CLOUDY OUTLOOK FOR GROWTH IN EMERGING EUROPE AND CENTRAL ASIA - PowerPoint PPT Presentation

CLOUDY OUTLOOK FOR GROWTH IN EMERGING EUROPE AND CENTRAL ASIA Presentation by Laura Tuck, Vice President, ECA Hans Timmer, Chief Economist, ECA October 8, 2014 Annual Meetings

Three key trends for Emerging Europe and Central Asia • Recovery in new EU member states remains tepid, but some signs of improvement. • Deep crisis in Ukraine due to the tensions, however, with the exception of a few industries, has not materialized into stiff headwinds for ECA as a whole. • Russia and some neighboring countries are slowing as past drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia’s medium-term prospects. 1

Economic Growth in ECA remains weak among developing regions in 2014 and 2015 GDP Growth (%), weighted average by region 9.0 8.3 8.0 7.4 7.2 7.2 6.9 6.9 7.0 6.0 6.0 5.4 5.2 4.9 4.8 4.7 5.0 4.6 4.6 4.2 4.2 4.1 2011 4.0 3.5 2012 3.0 3.0 2013 3.0 2.6 2.2 2.4 2.4 2014e 2.1 2.0 1.8 2.0 2015p 1.5 1.2 1.0 0.0 -1.0 -0.7 -2.0 Latin America & Europe & Central Middle East & N. East Asia & Pacific Sub-Saharan Africa South Asia Caribbean Asia Africa 2

3 ECA growth prospects have been adjusted down since 11 16 -9 -4 1 6 Croatia Slovenia Estonia Bulgaria Czech Republic the Spring, particularly for Ukraine Slovak Republic EU 11 Latvia Romania 2014 Real GDP Growth Projections Lithuania 2014 (April 2014 Projection) Poland Hungary Bosnia and Herzegovina Serbia Western Balkans Albania Montenegro Kosovo 2014 (September 2014 Projection) FYR Macedonia Ukraine Russia Belarus Moldova CIS, Georgia, Turkey, Ukraine Kyrgyz Republic Armenia Kazakhstan Azerbaijan Georgia Tajikistan Uzbekistan Turkmenistan Turkey

Drilling-down into the three trends for Emerging Europe and Central Asia • Recovery in new EU member states remains tepid, but some signs of improvement. • Deep crisis in Ukraine due to the tensions, however, with the exception of a few industries, has not materialized into stiff headwinds for ECA as a whole. • Russia and some neighboring countries are slowing as past drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia’s medium-term prospects. 4

Tepid growth in the new EU Member States, Crisis in Ukraine, and Stagnation in Russia Industrial Production Index (January 2013=100) 110 105 100 95 EU11 90 Russia 85 Ukraine 80 75 70 Note: The industrial sector includes manufacturing, mining, and utilities. Underlying data is in constant US$, seasonally adjusted.

Recovery in new EU member states remains tepid, but some signs of improvement 6

The external environment is weak, and expectations have deteriorated (Consensus Real GDP Forecast, Percent, April vs. September 2014) 8 7 April Forecast 6 September Forecast 5 4 3 2 1 0 China Brazil USA Euro Zone Source: Consensus Forecasts 7

Unwinding of fiscal imbalances has been slow, but progress has been made in Central and Eastern Europe (Percent Share of GDP) 3.0 CIS(less Russia&Ukraine) Ukraine Russia 2.0 Turkey Western Balkans 1.0 EU11 0.0 2010 2011 2012 2013 2014e -1.0 -2.0 New EU members -3.0 -4.0 -5.0 -6.0 -7.0 Source: National authorities, IMF, DEC GEP and ECSPE country teams' estimates/projections .

Labor had become more expensive across all European countries before the 2008 crisis ROM 400 Area of rising labor costs to productivity relative to Germany LAT 300 EST LTU CZE SVK HUN 200 BLG GRC POL IRL SVN NOR CYP ESP DNK POR FIN MLT LUX NLD ITA FRA BEL AUT SWE DEU DEU 100 GBR 100 120 140 160 180 200 Hourly Real Labour Productivity Growth, 2000-2008; 2000=100.0 9

Post-2008 crisis labor costs have adjusted downward 160 BLG 140 NOR SWE 120 LUX SVK AUT EST LTU FIN DEU DEU BEL SVN DNK FRA ITA NLD MLT POR POL ESP GBR LAT 100 CYP CZE Area of falling labor IRL costs to productivity HUN relative to Germany GRC ROM 80 90 100 110 120 Hourly Real Labour Productivity Growth, 2008-2013; 2008=100.0 10

Consequently, unemployment is declining across most of new EU member countries 25 20 15 10 5 0 -5 Since 2010, many new EU -10 member countries have seen declines in unemployment -15 HUN ROU CZE POL EST SVK LVA SVN BGR LTU HRV TUR MKD ALB MNE BIH SRB GEO KAZ RUS AZE MDA ARM UKR MLT ITA PRT CYP ESP GRC DEU NOR AUT BEL GBR LUX SWE FIN ISL FRA DNK NLD IRL EU11 TurkeyWestern Balkans CIS Southern Europe Northern Europe Unemployment (Change 2010-2014) Unemployment (Change 2008-2010) 11

