A REBALANCING ACT IN EMERGING EUROPE AND CENTRAL ASIA April 17, - - PowerPoint PPT Presentation

A REBALANCING ACT IN EMERGING EUROPE AND CENTRAL ASIA

April 17, 2015 Spring Meetings

A Rebalancing Act in Emerging Europe and Central Asia

ECA is expected to be the slowest growing region worldwide with almost no growth forecast for 2015

• Stable to moderately improving outlook in western part of

region is being offset by the direct and indirect impact of the

• il shock and uncertainty in the eastern part of the region
• The poor are hard hit by the oil shock due to the sharp

decline in real spending power from weaker output, reduced remittances, as well as the lower terms of trade

Bottom-line:

• Countries that are performing the rebalancing act to lower oil prices and

changing exchange rates can benefit from new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key.

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2

Economic Growth in ECA remains weakest among developing regions 2015

Source: World Bank

2.5 2.2 0.6 7.2 4.2 6.3 0.9 1.8 2.0 6.9 4.5 6.8 0.6 0.1 2.2 6.7 4.0 7.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Latin America & Caribbean Europe & Central Asia Middle East & N. Africa East Asia & Pacific Sub-Saharan Africa South Asia

GDP Growth (%), weighted average by region

2013 2014e 2015p

While overall ECA growth prospects are much lower in 2015 than last year, expectations are dramatically different across the region

2014 and 2015 Real GDP Growth

3 Source: World Bank

• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 Croatia Bulgaria Slovenia Hungary Czech Republic Slovak Republic Romania Poland FYR Macedonia Montenegro Kosovo Albania Bosnia and Herzegovina Serbia Turkey Turkmenistan Uzbekistan Tajikistan Georgia Kyrgyz Republic Azerbaijan Kazakhstan Armenia Moldova Belarus Russia Ukraine EU-Central and South Eastern Europe Western Balkans Turkey Eastern Europe, S. Caucasus, Central Asia and Russia 2014 2015 (April 2015 Projection) Average weighted growth in 2015: 1.1% Average weighted growth in 2015:

• 2.8%

Drilling-down into ECA Trends

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Outlook:

• Stable to moderately improving growth in western part of region,

but concerns remain

• The direct and indirect impact of the oil shock and uncertainty in

the eastern part of the region are hitting the poor hard

Bottom line:

• Countries that are performing the rebalancing act to lower oil prices

and changing exchange rates can benefit from new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key.

Stable to moderately improving growth in western part of region

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ECA countries close to Eurozone are benefiting from:

• Monetary policy easing (QE) in Europe with lower interest

rates

• Depreciating currencies, boosting demand for import

competing sectors and exports

• Lower cost of energy
• To date, limited spill-over from uncertainty in Greece and

Ukraine

Lower interest rates are a boost to ECA countries with close ties to the Eurozone

• 0.4
• 0.2

0.2 0.4 0.6 0.8 1 1.2 1yr 2yr 5yr 10yr

Yield in %

Eurozone Yield Curve

September, 2014 April, 2015

Source: European Central Bank 6

Depreciations against the dollar, help exports and lower demand for imports

Source: Bloomberg 7

0% 5% 10% 15% 20% 25% 30%

Depreciation of national currencies vis-a-vis the USD (April 2014-April 2015)

Along with lower oil prices, there are tentative signs that Eurozone confidence is picking up

80.0 85.0 90.0 95.0 100.0 105.0 110.0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15

EU Economic Sentiment Indicator (long-term average =100)

Note: Index based on monthly harmonized surveys of the industry, the services, retail trade and construction sectors, as well as to consumers within the EU member states.

Source: European Commission 8

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With modest growth in industrial production

95 96 97 98 99 100 101

European Union (28 countries)

Source: Eurostat

10

Limited spill-over in country risks from the uncertainty in Greece and Ukraine

20 40 60 80 100 120 140 160 180 5 10 15 20 25 30

14-Apr-14 21-Apr-14 28-Apr-14 5-May-14 12-May-14 19-May-14 26-May-14 2-Jun-14 9-Jun-14 16-Jun-14 23-Jun-14 30-Jun-14 7-Jul-14 14-Jul-14 21-Jul-14 28-Jul-14 4-Aug-14 11-Aug-14 18-Aug-14 25-Aug-14 1-Sep-14 8-Sep-14 15-Sep-14 22-Sep-14 29-Sep-14 6-Oct-14 13-Oct-14 20-Oct-14 27-Oct-14 3-Nov-14 10-Nov-14 17-Nov-14 24-Nov-14 1-Dec-14 8-Dec-14 15-Dec-14 22-Dec-14 29-Dec-14 5-Jan-15 12-Jan-15 19-Jan-15 26-Jan-15 2-Feb-15 9-Feb-15 16-Feb-15 23-Feb-15 2-Mar-15 9-Mar-15 16-Mar-15 23-Mar-15 30-Mar-15 6-Apr-15 13-Apr-15

Country Risk (Credit Default Swaps,10Yr Sovereign Spreads, %) Greece Russia Portugal Spain Turkey Ukraine (right axis)

Source: Bloomberg

….but concerns remain

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• Labor markets have a long way to recover, especially youth

employment

• ECA average youth unemployment greater than 25% compared to

about 13% for the rest of developing world

• Uncertainties linger on fundamental structural policies while

the debt overhang still stifles growth

• Non performing loans in ECA nearly 10% (W. Balkans 16.4%), other

regions average between 2% to 6%.

