Spring 215 Regional Economic Issues Report on Central, Eastern and Southeastern Europe (CESEE) repair recovery MIND THE CREDIT GAP downturn expansion May, 215
Growth Divergence in 214 Quarterly GDP Growth, 214 (Percent, year-on-year) 5 4 Baltics CEE SEE 8 6 4 Russia Turkey Other CIS 3 2 2-2 1-4 -6-8 -1 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4-1 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 Note: The negative trend for Other CIS is mainly driven by Ukraine, which has a weight of close to two-thirds. 1
3-Speed Growth Outlook: CEE - solid, SEE - sluggish, CIS - recession 5 4 3 2 1 LTU POL LVA TUR SVK CZE EST HUN 215 Growth Forecast (percent) SVN MKD BIH ALB ROM BGR SRB HRV MDA BLR UKR RUS 5 4 3 2 1-1 -1-2 -2-3 -3-4 -5-6 October 214 WEO -4-5 -6 2
3-Speed Growth Outlook: CEE - solid, SEE - sluggish, CIS - recession 5 4 3 2 1 215 Growth Forecast (percent) POL MKD TUR ALB LTU SVK CZE HUN LVA EST ROM SVN BIH BGR HRV 5 4 3 2 1-1 -2 SRB MDA BLR -1-2 -3 RUS -3-4 -4-5 -6 April 215 WEO UKR -5-6 3
Growth Revision: Oil Price, Euro Area, and Geopolitical Tensions 215 GDP Revisions Apr 215 WEO vs. Oct 214 WEO (Percentage points) Lower oil prices EU growth outlook Russia's slowdown Country-specific factors 1 2-1 -1-4 -2 Baltics CEE SEE -7 Russia Turkey Belarus, Moldova Ukraine 4
Inflation Outlook: Many Sub-Zero Readings in 214 CESEE: Headline Inflation, 214 (Percent, year-over-year) < to 2 >2 EST RUS LVA LTU BLR POL UKR CZE SVK HUN ROU BIH SRB MKD BGR TUR 5
Inflation Outlook: but Started to Turn Positive in 215 CESEE: Headline Inflation, 215 (Percent, year-over-year) < to 2 >2 EST RUS LVA LTU BLR POL UKR CZE SVK HUN ROU BIH BIH SRB MKD BGR TUR 6
Inflation Revision: Oil Price, Euro Area, and Geopolitical Tensions 215 Inflation Revisions Apr 215 WEO vs. Oct 214 WEO (Percentage points) Lower oil prices EU inflation outlook Russia's slowdown Country-specific factors 2 2 1 17 14 11-1 8 5-2 2-3 Baltics CEE SEE -1 Russia Turkey Belarus, Moldova Ukraine 7
Risks More Balanced but Significant Downside Risks Remain Protracted slow growth in euro area Surge in financial volatility Persistent strength of US dollar Geopolitical tensions around Russia/Ukraine impact of ECB monetary easing on growth impact of low oil prices on growth in oil importers 8
Downside Risks: Spillovers from Deeper Recession in Russia GDP Losses from Additional 4 Percent Fall in Russian GDP, 215 (Relative to Baseline, in Percent) Belarus, Moldova Ukraine Emerging Euro Area Bulgaria Serbia Croatia Hungary Czech Republic Turkey Poland Romania -3-2 -1 Note: Emerging euro area countries are Estonia, Latvia, Lithuania, Slovak Republic and Slovenia. 9
Downside Risks: Spillovers from Greece Potential for Greece Spillovers through Real and Financial Channels Exports (Percent of GDP) Market Share of Greek Subs (Percent of total bank assets) 28/1 213/14 Loan-to-Deposit Ratios of Greek Subs (Percent, average) 2 4 6 1 2 3 5 1 15 2 Bulgaria Macedonia, FYR Albania Romania Serbia 1
Incomplete Balance Sheet Repair in SEE Persistently High Debt 12 1 8 6 4 2 Private Sector Debt (Percent of GDP) Baltics SEE SEE CEE 25 28 29 213 25 28 29 213 25 28 29 213 25 28 29 213 Euro area/euro peggers Inflation targeters 11
Incomplete Balance Sheet Repair in SEE High NPLs Nonperforming loans (in percent of total loans) 2 15 1 5 Baltics SEE SEE CEE 25 28 29 213 25 28 29 213 25 28 29 213 25 28 29 213 Euro area/euro peggers Inflation targeters 12
