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CLOUDY OUTLOOK FOR GROWTH IN EMERGING EUROPE AND CENTRAL ASIA Presentation by Laura Tuck, Vice President, ECA Hans Timmer, Chief Economist, ECA October 8, 2014 Annual Meetings Three key trends for Emerging Europe and Central Asia

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CLOUDY OUTLOOK FOR GROWTH IN EMERGING EUROPE AND CENTRAL ASIA

October 8, 2014 Annual Meetings

Presentation by Laura Tuck, Vice President, ECA Hans Timmer, Chief Economist, ECA

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Three key trends for Emerging Europe and Central Asia

  • Recovery in new EU member states remains tepid, but

some signs of improvement.

  • Deep crisis in Ukraine due to the tensions, however, with the

exception of a few industries, has not materialized into stiff headwinds for ECA as a whole.

  • Russia and some neighboring countries are slowing as past

drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia’s medium-term prospects.

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Economic Growth in ECA remains weak among developing regions in 2014 and 2015

4.1 4.9

  • 0.7

8.3 4.6 7.2 3.0 2.4 1.5 7.4 3.5 4.2 2.4 2.2 2.6 7.2 4.7 4.8 1.2 1.8 3.0 6.9 4.6 5.4 2.0 2.1 4.2 6.9 5.2 6.0

  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Latin America & Caribbean Europe & Central Asia Middle East & N. Africa East Asia & Pacific Sub-Saharan Africa South Asia

GDP Growth (%), weighted average by region

2011 2012 2013 2014e 2015p

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ECA growth prospects have been adjusted down since the Spring, particularly for Ukraine

2014 Real GDP Growth Projections

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  • 9
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1 6 11 16 Croatia Slovenia Estonia Bulgaria Czech Republic Slovak Republic Latvia Romania Lithuania Poland Hungary Bosnia and Herzegovina Serbia Albania Montenegro Kosovo FYR Macedonia Ukraine Russia Belarus Moldova Kyrgyz Republic Armenia Kazakhstan Azerbaijan Georgia Tajikistan Uzbekistan Turkmenistan Turkey EU 11 Western Balkans CIS, Georgia, Turkey, Ukraine 2014 (April 2014 Projection) 2014 (September 2014 Projection)

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Drilling-down into the three trends for Emerging Europe and Central Asia

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  • Recovery in new EU member states remains tepid, but

some signs of improvement.

  • Deep crisis in Ukraine due to the tensions, however, with the

exception of a few industries, has not materialized into stiff headwinds for ECA as a whole.

  • Russia and some neighboring countries are slowing as past

drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia’s medium-term prospects.

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Tepid growth in the new EU Member States, Crisis in Ukraine, and Stagnation in Russia

Note: The industrial sector includes manufacturing, mining, and utilities. Underlying data is in constant US$, seasonally adjusted.

70 75 80 85 90 95 100 105 110

Industrial Production Index (January 2013=100)

EU11 Russia Ukraine

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Recovery in new EU member states remains tepid, but some signs of improvement

6

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7 Source: Consensus Forecasts

The external environment is weak, and expectations have deteriorated

1 2 3 4 5 6 7 8

China Brazil USA Euro Zone

(Consensus Real GDP Forecast, Percent, April vs. September 2014)

April Forecast September Forecast

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Source: National authorities, IMF, DEC GEP and ECSPE country teams' estimates/projections.

Unwinding of fiscal imbalances has been slow, but progress has been made in Central and Eastern Europe

  • 7.0
  • 6.0
  • 5.0
  • 4.0
  • 3.0
  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 2010 2011 2012 2013 2014e

(Percent Share of GDP)

CIS(less Russia&Ukraine) Ukraine Russia Turkey Western Balkans EU11

New EU members

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Labor had become more expensive across all European countries before the 2008 crisis

BEL BLG CZE DNK DEU EST IRL GRC ESP FRA ITA CYP LAT LTU LUX HUN MLT NLD AUT POL POR ROM SVN SVK FIN SWE GBR NOR DEU

100 200 300 400 100 120 140 160 180 200 Hourly Real Labour Productivity Growth, 2000-2008; 2000=100.0

Area of rising labor costs to productivity relative to Germany

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10 BEL BLG CZE DNK DEU EST IRL GRC ESP FRA ITA CYP LAT LTU LUX HUN MLT NLD AUT POL POR ROM SVN SVK FIN SWE GBR NOR DEU

80 100 120 140 160 90 100 110 120 Hourly Real Labour Productivity Growth, 2008-2013; 2008=100.0

Post-2008 crisis labor costs have adjusted downward

Area of falling labor costs to productivity relative to Germany

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Consequently, unemployment is declining across most of new EU member countries

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5 10 15 20 25 HUN ROU CZE POL EST SVK LVA SVN BGR LTU HRV TUR MKD ALB MNE BIH SRB GEO KAZ RUS AZE MDA ARM UKR MLT ITA PRT CYP ESP GRC DEU NOR AUT BEL GBR LUX SWE FIN ISL FRA DNK NLD IRL EU11 TurkeyWestern Balkans CIS Southern Europe Northern Europe

Unemployment (Change 2010-2014) Unemployment (Change 2008-2010)

Since 2010, many new EU member countries have seen declines in unemployment

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Declining unemployment rates in new EU member countries may bring income growth back in the bottom 40 percent...

