CEE countries continue their outstanding performance
- Financial wealth of CEE households to top at EUR 718 billion in 2007
- Key drivers: economic growth and improved labour market conditions in combination with limited impact so far from the US subprime crisis
- With demand for consumption and real estate investment remaining high, growth in household debt will continue to exceed growth in income
All over the CEE region good economic performances and improved labour market conditions are driving fast accumulation of financial wealth creation. “2007 is anticipated to be another record year for financial wealth creation”, so Debora Revoltella, UniCredit Group CEE Chief Economist, reporting on the recent study CEE Households’ Wealth and Debt Monitor. Although rising volatility is given, the economic results in combination with quickly developing capital markets and industry of long-term vehicles secure growth.
The economic experts of UniCredit Group forecast that CEE financial wealth should top at EUR 718 bn1 this year (roughly 1% of global wealth and 59% of GDP), accelerating by 20% yoy compared to 15% yoy growth registered in 2006. Accumulation of financial wealth has not been sensibly affected so far by the US subprime crisis. Indeed, financial markets in the CEE region have proven to be quite resilient to the recent international turbulences, quickly recovering from the short term shock. The very good economic fundamentals in CEE have promoted and continue to promote stability, although risks have clearly grown.
Good prospects for wealth creation in CEE with an average growth of 14%
“In the years to come, good economic prospects will continue to support the accumulation of financial wealth, although with some lowering in its dynamic”, so Debora Revoltella. The growth of financial wealth will continue to greatly exceed that of real economy. According to the economic experts from UniCredit Group an average growth of 14% a year in 2008-2009 to reach 64% of GDP by 2009 is expected, with particularly fast dynamic forecasted in Russia (31%), Bulgaria (21%), Romania and Turkey (19%). Estonia and Latvia represent somehow an exception, as the anticipated ‘soft landing’ of the economy will probably affect household saving capacity. This is resulting in only marginal increases in the ratio of financial wealth over GDP in the next two years.
In 2007 on average the peoples’ main desires were consumption and real estate investment. The strong demand for these two accelerators continued to spur increases in the level of household debt, which climbed by 42% in H1 20072. “Consumption in the region continues to be marked by quickly rising wages, improved labour market conditions and easier access to the credit market”, so Debora Revoltella. At the same time, households are also increasingly investing in their houses, motivated by optimism regarding future development of house prices and fast desired improvement in their standard of living. This sets the stage for another year of vigorous growth in household financial liabilities, forecasted to increase by over 30% yoy, so UniCredit Group Experts.
Household solvency remains good but sensitive
Growth in households lending is expected to continue also in the future, stimulated by the demand for durables and the far from saturated housing market. The significant liquidity shortage and surging risk aversion following the US subprime crisis are however expected to trigger an increase in the cost of refinancing for banks and some re-pricing of risks. This, combined with the widening financing gap at the regional level, increases the likelihood of some credit squeeze, with growth in household liabilities forecasted to stabilise in the 2008-2009 period, falling to an average rate of around 22%.
The still robust expansion in the level of indebtedness is also triggering a deterioration in the household sector’s net financial position. Although the level of household indebtedness remains generally well below the Euro area level, risks have risen. Household solvency has remained good, but sensitivity to shocks (especially in the case of any abrupt correction in real estate prices) has increased due to relatively high leverage ratios forecasted to increase this year to 36% of GDP above the Euro area average of 27%.
Structure of household debt (2006, % of the total)
Portfolio composition of households’ wealth (2006, % of the total)
Investments in insurance products and pension funds are key drivers
“Despite the recent turbulences in international financial markets, we continue to expect in the CEE relative growth of riskier and more profitable forms of investment”, so Debora Revoltella’s remark about the recent turmoil on the financial market. The economic experts from UniCredit Group forecast a dynamic increase in the segment of quoted shares and mutual funds in Slovenia, Croatia and, to less extent, in Bulgaria. There, the local markets continue to be mostly influenced by domestic dynamics. In the rest of the region, some slower growth is anticipated, especially in the segment of equity investments as current trends in global financial markets and some possible downward adjustments in market prices might negatively affect household sentiment.
All over the region investment in insurance products and especially pension funds will continue to be the main driver of financial wealth creation. They are expected to account for around one fourth of new savings flows generated at the regional level in the 2007-2009 period. Particular fast growth in pension funds assets is anticipated in the case of Latvia, Lithuania and Slovakia with a compound annual growth rate (CAGR) close or above 50%. The same counts for Bulgaria, where further restructuring of the pension system – via increases in the contribution rates for the second pillar - will support rapid accumulation in pension schemes (with a CAGR close to 40% in 2007-2009). The pension fund industry represents a promising segment also in Romania, where starting from 2008, a fully funded pension system will begin operating in addition to the recently reformed voluntary pension scheme (in place since May 2007).
About the UniCredit Group
With a current market capitalization of approximately €84 billion (1 October 2007), ranking among the top financial groups in Europe, UniCredit has a presence in 23 countries, with over 40 million clients and 9,000 branches, approximately 170,000 employees and total assets of approximately €1,018 billion (pro forma) as at 30 June 2007.
Through the merger with Capitalia, effective as of 1 October 2007, UniCredit has significantly strengthened its presence in Italy, which is one of its core markets alongside Germany, Austria and CEE.
In the CEE region, UniCredit operates the largest international banking network with over 3,700 branches and outlets, where more than 76,000 employees serve approximately 27 million customers.
1 CEE: Bulgaria, Croatia, Czech R., Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia and Turkey
2 Figures refer only to loans granted by banks (excluding financial leasing)