Regional Economic Outlook Caucasus and Central Asia October, 2015 - - PowerPoint PPT Presentation

Regional Economic Outlook

Caucasus and Central Asia

October, 2015

Outline

Global Environment CCA Outlook

2

Policy Priorities

3

Global Growth: Moderate and Uneven

World U.S. Euro Area Emerging markets China Russia 2014 3.4 2.4 0.9 4.6 7.3 0.6 2015 3.1 2.6 1.5 4.0 6.8

• 3.8

2016 3.6 2.8 1.6 4.5 6.3

• 0.6

4

Global Shock 1: Lower Prices of Oil…

20 40 60 80 100 120 140 160 2014 2015 2016 2017 2018 2019 95% confidence interval 86% confidence interval 68% confidence interval Brent spot price Brent futures

Brent Crude Oil Price 1 (U.S. dollars per barrel)

Sources: Bloomberg; and IMF staff calculations.

1 As of August 20, 2015. 2 Average of WTI, Brent, and the Dubai Fateh prices.

WEO Baseline Average Oil Price2 2015: $51.6 2016: $50.4

5

…And Other Key Commodities

Global Commodity Prices (Index Values, 2005=100)

Source: IMF Primary Commodity Prices database. 1/ Simple average of Brent, Dubai Fateh, and West Texas Intermediate prices.

50 100 150 200 250 300 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Food Metals Crude oil 1/ Natural gas (Asia)

6

Global Shock 2: Slowdown in Russia

• 4
• 3
• 2
• 1

1 2 3 4 5 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Current projections Average growth 1996-2013

Real growth in Russia (Percent)

Source: July WEO update

7

Russian Ruble, U.S. Dollar, and Oil Prices (Indices, Jan. 1, 2014 = 100)

Global Shock 3: Exchange Rate Movements

Sources: National authorities; Bloomberg; and IMF staff calculations. 1/ Simple average of Brent, Dubai Fateh, and West Texas Intermediate prices.

40 60 80 100 120 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oil Price 1/ Russia, USD/NC Index US NEER Index

8

Also: Conditions In China Have Been Changing…

7 7,2 7,4 7,6 7,8 8 8,2 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 1500 2000 2500 3000 3500 4000 4500 5000 5500 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

China: Quarterly Real GDP Growth (Seasonally Adjusted YoY Percent Change) Shanghai Stock Exchange Index (Index Values)

9

…Which Is Particularly Important for CCA Given Its Growing Linkages With That Country

Exports to China (Percent of Exports) Imports from China (Percent of Imports) Net FDI stock from China (Percent of GDP) FDI inflows from China (Percent of FDI Inflows) Debt from China (Percent of PPG Debt) ARM 11 9 0.035055357 GEO 3 9 0.306305509 3.96307884 KGZ 4 55 9.35030664 23.2789137 32 TJK 7 47 6.270927192 37.09879997 42 AZE 5 0.23160122 na KAZ 16 28 2.388730784 8.3744781 TKM 70 11 na na 30 UZB 26 19 0.285588707 36.41365023

Linkages with China

Between 0-0.5% 11 Between 10% and 40% 1 Between 0.5% and 5% 50 Above 40% 6 Between 5% and 10%

Caucasus And Central Asia

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Oil & gas exporters Oil & gas importers

Amid A Tough External Environment, Economic Growth Slowed in 2015

11

CCA Growth Rates (In Percent Change)

Sources: National authorities; Bloomberg; and IMF staff estimates.

30 40 50 60 70 80 90 100 110

• 6
• 4
• 2

2 4 6 8 10 2013 2014 2015 2016 Oil Importers Oil Exporters Russia Oil Price (USD, RHS)

CCA Growth Rates by Country (In Percent Change)

ARM AZE GEO KAZ KGZ TJK TKM UZB 2 4 6 8 10 2015 Oil Importers Oil Exporters

00-08 09-13 14-16 17-20

Oil Exporters

2 4 6 8 10 12 00-08 09-13 14-16 17-20

Non-Oil Growth Oil Importers

Gradual Recovery Over the Medium Term; Growth Prospects Well Below Past Averages Average).

12

CCA Growth Rates (In Percent Change)

Sources: National authorities; IMF staff estimates.

Risks Tilted To The Downside

Further weakening of prices for oil and other commodities Weaker growth in trading partners (Russia, China, Europe) Risks related to the normalization of U.S. monetary policy

13

200 400 600 2005 2010 2015 2020

Exports Are Expected To Recover Only Gradually

CCA Oil Importers: Exports (Index Values, 2005=100) CCA Oil Exporters: Exports (Index Values, 2005=100)

Long-Term Trend Sources: National authorities; and IMF staff estimates. 200 400 600 2005 2010 2015 2020

External Positions Are Set To Remain Weak

Remittances (Seasonally Adjusted Levels, Jan 2010 = 100)

50 100 150 200 250 300 янв.10 янв.11 янв.12 янв.13 янв.14 янв.15 Rubles National Currency US Dollars Sources: National authorities; and IMF staff estimates. 1/ Excludes employee compensation.

