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Transition Report 2008, Press conference transcript


Transition Report 2008, Press conference transcript

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              TRANSITION REPORT 2008

                PRESS CONFERENCE

               Tuesday 25 November 2008
MR WILLIAMS: Good afternoon everybody. Thank you very much for coming.
This is an on-the-record briefing on the Transition Report 2008.
As you can imagine – and Erik will talk about this a bit later – the printed copy of the
report has been very slightly amended. On page 10 in the “outlook” section there is
still a reference to growth for the EBRD transition countries of 3.5 per cent. As you
will have seen from the tables and the press releases, that is now 3 per cent. All the
tables on page 21 for GDP growth in 2009 have been superseded by the table that you
will have received in the press pack on Friday, and which is on the tables here.

On the basis that you will have read at least some of the report and possibly part of the
press releases, I will say nothing more but hand over to Erik, who is going to make a
brief introduction. We will then take questions. We may also have some people
telephoning in from other countries.
I mentioned in the note I sent to you on Friday that the electronic version of the report
has been updated.

MR BERGLOF: As you are fully aware, the crisis has hit our region. It was resilient
for over a year, reflecting both strong institutions and two decades of very successful
transformation and on the whole strong fiscal positions.

As you know, several countries have now been forced to seek shelter under the IMF
umbrella, sometimes complemented by others, and there will be more to follow.

This report addresses the crisis from three main perspectives. The first impact that we
are concerned with is the short-term impact on economic growth - and I will return to
that in a minute. The second impact, which is in a sense what the Transition Report is
for, is the impact on transition. While we have seen reasonable transition progress
over the year, we are concerned about the impact of the crisis on the speed of progress
and about the possibility of future reversal. The third aspect of the impact of the crisis
is the long-term growth prospects of these countries because there is still a lot of
potential for catch-up growth. We focus on three aspects of the foundations for long-
term economic growth, which are very important: education, particularly secondary
education; competition; and various forms of industrial policy interventions in order
to diversify economies and shift the emphasis of economies. We are particularly

transcript                                  1
concerned that the crisis will affect the resources available for education, and there
may be a perception gap whereby the situation is viewed as better in the region than it
actually is, from the data we have analysed.

The bottom line is that we think there is no alternative to the path of transition, the
very successful twenty years of progress that we have seen in the region.

Let me start with the impact on short-term growth. You have seen the numbers, but
I emphasise that they are highly uncertain at this point. We have provided what we
think is the most probable scenario, but the alternative scenarios are very much biased
downwards, in two respects: the numbers of the most probable scenarios have come
down since we signed off the report (though they have been updated in the electronic
versions); and the probability of different scenarios and more negative scenarios is
increasing. This is something we need to take into account.

In regard to the heterogeneity within groups, if you look at our main scenario there is
a halving of growth in the region, and more or less the same in our sub-regions.
However, within the sub-regions there is a lot of variation. It is clear that countries
that have opened up to the rest of the world, particularly those that have been
dependent on external financing, are more vulnerable than others. Countries that have
large foreign exchange exposures, such as Hungary, are very vulnerable at the

It is also clear that the impact of the slow-down in Western markets is very important
for countries that rely on exports, which most of our countries do. We also see quite
a rapid fall in industrial production in our countries, which reflects the slow-down in
economic growth and demand in our markets primarily but also the problems in the
financial sector in our countries.

The most important thing now is to stabilise the financial sector. What we do in the
Western economies is very important, because we know that the region relies very
strongly on the parent banks, primarily based in western Europe, as channels of
funding and liquidity to the region. It is also important that in supporting these parent
banks we ensure that we are not imposing restrictions on what they can do in terms of

transcript                                   2
supporting their subsidiaries. This is something we watch very closely and are
concerned about. There are other impacts of these bale-out packages that are
potentially negative for the region. Many of the countries that we operate in do not
have the resources to back general deposit guarantees, for example. They do not have
the resources to back fully their domestic banks. We have to make sure that there are
ways of compensating these countries for these effects.

