A REBALANCING ACT IN EMERGING EUROPE AND CENTRAL ASIA April 17, 2015 Spring Meetings
A Rebalancing Act in Emerging Europe and Central Asia ECA is expected to be the slowest growing region worldwide with almost no growth forecast for 2015 • Stable to moderately improving outlook in western part of region is being offset by the direct and indirect impact of the oil shock and uncertainty in the eastern part of the region • The poor are hard hit by the oil shock due to the sharp decline in real spending power from weaker output, reduced remittances, as well as the lower terms of trade Bottom-line: • Countries that are performing the rebalancing act to lower oil prices and changing exchange rates can benefit from new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key. 1
Economic Growth in ECA remains weakest among developing regions 2015 GDP Growth (%), weighted average by region 8.0 7.2 7.0 6.9 6.8 7.0 6.7 6.3 6.0 5.0 4.5 4.2 4.0 2013 4.0 2014e 2015p 3.0 2.5 2.2 2.2 2.0 1.8 2.0 0.9 1.0 0.6 0.6 0.1 0.0 Latin America & Europe & Central Middle East & N. East Asia & Pacific Sub-Saharan Africa South Asia Caribbean Asia Africa Source: World Bank 2
While overall ECA growth prospects are much lower in 2015 than last year, expectations are dramatically different across the region 12.0 2014 and 2015 Real GDP Growth 10.0 Average weighted growth in 2015: Average weighted growth in 2015: 1.1% 8.0 -2.8% 6.0 4.0 2.0 0.0 Croatia Slovenia Hungary Czech Republic Romania Poland FYR Macedonia Montenegro Kosovo Bosnia and Herzegovina Serbia Turkmenistan Tajikistan Azerbaijan Kazakhstan Armenia Belarus Russia Ukraine Bulgaria Slovak Republic Albania Turkey Uzbekistan Georgia Kyrgyz Republic Moldova -2.0 -4.0 -6.0 -8.0 EU-Central and South Eastern Western Balkans Turkey Eastern Europe, S. Caucasus, Central Asia and Europe Russia 2014 2015 (April 2015 Projection) Source: World Bank 3
Drilling-down into ECA Trends Outlook: • Stable to moderately improving growth in western part of region, but concerns remain • The direct and indirect impact of the oil shock and uncertainty in the eastern part of the region are hitting the poor hard Bottom line: • Countries that are performing the rebalancing act to lower oil prices and changing exchange rates can benefit from new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key. 4
Stable to moderately improving growth in western part of region ECA countries close to Eurozone are benefiting from: • Monetary policy easing (QE) in Europe with lower interest rates • Depreciating currencies, boosting demand for import competing sectors and exports • Lower cost of energy • To date, limited spill-over from uncertainty in Greece and Ukraine 5
Lower interest rates are a boost to ECA countries with close ties to the Eurozone 1.2 Eurozone Yield Curve 1 0.8 0.6 Yield in % 0.4 0.2 0 1yr 2yr 5yr 10yr -0.2 -0.4 September, 2014 April, 2015 Source: European Central Bank 6
Depreciations against the dollar, help exports and lower demand for imports Depreciation of national currencies vis-a-vis the USD (April 2014-April 2015) 30% 25% 20% 15% 10% 5% 0% Source: Bloomberg 7
Along with lower oil prices, there are tentative signs that Eurozone confidence is picking up EU Economic Sentiment Indicator (long-term average =100) 110.0 105.0 100.0 95.0 90.0 85.0 80.0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Note: Index based on monthly harmonized surveys of the industry, the services, retail trade and construction sectors, as well as to consumers within the EU member states . Source: European Commission 8
With modest growth in industrial production European Union (28 countries) 101 100 99 98 97 96 95 Source: Eurostat 9
10 Limited spill-over in country risks from the uncertainty Source: Bloomberg 10 15 20 25 30 0 5 14-Apr-14 21-Apr-14 28-Apr-14 5-May-14 12-May-14 Greece 19-May-14 26-May-14 2-Jun-14 9-Jun-14 16-Jun-14 23-Jun-14 30-Jun-14 Russia 7-Jul-14 14-Jul-14 (Credit Default Swaps,10Yr Sovereign Spreads, %) 21-Jul-14 in Greece and Ukraine 28-Jul-14 4-Aug-14 11-Aug-14 18-Aug-14 25-Aug-14 Portugal 1-Sep-14 8-Sep-14 15-Sep-14 22-Sep-14 Country Risk 29-Sep-14 6-Oct-14 13-Oct-14 20-Oct-14 Spain 27-Oct-14 3-Nov-14 10-Nov-14 17-Nov-14 24-Nov-14 1-Dec-14 8-Dec-14 Turkey 15-Dec-14 22-Dec-14 29-Dec-14 5-Jan-15 12-Jan-15 19-Jan-15 26-Jan-15 2-Feb-15 Ukraine (right axis) 9-Feb-15 16-Feb-15 23-Feb-15 2-Mar-15 9-Mar-15 16-Mar-15 23-Mar-15 30-Mar-15 6-Apr-15 13-Apr-15 0 20 40 60 80 100 120 140 160 180
