Regional Economic Outlook
Regional Economic Outlook
Caucasus and Central Asia
May 21, 2010
Outline
Global Outlook
CCA Outlook
Multi-speed recovery
Recovery
so far
Recovery ahead
• Proceeding at varying speeds
• Steep falls in activity not
followed by quick rebounds
• Subdued growth prospects for
many advanced economies
• Solid growth prospects for many
emerging economies
Global financial markets have recovered faster than expected
Global Stocks
(Morgan Stanley MSCI Stock Price Indices in U.S.
Dollars, MER Weighted; 2007 = 100)
Sovereign and Corporate Bond Spreads
(Basis points)
1 Averages
of BB-B US, BB-B Euro, and BBB Japan corporate bond spreads.
Capital flows have returned to emerging markets after sudden stop
Emerging Market External Bond and Equity Issuance
(Billions of U.S. dollars)
Bank credit remains hard to come by in many countries
Private Credit Growth
(Annualized percent change of 3mma over previous 3mma)
Banks need to rebuild capital
Source: Bank of England, European Central Bank, and the Federal Reserve Board.
World economy set for a further recovery at varying speeds
Real GDP Growth
(Percentage growth from previous year)
 Fading fiscal
stimulus
 Less inventory
restocking
will hold back growth
later in 2010 and 2011
Global financial crisis is leaving lasting scars on output levels
Global GDP
(Index, 2006=100)
Global Policy Challenges
 Devise credible exit strategies—medium-term fiscal consolidation plans
urgently needed
 Repair and reform financial systems
 Combat unemployment
 Manage capital flows
Caucasus and Central Asia
Oil & Gas Exporters
Oil & Gas Importers
Kazakhstan
Georgia
Uzbekistan
Armenia
Kyrgyz Republic
Turkmenistan
Tajikistan
Azerbaijan
Key Messages
An incipient recovery
I.
Substantial shocks in 2009, but economic impact
cushioned by policy response and donor support
II.
Recovery as the global economy picks up speed
III.
Events in Southern Europe little impact so far
I.
Exit from accommodative policies as growth gains
traction
II.
Medium term: private sector and diversification
I.
Fiscal constraints curtail governments’ room to
maneuver
II.
Medium term: rein in large external deficits
I.
Slow credit growth is weighing on outlook
II.
Policies should focus on repairing balance sheets
Energy exporters:
Energy importers:
Mounting stress in
banking systems
Exports are picking up
Exports of Goods in U.S. Dollars
(Annual growth, 3-month moving average; percent)
200
200
Armenia
Azerbaijan
Kazakhstan
150
Georgia
150
Kyrgyz Republic
Turkmenistan
50
50
0
0
-50
-50
-100
Dec-08
Mar-09
Jun-09
Sep-09
Tajikistan
100
Uzbekistan
100
Dec-09
Mar-10
Sources: National authorities; International Financial Statistics, IMF; and staff calculations.
-100
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Sources: National authorities; International Financial Statistics, IMF; and staff calculations.
Remittances are rebounding and capital inflows resuming
Remittance Inflows
Net Private Capital Flows
(Annual growth; percent)
(Percent of GDP)
100
15
GEO
80
KGZ
12
TJK
60
2008
2009
2010
9
40
6
20
3
0
-20
0
-40
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Sources: National authorities.
With Russia returning to growth,
remittances inflows are increasing again
-3
CCA energy exporters
CCA energy importers
Sources: National authorities; and staff calculations.
Energy exporters: net outflow in 2009.
Energy importers: large drop
Growth is recovering in 2010...
Real GDP Growth
Gross National Disposable Income Per Capita
(Annual change; percent)
(U.S. Dollars)
15
8,000
12
7,000
9
6,000
6
5,000
3
4,000
0
AZE
GEO
KGZ
TJK
UZB
ARM
KAZ
3,000
CCA energy exporters
-3
CCA energy importers
2,000
-6
Russia
1,000
World
-9
2000
2002
2004
2006
2008
Sources: National authorities; and staff calculations.
... but remains below pre-crisis levels
2010
0
2002
2004
2006
2008
2010
Sources: National authorities; and staff calculations.
The fall in per-capita income is reversing
Downside risks to the outlook
• Uncertainty regarding the speed of the global recovery
• Protracted political tensions in Central Asia could hold back
energy trade, transport, and the region’s growth potential
• Stress in the banking sector is holding back credit growth and
weighing on economic activity
Policies in the region to focus on preserving competitiveness
Real Effective Exchange Rate
Consumer Price Index
(Index; May 2008=100; upward movement indicates appreciation)
(Period average; annual growth, percent)
12
9
CCA Energy Exporters
CCA Energy Importers
U.S. inflation
Crude oil price, US$ y/y (right scale)
Food inflation (right scale)
6
120
90
130
ARM
AZE
GEO
KAZ
KGZ
TJK
TKM
UZB
120
60
110
3
30
0
0
-3
-30
90
-6
-60
80
May-08
Aug-08
Nov-08
Feb-09
Sources: Information Notice System, IMF.
100
Feb-09
May-09
Aug-09
Nov-09
Feb-10
Sources: National authorities; and World Economic Outlook, IMF; and staff calculations.
Monetary and exchange rate policy
should preserve the average decline in
inflation in 2009 ...
May-09
Aug-09
Nov-09
Feb-10
... and safeguard recent competitiveness
gains
For most oil exporters: Time to exit expansionary fiscal policies
Overall Fiscal Balance
(Percent of GDP)
24
20
2008
2009
2010
16
12
8
4
0
-4
-8
AZE
KAZ
TKM
UZB
Sources: National authorities; and staff calculations.
