Economic Trends and Challenges

Transcription

1 Economic Trends and Challenges in Central and Eastern Europe Christoph Rosenberg International Monetary Fund Warsaw Regional Office April 2007 Note: These are the author s s own views, not necessarily those of the IMF. Some of the data presented needs to be confirmed with country authorities

2 o The overall macro picture: better than ever o But undelying this are vulnerabilities in the run-up to Euro adoption Lack of fiscal adjustment Credit growth Currency mismatches External imbalances o Baltics vs. Slovakia (and other CEEs) Policy Conclusions

3 The overall macro The overall macro picture: better than ever

4 Growth performance is good, albeit mainly cyclical Annual GDP growth (percent) p 08p p 08p p 08p p 08p CE4 Baltics Romania &Bulgaria World Source: WEO April 2007.

5 Inflation is relatively subdued dued 8.0 Chart. Annual average CPI (percent) Baltics Romania & Bulgaria World 3.0 CE p 2008p Source: WEO April 2007.

6 especia especially ly considering that rising price levels are naturally associated with convergence. 90 CECs. Relative price level vs. relative GDP per capita (PPP), , EU25= SI TU CR EE CZ PL SK HU LT RO BG Relative price level Relative per capita GDP at PPPs Source: Eurostat

7 Even headline fiscal deficits are not looking so bad (except Hungary) 4 CECs. General Government deficit (ESA 95, percent of GDP) EDP/ Maastricht limit BU EE LV LT RO CZ SK* PL* HU* * incl. pension reform costs Source:EC General Government Data Autumn 2006

8 CEC financial markets outperform other EMs A. Stock Market Indices (May 10, 2006=100) B. Indices of Exchange Rate Against US$ (May 10, 2006 =100; (+) = appreciation) CEECs East Asia Latin America Other EMs DAX-30 Index FTSE-All Share Index May 10, 2006 May 10, 2006 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 C. External Bond Spreads D. 5-year CDS Spreads May 10, 2006 May 10, 2006 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Source: Pipat Luengnaruemitchai, Susan Schadler, Do Economists and Financial Markets Perspectives on the New Members of the EU differ?, IMF Working Paper 07/65.

9 ...despite receding euro adoption...despite receding euro adoption prospects. REUTERS Polls on Euro Adoption Date Median Value of the Responses Slovenia Lithuania Latvia Estonia Slovak_Republic Czech_Republic Aug05 Nov05 Feb06 May06 Aug06 Poland Hungary Aug05 Nov05 Feb06 May06 Aug06Aug05 Nov05 Feb06 May06 Aug06 Source: Reuters

10 Nevertheless we worry Nevertheless we worry in some countries about increasing vulnerabilities in the run-up up to euro adoption.

11 Macro Vulnerabilities Macro Vulnerabilities External imbalances are growing, especially in the Baltics Key Macro Indicators 2006 (in percent of GDP) Romania & CE4 Baltics Bulgaria EM countries* General government deficit C/A balance External debt Public debt Reserves/ST debt Credit growth (in percent) * EM countries - Argentina,Brazil, Chile, China, Colombia, Indonesia, Peru, Russia, Singapore, Thailand, data for Source: IMF GFS, IMF IFS, IMF Article IV Consultations

12 Macro Vulnerabilities Macro Vulnerabilities... but this should not surprise in an environment of rapid growth and still-evolving institutions. Policy dilemma: how to reduce vulnerabilities without impeding the convergence process?

13 Main Concerns Main Concerns Lack of fiscal adjustment Credit growth Currency mismatches External imbalances

14 Lack of fiscal adjustment Lack of fiscal adjustment

15 Despite healthy growth, public debt Despite healthy growth, public debt ratios are still high in some CECs. 80 CECs. Public debt (percent of GDP) Maximum prudent debt level HU PL SK CZ BU LT RO LV EE EU Source: EC Autumn Forecast 2006

16 Few countries have used the benign global environment and buoyant revenue to undertake fiscal adjustment. 4 CECs. Cyclically-adjusted budget balance (percent of GDP) Max prudent fiscal deficit EE LV LT SK PL CZ HU EU Source: EC Autumn Forecast 2006