What is critical in the measures we take now, not only in the financial sector but in the
real economy, is that whatever the short-term direction, the long-term direction should
be clear - that we are promoting further deepening of the market economies in these
countries. There may be a step backwards, but that should be done with a clear path
towards market-driven economies. Again, the fact that the economies that are most
open and most dependent on external finance are those that are hit most should not
mean that the economies should turn inward and reverse transition; the conclusion
that there is no turning back. The Western economies and the EBRD need to support
these countries through this difficult period.

The EBRD has increased its volume for next year by 20 per cent; we have added
another billion to our business volume target for next year. We are working with
individual banks and clients that are in difficult situations and we are also willing to
consider working with new clients. A lot of this will be in the financial sector. As
you know, this is one of the main areas of activity for the Bank and an area that is
particularly in need now.

MR PAUL HANNON (Dow Jones): I wonder if you could speak a little bit more
about the possible negative consequences for the banking systems in your region of
operation of the Bank's support programmes that have been announced in western
Europe. Is there some kind of depositor arbitrage going on? Is it the case that the
more secure and government-backed Western banks become, the more difficult it is
for the eastern banks to compete for increasingly scarce capital; and, if that is the
case, can anything be done about it?

MR BERGLOF: I mentioned that this is a serious concern and that there are three
impacts. The first impact is one that could come from these government schemes

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having restrictions on the extent to which parent banks that have received state
support can use this to support their subsidiaries. We are following this very closely
and the restrictions we have identified so far are not binding; but this is definitely a
concern and something that we need to be very careful to point out when we see them.

The other effect is funding costs. There are now a large number of banks in Western
economies that have been forced into government support because it is cheaper
funding; but the governments in our countries of operation do not have that option.
The governments do not have the resources to support their local banks. They have
more expensive funding.

The last thing that you mentioned is the risk of significant deposit withdrawals in
many of our countries of operation. This reflects the concern that governments cannot
credibly back up implicit, and certainly not explicit, guarantees. What can be done
about it? The bale-out schemes have been very important in providing stability to our
region, and I do not want to ignore that – without these parent banks our countries
would have been in a much worse situation than they are. An important reason why it
took so long for the crisis to impact on the region is the continued support of these
parent banks. However, we need to look at ways of compensating, in the form of
funds being made available to these countries to support their financial systems.
Some of the packages that have been designed to date reflect that to some extent; for
example, the Hungary package included a significant contribution from the ECB,
reflecting the realisation that there are these linkages.

MR SEBASTIAN TONG (Reuters): You talk about giving support to some countries
so that they can credibly back their banks: do you mean the EBRD or are you talking
in general, about the IMF? What do you think the EBRD can do?

MR BERGLOF: This is not part of the report, but I am happy to talk about it. The
EBRD is a very well-capitalised institution, and these reserves are there to be used in
times of crisis. We are increasing our business volume this year to reflect that. There
is demand for greater support, particularly in the financial sector, and expressed a
more general need to put pressure on the institutions that are involved in support. Our
support is very much directed to individual institutions; we are not a bank that

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provides general stability support; that is something more for the IMF. I am
suggesting that the various European institutions should be involved in recognising
this very close linkage between the financial system in the Western countries and the
financial systems of our countries of operation.

MR SEBASTIAN TONG: Out of the 7 billion next year, do we have an idea of the
figures by sector breakdown?

MR BERGLOF: We said that we would add one billion. Normally, we would do
about one-third financial sector. I would expect this to be more. When we added this
one billion, we said that it would be 500 million to central and eastern Europe, and
500 million to the rest of our region. Within that we did not specify whether it would
go to the financial sector, but my expectation is that quite a substantial part of that
will go to the financial sector.

MS YVONNE ESTERHAZY (Wirtschaftswoche): You mentioned that you were
going to provide help for existing and new clients and members. Can you elaborate
on what you are planning to do to help Turkey specifically, and what is in the pipeline

MR BERGLOF: Again, there is not much in the report on this, but I can answer very
briefly. For next year we have a very small volume –€150 million – which is not
very significant in a big country like Turkey, but over the next two years we are
talking about $600 million. Again, this is the very beginning and for us it is still a
new market. In terms of our potential support to Turkey in relation to the difficulties
it is experiencing, this is marginal. Turkey is a big, important European country,
which we think we should be involved in.

