The World Bank Europe and Central Asia (ECA) Economic Update Annual Meetings Istanbul October 3, 2009
More than $350 billion of ECA s foreign debt matures in 2010 Source: World Bank, DEC Prospects Group
Economic Update The Crisis Hits Home Office of the Chief Economist Human Development Sector Management Unit Poverty and Economic Management Sector Management Unit Europe and Central Asia Region World Bank Annual Meetings Istanbul, October 2009
Main points Good news for enterprises, but foreign debt clouds the future Industrial production stopped falling in mid-2009 But $350 billion of external debt due in 2010 Bad news for families as poverty and unemployment rise, while household debt clouds the future Poverty will rise by almost 15 million instead of falling by 15 million in 2009 Stress tests indicate more debt distress likely for households in 2010 Tough times ahead for governments, and social security debt clouds the future Fiscal deficits will rise from 1.5 to 5.5 percent of GDP in 2009 Stress tests indicate pension deficits rising to 5-6 percent of GDP 4
Good news for enterprises, but foreign debt clouds future 5
Industry has stopped shrinking Industrial production, percentage change (saar) Middle-East & North Africa East Asia & Pacific Developing South Asia Europe & Central Asia Latin America 6 Source: World Bank, DEC Prospects Group.
Interest rates are lower Emerging-market bond spreads have fallen but remain higher than pre-crisis levels 1200 1000 Corporate bonds (CEMBI Global) 800 600 400 Sovereign bonds (EMBI Global) Before Lehman Brothers 200 0 7 Source: World Bank, DEC Prospects Group
Business regulations are better Countries that made at least one positive reform in 2008 (%) Leading Ten Doing Business Reformers in 2008 1. Rwanda 2. Kyrgyz Republic 3. Macedonia, FYR 4. Belarus 5. United Arab Emirates 6. Moldova 7. Colombia 8. Tajikistan 9. Egypt, Arab Rep 10. Liberia 8 Source: World Bank, Doing Business 2009
But debt obligations loom large More than $350 billion of ECA s foreign debt matures in 2010 9 Source: World Bank, DEC Prospects Group
Bad news for families as poverty and unemployment rise, while household debt distress clouds the future 10
Poverty will rise Increases in poverty and vulnerability (change in people living on <$5/day) This graph needs to be redone, with a stacked bar chart with both Poverty (<$2.50) and vulnerability (2.50-5.00) 11 Source: World Bank Staff
Poverty will rise everywhere Share of households below national poverty lines Most recent poverty estimate Forecasted poverty in 2009 Armenia 23.8 (2007) 29.7 Azerbaijan 10.8 (2008) 11.8 Bulgaria 9.7 (2007) 11.3 Latvia 19.8 (2008) 26.9 Romania 5.7 (2008) 7.4 Russia 13.5 (2008) 15.5 Tajikistan 53.1 (2008) 57.9 Turkey 17.4 (2008) 21.9 Note: Estimates are not comparable across countries 12 Note: Estimates are not comparable across countries. Source: World Bank Staff
Rising job losses Registered unemployment has risen in almost every country since mid-2008 13 Source: World Bank Staff
Job losses most in middle-income income ECA Growth of unemployment rates, 2009 over 2008, percent 14 Source: World Bank Staff
Unemployment in Turkey has doubled Registered unemployment in Turkey, February 2008 to August 2009 15 Source: World Bank staff
Incomes in Turkey have been falling Evidence from Turkey finds a particularly large hit to self employment income 16 Source: World Bank-UNICEF Survey
The sources of household distress Shocks are transmitted to households through financial, product and labor markets Most recent poverty estimate Forecasted poverty in 2009 Armenia 23.8 (2007) 29.7 Azerbaijan 10.8 (2008) 11.8 Financial Market Credit Market Shock Bulgaria 9.7 (2007) 11.3 Latvia 19.8 (2008) 26.9 Product Market Relative Price Shock Romania 5.7 (2008) 7.4 Russia 13.5 (2008) 15.5 Tajikistan 53.1 (2008) 57.9 Lb Labor Market Income/Employment Shock Turkey 17.4 (2008) 21.9 Note: Estimates are not comparable across countries 17 Source: World Bank 2009: The Crisis Hits Home
Household stress tests show distress Severe Stress likely in Bosnia, Croatia, Estonia and Hungary Bosnia & Herzegovina Croatia Estonia Hungary 50 40 30 20 10 0 I II III IV V ALL I II III IV V ALL I II III IV V ALL I II III IV V ALL % of debt-holding households h that t are not vulnerable % of debt-holding households that are vulnerable, prior to the simulation % of debt-holding households that become vulnerable, as a result of the simulation Debt repayment as a % of household income (median), prior to the simulation Debt repayment as a % of household income (median), as a result of the simulation 18 Source: World Bank Staff
Tough times ahead for governments, and pension debt clouds the future 19
Rapid fiscal deterioration in 2009 Central and Eastern European government accounts were hit sooner Fiscal Balance (% GDP), 2000 2010 2 1 0 1 22 3 4 5 6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CEE + Turkey CIS 20 Source: World Bank Staff
Social protection ti spending ECA spends a lot on public pensions (percent of GDP) 21 Source: World Bank staff estimates and OECD Social Expenditure Database. Most data from 2000 to 2003.
Good coverage of social assistance Is lowest in ECA s poorest countries, but compares favorably with other regions 22 Source: World Bank Staff
And reasonable targeting Not all goes to poor, but accuracy compares favorably with programs in other regions 23 Source: World Bank Staff
Reforms needed for social security The reforms that help the most are inflation indexing and higher retirement ages 24 Source: World Bank staff
Messages Ci Crisis i is not over. Countries in Emerging Europe and Central Asia face a slow recovery No green shoots for workers Tighter money ahead. Post-crisis growth will likely be lower, and fiscal deficits higher Smaller budgets for governments Fiscal consolidation, not indiscriminate cuts. More efficiency of spending can mean more growth and more equity Better prospects for both families and firms 25
How the World Bank is helping Supporting budgets Increased lending (IBRD/IDA): $3.8bn in 2007, $4.2bn in 2008, $9.3bn in 2009 Operations in Armenia, Bulgaria, Georgia, Hungary, Latvia, Poland, Romania, Serbia, Tajikistan, Turkey, and Ukraine Strengthening institutions Helping countries such as Belarus, FYR Macedonia and Turkey improve social assistance programs Helping middle income countries strengthen banking systems Helping all countries improve social service delivery mechanisms Improving policies Public expenditure reviews, e.g., in Poland, Lithuania, Russia, and Latvia to identify areas for efficiency Economic reports, e.g., in Croatia and Central Asia to strengthen integration in Europe and Eurasia 26
More information World Bank, 2009: The Crisis Hits Home: Stress Testing Households in Europe and Central Asia, Report No. 50158-ECA. kschrader@worldbank.orgorg tcelasin@worldbank.org 27