Regional Economic Outlook Caucasus and Central Asia Azim Sadikov International Monetary Fund Resident Representative November 6, 2013
Outline Global Outlook CCA: Recent Developments, Outlook, and Risks Vision: Becoming Vibrant Emerging Markets Georgia: The Economy in 2013 and the Outlook
The global recovery has weakened Global Manufacturing PMI (Monthly Data, Index; > 50 = expansion; SA) Merchandise Exports (Annualized Monthly Percent Change, 3mma) 60 80 55 50 Latest: Aug 13 60 40 20 45 0 40 35 30 World Advanced Emerging 06 07 08 09 10 11 12 13 Advanced Emerging Latest: Aug 13 06 07 08 09 10 11 12 13-20 -40-60 -80 Source: IMF, Global Data Source. Global Outlook
The WEO forecast has been revised down, mainly on account of emerging economies WEO Real GDP Growth Projections (percent change from a year earlier) World U.S. Euro Area Japan Russia China CEE CCA 2013 (Oct. 2013) 2.9 1.6-0.4 2.0 1.5 7.6 2.3 5.8 2013 (Apr. 2013) 3.3 1.9-0.3 1.6 3.4 8.0 2.2 5.8 2014 (Oct. 2013) 3.6 2.6 1.0 1.2 3.0 7.3 2.7 6.1 2014 (Apr. 2013) 4.0 3.0 1.1 1.4 3.8 8.2 2.8 6.1 Source: IMF, World Economic Outlook. Global Outlook 8
EM growth has declined for both cyclical and structural reasons 1.0 Decomposing the 2011-13 Slowdown 1/ (percentage points) 0.5 0.0-0.5-1.0-1.5-2.0-2.5-3.0-3.5 Potential Cyclical Change in real growth Brazil South Africa China Russia India Source: IMF, World Economic Outlook. 1/ Cyclical component of growth calculated as the difference between real and potential growth. Potential growth estimated using multivariate filter (see Box 1.2 of the October 2013 WEO for details). 5
Metals and food prices are falling but oil prices have recently risen Global commodity price developments 1 (Index; 2005 = 100) Brent crude oil price prospects 2 (U.S. dollars per barrel) 300 250 Food Metals Gold (right scale) 500 400 175 150 95% confidence interval 86% confidence interval 68% confidence interval Futures 200 300 125 100 150 200 75 100 100 50 25 50 0 07 Dec-08 Dec-10 Dec-12 Dec-14 08 09 10 11 12 13 14 15 16 Sources: IMF, Primary Commodity Price System; and IMF staff calculations. 1 Food index derived from average price of corn, wheat, rice, and soybeans. 2 Derived from prices of futures options on Sep. 12, 2013. Global Outlook
Financial conditions have tightened 10 Bond Yields (Percent, Aug 2, 2012 Oct 22, 2013) 9 8 7 6 5 4 Chairman Bernanke's testimony to Congress Announcement by Fed not to taper 3 Aug-12 Nov-12 Feb-13 May-13 Aug-13 KAZ (Dev Bank, 20YR) ARM (7YR) TUR (10YR) GEO (10YR) Emerging markets Sources: IMF, World Economic Outlook; and Bloomberg LP. Global Outlook
Risks to global growth remain on the downside Global financial conditions tighten by more than expected Continued stop-gap measures and uncertainty over fiscal policy in the US Financial fragmentation in the euro area weighs on investment Insufficient fiscal consolidation and structural reforms in Japan Lower potential growth in emerging markets Lower commodity prices 8 8
Policy priorities Euro area United States Emerging markets Repair financial system Adopt a banking union Reduce budget deficit over the medium term Calibrate the timing of exit from unconventional monetary policy Improve resilience to shocks Accelerate structural reforms Let exchange rate adjust to capital flows Global Outlook 9
Caucasus and Central Asia Kazakhstan Georgia Armenia Azerbaijan Uzbekistan Turkmenistan Tajikistan Kyrgyz Republic Oil and gas exporters Oil and gas importers
Overview Outlook Risks Policies Robust growth over the near term A lower-than-anticipated growth in emerging economies Tightening of external financing conditions To enhancing resilience to shocks Toward becoming dynamic emerging markets 11
The economic outlook remains favorable despite sluggish growth in trading partners Real GDP, 2014 (Annual growth, percent) 12 9 6 3 0-3 CCA oil and gas exporters CCA oil and gas importers -6 Russia Central and Eastern Europe -9 2005-08 2009 2010 2011 2012 2013 2014 TKM UZB KGZ TJK AZE KAZ GEO ARM 2014 11 10 9 8 7 6 5 4 Sources: IMF, World Economic Outlook; and IMF staff calculations and projections. 12
Inflation stays largely within a comfort range Headline CPI Inflation (Annual percent change) 25 Oil and Gas Exporters 25 Oil and Gas Importers 20 20 KGZ 15 15 UZB 10 5 0 TKM AZE KAZ 10 5 0 TJK ARM CEE GEO -5 Jul-10 Jul-11 Jul-12 Jul-13-5 Jul-10 Jul-11 Jul-12 Jul-13 Sources: National authorities; and IMF staff calculations.