Incomplete Balance Sheet Repair in SEE Negative Credit Growth Corporate Bank Credit (6-month moving average of y-o-y growth rates, percent) 6 4 Baltics CEE SEE 2-2 -4-6 -8-1 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Note: Adjusted for FX valuation effects. 13
Incomplete Balance Sheet Repair in SEE No Investment Pick-up 35 Real Gross Investment (Index, 2=1) Baltics CEE SEE 3 25 2 15 1 28 29 21 211 212 213 214 14
Private Sector Balance-Sheet Repair 1. How much deleveraging? 2. Real Impact of Deleveraging 3. Remaining weaknesses and credit gaps 4. Policies to complete repair 15
1. How Much Deleveraging: Sizable Deleveraging Efforts Post-Crisis Change in Private Savings Rate (Percent of GDP) Bulgaria Montenegro Lithuania Latvia Macedonia, FYR Serbia Russia Estonia Croatia Belarus Hungary Slovenia Poland Slovak Republic Romania Moldova Czech Republic Bosnia Turkey Ukraine Albania -1 1 2 Post-Crisis Change in Private Investment Rate (Percentage points of GDP) Latvia Estonia Montenegro Romania Slovenia Lithuania Moldova Albania Bulgaria Ukraine Bosnia Slovak Republic Croatia Serbia Hungary Turkey Poland Czech Republic Kosovo Macedonia, FYR Russia Belarus -12-8 -4 4 8 16
1. How Much Deleveraging: but Modest Results Growth of Private Debt-to-GDP Ratio over 28 13 (Percent) Montenegro Lithuania Latvia Estonia Hungary Serbia Slovenia Bulgaria Romania Ukraine Croatia Bosnia & Herz Kosovo Poland Slovak Rep Czech Rep Macedonia, FYR Moldova Russia Albania Belarus Turkey -4-2 2 4 6 Contributions to Growth of Private Debt-to-GDP Ratio over 28 13 (Percent) Montenegro Lithuania Latvia Estonia Hungary Serbia Slovenia Bulgaria Romania Ukraine Croatia Bosnia & Herz Kosovo Poland Slovak Rep Czech Rep Macedonia, FYR Moldova Russia Albania Belarus Turkey Debt stock Nominal GDP -2-1 1 2 17
2. Real Impact of Deleveraging: Reduces Absorption of Leveraged Sectors 14 Employment and Leverage (Percent) 14 Investment and Leverage (Percent) 12 BGR 12 BGR Corporate debt to GDP 1 8 6 4 2 UKR EST SRB HUN HRV LVA RUS SVK POL TUR CZE SVN LTU Corporate debt to GDP 1 8 6 4 2 UKR HUN EST HRV SVN LVA SRB RUS SVK CZE POL TUR LTU -1.1-1. -.9 -.8 Employment fall in response to 1 percent decline in sales -.9 -.85 -.8 -.75 -.7 -.65 -.6 Investment fall in response to 1 percent decline in sales 18
2. Real Impact of Deleveraging: but Needed for Investment Recovery 6 CEE: Profitability and Investment (12-month growth rate, percent) 4 27q1 Growth of Investment 2-2 -4 29q1 214q1 21q1-6 -7-6 -5-4 -3-2 -1 1 2 3 4 5 6 7 Growth of Profitability Note: Data points are quarterly, weighted-averages for CEE EU countries. 19
3. Remaining Weaknesses and Credit Gaps: Corporate Debt Risk Exposures Liquidity Risk Debt-to-Income (Percent, aggregate sectoral accounts data) Slovenia Bulgaria Estonia Hungary Latvia Romania Slovak Republic Czech Republic Poland Lithuania 25 5 Solvency Risk Debt-to-Equity (Percent, aggregate sectoral accounts data) Latvia Croatia Bulgaria Slovenia Hungary Slovak Republic Romania Poland Estonia Czech Republic Lithuania 4 8 12 Note: Data are net of intercompany loans and cross-equity holdings among domestic firms. Thresholds are the cut-off points of the top quartile of the EU-wide distribution of the indicators over 1995-27. 2
3. Remaining Weaknesses and Credit Gaps: Corporate Debt Risk Exposures (2) Liquidity Risk Debt-to-Income (Percent, weighted-average of firm-level data) 1 2 Solvency Risk Debt-to-Equity (Percent, weighted-average of firm-level data) 5 1 15 Croatia Ukraine Slovenia Serbia Estonia Latvia Slovak Republic Russia Lithuania Turkey Romania Bulgaria Poland Hungary Czech Republic Latvia Croatia Ukraine Slovenia Russia Estonia Turkey Bulgaria Lithuania Romania Slovak Republic Poland Serbia Hungary Czech Republic Note: Data includes intercompany loans and cross-equity holdings among domestic firms. Thresholds are the average values of indicators across sample countries in 213. 21