• Gross capital flows remain weak

Private capital flows remain weak, particularly for regions hit by oil shock

2000 4000 6000 8000 10000 12000 14000 2010 2011 2012 2013 2014 2015*

Average Monthly Gross Capital Flows by Subregion

South Caucasus Central Asia EU-Central and South East Europe Ukraine Russia Turkey

* Average monthly flows for January and February 2015. Source: World Bank 12

The direct and indirect impact of the oil shock and uncertainty in the eastern part of the region are hitting the poor hard

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Countries highly dependent on oil exports, or on trade and remittances from oil exporting countries, are seeing a sharp decline in income

• Starting in the early 2000s, oil revenues, remittances, and

capital inflows had boosted domestic demand and raised costs of production

• The reversal of these trends has come fast and hit income

hard, and this is particularly concerning for the poor

The oil price shock has had a much stronger adverse impact

• n buying power than what is reflected by GDP alone, through

remittances and changes in export and import prices

1.5 1.3

• 3.8
• 12.27
• 12.73
• 7.2
• 14
• 12
• 10
• 8
• 6
• 4
• 2

2 4 Azerbaijan Kazakhstan Russia

Impact on Income from GDP Growth and the Terms of Trade (ToT) Shock (2015)

ToT GDP

• 4.1
• 0.4
• 0.1
• 1.3

0.0

• 5.1
• 4.7
• 0.8
• 4.1

0.8 1.5

• 3.5

2.0 1.3 1.7

• 2.0
• 6.5

7.6

• 10.0
• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0

Impact on Income From GDP Growth and Decline in Wage Remittances (2015)

GDP Change in remittances, % of GDP

Source: World Bank 14

The region experienced large real currency appreciations prior to the global crisis

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Which have largely been reversed in the last year with falling oil prices and lower remittances

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Remittances represent a large share of GDP in many Eastern European countries and Central Asia and expected declines are large

14% 15% 21% 12% 11% 15% 17%

• 2%

4% 1%

• 1%

0%

• 8%
• 16%
• 18%
• 12%
• 18%
• 23%
• 9%
• 23%
• 30%

21.0 0.2 0.1 31.6 24.9 48.9 11.9

• 40
• 30
• 20
• 10

10 20 30 40 50 60

• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 50% 60% Armenia Belarus Kazakhstan Kyrgyz Republic Moldova Tajikistan Uzbekistan 2013 % change 2014 % change 2015 % change Remittances, % GDP in 2013

Source: World Bank 17

Lower skilled workers from poorer households are more likely to be displaced

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20,000 40,000 60,000 80,000 100,000 120,000 1 2 3 4 5 6 7 8 9 10 Number of displaced workers Deciles (consumption per capita)

Russia: Displaced workers by welfare deciles

Source: Russia Household Budget Survey and micro-simulations

Poorer Wealthier

In remittance dependent countries, the impact drives some of the middle class and near poor into poverty

Source: Kyrgyz Integrated Household Survey and micro-simulations

Kyrgyz Republic: Incidence curve as a result of 50% reduction in remittances

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Poorer Wealthier

Oil shock is not cyclical and domestic prices will need to fall relative to foreign prices

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• Oil prices are expected to stay low in the medium-term. The

shock is not a temporary blip due to reduced demand

• Many oil exporters have allowed the nominal exchange rate

to make the needed adjustment in real domestic prices and this will allow them to benefit from the new opportunities in tradable sectors.

Many oil exporters have allowed exchange rates to make the adjustment in the real domestic relative prices as oil prices have fallen

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50 100 150 200 250 300 350 400 50 100 150 200 250

Real Oil Price (2003=100) Real Exchange Rate vis-à-vis Dollar (2003=100)

Oil and Relative Prices

Russia Kazakhstan Azerbaijan Average Oil Price (right axis)

Oil Prices

Source: World Bank

Countries that are performing the rebalancing act to lower oil prices and changing exchange rates are expected to benefit from new opportunities

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• To seize the new opportunities in tradable sectors,

allowing prices to adjust will help competitive sectors to grow and others to contract

• Ongoing reforms to improve the business climate as

well as prudent financial sector and macro management in dollarized economies.

• Adjustments to lower oil prices are painful, but

postponement can be very costly and may backfire

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Oil shock triggers sectoral adjustments toward some sectors and away from others

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5

Russia: Employment change as % of total employment

Source: Global Trade Analysis Project and Russia Statistics Office data, and CGE simulation results

24 Source: Central banks of Armenia, Azerbaijan, Georgia, and Kazakhstan.

Dollarization is high in some countries so authorities would want to monitor risks in the banking sector

10 20 30 40 50 60 70 80 Azerbaijan Armenia Kazakhstan Georgia 2014 Jan-15 Feb-15

Foreign currency deposits as a share of total deposits

Summary…

• Stable to moderately improving growth in western part of

region, but concerns remain

• Direct and indirect impact of the oil shock and uncertainty in

the eastern part of the region are hitting incomes hard and raising concerns for poverty

• Countries that are performing the rebalancing act to lower oil

prices and changing exchange rates are expected to seize new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key.

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Thank you!