Note: Shared prosperity figures from 2011 onwards are forecasted using an OLS regression of income growth of the bottom 40 on changes in unemployment, controlling for GDP growth and country level trends.

  • 10%
  • 5%

0% 5% 10% 15% 20%

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  • 1

1 2 3 4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Income Growth Bottom 40 Unemployment Rate, Annual Change Unemployment Rate (pct points, change; left axis) Income Growth of the Bottom 40 (right axis)

Unemployment rate Income growth of the bottom 40 percent

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Deep crisis in Ukraine due to the tensions, but with the exception of a few industries has not materialized into stiff headwinds for ECA as a whole

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Crisis takes toll on Ukraine’s economy

Source: JP Morgan

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e*

Ukraine FDI Inflows, Cross border CAPEX investments in $ millions

Note: Annualized, based on data through August 2014. World Bank staff estimates

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Nominal devaluations in the CIS have reflected high uncertainty

Source: JP Morgan

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5 15 25 35 45 55 65 Serbia Albania Kosovo Montenegro Bosnia and Herzegovina Macedonia, FYR Czech Republic Hungary Croatia Bulgaria Lithuania Estonia Latvia Slovak Republic Slovenia Romania Poland Ukraine Kazakhstan Belarus Moldova Turkey Russian Federation Uzbekistan Kyrgyz Republic Georgia Tajikistan Armenia Turkmenistan Azerbaijan Western Balkans EU11 CIS + Turkey

Exchange Rate (US$-LCU Sep 2014/ Sep 2013)

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Russia’s relative food price inflation was accelerating before it imposed sanctions on European food imports. The impact

  • n Europe has also been modest.

Difference between Food and headline CPI Inflation,

Percent, y-o-y

Source: Eurostat, Bloomberg

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  • 3
  • 2
  • 1

1 2 3 4 2012M01 2012M02 2012M03 2012M04 2012M05 2012M06 2012M07 2012M08 2012M09 2012M10 2012M11 2012M12 2013M01 2013M02 2013M03 2013M04 2013M05 2013M06 2013M07 2013M08 2013M09 2013M10 2013M11 2013M12 2014M01 2014M02 2014M03 2014M04 2014M05 2014M06 2014M07 2014M08

Western Europe EU11 Ukraine Russia Russia’s relative food inflation began before recent sanctions and tensions Europe’s relative food price deflation also started before sanctions and the recent tensions

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Increased financial uncertainty in Ukraine and Russia, but Russia is still close to EMBI Global spreads

Source: JP Morgan

100 200 300 400 500 600 700 800 900

  • 250
  • 150
  • 50

50 150 250 350 450 550 650 16-Sep-13 16-Oct-13 16-Nov-13 16-Dec-13 16-Jan-14 16-Feb-14 16-Mar-14 16-Apr-14 16-May-14 16-Jun-14 16-Jul-14 16-Aug-14 16-Sep-14

Country EMBI spread relative to EMBI Global Strip Spread (bps)

Russia Ukraine (right axis)

Unrest in Crimea region Downing of Malaysian Airlines flight

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Russia and some neighboring countries are slowing as past drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow

  • n Russia’s medium-term prospects.
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Russia’s investment and GDP growth were declining before the recent turmoil

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5 10 15 20 25 2007 2008 2009 2010 2011 2012 2013 2014e

Gross fixed capital formation (annual % growth) GDP growth (annual %)

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20 Source: Bloomberg

70 80 90 100 110 120 130 1/1/2009 3/1/2009 5/1/2009 7/1/2009 9/1/2009 11/1/2009 1/1/2010 3/1/2010 5/1/2010 7/1/2010 9/1/2010 11/1/2010 1/1/2011 3/1/2011 5/1/2011 7/1/2011 9/1/2011 11/1/2011 1/1/2012 3/1/2012 5/1/2012 7/1/2012 9/1/2012 11/1/2012 1/1/2013 3/1/2013 5/1/2013 7/1/2013 9/1/2013 11/1/2013 1/1/2014 3/1/2014 5/1/2014 7/1/2014 9/1/2014

Note: Russian domestic crude oil Volgo-Uraltic average price, benchmarked to east Siberian export price, US dollars/barrel.

US$/ barrel

While stable to recently declining oil prices have not been a big boost to the Russian economy or CIS energy exporters over the last year

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10 20 30 40 50 60 70 BLR ARM UZB MDA GEO KGZ KAZ LTU SER TUR LVA POL EST SVN SVK TJK ROM HUN BGR AZE TKM

% of total exports, 2013

Exports to Ukraine Exports to Russia

Source: UN Comtrade

Russia’s stagnation and Ukraine’s crisis matters for neighboring countries, less so for the rest of ECA

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Bottom-Line…

  • ECA forecast remains tepid as drivers of growth drivers

have slowed.

  • The Ukraine tensions have developed into a deep crisis for

Ukraine but spill-overs to other countries have been limited so far.

  • Growth in Russia and some neighboring countries is limited

by structural impediments. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia’s medium-term prospects.

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Thank you!