….but concerns remain • Labor markets have a long way to recover, especially youth employment • ECA average youth unemployment greater than 25% compared to about 13% for the rest of developing world • Uncertainties linger on fundamental structural policies while the debt overhang still stifles growth • Non performing loans in ECA nearly 10% (W. Balkans 16.4%), other regions average between 2% to 6%. • Gross capital flows remain weak 11
Private capital flows remain weak, particularly for regions hit by oil shock Average Monthly Gross Capital Flows by Subregion 14000 12000 10000 8000 6000 4000 2000 0 2010 2011 2012 2013 2014 2015* South Caucasus Central Asia EU-Central and South East Europe Ukraine Russia Turkey * Average monthly flows for January and February 2015. Source: World Bank 12
The direct and indirect impact of the oil shock and uncertainty in the eastern part of the region are hitting the poor hard Countries highly dependent on oil exports, or on trade and remittances from oil exporting countries, are seeing a sharp decline in income • Starting in the early 2000s, oil revenues, remittances, and capital inflows had boosted domestic demand and raised costs of production • The reversal of these trends has come fast and hit income hard, and this is particularly concerning for the poor 13
The oil price shock has had a much stronger adverse impact on buying power than what is reflected by GDP alone, through remittances and changes in export and import prices 10.0 Impact on Income From GDP Growth Impact on Income from GDP 8.0 and Decline in Wage Remittances Growth and the Terms of Trade 6.0 (2015) 4 (ToT) Shock (2015) 2 4.0 7.6 1.5 1.3 0 2.0 -3.8 -2 2.0 1.7 1.5 1.3 0.8 0.0 0.0 -0.1 -0.4 -4 -0.8 -1.3 -3.5 -6 -2.0 -4.1 -12.27 -4.1 -12.73 -4.7 -5.1 ToT -7.2 -8 -4.0 -6.5 GDP -10 GDP -2.0 -6.0 -12 -14 -8.0 Change in remittances, Azerbaijan Kazakhstan Russia % of GDP -10.0 Source: World Bank 14
The region experienced large real currency appreciations prior to the global crisis 15
Which have largely been reversed in the last year with falling oil prices and lower remittances 16
Remittances represent a large share of GDP in many Eastern European countries and Central Asia and expected declines are large 60% 60 2013 % change 2014 % change 2015 % change Remittances, % GDP in 2013 50% 50 48.9 40% 40 31.6 30% 30 24.9 21% 21.0 20% 20 17% 15% 14% 15% 12% 11% 11.9 10% 10 4% 1% 0% 0.2 0.1 0 0% -2% -1% -10% -10 -8% -9% -12% -16% -20% -20 -18% -18% -23% -23% -30% -30 -30% -40% -40 Armenia Belarus Kazakhstan Kyrgyz Republic Moldova Tajikistan Uzbekistan Source: World Bank 17
Lower skilled workers from poorer households are more likely to be displaced Russia: Displaced workers by welfare deciles 120,000 100,000 Number of displaced workers 80,000 60,000 40,000 20,000 0 1 2 3 4 5 6 7 8 9 10 Poorer Wealthier Deciles (consumption per capita) Source: Russia Household Budget Survey and micro-simulations 18
In remittance dependent countries, the impact drives some of the middle class and near poor into poverty Kyrgyz Republic: Incidence curve as a result of 50% reduction in remittances Poorer Wealthier Source: Kyrgyz Integrated Household Survey and micro-simulations 19
Oil shock is not cyclical and domestic prices will need to fall relative to foreign prices • Oil prices are expected to stay low in the medium-term. The shock is not a temporary blip due to reduced demand • Many oil exporters have allowed the nominal exchange rate to make the needed adjustment in real domestic prices and this will allow them to benefit from the new opportunities in tradable sectors. 20
Many oil exporters have allowed exchange rates to make the adjustment in the real domestic relative prices as oil prices have fallen Oil and Relative Prices 250 400 350 Real Exchange Rate vis-à-vis Dollar (2003=100) 200 300 Real Oil Price (2003=100) 250 150 200 100 150 100 Oil Prices 50 50 0 0 Russia Kazakhstan Azerbaijan Average Oil Price (right axis) Source: World Bank 21
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