17 Fiscal policy is even more procyclical if one accounts for EU funds 2.5 Fiscal stimulus (percent of GDP, 2006) headline headline excluding transfers to and from the EU -1 HU CZ SK LT LV EE PL Source: Christoph B. Rosenberg and Robert Sierhej, Interpreting EU Funds Data for Macro Analysis in the New Member States, IMF Working Paper (forthcoming)

18 Primary spending in Central Europe is high, suggesting that fiscal adjustments should start on the expenditure side BU RO pt si HU CZ gr mt PL SK cy LV LT EE it es fr de fi se de at be nl 5,000 15,000 25,000 35,000 45,000 GDP per capita at PPS 2005 uk ie no Primary spending (percent of GDP) Source: AMECO. Primary expenditure, average (percent of GDP)

19 Rapid growth of credit Rapid growth of credit to the private sector

20 Credit growth has been brisk. Average growth of credit to the private sector (in percentage points of GDP) 12 CECs: Non-core EMU: * Scandinavia: Asia: Latvia (LV) Estonia (EE) Lithuania (LT) Bulgaria (BU) Hungary (HU) Romania(RO) Poland (PL) Slovakia (SK) Czech Republic Ireland (IE) Portugal (PT) Greece (GR) Spain (ES) Finland Sweden Thailand Indonesia Korea *Greece Source: IFS, national authorities, IMF staff calculations

21 Private credit still has some room to grow, at least in Central Europe 120 EU countries: Bank credit to the private sector: Actual and estimated equilibrium levels (percent of GDP) CECs countries (2006) Non-core EMU (1998) CZ HU PL SK EE LV LT IE GR* PT ES Actual Estimated *Greece (Q1.1999) Source: National authorities, calculations based on Schadler et al. (2005)

22 Build-up up of currency mismatches in the non-financial sector

23 Most CECs are exposed to currency risk emanating in the non-financial private sector CECs.. Economy-wide currency mismatches Net FX position, 2006 (in percent of GDP) HU LV PL* EE LT CZ Change in net FX position, (in percent of GDP) HU LV PL* EE LT CZ Sectoral net FX position, Public Financial NFPS LV HU PL* EE LT CZ * Data for Source: National authorities.

24 Banks balanced position masks important shifts in the size and funding of their fx lending CECs. Change of foreign currency credits and deposits during (in percentage points of GDP) foreign currency-denominated credits foreign currency-denominated deposits LV EE LT HU PL SK CZ Source: National authorities, IMF staff estimates

25 Large external Large external stock and flow imbalances

26 Current account deficits are high, especially in the Baltics and Bulgaria 0 CECs. Current account deficit, 2006 (in percent of GDP) p 08p -25 LV BU EE LT RO SK HU CZ PL Source: Eurostat, National Authorities

27 As expected, net IIPs are negative, but unlike in other EMs they have lately deteriorated CECs and EMs: International Investment Position Net IIP (2006, in percent of GDP) HU EE LV BU LT PL BU SK CZ RO Latin Turkey* America* Change in net IIP (in percentage points of GDP) EE LV HU CZ BU LT SK PL RO Latin Turkey* Am.* Source: National authorities, Milesi-Ferretti and Lane, External Wealth of Nations database. * Data for 2005.

28 Why are the Baltics overheating and Slovakia (and other CECs) are not?

29 Why are the Baltics overheating and Why are the Baltics overheating and Slovakia (and other CECs) ) not? Macroeconomic indicators (annual growth, in pecent) Slovakia Baltics e 2007p e 2007p Real GDP Domestic Demand CA balance (% of GDP) CPI (average) Credit to private sector Real wage Population (millions, 2005) GDP Per capita (PPP, % of EU15) * Baltics is a simple average of EE, LV and LT figures. Source: Eurostat, national authorities WEO April 2007.

30 Why are the Baltics overheating and Why are the Baltics overheating and Slovakia (and other CECs) ) not? Differences in macro fundamental: o Monetary framework: fixed vs. flexible exchange rates o Fiscal policy and EU funds utilization o Labor markets and migration o Allocation of investment: Export-oriented and productive sectors vs. real estate and domestic services

31 Conclusions The general maro outlook is positive, and is largely well deserved due to good policies in the run-up to EU membership But vulnerabilities are growing, especially in the Baltics ( Running with your shoelaces open ). Governments are making insufficient use of the supportive environment. Policy challenges: Anti-cyclical fiscal policies Financial sector supervision Creating flexible economies and sound institutions Euro adoption

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