How Do the Challenges Facing Emerging Europe Compare?

Transcription

1 How Do the Challenges Facing Emerging Europe Compare? 12 th CEI Summit Economic Forum Mark Allen Senior IMF Resident Representative for Central and Eastern Europe

2 First Shock: collapse in trade 6 4 World Exports, Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8

3 Second shock: sudden stop of capital inflows This sudden stop Sudden stop in % of GDP % % Portfolio FDI Other Total net capital flows 8Q1 8Q2 8Q3 8Q4 9Q Q3 97 Q4 98 Q1 98 Q2 98 Q3 Covers 28 EM countries.

4 ...especially a reversal of bank flows BIS-reporting bank flows to emerging markets

5 IMF Assistance suddenly needed Access levels and growth declines in Fund arrangements 1 ARG ARG Percent change in real GDP 1/ RUS IDN BRA PHL MEX UKR ARG TUR KOR THA IDN IDN ARG TUR COL TUR BRA BRA IRQ URY = 1 percent of quota PAK LKA POL GTM MNG BLR COL SLV CRI BIH GEO SRB HUN MEX ISL SYC ROM UKR ARM -25 LVA Sources: WEO and staff calculations. 1/ Maximum cumulative decline in three years from program inception; projected changes for current programs.

6 ...particularly in CEI region

7 Credit growth (27/6, percent) Credit booms and external deficits made countries vulnerable Vulnerabilities in Emerging Markets, pre-crisis (27) Program (actual or under discussion) Non Program CA deficit, percent of GDP

8 World economy is recovering but haltingly 15 Emerging 1 World 5 Advanced

9 CEI region to recover slowly Central and Eastern Europe CIS (plus) Developing Asia Middle East Western Hemisphere -8

10 Growth projections for CEI (1) Bulgaria Croatia Hungary Poland Romania

11 Growth projections for CEI (2) Albania BiH Macedonia,FYR Moldova Serbia Ukraine -15-2

12 Recovery depends strongly on the external environment EM Growth and Advanced Economy Demand Growth (percent) Growth projection for 29 (latest WEO) R 2 = 33% Growth in advanced economy import demand (29, percent) Source: WEO, IFS

13 but output held back by banking crisis 1 Output Losses after Banking Crises (per capital GDP; percent deviation from pre-crisis trend) banking crises. Figure reports mean difference from pre-crisis trend (over t=-1 to t=-3); t=-1 normalized to ; crisis begins at t=. Inner shading indicates 9% confidence interval for the mean; outer shading indicate inter-quartile range.

14 The sudden stop is partially unwinding Total cumulative net capital flows to EM USD bn (proxied by net reserves trade balance) M1 25M7 26M1 26M7 27M1 27M7 28M1 28M7 29M1 29M7

15 as portfolio flows rebound J a n - 5 J u l- 5 Source: TIC, EPFR Investors are flowing back Investors cumulative flows to EM (USD billion) US investors in EM (rhs) J a n - 6 J u l- 6 Foreign investors in EM dedicated mutual funds J a n - 7 J u l- 7 J a n - 8 J u l- 8 J a n - 9 J u l Emerging Market Private Sector Gross External Issuance (In billions of U.S. dollars) 2 5 -Q 1 And primary issuance is recovering strongly 2 6 -Q Q 1 Source: Dealogic, as of September 8, Q Q 1

16 but recovery in bank flows may be 1 9 E Europe (Mar 29) more sluggish Cross-border bank lending stays low after crises (Bank exposures relative to recipient GDP) Latin America (Dec 1983) 8 Asia (Sep 1997) t-2 t-15 t-1 t-5 t t+5 t+1 t+15 t+2 t+25 t+3 Quarters

17 External vulnerability of emerging Europe is falling Current Account Balance (percent of GDP) 1/ Asia Middle East -2-4 Europe Latin America / Regional averages weighted by GDP

18 25 2 but financial vulnerability is on the rise.. Non-Performing Loans 1/2/ Middle East 15 1 Europe Asia 5 Latin America / Unweighted regional outreach.

19 and rising deficits and debt are increasing fiscal vulnerabilities Overall Fiscal Balance (percent of GDP) 2/ Middle East Europe Asia Latin America

20 The cost of borrowing is likely to rise EMs EMBI spread and Debt to Revenue Ratios 8 EMBI Spread (Global) Correlation= Median General Govt Debt Revenue Ratio

21 If policies address risks, strong growth should be possible again Risks Slow recovery in industrial countries Lethargic recovery of bank inflows Poor implementation of adjustment programs Fragility in domestic financial systems Growing public debt Advantages CEI countries well placed for European investment Well educated labor force Poised to continue convergence to West European levels IMF and others willing to continue support

22 Thank you!