Fiscal balances projected to increase only in Azerbaijan;
Kazakhstan needs continued fiscal stimulus.
Oil exporters: Turn to medium-term challenges
Ease of Doing Business
Oil Production
(Worldwide rankings, 2009/10, with 1 being the best outcome)
(Millions of barrels per day)
0
1.15
20
1.10
40
Business Enviorenment
(Ranking among 183 countries)
AZE
AZE
KAZ
60
80
Better
ranking
100
1.05
1.00
UZB
0.95
120
CEE
140
0.90
160
Baltics
180
0.85
0.80
200
Ease of Doing
Business
Starting a
Business
Trading
Across Borders
Sources: World Bank.; and staff calculations
Notes: CEE denote Central and Eastern Europe economies. Regional averages weighted by GDP at
purchasing power parity.
Business environment lagging those in
comparators, holding back private sector
growth
2008
2009
2010
2011
2012
2013
2014
2015
Sources: National authorities; and staff projections.
Non-oil economy to become driver of
growth in Azerbaijan as oil production
declines
Oil importers: Some fiscal tightening or neutral stance
Overall Fiscal Balance
(Percent of GDP)
ARM
GEO
KGZ
TJK
0
0.01
-2
-4
-6
-8
2008
2009
2010
-10
Sources: National authorities; and staff calculations.
Stance appropriate if projected growth materializes
Oil importers: Have limited fiscal space
Government debt
Donor Grants
(Percent of GDP)
(Percent of GDP)
70
60
7
2008
2009
2010
6
50
5
40
4
30
3
20
2
10
1
0
2008
2009
2010
0
ARM
GEO
KGZ
TJK
Sources: National authorities; and staff calculations.
Fiscal policy constrained by growing
public debt burden
ARM
GEO
KGZ
TJK
Sources: National authorities; and staff calculations.
Additional donor support would provide
fiscal space, including for infrastructure
investments
Oil Importers: Need to reduce external deficits
External Debt
Current Account Balance
(Percent of GDP)
(Percent of GDP)
70
8
2008
4
2008
2009
2010
2009
2010
60
0
50
-4
40
-8
30
-12
20
-16
10
-20
0
-24
ARM
GEO
KGZ
Sources: National authorities; and staff calculations.
1 EM refers to emerging and developing economies.
TJK
EM¹
Current account deficits remain high...
ARM
GEO
KGZ
Sources: National authorities; and staff calculations.
1 EM refers to emerging and developing economies.
TJK
... and external debt is increasing
EM¹
The global crisis had led to mounting stress in CCA banking systems...
...which has caused a sharp slowdown in credit growth
Real Credit Growth1
(Annual growth, percent)
120
ARM
AZE
GEO
KAZ
KGZ
TJK
100
80
60
40
20
0
-20
Jun-06
Dec-06
Jun-07
Sources: National authorities; and staff calculations.
1 Real credit is exchange rate adjusted.
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Funding dried up during the crisis and has not yet returned
Credit To Private Sector and Deposits
(PPPGDP weighted; annual percentage change)
90
80
Credit¹
70
Deposits²
60
50
40
30
20
10
0
Jan-07
Jan-08
Jan-09
Jan-10
Sources: National authorities; and staff calculations.
1 Excludes Turkmenistan
2 Excludes Turkmenistan and Uzbekistan.
A sharp reduction in funding, which had been fueling
rapid and above-trend credit growth in previous years
High dollarization made banks vulnerable...
Share of Foreign Currency Loans in Total Loans
(Percent)
90
80
Azerbaijan
Armenia
Georgia
Kyrgyz Republic
Kazakhstan
Tajikistan
70
60
50
40
30
2002Q4
2003Q4
2004Q4
2005Q4
2006Q4
2007Q4
2008Q4
2009Q4
Sources: National authorities; and International Financial Statistics, IMF.
... to indirect currency risk, resulting from lending in foreign
currency to imperfectly hedged domestic borrowers
Exchange rates depreciated and balance sheets weakened
Depreciations and Balance Sheet Deteriorations
(Percentage points; except for depreciation: percent)
40
Nominal depreciation vs. U.S. dollar
Change in capital-asset ratio
Bank balance sheets
weakened as a result of :
•Exchange rate
depreciations—channeled
primarily via exposure to
indirect currency risk
•Deterioration in overall
economic activity
Change in NPL
30
20
10
0
-10
-20
AZE
•Loss of funds
ARM
GEO
KYR
KAZ
TJK
Sources: National authorities; and International Financial Statistics, IMF.
Note: depreciation is measured from pre-crisis to most recent 2009 data.
Policies should aid banks to repair
balance sheets and, in some cases,
provide liquidity and capital
Dedollarize over the medium term
• Policies should promote dedollarization to reduce vulnerabilities to sudden
exchange-rate movements, and thus currency risk
• Macroeconomic stability, greater exchange rate flexibility, and prudential
measures should encourage dedollarization
• Developing local debt markets can contribute to dedollarization by giving
domestic agents access to a wider range of domestic-currency financial
instruments
• Local debt markets would also provide a more diversified funding base for
banks
Policies to start turning to medium term issues
• Exit from accommodative policies as recovery gains traction. This may take longer
for the energy importers—additional donor support may be needed
• Energy exporters need to strengthen the business environment in the non-oil
economy and diversify away from the hydrocarbon sector
• Energy importers need to arrest build up of external debt
• Restoring credit growth requires banks to repair balance sheets. In some cases,
public support may be needed
• Dedollarization would remove a key vulnerability in future crises