3. Remaining Weaknesses and Credit Gaps: Corporate Debt Risk Exposures (3) Liquidity Risk Solvency Risk Serbia* Slovenia Bulgaria Croatia* Ukraine* Latvia Russia* Turkey* Note: (*) based fully or in part on firm-level data. 22
3. Remaining Weaknesses and Credit Gaps: Corporate Debt-at-Risk Liquidity Risk Debt-to-Income (Percent) Corporate debt-to-gdp, of which Weak firms (debt-to-earnings > 8 or negative) Viable firms No firm-level data available 5 1 15 Bulgaria Ukraine Hungary Croatia Estonia Slovenia Latvia Turkey Serbia Russia Czech Republic Romania Slovak Republic Poland Lithuania Solvency Risk Debt-to-Equity (Percent) Corporate debt-to-gdp, of which Weak firms (debt-to-equity > 5 or negative) Viable firms No firm-level data available Bulgaria Ukraine Hungary Croatia Estonia Slovenia Latvia Turkey Serbia Russia Czech Republic Romania Slovak Republic Poland Lithuania 5 1 15 23
3. Remaining Weaknesses and Credit Gaps: Credit Gaps in 213 213 gap between actual and fundamentals-consistent growth of per capita, real private debt (%) Estimated Credit Gaps, 213 5 RUS SVK CZE MDA HRV -15-1 -5 5 BIH1 15 2MKD 25 HUN BGR -5 POL ROM LTU LVA 2 Level: below model benchmark Growth: higher than model benchmark 15 1 EST -1-15 Level: below model benchmark Growth: lower than model benchmark -2 BLR SVN Level: above model benchmark Growth: higher than model benchmark 213gap between actual and long-run fundamentals-consistent values of private debt (% of GDP) TUR UKR Level: above model benchmark Growth: lower than model benchmark 24
3. Remaining Weaknesses and Credit Gaps: Credit Gaps in 22 213 Credit Gap as Ratio to GDP in 22 (Percent) Level: below model benchmark HRV BGR UKR EST BLR HUN SVK POL BIH SVN CZE RUS MKD ROM TUR LVA MDA LTU Level: above model benchmark -1-5 5 1 15 2 25 25
4. Policies to Complete Repair: Fiscal Accommodation but Reduced Space Slovenia Croatia Montenegro Serbia Slovak Republic Romania Lithuania Ukraine Latvia Belarus Czech Republic Albania Macedonia, FYR Bosnia Poland Russia Estonia Hungary Moldova Bulgaria Turkey Kosovo 28-13 Change in Public Debt (Percentage points of GDP) -2 2 4 6 Gap between Debt-Stabilizing and Actual Primary Balance (Percent of GDP) Country 28 211 213 Belarus -4.8-4.1 Bosnia -1.7 1.1 -.5 Bulgaria -4.6 3.9 -.1 Croatia -1.1 3.5 2.8 Czech Republic -.8 2.2 -.5 Hungary -1 2.1 -.8 Latvia 4.1 1.1 -.5 Lithuania 2.7 3.1 -.3 Macedonia -.1 1.3 1.7 Poland.6 1.4.8 Romania 2.5 2 -.3 Russia -.2 -.5 1 Serbia.3 1.5 3.8 Slovak Republic 1.2 2.3.3 Slovenia -1.3 4.7 3.5 Turkey -1.5-2.2-1.1 Ukraine 1.5 1.4-1 26
4. Policies to Complete Repair: Monetary Policy Key, but Options Limited CESEE Exchange Rate Regimes Euro peggers Euro area members Bosnia and Herzegovina Latvia Bulgaria Lithuania Croatia Estonia Kosovo Slovak Republic Macedonia, FYR Slovenia Montenegro, Rep. of Other exchange rate regimes Albania Romania Belarus Serbia Czech Republic Ukraine Hungary Russia Moldova Turkey Poland 12 1 8 6 4 2 Central Bank Policy Rates, 28 15 (Percent) Romania Hungary Poland Czech Republic Dec-8 Dec-1 Dec-12 Dec-14 27
