises. The system allows to: i) decompose the impact of shocks on the real economy and financial markets and ii) identify early warning indicators or estimate a binomial Probit model. These leading indicators have been grouped into three blocks related to i) macroeconomic resilience factors, ii) factors weakening bank (CAMELS accounting ratios) and iii) macro-prudential factors indicating the soundness of financial systems.The results of the econometric analyses have generally shown that the early warning system clearly indicates that, in addition to the actual obvious effects, the probability of a negative impact of international financial crisis seem explained by the mechanisms of monetary contagion,: i) the risk of deteriorating terms of trade, ii) the risk of over-appreciation of the real effective exchange rate, iii) the swelling of compromised bank accounts and incidentally iv) excessive use of central bank refinancing.On banking policy. The collective assessment of the regulatory and supervisory structures of the SEMCs in comparison with the EU-MED standards pre- and post-crisis gives a mixed picture. Despite some improvements, key weaknesses remain in deposit insurance, entry obstacles and legal rights. Moreover, some disparities have also become more apparent, especially in the potential for political interference and private monitoring. The deposit insurance index has failed to improve between 2007 and 2013, because the Egyptian, Israeli, Palestinian, Syrian and Tunisian authorities have chosen not to put in place an explicit insurance scheme. Implicit schemes may enhance risk-taking through a blanket government guarantee for the leading institutions. In addition, in Algeria, Jordan, Lebanon and Morocco, no effort has been made to align the banks’ incentives by implementing risk-based premiums or co-insurance schemes, which would help internalise some of the costs to the deposit guarantee schemes that stem from excessive risk-taking.Another major issue, the presence of entry obstacles, continues to be a key weakness in the regulatory structures of the region. Although the licensing requirements exhibit similarities in all countries bordering the Mediterranean, other indicators point at substantial barriers to entry. Government ownership, which is widespread in the region, gives undue advantages to incumbent banks and restricts entry incentives. In Algeria, Egypt and Syria as well as to some extent Morocco, Tunisia and Turkey, government ownership remains significant. Although government ownership may have some benefits, the authorities have to ensure that such roles are well-defined within a national strategy with clear objectives and instruments, and that they do not represent an obstacle to the development of the financial system. The rates of foreign denials are also still very high, further supporting the idea of substantial entry barriers and competitive advantages enjoyed by domestic incumbent banks.In addition to the two key weaknesses summarised above, the 2011 survey points at three new concerns. Poor accounting practices have contributed to an increasing disparity in private monitoring indices. Furthermore, political interference has become a significant possibility, potentially undermining supervisory authority and reinforcing the governments’ direct control ? an additional concern for the competitiveness and efficiency of the banking sector (Casu & Ferrari, 2013). As the eruption of public discontent in Tunisia and Egypt in early 2011 clearly attests, the region’s governments have attempted to maintain a tight grip on their countries’ political and economic systems. It is exactly such forms of interference that may conflict with the objectives of the financial and competition authorities.In contrast, the SEMCs have implemented a number of reforms to improve the availability and use of credit information by financial institutions. Egypt, and more recently Morocco, established private credit bureaus in 2006 and 2009, respectively. Algeria, Israel, Jordan, Lebanon and Tunisia continue to rely solely on public registries, three of them meeting all the criteria except collecting credit information on retail stores or utility companies. The same applies to Turkey, which has both public and private credit bureaus. Although the literature provides little guidance, private credit bureaus have better access to new technologies and know-how to ensure that information-sharing mechanisms work effectively.