Risks to the near-term outlook are tilted to the downside Risk Slower than expected growth in emerging markets Channel Russia/China Commodity prices and volumes Tighter global financial conditions Financial flows Funding costs CCA Impact Exports FDI Remittances Oil and gas Aluminum Cotton Non-ferrous metals Bank credit lines FDI Rollover needs
Oil and gas exporters: weakening fiscal balances 10 5 Oil and Gas Exporters (Percent of GDP) Oil and Gas Exporters (Fiscal breakeven oil prices, U.S. dollars per barrel) 110 100 0-5 -10 Overall fiscal balance Non-oil fiscal balance (percent of non-oil GDP) 90 80 70 2011 2014-15 -20-25 2006 2008 2010 2012 2014 60 50 40 30 AZE KAZ TKM Sources: National authorities; and IMF staff estimates.
Oil and gas importers: Save for the rainy day 0.0-2.0 General Government Deficit (percent of GDP) CCA Oil Importers Central and Eastern Europe Georgia 50 45 General Government Debt (percent of GDP) 2006 2008 2010 2012 2014 40-4.0 35-6.0 30-8.0 25-10.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 20 CCA Oil Importers Central and Eastern Europe Georgia Sources: National authorities; and IMF staff estimates. 16
Weakening external positions underscore the need for adjustment 70 60 Oil and Gas Exporters (percent of GDP) Gross external debt, left scale Current account balance Reserves, months of imports 12 10 70 60 Oil and Gas Importers (percent of GDP) 12 10 70 60 Central and Eastern Europe (percent of GDP) 12 10 50 8 50 8 50 8 40 6 40 6 40 6 30 4 30 4 30 4 20 2010 2011 2012 2013 2014 2 20 2010 2011 2012 2013 2014 2 20 2010 2011 2012 2013 2014 2 * Current account balance for CCA oil and gas exporters; current account deficit for CCA oil and gas importers and CEE. Sources: National authorities; and IMF staff estimates.
Continue to bolster financial sector soundness Non-performing Loans 1/ (On a 90-day basis; percent of total loans) Capital Adequacy Ratio (Percent of risk-weighted assets) 35 30 2011 2013 (latest) 35 30 2011 2013 (latest) 25 25 20 20 15 15 10 10 5 5 0 ARM AZE GEO KAZ KGZ UKR TUR CEE 2/ 0 ARM AZE GEO KAZ KGZ UKR TUR CEE 2/ Sources: National authorities; and IMF staff estimates. 1/ 90-day basis. 2/ Includes BIH, BGR, HRV, HUN, LVA, LTU, MKD, POL, ROU, and TUR. 18
Summary of near-term priorities Oil and Gas Exporters Delink spending decisions from short-term fluctuations in oil prices, in particular save in good times Preserve oil wealth for future generation and ensure that budgets are sustainable Improve spending quality to ensure that all public investment are productive Oil and Gas Importers Create fiscal space by reining in hardto-reverse expenditures and by broadening tax bases Use part of the space to better target safety nets, and to invest in health, education, and infrastructure Increase exchange rate flexibility to lower the risk of output and price fluctuations Some countries need to restore the health of the banking system 19
Vision for the CCA: Become vibrant emerging markets Growth
Obstacles and risks to the CCA vision
Accelerate reforms to become dynamic emerging markets Strengthen fiscal frameworks Improve the effectiveness of monetary policy Foster financial development Transition to emerging markets Enhance structural reforms Promote trade integration
CCA: Key Takeaways Growth to remain reasonably rapid but risks are tilted to the downside. Oil exporters need to preserve oil wealth for future generation. Oil importers should increase fiscal buffers and introduce more exchange rate flexibility. All need ambitious reforms to become dynamic emerging markets.
Georgia
Georgia s neighborhood: Growth expected to pick up in 2014 10.0 Gross Domestic Product (percent change) Georgia Azerbaijan Armenia Russia Turkey 8.0 6.0 4.0 2.0 0.0 2011 2012 2013 2014 2015 Source: IMF, World Economic Outlook.
Activity has been broadly flat since July 2012 1.6 Monthly GDP, 2010-2013 Billions of GEL 1.5 1.4 1.3 1.2 1.1 Actual GDP 1.0 0.9 0.8 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Seasonally adjusted GDP Sources: GEOSTAT and IMF staff estimates.