4. Policies to Complete Repair: Need Flexible Adjustment Mechanisms Post-Crisis Deleveraging and Labor Market Flexibility Post-crisis change in average private saving-investment balance (Percentage points of GDP) 3 25 2 15 1 5-5 SRB ALB SVN UKR TUR BLR RUS HRV MDA SVK POL MNE LVA HUN BIH LTU EST ROM CZE 6 6.5 7 7.5 8 Labor Market Regulations, 212 (Index, 1 = least restrictive) BGR 28
4. Policies to Complete Repair: Need to Clean up Bank Loan Portfolios Private investment, 214 (Percent of GDP) 28 26 24 22 2 18 16 14 12 1 NPLs and Investment (Percent) EST SVK TUR BLR CZE LVA UVK RUS POL MDA MKD LTU SVN HRV UKR BIH HUN BGR MNE ALB ROM SRB 5 1 15 2 25 Share of non-performing in total bank loans, 213 (Percent) 29
4. Policies to Complete Repair: Need Effective Legal Frameworks Country Ranks on Enforcing Contracts and Resolving Insolvency 16 Country Rank on Enforcing Contracts (1 = best practice) 14 12 1 8 6 4 2 BIH SVK CZE MNE BGR EST SVN ALB SRB MKD POL ROM HRV MDA HUN TUR UKR 2 4 6 8 1 12 14 16 Country Rank on Resolving Insolvency, 215 (1 = best practice) 3
4. Policies to Support Repair and Growth Unfinished Structural Reform Agenda CESEE: Structural Reforms Relative to OECD Countries Baltics CEE SEE CIS Turkey EU15 Institutions and contracts Infrastructure Human capital Labor market efficiency Business regulation Openness to trade and FDI Credit market rigidity Innovation Note: Red - value in the 25 th percentile; Yellow - value in the 5 th and 75 th percentile. The sample includes all OECD and CESEE countries. 31
Conclusions and Policy Messages Growth disparities across CESEE due to Differential impact of external shocks Incomplete balance-sheet repair and structural weaknesses (in some SEE and CIS) Policy response Mind the credit gaps and use monetary and fiscal space to support recovery and balance sheet repair Institutional reforms Address high NPLs Upgrade legal frameworks Complete structural reform agenda 32
repair recovery THANK YOU! downturn expansion 33
Growth divergent across the region CESEE: Outlook for Real GDP Growth Projection 214 215 216 CESEE 1 1.4 -.4 1.3 Baltics 1,2 2.6 2.6 3.3 Central and Eastern Europe 1,3 3. 3.1 3.1 Southeastern Europe 1,4 1.7 1.9 2.4 Other CIS 1,5-3.9-4.6 1.4 Russia.6-3.8-1.1 Turkey 2.9 3.1 3.6 Note: 1 Weighted average. Weighted by GDP valued at purchasing power parity. 2 Estonia, Latvia, and Lithuania; 3 Czech Republic, Hungary, Poland, Slovak Republic, and Slovenia; 4 Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia FYR, Montenegro, Romania, and Serbia; 5 Belarus, Moldova, and Ukraine. 34 Source: IMF World Economic Outlook database.
In 214, investment made significant positive contribution to growth only in CEE 6 CESEE: Contributions to Real GDP Growth in 214 (Percent) Consumption Investment Net exports GDP growth (yoy) 4 2-2 -4 214H1 214H2 214H1 214H2 214H1 214H2 214H1 214H2 214H1 214H2 Baltics CEE SEE Russia Turkey Sources: Haver Analytics; and IMF staff calculations. 35
Credit Gaps in 213 213 gap between actual and fundamentals-consistent growth of per capita, real private debt (%) 5 RUS SVK CZE MDA HRV -15-1 -5 5 BIH1 15 2MKD 25 HUN BGR -5 POL ROM LTU LVA 2 Level: below model benchmark Growth: higher than model benchmark 15 1 EST -1-15 Level: below model benchmark Growth: lower than model benchmark -2 BLR SVN Level: above model benchmark Growth: higher than model benchmark 213gap between actual and long-run fundamentals-consistent values of private debt (% of GDP) TUR UKR Level: above model benchmark Growth: lower than model benchmark Notes: Data for Bulgaria and Poland are for the 212 gap and for Romania for 211, due to missing data. 36