Current Account Decomposition (Percent of GDP)

• 30
• 20
• 10

10 20 2013 2014 2015 2016 2013 2014 2015 2016 Oil importers Oil exporters Trade balance Net remittances 1/ Other Current account

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Currencies Are Adjusting To New Realities…

Sources: National authorities; and IMF staff calculations. 50 60 70 80 90 100 110 Jan-10 Jan-12 Jan-14 ARM GEO KGZ TJK 50 60 70 80 90 100 110 Jan-10 Jan-12 Jan-14 AZE KAZ TKM UZB

Oil Exporters (U.S. dollars per National Currency, Jan. 1, 2010=100) Oil Importers (U.S. dollars per National Currency, Jan. 1, 2010=100)

2 4 6 8 10 12 ARM GEO KGZ TJK 2014 Inflation Forecast 2015 Inflation Forecast 2016 Inflation Forecast

17

Inflation (In Percent Change)

Sources: National authorities; and IMF staff calculations.

…And Inflation Is Edging Up

2 4 6 8 10 12 AZE KAZ UZB TKM

Oil Importers Oil Exporters

Dollarization Has Risen…

18 Source: National authorities; IFS; and IMF staff calculations.

10 20 30 40 50 60 70 80 ARM GEO KGZ TJK AZE KAZ Jun-14 Latest 10 20 30 40 50 60 70 80 ARM GEO KGZ TJK AZE KAZ Jun-14 Latest Deposit Dollarization (In Percent of Total Deposits) Loan Dollarization (In Percent of Total Loans)

… And Financial Sector Vulnerabilities Are Up.

19 Source: National authorities; IMF staff calculations. 5 10 15 20 25 30 35 ARM GEO KGZ TJK AZE KAZ Jun-14 Latest

• 2
• 1

1 2 3 ARM GEO KGZ TJK AZE KAZ 5 10 15 20 25 30 ARM GEO KGZ TJK AZE KAZ Non-Performing Loans (In Percent of Total Loans) Return on Assets (In Percent) Capital Adequacy Ratio (In Percent of Risk-Weighted Assets)

• 3
• 2
• 1

1 2 3

• 15
• 10
• 5

5 10 15 2014 2015 2016 2017 2018 Public Debt Fiscal Balance (RHS)

Oil Exporters

Fiscal Positions Have Weakened: Lower Revenues And Countercyclical Measures

20 Sources: National authorities; and IMF staff calculations.

• 3
• 2
• 1

1 2 3

• 45
• 30
• 15

15 30 45

2014 2015 2016 2017 2018

Oil Importers

Selected Fiscal Indicators (In Percent of GDP)

Policy Priority 1: Fiscal Policy Needs To Ensure Medium-Term Sustainability

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Near-term Growth Debt Sustainability, Saving for the Future

• Where conditions allow, temporary fiscal easing over the near term will provide

support to growth.

• As cyclical conditions improve, countries need to tighten their fiscal stance to

ensure medium-term fiscal sustainability.

• Improving the quality of public expenditure, and preserving capital and social

expenditure, will help to safeguard growth and make it more inclusive.

Fiscal Policy

22

Fiscal Breakeven Oil Prices (In U.S. Dollars per Barrel)

• 8
• 6
• 4
• 2

2 AZE KAZ TKM Medium-Term Gap Between Projected Fiscal Balance and Optimal Policies Consistent with PIH 1/ (In Percentage Points of Non-Oil GDP)

Sources: IMF staff calculations 1/ Difference between actual Non-Oil Primary Balance (NOPB) and NOPB recommended by the Permanent Income Hypothesis. The high growth scenario assumes an annual increase in non-oil growth by one percentage point.

WEO Oil Price 2015

20 40 60 80 100 AZE KAZ TKM

2014 2015 2016

Oil Exporters: Fiscal Policy Needs To Adjust

23

Inflation Financial Intermediation and Near-term Growth

Policy Priority 2: Monetary Prudence And Greater Exchange Rate Flexibility

• Monetary policy should be

primarily calibrated to inflationary pressures, with due consideration to its impact on financial intermediation and output.

• Greater exchange rate flexibility

will help absorb shocks, maintain competitiveness and prevent a rundown of external buffers.

• Stronger macro-prudential

regulations, supervision and crisis management framework necessary to ensure financial sector remains healthy.

Competitiveness, External Buffers and Balance Monetary Policy Exchange Rate Policy Financial Stability

24

Policy Priority 3: Structural Reforms To Boost Long-Term Growth

0% 20% 40% 60% 80% 100% Education Quality Financial Services Control of Corruption Export Diversity Export Integration Doing Business Emerging Market Averages Structural Reform Indicators (In Global Percent Rank)

Sources: Education Quality: Global Competitiveness Report; Financial Services: Global Competitiveness Report and Doing Business; Control of Corruption: Worldwide Governance Indicators; Export Diversity: IMF/DFID Export Diversity Index; Export Integration: World Economic Outlook; and Doing Business: Doing Business Report.

Key Takeaways

• A foray of external shocks is weighing on growth, budgets and

currencies.

• These shocks are likely to be long lasting, requiring policy

adjustment.

• While temporary fiscal easing can support growth, fiscal

consolidation will be needed over the medium term to rebuild buffers and ensure debt sustainability.

• Exchange rate flexibility will preserve external buffers, but it

needs to be accompanied by strengthened financial supervision to safeguard financial stability.

• Structural reforms are needed to boost weakening medium-term

growth prospects.

25

Ties With Russia Go Beyond Exports; Include Remittances, FDI And Confidence

27 <3% of GDP 3-10% of GDP >10% of GDP

Exports Imports Remittances FDI ARM GEO KGZ TJK AZE KAZ TKM UZB

Linkages with Russia