Investment-led slowdown, with consumption flat and external sector performing strongly Contribution to the Annual Nominal GDP Growth Jan-Jun, 2013 over Jan-Jun, 2012 (percent change) Total 2.0 Discrepancy -0.5 Imports 2.5 Exports 4.4 Investment -4.5 Public consumption -0.9 Private consumption 0.9-5 -4-3 -2-1 0 1 2 3 4 5 Sources: GEOSTAT, IMF staff estimates
Investment- and government-dependent sectors dragging growth down Sector Contribution to the Annual Nominal GDP Growth Jan-Jun, 2013 over Jan-Jun, 2012 (percent change) Total 2.0 Industry 0.5 Agriculture Real estate & rent Trade Education and Health 0.8 0.8 0.8 0.7 Other -0.1 Public administration -0.9 Construction -0.6-1.5-1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 Sources: GEOSTAT, IMF staff estimates
Shortfalls in government spending, especially capital Total Spending (percent of GDP) Capital Expenditure (percent of GDP) 35 8 30 25. 2012 7 6 2012 20 15 2013 5 4 3 10 5 2 1 2013 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: NBG, IMF staff estimates;
more than offset somewhat weaker revenue, resulting in fiscal surplus so far Total Revenue (percent of GDP) Fiscal Balance (percent of GDP) 35 30 25 20 15 10 5. 1.0 2013 2012 0.5 0.0-0.5 2013-1.0-1.5 2012-2.0-2.5 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -3.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: NBG, IMF staff estimates;
Need to continue prudent fiscal policy to safeguard debt sustainability 9.0 50 8.0 7.0 6.0 Fiscal Deficit (percent of GDP) Government Debt (percent of GDP) 40 5.0 30 4.0 20 3.0 2.0 10 1.0 0.0 2006 2007 2008 2009 2010 2011 2012 2013 0 Sources: MOF and Fund Staff estimates;
Deflationary pressures due to the strength of lari, the slowdown, and administered price cuts Consumer Price Inflation and the Policy Rate 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0 Policy rate (Rhs). Core Inflation Headline 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0-6.0 0.0 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Sources: GEOSTAT and IMF staff estimates;
Market rates started to come down, reacting to weak credit demand and monetary loosening 25.0 18.0 16.0 20.0 GEL loan rates 14.0 USD loan rates 15.0 GEL deposit rates g 12.0 10.0 10.0 5.0 Policy Rate 8.0 6.0 USD deposit rates 0.0 4.0 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Sources: NBG and IMF staff estimates.
Yet, corporate loans stagnant; household loans continue to grow slowly 9 8 Bank Loans (in billions of GEL) 7 6 Households 5 4 3 2 Corporations Loans to Individuals 1 0 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Sources: GEOSTAT and IMF staff estimates;
Exports and Tourism performing strongly 50 900 40 Number of Tourists thousands, (rhs) 800 700 30 600 20 500 400 10 0 Exports, 3-month moving average, annual growth 300 200 100-10 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 0 Sources: GEOSTAT and IMF staff estimates. 35
partly supported by a re-opening of the Russian market 20 18 16 14 12 Share of exports to Russia in total exports (in percent). Share of tourists from Russia in total tourists (in percent) 10 8 6 4 2 0 2005 2009/11 2013 2005 2009/11 2013 Sources: National authorities; and IMF staff estimates.
1.0 Exports growth and imports contraction reducing the trade deficit Georgia: Trade Balance (billions of USD) 0.5 0.0-0.5-1.0-1.5-2.0 Imports Exports Balance -2.5 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 Sources: GEOSTAT and IMF staff estimates.
Current account deficit narrowing: structural or temporary? 0.0 0-0.5-5 -1.0-10 -1.5-15 -2.0-2.5 CA deficit (USD bln) % of GDP -20-3.0 2006 2007 2008 2009 2010 2011 2012 2013 2014-25 Sources: NBG, IMF staff estimates;
With external inflows proving resilient 1.4 Electronic Transfers (remittances) 1.2 1.0 Jan-Sep 2012 Jan-Sep 2013. Billions of USD 0.8 0.6 0.4 Jan-Jun 2012 FDI Jan-Jun 2013 0.2 0.0 Sources: NBG, IMF staff estimates;
the NBG used the opportunity to accumulate reserves 3.2 Foreign assets 2.8 2.4 2.0 Foreign assets (excluding IMF ) 1.6 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Sources: NBG and IMF staff estimates.
Georgia: Key Takeaways Near Term 1. Slowdown in 2013 due to: weak investor confidence reflecting political and policy uncertainty shortfalls in government spending 2. Growth should pick up in 2014 but requires restoring investor confidence overcoming spending shortfalls while avoiding waste 3. Strong performance of the external sector likely to continue, supported by a gradual re-opening of the Russian market progress toward deeper integration with the EU (I)
Georgia: Medium Term Policy Challenges 1. Generate sustained job-creating growth pursue structural reforms to improve competitiveness invest in education and job training improve business environment 2. Reduce external sector vulnerabilities (I) lock-in some of the recent gains in the current account allow greater exchange rate flexibility remain vigilant and manage carefully short-term capital flows 3. Build fiscal buffers adopt a prudent 2014 budget use fiscal policy to contain domestic demand
Thank You! To access the full report online or to provide comments, please visit: http://www.imf.org/external/country/geo/rr/ and click the link for Regional Economic Outlook (I)