MR JULIAN EVANS (EMEA): You said that for some of the Western bail-outs you
were worried about restrictions on how parent banks could behave in eastern Europe.
Can you give us some specifics?

MR BERGLOF: In most schemes that we have looked at there are restrictions of one
form or another, either on the parent bank or on the subsidiaries. Any new money

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going to a subsidiary will have to be matched by deposit growth. As I said, these
restrictions, as far as we have been able to determine, are not binding at this point, but
I am voicing a concern that there are very strong pressures, and statements are made
in political debates in the countries stating that this money should in no way be used
to support banks outside the borders of Sweden, Austria, Italy or Greece. It is very
important and why we want to emphasise this issue.

MR GABRIEL PARTOS (The Economist Intelligence Unit): Mr Berglof, you
mentioned the increased funding for central Europe in the coming year. To what
extent is the reversal of the previous trend expected to affect the graduation of these
countries from the EBRD? Will it put back the timetable, in other words?

MR BERGLOF: Again, we do not write much about this either in the report, but you
ask, and I invited it, I guess, by making my comments at the end. The policy is that
graduation is still very much there, but if we put additional resources into these
countries now as a crisis response, we need to be flexible about the graduation date
depending on how long the crisis lasts.

MR ALEKSANDR SMOTROV (RIA): Despite the common trend of GDP slowing
down next year in the countries of operation, countries like Tajikistan and
Turkmenistan are supposed to grow; so on what is that growth based in your forecast?

MR BERGLOF: In those two examples, and perhaps more generally, some countries
are much less integrated in the world economy, both in terms of funding needs and in
terms of trade. For such countries the impact of the global financial crisis may be
smaller. Having said that, certainly in the case of Tajikistan there are two effects.
One is that growth this year was not so strong. They had a very difficult year, so it
will be easier to achieve a growth increase this year. The second thing, which is on
the downside, is that we still do not know the impact of the slow-down in Russia on
Tajikistan and many other countries. Of grave concern is the combination of a
decrease in remittances, which are very important for Tajikistan and many other
countries, and the potential of the return of many migrant workers to job markets that
are not very welcoming at the moment.

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MS FIRDEVS ROBINSON (BBC World Service): In the last question you touched
briefly on the impact of the global crisis on certain countries, particularly resource-
rich countries of the Former Soviet Union. They seem to be a lot more optimistic
about the short and longer-term impact of the crisis. Do you share that optimism?
How do you see the impact of falling oil prices on those countries in relation to
general global difficulties?

MR BERGLOF: Some of the countries that come to mind when you say “resource
dependent” I would not characterise as optimistic. I am going to Moscow tonight, but
my sense is that it is anything but optimism that is prevailing in Moscow at the
moment. Even in Kazakhstan there is increasing awareness of the severity of the
problems that it is facing. The Kazakhstan case is a combination of two things:
problems in the financial sector, because they were so dependent on external funding;
and also the very rapid fall in commodity prices, particularly oil.

Azerbaijan is one country that you probably had in mind. Growth rates have been
very, very high by international standards and reflect the opening of the BTC pipeline
and everything that came out of that. I think that Azerbaijan, because of the slowing
down from that very, very high level of growth, is perhaps also less vulnerable to this.
Of course, it will definitely affect them.

MR STEFAN WAGSTYL (Financial Times): What do you think will be the impact
of government macroeconomic intervention in western versus eastern Europe? We
see governments in a number of Western countries, including in Britain, having very
aggressive, Keynesian countercyclical policy; but for the most part in the transition
countries we see governments either pursuing retrenchment or being encouraged to.
Russia is a bit of an exception. What will be the impact on the majority of countries
in our region that are tightening their belts if much larger economies around them are
not doing so?

MR BERGLOF: First, many of our countries do not have an option; most of them do
not have the resources to do large spending packages, with the exception perhaps of
some of the countries with very large reserves, which do have this option.

