Ministry of Finance – Portugal

Session 3. Financial Policies, financial systems

and productivity

Discussion

BIS – IMF – OECD Joint Conference

Weak productivity: The role of financial factors and policies

10-11 January 2018

Ana Fontoura Gouveia GPEARI – PT Ministry of Finance / Nova School of Business and Economics

The views are those of the presenter and not necessarily those of the institutions

Distressed banks, distressed decisions? Anderson, Riley and Young

• UK firm-level data (smaller underrepresented), 2002-2012, banking relationships

• Exit probabilities

Results

• Financial crisis Restricted credit availability increased business failure

• Attachment to weak banks affects more the highly leveraged firms

• Forbearance? Even for the same leverage, “unnatural selection”, where more productive may leave

Debt overhang, rollover risk and corporate investment Kalemli-Ozcan, Laeven, Moreno

• Firm-level data, bank-level data, 8 European countries, 2000-2012

• Investment growth

Results

• Weak bank and leverage reduce investment

• Leverage more negative if firms linked to weak banks

• Evergreening? Firms attached to weak banks and with higher rollover risk decreased their investment more

Monetary policy, factor allocation and growth (Banergee, Kharroubi and Zampolli)

• Industry level data; 2000-2015; 15 countries

• Resource allocation

Results

• Looser monetary policy – alleviates credit constraints – effects on productive v. unproductive firms – Conventional monpol – steeper slope yield curve - increases

aggregate productivity growth

– QE – flatter slope yield curve - reduces aggregate productivity growth

• Stronger effects for labour reallocation (v. capital)

Granular data

• EU KLEMS

• ORBIS/AMADEUS

• Bankscope

• Kompass

• FAME

• ECB sovereign exposures

• IBSI

Some insights from research on Portugal

1. Weak bank definition

• State support (Anderson, Riley and Young) – Sample selection? E.g. BES collapse in Portugal. Beck et al (2017)

find most exposed banks decreased credit supply but firms able to compensate with other sources of funding, including new lending with banks with which they had no relation – exceptional times - limited impact on credit –better firms?

• Exposure to sovereigns (Kalemli-Ozcan, Laeven and Moreno) – In itself a measure of bank weakness? Exposure to sovereign risk

periphery Others? • Principal Component Analysis: Capital, NPLs, ROAA, retail funding, Z-

score, net income, net interest income (Andrews and Petroulakis, 2017)

• CDS variation around shock (Duval, Hong and Timmer) • Directly measure firms’ access to credit? (e.g. SAFE)

2. Mechanisms at play? The link with zombie firms

Variable Unit Zombie Non-zombie p-value*

Total Workers unit 23,36 15,74 0.000

Turnover 103 € 3183,45 1987,17 0.000

Operating Length years 23,93 21,86 0.000

Labor Productivity € 3,57 11,58 0.000

Tangible Assets 103 € 1418,83 578,54 0.000

N 111 609 834 204

Access to finance by zombies? • Higher tangible assets – collateral; More workers – support

to avoid losses; Older – longer banking relationships …but much less productive

Osterhold and Gouveia (forthcoming): PT good case study due to large number of zombies in the past + one of the largest improvements in insolvency framework more recently + database covering all firms

3. Non-linearities and heterogeneity: leverage and investment

• Non-linear effects – Martins, Gonçalves and Duque (forthcoming): positive effects of

increased leverage up to the percentile 82.

– González and Martínez-Carrascal (2017): Debt ratio detrimental for investment for firms with high levels of debt (above 75 percentile), even more negative during crisis (2008-2012).

• Firm dimension – Impact of leverage on investment heterogeneous across firm

dimension (Farinha and Prego, 2013).

3. Non-linearities and heterogeneity: leverage and investment

Figure 1. Investment by sector (2008=100) Figure 2. Credit to NFC (2009=100)

Source: INE (Forecast based on Investment

Survey and Ministry of Economy

Source: Bank of Portugal and GPEARI

• Investment developments different across sectors (e.g. real estate, utilities)

• Threshold for leverage sectoral specific (Martins, Gonçalves and Duque)

• Zombie share very different in different sectors (Osterhold and Gouveia)

Sectoral estimates with firm level data

4. Investment – Debt - Savings

Figure 1 – Evolution of financing sources of NFC (% of GDP)

Source: National Accounts, Statistics Portugal

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Net lending (-) /net borrowing (+) Gross savings Gross fixed capital formation

Firm level data papers stop in 2012 – fundamental change?

4. Investment – Debt - Savings

• Firm-level data confirms relevance of firms’ savings in supporting investment (Banco de Portugal, 2017a).

• Not specific to Portugal. NFC savings increased in large number of countries, alongside increases in profits (Chen et al., 2017).

• Structural change? Profitability not relevant in past recovers. But it is now. (González and Martínez-Carrascal, 2017)

Important asymmetries (Banco de Portugal, 2017b). • In some firms, savings are financing investment (no increase in firms’

leverage). • Firms that have larger increases in investment experience a rise in

their debt ratios. • Some other firms have been retaining earnings in order to deleverage.

Back to the papers

Weak banks, credit constraints & high leverage (in a context of weak demand and high uncertainty):

– Slow exit of the least productive

– Hindered resource reallocation

– Lower investment

– Evergreening? Mixed evidence

Role for public policy?

Role for public policy?

• QE – even if some negative effects on reallocation (further evidence needed), what is the counterfactual? Lower AD, less credit to good firms, lower employment (hysteresis)…

• Fiscal policy – scope?

• Structural reforms

– Mix of policies – address bank weaknesses + insolvency frameworks (we know what to do after OECD work

– Zombies. Can resources be reallocated? (uncertain. HK via education; what about K?)

– Policy complementarities (e.g. zombies high share of employment ALMP)

• Change banks’ incentives. Credit based on productivity. Public policy? E.g. Credit guarantees (Rodrigues et al, 2016; Farinha and Felix, forthcoming)

Obrigada!

ana.gouveia@gpeari.min-financas.pt