Declining unemployment rates in new EU member countries may bring income growth back in the bottom 40 percent... 4 20% 3 15% Unemployment rate Unemployment Rate, Annual Change Income Growth Bottom 40 2 10% Income growth of the bottom 40 1 5% percent 0 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -1 -5% -2 -10% Unemployment Rate (pct points, change; left axis) Income Growth of the Bottom 40 (right axis) Note: Shared prosperity figures from 2011 onwards are forecasted using an OLS regression of income growth of the bottom 40 on changes in unemployment, controlling for GDP growth and country level trends . 12

Deep crisis in Ukraine due to the tensions, but with the exception of a few industries has not materialized into stiff headwinds for ECA as a whole 13

Crisis takes toll on Ukraine’s economy Ukraine FDI Inflows, Cross border CAPEX investments in $ millions 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e* Source: JP Morgan 14 Note: Annualized, based on data through August 2014. World Bank staff estimates

15 15 25 35 45 55 65 -5 Source: JP Morgan 5 Nominal devaluations in the CIS have reflected Serbia Albania Western Balkans Kosovo Montenegro Bosnia and Herzegovina Macedonia, FYR Czech Republic Hungary (US$-LCU Sep 2014/ Sep 2013) Croatia high uncertainty Bulgaria Lithuania Estonia EU11 Exchange Rate Latvia Slovak Republic Slovenia Romania Poland Ukraine Kazakhstan Belarus Moldova Turkey CIS + Turkey Russian Federation Uzbekistan Kyrgyz Republic Georgia Tajikistan Armenia Turkmenistan Azerbaijan

Russia’s relative food price inflation was accelerating before it imposed sanctions on European food imports. The impact on Europe has also been modest. Difference between Food and headline CPI Inflation, Percent, y-o-y 4 Russia’s relative food inflation began before recent sanctions and 3 tensions 2 1 0 2012M01 2012M02 2012M03 2012M04 2012M05 2012M06 2012M07 2012M08 2012M09 2012M10 2012M11 2012M12 2013M01 2013M02 2013M03 2013M04 2013M05 2013M06 2013M07 2013M08 2013M09 2013M10 2013M11 2013M12 2014M01 2014M02 2014M03 2014M04 2014M05 2014M06 2014M07 2014M08 -1 -2 Europe’s relative food -3 price deflation also started before sanctions and the -4 recent tensions -5 Western Europe EU11 Ukraine Russia -6 Source: Eurostat, Bloomberg 16

Increased financial uncertainty in Ukraine and Russia, but Russia is still close to EMBI Global spreads Country EMBI spread relative to EMBI Global Strip Spread (bps) 650 900 Unrest in Downing of Crimea region Malaysian Airlines flight 550 800 450 700 350 600 250 500 150 400 50 300 16-Sep-13 16-Oct-13 16-Nov-13 16-Dec-13 16-Jan-14 16-Feb-14 16-Mar-14 16-Apr-14 16-May-14 16-Jun-14 16-Jul-14 16-Aug-14 16-Sep-14 -50 200 -150 100 -250 0 Russia Ukraine (right axis) 17 Source: JP Morgan

Russia and some neighboring countries are slowing as past drivers of strong growth have largely run their course. In Russia, geopolitical tensions and an uncertain policy environment are casting the longest shadow on Russia’s medium -term prospects. 18

Russia’s investment and GDP growth were declining before the recent turmoil 25 20 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014e -5 -10 -15 -20 Gross fixed capital formation (annual % growth) GDP growth (annual %) 19

While stable to recently declining oil prices have not been a big boost to the Russian economy or CIS energy exporters over the last year 130 US$/ barrel 120 110 100 90 80 70 1/1/2009 3/1/2009 5/1/2009 7/1/2009 9/1/2009 11/1/2009 1/1/2010 3/1/2010 5/1/2010 7/1/2010 9/1/2010 11/1/2010 1/1/2011 3/1/2011 5/1/2011 7/1/2011 9/1/2011 11/1/2011 1/1/2012 3/1/2012 5/1/2012 7/1/2012 9/1/2012 11/1/2012 1/1/2013 3/1/2013 5/1/2013 7/1/2013 9/1/2013 11/1/2013 1/1/2014 3/1/2014 5/1/2014 7/1/2014 9/1/2014 Source: Bloomberg Note: Russian domestic crude oil Volgo-Uraltic average price, benchmarked to east Siberian export price, US 20 dollars/barrel.

Russia’s stagnation and Ukraine’s crisis matters for neighboring countries, less so for the rest of ECA 70 % of total exports, 2013 60 50 40 30 20 10 0 BLR ARM UZB MDA GEO KGZ KAZ LTU SER TUR LVA POL EST SVN SVK TJK ROM HUN BGR AZE TKM Exports to Ukraine Exports to Russia Source: UN Comtrade 21