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One has to be very careful when recommending further fiscal restraint in countries
that are under pressure, because we know from experience of the Asian crisis that this
can really backfire. At the same time, there is a need to be very careful, to realise that
many of the liabilities now being built up in the financial sector will be heavyweight
in this country. You almost have to do it country by country. The question of
whether the bail-out package in the West will be negative, I think not to the extent
that it boosts consumption, which is the main objective. That could help our
countries, given their strong dependence on exports to western Europe.

MR A SWIDILITSKI (Polish News Agency): Are you concerned about Poland’s
balance of payments and sources of financing of current account deficits, and how do
you view the EMU accession timetable?

MR BERGLOF: What has been a very positive feature of the growth model in
general, certainly the south-eastern European countries in our region, is the fact that
even though it had these very large current account deficits, it was financed primarily
through foreign direct investment and parent bank support. That is generally true in
Poland. The great concern is what will happen to foreign direct investment. It is too
early to tell, but there are many signs that foreign direct investment volumes will not
hold up. This has an immediate impact on the financing needs in the countries.
Foreign direct investment is an important element of transition as well, and has
brought in a lot of skills and technology into the region; and we are concerned that
what is happening now will slow down that driver of transition.

These events have shown to the countries outside the euro the potential value of being
part of the euro. There might be a silver lining to the crisis in that some of the criteria
we are currently using for assessing whether or not countries should become members
of the euro might be easier to meet. I am thinking in particular of the inflation
criteria, which have been the main obstacles for the candidate countries. That seems
easier to meet now. It is too early to say what the effect will be on debt. I looked at
this a few weeks ago; it seems that there is still quite a bit of room, even taking into
account what is happening now, to increase debt levels to remain within Maastricht
criteria. There are some variations across countries, but that is the broad picture.

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What I think is very dangerous – and this is a discussion that is ongoing – is to say
that we should now introduce some new criteria. In particular, the criterion that has
been discussed is the quality of the banking systems, which I think is, first of all, a
very fussy criterion and one that is almost hypocritical. I have already emphasised the
need to understand the linkages between our financial systems. The problems that
arise in the countries that have a strong bank presence from Western parent banks are,
I think, a reflection of regulatory shortcomings, both in the host countries and in the
home countries. I do not think it would be right to start separating out some parts of
this very much integrated European system and assessing it. The basic message is
that we should stick to a timetable of clear points in assessing these countries; we
should stick to clear and transparent criteria and hope that the process will go as fast
as possible.

MS AGNES LOVASZ (Bloomberg News): You mentioned that you expect some
additional countries to turn to the IMF. We have seen Hungary, Ukraine, Belarus and
Latvia do so. Which countries in particular are you thinking of?

MR BERGLOF: We are not in the business of speculating about countries that go to
the IMF. First of all, going to the IMF is not necessarily a bad thing. You did not
mention some countries. For example, Serbia has gone to the IMF, but did so at an
early stage as a precautionary measure, so I think there should not necessarily be a
stigma in doing so. Secondly, I want to emphasise that it is important for us too. We
work very closely with the IMF in the countries where it is now present, for example
in Ukraine and Hungary, because the IMF provides the framework for the projects
that we become engaged in. We also see a need, using our experience from the banks
that we invest in or have contributed to, to be part of shaping that system.

That was a long answer to a short question. I do not want to speculate on which
countries will go to the IMF. The IMF plays an important role and we want to be part
of supporting that role.

MS ODILE DUPERRY (AFP): Can you elaborate on the countries in which you see
a full recession next year, namely Estonia and Latvia? I notice that your forecasts are
more optimistic, even if there is a recession, than the official forecasts of those

transcript                                   9
countries. For Latvia, for example, you say 0.9, while they say -3.5 to -3.9, which is a
huge difference.

MR BERGLOF: I am not sure I want to get into this game. This is a very difficult
time at which to make assessments. These countries had double-digit growth a little
over a year ago. They have gone, in a year, to zero growth. They will go below zero,
and whether that will be by 1 per cent or 3 per cent is very hard to determine now.
A team from my unit is in Latvia as we speak. That country is in a very difficult
situation. One should be very careful about speculating how that will be reflected in
terms of growth numbers.

I want to emphasise that we have a main scenario, the most probable scenario, and
then we have other scenarios which are very heavily biased downward. The
probabilities of the downward scenarios have increased over the past month or so.

MR JULIAN EVANS (EMEA): I have a question about the EBRD's philosophy of
transition and its general philosophy. You were set up in the 1990s with a philosophy
of helping privatisation and the growth of free and open markets. We see across the
world now, including in emerging Europe, a massive increase in the role of the state
in the financial sector, probably next a year a massive increase in the role of the state
in the industrial sector, and a massive bail-out of companies. Is the EBRD out of
step? Are you still promoting a 1990s era philosophy that is hard to justify when
shareholders seem to receive the profits in good times and the taxpayer foots the bill
in bad times?

MR BERGLOF: First of all, I think we have to distinguish what policies are the
correct ones in normal times and those that are the correct ones in these very
exceptional circumstances. If we go back to the market economies of western Europe
or the United States, there have been periods of very strong state intervention. The
important thing is to get out of that. In my own country, Sweden, we had very strong
state intervention in the early 1990s when we had the banking crisis. The key was to
get out of it. It took longer than people thought it would at the time, but there was no
way around having greater state intervention, particularly in guaranteeing the stability
of the financial system. That is a very different question from the one that EBRD was

transcript                                  10
set up to address, which was to go from centrally planned economies to market
economies. There is by now so much evidence that this is the superior model. One
can quibble about the exact design of a market economy, but for our countries of
operation the direction should be very clear, and what has happened now is not a
reason to rethink that.

MR JULIAN EVANS (EMEA): Once the taxpayers have bailed out the banks, the
oligarchs, and so forth, should they be allowed to go back to the same model within
three years?

MR BERGLOF: I talked about the financial system that needs to be supported.
Small and medium size enterprises and mortgages for homes are the first to be hurt
when the financial sector gets into trouble. That is what is at risk now, and that is
why we need to support the financial institutions. I did not say anything about a
general bail-out outside the financial sector. Certainly, I think there are a lot of
reasons for being critical of some of the elements of the current models in our
countries, but the most important thing is that we want to support a strong private
sector, focusing on entrepreneurship, small and medium size enterprises. That is the
model that EBRD was set up to promote.

MS FIRDEVS ROBINSON (BBC Central Asia Service): Could you tell us a little
more about your future investment plans in the light of the global crisis? I am
particularly interested in big projects like Nabucco and others. Will they really

MR BERGLOF: Let me first give a general answer and then maybe try to be more
specific. You are talking about infrastructure projects in general. Infrastructure
projects are one area where transition may be at risk. Infrastructure in general will be
difficult because physical constraints will be much more severe. There is therefore a
great need for private capital, but that is not really available now, so it will be very
difficult to meet the infrastructure plans that most of these countries have.

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As far as Nabucco is concerned, I think that it is facing a lot of challenges and it is
certainly not in our business pipeline at the moment. Whether or not it will ever
materialise is still very much an open issue, in the main unrelated to the financial
crisis, I would say.

MS ALBANA KASAPI (BBC Albanian Service): Based on your estimations and
calculations, can you say that the transition of the countries of south-eastern Europe
from the system they were in 10 or 15 years ago towards full-fledged market economy
will be slowed down as a result of the current crisis?

MR BERGLOF: I do not think I can say anything for sure, but I can say that we are
very worried about that. I mentioned that I am worried about it in the financial sector.
A tremendous success of the transition is the fact that financial development has
reached out to parts of the economy that did not have access to finance in the past, and
I think there are immediate risks there. I see risks in infrastructure; I see a risk with
foreign direct investment reducing and thus affecting the type of transition that we
see. How great the impact will be, I do not know. From our perspective, we should
do everything we can to mitigate the risks.

I was asked to clarify the 1 billion that I mentioned. Of that, 500 million was for
central and eastern Europe, what we call the EU7, so not including Croatia. The
second 500 million was primarily for the Western Balkans and what we call the early
transition countries, namely the countries in the Caucasus, central Asia and part of the
western CIS.

MR SEBASTIAN TONG (Reuters): You said you were worried about the financial
systems and infrastructure. Given that the needs of the region are quite vast and even
the capital of the EBRD is quite limited, how will you change? Will the lending
strategy be changed next year? Can you be specific?

MR BERGLOF: The environment will be much more difficult to operate in, for
many reasons. The needs and the demands on the EBRD will be much greater. In the
past the EBRD has used its own resources to mobilise other investors, and that will be
much more difficult. We see it already in our syndication activities. It is much

transcript                                  12
trickier to get others to come along with us, which means that we have to take larger
shares ourselves in specific projects, which reduces the resources we can use for other
investments. There are also many other challenges. An important part of what we did
was to help bring in foreign investors, some of whom often had little prior experience
in the region. I think the appetite for that at the moment is much less. For us to
identify and convince foreign investors to come into some of the more remote areas of
our region – the early transition countries that I mentioned – will be a difficult
challenge. Certainly it is affecting how we operate. We think the key thing is to
support the financial sector and use it to ensure that we can reach small and medium
size enterprises in particular. That is the overriding objective.

MR STEFAN WAGSTYL (Financial Times): Are you now seeing fewer new
projects and more projects which are either refinancings or even some sort of rescue
and far fewer private investors coming to you with greenfield investments or new

MR BERGLOF: I think that that is probably a fair summary. Certainly we are seeing
fewer new investors. We are seeing investors that in the past invested on their own
but who now feel a need to work with us. That is in the financial sector but not only
there. It is a very different climate.

MR STEFAN WAGSTYL (Financial Times): And some refinancings?

MR BERGLOF: As I said initially, it is very important for us to support existing
clients, particularly in the financial sector but also more generally. In individual
projects, individual companies and banks, a lot of the transition that has been
achieved is now being challenged. For example, with a bank in central Europe that is
now facing possible deposit withdrawals for the reasons that I mentioned before and
which plays a very important role in a particular region, it is important for us to try to
stick with that client and make sure that they come through. Of course, there are risks
involved here, but I think that that is a responsibility we have.

transcript                                  13
MR JULIAN EVANS (EMEA): A billion extra is not that much more when you
consider that the IMF has had a 100 billion from Japan and is looking for even more
than that. Are you looking for more money from your shareholders?

MR BERGLOF: We are not looking for more money. If someone came to us with
money, we would try to do the best we could with it. The more important point is that
we are a very different type of institution. We are a project institution; we work in
specific projects; we try to use conditions in these projects to achieve transition
impact; we try to focus on high quality projects. One of the roles of my office in the
Bank is to assess individual projects, follow up and monitor what is happening in
terms of transition in individual projects. It is a very different model. Even small
amounts of money can achieve quite a lot.

MR STEFAN WAGSTYL (Financial Times): A number of private forecasters
happily follow the line of forecasting a slowdown next year and even a recession but
say that in 2010 and 2011 everything will get better. Do you agree with that

MR BERGLOF: What happens in our region is very much determined by what
happens in the rest of the world. As far as I can tell, very few people expect an upturn
before at least the fourth quarter of next year, and I think fewer and fewer people
believe in that. In our region, to be realistic, the pick-up will come later. There will
be a lag, and we have to be prepared for that. Once demand starts growing in export
markets, it will benefit our region, but that will take some time.

MR SEBASTIAN TONG (Reuters): There was a lot of debate about the future of the
EBRD and its role earlier this year. How do you see that discussion now? Do you
feel vindicated?

MR BERGLOF: I hear that question very seldom these days, so maybe there is a
sense of vindication. I do not want to be flippant about this. We certainly saw from
our shareholders some of the scepticism that you mention, but I think there is now
very strong support for our increased involvement. Even in countries where we

transcript                                  14
previously said we would withdraw, there is a real role for EBRD in helping these
countries through this difficult period.

MR WILLIAMS: If there are no further questions, and none from the field, thank you
very much for coming.


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